61ST ANNUAL ANTITRUST LAW SPRING MEETING April 10, 2013 3:45-5:15 pm Lessons From the AU0 Trial Lessons ofauo: Application of the Per Se Rule Precluded Evaluation of the Reasons for, and Impact of Competitor Meetings Presented By: Christopher Nedeau, Veronica Harris SECTION OF ANTITRUST LAW Promoting Competition Protecting Consumers
LESSONS OF AUO: Application of the Per Se Rule Precluded Evaluation of the Reasons for, and Impact of, Competitor Meetings. Written by: Christopher Nedeau and Veronica Harris of Nossaman LLP 1. In the Ninth Circuit, under Metro Industries, Inc. v. Sammi Corp., 82 F.3d 839 (1996), Sherman Act antitrust claims based on foreign conduct must be evaluated under the rule of reason. In the AUO case, the district court, in contravention of precedent and in violation of the due process rights of the defendants, applied the per se rule. Thus, the government was not required to prove actual impact of the crystal meetings where prices were discussed and consensus reached on American consumers or the U.S. economy. Application of the per se standard at the behest of the DOJ, led to the conviction of AUO, its subsidiary and ultimately three AUO employees without inquiry into the reasons for the conduct, whether the U.S. economy was actually harmed by the foreign conduct, or whether the conduct ultimately benefited consumers. Had the rule of reason standard been applied, the outcome may have been quite different. The distinction between the per se rule and the rule of reason is critical and is brought into focus as the per se rule has come under increasing criticism. It is well-established that Section 1 of the Sherman Act (which encompasses conspiracies in constraint of trade such as price-fixing) is intended to prohibit only unreasonable restraints of trade. Generally, in analyzing whether or not an alleged restraint of trade is illegal, one must look at "a variety of factors including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint s history, nature, and effect." State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). The default "rule of reason" test "weighs legitimate justifications for restraint against any anti-competitive effects." Paladin Assocs., Inc. v. Montana Power Co., 328 F.3d 1145, 1156 (9th Cir. 2003). The per se rule is a narrowly prescribed exception to the rule of reason. It applies only to restraints that have a pernicious effect on competitors and lack... any redeeming value." Northern Pac. Ry. v. United States, 356 U.S. 1, 5 (1958). The underlying reasoning for the rule, which is essentially a short-cut to avoid extensive economic analysis, is that such conduct would always or almost always tend to restrict competition and decrease output. Broadcast Music, Inc. v. CBS, 441 U.S. 1, 19-20 (1979). The per se rule means just that that such conduct is per se illegal regardless of whether or not it actually causes harm. There is no inquiry into the effects of the conduct or the intentions of those engaged therein. The sole focus is whether the conduct occurred and whether the defendants joined in it. Of course, one ought to be cautious to presume harm and disregard intent when a closer look might show their absence. This is particularly true in criminal cases, where faithful adherence to the presumption of innocence means that the additional time and resources required for a rule of reason analysis is justified in the face of high fines and long incarceration. 1 Nossaman LLP served as lead counsel for AU Optronics Corporation ( AUO ). 1
In fact, courts have been increasingly reluctant to apply the per se rule over the last several decades. The Supreme Court has gone so far as to overrule previously wellestablished precedent deeming certain conduct per se illegal. Conduct that is no longer presumed illegal but is analyzed under the rule of reason includes: vertical minimum price-fixing, maximum resale price maintenance, and agreements to restrict locations for resale of merchandise. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 882 (2007) (vertical minimum price fixing); State Oil Co. v. Khan, 522 U.S. 3, 7 (1997) (maximum resale price maintenance); Cont l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58-59 (agreement to restrict the resale locations). Given courts hesitancy to apply the per se rule in domestic cases, it is troubling to see the district court reverse course in the AUO case in contravention of the Ninth Circuit s decision in Metro Industries. In Metro Industries, the court held that where a Sherman Act claim is based on conduct outside the United States we apply rule of reason analysis to determine whether there is a Sherman Act violation. 82 F.3d at 845. In so doing, the Ninth Circuit appeared to recognize that to the extent that the per se rule is an imperceptive and harsh instrument in the domestic context, the complexities of the international context make it even more so. The Court reasoned that "the conventional assumptions the courts make in appraising restraints in domestic markets are not necessarily applicable in foreign markets." Id. at 845. It went on to state that restraints that are foreign in nature may "pose very little danger to American commerce or have more persuasive justifications than are likely in similar restraints at home." Id. The court further explained that this rule applies even if the conduct would require application of the per se rule, [if] it occurred in a domestic context. Id. at 844. The court actually used price fixing in a foreign country to illustrate its point that this rule applies to any type of antitrust activity based on foreign conduct. Id. at 845. The question of whether the alleged illegal activity at issue was "foreign conduct was less clear in Metro Industries than in AUO. The Metro Industries case involved cooperation between the U.S. company that was the plaintiff and the foreign defendant; it involved a product specifically designed for the U.S. market; U.S. subsidiaries of the foreign defendant assisted in the illegal activity in the U.S.; the foreign defendant had significant business in the U.S.; and the effect of the conduct in the U.S. was evident. 82 F.3d at 847. Nonetheless, the Ninth Circuit deemed that the alleged illegal activity was "foreign conduct" and thus the rule of reason applied. Id. at 845. In the AUO case, the evidence showed that the alleged cartel activity was wholly foreign conduct. The government s convictions in the AUO trial relied on allegations that they joined other foreign competitors in a conspiracy to fix prices of TFT-LCD panels in meetings that occurred in hotel conference rooms in Taipei, Taiwan. The testimony at trial confirmed that the conduct at issue took place outside of the United States. The panels involved in the alleged conspiracy were manufactured by foreign entities, purchased by foreign entities and shipped to foreign destinations before they were incorporated into monitors, laptops and other consumer products, some of which were 2
ultimately purchased by U.S. companies or consumers. Nonetheless, the district court ignored the dictate of Metro Industries that the Sherman Act cannot be applied to foreign conduct without first looking at whether the challenged restraints on trade are unreasonable. Thus, the AUO defendants were prohibited from putting on a defense demonstrating the reasons for their conduct and the actual effect that such conduct had on competition and ultimately on the U.S. economy and domestic consumers. Despite its erroneous legal ruling, the district court seemed to appreciate the particular circumstances of the AUO case that made a rule of reason standard so essential to a just result, based on the real facts rather than legal presumption. The court acknowledged during sentencing that "there were reasons for committing these acts." (Sept. 20, 2012 Transcript of Proceedings 19:20-21.) It stated that the AUO executives were facing "a lot of business pressures. (Id. 18:10-12.) They thought "they were doing the right thing vis-à-vis their industry and their companies." (Id. 18:5-7.) And it concluded that "the business logic of assisting the fledgling industry in another country and in another culture and acting in and for the benefit of [the] company and others in the industry are offsetting features of this crime." (Id. 17:21-25.) Further, the district court acknowledged that AUO and AUOA and the individual defendants here have produced an extremely useful product, and it really has changed the world." (Id. 15:22-24.) But the infiltration of our lives by these now omnipresent panels was not always a foregone conclusion. The TFT-LCD panel industry faced significant obstacles to its development and growth. Panel manufacturers like AUO took tremendous risks, investing enormous amounts of capital, earning razor-thin and often negative margins, navigating huge swings in supply and demand, and attempting to survive during long periods of oversupply. Many companies fled the panel-making business and the survival of the ones that stayed was constantly threatened. The precarious existence of this important and innovative, but very risky and fragile industry was the context in which employees from the LCD manufacturers began meeting in Taiwan to exchange information about the market and pricing. Attendance at these crystal meetings did not result in exorbitant profits for AUO nor did it result in rising or even stable prices of LCD panels. Instead, throughout six years of competitor meetings despite consumer demand for the panels increasing the general trend of panel prices was downward. Indeed, the uncontested evidence at trial showed that AUO consistently charged prices lower than those discussed at the competitor meetings. Remarkably, throughout the period, AUO invested more than $14 billion dollars to lower the cost of manufacturing the panels, increase their quality and simultaneously increased shipments by more than 900%. Indeed, during the AUO trial the government put on two witnesses who represented the supposed victims of the alleged conspiracy (Hewlett Packard and Dell). Both witnesses testified that more often than not they set and obtained target prices for panels that were below the market price. These powerful American corporations sold finished products (monitors and laptops) and along with the off-shore system integrators and other component suppliers, were not subject to the huge swings in supply and demand 3
that plagued the panel manufacturers. Nor did they invest millions of dollars into new technology to both improve the quality of LCD panels and decrease the price. These examples are only some of the evidence that demonstrate the viability of a defense for AUO and its employees under the rule of reason. The district court s erroneous decision that the jury could not take into account any of the actual effects of the conspiracy required the government prosecutors only to put on evidence that an antitrust cartel existed and that the AUO defendants joined it, in order to obtain convictions. This departure from Ninth Circuit precedent not only stripped defendants of a potentially exculpatory defense, it violated the defendants due process rights. This due process violation is egregious because the individual defendants were Taiwanese citizens living in their home country who voluntarily came to the U.S. to face the charges against them, weighing the risks of huge fines and up to 10 years in prison for an opportunity to explain their actions. The danger of giving short shrift to the fair notice principle underlying the Due Process Clause is problematic in the context of the AUO case because the words of the Sherman Act are vague and overbroad with respect to what conduct is illegal. United States v. U.S. Gypsum Co., 438 U.S. 422, 438 (1978) ( unlike most traditional criminal statutes, [the Sherman Act] does not, in clear and categorical terms, precisely identify the contact which it prescribes"). The AUO defendants relied on undisputed Ninth Circuit precedent when they chose to come to American shores and face the government s charges in order to prove that they never possessed the mens rea required for criminal liability. The economic evidence would show that the alleged illegal activity had pro-competitive effects which greatly outweighed any anti-competitive result. Whether the jury would have understood the actions of AUO and its employees differently if they were allowed to hear why the meetings took place; why AUO attended them; and what was the demonstrable effect of these meetings on competition between foreign TFT-LCD manufacturers, will now likely go unanswered. 4