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Motorola Mobility and the FTAIA: A Deterrence-Based Definition of “Direct” Effect

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In Motorola Mobility LLC v. AU Optronics, No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 27, 2014), the Seventh Circuit Court of Appeals offers an interpretation of the Foreign Trade Antitrust Improvements Act (FTAIA), 15 U.S.C. §6a that would have significant implications for the right to sue foreign companies under the Sherman Act. The FTAIA states that the Sherman Act “shall not apply to conduct involving trade or commerce … with foreign nations.” but provides some exceptions to that rule. The exception of relevance to Motorola Mobility is that foreign companies are liable under the Sherman Act when their conduct has “a direct, substantial, and reasonably foreseeable effect” on U.S. commerce and “such effect gives rise to a claim under [the Sherman Act].”

Motorola Mobility involves an alleged cartel of foreign manufacturers of liquid crystal display (LCD) panels used in mobile phones. In a decision written by Judge Richard Posner, the LCD manufacturers were found not liable because their conduct did not have a “direct” effect and thus did not fall into the above-stated exception to the FTAIA:[1]

The alleged price fixers are not selling the panels in the United States. They are selling them abroad to foreign companies (the Motorola subsidiaries) that incorporate them into products that are then exported to the United States for resale by the parent. The effect of component price fixing on the price of the product of which it is a component is indirect …

Courts have wrestled with what the U.S. Congress might have meant by “direct,” which has served to produce a litany of definitions. The Seventh Circuit concluded that there was no direct effect in the Motorola case because the effect is “remote”[2] which is a term used in Minn-Chem, Inc. v. Agrium, Inc.,” 683 F.3d 845 (7th Cir. 2012). The Minn-Chem decision drew upon the Ninth Circuit Court when it said that “direct” means that “it follows as an immediate consequence of the defendant’s activity.”[3] and that an effect is not direct when “it depends on … uncertain intervening developments.”[4] In connection with the Minn-Chem decision, an Amicus Curiae Brief submitted to the Seventh Circuit[5] interpreted “direct” as “reasonably proximate.”

Focusing on what it means to be “remote” or “immediate consequence” or “reasonably proximate” does not seem to bring us any closer to a useful definition in that each term is as ill-defined as the preceding one. What is lacking is a guiding principle for determining whether an effect is direct. A more sound approach is to identify a primary objective of the FTAIA and then define “a direct, substantial, and reasonably foreseeable effect” on U.S. commerce in a manner consistent with that objective.

The FTAIA seeks to balance comity and the protection of U.S. commerce; that the U.S. should not intervene with regards to foreign conduct except when it creates substantial harm for U.S. commerce. Given that the FTAIA pertains to when foreign conduct is liable under the Sherman Act, harm refers to that caused by anti-competitive conduct. It is well-accepted that a (if not the) primary focus of antitrust law and enforcement is deterrence; it is better to ex ante deter anti-competitive behavior than to ex post disrupt and punish anti-competitive conduct.  Deterrence is especially valued here because interfering in the conduct of foreign nations runs counter to sovereignty which thereby puts a premium on avoiding the need for intervention.

The guiding principle recommended here is to assume that the “direct, substantial, and reasonably foreseeable effect” exception was made in order to deter foreign conduct that harms U.S. commerce, and to then interpret “reasonably foreseeable” and “direct” so as to most effectively achieve that objective. This argument is developed in a short paper that can be found at http://assets.wharton.upenn.edu/~harrij/blog.html . The paper also shows how “direct” effect as defined by the Seventh Circuit falls short with regards to this objective of the FTAIA.

 


[1] Motorola Mobility LLC v. AU Optronics, No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 27, 2014), pp. 4-5.

[2] Ibid, p. 4.

[3] United States v. LSL Biotechs., 379 F.3d 672, 680 (9th Cir. 2004)

[4] Ibid at 681.

[5] “Brief for the United States and the Federal Trade Commission as Amici Curiae in Support of Neither Party on Rehearing En Banc,” January 12, 2012; p. 8.

Regulating for fairness as well as competition

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It may be trite but it is undoubtedly true that laws against anti-competitive conduct, like any laws, are only effective insofar as they influence people to comply with them. Law enforcement authorities are limited in their capacity and resources and rely on most of those who are subject to the law to comply voluntarily with it most of the time. Given this, it is essential to understand the factors that influence compliance with the law.

In the field of competition law and enforcement, it is generally assumed that motivations to comply or not comply with the law will be amoral, calculative and primarily, if not exclusively, economic in nature. Scant attention has been paid by authorities or others to the issue of normative compliance (cf Wouter Wils; Christine Parker). Yet it is well established in an impressive body of theoretical and empirical research that normative motivations are also highly instrumental in shaping attitudes and behavior in relation to the law (Tom Tyler’s work on this is particularly compelling).

As is pointed out in that research, normative motivation to comply can be based on a belief that a law is just or right in the sense that obeying the law leads to an outcome that fits with moral or ideological values – the firm complies with the law because its managers and employees see its goals and rules as substantively fair. In the present context, this would mean that people agree with the ethos of competition and agree that there should be a law to protect it. Further, people are also likely to obey a law where they see that law, and its enforcement, as ‘legitimate’, and they judge legitimacy by whether the relevant legal authorities are considered to be procedurally fair. In the present context, this would mean that people comply because they respect the agencies and processes employed in enforcement of competition law, rather than or in addition to respecting the substance of the law.

In recent years much attention has been paid to the issue of procedural fairness in competition law enforcement, particularly in Europe. ASCOLA’s recent annual conference was devoted to the issue and highlighted its significance and complexity. For information on the conference and links to papers, see here. In some respects, however, the issue of substantive fairness is even more challenging. That is essentially because competition, which the law is seeking to protect, is in its nature unfair – at times brutally so. Damage to, if not elimination of, inefficient competitors in the process of competition is a sign that the law is working. In other words, in substance, the law may dispense with fairness in the interests of efficiency (and ultimately in the interests of the consumer welfare that efficiency delivers).

This poses a problem for securing normative compliance – particularly on the part of small to medium sized businesses, given that they are generally the first to be damaged or eliminated, especially in concentrated markets or supply chains where there are significant imbalances in bargaining power. The retail grocery sector in many jurisdictions exemplifies this. In that sector, large supermarket chains are often able to impose exacting and, in some instances, oppressive terms and conditions on their suppliers (smaller suppliers particularly) in the name of competition, efficiency and consumer benefit. The perception that this is unfair is potentially corrosive to respect for the law and hence for normatively motivated compliance. However, as the Australian experience bears out, it can also generate unproductive and distorted debates about the objectives and effectiveness of the competition law and such debates, when politicised (as they often are), can lead to changes in the law that are inconsistent with economic principle if not also practically unenforceable. Amendments over the years to Australia’s abuse of dominance (misuse of market power) prohibition are illustrative of this phenomenon.

There is therefore arguably a case for having laws that address unfairness in business to business dealings, laws that are independent of competition laws – given that each is concerned with quite different objectives. In Australia there is a ‘fair trading’ law that prohibits unconscionable conduct in business to business dealings (it is not confined to consumer protection). Pursuant to that law, in April this year, the Australian Competition and Consumer Commission brought proceedings alleging that the supermarket chain, Coles, had acted unconscionably in relation to its dealings with 200 of its smaller suppliers in connection with a rebate scheme. The ACCC‘s media release is available here. Moreover, the government has turned its attention to a range of policies that will provide ‘special protections’ for small business, in recognition of their contributions to both economic vitality and social amenity, and their vulnerability to the effects of competition in Australia’s many concentrated markets. One such policy involves extending the current protection against unfair standard form contracts in consumer transactions to small businesses. Another considers the possibility of making greater use of codes of conduct (including legally enforceable codes, with penalties for breach) that would regulate aspects of both substantive and procedural fairness in particular sectors. There is one such code proposed for the grocery sector (inspired in part by a similar code introduced in the UK in 2013). The draft grocery code was the subject of my last post.

The Australian developments mirror initiatives in Europe where the authorities are examining various ways to tackle unfair trading practices in supply chains. Such efforts are relatively nascent but reflect a growing sensitivity by authorities around the world to the need to address fairness, in addition to albeit separately from competition, in business regulation. It is important that these initiatives be pursued with political commitment and enforcement vigour so as to ensure that economic conditions are not just competitive but fair also. In the long run, failing to create such conditions may undermine business respect for the law and reduce decisions about compliance to an economic calculation, at a significant cost to enforcement resources. There may be costs also for business certainty and as a consequence for the willingness of firms to innovate and invest, ultimately to the detriment of consumers and the economy generally. Moreover, a legal regime that makes no allowance for fairness in trade and commerce will carry an inevitable social cost – a cost that will be damaging to the type of society in which we might all aspire to live.

Mozambique in the Process of Implementing a New Competition Regime

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The proliferation of competition regimes worldwide is a clear trend of the transition to the twenty-first century which, contrary to what could be expected, has not subsided with the 2007-2008 worldwide economic crisis. In fact, this apparently irresistible movement has even led some, as Judge Ginsburg, to comment in a rather provocative manner during the recent ABA Antitrust Spring Meeting that there were by far too many competition regimes worldwide (leading to an overlap between various regimes and problems of enforcement as regards transnational transactions). While acknowledging the actual issues emphasized by this prestigious voice of Judge Ginsburg, I consider that we still stand to gain from an expansion of competition regimes to economies in transition, provided that the particularities of the introducing ‘ex novo’ competition rules in these contexts is duly pondered.
This applies to the recent developments concerning the implementation of the new 2013 Competition Law of Mozambique. As a previous disclaimer, I should add that I have been acting as from December 2013 as consultant of the Government of Mozambique for the purposes of implementing this competition regime (with the support of several international agencies for economic development).
Mozambique, a former Portuguese colony in the Southeast of Africa, that approved a Socialist Constitution after gaining independence in 1975 and also endured a civil war for various years, has been going through a comprehensive change of its economic constitution and, after significant hurdles arising from lack of economic infrastructure and capital, has started recently a process of significant economic growth, marked inter alia by the development of the energy sector (but also other areas, as it happens with the gradual development of its financial sector).
The implementation of a new competition regime will therefore represent a true cornerstone of this overall process of economic transition. A decisive element of this process of implementation will be the establishment from scratch of a new Competition Authority, as an independent body with an important set of powers. Also important within this context will be the kind of institutional safeguards of that independence of the Authority and the proper recruitment and training of specialized personnel. Also relevant, is the importance attributed to the prospective specialized training of judges to deal in the near future with cases of judicial scrutiny of competition cases.

Competition Policy Priorities for the Year 2014 in Portugal

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In accordance with the provisions of article 7, par. 3 of Portuguese Competition Act (hereinafter, ‘PCA’) arising of the 2012 comprehensive reform (Law nº 19/2012), the Portuguese Competition Authority (hereinafter ‘AdC’) set out by the end of 2013 the “Priorities of Competition Policy for 2014”. This happens only some months after the Government empowered a new President of AdC (Prof. António Ferreira Gomes, formerly at the OECD).

After emphasizing as new relevant developments to take into consideration in the course of 2014, the importance of the new provisions of the 2012 PCA and the establishment of the specialized Competition and Regulation Court, the AdC set as its priorities (i) the safeguard of effective competition towards a dynamic economy, (ii) the promotion of a competition culture and of transparency and (iii) the reinforcement of the capacity of intervention of the Authority.

As regards safeguarding effective competition (i), particularly noteworthy is the fact that AdC, beside a stated intention of fighting cartels, promoting for that the leniency regime (scarcely used so far in Portugal), also purports to act ‘ex officio’ against anticompetitive practices regardless of complaints and of leniency applications. That is a development to welcome since these days some Competition Authorities tend to rely almost exclusively on leniency and focus entirely on cartels (thus unduly reducing their scope of action). Also of the greatest relevance and significance is the stated intent to focus on the investigation and sanctioning of exclusionary abuses of dominant position, enhancing investigation techniques and the proof of infractions. This is an area which we consider decisive for AdC, given the difficulties experimented in the past in the field of abuse of dominant position with Portuguese Courts. In the second domain (ii), we regard of pivotal importance the stated intent of pursuing market studies and sectoral inquiries – energy and maritime ports are, as far as we are concerned, clear targets for AdC to use its enhanced powers in this field after the 2012 reform (leading hopefully to competition oriented practical measures in those sectors). Finally, in the third aforementioned domain (iii) particularly relevant is the stated intent of reinforcing the internal control and due process in terms of decisions of AdC concerning anticompetitive practices as, inter alia, a means of ensuring a better ability to sustain judicial scrutiny.

On the whole, given these stated priorities and the positive expectations emerging from the widely regarded positive track-record of its new President, 2014 may represent a decisive turning point – for the better – for a AdC entering the second decade of its activity.