Ninth Circuit Validates a Theory of Extraterritorial Antitrust Regulation in Global Price-Fixing Case

“Close-up of a hard disk drive on a black background” by Ivan Radic is licensed under CC BY 2.0.

It is not easy for the foreign victims of global price-fixing schemes to assert viable claims under U.S. antitrust law, even when the conspiracy in question also affects U.S. markets. In a recent case, though, the Ninth Circuit vacated an order of summary judgment against the foreign purchasers of price-fixed goods, concluding that they had alleged a viable theory for the extraterritorial application of U.S. law to their claims.

The dispute, Seagate Technology LLC v. NHK Spring Co., Ltd., involves a civil antitrust claim launched in the wake of a criminal prosecution. In 2019, the Japanese company NHK Spring Co., Ltd. (NHK) pleaded guilty to criminal price-fixing under the Sherman Act. The company admitted to fixing the prices of hard disk drive suspension assemblies, a component used in the manufacture of consumer electronic devices, in the United States and foreign markets. One of NHK’s customers, California-based Seagate Technology LLC, along with two of its foreign subsidiaries, subsequently launched a civil suit seeking treble damages.

The potential obstacle to Seagate’s claims was that most of the suspension assemblies had been purchased in Thailand, by Seagate’s Thai entity. NHK sought dismissal, arguing that Seagate’s claims were based on foreign injury and did not fall within the scope of U.S. antitrust law.

Background: Applying U.S. Antitrust Law to Global Price-Fixing Schemes

Under Section 6 of the Foreign Trade Antitrust Improvements Act, most foreign commercial activity lies beyond the reach of U.S. antitrust law. The Act recognizes two exceptions. The first is a categorical exception for import trade. Anticompetitive conduct overseas that affects the price of goods imported into and bought by purchasers in the United States falls within the scope of U.S. law. This exception protects domestic purchasers of price-fixed goods.

The second is a more limited exception for claims related to foreign antitrust injuries. If (a) foreign anticompetitive conduct has a “direct, substantial, and reasonably foreseeable effect” within the United States and (b) that effect “gives rise to a claim” under the Sherman Act, then U.S. law applies.

The key Supreme Court decision interpreting the FTAIA, F. Hoffmann-La Roche Ltd. v. Empagran S.A. (2004), held that the existence of domestic effects does not trigger the application of U.S. law to claims based on “independent” foreign injury. In other words, to invoke U.S. law, it is not enough for a plaintiff to establish that it was the victim of a price-fixing scheme that also harmed U.S. purchasers. It has to show that the effects within the United States actually gave rise to its injury. However, the Court didn’t clarify how close the causal connection has to be between the U.S. effect and the plaintiff’s injury.

Seagate’s Claims

Seagate manufactures hard disk drives. These drives include a number of component parts, including the suspension assemblies Seagate bought from NHK. Seagate sources those components abroad, incorporates them in multiple stages in the assembly (also abroad) of finished hard disk drives, and then ships the finished drives to its Singapore entity for distribution. Some of them are sold by other Seagate entities outside the United States, and some are imported into the United States for sale there.

Alleging that NHK’s price-fixing had caused antitrust injury, Seagate and its foreign entities invoked both the import exception and the effects exception laid out in the FTAIA.

The Import Exception

Seagate’s purchases of price-fixed suspension assemblies from NHK took place in Thailand. Those assemblies were not imported into the United States; rather, they were incorporated into hard disk drives some of which were then imported (by Seagate itself) into the United States. Seagate nevertheless argued that the import exception applied to the purchases of the suspension assemblies that came into the United States as part of completed disk drives.

The Ninth Circuit rejected this argument, noting that NHK had not imported the suspension assemblies in question into the United States. It concluded that “mere parts in the international supply chain lack sufficient U.S. nexus to justify the extraterritorial reach of American antitrust laws.”

The Effects Exception

As noted above, the effects exception applies when foreign activity causes a direct effect in the United States that then gives rise to foreign antitrust injury. Like other courts including the D.C. Circuit and the Seventh Circuit, the Ninth Circuit has adopted a restrictive standard of proximate causation. Under this standard it is not enough to show that U.S. price-fixing is related to price-fixing in other countries—or even that foreign price-fixing could not have occurred but for U.S. price-fixing. Rather, a claimant must establish that the U.S. price-fixing is the proximate cause of its foreign injury.

The Ninth Circuit clarified this standard in In re Dynamic Random Access Memory Antitrust Litigation (2008):

“The defendants’ conspiracy may have fixed prices in the United States and abroad, and maintaining higher U.S. prices might have been necessary to sustain the higher prices globally, but [the plaintiff] has not shown that the higher U.S. prices proximately caused its foreign injury of having to pay higher prices abroad. Other actors or forces may have affected the foreign prices.”

Seagate alleged facts suggesting that their claims met this restrictive standard. Their argument rested on the process by which the company sourced components. Each quarter, Seagate’s U.S.-based Commodities Management Team (CMT) would send a request for quotation soliciting bids for particular components from its suppliers. The suppliers would respond with those bids, at which point the CMT would negotiate product volume and pricing with each supplier. The agreed prices and volumes were then transmitted to Seagate’s foreign entities, which would refer to them in placing eventual purchase orders. Within this system, as the court observed, the foreign entities “apparently lacked any authority to decide on any terms of purchase.” The U.S. prices, inflated by NHK’s price fixing, directly set the price of the foreign purchases as well.

The Ninth Circuit held that these allegations distinguished Seagate’s claims from those that had been rejected in other cases:

“We believe the district court erred in reading In re DRAM as categorically holding that rigged U.S. prices cannot proximately cause injuries abroad. In that case, we rejected the tenuous theory that higher U.S. prices for computer memory chips (i.e., the domestic effect) proximately caused higher global pricing (i.e., the foreign injury) because the plaintiff relied on the interconnected nature of the computer memory chip market and the leading role of U.S. buyers.… Seagate’s theory, in contrast, is rooted in the certainty of binding pricing contracts—not the complex vagaries of the global pricing market.… Seagate explains exactly how “[d]efendants’ activities resulted in the U.S. prices directly setting the worldwide price” and thus causing the foreign antitrust injury: NHK and a competitor conspired to fix prices, setting inflated U.S. prices (i.e., the domestic effect) that Seagate’s foreign entities then accepted as a matter of company policy and contractual requirements (i.e., the foreign injury).”

The court remanded for the district court to assess any remaining factual questions regarding the pricing strategy—noting that it “suspect[ed that] Seagate has adduced enough evidence of a direct, proximate relationship to pass summary judgment.”

Opening the Floodgates?

The Ninth Circuit recognized that its decision might appear inconsistent with the thrust of Empagran and other precedent, asking the salient question: “[A] foreign company bought a price-fixed good from another foreign company abroad. Why should that foreign company have access to our courts based on our laws?”

It answered its own question in part by referring to the rigorous nature of the proximate cause test itself. Because that test requires that any foreign injuries are the direct result of substantial harm to U.S. commerce, the court said, its decision would not “[open] U.S. courts to a flood of lawsuits from suppliers overseas.” But then, in a concluding section, the court provided another answer to the question. “Simply put, Americans too were harmed by NHK’s price-fixing, even if foreign companies are the ones suing based on their injuries suffered abroad.” In a final footnote, it even noted: “To be fair, Americans will not directly reap the benefits of any damages award in this case. But the deterrent effect on future anticompetitive behavior will still benefit the United States.”

In Empagran, the Supreme Court considered but dismissed precisely this argument—that the application of U.S. law to foreign claims might, by increasing deterrence, lessen the incidence of foreign anticompetitive activity directed at the United States. I happen to agree with this argument, and co-authored an amicus brief in the Empagran case saying as much—and so it is gratifying to see it resurface as a justification for extraterritorial regulation of global price-fixing.