China’s attempt to
control vitamin C market leads to multi-national legal discussion
Plaintiffs-Appellees,
Animal Science Products, Inc. and The Ranis Company, Inc., along with various
U.S. vitamin C purchasers, brought a multi-district antitrust class action
against Defendants-Appellants Hebei Welcome Pharmaceutical and North China
Pharmaceutical Group Corporation, entities incorporated under the laws of
China. In their complaint, Plaintiffs alleged that Defendants conspired to fix
the price and supply of vitamin C sold to U.S. companies on the international
market in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and
Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 4, 1.
Beginning
in the 1970s, China, the leading producer and exporter of vitamin C, started
implementing various export controls in order to retain a competitive edge over
other producers of vitamin C on the world market. In 1990s, as a result of a
reduction in vitamin C prices, the Government facilitated industry-wide
consolidation and implemented regulations to control the prices of vitamin C
exports. In 2001, China supplied 60% of the worldwide vitamin C market.
In
2005, various vitamin C purchasers in the United States, including
Plaintiffs-Appellees, filed numerous suits against Defendants-Appellants. The
Plaintiffs alleged that in December 2001 Defendants colluded with an entity
referred to as both, the Western Medicine Department of the Association of
Importers and Exporters of Medicines and Health Products of China and the China
Chamber of Commerce of Medicines & Health Products Importers &
Exporters, (the “Chamber”), and agreed to restrict their exports of Vitamin C
in order to create a shortage of supply in the international market, all with
the purpose and effect of fixing prices.
Defendants
moved to dismiss the complaint on the basis that they acted pursuant to Chinese
regulations regarding vitamin C export pricing. Furthermore, they argued that
they were required by the Chinese Government to coordinate prices and create
supply shortage. Moreover, Defendants argued that the district court should
dismiss the complaint pursuant to the act of state doctrine, the doctrine of
foreign sovereign compulsion, and/or principles of international comity.
In
support of Defendants’ motion to dismiss, the Ministry of Commerce of the People’s
Republic of China (the “Ministry’) filed an amicus curiae brief representing
that it is the highest authority within the Chinese Government authorized to
regulate foreign trade; and that the Chamber is a Ministry-supervised entity
authorized by the Ministry to regulate vitamin C export prices and output
levels. As presented, the Chamber was an instrumentality of the State that was
required to implement the Ministry’s administrative rules and regulations with
respect to vitamin C trade. The Ministry also presented evidence that the
Chamber created a vitamin C Subcommittee (the “Subcommittee”) in 1997, and a
“price verification and chop” policy (“PVC”) implemented in 2002, all with the
aim to regulate the vitamin C industry. As explained, before 2002, only
companies that were members of the Subcommittee were allowed to export vitamin
C, and were granted an “export quota license” if its export price and volume complied
with the Subcommittee’s coordinated export price and export quota.
The
Ministry also represented that, in 2002, the Chamber implemented the PVC
system, which was in place during the time of the antitrust violations alleged
in this case. The implementation of the PVC system was announced by an official
notice (“the 2002 Notice”). The 2002 Notice gave the right to the Chamber “to
coordinate export prices and industry self-discipline.” Under this system,
vitamin C manufacturers were required to submit documentation to the Chamber
indicating both the amount and price of vitamin C it intended to export. The
Chamber affixed a “chop” to the contract signalizing that the contract had been
reviewed and approved by the Chamber only if the price of the contract was at
or above the minimum acceptable price set by coordination through the Chamber.
The
district court denied Defendants’ motion to dismiss in order to allow for
further discovery with respect with whether Defendants’ assertion that the
actions constituting the basis of the antitrust violations were compelled by
the Chinese Government.
After
further discovery, Defendants moved for summary judgment. The district court
denied Defendants’ motion for summary judgment, determining that “Chinese law
did not compel Defendants’ anticompetitive conduct” in any of the relevant time
periods.
In
March 2013, after a jury trial, the jury found Defendants liable for violations
of Section 1 of the Sherman Act. The district court then awarded Plaintiffs
approximately $147 million in damages and issued a permanent injunction barring
Defendants from further violating the Sherman Act. Defendants appealed the
judgment.
The
United States Court of Appeals for the Second Circuit vacated and reversed the
judgment based on international comity at issue in Defendants’ motion to
dismiss and remanded the case with instructions to dismiss Plaintiffs’
complaint with prejudice.
The
Court addressed the question of what laws and standards control when U.S.
antitrust laws are violated by foreign companies that claim to be acting at the
express direction or mandate of a foreign government.
“The
central issue that we address is whether principles of international comity
required the district court to dismiss the suit. As part of our comity analysis
we must determine whether Chinese law required Defendants to engage in anticompetitive
conduct that violated U.S. antitrust laws. Within that inquiry, we examine the
appropriate level of deference to be afforded a foreign sovereign’s
interpretation of its own laws. […]”
“We
review for abuse of discretion a district court’s denial of a motion to dismiss
on international comity grounds. JP Morgan Chase Bank v. Altos Hornos de
Mexico, 412 F.3d 418, 422 (2d Cir. 2005). An abuse of discretion ‘occurs when
(1) the court’s decision rests on an error of law or clearly erroneous factual
finding, or (2) its decision cannot be located within the range of permissible
decisions.’ CBS Broad. Inc. v. FilmOn.com, Inc., 814 F.3d 91, 104 (2d Cir.
2016) (alterations and internal quotation omitted). The determination of
foreign law is ‘a question of law, which is subject to de novo review.’ Karaha
Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (‘Pertamina’),
313 F.3d 70, 80 (2d Cir. 2002) (internal quotation omitted). In determining
foreign law, “we may consider any ‘relevant material or source, including the
legal authorities supplied by the parties on appeal as well as those
authorities presented to the district court below.’ Carlisle Ventures, Inc. v.
Banco Espanol de Credito, S.A., 176 F.3d 601, 604 (2d Cir. 1999); see Fed. R.
Civ. P. 44.1.”
“[…]
Comity is both a principle guiding relations between foreign governments and a
legal doctrine by which U.S. courts recognize an individual’s acts under
foreign law. See In re Maxwell Commc’n Corp., 93 F.3d 1036, 1046 (2d Cir.
1996). ‘Comity, in the legal sense, is neither a matter of absolute obligation,
on the one hand, nor of mere courtesy and good will, upon the other.’ Hilton v.
Guyot, 159 U.S. 113, 163-64 (1895) (internal quotations omitted). ‘[I]t is the
recognition which one nation allows within its territory to the legislative,
executive or judicial acts of another nation, having due regard both to
international duty and convenience, and to the rights of its own citizens or of
other persons who are under the protection of its laws.’ Id. This doctrine ‘is
not just a vague political concern favoring international cooperation when it
is in our interest to do so [but r]ather it is a principle under which judicial
decisions reflect the systemic value of reciprocal tolerance and goodwill.’ Societe
Nationale Industrielle Aerospatiale v. U.S. Dist. Court of S. Dist. of Iowa,
482 U.S. 522, 555 (1987). […]”
“The
principles of comity implicate a federal court’s exercise of jurisdiction.
O.N.E. Shipping Ltd. v. Flota Mercante Grancolombiana, S.A., 830 F.2d 449, 452
(2d Cir. 1987). Defendants do not dispute that the district court had subject
matter jurisdiction over Plaintiffs’ claims, see Hartford Fire Ins. Co. v.
California, 509 U.S. 764, 796 (1993) (collecting cases) (’[I]t is well
established by now that the Sherman Act applies to foreign conduct that was
meant to produce and did in fact produce some substantial effect in the United
States.’); rather, Defendants argue that principles of international comity
required the district court to abstain from exercising that jurisdiction here,
see O.N.E. Shipping Ltd., 830 F.2d at 452. […]”
To
determine whether to abstain from asserting jurisdiction on comity grounds the
Court applies the multi-factor balancing test set out in Timberlane Lumber Co.
v. Bank of Am., N.T. & S.A., 549 F.2d 597, 614-15 (9th Cir. 1976) and
Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287, 1297-98 (3d Cir.
1979).
“Combined
and summarized here, the enumerated factors from Timberlane Lumber and
Mannington Mills (collectively the ‘comity balancing test’) guiding our
analysis of whether to dismiss on international comity grounds include: (1)
Degree of conflict with foreign law or policy; (2) Nationality of the parties,
locations or principal places of business of corporations; (3) Relative
importance of the alleged violation of conduct here as compared with conduct
abroad; (4) The extent to which enforcement by either state can be expected to
achieve compliance, the availability of a remedy abroad and the pendency of
litigation there; (5) Existence of intent to harm or affect American commerce
and its foreseeability; (6) Possible effect upon foreign relations if the court
exercises jurisdiction and grants relief; (7) If relief is granted, whether a
party will be placed in the position of being forced to perform an act illegal
in either country or be under conflicting requirements by both countries; (8)
Whether the court can make its order effective; (9) Whether an order for relief
would be acceptable in this country if made by the foreign nation under similar
circumstances; and (10) Whether a treaty with the affected nations has
addressed the issue. Mannington Mills, Inc., 595 F.2d at 1297-98; Timberlane
Lumber Co., 549 F.2d at 614.”
The
Court then applied the ten factors to this case.
“Since
our adoption of the comity balancing test, the Supreme Court, in determining
whether international comity cautioned against exercising jurisdiction over
antitrust claims premised entirely on foreign conduct, relied solely upon the
first factor—the degree of conflict between U.S. and foreign law—to decide that
abstention was inappropriate. Hartford Fire, 509 U.S. at 798 (’The only
substantial question in this litigation is whether there is in fact a true
conflict between domestic and foreign law.’ (internal quotation omitted)). The
Court explained that just because ‘conduct is lawful in the state in which it
took place will not, of itself, bar application of the United States antitrust
laws.’ Id. Thus, in that case, the degree of conflict between the laws of the
two states had to rise to the level of a true conflict, i.e. ‘compliance with
the laws of both countries [must have been] impossible,’ to justify the Court’s
abstention on comity grounds. Id. at 799. In other words, ‘[n]o conflict exists
. . . ‘where a person subject to regulation by two states can comply with the
laws of both.’ Id. (quoting Restatement (Third) of Foreign Relations Law § 403,
cmt. e). After determining that there was not a true conflict, the Court
reflected that there was ‘no need in this litigation to address other
considerations that might inform a decision to refrain from the exercise of
jurisdiction on the ground of international comity.’ Id.”
“We
read Hartford Fire narrowly and interpret the modifying phrase ‘in this
litigation’ in reference to the ‘other considerations that might inform a
decision’ as suggesting that the remaining factors in the comity balancing test
are still relevant to an abstention analysis. Id.; see Mujica v. AirScan Inc.,
771 F.3d 580, 600 (9th Cir. 2014). […] That a true conflict was lacking in
Hartford Fire does not, in the inverse, lead us to conclude that the presence
of such a conflict alone is sufficient to require dismissal and thereby vitiate
the need to consider the remaining factors.”
In
order to determine whether a “true conflict” exists, the Court first determined
what the law of each country requires.
“The
Sherman Act prohibits ‘[e]very contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce.’ 15 U.S.C. § 1.
While this language has been interpreted to outlaw only unreasonable restraints
in trade, see, e.g., State Oil Co. v. Khan, 522 U.S. 3, 10 (1997), certain
types of anticompetitive conduct are ‘so plainly anticompetitive that no
elaborate study of the industry is needed to establish their illegality,’ Nat.
Soc. of Prof’l Eng’rs v. United States, 435 U.S. 679, 692 (1978). ‘Price-fixing
agreements between two or more competitors, otherwise known as horizontal
price-fixing agreements, fall into the category of arrangements that are per se
unlawful.’ Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006). Thus, if Chinese law
required Defendants to enter into horizontal price-fixing agreements,
‘compliance with the laws of both countries is [] impossible,’ Hartford Fire,
509 U.S. at 799, and there is a true conflict.”
Court’s
interpretation of the record as to Chinese law hinges on the amount of
deference that the Court extended to the Chinese Government’s explanation of
its own laws.
“There
is competing authority on the level of deference owed by U.S. courts to a
foreign
government’s
official statement regarding its own laws and regulations. In the seminal case
United States v. Pink, 315 U.S. 203 (1942), the Supreme Court considered, inter
alia, the extraterritorial reach of a 1918 decree nationalizing Russia’s
insurance business. The record before the Pink Court included expert testimony
and ‘voluminous’ other evidence bearing on the proper interpretation of the
1918 decree and its extraterritorial effect. Id. at 218. This evidence included
an official declaration of the Russian Government explaining the intended
extraterritorial effect of the decree. See id. at 219-20. The Court ‘d[id] not
stop to review’ the whole body of evidence, however, id. at 218, because it
determined that the official declaration was ‘conclusive’ as to the
extraterritorial effect of the decree, id. at 220.
Since
1942, several courts have cited Pink for the proposition that an official
statement or declaration from a foreign government clarifying its laws must be
accepted as conclusive, while others intimated that while the official
statements of a foreign government interpreting its laws are entitled to
deference, U.S. courts need not accept such statements as conclusive. In the
present case, however, the district court “[…] relied on three authorities—Rule
44.1, Villegas Duran v. Arribada Beaumont, 534 F.3d 142 (2d Cir. 2008), and
Karaha Bodas, 313 F.3d 70—for the proposition that the Second Circuit, in particular,
has ‘adopted a softer view toward the submissions of foreign governments.’ In
re Vitamin C Antitrust Litig., 584 F. Supp. 2d at 557.”
The
Court disagreed.
“Contrary
to the district court’s reasoning, we find no support for the argument that Rule
44.1, adopted in 1966 long after Pink was decided, modified the level of
deference that a U.S. court must extend to a foreign government’s
interpretation of its own laws. Rule 44.1 provides that, when determining
foreign law, a court ‘may consider any relevant material or source, including
testimony, whether or not submitted by a party or admissible under the Federal
Rules of Evidence.’ Fed. R. Civ. P. 44.1. According to the advisory committee
notes, the rule has two purposes: (1) to make a court’s determination of
foreign law a matter of law rather than fact, and (2) to relax the evidentiary
standard and to create a uniform procedure for interpreting foreign law. Fed.
R. Civ. P. 44.1 advisory committee’s notes to 1966 adoption. The advisory
committee notes suggest that Rule 44.1 was meant to address some of the
challenges facing litigants whose claims and defenses depended upon foreign law
and to provide courts with a greater array of tools for understanding and
interpreting those laws. Id. Rule 44.1 explicitly focuses on what a court may
consider when determining foreign law, but it is silent as to how a court
should analyze the relevant material or sources. Thus, courts must still
evaluate the relevant source material within the context of each case. See,
e.g., Curley v. AMR Corp., 153 F.3d 5, 14-15 (2d Cir. 1998) (explaining that
because ‘Mexican law is much different’ than New York state law and ‘its
sources do not lie in precedent cases’ the court must ‘consider the text of the
constitution, civil code and statutory provisions . . . and give them
preponderant consideration’ when analyzing Mexican law). Finding no authority
to the contrary, we conclude that Rule 44.1 does not alter the legal standards
by which courts analyze foreign law, and thus, the rule does not abrogate or
‘soften’ the level of deference owed by U.S. courts to statements of foreign
governments appearing in U.S. courts.”
The
Court also disagreed with district court’s adoption of the decision in Vilegas
Duran to bolster its conclusion that this court has adopted a softer view
toward submissions of foreign governments.
“[…]
We consider Villegas Duran inapplicable to the present case for two reasons.
First, because the Chilean Government did not appear before the court in that
case, either as a party or as an amicus, the level of deference the court
afforded the Chilean affidavit does not guide our application here. Second,
Villegas Duran was overturned by the Supreme Court, Duran v. Beaumont, 560 U.S.
921 (2010), in light of Abbott v. Abbott, 560 U.S. 1 (2010). […]”
And
it also disagreed with district court’s reliance on the decision in Karaha
Bodas, 313 F.3d 70.
“[…]
In that case, a judgment creditor of an oil and gas company owned and
controlled by the Republic of Indonesia sought to execute upon funds held in
New York trust accounts. Id. at 71. The Republic of Indonesia joined the appeal
as a party with an affected interest, and in so doing, sought to clarify the
applicable Indonesian law as well as the Indonesian Government’s relationship
with the gas company. Id. Citing to our sister circuits in Amoco Cadiz and
Access Telecom, we credited the Republic of Indonesia’s interpretation and
explained that ‘a foreign sovereign’s views regarding its own laws
merit—although they do not command—some degree of deference.’ Id. at 92. We
clarified that, ‘where a choice between two interpretations of ambiguous
foreign law rests finely balanced, the support of a foreign sovereign for one
interpretation furnishes legitimate assistance in the resolution of
interpretive dilemmas.’ Id.”
“It
is noteworthy that, while we suggested in Karaha Bodas that deference to a
foreign sovereign’s interpretation need not be ‘conclusive’ in every case, we
ultimately adopted the Republic of Indonesia’s interpretation of its own
regulation. […]”
“Consistent
with our holding in Karaha Bodas and the Supreme Court’s pronouncements in
Pink, we reaffirm the principle that when a foreign government, acting through
counsel or otherwise, directly participates in U.S. court proceedings by
providing a sworn evidentiary proffer regarding the construction and effect of
its laws and regulations, which is reasonable under the circumstances
presented, a U.S. court is bound to defer to those statements. If deference by
any measure is to mean anything, it must mean that a U.S. court not embark on a
challenge to a foreign government’s official representation to the court
regarding its laws or regulations, even if that representation is inconsistent
with how those laws might be interpreted under the principles of our legal
system. Cf. Abbott, 560 U.S. at 20. […] Not extending deference in these
circumstances disregards and unravels the tradition of according respect to a
foreign government’s explication of its own laws, the same respect and
treatment that we would expect our government to receive in comparable matters
before a foreign court. Cf. Hilton v. Guyot, 159 U.S. 113, 191 (1895). […]”
The
Court takes into consideration the official statements of the Ministry, and
concludes that “[…] Chinese law required Defendants to engage in activities in
China that constituted antitrust violations here in the United States.”
“[…]
[W]e find it reasonable to view the entire PVC regime as a decentralized means
by which the Ministry, through the Chamber, regulated the export of vitamin C
by deferring to the manufacturers and adopting their agreed upon price as the
minimum export price. In short, by directing vitamin C manufacturers to
coordinate export prices and quantities and adopting those standards into the
regulatory regime, the Chinese Government required Defendants to violate the
Sherman Act. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224 n.59
(1940) (’[I]t is [] well settled that conspiracies under the Sherman Act are
not dependent on any overt act other than the act of conspiring.’).”
Disagreeing
with district court’s finding problematic the possibility that the “defendants
[made] their own choices and then ask[ed] for the government’s imprimatur,” the
Court states,
“Whether
Defendants had a hand in the Chinese government’s decision to mandate some
level of price-fixing is irrelevant to whether Chinese law actually required
Defendants to act in a way that violated U.S antitrust laws. Moreover,
inquiring into the motives behind the Chinese Government’s decision to regulate
the vitamin C market in the way it did is barred by the act of state doctrine.
‘In essence, the act of state doctrine is a principle of law designed primarily
to avoid judicial inquiry into the acts and conduct of the officials of the
foreign state, its affairs and its policies and the underlying reasons and
motivations for the actions of the foreign government.’ O.N.E. Shipping Ltd.,
830 F.2d at 452. The act of state doctrine precludes us from discrediting the Subcommittee
or the PVC process as ad hoc protectionist regimes that were intended to
provide governmental sanction to an otherwise privately formed cartel. By
focusing on the Defendants’ role in the regulatory regime, as opposed to the
regime itself, the district court erroneously required Defendants to show that
the government essentially forced Defendants to price-fix against their will in
order to show that there was a true conflict between U.S. antitrust law and
Chinese law. This demands too much. It is enough that Chinese law actually
mandated such action, regardless of whether Defendants benefited from, complied
with, or orchestrated the mandate. Thus, we decline to analyze why China
regulated vitamin C in the manner it did and instead focus on what Chinese law
required. See id. at 453.”
The
Court concluded that “Because we hold that Defendants could not comply with
both U.S. antitrust laws and Chinese law regulating the foreign export of
vitamin C, a true conflict exists between the applicable laws of China and
those of the United States.”
Having
determined that Chinese law required Defendants to violate U.S. antitrust law,
the Court turns to analyze whether the remaining factors weigh in favor of
dismissal based on principles of international comity. The Court held that the
remaining factors in the comity balancing test decidedly weight in favor of
dismissal and counsel against exercising jurisdiction in the instant case.
“All
Defendants are Chinese vitamin C manufacturers with their principal places of
business in China, and all the relevant conduct at issue took place entirely in
China. Although Plaintiffs may be unable to obtain a remedy for Sherman Act
violations in another forum, complaints as to China’s export policies can
adequately be addressed through diplomatic channels and the World Trade
Organization’s processes. […] Moreover, there is no evidence that Defendants
acted with the express purpose or intent to affect U.S. commerce or harm U.S.
businesses in particular. […]” And concluded that “[w]hile it was reasonably
foreseeable that China’s vitamin C policies would generally have a negative
effect on Plaintiffs as participants in the international market for vitamin C,
as noted above, there is no evidence that Defendants’ antitrust activities were
specifically directed at Plaintiffs or other U.S. companies.”
“Furthermore,
according to the Ministry, the exercise of jurisdiction by the district court
has already negatively affected U.S.-China relations. […] The Chinese
Government has repeatedly made known to the federal courts, as well as to the
United States Department of State in an official diplomatic communication
relating to this case, that it considers the lack of deference it received in
our courts, and the exercise of jurisdiction over this suit, to be
disrespectful and that it ‘has attached great importance to this case.’ Doc.
No. 111, Diplomatic Correspondence between Embassy for the People’s Republic of
China and the United States Department of State, April 9, 2014; cf. Société Nationale
Industrielle Aérospatiale, 482 U.S. at 546. […]”
“Currently,
the district court’s judgment orders Defendants to comply with conflicting
legal requirements. This is an untenable outcome. It is unlikely, moreover,
that the injunctive relief the Plaintiffs obtained would be enforceable in
China. If a similar injunction were issued in China against a U.S. company,
prohibiting that company from abiding by U.S. economic regulations, we would
undoubtedly decline to enforce that order. See Corporacion Mexicana De
Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploracion Y
Produccion,No. 13-4022, 2016 WL 4087215 (2d Cir. Aug. 2, 2016). […]”
“Simply
put, the factors weigh in favor of abstention. Recognizing China’s strong
interest in its protectionist economic policies and given the direct conflict
between Chinese policy and our antitrust laws, we conclude that China’s
‘interests outweigh whatever antitrust enforcement interests the United States
may have in this case as a matter of law.’ O.N.E. Shipping Ltd., 830 F.2d at
450. Accordingly, we hold that the district court abused its discretion by
failing to abstain on international comity grounds from asserting jurisdiction,
and we reverse the district court’s order denying Defendants’ motion to dismiss.”
The
Court thus concluded that “[a]ccording appropriate deference to the Ministry’s
official statements to the district court and to this Court on appeal, we hold
that Defendants were required by Chinese law to set prices and reduce
quantities of vitamin C sold abroad and doing so posed a true conflict between
China’s regulatory scheme and U.S. antitrust laws such that this conflict in
Defendants’ legal obligations, balanced with other factors, mandates dismissal
of Plaintiffs’ suit on international comity grounds.”
The
Court reversed the district court’s order denying Defendants’ motion to
dismiss, and remanded with instructions to dismiss Plaintiffs’ complaint with
prejudice.
*** K. Todd Wallace is an attorney at Wallace Meyaski in New Orleans. He has nearly 20 years of experience in the legal and business professions with established excellence in trial advocacy, negotiation, strategic and initiative planning, government relations, mergers and acquisitions, and team building. See http://www.walmey.com/our-attorneys/k-todd-wallace/
