By John R. Foote and Karl K. Sung*
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); 584 F. Supp. 2d 546, 552 (E.D.N.Y. 2008). 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.
The Eastern District of New York Refuses to Grant Deference to an Official Representation by the Chinese Government
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 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, which is equivalent to a cabinet level department in the United States, 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.”
Defendants moved to dismiss the complaint on grounds of, inter alia, principles of international comity, arguing that the court was required to take the Ministry’s interpretation of its own laws and its statement that it had compelled Defendants to fix vitamin C prices and export volumes as “conclusive evidence” of compulsion. Plaintiffs argued that the Defendants’ price fixing was voluntary and attacked the Ministry’s amicus brief, stating that the Ministry had failed to point to a single law or regulation that specifically addressed the vitamin C prices or price agreements at issue in the complaint. Plaintiffs also brought forth publicly available records purporting to state that the Chamber’s vitamin C manufacturers “were able to reach a self-regulated agreement successfully, whereby they would voluntarily control the quantity and pace of exports … [which] have been completely implemented by each enterprises’ own decisions and self-restraint, without any government intervention.” (Emphasis in original). The district court was not persuaded by the Ministry’s explanation that these records use terms of art that have different meanings in the context of China’s government and economic policy, the meanings of which when taken in context are quite different from their literal translations.
First, the district court held that, while the Ministry’s amicus brief was “entitled to substantial deference,” it would “not be taken as conclusive evidence of compulsion,” particularly in light of the publicly available records that purportedly contradicted the Ministry’s position, as well as other evidence “suggest[ing] that the hand of government was not weighing as heavily on defendants as defendants and the Ministry would have this court believe.”
Second, upon concluding that it would not grant the Ministry’s statement complete deference, the district court attempted to interpret Chinese law and determine whether Defendants, at the time of their anticompetitive behavior, were acting in their capacity as government agents or acting as private companies.
|Rather than codifying its statutes, the Chinese government apparently frequently governs by regulations promulgated by various ministries … according to the Ministry, private citizens or companies may be authorized under Chinese regulations to act in certain circumstances as government agents …. It is this  circumstance that so complicates the question of compulsion in this case. It is not clear from the record at this stage of the case whether defendants were performing government function, whether they were acting as private citizens pursuant to governmental directives or whether they were acting as unrestrained private citizens. (Emphasis added).|
The district court thought it necessary “to differentiate between a cartel that was voluntarily formed by its members, who then had to seek governmental approval, and a cartel that was mandated by governmental fiat.” The court refused to dismiss the case because it “is not clear that this scenario of defendants making their own choices and then asking for the government’s imprimatur…would qualify as the type of governmental act or compulsions contemplated by the defenses raised by defendants.”
On a subsequent motion for summary judgment, the district court, again, declined to defer to the Ministry’s interpretation of Chinese law despite admitting that “asserting a claim of compulsion under a foreign regime that so differs from our own concept of law can be akin to trying to fit a round peg into a square hole.” See 810 F. Supp. 2d 522, 550 (E.D.N.Y. 2011). Rather, the district court took it upon itself to interpret Chinese law “based on what may be considered the more traditional sources of foreign law—primarily the governmental directives themselves as well as the charter documents of the Subcommittee and the Chamber.” The district court concluded that the statement by the Chinese government about its own laws and what they required was 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.
The Second Circuit Court of Appeals Reversed the District Court and Orders the Case Dismissed on Grounds of International Comity
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 [sic], 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. (Emphasis added)|
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. (Emphasis added)
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.
Plaintiff’s Petition for a Writ of Certiorari to the U.S. Supreme Court
The standard of deference applied by the Second Circuit, as well as its grounds for ruling in favor of Defendants, has been placed into question by Plaintiffs’ petition for a writ of certiorari in the Supreme Court of the United States that was filed on April 3, 2017. Plaintiffs argue that the opinion issued by the Second Circuit warrants review on three separate grounds. First, the Second Circuit’s decision to review and reverse the District Court’s order denying Defendants’ motion to dismiss after a full trial on the merits has created a split with the Fifth, Sixth, and Tenth Circuits, each of which have held that a defendant may not appeal from a pretrial denial of a motion to dismiss following trial.
Second, Plaintiffs argue that courts of appeals have diverged widely on the proper standard of deference that should be given to an appearing foreign sovereign’s official statement. Plaintiffs explain that, while the Second Circuit has aligned itself with the Ninth Circuit in holding that it is “bound to defer” to such statements, this standard directly conflicts with the standard applied by the D.C. and Sixth Circuits, and the Fifth, Seventh and Eleventh Circuits each applies its own flexible standard of deference.
Third, Plaintiffs request that the U.S. Supreme Court decide whether courts have authority to abstain from exercising Sherman Act jurisdiction on grounds of international comity, arguing that asserting such extraterritorial jurisdiction should be “decided by statutory text, rather than a case-by-case application of a discretionary ten-part test.” The U.S. Supreme Court has yet to rule on Plaintiffs’ writ petition.
Unless and until the U.S. Supreme Court clarifies further, courts in the Second Circuit 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. Courts in other circuits also grant deference in varying degrees to foreign government statements about their own laws. 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.
*John R. Foote is senior counsel, and Karl K. Sung is an associate, in the Commercial Litigation Practice Group in the San Francisco office of Nixon Peabody LLP. Mr. Foote can be contacted at email@example.com , and Mr. Sung at firstname.lastname@example.org .