Domestic or foreign phones?

Photographer: Angela Weiss/Getty Images

Motorola's Global Tangle in Antitrust Law

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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Should the U.S. be the international sheriff, enforcing its laws aggressively across borders to assure fairness and fight corruption? The prosecution of FIFA, the world's soccer governing body, has been met with mostly positive reaction (apart from the cynical Vladimir Putin) -- which supports a broad use of this power.

The U.S. Supreme Court now has the chance to decide whether it will consider an analogous issue in the context of an antitrust suit brought by Motorola Mobility: Do U.S. laws authorizing private antitrust lawsuits extend to cartels that sell to subsidiaries of U.S. companies? The U.S. Court of Appeals for the Seventh Circuit, in an opinion by the influential Judge Richard Posner, has said no. But even he left a loophole for an intriguing distinction between U.S. government enforcement, which can reach foreign conduct that affects domestic commerce, and private antitrust enforcement, which can’t.

The background to the Motorola case starts simply. Foreign makers of LCD screens for its mobile phones formed a cartel and sold the screens at artificially inflated prices. (We know this because the U.S. government convicted some cartel members for criminal conspiracy.) Motorola then sued cartel members for antitrust violations.

But there was a twist. Motorola bought only 1 percent of its screens for U.S. phones directly from the cartel. The rest of the screens were bought by Motorola subsidiaries registered abroad. In other words, foreign subsidiaries bought screens from foreign makers at cartelized prices.

Does U.S. law apply? The statutory structure, knows as the Foreign Trade Antitrust Improvements Act, has two requirements. First, foreign activities have to affect U.S. commerce directly -- similar to the requirement for the government to bring criminal prosecutions or civil cases against foreign price fixing activity. Second, the effect has to “give rise to a claim” under U.S. law.

In his opinion, Posner split the baby. Urged on by the Department of Justice, he held that the first requirement was met: The foreign screen cartel affected U.S. commerce, because it raised the price of screens that Motorola bought from its foreign subsidiaries for use in U.S. phones. Posner was even willing to say that the effect was direct, because the screens didn’t go through “many layers” of resale to create a “ripple effect.” It was direct enough, in other words, for the government to bring antitrust charges against the cartel.

But Posner refused to conclude that the foreign sales to Motorola’s foreign subsidiaries gave rise to a claim under U.S. antitrust law. His reasoning was based on concern about U.S. law applying abroad, or “extraterritorially” as the law describes it. According to Posner, and according to Seventh Circuit precedent, “U.S. antitrust laws are not to be used for injury to foreign customers.” If they were, he argued, this would interfere with foreign nations’ efforts to enforce their own antitrust laws. The basis for holding back is “comity,” defined by Posner as “good relations among nations.”

Of course, Motorola had a ready answer to this legal problem of extraterritoriality: It’s a U.S. company selling to U.S. consumers. Although it acted through subsidiaries, those subsidiaries were really part of Motorola for purposes of purchasing and selling. Therefore, the company argued, it should be able to bring a suit for price-fixing in sales to its subsidiaries.

Now Posner got clever. He pointed out that Motorola treats its subsidiaries as different companies for purposes of tax law. With a Latin flourish, he held that “distinct in uno, distinct in omnibus.” If the subsidiaries were foreign for one purpose, he insisted, they must be foreign for all purposes -- and therefore didn’t count as Motorola for purposes of antitrust law.

How you feel about this legal sleight of hand is a good index of where you stand on corporate privilege. If you dislike U.S. companies avoiding taxes by foreign registrations, you’ll probably want to cheer for Posner, who hoisted Motorola on its own petard.

If, however, you see multiple subsidiaries as a natural and necessary tool for global corporations subject to regulations and rules from scores of different countries, you may well think Posner was too clever by half. Nothing is more common in law for the same entity to have different characters depending on context. The subsidiaries could easily not count as Motorola for tax purposes, but could count as Motorola for antitrust enforcement purposes.

This latter logic would especially make sense if U.S. laws offer better odds of recovering for antitrust violations than the laws of other countries -- which they often do. Posner’s cleverness was intended to limit the effect of U.S. laws. But that makes no sense if the U.S. laws are better and if other countries don’t mind their application.

There’s good reason to think that well-intentioned foreign countries may not mind the reach of U.S. antitrust laws. The governments of China, Japan, South Korea and Taiwan all worry about too extensive an application of U.S. antitrust law, and have expressed the view that the U.S. should hold back. But that’s because all of them have major corporate actors that exist in cooperative and maybe even collusive relations with one another.

Posner was forced to admit in his opinion that, even under his reading of the law, the U.S. government remains free to enforce antitrust statutes. He tried to distinguish public from private enforcement by saying that the government could be expected to exercise discretion in extraterritorial application of antitrust law, whereas private companies wouldn’t be so discrete.

But from the standpoint of the Asian nations that objected, it can’t be much of a relief that only the government can pursue foreign antitrust judgments. And from the standpoint of good international actors who want to fight anticompetitive behavior, the distinction also makes little sense. The Supreme Court, if it takes the case, shouldn’t rely on Posner’s argument. Extraterritorial enforcement can be a good thing. And it shouldn’t matter whether it’s private or public.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Feldman at nfeldman7@bloomberg.net

To contact the editor on this story:
Stacey Shick at sshick@bloomberg.net