On September 20 2016 the Second Circuit Court of Appeals overturned a federal district court judgment in a class action antitrust lawsuit against two Chinese companies accused of conspiring to fix the price and output of vitamin C sold into the United States. The opinion overturned a jury verdict against the Chinese companies awarding the plaintiffs approximately $147 million (close to Rmb1 billion) in damages. The case is noteworthy because the court held that the companies were compelled to fix the price and output by Chinese law, and therefore their conduct was outside the antitrust jurisdiction of the US federal courts.
The case began a decade ago when vitamin C buyers began filing complaints alleging that Chinese vitamin C sellers had fixed prices and output. The cases were eventually consolidated into a multi-district class action in the Eastern District of New York. The defendants moved to dismiss the complaint based on the act of state doctrine, the defence of foreign sovereign compulsion and the principle of international comity. The district court denied the motion to allow for further discovery on the issue.
The defendants subsequently moved for summary judgment on the same grounds. The district court again denied the motion, declining to give deference to the interpretation of Chinese law made by the Chinese Ministry of Commerce (MOFCOM), which intervened as amicus curiae (friend of the courts) in the case. The district court found that: "Chinese law did not compel [the] defendants' anticompetitive conduct." The case went to trial and, in March 2013, a jury awarded the plaintiffs approximately $147 million in damages and an injunction barring defendants from fixing the price or output of vitamin C.
Defendants Hebei Welcome Pharmaceutical Co Ltd and North China Pharmaceutical Group Corp appealed the district court's judgment. In a unanimous opinion written by Judge Peter W Hall, the three-judge Second Circuit panel held that the district court had "abused its discretion by not abstaining, on international comity grounds, from asserting jurisdiction". The opinion said that the district judge had:
"erred by concluding that Chinese law did not require defendants to violate US antitrust law and further erred by not extending adequate deference to the Chinese Government's proffer of the interpretation of its own laws."
The court's ruling is binding law in the Second Circuit (New York, Vermont and Connecticut) and potential persuasive authority in other federal courts.
The case is remarkable because the amicus brief filed by MOFCOM represents the first time that a government entity has ever appeared amicus curiae before a US court. The court held that it was bound to MOFCOM's position that Chinese law required the defendants to fix prices and output:
"When a foreign government, acting through counsel or otherwise, directly participates in US 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 US court is bound to defer to those statements … even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system."
The court noted that:
"deference in this case is particularly important 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."
The court held that it did not matter whether defendants helped create the Chinese mandate or whether the Chinese mandate was enforced: "it is enough that Chinese law actually mandated such action, regardless of whether defendants benefited from, complied with, or orchestrated the mandate."
After finding that a true conflict existed between Chinese and US law, the court proceeded to consider the remaining factors in the international comity test, finding that each of those factors supported abstaining from jurisdiction over the plaintiffs' claims. In considering those factors, the court noted that: "the exercise of jurisdiction by the district court has already negatively affected US-China relations", reflected in communications from the Chinese government to the federal courts and the US Department of State.
International companies doing business in the United States may face conflicting obligations under US law and the law of their home country. The Second Circuit's ruling provides international companies with a stronger basis for objecting to US antitrust claims when those companies cannot simultaneously comply with US antitrust law and the law of their home country. However, international companies doing business in the United States should be mindful of the following:
- As the Second Circuit Court of Appeals held, the mere existence of a conflict between US antitrust law and the law of the home country is insufficient to avoid federal courts. Instead, the defendant must satisfy a multi-factor balancing test reflecting international comity standards.
- In evaluating whether a true conflict exists between US antitrust law and the law of the home country – a critical threshold element of the multi-factor test – a court may afford strong deference to the home country's explanation of its own laws.
- Where the existence of a conflict between US antitrust law and the law of the home country is not particularly clear, international companies run a greater risk of protracted antitrust litigation over many years, even if they ultimately prevail.
For further information on this topic please contact Justin W Bernick or Logan Breed at Hogan Lovells US LLP's Washington office by telephone (+1 202 637 5600) or email (email@example.com or firstname.lastname@example.org). Alternatively, contact Adrian Emch at Hogan Lovells International LLP's Beijing office by telephone (+86 10 6582 9488) or email (email@example.com). The Hogan Lovells website can be accessed at www.hoganlovells.com.
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