Article by Robert Ritchie*
Judge Brian Cogan of the U.S. District Court for the Eastern
District of New York rejected an argument on summary judgment that
a group of Chinese vitamin C manufacturers were compelled by the
Chinese government to fix prices for the export of vitamin
C.1 By doing so, he allowed a putative antitrust class
action against the manufacturers to move forward. The decision
explored the contours of the foreign sovereign compulsion doctrine,
taking a narrow view of its potency as a defense to antitrust
liability. Notably, the decision rejected the arguments of
China's Ministry of Commerce (the "Ministry"), which
argued in support of the defendants in the Chinese government's
first ever appearance before a U.S. court as an amicus.
In 2002, the Chinese government established an export regime for
several products, including vitamin C, known as "Price
Verification and Chop." The regime was to be administered by
the Chamber of Commerce of Medicines and Health Products Importers
and Exporters ("Chamber of Commerce"), an entity that the
Chinese government had earlier established to serve as both a
regulatory body and a private trade association. The defendants
were members of the Chamber of Commerce and its subcommittee for
importers and exporters of vitamin C. Pursuant to Price
Verification and Chop, the subcommittee enacted an
"industry-wide price agreement" for the export of vitamin
C.2 Anyone wishing to export vitamin C would then have
to submit its contract to the Chamber of Commerce, which would
analyze the contract for conformity with the price agreement.
Customs would prevent the export of products under contracts found
not to be in conformity.
Before the implementation of Price Verification and Chop, the
Chinese government had directed the Chamber of Commerce itself to
establish mandatory minimum export prices for Vitamin C. The
Chamber of Commerce enforced these mandatory minimum prices by
suspending or revoking the violator's export
license.3 The Price Verification and Chop regime thus
relaxed the prior regime and was part of the Chinese
government's overall transition from a command-and-control
economy to a more market-based economy.
The regulations establishing the Price Verification and Chop regime
made note of this. It referred to the subcommittee of Vitamin C
manufacturers within the Chamber of Commerce as "a
self-disciplinary industry organization . . . established on a
voluntary basis."4 But though membership on the
subcommittee was voluntary, compliance with its Price Verification
and Chop procedures was not. Non-members of the Chamber of Commerce
were also subjected to these procedures. Companies that did not
comply could not export vitamin C and were subject to other
penalties.5
In 2005, the putative plaintiff class filed the initial complaint
in this case. In it they argued that the defendants —
primarily made up of Herbei Welcome Pharmaceutical Co. Ltd.; Aland
(Jiangsu) Nutraceutical Co., Ltd.; Northeast Pharmaceutical Co.
Ltd.; and Weisheng Pharmaceutical Co. Ltd. — had
conspired to fix prices of vitamin C in violation of Section 1 of
the Sherman Act and Sections 4 and 16 of the Clayton Act. The
defendants — and the Ministry in its amicus in support of
the defendants' motions — did not dispute that the
price agreements implemented by the Price Verification and Chop
regime violated U.S. antitrust laws, save for one defense: that
they were compelled by the Chinese government to fix prices. They
argued that the description of the subcommittee of vitamin C
manufacturers within the Chamber of Commerce as "a
self-disciplinary industry organization . . . established on a
voluntary basis" was misleading. Rather, they maintained, it
referred to a regulatory system supervised by the Chinese
government and enforced by penalties.6 As such, they
argued that their actions should be shielded from liability under
the foreign sovereign compulsion doctrine.
The foreign sovereign compulsion doctrine and the related doctrines
of comity and act of state serve to protect foreign firms from, in
Judge Cogan's colorful terms, being "placed between the
rock of its own local law and the hard place of U.S.
law."7 The judiciary has recognized that it would
be unfair to impose liability upon a firm that had been compelled
to act illegally by the command of a foreign sovereign.8
In response, it has employed these doctrines to protect a defendant
from liability under U.S. antitrust laws when the defendant, by
complying with U.S. antitrust laws, would subject himself to
"the imposition of penal or other severe sanctions for
refusing to comply with [a] foreign government's
command."9
In this case, however, the court found several reasons why such a
defense was inappropriate. For example, the court took issue with
the fact that the Ministry never fully explained what penalties the
government would subject the defendants to if they failed to comply
with the Price Verification and Chop regime. Although it was clear
that a defendant would not be able to export under a contract that
failed to abide by an industry agreement, there was no evidence
that the defendants would lose any rights if they declined to reach
an agreement in the first place.10 For this reason, the
court rejected the Ministry's argument that it required the
defendants to be members of the subcommittee on pain of significant
penalties.
Next, the court noted that the relevant law and regulations did
not, on their face, indicate that the defendants were required to
set prices above the market price.11 Although the
Ministry argued that they were required to do so, the Chinese
government's own testimony to the World Trade Organization in
2002 contradicted this assertion. China had testified to the WTO in
2002 that the regime was designed "to minimize the possibility
of injurious dumping of Chinese exports by individual
exporters."12
Finally, the court found it hard to believe that the defendants had
been compelled to act when the actions in question were in their
own economic self interest. The court observed "that a
compulsory regime is unlikely to be present where the
defendants' economic interest is in accordance with the
allegedly compelled conduct."13 Because of this,
Judge Cogan was less willing to defer to the Chinese
government's interpretation of its own law, noting that
"when the alleged compulsion is in the defendants' own
self-interest, a more careful scrutiny of a foreign
government's statement is warranted."14
The court thus denied the defendants' motion for summary
judgment, noting that "[t]he Chinese law relied upon by the
defendants did not compel their illegal conduct. Although the
defendants and the Chinese government argue to the contrary, the
provisions of Chinese law before me do not support their position,
which is also belied by the factual
record."15
In re Vitamin C Antitrust Litigation signals that the
circumstances in which the foreign sovereign compulsion defense is
applicable may be quite limited. How this case and similar ones
fare going forward is worth watching. If Judge Cogan's approach
is followed by other courts, the foreign sovereign compulsion
doctrine will only be applicable in the rare cases in which a
foreign sovereign has openly and explicitly ordered a firm to
engage in anticompetitive behavior. This case may have very serious
ramifications for Chinese exporters selling in the United
States.
* Sat for Bar July 2011; results pending.
Footnotes
1 In re Vitamin C Antitrust Litigation, No. 06-MD-1738 (E.D.N.Y. Sept. 6, 2011).
2 Id. slip op. at 9.
3 Id. at 7-8.
4 Id. at 11.
5 Id. at 12.
6 Id. at 16.
7 Id. at 2.
8 Mannington Mills, Inc. v. Congoleum Corp., 595
F.2d 1287, 1293 (3d Cir. 1979).
9 In re Vitamin C, slip op. at 35.
10 Id. at 57.
11 Id. at 60.
12 Id. at 61.
13 Id. at 46-47.
14 Id.
15 Id. at 2.
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