Special Master Provides FTAIA Guidance on Incorporated Product Claims

In the In re Capacitors Antitrust Litigation (No. III), 17-md-2801 (N.D. Cal.) matter, Special Master Jeffrey Bleich has made the following recommendations to the District Court on how to interpret and apply the ever-puzzling Foreign Trade Antitrust Improvements Act (FTAIA), in connection with a dispute between two class members and class counsel on how to allocate settlement funds:

• claims based on overseas purchases of components, which are then incorporated into finished (or semi-finished) products and ultimately shipped into the U.S., could potentially meet either the import exclusion and/or the “domestic effects” exception of the FTAIA;
• direct purchaser plaintiff (DPP) class counsel should be given the discretion to evaluate the strength of such claims for purposes of distributing settlement funds; and
• to determine the amounts recoverable for such claims, class members should provide class counsel with information relevant to defendants’ awareness (actual or constructive) that the capacitors they sold at allegedly artificially inflated prices overseas were likely to be shipped in finished products to the United States. In so holding, the Special Master rejected the argument presented by objecting class members that the defendants’ knowledge and intent is irrelevant under the statute.

In the event that the Court adopts the Special Master’s views, particularly as to the last point, we finally may have clearer precedent regarding the nature of the evidence needed to satisfy the “reasonable foreseeability” prong of the domestic effects exception to the FTAIA in situations where the alleged price-fix was on components sold abroad which later enter the U.S. as finished products. The court’s adoption of the recommendation would also strengthen the argument advanced by some (including class counsel in the Capacitors case) that the fact-bound nature of these foreign finished product claims make them inappropriate for class treatment.

The Court has not yet scheduled a hearing or indicated when a ruling on the Special Master’s Report & Recommendations will be issued.

The Current Dispute

The proceedings before the Special Master arose from a motion by two DPP class members who objected to the allocation of funds from settlements between the class and certain defendants totaling $66.9 million. The objecting class members’ principal complaint is that DPPs released incorporated capacitor claims, i.e., claims based on overseas purchases of components that eventually made their way into the U.S. in finished (or semi-finished) products, without properly compensating class members that possess this type of claim. The two objecting class members asserted that they had damages totaling $192 million and $199 million, respectively, arising from this type of claim.

The Court’s Previous FTAIA Rulings

Judge Donato had previously issued two FTAIA rulings in Capacitors—both under the summary judgment standard:

In its first decision, the Court assessed the viability of DPPs’ claims based on incorporated capacitor commerce and held that the domestic effects exception of the FTAIA left only a “small opening” for DPPs to pursue those claims, which would require plaintiffs to proffer additional facts “to get through the eye of that needle.” 14-cv-03264, ECF 1302 at 11.

In its second decision, the Court assessed claims for incorporated capacitor commerce brought by opt-out plaintiff Flextronics International USA, Inc. Flextronics claimed that certain of its foreign finished product claims—specifically, those based on purchases of capacitors for units built outside the U.S. for later sale in the U.S.—qualified as “import trade or commerce” and are therefore actionable under the Sherman Act and are not precluded by the FTAIA. On September 20, 2018, the Court issued an order finding that Flextronics could proceed to trial on such a theory, but expressly limited its holdings to the facts presented by Flextronics in that case. 17-md-2801, ECF No. 329. The current objecting class members claim that those facts are sufficiently analogous to their own that they should be entitled to compensation through the settlements obtained by the DPPs via the import commerce exception to the statute.

Special Master’s July 31 Report & Recommendation

On April 10, 2019, Judge Donato referred the current dispute to Special Master Jeffrey Bleich. On July 31, 2019, the Special Master issued a Report and Recommendation (R&R, 17-md-2801, ECF No. 821) finding that the release language in DPPs’ previous settlement agreements at issue was broad enough to cover the objecting class members’ claims based on capacitors first sold by the defendants outside the U.S. to the objecting class members’ foreign agents and incorporated into finished products shipped to the objecting class members in the U.S. and that such claims were legally viable and eligible for compensation, even if “iffy and attenuated.” The Special Master also said that DPPs ought to have the discretion to evaluate the strength of the objectors’ legal claims based on that commerce when DPPs determine how the settlement funds are to be allocated.

In that regard, the Special Master concluded that, in order to recover from the settlements for the incorporated capacitor commerce, the objecting class members would still need to make a satisfactory evidentiary showing to the DPPs that they would have a reasonable chance of prevailing on such claims. In particular, they would need to produce evidence establishing that it was reasonably foreseeable to the defendants that the capacitors that they sold at artificially inflated prices would be shipped to the objecting class members in the U.S. in the finished products at issue, and have an effect on U.S. commerce—an “evidentiary challenge” that the Special Master deemed “not insignificant.”

In doing so, the Special Master rejected the objecting class members’ argument that the defendants’ knowledge and intent is not relevant to the FTAIA. The Special Master noted that Flextronics “presented evidence that defendants sold capacitors to Flex Affiliates knowing that the capacitors would be incorporated into goods that were intended to be (and were) shipped to the U.S.” “Accordingly, there is a mens rea requirement under the FTAIA in that, at the very least, it must be reasonably foreseeable to a defendant its sale of goods at artificially inflated prices will be shipped to the United States where it will have an effect on U.S. commerce.”

The objecting class members took issue with the Special Master’s interpretation of the FTAIA, and with the authority given to DPPs to allocate the settlement funds. The objectors argued that their purchases of incorporated capacitors are import commerce and “thus are not subject to the FTAIA’s requirement that defendants reasonably foresaw an effect on the United States.” The objecting class members claim that the Special Master did not consider this situation because he only addressed their evidentiary burden “if Objecting Members were to pursue claims under a domestic effects theory.” DPPs filed a response to this, arguing that Judge Donato should adopt the Special Master’s recommendation in full, including the Special Master’s conclusion that the objecting class members are required to submit evidence to DPPs to substantiate its claims based on the foreign commerce.

Special Master’s November 1 Report & Recommendation

Judge Donato asked the Special Master to submit a supplemental report, which he did on November 1, 2019. In the second report (17-md-2801, ECF No. 2473), the Special Master upheld his original recommendations and clarified that his “decision to recommend compensation for incorporated capacitor claims was not based on a finding” that the commerce at issues constituted import commerce or non-import commerce with domestic effects under the FTAIA. He only found that “a Sherman Act claim and/or an alternative FTAIA claim is sufficiently viable to justify compensation” and that the value of such a claim will be “subject to litigation risk which may or may not be higher than claims based on raw capacitor purchases.”

We will now have to wait and see what approach the District Court takes in this interesting spin-off to the main litigation, which may provide a clear approach for how to apply the FTAIA to incorporated product claims.