The Foreign Trade Antitrust Improvements Act of 19821 (FTAIA) establishes as a default rule that the Sherman Act2 does not apply to nonimport foreign commerce.3 However, the so-called “domestic effects” exception of the FTAIA permits Sherman Act claims based on foreign conduct when (1) that conduct “has a direct, substantial, and reasonably foreseeable effect” on U.S.-related commerce4 and (2) the plaintiff’s claim arises from that effect.5 Although the FTAIA purports to clarify the international scope of the Sherman Act, courts have struggled to interpret its “inelegantly phrased”6 language and ascertain the full reach of the Sherman Act.7
Recently, in Lotes Co. v. Hon Hai Precision Industry Co.,8 the Second Circuit interpreted “direct . . . effect” to require a “reasonably proximate causal nexus” between conduct and effect.9 This interpretation, though, risks unreasonable interference with the sovereignty of foreign countries and provides inadequate guidance to actors in foreign markets. Instead, courts should adopt an alternative rule that limits the “direct . . . effect” language to effects in the market at which the conduct is directed, which will mitigate friction between different nations’ antitrust regimes and provide more clarity to foreign actors. Such a reading is not only consistent with the statute but also consistent with the international comity canon of statutory interpretation that the Supreme Court has applied in interpreting the FTAIA.10
Lotes Co. is a Taiwanese corporation that designs and manufactures Universal Serial Bus (USB) connectors that are incorporated into electronics manufactured abroad and then sold in the United States.11 The defendants, Hon Hai Precision Industry Co. and various Foxconn companies,12 perform functions similar to those of Lotes,13 but also own patents related to the latest USB technology, USB 3.0.14 Lotes alleged that under the terms of the USB 3.0 standard-setting agreement, “contributors” to the standard — including patent owners, such as Hon Hai — are required to license USB 3.0 patents to all “adopters” of the standard, such as Lotes, under prescribed terms.15 Instead, Hon Hai and Foxconn delayed licensing and, when Lotes began manufacturing USB 3.0 products, pursued patent infringement lawsuits in China in order to establish and maintain dominant market share.16 These lawsuits would have the effect, Lotes claimed, of increasing the cost not only of the USB 3.0 connectors sold in China, but also of all products, including those sold in the United States, that incorporate USB 3.0 technology.17 Lotes brought suit in the District Court for the Southern District of New York, alleging violations of the Sherman Act and making various state law claims.18
The district court granted the defendants’ motion to dismiss.19 Following Second Circuit precedent, the district court held that the FTAIA’s requirements were jurisdictional.20 Accordingly, the court proceeded to examine whether the domestic effects of defendants’ foreign conduct fell within the FTAIA’s exception. In analyzing whether the domestic effects of the defendants’ conduct were sufficiently “direct,” the court adopted the Ninth Circuit’s test from United States v. LSL Biotechnologies,21 which asks whether the effects flowed as “an immediate consequence” of the conduct.22 Applying that test, the district court concluded that the domestic “effects are simply too attenuated to establish the proximate causation required by the FTAIA.”23
Writing for a unanimous panel of the Second Circuit, Chief Judge Katzmann24 affirmed on alternate grounds. The court first overruled its prior holding that the FTAIA’s requirements were jurisdictional, citing the Supreme Court’s intervening decision in Arbaugh v. Y & H Corp.,25 which instructed lower courts to interpret statutory limitations as jurisdictional only if explicitly required by the text.26 Because the statute’s requirements were substantive, not jurisdictional, the court then evaluated — and rejected — Lotes’s argument that the defendants had waived the protections of the FTAIA by contract.27
Having determined that the statute applied to the case, the court then turned to the question of whether the alleged conduct had the requisite “direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce. The court criticized the LSL “immediate consequence” rule as unsupported by the text of the FTAIA.28 Because any domestic effect that is both “immediate” and “substantial” would also be “reasonably foreseeable,” an interpretation of “direct” as “immediately consequential” would render “foreseeable” superfluous, thus violating the cardinal rule of statutory interpretation against surplusage.29 Further, the “immediate consequence” test, Chief Judge Katzmann argued, “focuses narrowly on a single factor” of “spatial and temporal separation” between conduct and effect.30 In the world of modern commerce, where many end products sold domestically consist of components manufactured overseas, such an “immediate consequence” test was too restrictive.31
Chief Judge Katzmann instead adopted the Seventh Circuit’s alternative direct effects test, which considers whether there is “a reasonably proximate causal nexus” between the foreign conduct and the domestic effect.32 This “less stringent” test was a “better reading of the statute”33 that avoided the problems of the LSL test while “still addressing antitrust law’s classic aversion to remote injuries.”34 Such an interpretation was also more consistent with traditional analysis of domestic antitrust claims, which focuses on “directness or indirectness,” often using the language of proximate cause.35 Despite the difficulty of defining proximate cause, courts can rely on judicial experience to analyze the many relevant factors.36
Although the court found that the trial court had applied the wrong standard, it did not perform a direct effects analysis of the defendants’ conduct because any domestic effects, direct or not, did not “give rise to a claim” as required by the FTAIA.37 The Supreme Court, in F. Hoffman-La Roche Ltd v. Empagran S.A.,38 had interpreted this second prong to require that the domestic effects “give rise to” the plaintiff’s claim, as opposed to just anyone’s claim.39 In Empagran, the Court began with the presumption that ambiguous statutes should be construed to avoid unreasonable interference with other nations — a canon derived from principles of comity.40 While recognizing that comity concerns do not categorically prohibit the enforcement of U.S. antitrust laws against foreign conduct, the Court in Empagran emphasized that extraterritoriality was appropriate — reasonable — only when targeted against domestic harm.41 Chief Judge Katzmann, referencing comity concerns, framed the question as “whether any domestic effect . . . proximately caused Lotes’s injury.”42 The court found that the plaintiff’s injuries in fact preceded the domestic effects, and, noting that “[a]n effect never precedes its cause,”43 affirmed the dismissal of the complaint on these alternate grounds.44
The interpretation of “direct . . . effect” adopted by the Second Circuit in Lotes has two negative implications: First, the interpretation allows extraterritorial application of U.S. laws that might unreasonably interfere with foreign sovereigns’ regulation of their own territories. Second, the proximate cause standard creates unpredictability in global markets. The “immediate consequence” test, though stricter, has not in practice mitigated these concerns. Instead, courts should adopt a clearer and more limited test, one that considers only the effects on the market toward which the conduct was directed. Such an interpretation is consistent with the text of the FTAIA when viewed — as by the Court in Empagran — through the lens of international comity.
As Chief Judge Katzmann recognized, proximate cause is “notoriously slippery” and difficult to apply.45 It may or may not also be too broad in its international scope — because it is so nebulous, there is certainly a risk of extraterritorial overreach as courts apply it “case by case.”46 The risk that extraterritorial application will interfere with other sovereigns is particularly high in the realm of antitrust law,47 where different countries have adopted dramatically different laws that comport with their prevailing business cultures.48 Additionally, ambiguity concerning the scope of U.S. antitrust law can deter foreign actors from taking advantage of their own countries’ amnesty programs, thus reducing the effectiveness of those policies.49
Similarly, a proximate cause standard does not provide useful guidance to individual and corporate actors in foreign markets.50 One impetus for passing the FTAIA was to provide clarity to U.S. exporters whose actions abroad were consistent with those of their foreign competitors.51 As markets have globalized, foreign actors increasingly cannot be certain whether they might be subject to U.S. laws52: under the proximate cause standard, they must constantly evaluate whether their actions have “proximate effects” on U.S. markets — if this impact can be determined ex ante at all. If a foreign actor reasonably does not expect to be subject to U.S. law — as when his foreign conduct is directed at local markets — it is unreasonable to impose U.S. law on him.53
The LSL “immediate consequence” test rejected in Lotes is potentially more rigid, and it is at least more “stringent” in that it applies to less conduct.54 In practice, however, application of the “immediate consequence” test has been inconsistent.55 Some courts have considered anticompetitive conduct in one market to have immediate consequences only in that particular market — effects in other markets would not be sufficiently immediate or, to use the statute’s term, direct.56 But other courts have discussed the “immediate consequence” test in terms synonymous with proximate cause.57
Whatever terminology courts use, “direct” effects should be limited to effects in the market at which the conduct is directed. If overseas conduct by actors in a global market raises prices for that market in the United States, such conduct should be regulated by the Sherman Act.58 Such a rule simultaneously reduces unreasonable interference with other sovereigns’ interests and gives foreign actors more concrete guidance for what conduct is regulated by U.S. laws.59 The Seventh Circuit recently took a similar approach in Motorola Mobility LLC v. AU Optronics Corp.60 by interpreting Minn-Chem, Inc. v. Agrium Inc.61 narrowly to hold that entirely overseas commerce of goods later incorporated into products sold in the United States was outside the domestic-injury exception.62 Even though, as Chief Judge Katzmann noted in Lotes, complex commerce is “increasingly common in our modern global economy,”63 it does not necessarily follow that the Sherman Act should apply to it. Instead, as Judge Posner argued in Motorola Mobility, such components commerce creates just “a few ripples in the United States.”64
That kind of clear and narrow rulemaking makes sense in the context of extraterritorial jurisdiction, where there are foreign relations concerns. Of course, such concerns are irrelevant if the Minn-Chem reading is compelled by the statutory language. But the FTAIA is far from unambiguous — as the Supreme Court once noted: “[I]t is unclear . . . . whether the Act[] . . . amends existing law or merely codifies it.”65 Thus, courts should appropriately consider other means of statutory interpretation. Principles of comity — avoiding unreasonable interference with other sovereigns — ought to be at the forefront when analyzing statutes with extraterritorial application.66 In Empagran, the Court rejected the plaintiffs’ argument that comity concerns could be addressed case-by-case in the FTAIA context,67 and instead considered comity in the interpretation of the statute.68 Accordingly, courts interpreting the FTAIA’s “direct, substantial, and reasonably foreseeable” language — which tracks closely with one of the traditional factors for comity analysis69 — should similarly be guided by principles of international comity. But although courts following Empagran have applied comity to interpret the FTAIA’s “gives rise to” language,70 neither the court in Lotes, nor either the Seventh Circuit in Minn-Chem or the Ninth Circuit in LSL, addressed these concerns in interpreting “direct . . . effect.”71 They should have.
Prudential political and economic considerations, as well as legal principles of comity, counsel against the “unreasonable” application of U.S. laws extraterritorially.72 In the antitrust context, where the presumption against extraterritoriality has already been breached, more than the vagaries of proximate cause are required to prevent slipping into “unreasonable” interference with other sovereigns’ interests. As the Supreme Court noted in Empagran, litigation uncertainty itself could “threaten interference with a foreign nation’s ability to maintain the integrity of its own antitrust enforcement system.”73 The court in Lotes missed an opportunity to establish a bright-line rule that not only appropriately limits the extraterritorial reach of the Sherman Act, but also alerts foreign actors, ex ante, to that scope.