January 05, 2017
Author(s): John R. Foote
In In re Vitamin C Antitrust Litigation, for the first time ever, the Chinese government appeared amicus curiae in a U.S. court to submit a statement supporting the defense of Chinese companies See 837 F.3d 175, 180 (2d Cir. 2016). The treatment of China’s official statement and the amount of deference the district court gave to it became an international issue of great importance to both countries. As detailed below, the Chinese government’s historic appearance was crucial in absolving Chinese manufacturers from liability under the antitrust laws of the United States.
In In re Vitamin C Antitrust Litigation, United States vitamin C purchasers (Plaintiffs) brought an antitrust class action lawsuit against Chinese vitamin C manufacturers, Hebei Welcome Pharmaceutical and North China Pharmaceutical Group Corporation (Defendants). Plaintiffs alleged that Defendants had violated U.S. antitrust laws by colluding with the “China Chamber of Commerce of Medicines & Health Products Importers & Exporters” (Chamber) and establishing an illegal cartel to fix the price and create a shortage of vitamin C for sale to United States companies on the international market.
Rather than deny Plaintiffs’ allegations, Defendants moved to dismiss the complaint on grounds that they were required by the Ministry of Commerce of the People’s Republic of China (Ministry) to engage in the alleged anticompetitive conduct. The Ministry was the highest authority within the Chinese government authorized to regulate foreign trade. It oversaw and supervised the Chamber, which, according to the Ministry, was “an instrumentality of the State that was required to implement the Ministry’s administrative rules and regulations with respect to the vitamin C trade.”
The Ministry filed an amicus curiae brief with the district court in support of Defendants’ motion to dismiss. The Ministry’s appearance was not only significant, but also historic because it was the first time that any entity of the Chinese government had appeared amicus curiae before any U.S. court. In its brief, the Ministry explained that it had authorized and backed efforts by the Chamber to regulate the vitamin C industry by requiring all Chinese vitamin C manufacturers to agree on the price at which vitamin C would be sold abroad. The Ministry asserted in its brief that it had, in fact, “compelled the [Chamber] and its licensed members to set and coordinate vitamin C prices and export volumes.”
Because the Chinese government required Defendants to fix the price and supply of vitamin C sold abroad, Defendants moved to dismiss the complaint on grounds of, inter alia, principles of international comity. Despite the Ministry’s amicus brief, the district court denied the motion, stating that the factual record was “simply too ambiguous to foreclose further inquiry into the voluntariness of defendants’ actions.” On a subsequent motion for summary judgment, the district court, again, “decline[d] to defer to the Ministry’s interpretation of Chinese law.” In other words, the district court found the statement by the Chinese government about its own laws and what they required insufficient for a ruling that Chinese law had compelled Defendants to engage in the alleged anticompetitive conduct. The case ultimately went to a jury trial, which resulted in a judgment that awarded approximately $147 million in damages to Plaintiffs. Defendants appealed to the United States Court of Appeals for the Second Circuit.
On appeal, the primary issue before the Second Circuit was “whether principles of international comity required the district court to dismiss the suit.” International comity, the court explained, is a legal doctrine by which U.S. courts recognize and, under certain circumstances, allow foreign conduct that violates U.S. laws when those acts were required by foreign law. It “is a principle under which judicial decisions reflect the systemic value of reciprocal tolerance and goodwill.” It maintains “amicable working relationships between nations, a shorthand for good neighbourliness, common courtesy and mutual respect between those who labour in adjoining judicial vineyards.” The Second Circuit explained that the principles of international comity affect a federal court’s exercise of jurisdiction. When international comity applies, U.S. courts must abstain from exercising jurisdiction over antitrust violations that occur abroad and that create a conflict with the laws and regulations of a foreign nation.
The Second Circuit applied a 10-factor “comity balancing test” to determine whether principles of international comity required the district court to abstain from its exercise of subject matter jurisdiction over Plaintiffs’ claims. The first and most important factor in the “comity balancing test” was whether a “true conflict” existed, which required the Second Circuit to determine whether Defendants could have sold and distributed vitamin C while in compliance with both Chinese and U.S. law. This necessarily hinged on a conclusive determination as to what the law of each country required. Because the Ministry had filed an official statement as to what its own laws and regulations required, the Second Circuit needed to decide how much “deference” to give to the Ministry’s interpretation of its own laws.
“If deference by any measure is to mean anything,” the Second Circuit explained, “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 own laws or regulations, even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system.” The court further asserted that “[n]ot 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.” In holding that U.S. courts are prohibited from challenging a foreign government’s official representation regarding its laws and regulations, the court stated in definitive fashion:
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.
The Second Circuit concluded that the district court had erred by not according deference to the Ministry’s official statement. First, the district court should not have analyzed whether Defendants played a role in the Chinese government’s decision to mandate fixed prices or Defendants’ specific anticompetitive acts were compelled by China. According to the Second Circuit, these issues were unnecessary to a “true conflict” analysis and irrelevant to the issue of whether Chinese law required Defendants to act in a way that violated U.S. antitrust laws. Second, the Second Circuit explained that the district court was prohibited from inquiring into the motives behind China’s decisions to regulate the vitamin C market in the manner it did. Such an inquiry was barred by the “act of state doctrine,” which is a legal principle “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.” The Second Circuit held that the district court “erred by not extending adequate deference to the Chinese government’s proffer of the interpretation of its own laws,” and concluded that Chinese law did indeed require Defendants to violate United States antitrust law.
Having concluded that Defendants were compelled to violate U.S. antitrust laws, the court then considered the remaining nine factors of the comity balancing test to determine whether the district court should have abstained from exercising its jurisdiction over the case. The court concluded that the remaining factors “clearly weigh in favor of U.S. courts abstaining from asserting jurisdiction” because, inter alia: Defendants all had their principle places of business in China; the relevant conduct took place in China; China’s export policies could be adequately addressed through diplomatic channels and the World Trade Organization’s process; and there was no evidence that China had intended to affect U.S. commerce or U.S. businesses, or that Defendants’ price fixing was specifically directed at Plaintiffs or other U.S. companies.
Notably, in assessing the fifth remaining factor—“possible effect upon foreign relations if the court exercises jurisdiction and grants relief”—the Second Circuit emphasized that the district court’s exercise of jurisdiction over the case had already negatively affected the relationship between the United States and China. The court specifically noted that the Chinese government had repeatedly communicated, including through official diplomatic channels, that it considered the lack of deference it received from the district court and its unwillingness to abstain from exercising its jurisdiction over the case to be “disrespectful” and that it had “attached great importance” to the case. Perhaps because of this, the Second Circuit did not mince words when it stated, “China’s interests outweigh whatever antitrust enforcement interests the United States may have in this case as a matter law.”
The Second Circuit held that the district court had abused its discretion by not abstaining, on international comity grounds, from asserting jurisdiction. The Second Circuit vacated the district court’s judgment, reversed the district court’s order denying Defendants’ motion to dismiss and remanded the case with instructions to the district court to dismiss Plaintiffs’ complaint with prejudice.
U.S. courts must credit and accord great deference to an official statement by a foreign government regarding an interpretation of its own laws and what specifically they require. Thus, a statement by a foreign government that its law compelled a company to engage in conduct that violates the competition laws of the United States may protect that company from liability. Nixon Peabody LLP can analyze the unique circumstances of such a situation and provide counsel on whether the requirements of foreign law are likely to preclude enforcement of U.S. antitrust laws.
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