E-BRIEFS, NEWS AND NOTES: JUNE 2023

By Anthony Leon

Last month, the Northern District of California ruled that Seagate LLC, a hard disk drive manufacturer, may only pursue their price-fixing antitrust claims against foreign manufacturers of suspension assemblies predicated on purchases of products that entered the United States. Seagate Technology, LLC, et al. v. Headway Technologies, Inc., et al., Case No. 3:20-cv-01217 MMC and Case No. 19-md-02918-MMC.

The case arose out of complaints filed in 2020 by Seagate Technology LLC and others (the “Direct Purchasers Plaintiffs,” or “DPP”) against NHK Spring Co., Ltd. and others (the Defendants), alleging that the Defendants engaged in a conspiracy to fix the prices of hard drive suspensions assemblies (SAs) sold in the United States, resulting in plaintiffs allegedly paying more for them than they would have had the conduct not happened. Consequently, the Direct Plaintiffs brought antitrust claims against the Defendants, including violations of the Sherman Act, California’s Cartwright Act, and California’s Unfair Competition Law.

Concurrently, Indirect-Purchasers Plaintiffs (IPP) and End-User Plaintiffs (EUP) joined the lawsuit against the Defendants, claiming the Defendants violated various states’ antitrust statutes and consumer protection statutes. They also assert claims for unjust enrichment under state laws.

The Defendants moved for summary judgment against all the Plaintiffs, arguing that the FTAIA barred the Plaintiffs’ claims because the alleged conspiracy did not have a “direct, substantial, and reasonably foreseeable effect” on US commerce. They also argued the IPP and EUP claims were barred by the Commerce Clause.

The District Court granted in part, and denied in part, Defendants’ motion for summary judgment. The Court granted the motion regarding the DPPs’ antitrust claims predicated on direct purchases of SAs by Seagate Thailand and Seagate Singapore, where products containing those SAs did not enter the United States. The Court denied Defendants’ motions for summary judgment for all other claims, including those brought by the IPPs and the EUPs.

The claims are predicated on purchases that constitute international commerce.

Defendants argued that some of the DPP’s antitrust claims should be barred since the claims arise from sales of SAs outside the United States, and therefore should be treated as international commerce. The Defendants, corporations based outside the United States, billed and shipped the SAs to Seagate Thailand and Seagate Singapore.

Seagate Plaintiffs argued that the direct purchaser remains Seagate LLC, a company located in the U.S., since Seagate Thailand would have solely acted as an agent for Seagate LLC. They do not argue, however, that Seagate Singapore acted as an agent for Seagate LLC.

The Court sided against the Plaintiffs, considering that there was not enough evidence to prove a relationship of agency between the two companies. The Court highlighted that Seagate Thailand used funds that did not belong to Seagate LLC to buy the SAs, which were then used to manufacture HDDs, a key function of the company. Seagate Thailand then invoiced Seagate Singapore for the finished products and received payment in return.

The Court found that the purchases constitute international commerce and should be barred unless it was shown that the conduct constitutes import activity or that the Foreign Trade Antitrust Improvements Act (FTAIA) “brings [the conduct] back within the Sherman Act’s reach.”

U.S. antitrust claims can only be based on a conduct that “affected domestic U.S. commerce.”

Defendants argued the antitrust claims should all be barred by the FTAIA, which generally prohibits the application of the Sherman Act to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations. Courts have generally considered that state law antitrust claims are limited by the FTAIA to the same extent as any federal law claims.

This prohibition applies unless the conduct is “import trade or import commerce,” or there is a showing that it (1) has a direct, substantial, and reasonably foreseeable effect on American commerce, and (2) has an effect of a kind that antitrust law considers harmful. In the last option, if one or both of these prongs are shown, Defendants’ motion for summary judgment should be denied.

On the DPP claims, the Court distinguished between claims that are based on products that have entered the US, and those that did not enter the US.

For products that have entered the US, Defendants argued Seagate Plaintiffs cannot establish the applicability of the import trade or commerce exclusion since they do not provide evidence that any SAs or any products containing SAs were shipped by any defendant to the US. The Court, however, referring to a precedent outlined in Capacitors, found that the import trade or commerce exclusion can be established without a showing that the defendants themselves shipped price-fixed goods into the US. Here, during the negotiations, the alleged conspirators “required” Seagate LLC to disclose the names of Seagate customers, which included large companies located in the US. In this regard, the Defendants cannot be entitled to summary judgment as to Seagate Plaintiffs’ antitrust claims that are predicated on direct purchases of SAs made by Seagate Thailand and Seagate Singapore, where products containing those SAs were then shipped to the United States.

On the contrary, the Court granted Defendants’ motion for summary judgment predicated on direct purchases of products that entered the United States. The Court sided with Defendants that any effect resulting from the direct purchases of SAs by Seagate Thailand or Seagate Singapore of products that never entered the US entirely occurred overseas. In the Court’s words, the direct purchaser claims arise from “wholly foreign transactions,” as the subject products “never wind up in this country’s stream of commerce.”

On the IPPs claims, while pointing out that the IPPs could not establish the applicability of the domestic effects exception, the Court found that the Defendants could not claim the import trade/import commerce exclusion since Defendants have been using employees based in the United States and negotiated in the United States with HDD manufacturers the prices that would be paid when purchase orders for SAs were placed for delivery to the manufacturers’ foreign affiliates. For this, Defendants have not shown they are entitled to summary judgment on the issue of the applicability of the FTAIA.

The Court also rejected the argument that the Commerce Clause bars the IPPs’ claims that arise under state law since all of the IPPs’ state law claims are based on each IPPs’ purchases in the state where such IPP resides. The Court also rejected Defendants’ argument that the text of the states’ antitrust statutes limits their scope to agreements that restrain trade “in” or “within” the particular state.

Conclusion

When bringing an antitrust claim in a US, Plaintiffs should ensure they can establish a showing that transactions that occurred abroad have affected the domestic commerce in order not to be barred by the FTAIA. If not, they should be able to prove the applicability of the import trade or commerce exclusion. Absent such a showing, their claim would likely see a similar fate than Seagate’s claims predicated on purchased products that did not enter the US.

By Lillian Grinnell and Allie Kuritzky

In the case of United States of America v. American Airlines Group, Inc. and JetBlue Airways Corporation, the District Court found that the Northeast Alliance (“NEA”), a partnership between American Airlines and JetBlue, violated Section 1 of the Sherman Act. A violation of Section 1 requires (1) an agreement between separate entities, that (2) unreasonably restrains trade, and (3) impacts interstate commerce. The Court observed that the first and third elements were clearly satisfied in this case, and the discussion revolved around the second element, whether the NEA unreasonably restrained trade. The NEA was determined to have substantially diminished competition in the domestic airline market, with broader anti-competitive effects as well. The Court held that plaintiffs’ expert witnesses were credible, providing coherent perspectives, examples and proof that the NEA represented an agreement that restrained normal competitive trade. The defendants’ claims that the NEA actually promoted and enhanced competitive behavior between American Airlines and JetBlue were shown to be unconvincing to the Court

Facts

 In 2020, American Airlines and JetBlue, two major competitors in the domestic air travel market, negotiated an agreement in which they effectively began to operate as one carrier for most of their flights out of New York and Boston. They shared and traded airport slot and gate assets, created a revenue pooling and sharing agreement, and adjusted their individual route and flight schedules to avoid having competing flights on the same routes times. Prior to this agreement, both JetBlue and American Airlines operated the same routes and times, competing vigorously with one another. After the formation of the NEA, they began to cooperate, allocating particular routes and flight times to one another—effectively sharing those routes. Also in 2020, American Airlines announced the West Coast International Alliance (“WCIA”) with Alaska Airlines. The WCIA, provided for certain cross-carrier collaborations, including code-sharing, reciprocal lounge and loyalty benefits for customers. It also had several limitations, however, including scheduling coordination of flights and total exclusion of any routes in which there were competing direct services.

The combining of American Airlines and JetBlue in the NEA had several effects. Since they shared revenues across the routes included in the agreement, they began to financially operate as one airline, indifferent to which of them were chosen by customers. In addition, the emphasis of the agreement on the New York and Boston regions drew both airlines to move away from other growth opportunities and focus on expanding operations in these two hubs. This change, coupled with the two airlines’ dividing their now shared market between them, meant that both airlines were flying other routes less than before and also that each airline would no longer fly a route flown by the other (formerly competing) airline. Additionally, American Airlines is a Global Network Carrier (GNC), an airline that has hubs and destinations all over the world. In contrast, JetBlue is categorized as a Low-to-Mid Cost Carrier, operating as a mix between a small market disruptor and established airline of significant size. The NEA interfered with JetBlue’s ability to acquire gate and slot assets which it had formerly pursued, both in the United States and in the United Kingdom. Regulators in the UK recently rejected JetBlue’s application for extra slots at Heathrow because they questioned whether, in light of the NEA, JetBlue was truly still a competition-enhancing disruptor, as JetBlue has historically claimed.

The DOJ along with the District of Columbia, Arizona, California, Florida, Massachusetts, Pennsylvania and Virginia, sued JetBlue and American, alleging that the NEA qualified as a true restraint of competition. By pooling their revenues, sharing their airport assets and by merging their schedules so as not to have overlapping flights, the plaintiffs claimed the defendants have directly reduced the number of competitors in the market by one.

Analysis

The Court analyzed the factors needed to illustrate direct and indirect harm to competitive trade. The Court viewed the direct harms posed by the NEA as obvious and considerable. Firstly, as admitted by the JetBlue CEO in his testimony, the partnership interests of the NEA led the defendants to operate as one carrier, collaborating and no longer competing. Specifically, the usage of an optimized schedule is designed to actually eliminate overlapping or duplicate flight plans—the very definition of directly undermining competition. The Court noted that the defendants’ ultimate objective in these practices is simple market allocation, in which certain routes are assigned to American, and others to JetBlue, with no overlap. The Court stated that such a practice is clearly illegal, as the Supreme Court held that “an agreement between competitors… to allocate territories to minimize competition” is a “classic violation of the Sherman Act.”

The Court found significant evidence indicating anti-competitive behavior on the part of both carriers and a complete lack of any evidence indicating competition—including in terms of fares, schedules, services, or advertising. The only exception in which the Court surmised any possibility of competitive behavior between the carriers was within the division of revenue agreement. The airlines claimed that this arrangement should foster competition between the two carriers toward netting the greater share of the revenues. The Court noted that in practice, the carriers clearly prioritized their agreement to collaborate over any competition fostered by that agreement. This was evidenced when, at the end of 2021, JetBlue was found to owe American Airlines a revenue reallocation payment of $200 million as a result of this agreement. American agreed to forgo most of this payment, reducing the obligation to $27 million, so as not to jeopardize the NEA by being overly strict about this issue. The Court observed that this clearly illustrated that even in this area, the only aspect in which any competitive dynamic could be claimed, there was no true competition, but only collaboration. No two competing businesses would have an economic incentive to behave in this fashion.

In further assessing direct harms caused by the NEA, the Court observed that JetBlue’s own status as a maverick, low-cost competitor in the market has also been impacted. JetBlue lost access to specific airport gates and slots in the UK as a direct result of its entanglement in the NEA with American. This change in JetBlue’s market status, among other factors, has led to an increase in JetBlue’s operating costs –thereby interfering with its discount model so closely associated with its brand. Thus, in addition to directly reducing competition between JetBlue and American in terms of flight schedules and other operations, the NEA relationship itself constricted JetBlue’s ability to have competitive impact in other markets as well.

While the Court noted that there was abundant language in the NEA referring to “customer benefits” and “customer value,” it was clear that the primary motivation for establishing the NEA was for the airlines to strengthen their own competitive positions against other carriers. While the airlines portrayed this motivation as procompetitive, because the NEA would allow them to compete more powerfully against Delta, the Court did not find this to be a persuasive justification as increased market share is not the priority of the Sherman Act—anticompetitive practices are. The Court added that while the NEA might have had positive effects on consumers, the anticompetitive effects significantly outweighed them and undermined fundamental antitrust principles. Ultimately, the Court concluded that the NEA is a clear example of anticompetitive collusion between two significant market participants in a constrained market.