Second Circuit reverses a price-fixing cartel verdict against Chinese defendants on international comity grounds
By Valerio Cosimo Romano
On 20 September 2016, the United States Court of Appeals for the Second Circuit (the “Appeals court”) in New York reversed a federal district court judgment in an antitrust lawsuit against two Chinese companies accused of conspiring to fix the price and output of vitamin C sold to the United States.
In 2005, several vitamin C purchasers in the United States filed suit against two Chinese companies, alleging that the defendants and their co-conspirators had established an illegal cartel with the purpose and effect of fixing prices, controlling the supply of vitamin C exported to the United States and worldwide, and inflating the prices of vitamin C in the United States and elsewhere. Defendants argued that they had acted in line with Chinese regulations on vitamin C export pricing which, in essence, requires coordination on prices and creation of a supply shortage, and that pursuant to the principle of international comity (i.e., the recognition granted by a nation within its territory to the legislative, executive, or judicial acts of another nation) the Court should have abstained from exercising jurisdiction in the case. The case went to trial, and in March 2013 a jury awarded plaintiffs approximately USD 147 million in damages and issued an injunction barring defendants from fixing the price or output of vitamin C. Defendants appealed the district court’s judgment.
Preliminarily, the appeals court determined whether Chinese law required defendants to engage in a conduct contrary to U.S. antitrust laws.
Defendants’ argument was supported by the Chinese Ministry of Commerce, which filed an amicus curiae brief in support of Defendants’ motion to dismiss, confirming that it had compelled Defendants to sell the goods at industry wide-coordinated prices and export volumes, in order to assist China in its transition from a state run command economy to a market‐driven economy. Consistent with prior case law, the appeals court reaffirmed the principle that when a foreign government participates in U.S. court proceedings providing a reasonable evidentiary proffer on the construction and effect of its laws and regulations, the U.S. court is bound to defer to those statements. On that basis, the Court concluded that Chinese law required Defendants to engage in activities that amounted to U.S. antitrust violations.
Once ascertained the existence of a “true conflict” of laws between the applicable Chinese regulations and the relevant U.S. law, the Court determined whether it had to abstain from asserting jurisdiction on comity grounds.
In order to do so, it applied the Timberlane Lumber-Mannington Mills multi‐factor balancing test, which involves the analysis of: the degree of conflict with foreign law or policy; the nationality of the parties, locations or principal places of business of corporations; the relative importance of the alleged violation of conduct here as compared with conduct abroad; the extent to which enforcement by either state can be expected to achieve compliance, the availability of a remedy abroad and the pendency of litigation there; the existence of intent to harm or affect U.S. commerce and its foreseeability; the possible effect upon foreign relations if the court exercises jurisdiction and grants relief; whether a party will be placed in the position of being forced to perform an act illegal in either country or be under conflicting requirements by both countries; whether the court can make its order effective; whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances, and lastly whether a treaty with the affected nations has addressed the issue.
Applying the test, the Court held that China’s interests outweigh the U.S. antitrust enforcement’s interests and thus that the factors counsel against exercising jurisdiction in the case. The Court further noted that Plaintiffs are not without recourse in respect to China’s export policies, since they can always resort to the executive branch, which would deal with the issue with foreign policy instruments.
Consequently, the Appeals court held that the district court had abused its discretion by not abstaining from asserting jurisdiction, and reversed the court’s order.
This judgment is an exercise of legal diplomacy aimed at balancing the enforcement of U.S. antitrust and the right to recourse for U.S. citizens on the one hand, and the recognition and deference to be granted to the legislative and governmental acts performed by sovereign states on the other hand. In fact, the complex intersection of legal, political, and economic effects stemming from the clash of legal systems mandates a prudential approach in deciding matters like this. However, sovereign self-limitation shall not be intended as a legitimization of a free riding behavior over foreign economies. Thus, its application shall be kept to a minimum in order not to impair the effectiveness of national antitrust laws.