In a decision filed on August 7, 2012, in a federal court in New York, a judge ruled that a Chinese company could not evade jurisdiction of the U.S. courts and must face the prospect of a trial for colluding to fix the price of vitamin C exported from China into the United States. Two Chinese subsidiaries of the company, however, were dismissed for lack of personal jurisdiction. The court demonstrates the challenges Chinese companies face as they increase their level of activity and scope of operations in the United States.
Judge Brian Cogan of the Eastern District of New York denied the motion to dismiss of defendant North China Pharmaceutical Group Corp. (“North China Pharmaceutical”) after ruling that the Shijiazhuang-based company is subject to the U.S. federal antitrust laws, as well as New York’s “long-arm” statute. In particular, the court held that there were several facts produced in discovery that established personal jurisdiction over North China Pharmaceutical. First, the court held that the plaintiffs established in discovery that there were sufficient facts to support their claim that the deputy general manager of North China Pharmaceutical attended meetings with other conspirators to fix the price, and to limit the supply, of vitamin C – notwithstanding that the same individual filled a variety of roles at other companies that the court dismissed from the case.
The court spent several pages of the decision distinguishing this case from other price-fixing cases in New York where personal jurisdiction over a foreign alleged conspirator was not established. For example, the court noted that, unlike companies dismissed in other cases, North China Pharmaceutical’s economic interests were “aligned” with those of other conspirators. There were also facts establishing that North China Pharmaceutical was represented at cartel meetings which allegedly took place in China. The court dismissed, however, two subsidiaries of North China Pharmaceutical because the facts alleged by the plaintiffs were inadequate to create an inference that the subsidiaries were themselves represented at any cartel meetings. These facts, the court held, were sufficient to establish personal jurisdiction over North China Pharmaceutical for purposes of the federal antitrust laws.
The court also held that North China Pharmaceutical was subject to jurisdiction in New York under the state’s “situs of injury” test. Here, the court held that although “the conspiracy to inflate the price of vitamin C occurred in China,” the “first effects” of the cartel – that is, the increase in the price of vitamin C – took place in New York. The ruling makes clear that the “situs of injury” test is heavily fact-dependent, but the court found that the facts in this case weighed in favor of establishing the economic injury in New York as the first effects of the cartel. The court noted, however, that there was no such evidence that two subsidiaries of North China Pharmaceutical caused economic injury in New York – in fact, there was almost no evidence that they even sold products into New York. The plaintiffs’ assertion that there “may have” been a shipment was not adequate where there were no facts in the record to suggest the subsidiaries participated in the alleged conspiracy.
Finally, the court noted that – in an earlier decision – it had overruled the defendants’ argument that they were compelled by acts of the government of China to charge higher prices. According to the defendants, their actions were compelled by China and they should have been dismissed under the doctrine of foreign sovereign compulsion. Interestingly, the China Ministry of Commerce (MOFCOM) previously filed a brief detailing MOFCOM’s role in pricing vitamin C.4 Nonetheless, the court held that MOFCOM’s position, even though entitled to “substantial deference,” was not controlling and was too ambiguous to dismiss the case outright at the pleadings stage. The court acknowledged that the defendant was “caught between the proverbial rock and a hard place where compliance with one country’s laws results in violation of another’s.”
The vitamin C case is one of the first of its kind in the United States, but it amply demonstrates the difficulties Chinese companies can expect as their operations expand abroad, and, in particular, in the United States. The case also highlights the importance of presenting all relevant facts (including, for instance, the position of MOFCOM) in a lucid manner at the early stages of the case. Indeed, the case makes clear that it is critical to anticipate these problems before having to deal with them in court or before foreign regulators.