On September 20, 2016, the U.S. Court of Appeals for the Second Circuit issued an opinion in In re Vitamin C Antitrust Litigation, reversing the district court’s eight year-old decision not to grant a motion to dismiss the case, based on international comity. The Second Circuit vacated the $147 million judgment against the two defendants that took the case to trial in 2013, and remanded with instructions to dismiss the complaint with prejudice. The court did not opine on the defendants’ other grounds for dismissal – the foreign sovereign compulsion, act of state, and political question doctrines. In re Vitamin C Antitrust Litig., No. 13-4791 (2d Cir. Sept. 20, 2016).
In 2005, the plaintiffs brought several class action complaints against the major Chinese vitamin C manufacturers, alleging that the manufacturers illegally fixed the price and output levels of vitamin C that they exported to the United States. The cases, which were consolidated in the Eastern District of New York, marked the first time that Chinese companies had been sued in a U.S. court for violation of the Sherman Act.
For context, the Chinese Government regulates the vitamin C industry through the China Chamber of Commerce of Medicines & Health Products Importers & Exporters (“Chamber”), which itself is an arm of the Ministry of Commerce of the People’s Republic of China (“Ministry”). The Ministry is China’s equivalent of the U.S. Department of Commerce. The Chamber created an entity called the vitamin C Subcommittee (“Subcommittee”), which included representatives from the major Chinese vitamin C manufacturers. The Subcommittee members, at the Ministry’s Direction, set and coordinated vitamin C prices and export levels to help the Chinese vitamin C industry remain stable as the country transitioned from a centrally-planned economy to one that is more market-based in accordance with China’s obligations to the World Trade Organization (“WTO”). Under a 2002 Notice issued by the Ministry, in order to export vitamin C, a manufacturer was required to submit documentation to the Chamber indicating the amount and price of vitamin C it desired to export. If the Chamber found the price and quantity in line with the levels set by the Subcommittee, it would “verify” the contract and affix a “chop” (a type of seal) to the contract, indicating that the Chamber had reviewed and approved the transaction.
The plaintiffs, for their part, viewed the Chamber and the Subcommittee as more akin to a trade association than a government entity, and argued that the language contained in 2002 Notice did not require the manufacturers to agree on price and output.
The defendants moved to dismiss the consolidated complaint on grounds of foreign sovereign compulsion, international comity, and the act of state doctrine. In what the Second Circuit called “an historic act,” the Ministry filed an amicus brief in support of the defendants’ dismissal motion – the first time any Chinese Government entity appeared as an amicus in any U.S. court. The Ministry’s brief explained the structure and operation of the vitamin C industry in China, and made clear that the manufacturers were, in fact, required by Chinese law to coordinate on the price and output of vitamin C. The district court, however, refused to defer to the Ministry’s explanation of Chinese law and denied the motion. The district court denied the defendants’ summary judgment motions, and a jury trial took place in 2013. Plaintiffs prevailed in the trial, which resulted in a $147 million judgment post-trebling.
The Second Circuit, eight years after the district court denied the defendants’ motion to dismiss, held that because the Chinese Government appeared before the district court and made a statement under oath that Chinese law required the defendants to set prices and limit quantities of vitamin C sold in the United States, and because the defendants could not simultaneously comply with Chinese law (as explained to the court by the Ministry) and with the U.S. antitrust laws, the district court should have declined to exercise jurisdiction over the case. The court did not reach the question of whether the foreign sovereign compulsion, act of state or political question defenses also provide grounds for dismissing the case.
The appellate court held that the district court should have deferred to the Ministry’s statement that Chinese law required the defendants to coordinate the price and output of vitamin C. It “reaffirm[ed] 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 further stated: “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.”
Accepting the Ministry amicus submission as true, the Second Circuit determined that under the verification and chop regime, the defendants would only be allowed to export vitamin C to the United States. if they did so after coordinating on price and output. That coordination constitutes an antitrust violation in the United States, which put the defendants in the impossible position of being unable to comply with Chinese law and with U.S. law at the same time. As such, the district court should have declined to exercise subject matter jurisdiction over the case and should have dismissed it.
Of particular note, the Second Circuit stated that deference to the Chinese government is especially important in this case “because of the unique and complex nature of the Chinese legal- and economic-regulatory system and the stark differences between the Chinese system and ours.” Further, the appellate court explained that the plaintiffs are not without a remedy – they can address their complaint through diplomatic channels and the World Trade Organization’s processes. Allowing the district court to order the vitamin C manufacturers to comply with conflicting legal requirements, however, “is an untenable outcome.”
For defendants, the Second Circuit’s decision underscores that in advancing arguments based on international comity concerns, it may be prudent, or even necessary, to seek the assistance of the relevant foreign government to create an evidentiary record of the foreign country’s laws that are in conflict with U.S. laws.
Disclosure Statement: The authors represented one of the defendant vitamin C manufacturers in In re Vitamin C Antitrust Litigation. Although Orrick and its client worked with the Ministry and briefed and argued the motion to dismiss on comity and other grounds in the District Court, its client was not involved in the appeal to the Second Circuit.