Argued January 13, 2014.
[Copyrighted Material Omitted]
Appeal from a judgment entered on May 20, 2013, by the United States District Court for the Southern District of New York (Scheindlin, J.), dismissing the plaintiff's federal antitrust claims for lack of subject matter jurisdiction under the Foreign Trade Antitrust Improvements Act (" FTAIA" ), 15 U.S.C. § 6a, and declining to exercise supplemental jurisdiction over the plaintiff's remaining state-law claims. We hold, under
Arbaugh v. Y& H Corp., 546 U.S. 500, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006), and its progeny, that the requirements of the FTAIA are nonjurisdictional, overruling
Filetech S.A. v. France Telecom S.A., 157 F.3d 922 (2d Cir. 1998), in this respect. However, we reject the plaintiff's contention that the defendants have waived these nonjurisdictional requirements by contract in this case. We further hold, following the Seventh Circuit's decision in
Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012) (en banc), that foreign anticompetitive conduct has a " direct . . . effect" on U.S. domestic or import commerce under the FTAIA, 15 U.S.C. § 6a(1), where there is a reasonably proximate causal nexus between the conduct and the effect. We decline to decide whether, under the proper standard, the plaintiff here has plausibly alleged a " direct, substantial, and reasonably foreseeable effect" on U.S. domestic or import commerce under the FTAIA, id., but affirm the district court's dismissal of the plaintiff's antitrust claims on the alternative ground that any such effect did not " give rise to" the plaintiff's claims. 15 U.S.C. § 6a(2).
Accordingly, the judgment of the district court is AFFIRMED.
NICHOLAS S. GIKKAS, The Gikkas Law Firm, Palo Alto, CA (Douglas M. Garrou and Ryan A. Shores, Hunton & Williams LLP, Richmond, VA, and Washington, DC, on the brief), for Plaintiff-Appellant Lotes Co., Ltd.
WILLARD K. TOM (Thomas M. Peterson, Thomas J. Lang, and Brian A. Herman, on the brief), Morgan, Lewis & Bockius LLP, San Francisco, CA, Washington, DC, and New York, NY, for Defendants-Appellees Hon Hai Precision Industry Co., Ltd., Foxconn International Holdings, Ltd., Foxconn Electronics, Inc., and Foxconn International, Inc., AKA Foxcomm International, Inc.
JAMES FREDERICKS, U.S. Department of Justice (William J. Baer, Assistant Attorney General, and Kristen C. Limarzi, Attorney, U.S. Department of Justice; Jonathan E. Nuechterlein, General Counsel, John F. Daly, Deputy General Counsel for Litigation, and Mark S. Hegedus, Attorney, Federal Trade Commission, on the brief), Washington, DC, for Amici Curiae the United States of America and the Federal Trade Commission.
Before: KATZMANN, Chief Judge, LIVINGSTON, Circuit Judge, and CARTER, District Judge.
Katzmann, Chief Judge:
This appeal presents important questions regarding the extraterritorial reach of U.S. antitrust law. The plaintiff, a Taiwanese electronics manufacturing company with facilities in China, alleges that the defendants, a group of five competing electronics firms, have attempted to leverage their ownership of certain key patents to gain control of a new technological standard for USB connectors and, by extension, to gain monopoly power over the entire USB connector industry. In considering whether these allegations suffice to state a viable claim under the Sherman Act, 15 U.S.C. § § 1, 2, we must decide whether the restrictions Congress has imposed on antitrust claims based on foreign conduct under the Foreign Trade Antitrust Improvements Act (" FTAIA" ), 15 U.S.C. § 6a, are jurisdictional in nature; whether the defendants in this case have waived the requirements of the FTAIA by contract; whether the defendants' alleged anticompetitive conduct has a " direct, substantial, and reasonably foreseeable effect" on U.S. domestic or import commerce under the FTAIA, id. § 6a(1); and whether any such effect " gives rise to" the plaintiff's claims, id. § 6a(2).
We hold that, under the principles articulated in a line of recent Supreme Court decisions extending from Arbaugh v. Y& H Corp., 546 U.S. 500, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006), to Sebelius v. Auburn Regional Medical Center, 133 S.Ct. 817, 184 L.Ed.2d 627 (2013), the requirements of the FTAIA are substantive and nonjurisdictional in nature. Because Congress has not " clearly state[d]," id. at 824 (quoting Arbaugh, 546 U.S. at 515), that these requirements are jurisdictional, they go to the merits of the claim rather than the adjudicative power of the court. In so holding, we overrule our prior decision in Filetech S.A. v. France Telecom S.A., 157 F.3d 922 (2d Cir. 1998), in this respect. However, although the FTAIA's requirements are nonjurisdictional and thus potentially waivable, we reject the plaintiff's argument that the defendants somehow have waived them by contract in this case.
We further hold that foreign anticompetitive conduct can have a statutorily required " direct, substantial, and reasonably foreseeable effect" on U.S. domestic or import commerce even if the effect does not follow as an immediate consequence of the defendant's conduct, so long as there is a reasonably proximate causal nexus between the conduct and the effect. We thus reject the interpretation of " direct . . . effect" advanced by the Ninth Circuit in United States v. LSL Biotechnologies, 379 F.3d 672, 680 (9th Cir. 2004), which the district court followed below, in favor of the interpretation advocated by amici curiae the United States of America and the Federal Trade Commission (" FTC" ) and adopted by the Seventh Circuit in its en banc decision in Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 856-58 (7th Cir. 2012) (en banc).
We need not decide, however, whether the plaintiff here has plausibly alleged the requisite " direct, substantial, and reasonably foreseeable effect" under the proper standard. That is because the FTAIA contains a second limitation, under which the aforementioned domestic effect must " give rise to" the plaintiff's claim. 15 U.S.C. § 6a(2). Here, regardless of what effect the defendants' conduct has on U.S. domestic or import commerce, any such effect did not " give rise to" the plaintiff's claim. To the contrary, in the causal chain the plaintiff alleges, the plaintiff's exclusion from the relevant market actually precedes the alleged domestic effect.
Accordingly, we affirm on alternative grounds the judgment of the district court dismissing the plaintiff's claims.
I. Factual Background
The pertinent facts, resolving all ambiguities and drawing all reasonable inferences in the plaintiff's favor, are as follows.
Plaintiff-Appellant Lotes Co., Ltd. (" Lotes" ) is a Taiwanese corporation specializing in the design and manufacture of electronic components for notebook computers, including Universal Serial Bus (" USB" ) connectors. USB connectors are used primarily to connect computer peripherals, such as printers, keyboards, and external hard drives, to personal computers, smart phones, and other electronic devices. USB connectors are among the most successful connectors in the history of personal computing, having achieved near-universal adoption from device and peripheral makers.
Lotes manufactures USB connectors in factories located in China. From there, it typically sells the connectors to other Taiwanese firms with facilities in China known as Original Design Manufacturers (" ODMs" ). ODMs make and assemble computer products incorporating USB connectors for many well-known computer brands, such as Acer, Dell, HP, and Apple. Those name-brand computer products, in turn, make their way into the hands of consumers and businesses around the world, including in the United States. " According to industry sources and press reports, as of 2011[,] roughly 94% of global notebook computers were assembled by a small number of Taiwanese vendors, primarily [ODMs] maintaining production facilities in China." J.A. 36.
The defendants are a group of companies that compete with Lotes in making and selling USB connectors. They also are involved in making, assembling, and distributing electronic components and devices that incorporate USB connectors. Defendant-Appellee Hon Hai Precision Industry Co., Ltd. (" Hon Hai" ) is a Taiwanese corporation that is one of the world's largest manufacturers of electronic components, including USB connectors. Defendant-Appellee Foxconn International Holdings, Ltd. is a Cayman Islands corporation specializing in the design and manufacture of components for consumer electronics products, and is one of the largest exporters from China. Defendant-Appellee Foxconn International, Inc. is a California corporation that receives products from other Foxconn companies for distribution within the United States. Defendant-Appellee Foxconn Electronics, Inc. is another California corporation that designs and manufactures components for consumer electronics. Defendant Foxconn (Kunshan) Computer Connector Co., Ltd. (" Foxconn Kunshan" ) is a Chinese ODM. Although the corporate relationships among the defendants are not clear from the complaint, Lotes often refers to the Foxconn defendants collectively, and alleges that Hon Hai has " invested in Foxconn International [Holdings] to manufacture goods in China and other places." J.A. 41.
The dispute in this case arises out of the development of the latest industry standard for USB connectors, known as USB 3.0. This standard represents a major technological advance over prior standards, including a significant increase in data transmission speeds. When Lotes filed its complaint in this case in late 2012, USB 3.0 connectors were expected to re
place the previous generation of USB connectors entirely within a year's time.
Common technological standards like USB 3.0 carry pro-competitive benefits and anticompetitive risks. On the pro-competitive side, common standards enable different firms to produce products that are compatible with one another, promoting innovation and competition. Because standards-compliant products can interoperate with many other products, they can be more valuable, providing greater benefits to consumers and simulating increased investment from manufacturers. Standardized products also reduce the need for customization, which facilitates economies of scale and enables downstream manufacturers to switch suppliers more easily. These effects promote price competition and drive down costs.
At the same time, " [t]here is no doubt that the members of [standard-setting] associations often have economic incentives to restrain competition and that the product standards set by such associations have a serious potential for anticompetitive harm." Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500, 108 S.Ct. 1931, 100 L.Ed.2d 497 (1988). The process of developing standards, for example, requires extensive cooperation and coordination among competitors, which can be subverted to anticompetitive ends. See id . Technical standardization also creates " lock-in" effects and raises the specter of " patent hold-ups." The Third Circuit has described this kind of abusive scheme as follows:
[A standard-setting organization] may complete its lengthy process of evaluating technologies and adopting a new standard, only to discover that certain technologies essential to implementing the standard are patented. When this occurs, the patent holder is in a position to " hold up" industry participants from implementing the standard. Industry participants who have invested significant resources developing products and technologies that conform to the standard will find it prohibitively expensive to abandon their investment and switch to another standard. They will have become " locked in" to the standard. In this unique position of bargaining power, the patent holder may be able to extract supracompetitive royalties from the industry participants.
Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 300 (3d Cir. 2007).
To guard against these risks, standard-setting organizations restrain the behavior of parties participating in the standard by contract. Of particular relevance here, standard-setting organizations typically secure agreements wherein parties who contribute proprietary technology to the standard promise to license that technology on reasonable and nondiscriminatory (" RAND" ) terms. Absent such an agreement, the standard-setting organization will omit the technology in question from the standard. RAND licenses are thus part of a quid pro quo, representing the consideration contributing parties give to standard-setting organizations in exchange for the competitive benefits they will receive from gaining industry-wide acceptance of their preferred technologies.
The standard-setting organization responsible for developing standards for USB connectors is the USB Implementers Forum, Inc. (" USB--IF" ), a non-profit organization founded by Intel in 1995. To protect against anticompetitive risks, the USB-IF required parties contributing to the USB 3.0 standard to sign the USB 3.0 Contributors Agreement (the " Contributors Agreement" ). Lotes and the defendants have signed this agreement. Lotes and the defendants also signed USB 3.0 Adopters Agreement within the required
Adoption Period. Lotes and the defendants thus are both contributors to and adopters of the USB 3.0 standard.
As relevant here, paragraph 3.4 of the Contributors Agreement, entitled " Limited Patent Licensing Obligations in Contributions," obligates " Contributor[s]" to grant to any " Adopter" a " non-exclusive world-wide license under any Necessary Claim of a patent or patent application . . . on a royalty-free basis and under otherwise reasonable and nondiscriminatory ('RAND--Zero') terms . . . ." J.A. 79 (emphasis omitted). Under this provision, the defendants are obligated to provide RAND-Zero licenses to Lotes for all patent claims needed to practice the USB 3.0 standard.
In addition to this RAND-Zero provision, the Contributors Agreement also contains other provisions designed to prevent the USB-IF from becoming a forum for antitrust violations. Paragraph 2 provides in pertinent part:
Contributor[s] . . . understand that in certain lines of business they are or may be direct competitors and that it is imperative that they and their representatives act in a manner which does not violate any state, federal or international antitrust laws and regulations. Without limiting the generality of the foregoing, Contributor[s] . . . acknowledge that this Agreement prohibits any communications regarding . . . exclusion of competitors or any other topic that may be construed as a violation of antitrust laws.
J.A. 78. Similarly, paragraph 6.12 provides: " Anything in this Agreement to the contrary notwithstanding, the obligations of the parties hereto shall be subject to all laws, present and future, of any government having jurisdiction over the parties hereto . . . ." J.A. 81. The agreement also contains a New York choice-of-law clause, as well as an exclusive choice-of-forum clause providing that " all disputes arising in any way out of this Agreement shall be heard exclusively in, and all parties irrevocably consent to jurisdiction and venue in, the state and Federal courts of New York, New York." J.A. 81.
The crux of Lotes's complaint is its claim that the defendants have brazenly flouted their obligations under the Contributors Agreement to provide RAND-Zero licenses to adopters of the USB 3.0 standard. To begin with, Lotes alleges that " Hon Hai and Foxconn have contacted the customers and distributors of Lotes to allege that they have the sole patent rights on USB 3.0 connectors and would sue them if they did not buy from Foxconn." J.A. 49--50. Hon Hai and Foxconn have also refused to provide RAND-Zero licenses to other manufacturers similarly situated to Lotes " and have sent out warning letters threatening those manufacturers with patent litigation." J.A. 50.
Foxconn has also allegedly disseminated its plans to monopolize the USB connector industry through the press. In a February 23, 2010 article, a Taiwanese trade press publication reported that Foxconn was " the first to obtain patents related to USB 3.0 products," which would enable it " initially [to] enjoy a monopolistic position." J.A. 106. The article also indicated--ominously, according to Lotes--that Foxconn would " definitely take note of whether its competitors' USB 3.0 products infringe its patents." Id.
Despite these worrisome signs, Lotes attempted to secure a RAND-Zero license from Hon Hai. On March 25, 2011, at Hon Hai's request, Lotes executed and returned a non-disclosure agreement to enable licensing negotiations to proceed. On April 20, 2011, Hon Hai's U.S. outside counsel ...