WSGR Persuades Second Circuit to Overturn $150 Million Judgment Against Chinese Vitamin C Manufacturers

by Wilson Sonsini Goodrich & Rosati

On September 20, 2016, the U.S. Court of Appeals for the Second Circuit issued its decision in a closely watched dispute over the question of whether foreign companies may be held liable under U.S. antitrust law for price fixing where the companies' home government claims that it compelled the conduct at issue. In the process of resolving the case, the Second Circuit provided important guidance on the scope of deference U.S. courts should give to foreign authorities' interpretations of their own laws and the applicability of the international comity doctrine to U.S. private litigation.

In In re Vitamin C Antitrust Litigation, two plaintiff classes, one a direct purchaser class seeking damages and the other a class seeking injunctive relief, filed suit in the U.S. District Court for the Eastern District of New York. The two classes alleged that two Chinese companies, vitamin C manufacturer Hebei Welcome Pharmaceutical Co. and North China Pharmaceutical Group (NCPG), Hebei Welcome's parent company, along with several alleged co-conspirators, had engaged in price fixing in violation of U.S. antitrust laws in connection with vitamin C exported from China. At the motion to dismiss stage, the Ministry of Commerce of the People's Republic of China (MOFCOM) made the unprecedented move of formally appearing in the trial court litigation as an amicus participant to advise the court that Chinese law and regulations promulgated by MOFCOM compelled the alleged price-fixing conduct.

The district court held at the motion to dismiss stage that it needed more evidence on whether the MOFCOM regulations were really compulsory, and at the summary judgment stage the district court declined to defer to MOFCOM's interpretation and instead found that gaps it saw in the text of the regulations and in their enforcement meant that the Chinese government did not compel the conduct. Finding that the defendants could have complied with both Chinese law and American law, the court required the defendants to stand trial. Most of the defendants settled. In 2013, however, a jury found Hebei Welcome and NCPG guilty of price fixing and awarded the plaintiffs $150 million in treble damages.

Wilson Sonsini Goodrich & Rosati was retained for the appeal before the Second Circuit, and the Chinese government supported the appeal through an amicus brief from MOFCOM and a formal diplomatic note from the Chinese Embassy to the U.S. State Department protesting the judgment. A panel of the Second Circuit comprised of Circuit Judges Peter Hall, Richard Wesley, and José Cabranes unanimously vacated the district court's judgment and reversed the denial of the original motion to dismiss.

In an opinion by Judge Hall, the Second Circuit found that the district court erred in failing to defer to the Chinese government's interpretation of its own laws. It held that "when a foreign government . . . directly participates in U.S. 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 U.S. court is bound to defer to those statements." This means that "a U.S. court [may] not embark on a challenge to a foreign government's official representation to the court regarding its laws or regulations, even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system." Applying this standard, the court held that MOFCOM's interpretation of its regulations was sufficiently cogent and detailed that the district court should have deferred to it, and that deference required a finding that the requirements of Chinese law applicable to the vitamin C manufacturers conflicted with the requirements of U.S. antitrust law.

In addition to clarifying the standard of deference owed to a foreign government's interpretation of its own laws, the court clarified the test for applying the doctrine of international comity abstention, which requires a federal court to decline to hear a case even if it has jurisdiction where deciding the case would excessively entangle the court in international affairs. The court reconciled statements in a 1993 Supreme Court case suggesting that the only consideration for international comity abstention is whether or not a "true conflict" exists between U.S. law and foreign law with statements in earlier appellate cases holding that the courts should consider a variety of factors in addition to conflicting legal standards. These factors include:

"(1) Degree of conflict with foreign law or policy;
(2) Nationality of the parties, locations, or principal places of business of corporations;
(3) Relative importance of the alleged violation of conduct here as compared with conduct abroad;
(4) 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;
(5) Existence of intent to harm or affect American commerce and its foreseeability;
(6) Possible effect upon foreign relations if the court exercises jurisdiction and grants relief;
(7) If relief is granted, 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;
(8) Whether the court can make its order effective;
(9) Whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances; and
(10) Whether a treaty with the affected nations has addressed the issue."

The Second Circuit determined that while the Supreme Court's decision emphasized the importance of the conflict factor, it did not eliminate the relevance of the other factors. The court did not address the question of whether or not international comity abstention could ever be appropriate in the absence of a conflict between U.S. and foreign law, but it did hold that the balancing of the other factors was still required even in cases of true conflict of laws.

Applying the remaining factors, the court found that they "decidedly" favored abstention. The court noted that the companies at issue were all Chinese companies with principal places of business and manufacturing facilities in China, that the conduct occurred entirely in China and there was no evidence that the conduct specifically targeted the U.S. for harm, and that the case had already adversely impacted U.S.-China relations. Throughout, the court emphasized the fact that the U.S. would expect deference to its policy choices if the roles were reversed. The court also noted that the U.S. and China are both World Trade Organization members and signatories to a variety of multi-lateral and bi-lateral agreements relevant to the issue of export price fixing, and that the plaintiffs could have "recourse to the executive branch, which is best suited to deal with foreign policy, sanctions, treaties, and bi-lateral negotiations." The court therefore vacated the district court's judgment, reversed the district court's denial of the defendants' motion to dismiss on international comity grounds, and remanded the case with instructions to dismiss the plaintiffs' complaint with prejudice.

In reversing the district court's decision, the Second Circuit reestablished that when a foreign government submits an official statement and evidentiary proffer providing a reasonable interpretation of its own law, it is inappropriate for U.S. courts to disregard that statement and instead apply its own interpretation. Moreover, the Second Circuit's decision avoids a scenario where a foreign company can face liability in U.S. courts based on conduct that is required by their own laws, at least where the other comity factors support abstention. As the first major appellate decision on the application of international comity to private antitrust litigation in several decades, the decision provides important guidance to district courts going forward.

Daniel Weick and Justin Cohen contributed to the preparation of this WSGR Alert.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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