In a case that reverberated throughout Chinese state-owned and private companies, as well as various organs of the Chinese government, in a recent private civil class action case in United States District Court for the Eastern District of New York, a jury found the remaining defendants liable for fixing the prices and limiting the supply of vitamin C exported to the United States from China1. The jury rejected the defense argument that they should not be held liable because their agreement was compelled by the Chinese government. The jury awarded damages of US$54 million and the court, according to American law, tripled this amount to US$162 million. While this represents a substantial jury verdict, it is relatively small compared to other private class action cartel verdicts recently entered by United States courts.
The Vitamin C case
Cartel cases like the Vitamin C case are usually brought as “class actions.” A class action allows individual plaintiffs whose overcharge claims might be too small to warrant the expense of filing a suit, to join together in one suit where the collective overcharges may be significant. A court may certify a class of hundreds, or even thousands, of individual plaintiffs in one lawsuit when common questions of law or fact predominate over any questions affecting only individual class members. If a jury renders a damage verdict for the plaintiffs, individual class members are allotted a share of the damages based on how much of the product in question they purchased. If a single customer purchased a very large amount of the product that was subject to the cartel, they may “opt-out” of the class action suit. An opt-out plaintiff withdraws from the class action to pursue a case on their own. Cartel cases are attractive to private plaintiffs because the amount of damages found by the jury is tripled.
The plaintiffs in the Vitamin C case were American food and beverage companies, vitamin packagers, and wholesalers and distributors who purchased vitamin C manufactured in China and shipped into the United States. The defendants were HeBei Welcome Pharmaceutical Co. Ltd; Aland (Jiangsu) Nutraceutical Co. Ltd.; Northeast Pharmaceutical Co. Ltd; and Weisheng Pharmaceutical Co. Ltd. The lawsuit alleged that customers who purchased imported vitamin C from the defendants had been overcharged as a result of an illegal cartel to fix prices and limit supply. Aland (Jiangsu) and Weisheng settled their case before trial by agreeing to pay monetary damages. HeBei and its parent, North China Pharmaceutical, went to trial.
The Chinese government compelled the collective conduct
Before a case proceeds to trial the defense may file motions to attempt to have the case dismissed. In this case, the defendants did not deny that they had fixed prices, but claimed they should not be held liable because the Chinese government compelled their conduct. This defense, known as foreign sovereign compulsion, recognizes that a foreign national should not be faced with the dilemma of violating its own native law to comply with American law. This defense, however, is difficult to prove as courts and juries in the United States are often skeptical that a government would “force” companies to fix prices. Defendants also raised two related defenses pretrial: comity and state action. Under the doctrine of comity, a court may refrain from hearing a case if doing so would unduly infringe on the laws or actions of another country. Comity is optional on the part of the prosecution and the Court as it is generally governed by equitable law in the United States, rather than by statute or case law. The state action doctrine provides a defense if the evidence demonstrates that the government actually set and regulated, or actively supervised, the defendants’ prices. To be successful, each of these defenses required evidence of specific actions by the Chinese government or specific Chinese laws that compelled the defendants to fix the export price of vitamin C.
In support of defendants’ pretrial motions, the Ministry of Commerce of the People’s Republic of China (MOFCOM) filed a brief that explained the Chinese government’s regulation of vitamin C exports and the oversight of the Chamber of Commerce of Medicines and Health Products Importers and Exporters (the Chamber). The brief explained that MOFCOM “formulates strategies, guidelines and policies concerning domestic and foreign trade and international economic cooperation…and regulates market operation to achieve an integrated, competitive and orderly market system.” 2 In its brief, MOFCOM also explained that in China, regulations are not always clearly written, but there is a long history of a “system of self-discipline” that is well known to, and complied with, by Chinese companies. According to MOFCOM, the defendants understood that they were required to coordinate pricing or be subjected to sanctions, including revocation of the license to export. 3 MOFCOM’s brief asserted that defendants’ actions were compelled by the Chinese government.
The plaintiffs presented the court with a much different story. They pointed to evidence, mostly minutes from the vitamin C subcommittee of the Chamber, 4 which indicated that the agreements reached at the trade association were done so voluntarily. There was no evidence in the meeting minutes to support the idea that the defendants were compelled to fix prices. In addition, the 2002 Charter of the vitamin C subcommittee describes the subcommittee as “a self-disciplinary industry organization…established on a voluntary basis.” 5 The court also considered a filing made by the Chinese government to the World Trade Organization which stated that it gave up export administration of vitamin C as of January, 2002. 6 The court denied the motion to dismiss the case based on the foreign sovereign compulsion defense. Instead, the court concluded that “the Ministry’s [MOFCOM’s] assertion of compulsion is a post-hoc attempt to shield defendants’ conduct from antitrust scrutiny.” 7
The court did not have jurisdiction over activity in China
Another issue that was decided in the Vitamin C case before the case went to the jury is whether the court in the United States had jurisdiction to hear the case since all of the cartel activity took place in China. The United States does not want its courts burdened with cases involving foreign conduct which has only a minimal impact on American consumers. The United States Congress passed the Foreign Trade Antitrust Improvement Act of 1982 (FTAIA) that sets forth a general rule that the Sherman Act (the statute prohibiting cartels) “shall not apply to conduct involving trade or commerce (other than import trade or commerce) with foreign nations.” 8 As exceptions to the general rule against jurisdiction, the Act specifically provides jurisdiction where the cartel involves import commerce. The FTAIA also provides jurisdiction where the cartel has a “direct, substantial, and reasonably foreseeable effect” on commerce in the United States.
The facts in the Vitamin C case provided the court with jurisdiction on both of these grounds. First, most of the vitamin C sold by the defendants was imported commerce—that is, the product was sold by the defendants directly to customers in the United States. Secondly, even in instances where the vitamin C was first sold to a third party outside the United States (for example, a distributor) and then imported into the United States, the cartel still had a direct, substantial and reasonably foreseeable effect on commerce in the United States. The evidence showed that the defendants’ price fixing specifically targeted customers in the United States. This is sufficient to establish jurisdiction in the United States even if there is a third party intermediary before the sale is made in the United States. By contrast, there would likely not be jurisdiction in American court if the cartel had only fixed prices in Asia, even though arguably, prices in the United States might be indirectly raised because world markets are often interconnected. 9
The court denied all of the defendants’ motions to have the case dismissed and the case went to trial.
The jury trial
The jury trial focused on the same issue of whether the defendants’ price fixing was compelled under Chinese law. The defendants called as a witness Qiao Haili, who headed the Chamber’s vitamin C subcommittee from 1997 to 2007. He testified that on behalf of MOFCOM, he compelled the companies to agree to prices and output. The witness further testified that he had the power to sanction companies that did not comply. The defendants called other witnesses who also asserted that the cooperation on export prices was compelled by MOFCOM. But, the defense witnesses had no contemporaneous documents to corroborate their claims of compulsion by Chinese law or involvement by the Chinese government in setting prices. The plaintiffs, on the other hand, presented to the jury the same type of evidence that had persuaded the judge in pretrial motions. For example, the subcommittee minutes contained no reference to compulsion or direction by the Chinese government. Instead, the documents indicated that the pricing agreements were reached voluntarily through “friendly consultation.” And, there was no evidence in any documents to indicate that companies might face sanctions if they did not reach agreement or failed to abide by the agreement. Accordingly, the fact finder found that the contemporaneous documents created during the cartel period were more persuasive than the uncorroborated “after the fact” trial testimony of the defense witnesses. The jury found that there was a cartel, that it was not compelled by the Chinese government and awarded damages to the plaintiff.
The last word?
Following the verdict and judgment, the remaining defendants filed a Motion for Judgment as a Matter of Law, arguing that irrespective of the jury’s verdict, their conduct in China was mandated by the Chinese government and thus legal as a matter of law. Defendants pleadings make both legal arguments well as raise issues of foreign relations, including a lengthy recitation of MOFCOM’s press release criticizing the verdict and judgment as “totally improper” and warning that “[i]f such mistakes are not corrected, it will be worrisome for the global society and companies, which will lead to increasing international disputes and eventually harm US interests.” 10 If the trial court rejects defendants’ post-trial motions, defendants will no doubt file an appeal, where the appellate court can review completely the legal determinations of the trial court while giving substantial deference to its factual determinations.
A look ahead
The success of the plaintiffs in the Vitamin C case will no doubt encourage similar lawsuits by American customers of imported Chinese goods. Similar class action price fixing cases are already pending against Chinese bauxite and magnesium companies. There is also a civil case filed against Chinese manufacturers of solar panels alleging that those manufacturers colluded to sell at below cost prices in the United States to illegally disadvantage US companies. The ability to obtain evidence can present problems in bringing these lawsuits, but these problems are not insurmountable. The amount of Chinese goods imported into the United States and the lure of triple damages will likely lead to much more civil litigation. It is important that foreign companies that import product into the United States discuss possible competition issues with counsel early on and take corrective measures before becoming the target of a class action.