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Client Briefing: US Second Circuit reverses Vitamin C ruling on international comity grounds

On September 20, in a landmark decision, the US Court of Appeals for the Second Circuit reversed a district court's decision in In re: Vitamin C Antitrust Litigation on international comity grounds.  In vacating a $147m antitrust judgment against Chinese vitamin C manufacturers, the Second Circuit held that, in deference to statements made by MOFCOM in its amicus brief, the defendants were required by Chinese law to set prices and reduce quantities of vitamin C sold abroad. Such a conflict in defendants’ legal obligations, balanced with other factors, mandated dismissal of plaintiffs’ suit.


At a press conference on October 10, 2016, the Ministry of Commerce of the People's Republic of China (MOFCOM) commented positively on its role in a landmark decision handed down several weeks ago in In re: Vitamin C Antitrust Litigation.  On September 20, the US Court of Appeals for the Second Circuit (the Second Circuit) reversed a decision by a US district court on international comity grounds, vacating a $147m judgment against Chinese vitamin C manufacturers for fixing prices and output in violation of US antitrust laws, and remanding the case to the district court to dismiss the complaint with prejudice. The Second Circuit determined that, in deference to statements made by MOFCOM in its amicus brief, the defendants were required by Chinese law to set prices and reduce quantities of vitamin C sold abroad. Such a conflict in defendants’ legal obligations, balanced with other factors, mandated dismissal of plaintiffs’ suit on international comity grounds.

Case Background

In 2005, US vitamin C purchasers (the Plaintiffs) filed a class action lawsuit against Chinese vitamin C producer Hebei Welcome Pharmaceutical Co. and its holding company, North China Pharmaceutical Group Corporation (the Defendants), for allegedly engaging in an illegal cartel to fix prices and control output of vitamin C exported from China to the United States and worldwide in violation of US antitrust law. The cartel, the Plaintiffs alleged, was formed with the China Chamber of Commerce of Medicines & Health Products Importers & Exporters (the Chamber).

Rather than deny the Plaintiffs' allegations, the Defendants, in a motion to dismiss and subsequent motion for summary judgment, raised three defenses: the act of state doctrine, the defense of foreign sovereign compulsion, and the principle of international comity. The Defendants argued that they acted pursuant to Chinese regulations and were, in essence, compelled by MOFCOM – an executive agency in China responsible for policy on, among other things, foreign trade, export and import regulations, consumer protection and market competition – to fix the price and quantity of vitamin C sold abroad. To support Defendants’ motions, MOFCOM filed a statement and amicus curiae brief, which was the first time any entity of the Chinese Government had appeared as amicus curiae before any US court.

Intervening at the district court level (and later at the appellate level) in strong support of the Defendants’ position, MOFCOM’s statement and brief explained that the Chamber was entirely unlike a trade association (as Plaintiffs alleged) but was a “Ministry supervised entity authorized by the Ministry to regulate vitamin C export prices and output levels.” In addition, MOFCOM explained China’s regime to regulate export prices: during the relevant period, all vitamin C manufacturers were required to submit documentation to the Chamber indicating both the amount and price of vitamin C it intended to export. The Chamber would then “verify” the contract price and affix a special seal to the contract that indicated the Chamber’s approval; a seal was provided only if the price was “at or above the minimum acceptable price set by coordination through the Chamber.”

In denying the Defendants’ motions, the district court held that “Chinese law did not compel Defendants’ anticompetitive conduct” during the relevant periods. The court heavily relied on written evidence of Chinese law, such as statutes and government orders that on their face did not mandate any price fixing, and indicated that the price fixing was voluntary and a type of “self-discipline” among Chinese vitamin C producers. Following the district court’s decision, several parties settled and the remaining Defendants proceeded to trial, where a jury returned a $147m award.

The Second Circuit’s decision: Level of deference and reasonableness of MOFCOM’s explanation

On appeal, the Second Circuit – eight years after the initial motion to dismiss was denied – reversed the district court’s decision on international comity grounds, reaffirming the principle that when a foreign government (i) directly participates in US court proceedings, (ii) by providing a sworn evidentiary proffer regarding the construction and effect of its laws and regulations, (iii) which is reasonable under the circumstances presented, a US court is bound to defer to those statements.

Applying a multifactor “comity balancing test” set out in Timberlane Lumber Co. v. Bank of America, N.T. & S.A., 549 F.2d 597 (9th Cir. 1976) and Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287 (3rd Cir. 1979), the Second Circuit found MOFCOM’s explanation credible. The court held that while on their face the terms “industry self-discipline,” “coordination,” and “voluntary restraint” may suggest voluntary price fixing by the Defendants, the district court failed to give sufficient deference “to the Ministry’s reasonable explanation that these are terms of art within Chinese law connoting the government’s expectation that private actors actively self-regulate to achieve the government’s policy goals in order to minimize the need for the government to resort to stronger enforcement methods.” In this context, the Second Circuit found it reasonable to view the regime by which MOFCOM regulated the export of vitamin C by deferring to the manufacturers and adopting their agreed-upon price as the minimum export price, thus creating a “true conflict” between Chinese law and US law.

Implications for Chinese companies active in the United States

Chinese companies frequently have been accused of dumping products into the United States. To address anti-dumping concerns, Chinese companies may consider it reasonable to “self-regulate” their minimum export prices to avoid potential anti-dumping claims. This approach, however, may lead to a different and even more severe legal consequence, i.e. violation of the US antitrust laws.

The approach adopted by the Second Circuit in this case has significant implications for Chinese companies active in export sales to the United States.1 Price fixing, or any form of naked collusion with competitors on price or output, is a hard-core violation of antitrust law in almost any jurisdiction, often carrying severe penalties. In the United States, in addition to criminal penalties including substantial monetary fines and individual prison sentences, private parties may seek damages in civil litigation – which are automatically trebled pursuant to US antitrust law. Therefore, although companies are free to set and adjust their own prices to avoid anti-dumping risks, or for any other purposes, they must refrain from communicating with competitors, either directly or indirectly, including via intermediary organizations such as the Chamber of Commerce, regarding pricing or output strategy and determinations.

Furthermore, if the companies are compelled by the government to fix prices or restrict output, they must carefully assess whether, if sued in the United States for antitrust violations, they would be in a position to provide sufficient evidence to prove that their offending conduct was government mandated – i.e. it would be a violation of Chinese law not to comply. According to Vitamin C, the strongest defense will include probative written evidence such as statutes or government orders. If written evidence is unavailable or, as in this case, does not on its face reflect the government mandate, the defense should seek endorsement and explanation from the Chinese government.

Finally, although Vitamin C concerns export sales in an antitrust context, its implications reach beyond international trade and antitrust considerations, potentially to touch almost any facet of cross-border transactions, including cross-border M&A, outbound investment and provision of services that may involve conflict of laws between China and the United States. In particular, Chinese companies subject to government-mandated price fixing or output restrictions should consider this context when pursuing strategic acquisitions outside of China. Although the application of legal comity – as used in Vitamin C – may assist companies in avoiding present US antitrust liability, admissions of ongoing antitrust violations could have broader – and yet unforeseen – implications in the future. For example, admissions in US courts to anticompetitive conduct immunized by comity considerations may lead to increased scrutiny of the admitting parties’ M&A activity – i.e. if companies have admitted to participating in a price-fixing cartel, any future strategic transactions may be considered by antitrust agencies as potential additions to the ongoing anticompetitive scheme.

Implications for the Chambers of Commerce in China

Substantially all of the Chambers of Commerce in China2 have the responsibility to “facilitate self-discipline within the industry” and “coordinate and settle disputes between members.” The Chambers should handle these responsibilities carefully; otherwise, they could easily become a platform for their members to facilitate price fixing or other forms of collusion. To help members mitigate antitrust risks, suggested practice is for the Chambers to: (i) refrain from facilitating or coordinating any collusion among their members with regard to price, output or any sensitive transaction terms; (ii) prohibit their members from communicating with each other, or obtaining information from the Chambers, without proper safeguards to protect competitively sensitive information; and (iii) otherwise actively enforce government mandates.

On the other hand, if a Chamber, as in Vitamin C, is mandated by the government to coordinate among its members on certain transaction terms that may give rise to antitrust risks, the Chamber should consider actively working with both the government and members to mitigate the potential liability in the United States and other jurisdictions. First, the Chamber may present official documents to the relevant legal authority to demonstrate its legal status as a government-led entity, rather than an autonomous entity similar to trade associations in the EU and the United States. Second, the Chamber may help members collect evidence to prove the relevant government mandate. Although it does not seem practical to involve MOFCOM in every US legal proceeding as amicus curiae, the Vitamin C decision makes it clear that US courts will consider “any relevant material or source” in determining foreign law, including any government document proving the mandate will be helpful for members. 
1 Even supposing that MOFCOM would decide to intervene and appear as amicus curiae before a US court in future litigation, there is no guarantee that the court would accept international comity arguments. Where the Second Circuit’s decision is mandatory on district courts and other lower courts within the circuit, the decision is considered persuasive authority and not binding in other federal circuits or state courts.

2 For the purpose of this briefing, “Chambers of Commerce” refers only to the seven Chambers of Commerce with similar legal status as the Chamber in Vitamin C, i.e. those that directly subordinate to MOFCOM, which are: China Chamber of Commerce for Import & Export of Medicines & Health Products (the Chamber in this case); China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters; China Chamber of Commerce for Import & Export of Textile and Apparel; China Chamber of Commerce for Import & Export of Light Industrial Products and Arts-Crafts; China Chamber of Commerce for Import & Export of Foodstuffs, Native Produce and Animal By-Products; China Chamber of Commerce for Motorcycle; and China International Contractor Association.