On September 30, 2016, the U.S. Court of Appeals for the Second Circuit issued its decision in In re Vitamin C Antitrust Litigation, No. 13-4791-cv, reversing a $147 million judgment against Chinese vitamin C manufacturers on international comity grounds. The Second Circuit held that the district court should have given deference to an amicus brief filed by the Chinese Government stating that the conduct accused in the complaint was mandated by Chinese law, and that the lower court should have abstained accordingly from asserting jurisdiction over the case. The plaintiffs have since filed a petition for rehearing en banc, which is pending as of this writing. The decision has garnered considerable attention in both the U.S. and China (where it was hailed as a victory for Chinese companies over the extraterritorial application of U.S. laws), but its practical import may be tempered by recent developments in Chinese law and policy and the distinction of an unprecedented appearance by the Chinese Government as amicus curiae supporting the defense of sovereign compulsion.
The case involved claims brought by U.S. purchasers of vitamin C against Chinese manufacturers pursuant to the Sherman and Clayton Acts, alleging that the defendants conspired to fix prices and limit supplies of vitamin C sold on the international market in 2001 to 2005. Although the defendants were located in China and sold vitamin C on international markets, and not within the United States, they were subject to liability under U.S. antitrust laws pursuant to the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA), 15 U.S.C. § 6a, which permits the application of U.S. antitrust laws to conduct involving foreign trade and commerce where “such conduct has a direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce.
At the district court, the Chinese manufacturers moved to dismiss, under the act of state doctrine, the doctrine of foreign sovereign compulsion, and principles of international comity, on the grounds that Chinese regulations required that they coordinate prices and limit supply. Although the Ministry of Commerce of the People’s Republic of China ("MOFCOM") filed an amicus brief in support of the defendants' position, the district court denied the motion, citing the need for additional discovery as to whether the conduct alleged in the complaint was compelled by the Chinese Government. The district court later denied a motion for summary judgment asserting similar defenses, rejecting the Chinese Government’s interpretation of the applicable regulations and concluding that “Chinese law did not compel Defendants’ anticompetitive conduct” during the relevant time periods. 810 F. Supp. 2d 522, 525-26 (E.D.N.Y. 2011). The case was subsequently tried to a jury, which returned a verdict in favor of the plaintiffs, ultimately resulting in a $147 million judgment against the defendants.
The Second Circuit took issue with the district court’s decision not to defer to the Ministry’s interpretation of Chinese law, holding that “the court erred by concluding that Chinese law did not require Defendants to violate U.S. antitrust law and … by not extending adequate deference to the Chinese Government’s proffer of the interpretation of its own laws.” Slip Op. at 13-14. After an extensive analysis of the standard of deference owed to a foreign government’s interpretation of its own laws, the Court of Appeals “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.” Id. at 31. While noting that the “district court’s careful and thorough treatment of the evidence before it in analyzing what Chinese law required at both the motion to dismiss and summary judgment stages would have been entirely appropriate” had the Ministry not appeared in the litigation, the Court of Appeals concluded that analysis was not appropriate in light of the Ministry’s “reasonable interpretation” of its laws as requiring the defendants to fix prices and limit supplies. Id. at 35 & n.10.
The Vitamin C decision has received significant attention in the press, in part because it is the first time the Chinese Government has appeared as amicus curiae in U.S. court proceedings, and in part because, until the Second Circuit’s reversal, it marked the first time a Chinese manufacturer has been found liable under U.S. antitrust laws. It has also drawn some criticism from those who interpret the decision as providing a free pass to foreign companies to violate U.S. antitrust laws, so long as they can claim their conduct is lawful in their home territory. But the Second Circuit’s decision is not nearly so broad, nor is it the only decision recognizing that Chinese manufacturers could be shielded from antitrust liability based on the obligations imposed by Chinese regulations.
For example, in Animal Science Products, Inc. v. China National Metals & Minerals Import & Export Corp., 702 F. Supp. 2d 320 (D.N.J. 2010), the District of New Jersey granted a motion to dismiss antitrust claims brought against Chinese exporters of magnesite. Taking note of MOFCOM's amicus brief in the Vitamin C case, the court stated, “[A] foreign sovereign's admission of legal compulsion of its subjects might warrant a high—often, nearly binding—degree of deference, even if the admitted compulsion was based on what might be deemed, in American jurisprudence, a form of ‘unwritten law.’” Id. at 426. However, due to the lack of evidence regarding any actual minimum prices mandated by the Chinese Government, as well as allegations by the plaintiffs that the defendants separately entered into private agreements to fix prices higher than any government-mandated minimum, the court declined to dismiss the case on international comity grounds at that time, and instead dismissed the case on alternate grounds. See id. at 463-65. After appellate review, the case was remanded to the district court and dismissed for lack of standing, and the question of international comity was not revisited. See 34 F. Supp. 3d 465 (D.N.J. 2014).
More recently, in Resco Prods., Inc. v. Bosai Minerals Group Co., Ltd., 158 F. Supp. 3d 406 (W.D. Penn. 2016), the Western District of Pennsylvania granted summary judgment dismissing antitrust claims brought against Chinese exporters of bauxite, finding that no reasonable juror could conclude that the defendants had conspired to fix export prices and quotas because the prices and quotas were mandated by MOFCOM. Although the plaintiffs alleged that the defendants had separately conspired to fix prices and limit output, the evidence demonstrated that the defendants lacked the authority to influence prices or quantities, which were mandated by MOFCOM. Id. at 422. This case is currently on appeal before the Third Circuit.
The primary distinction between Vitamin C, on the one hand, and Resco and Animal Science, on the other, is the involvement of the Chinese Government. The Resco and Animal Science courts both determined that the record before them was insufficient to dismiss the case on international comity grounds absent discovery—an approach that the Second Circuit recognized may be “reasonable” where the foreign government does not offer an interpretation of its own laws. Vitamin C, slip op. at 44 n.14. The Ministry’s amicus brief in Vitamin C, however, was “sufficient to determine what Chinese law required and whether abstention was appropriate” at the motion to dismiss stage. Id.
Despite the Second Circuit’s strong statements about deference to foreign governments, the Court’s analysis indicates a much narrower applicability that will typically require courts to conduct the type of analysis performed in Resco and Animal Science. First, the Court noted that principles of international comity require abstention only when there is a “true conflict” between the laws of two nations—in other words, “compliance with the laws of both countries [must have been] impossible.” Id. at 19-20 (quoting Hartford Fire Ins. Co. v. California, 509 U.S. 764, 799 (1993)). Second, the Second Circuit’s application of comity requires deference only where “a foreign government … directly participates in U.S. court proceedings.” Id. at 30 (emphasis added). Finally, even in the rare instances where a foreign government appears and states that a defendant’s conduct was compelled under its laws, principles of international comity only require dismissal if the additional factors articulated in Timberlane Lumber Co. v. Bank of Am., N.T. & S.A., 549 F.2d 597, 614-15 (9th Cir. 1976) and Mannington 10 Mills, Inc. v. Congoleum Corp., 595 F.2d 1287, 1297-98 (3d Cir. 1979) are satisfied. Vitamin C, slip op. at 40-41. These factors include relevant conduct in the United States, the ability to enforce a U.S. judgment, the intent and foreseeability of harming American commerce, and the possible effect on foreign relations, among others.
The Second Circuit found the record developed below, following limited discovery, sufficient to conclude that the remaining factors favored dismissal at the motion to dismiss stage. But the court cautioned that “it may not be reasonable in all cases to abstain on comity grounds from asserting jurisdiction at the motion to dismiss stage and that a trial court may need the opportunity to consider the countervailing interests and policies on the record that follows discovery.” Id. at 44 n.14. The Court of Appeals thus left open the possibility that a district court could reach a contrary conclusion on different facts notwithstanding a foreign government’s attestation of legal compulsion.
There are other reasons to believe that the Second Circuit's decision may have limited impact in future cases. The conduct complained of took place over a decade ago (2001-2005). According to MOFCOM's amicus brief, the Chinese government's intervention in Vitamin C pricing started in the 1990's, when Chinese exporters needed approval from quasi- governmental industry trade associations to ship products abroad, and continued into the period at issue—when imposing price and supply restrictions was seen as a way to avoid anti-dumping claims by the U.S. and European Union. China's export policies have since evolved, in part due to its admission to the WTO; and, in 2008, China adopted its own antitrust laws, which prohibit price-fixing and other anticompetitive practices. These developments may make it harder for Chinese defendants in future cases to avoid liability by claiming sovereign compulsion of price-fixing or other anticompetitive conduct now prohibited by Chinese law or regulations.