China: Comity And State Compulsion: What Is The Difference And Why Should It Matter?

Last Updated: 26 July 2017
Article by Frank Fine

As the reader probably knows, the US Vitamin C cartel litigation, culminating in a judgment by the 2nd Circuit federal court on 20 September 2016, was a watershed case—not with regard to cartel law, but rather, whether the US courts had jurisdiction under the circumstances.   The 2nd Circuit court overturned the decision of the federal district court by holding that the international law principle of comity prevented the assertion of jurisdiction.  

The purpose of this brief paper is to explain what the concept of comity is, how it differs from the defense of State compulsion, and how Chinese companies, in particular SOEs, may benefit from this knowledge.

Comity is a principle of public international law.  In a legal context, comity traditionally refers to the recognition by the courts of one country (or legal system) of the laws and judicial acts of another, but this concept may also extend to recognition by administrative bodies of enforcement actions taken by administrative bodies of other countries or legal systems. 

In Vitamin C, the the 2nd Circuit held that the principle of comity bound it to accept the argument of MOFCOM, which had filed an amicus curiae brief supported by a court appearance (the first time any foreign government had done so in a US federal court), that Chinese law required the defendants to fix prices. It should be noted that the 2nd Circuit did not differ with the district court on whether the defendants were, in fact, compelled by Chinese law to fix prices, but rather, that the lower court had abused its discretion by finding that compulsion existed.  In other words, the principle of comity prevented an assertion of jurisdiction which would have led to the district court making such evidentiary findings.

Instead, the 2nd Circuit applied a 10-factor balancing test to determine whether comity applied, and consequently whether the district court was authorized to adjudicate.  These factors were:  (1) whether there was a true conflict between US and Chinese law; (2) where the parties had their principal place of business;  (3) the relative significance of the illegal behavior in each jurisdiction; (4) the likelihood of Chinese legal enforcement and an effective remedy; (5) any effects on US commerce;  (6) and potential adverse effects on foreign relations if US jurisdiction were asserted; (7) if legal enforcement occurred, would it cause the defendants to commit an illegal act in the other country or submit it conflicting legal obligations; (8) whether the US court was in a position to impose effective relief; (9) if China imposed similar relief, would it be acceptable to the US; and (10)  whether a treaty between the two countries already dealt with the comity issue. 

In the case at bar, the 2nd Circuit found that the balancing of factors led inexorably to the conclusion that jurisdiction was inappropriate as a matter of international law.   Manifestly, the main reasons for this conclusion were that the US and Chinese views differed on whether the defendants were compelled to fix prices, and that if the US district court found that the defendants were guilty of price fixing and thereafter legally bound not to fix prices, they would have violated their obligations to MOFCOM, perhaps resulting in liability in China. 

It is also worth noting that the cooperation agreements between the US and Chinese antitrust authorities did not include any provisions on comity (the 10th factor above).  

Curiously, the Competition Directorate of the European Commission never opened a cartel investigation regarding Vitamin C, and apparently, this position has never been publicly explained.  The Commission was perhaps influenced by the political sensitivity of such an investigation and preferred to defer to the US courts because the class action there, if judgment were rendered for the plaintiffs, would have resulted in potentially enormous damages against the Chinese defendants—and a sufficient deterrent effect.   

However, how would DG Competition have hypothetically handled the Vitamin C investigation?  And how would the issue of comity have been dealt with? 

As an initial matter, DG Competition would have examined the 2012 cooperation agreement between the EU and the NDRC.  Here, it would have found an absence of comity provisions.  Indeed, the agreement confirms that does not create legal rights or obligations under international law.  But then, the Commission would have had regard to the principle of comity under public international law.  Immediately, it would have found that neither the Commission nor EU Courts had previously applied the principle of comity in an antitrust case to nullify jurisdiction.  The Commission would have had at its disposal the 1988 judgment of the European Court of Justice in Wood Pulp (Cases 89/95), in which the Court held that there was no legal conflict between the US and EU justifying the application of comity.  The Webb-Pomerene Act relied upon by the defendants did not compel them to fix prices; rather, the Act exempted export cartels from the application of US antitrust laws.   Enforcement of EU antitrust laws did not cause the defendants to violate US antitrust laws. The Commission's more recent decision in LCD (Case COMP/39.909 of 12 August 2010) also considered the application of comity.  In that case, Article 5 of the cooperation agreement between the Korea and the EU provided for "negative" comity, i.e. that each party would give careful consideration to the "important interests" of the other party.   However, the EU concluded that the KFTC never claimed any important interests. 

Despite the lack of clarity in EU decisions, it is arguable that the same or similar application of comity applied by the 2nd Circuit would have occurred if the European Commission investigated the Chinese Vitamin C producers.   It is not that the EU refutes the legitimacy of comity, but rather, has not had an appropriate case in which to apply the principle.

As suggested earlier, the concept of State compulsion is quite different from comity. First, State compulsion is not a principle of public international law.  It arises from the notion that companies should not be liable for acts that are not autonomous, but rather, required by the State.   Secondly, the concept of State compulsion, if applicable, does not result in the non-assertion of jurisdiction, but rather, in a finding that the company did not commit an antitrust infringement.  Indeed, one asserts State compulsion as a defense, and it is considered along with all the evidence on the issue of liability.

But how is State compulsion proven?  As the European Court of Justice held in Ladbroke Racing (Cases C-359-95P of 1997), the defense applies when a company is required to violate EU antitrust law by national legislation.  Alternatively, this case held that the defense applies when the national legislation creates a "legal framework" which eliminates competition.  As the Court more recently held in Deutsche Telekom (Case 290/08P of 2010),  it is no defense that the behavior in question was simply encouraged or made easier by the State. 

Finally, it is worth noting that until now, the EU has not applied the defense of State compulsion in any investigation involving compulsion from non-EU jurisdictions.  But there is certainly no legal impediment preventing the Commission from doing so, particularly with regard to Chinese companies.  There are at least four cases in which the defendants argued that third countries compelled the conduct in question, but the EU found that they had not satisfied the compulsion requirement—there was no issue that if compulsion existed, the defense would have been appropriate.   See e.g., Aluminium Imports from Eastern Europe (OJ L 92/1 (1985)); Franco-Japanese Ballbearings (OJ L 343/19 (1974)); French-West African Shipowners' Committees (OJ L 134/1 (1992)); and Compagnie Maritime Belge Transports (Cases C-395-96P of 2000).   On this basis, one may foresee in an appropriate EU case, Chinese companies may be successful in asserting the State compulsion defense.

As regards the Vitamin C case, one cannot foresee, if this cartel were investigated by DG Competition, whether it would have concluded that the companies in question were compelled by the Chinese government to engage in price-fixing.   It is also an open question whether MOFCOM officials would been allowed by DG Competition to put their argument orally in European Commission offices in a live investigation involving third parties.  However, there are no procedural mechanisms or niceties that would prevent this from happening, and in the current climate of bilateral cooperation, DG Competition should be given the benefit of the doubt.   Even if there were no bilateral meeting as such,  DG Competition would

almost certainly have welcomed written submissions from MOFCOM.  

The Vitamin C litigation has clearly generated a lot of controversy and public interest about the principle of comity and the defense of State compulsion, particular when Chinese law and companies are involved.   For Chinese SOEs in particular, they would be well-advised to inform themselves of their foreign legal rights when following PRC directives in other countries, especially when those directives may lead directly to antitrust violations in those countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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