15 October, 2016
The United States Court of Appeals for the Second Circuit (the “Second Circuit”) in New York has vacated and reversed a $147 million antitrust verdict against a Chinese vitamin C manufacturer and its holding company, ruling that the district court should have granted Defendants’ original motion to dismiss. The case represents the first time an agency of the Chinese government, MOFCOM, appeared as amicus in a U.S. court to inform the U.S. court of applicable Chinese law, an occasion which the Court of Appeals called historic.
Plaintiffs, U.S. vitamin C purchasers, brought a class action on behalf of all such purchasers alleging that Defendant Chinese manufacturers violated Section 1 of the Sherman Act with the “purpose and effect of fixing prices, controlling the support of vitamin C to be exported to the United States and worldwide ….” They asserted that Defendants and the China Chamber of Commerce of Medicines & Health Products Importers & Exporters (the “Chamber”) colluded in order to create a vitamin C shortage in the international market, and that Defendants and the Chamber entered into agreements to restrict exports of vitamin C by limiting production and increasing pricing.
According to plaintiffs, this had the effect of creating the shortage and maintaining China’s status as a leading exporter.
Defendants moved to dismiss on the ground they were acting pursuant to Chinese government regulations that required the conduct. Specifically, the Chamber implemented a “price verification and chop” policy in 2002 after China joined the World Trade Organization, requiring vitamin C manufacturers to submit documentation to the Chamber with the amount and price of their intended vitamin C exports. The Chamber reviewed these documents signaling its approval with a seal required for export if the price of the contract was “at or above the minimum acceptable price set by coordination through the Chamber.”
The Ministry of Commerce of the People’s Republic of China (the “MOFCOM”) filed an amicus curiae brief in support of Defendants’ motion to dismiss. MOFCOM explained, and provided regulations showing, that all vitamin C exported from China during the relevant time period was required to be sold at industry-wide coordinated prices. In denying Defendants’ motion to dismiss, the district court cited its discretion to consider evidence beyond the MOFCOM’s brief.
The Second Circuit’s unanimous decision centered on principles of international comity. The court focused on “the appropriate level of deference to be afforded a foreign sovereign’s interpretation of its own laws” and held that the lower court had abused its discretion (1) by finding that Chinese law did not require Defendants to violate U.S. antitrust law and (2) by “not extending adequate deference to the Chinese Government’s proffer of the interpretation of its own laws.”
The appellate court applied a multi-factor balancing test to determine whether it should abstain from asserting jurisdiction on comity grounds:
First and most importantly, the court found a “true conflict” between U.S. and Chinese law, noting that its interpretation “hinge[d] on the amount of deference that [it] extend[ed] to the Chinese Government’s explanation of its own laws.” Rejecting the district court’s interpretation of case law and Rule 44.1 of the Federal Rules of Civil Procedure, the court held, “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.”
This is so, the court reasoned, “even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system.” The court also noted that deference was even more important under the circumstances of this case because of the complexity of the Chinese economic regulatory system and its differences from the U.S. regulatory system.
The court also considered nine other comity balancing test factors, finding that they “decidedly” weighed against the exercise of U.S. court jurisdiction over plaintiffs’ claims. Those factors were
1) the nationality of the parties, locations or principal places of business of corporations;
2) the relative importance of the alleged violation of conduct here versus abroad;
3) the likelihood of enforcement achieving compliance here or abroad, as well as the availability of a remedy abroad, or any pendant litigation there;
4) the existence of an intent to harm or affect American commerce, and that harm’s foreseeability;
5) the possible effect on foreign relations if the court exercised jurisdiction and granted relief;
6) if relief was granted, whether a party would be placed in the position of being forced to perform an act illegal in either country or be under conflicting requirements by both countries;
7) whether the court could make its order effective;
8) whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances; and
9) whether a treaty with the affected nations has addressed the issue.
The Second Circuit decision confirms the respect due between sovereigns when a nation’s government informs another sovereign of what its applicable law is. It points out the importance of a foreign sovereign directly appearing in the U.S. court to state its applicable law. If MOFCOM had not done so, the district court’s analysis of foreign law might have been upheld.
The Baker & McKenzie New York antitrust group – Darrell Prescott, Charles Critchlow, and Catherine Stillman — represented two defendants in the district court in making the motion, that ultimately led to the Second Circuit’s dismissal. The Court of Appeals decision adopted the arguments we consistently made since the inception of the litigation.
Plaintiffs have requested that the Second Circuit reconsider its decision and are likely to seek review by the U.S. Supreme Court of this landmark decision.
Milton W. M. Cheng, Managing Partner, Baker & McKenzie
milton.cheng@bakermckenzie.com
