United States: Caught Between A Rock And A Hard Place: The Second Circuit To Decide Appeal From Cartel Defendants Who Argued Compliance With Chinese Law Resulted In Sherman Act Violations

On January 28, 2016, the United States Court of Appeals for the Second Circuit heard arguments on whether the doctrines of act of state, foreign sovereign compulsion, and international comity required the reversal of a jury's verdict against two Chinese companies that were found liable for violating Section 1 of the Sherman Act. The plaintiffs in In re: Vitamin C Antitrust Litigation (06-MD-1738) had alleged that defendants Hebei Welcome Pharmaceutical Co. Ltd. and North China Pharmaceutical Group Corporation formed an illegal cartel to fix prices and limit supply for exports of vitamin C sold in the United States. A jury from the Eastern District of New York agreed and awarded $153 million in treble damages.

On appeal, the defendants argued before appellate judges Jose A. Cabranes, Richard C. Wesley, and Peter W. Hall that Chinese law required the price-fixing and barred the plaintiffs' claims as a matter of law. The defendants' argument was supported by an amicus brief from the People's Republic of China, in which the government of China argued that the defendants' price-fixing was compelled by Chinese law, and as such was completely immune from U.S. antitrust liability.

At oral arguments, Judge Hall questioned whether companies regulated by China's government should be subject to U.S. antitrust law. He specifically questioned whether the District Court gave the appropriate deference owed to the Chinese government's interpretation of its own laws. From Judge Hall's questions, the Second Circuit may well remand this case back to the District Court for further proceedings consistent with the Second Circuit's practice of giving deference to a foreign sovereign's view of its own laws.

A First in U.S. Antitrust Litigation

Before the District Court, the defendants argued their actions were compelled by China's Ministry of Commerce and invoked the doctrines of act of state, foreign sovereign compulsion, and international comity as a complete defense to the plaintiffs' claims. In a nutshell, the act of state doctrine derives from a separation of powers and a respect for the sovereignty of other nations and holds that the courts of one nation may not sit in judgment of the public acts of another sovereign within its borders. The foreign sovereign compulsion doctrine focuses on the plight of a defendant who is subject to conflicting legal obligations under two sovereign states and provides a defense where compliance with one country's laws results in the violation of another's. Finally, international comity is the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation and supports dismissal where a true conflict exists between U.S. and foreign law.

In a first for U.S. antitrust litigation, the Chinese government through its Ministry of Commerce submitted an amicus brief detailing the Ministry's role in orchestrating and maintaining the vitamin C cartel. This was unprecedented. The Chinese government had never come before the United States as amicus to present its views. According to the Ministry, defendants were compelled under Chinese law to collectively set a price for vitamin C exports. Although the Ministry itself did not decide what specific prices should be, the Ministry asserted that the defendants could not have exported vitamin C that did not conform to the agreed-upon price.

The defendants argued that the Ministry's brief was conclusive as to the question of whether the defendants' conduct was required under Chinese law. On this issue, however, the plaintiffs argued that Federal Rule of Civil Procedure 44.1 allows U.S. courts wide discretion to determine foreign law and that U.S. courts are not bound to accept the assertions of a foreign sovereign.

The District Court decided that the Ministry's amicus brief, although entitled to substantial deference, was not conclusive evidence of compulsion, particularly where, as here, the plaintiffs had submitted documentary evidence that directly contradicted the Ministry's position. Thus, in letting the case go to a jury, the District Court found an issue of fact as to whether the defendants were performing a government function, whether they were acting as private citizens pursuant to government directives, or whether they were acting voluntarily as unrestrained private citizens.

With Amicus From the Ministry of Commerce, Defendants Appeal

On March 14, 2013, the jury found the defendants guilty for violating the Sherman Act. On appeal, the defendants argue that the District Court's ruling that Chinese law did not compel the defendants was erroneous and that the plaintiffs' claims never should have been brought before a jury. Alternatively, the defendants argue that even if it was proper to submit this matter to a jury, the trial was fatally flawed by the District Court's decision to exclude from the jury copies of Chinese laws and witness testimony about the meaning and contents of those laws.

As appellees, the plaintiffs ask the Second Circuit to affirm the District Court's ruling that Chinese law did not compel the defendants' price-fixing and that it was inappropriate to present evidence about the meaning of Chinese law to the jury. The plaintiffs concede the Chinese government was entitled to deference as to the meaning of its laws. But the plaintiffs argue the determination of foreign law was a question of law for the District Court, not the jury, to decide, and the District Court properly did so when it ruled, as a matter of law, that Chinese law did not compel the defendants' conduct.

The plaintiffs further argue that one purpose of the trial was to determine, regardless of what Chinese law allowed, whether the Chinese government actually compelled the defendants' conduct as a matter of fact. Here, the District Court instructed the jury that it was required to return a defense verdict if the defendant proved, by a preponderance of the evidence, that the Chinese government actually compelled them to fix prices. The defendants never challenged this jury instruction. Moreover, the plaintiffs point to evidence presented at trial from which a jury could have found that the Chinese government did not actually compel the defendants' price-fixing and that it was done voluntarily. The plaintiffs also point to evidence that the defendants "manufactured" the compulsion defense after the lawsuit was filed in order to escape liability for their own voluntary conduct.

In deciding that Chinese law did absolve the defendants, the District Court cited to a Second Circuit opinion, Villegas Duran v. Arribada Beaumont, 534 F.3d 142 (2d Cir. 2008), in which the Second Circuit declined to follow an affidavit from a branch of the Chilean government regarding a child custody matter under the Hague Convention. In Villegas Duran, the Second Circuit held that even if the Chilean affidavit was authoritative, the District Court was not bound to follow it. Id. at 148. Interestingly, Judge Clark, one of the panel members on this appeal, dissented in Villegas Duran. Noting that he would expect the same deference from a Chilean court, Judge Clark voted to vacate the District Court's decision and remand the case for further proceedings consistent with the Second Circuit's "practice of giving deference to a foreign sovereign's views of its own laws." Id. at 152.

In light of Judge Clark's prior dissent and Judge Hall's questions at oral arguments, do not be surprised if Judge Clark's dissent in Villegas Duran commands a majority in In re: Vitamin C Antitrust Litigation, and this case returns to the District Court. Expect a decision this coming spring.

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