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Chinese Vitamin C Makers Fail to Establish that the Chinese Government Compelled Their Price-Fixing; Lose Summary Judgment

Thursday, September 15, 2011

Alexandra Kay | Bloomberg Law In re Vitamin C Antitrust Litig., No. 06-MD-1738, 2011 BL 228801 (E.D.N.Y. Sept. 6, 2011) Chinese manufacturers of vitamin C must face price-fixing claims in the United States, the U.S. District Court for the Eastern District of New York recently held. According to plaintiffs, direct commercial buyers of vitamin C, defendants formed a cartel in 2001 to control prices and the export volume of vitamin C. Defendants did not dispute the price-fixing allegations, arguing instead that they were entitled to summary judgment because the Chinese government compelled their conduct. The court rejected defendants' argument and denied the motion, finding that defendants acted voluntarily; thus the defenses of foreign sovereign compulsion, act of state, and comity did not apply.

Pertinent Chinese Regulations for Vitamin C Exports

Although the relevant time period for the claims begins in December 2001, the court explained that pertinent background to the conduct at issue dated back to the 1980s, when the Chinese government established various Chambers of Commerce for Import and Export. These chambers were given governmental functions – including the regulation of import and export commerce – as well as private functions, such as organizing trade fairs and conducting market research. The Chamber of Commerce of Medicines and Health Products Importers and Exports (the Chamber), of which defendants were members, purportedly regulated vitamin C. In 1997, to rectify perceived problems in the vitamin C industry, the Ministry of Commerce of the People's Republic of China (Ministry) promulgated regulations for the industry that required export licenses and set export quotas. The Ministry directed the Chamber to supervise the implementation of these regulations, by, among other things, establishing mandatory minimum export prices. The 1997 directives were abolished in 2002. Under a new regime implemented at that time, known as "Price Verification and Chop," vitamin C was no longer subject to supervision by customs. Instead, the Chamber was required to submit to customs "information on industry-wide negotiated prices," and customs would only permit export if the relevant contract was reviewed by the Chamber and received a "chop," or seal, indicating its legality. Id. at 9. The 2002 regulations also contained a suspension provision, which provided that the customs and chambers could suspend export price review with the approval of the members of the subcommittee on vitamin C. After 2002, companies were no longer required to be members of the Chamber to export vitamin C. The 2002 regulations described the vitamin C subcommittee of the Chamber as a "self-disciplinary industry organization jointly established on a voluntary basis by those [Chamber] members which conduct import and export of vitamin C." Id. at 11. Though the 2002 regulations outlined a few penalties for violating the Chambers rules, unlike the 1997 regulations, they did not provide for the penalty of revocation of a company's export license.

Defendants Claim the Chinese Government Compelled the Price-Fixing

Beginning in 2001, during meetings of the Chamber, defendants allegedly formed their cartel and agreed upon a "coordinated export price" for vitamin C as well as a limit for total export volume. Id. at 19. Defendants allegedly continued this coordination of prices and output over the next three years. Defendants argued that the Chinese government compelled their price-fixing practices and sought summary judgment by invoking the defenses of foreign sovereign compulsion, act of state, and the doctrine of international comity. In a rare appearance before U.S. courts, the Ministry filed an amicus brief on behalf of defendants' behalf.

Court Reject's Ministry's Interpretation of Chinese Law

At the outset, the court noted that it must determine what deference, if any, should be accorded to the Ministry's interpretation of Chinese law. Under Second Circuit precedent, the court explained, a foreign government's position on its own law is not entitled to absolute and conclusive deference in all circumstances, and further inquiry is permissible. Noting significant flaws in the Ministry's statements, the court found it was unworthy of deference. According to the court, the Ministry failed to address key provisions of the 2002 regulations. Moreover, the Chinese governmental directives contained language that directly contradicted the Ministry's position. The Ministry was vague and ambiguous regarding the penalties under the self-discipline system, and the court found that its statement "reads like a carefully crafted and phrased litigation position" rather than a straightforward explanation of Chinese law. Id. at 46. Moreover, the court could not "ignore the obvious fact that a compulsory regime is unlikely to be present where the defendants' economic interest is in accordance with the allegedly compelled conduct." Id. at 47. Accordingly, the court declined to defer to the Ministry's interpretation of Chinese law, opting to rely on "more traditional sources of foreign law" - namely, the governmental directives themselves and the charter documents of the Chamber and its vitamin C subcommittee. Id. at 44.

Chinese Government Did Not Compel Defendants' Price-Fixing

The court concluded that, contrary to defendants' and the Ministry's contention, the factual record and the pertinent Chinese laws indicated that the Chinese government did not compel defendants' conduct. First, the court noted that China had represented to the World Trade Organization that as of January 1, 2002, China "gave up export administration. . . of vitamin C." Id. at 15 (internal quotations omitted). Moreover, the court interpreted the suspension provision of the 2002 regulations as granting defendants the unilateral authority to suspend verification and chop. Thus, while the Ministry encouraged defendants' cartel, it did not compel the conduct. According to the court, this alone rendered any potential act of state concerns moot and was sufficient reason to deny summary judgment. Second, the court found the absence of significant penalties for non-compliance with the self-discipline system dispositive. Certain governmental directives expressly stated that Chamber membership was no longer required under the 2002 regulations. Thus, the threat of loss of membership in the Chamber was not a significant penalty. Accordingly, the court wrote that the Ministry and defendants failed to explain "how defendants' participation in price-setting and output-setting is compelled" given that membership was no longer required to export vitamin C. Id. at 55. In addition, the court found that "'self-discipline' does not involve coercion" and that instead, defendants "were engaged in consensual cartelization." Id. at 69. Third, the court found that even if some compulsion was found on the part of the Chinese government, summary judgment was still improper because Chinese law did not compel all of defendants' illegal conduct. The relevant directives "do not indicate that defendants were required to set prices above a level that would have avoided anti-dumping suits and below-cost pricing." Id. at 60. Thus, the court held that to the extent there was compulsion, it was limited to setting minimum prices and output levels to avoid anti-dumping liability and below-cost pricing.

Lack of Compulsion Was Fatal to Defenses Argued

Having determined that the defendants voluntarily reached agreements to fix prices for vitamin C, the court concluded that the FSC defense was inapplicable. As the court explained, the foreign sovereign compulsion defense is available only when the offending action was coerced or required by a foreign sovereign. While the Chamber convened meetings where the price-fixing agreements were discussed, actions that facilitated the conspiracy were legally distinct from compelling the unlawful acts. Likewise, the act of state doctrine did not apply because adjudication of plaintiffs' claims did not require the court to invalidate any Chinese law, regulation, or official act. The Chinese licensing and quota system ended as of January 1, 2002 and given the court's determination that the Chinese government did not compel defendants' conduct, their voluntary actions were not entitled to the defense. Finally, following the Supreme Court's decision addressing comity in Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993), the court noted that it remains uncertain whether a comity analysis is still permitted in the absence of a true conflict between domestic and foreign laws. Nevertheless, the court explained that because defendants' price-fixing was not compelled by the Chinese government, dismissal on comity grounds was not justified. Without such compulsion, the case is no different than any other extraterritorial price-fixing conspiracy that targets the United States. While these doctrines "recognize that a foreign national should not be placed between the rock of its own local law and the hard place of U.S. law," here, the court wrote, "there is no rock and no hard place." Id. at 2. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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