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Second Circuit Clarifies Its FTAIA Standard
Lotes Co., Ltd. v. Hon Hai Precision Industry Co., Ltd., No. 13-2280, slip op. (2d Cir. June 4,
2014).
On June 4, 2014, in Lotes Co. Ltd. v. Hon Hai Precision Indus. Co., Ltd., the U.S. Court
of Appeals for the Second Circuit clarified several aspects of its case law regarding the Foreign
Trade Antitrust Improvements Act (FTAIA), 15 U.S.C. 6a The panel held that the
requirements of the FTAIA are non-jurisdictional, overruling Filtech S.A. v. France Telecom
S.A., 157 F.3d 922 (2d Cir. 1998). In addition, the Second Circuit followed the Seventh Circuits
decision in Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012) (en banc), holding that
foreign anticompetitive conduct has a direct effect on U.S. domestic or import commerce when
there is a reasonably proximate causal nexus between the conduct and the effect.
Lotes manufactures universal serial bus (USB) connectors in China. Lotes sells those
USB connectors to original device manufacturers (ODMs) in China. The ODMs, including the
defendants Hon Hai and Foxconn, incorporate the USB connectors into notebook computers,
which are exported to the United States and other countries.
Lotes alleged that Hon Hai and Foxconn conspired to monopolize the market for devices
that incorporate USB 3.0 connectors (the latest industry standard for USB connectors).
According to Lotes, Hon Hai and Foxconn promised to license the patents necessary to
manufacture USB 3.0 devices to members of a standard-setting organization, including Lotes, on
reasonable and non-discriminatory terms. Then, Foxconn and Hon Hai refused to license the
patents to Lotes. Lotes alleged that this anticompetitive behavior in China would have
downstream effects worldwide, including in the United States.
Foxconn and Hon Hai moved to dismiss Lotes complaint for lack of subject matter
jurisdiction. The district court granted the motion. It reasoned that the FTAIA is jurisdictional
and held that Lotes failed to allege a direct, substantial, and reasonable foreseeable effect on
U.S. commerce.
The Second Circuit affirmed, but its analysis differed from that of the district court.
Following Arbaugh v. Y&H Corp., 546 U.S. 500 (2006), the Second Circuit held that the
requirements of the FTAIA go to the merits of an antitrust claim rather than to subject matter
jurisdiction. The Second Circuit also rejected the defendants arguments that the structure of
the Sherman Act, the FTAIAs legislative history, principals of international comity, and dictum
from F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004) compelled the
conclusion that the FTAIA was jurisdictional.
The Second Circuit also adopted a different definition of the word direct in the
FTAIAs direct, substantial, and reasonably foreseeable effect standard. The FTAIA states
that the Sherman Act does not apply to conduct involving foreign trade or commerce (other than
import trade or commerce) with foreign nations unless the trade or commerce (1) has a direct,
substantial, and reasonably foreseeable effect on domestic commerce and (2) the domestic
effect gives rise to a claim under federal antitrust law. 15 U.S.C. 6a(1)(A). The Second
Circuit agreed with the position advocated in the amicus curiae brief submitted by the

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Department of Justice and Federal Trade Commission, and defined the word direct to mean a
reasonably proximate causal nexus.
In dicta, the Second Circuit faulted the district court for placing near-dispositive weight
on the fact that the USB connectors at issue were manufactured in China before being shipped to
the U.S. The court stated that [t]here 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. The Second Circuit
indicated that district courts should examine multiple factors when determining whether a
domestic effect is directincluding the structure of the market and the nature of the
commercial relationships at each link in the causal chain. The Second Circuit also observed
that principals of proximate causation would drive this analysis, although the court noted that
proximate causation is a notoriously slippery doctrine.
However, the Second Circuit did not apply this test to the facts alleged by Lotes. Instead,
the court found that Lotes claims did not give rise to a claim under federal antitrust law.
Under this prong of the FTAIA, the Second Circuit reasoned that a domestic effect must
proximately cause the plaintiffs injury. The court held that Lotes claims failed this test. Lotes
alleged that it was injured by Foxconns patent hold up scheme in China, resulting in
downstream effects in the U.S. Therefore, the court concluded that Lotes' injury precedes any
domestic effect in the causal chain. Accordingly, the Second Circuit affirmed the district
courts dismissal on this alternative ground.