Second Circuit Clarifies International Reach of the Antitrust Laws in Lotes FTAIA Decision

On June 4, the Second Circuit decided Lotes Co. v. Hon Hai Precision Industry Co. (Foxconn),1 overturning the Circuit’s prior precedent and clarifying the its interpretations of the Foreign Trade Antitrust Improvements Act (FTAIA).2  With this ruling, the Second Circuit continues the evolving dialogue among federal appellate courts on FTAIA jurisprudence.  The Second Circuit made several key holdings as it affirmed the SDNY’s dismissal of Lotes’s claims on alternative grounds:

  • The requirements of the FTAIA are substantive, merits elements to prove, as opposed to jurisdictional requirements. In so holding, the Second Circuit overrules its prior precedent and joins the interpretation of the Third and Seventh Circuits3;
  • The FTAIA’s “direct” effect requirement should be interpreted to mean a “reasonably proximate causal nexus.” Here, the Second Circuit again sides with Seventh Circuit precedent,4 adopting a less stringent standard than the Ninth Circuit’s “immediate consequence” standard.5
  • Claims are barred by the FTAIA when the U.S. domestic effect of the alleged anticompetitive conduct does not “give rise to” the plaintiff’s harm. Here, the court dismissed Lotes’s claims for this reason – that Foxconn’s alleged anticompetitive conduct excluded Lotes from the market in Asia, several steps in the chain of commerce before the relevant products entered the U.S.

Factual background

The plaintiff, Lotes Co., a Taiwanese electronics manufacturer specializing in the design and manufacture of electronic components for laptop computers, alleged that the defendants, Hon Hai Precision Industry Co., Ltd. and several of its affiliates (“Foxconn”), were leveraging patents for a new standard for USB connectors in order to monopolize the entire USB connector market and to exclude Lotes from that market. Lotes manufactured and sold its USB connectors in Asia, primarily to Taiwanese Original Design Manufacturers (“ODMs”) which make and assemble computer products that are sold internationally, including in the United States.

Lotes alleged that the defendants violated a contractual duty, pursuant to a standard-setting contributors’ agreement, to license their patents covering certain USB technology on reasonable and nondiscriminatory (RAND) terms. When Lotes started to incorporate the new standard designs into its USB product, defendants filed infringement claims against Lotes in Chinese court. Lotes alleged that these maneuvers were calculated to remove Lotes as a competitor and to monopolize the USB design and manufacturing market in violation of Sherman Act Sections 1 and 2. Lotes brought suit in U.S. federal court in the Southern District of New York.


Congress passed the FTAIA6 in 1982 to clarify when the Sherman Act might reach conduct taking place entirely outside of the United States. The FTAIA states that the Sherman Act does not extend to foreign, non-import trade or commerce with foreign nations except when:

  1. such conduct has a direct, substantial, and reasonably foreseeable effect —
  2. on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or
  3. on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and
  4. such effect gives rise to a claim under the provisions of sections 1 to 7 of this title, other than this section.7

The FTAIA clarifies that the U.S. antitrust laws, therefore, do not apply to foreign conduct unless it has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce, and (2) that effect “gives rise to” the plaintiff’s claim. However, courts have grappled with the application of the FTAIA; Lotes marks the next step in the Second Circuit’s FTAIA jurisprudence.

Decision below

In May 2013, the District Court for the Southern District of New York dismissed Lotes’ complaint with prejudice for lack of subject matter jurisdiction. The court relied on the Second Circuit’s holding in Filetech S.A. v. France Telecom S.A.,8 finding that the requirements of the FTAIA are jurisdictional as opposed to substantive elements. The district court further held that Lotes had failed to adequately allege a “direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce under the FTAIA.9

Second Circuit decision

The Second Circuit affirmed the SDNY’s dismissal of Lotes’s claim on alternative grounds. The court took the opportunity presented in the case to overturn the holding in Filetech and to clarify the FTAIA’s “direct, substantial, and reasonably foreseeable effect” requirement. Notwithstanding the court’s loosening of the FTAIA requirement, the court held that the U.S. domestic effect of the defendants’ alleged anticompetitive conduct did not “give rise to” Lotes’s claim, and thus the claim was barred by the FTAIA.

Merits vs. Jurisdiction

The Second Circuit joins other circuits that have applied the Supreme Court’s decision in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006) to hold that FTAIA requirements are substantive, merits issues instead of jurisdictional. In doing so, the Second Circuit expressly overrules its prior decision in Filetech.

In Arbaugh, the Supreme Court announced a “readily administrable bright line” to determine when statutory requirements are jurisdictional:

If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character. 546 U.S. at 515–16 (footnote and internal citation omitted).

The court, applying Arbaugh, concluded that “the requirements of the FTAIA go to the merits of an antitrust claim rather than to subject matter jurisdiction.”10 The court notes that in so holding, it joins the Third and Seventh Circuits in overruling their contrary pre-Arbaughprecedents.11 We have previously discussed the Seventh Circuit’s FTAIA jurisprudence and its Minn-Chem decision here.

Direct effect

The Second Circuit held that a “direct, substantial, and reasonably foreseeable effect” can exist if there is “a reasonably proximate causal nexus between the conduct and the effect,” even if the effect is not an “immediate consequence” of defendant’s conduct.  In so holding, the court agrees with the Seventh Circuit’s 2012 Minn-Chem en banc decision, and rejects the Ninth Circuit’s interpretation in U.S. v. LSL Biotechnologies.12

The district court relied upon the Ninth Circuit’s decision in LSL which held that “an effect is ‘direct’ if it follows as an immediate consequence of the defendant’s activity.”13 In applying this standard, the district court found a “disconnect” between the relevant foreign market for USB 3.0 connectors as components and the downstream U.S. market allegedly affected by defendants’ attempted monopolization (notebooks, desktop computers, etc.).14 Thus, the alleged U.S. effects were too attenuated to establish “the proximate causation required by the FTAIA.”15

To define “direct,” the Second Circuit looks instead to the Seventh Circuit’s decision in Minn-Chem. The court agreed with the Seventh Circuit that “the term ‘direct’ means only ‘a reasonably proximate causal nexus’” and reflects a superior reading of the FTAIA.16 The court reasons that “To demand that any domestic effect must follow as an immediate consequence of a defendant’s foreign anticompetitive conduct would all but collapse the FTAIA’s domestic effects exception into its separate import exclusion.”17

The court notes that numerous factors will inform the “direct” effect analysis:

Whether the causal nexus between foreign conduct and a domestic effect is sufficiently “direct” under the FTAIA in a particular case will depend on many factors, including the structure of the market and the nature of the commercial relationships at each link in the causal chain. Courts confronting claims under the FTAIA will have to consider all of the relevant facts, using all of the traditional tools courts have used to analyze questions of proximate causation.18

However, the court does not conduct this proximate cause analysis in Lotes, finding instead that the alleged domestic effect did not give rise to plaintiff’s claims.19 Although it does not reach the “direct” effect analysis, the court nonetheless notes the fact that the relevant USB connectors were manufactured, sold, and assembled into finished computer products in China before being sold in the U.S. is not dispositive. “There is nothing inherent in the nature of outsourcing or international supply chains that necessarily prevents the transmission of anticompetitive harms or renders any and all domestic effects impermissibly remote and indirect.”20

“Gives rise to”

Citing the Supreme Court’s decision in F. Hoffmann‐La Roche Ltd. v. Empagran S.A.,21 the court notes that the FTAIA “includes two distinct causation inquiries, one asking whether the defendants’ foreign conduct caused a cognizable domestic effect, and the other asking whether that effect caused the plaintiff’s injury.”22 To satisfy the second inquiry, “the domestic effect [of the anticompetitive conduct] must proximately cause the plaintiff’s injury.”  The Second Circuit cites in support of this proximate causation standard decisions from the Eighth Circuit in In re Monosodium Glutamate Antitrust Litig.,23 the Ninth Circuit in In re Dynamic Random Access Memory (DRAM) Antitrust Litig.,24 and the D.C. Circuit in Empagran S.A. v. F. Hoffmann‐LaRoche, Ltd.25

In analyzing Lotes’s alleged injuries, the court held that, “regardless of what effect the defendants’ conduct had on U.S. domestic or import commerce, any such effect did not ‘give[] rise to’ the plaintiff’s claim.”26  Instead, Lotes’s harm – exclusion from the USB 3.0 market – actually preceded the alleged domestic effect. Lotes’s injury occurred in Asia, several steps in the chain before the alleged effect in the U.S.

The court rejected Lotes’s argument that it also suffered harm in the U.S. by being excluded from the U.S. market. The court notes that Lotes did not allege that it manufactures or imports products in the U.S. or otherwise does business in the U.S.  Further, the alleged U.S. exclusion is not a but-for cause of the injury, because Lotes would already be excluded from the U.S. market based on injury that occurred in China due to the Chinese patent infringement suits.

Implications and conclusion

Both plaintiffs and defendants will find elements for cheer and for concern in the Second Circuit’s Lotes decision.

Plaintiffs will be pleased with the circuit’s adoption of the Seventh Circuit’s softer “reasonably proximate causal nexus” analysis of “direct” effects, rather than the strict “immediate consequence” test used in the Ninth Circuit. By allowing more attenuated conduct to qualify as “direct,” the Second and Seventh Circuits have broadened the conduct that might be subject to the country’s antitrust laws.

Defendants will be happy to see yet another case dismissed under the “gives rise to” prong of the FTAIA analysis, consistent with Judge Posner’s strong language in the Seventh Circuit’s recent pro-defendant ruling in Motorola Mobility LLC v. AU Optronics Corp.27 (Weil’s Cartel Watch discussed the Seventh Circuit’s Motorola decision here).  As Lotes demonstrates, even if a plaintiff can meet the FTAIA’s first prong and plausibly claim “direct, substantial, and reasonably foreseeable effect” in the U.S., the plaintiff still faces the burden of demonstrating that that specific effect led to their particular harm, a task that can prove difficult for foreign plaintiffs not engaged in relevant business directly in the U.S.

In a footnote sure to foreshadow future litigation, the court also suggests that it is open to considering whether there might be a new FTAIA-driven exception to the general rule articulated in the Supreme Court’s Illinois Brick Co. v. Illinois decision prohibiting indirect purchaser claims under the Sherman Act.28 The court notes that it has not yet had occasion to consider whether indirect purchaser federal claims might be allowed in situations where the direct purchaser’s claim is be barred by the FTAIA,29 but cites the Seventh Circuit’s March 2014 Motorola decision as suggesting that the Illinois Brickprohibition would continue to apply to such indirect purchaser claims.30  This issue appears destined for litigation in the years to come.

With this decision, the Second Circuit also joins an increasing trend to treat the FTAIA requirements as substantive elements of an antitrust claim as opposed to requirements for subject-matter jurisdiction. After the Supreme Court’s holding in Arbaugh, every court to address the FTAIA has overturned prior inconsistent precedent and found that the FTAIA lists substantive elements that get to the merits of the controversy.31 This holding makes it more difficult for defendants to get claims dismissed under the FTAIA early in litigation at the motion to dismiss stage, but adds additional elements that plaintiffs must prove at trial on any Sherman Act claim.

Finally, this case is further evidence that the courts give significant weight to the government’s opinions when handling antitrust cases that implicate international relations. In Lotes, the Second Circuit expressly declined to follow the Ninth Circuit and the court below in adopting the “immediate consequence” interpretation of “direct,” “in favor of the interpretation advocated by amici curiae the United States of America and the Federal Trade Commission.”32Of further note, in the ongoing Motorola case in the Seventh Circuit, the court invited the U.S. Department of Commerce and the U.S. Department of State to file briefs as amici curiae, stating “the court has special interest . . . in the Departments’ views on the potential effects on foreign relations resulting from the issues presented by this case.”33

The Second Circuit’s Lotes decision is sure to be cited by plaintiffs, defendants, enforcement agencies, and courts alike as FTAIA jurisprudence continues to evolve in courts around the country.

Endnotes    (↵ returns to text)
  1. No. 13-2280, 2014 WL 2487188 (2d Cir. Jun. 4, 2014) (hereinafter Slip Op.).
  2. 15 U.S.C. § 6a.
  3.  MinnChem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012) (en banc); Animal Sci. Prods., Inc. v. China Minmetals Corp., 654 F.3d 462, 467–68 (3d Cir. 2011).
  4. Slip-Op at 36; Minn-Chemid.
  5.  U.S. v. LSL Biotechnologies, 379 F.3d 672 (9th Cir. 2004).
  6. 15 U.S.C. § 6a.
  7.  Id.
  8. 157 F.3d 922 (2d Cir. 1998).
  9.  12 CIV. 7465 SAS, 2013 WL 2099227 (S.D.N.Y. May 14, 2013) aff’d on other grounds sub nom. Lotes Co., Ltd. v. Hon Hai Precision Indus. Co., 13-2280, 2014 WL 2487188 (2d Cir. June 4, 2014).
  10.  Slip Op. at 24.
  11. Minn‐Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012) (en banc); Animal Sci. Prods., Inc. v. China Minmetals Corp., 654 F.3d 462, 467–68 (3d Cir. 2011).
  12. 379 F.3d 672 (9th Cir. 2004).
  13.  379 F.3d at 680.
  14.  Slip Op. at 34.
  15.  Id.
  16.  Slip Op. at 35-36, quoting Minn-Chem, 683 F.3d at 857.
  17.  Slip Op. at 40.
  18.  Id. at 44.
  19.  See discussion infra.
  20.  Slip Op. at 44.
  21.  542 U.S. 155 (2004).
  22.  Slip Op. at 46.
  23.  477 F.3d 535 (8th Cir. 2007).
  24.  546 F.3d 981 (9th Cir. 2008).
  25.  417 F.3d 1267, 1271 (D.C. Cir. 2005) (on remand after F. Hoffmann‐La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004)).
  26.  Slip Op. at 6.
  27.  746 F.3d 842, (7th Cir. 2014).
  28. This rule was articulated in the Supreme Court’s ruling in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
  29.  Slip Op. at 43 n.7.
  30.  The DOJ and FTC also noted this possible new Illinois Brick exception in their joint amicus brief in support of seeking a rehearing en banc by the Seventh Circuit in Motorola v. AU Optronics Corp.  See Br. U.S. & Fed. Trade Comm’n as Amici Curiae ISO Panel Rehearing or Rehearing En Banc at 14 n.2, Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003 (7th Cir. Apr. 24, 2014).
  31.  See Slip Op. at 24; Minn-Chem, 683 F.3d at 851-52; Animal Sci. Prods., Inc. v. China Minmetals Corp., 654 F.3d at 467-68.
  32.  Slip Op. at 5.
  33.  Order, Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003 (7th Cir. May 1, 2014).
Jane Cooper

D. Jane Cooper

Kevin B. Goldstein

Kevin B. Goldstein