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An Allen & Overy LLP partner discusses the Vitamin C case, which involves a price-fixing dispute between U.S. purchasers and Chinese vitamin C producers. The author notes that the decision will boil down to how much deference U.S. courts should give to a foreign government’s characterization of its own law.
By Andrew Rhys Davies
This term, the U.S. Supreme Court returns to a familiar theme—the complexities that arise when U.S. law and jurisdiction protrude into a globalized economy.
In recent years, the Court has repeatedly acted to limit the extraterritorial application of U.S. laws, recognizing that international friction often results when people and events overseas are subjected to U.S. regulation. ( RJR Nabisco Inc. v. European Cmty., 136 S. Ct. 2090, 2101-02, 2106-07 (2016) (RICO); Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108, 124-25 (2013) (ATCA); Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 265, 270-71 (2010) (federal securities laws)). And—regardless of whether a particular U.S. regulatory regime applies extraterritorially—the Court has recently adopted a restrained approach to jurisdiction, holding, among other things, that U.S. courts cannot adjudicate cases against foreign defendants arising from conduct that has no nexus to the United States. ( Daimler AG v. Bauman, 134 S. Ct. 746, 763 (2014)).
The Vitamin C case, Animal Science Products Inc. v. Hebei Welcome Pharmaceutical Co., presents an issue that arises when U.S. law does apply to conduct in another country and the U.S. court or regulator does have jurisdiction, but the regulated person says that it should be excused from complying with U.S. law because the law of the foreign country imposes conflicting obligations. That issue is whether U.S. courts are permitted to disagree with a foreign government’s statement of the meaning and effect of that country’s law.
In the Vitamin C case, a class of vitamin C purchasers brought claims under the Sherman Act, alleging that the leading Chinese manufacturers conspired to fix the price of vitamin C exported to the United States. The manufacturers admitted the allegations, but sought dismissal on the ground that the Chinese regulatory regime compelled their anticompetitive conduct. The Chinese Ministry of Commerce (MOFCOM) filed an amicus brief in the U.S. court, attesting that Chinese law indeed compelled the price-fixing that formed the basis for the claims in the U.S. lawsuit.
The district court was not persuaded by MOFCOM’s submission, characterizing it as a “litigation position”—a “post-hoc attempt to shield” the Chinese manufacturers’ conduct from scrutiny. ( In re Vitamin C Antitrust Litig., 810 F. Supp. 2d 522, 552 (E.D.N.Y. 2011)). The case therefore proceeded to trial, at which a jury predictably returned a multimillion-dollar damages award.
But the U.S. Court of Appeals for the Second Circuit ruled that the district court should have dismissed the case on international comity grounds at the outset. In the Second Circuit’s view, when a foreign government directly participates in U.S. litigation and apprises the U.S. court of the meaning and effect of its laws, the U.S. court is “bound to defer” to the foreign government. There is an exception for a statement that is facially unreasonable, for example, because it is entirely unsupported by citation to law or documentary evidence. ( In re Vitamin C Antitrust Litig., 837 F.3d 175, 189 & n.8 (2d Cir. 2016)).
China has argued persuasively in its amicus brief to the Supreme Court that the Second Circuit’s conclusive-deference standard is consistent with precedent, and that it is both principled and pragmatic—in that it promotes international comity and is more likely than any other approach to yield a correct understanding of foreign law.
The U.S. Department of Justice has urged the Supreme Court to reject the Second Circuit’s “rigid” conclusive-deference standard. But the DOJ disclaims any concrete alternative, advocating an “it all depends” approach. Under the DOJ’s view, as long as the U.S. court is respectful, it may give the foreign government’s statement however much weight it thinks appropriate depending on whatever factors the court may consider relevant. At this level of generality, the DOJ’s approach might not sound so unreasonable, but its submission never ventures beyond the abstract. The DOJ offers no view as to whether the district court’s treatment of MOFCOM’s statement was appropriate in the Vitamin C case, much less a view on how the statement would fare if subject to the correct level of respectful consideration.
Venturing into the concrete, the Second Circuit was trying to avoid particular kinds of mischief that have bedeviled U.S. courts’ past treatment of foreign law. The district court was faulted in particular for embarking on its own interpretation of foreign law by reading translated Chinese law materials, resulting in an interpretation that the Second Circuit viewed as “nonsensical.” ( See id. at 190-91.) Even assuming a U.S. court has a comprehensive and accurately-translated set of materials, it will inevitably read them without reference to the applicable historical, foundational, and interpretive principles. Turning the tables, one wonders whether a Chinese judge reading a Chinese translation of the U.S. Constitution would, for instance, divine the existence of a right to burn the flag or to enter into a same-sex marriage.
The Second Circuit also held that U.S. courts cannot inquire into the foreign government’s motives. Off the table, therefore, are arguments that challenge the legitimacy of foreign law, such as the argument that China was engaged in improper protectionism. MOFCOM has reinforced this theme, informing the Supreme Court in its amicus brief that China viewed the district court’s hostility and suspicion as not only “ill-considered,” but “profoundly disrespectful.” For the same reasons, the Second Circuit would prohibit U.S. courts from considering whether the foreign defendant had some role in the foreign government’s regulatory actions, such as the argument that MOFCOM had essentially endorsed a private cartel in the vitamin C market. Nor, finally, under the Second Circuit’s approach, can U.S. courts consider whether and how the foreign government actually enforces its laws. ( See id. at 191-92.)
This was not the first case in which U.S. courts have considered precisely those kinds of improper factors to evaluate whether a foreign entity is subject to foreign law, considering the absence of evidence that the Chinese government has previously enforced its laws in the manner feared, or assuming that the Chinese government may not enforce its banking laws against banks in which it holds substantial ownership interests. ( See, e.g., Tiffany (NJ) LLC v. Forbse, No. 11-cv-4976 NRB, 2012 WL 1918866, at *8-*9 (S.D.N.Y. May 23, 2012), aff’d in part, vacated in part sub nom. Tiffany (NJ) LLC v. China Merchants Bank, 589 F. App’x 550 (2d Cir. 2014); Gucci Am., Inc. v. Weixing Li, No. 10-cv-4974 RJS, 2011 WL 6156936, at *11 (S.D.N.Y. Aug. 23, 2011), vacated, 768 F.3d 122 (2d Cir. 2014). The author represented the banks in the Tiffany and Gucci cases.)
At the Supreme Court level, the Vitamin C case is limited to the question of how a U.S. court determines the meaning of foreign law. The Supreme Court declined to review the Second Circuit’s decision that in this case the Sherman Act gave way to conflicting Chinese law. Underlying the Second Circuit’s decision is a conviction that macroeconomic disputes are better addressed through intergovernmental diplomacy than through private-party litigation. Of course, the Second Circuit wrote in September 2016, when no U.S. governmental representative had recently articulated the view that trade wars are good and easily won.
The Supreme Court heard oral argument in the case on April 24.
Andrew Rhys Davies is a partner in the litigation practice at Allen & Overy LLP in New York. Davies assists clients with their U.S. litigation and regulatory problems, focusing on securities and financial services, and on cross-border matters involving jurisdictional and comity issues. He can be reached at Andrew.Rhys.Davies@AllenOvery.com.
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