Insights

The Cost of Doing Business: Supreme Court Vacates Chinese Defendants' Antitrust Win

In Short

The Situation: In Animal Science Products, Inc. v. Hebei Welcome Pharmaceutical Co., the defendants in an anticompetition matter—who were China-based manufacturers of vitamin C—claimed that Chinese law required them to coordinate prices and export volumes.

The Result: In its ruling, the U.S. Supreme Court unanimously held that a federal court is not bound to give conclusive deference to a foreign government's interpretation of its law.

Looking Ahead: The Court's case-specific test giving "reasonable consideration" to governments' interpretations, which includes considering "the statement's clarity, thoroughness, and support; its context and purpose; the transparency of the foreign legal system; the role and authority of the entity or official offering the statement; and the statement's consistency with … past positions," provides limited guidance to foreign companies looking to comply with local regulations without conflicting with U.S. laws.


Background

The case, Animal Science Products, Inc. v. Hebei Welcome Pharmaceutical Co., began in 2005 when a group of vitamin C purchasers filed various lawsuits against Chinese manufacturers of vitamin C. These lawsuits were consolidated into a multidistrict class action in the Eastern District of New York. The plaintiffs allege that the defendants conspired to fix the price and supply of vitamin C sold to U.S. companies and others worldwide in violation of the Sherman Act and the Clayton Act. They assert that the defendants established an illegal cartel designed to limit production and increase the price of vitamin C to create a shortage of supply in the international market and thereby maintain China's position as the global market leader. According to the plaintiffs, the defendants colluded through their membership in a Chinese association, the "Chamber."

In motions to dismiss and for summary judgment, the defendants sought dismissal of the plaintiffs' claims on the grounds that, as Chinese entities, they were acting pursuant to Chinese regulation—specifically from the Ministry of Commerce of the People's Republic of China ("MOFCOM")—that required them to coordinate prices and export volumes in conflict with U.S. antitrust law. Although, under the Foreign Trade Antitrust Improvements Act of 1982 ("FTAIA"), the Sherman Act applies to conduct involving foreign trade or commerce when "such conduct has a direct, substantial, and reasonably foreseeable effect" on domestic or import commerce, the defendants argued that principles of international comity required the court to abstain from exercising jurisdiction, given the conflict between U.S. and Chinese law.

Surprisingly, the Chinese government, through MOFCOM, filed an amicus curiae brief in support of the defendants, asserting that: (i) MOFCOM is the highest authority within the Chinese government authorized to regulate foreign trade; (ii) MOFCOM authorizes and supervises the Chamber to regulate vitamin C export prices and output levels; and (iii) MOFCOM compelled the setting and coordination of vitamin C prices. MOFCOM went so far as to say that all vitamin C legally exported during the relevant period was required to be sold at industrywide coordinated prices.

The district court twice rejected the defendants' argument, concluding that Chinese law did not compel the defendants' anticompetitive conduct. Central to this conclusion were the district court's consideration of inconsistent statements by MOFCOM (including a statement that China gave up the administration of vitamin C in 2002), MOFCOM's failure to identify any written law or regulation requiring defendants' actions, and a refusal to "defer to MOFCOM's interpretation of Chinese law" because it failed to address critical provisions that undermined its interpretation. The district court exercised its "substantial discretion" in considering different types of evidence, including expert testimony regarding Chinese law. In 2013, the case went to trial, and a jury found the defendants liable for violations of the Sherman Act for approximately $147 million in damages.

On appeal, the U.S. Court of Appeals for the Second Circuit vacated the judgment, reversed the district court's order denying the motion to dismiss, and remanded with instructions to dismiss the plaintiffs' complaint. The key area of disagreement between the Second Circuit panel and the district court was the level of deference to be afforded to MOFCOM's position on what Chinese law required. The court held that it was "bound to extend" deference to an official statement from a foreign government explicating its own laws and regulations, and concluded that "when a foreign government, acting through counsel or otherwise, 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."

Had MOFCOM not appeared, the court acknowledged "the district court's careful and thorough treatment of the evidence … would have been entirely appropriate." However, in finding MOFCOM's interpretation to be "reasonable," the court showed it total deference and held that Chinese law required the defendants to collude in conflict with U.S. antitrust law. The court then proceeded to apply a multifactor balancing test to conclude that the principles of international comity supported abstention.

Supreme Court Decision

In a unanimous opinion authored by Justice Ginsburg, the Supreme Court reversed and remanded the Second Circuit's decision, holding that a "federal court should accord respectful consideration to a foreign government's submission, but is not bound to accord conclusive effect to the foreign government's statements." The Court neither substantively ruled on the interpretation of Chinese law in the underlying case, nor did it announce a bright line test to apply going forward. Instead, the Court stressed that "no single formula or rule will fit all cases in which a foreign government describes its own law;" instead, the weight to be accorded a foreign state's views about the meaning of its own laws will "depend upon the circumstances."

However, relevant considerations for courts in deciding what level of deference to give a foreign government's views on its law include "the statement's clarity, thoroughness, and support; its context and purpose; the transparency of the foreign legal system; the role and authority of the entity or official offering the statement; and the statement's consistency with the foreign government's past positions."

The focus of the Court's analysis was Federal Rule of Civil Procedure 44.1, which specifics that a determination of foreign law "must be treated as a ruling on a question of law," as opposed to a finding of fact, and that "the court may consider any relevant material or source" in making its determination. The Court noted the "obvious" purpose of the rule was "to make the process of determining alien law identical to the method of ascertaining domestic law to the extent that it is possible to do so."

Just as a state attorney general's views on state law merit "respectful consideration" but "do not garner controlling weight," so, too, does a foreign government's interpretation on its own law. Thus, where a foreign government submits its own interpretation on the law, a court should "carefully consider" the submission, but may also look to other materials in making its determination, which may be especially appropriate when "a foreign court makes conflicting statements … or … offers an account in the context of litigation."

The Court also found the other rationale underlying the Second Circuit's decision—reciprocity of deference for the U.S. government in foreign tribunals—was of no concern, given that the United States historically has not argued that foreign courts are bound to accept its interpretation of the law without consideration of other sources.

Impact Going Forward

While the Court offered several criteria courts should consider, its list is not exhaustive. Even if it were, such a multifactor balancing approach casts more uncertainty for parties than the Second Circuit's more rigid approach.

The Supreme Court's test also limits the ability of foreign governments to affect the reach of U.S. antitrust regulations. Had the Second Circuit's decision been upheld, foreign governments could have felt more emboldened to participate in litigation involving interpretation of their laws. This would have provided a potential avenue by which the FTAIA's reach could have been more easily limited given that, despite the FTAIA's condemnation of foreign conduct that has a direct, substantial, and reasonably foreseeable impact on domestic or import commerce, rigid deference to foreign governmental views would immunize such conduct. The Supreme Court's case-by-case approach may dampen any such motivation.

Broader implications from this litigation are on the horizon. Here, MOFCOM's amicus brief stated that the policies at issue were put in place "to meet the need of building the socialist market economy and deepening the reform of foreign economic and trade management system." Similar contentions may arise between other socialist economies and the United States. For example, the thawing of relations between the United States and Cuba may bring new opportunities for American companies to import Cuban goods. However, as the United States gradually loosens restrictions on importing Cuban goods, such as pharmaceuticals, into the country, participating companies should monitor whether Cuba's control of those industries might conflict with U.S. antitrust law, as many businesses in Cuba (like in China) remain heavily subsidized state-owned enterprises. The cost of doing business in the United States may well be liability for these foreign companies under U.S. competition laws.


Two Key Takeaways

  1. In Animal Science Products, Inc. v. Hebei Welcome Pharmaceutical Co., the U.S. Supreme Court noted that "federal court should accord respectful consideration to a foreign government's submission, but is not bound to accord conclusive effect to the foreign government's statements."
  2. The Supreme Court's case-by-case approach may discourage foreign companies from testing U.S. antitrust regulations.

Lawyer Contacts

For further information, please contact your principal Firm representative or the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com/contactus/

Michelle K. Fischer
Cleveland
+1.216.586.7096
mfischer@jonesday.com

Tiffany D. Lipscomb-Jackson
Columbus
+1.614.281.3876
tdlipscombjackson@jonesday.com

John M. Majoras
Washington
+1.202.879.7652
jmmajoras@jonesday.com

Eric P. Enson
Los Angeles / San Francisco
+1.213.243.2304 / +1.415.963.6994
epenson@jonesday.com

Alexandra L. Schill, an associate in the Columbus Office, and Michael Stork, an associate in the Washington Office, assisted in the preparation of this Commentary.

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