Apr 05, 2018 06:19 PM

Opinion: China’s Firms Could End Up Trapped Between U.S. Law, Beijing

Facing a $147 million claim in U.S. courts, two Chinese vitamin C manufacturers argued in a brief filed before the U.S. Supreme Court last week that they should not be punished for following an explicit directive from the Chinese Ministry of Commerce (MOFCOM). 

MOFCOM has also requested to participate in the oral argument in support of the Chinese companies, which would mark the first time in history that the Chinese government has appeared before the U.S. Supreme Court. In its request, MOFCOM reconfirmed that Chinese regulations compelled the actions of the Chinese manufacturers. For the other side, claimants argued — with support from the U.S. Department of Justice — that U.S. courts are not required to defer absolutely to the Chinese government’s interpretation of Chinese law or regulations. The court’s ruling — expected in June — is likely to have an enormous impact on the way Chinese companies make business decisions regarding U.S. markets. 

The facts underlying the case date back to the late 1990s, when, as part of efforts to prevent market disorder during China’s transition from a command to a market economy, MOFCOM established the Vitamin C Sub-Committee. The sub-committee included Chinese vitamin C manufacturers and exporters. MOFCOM issued regulations requiring the sub-committee to limit vitamin C production and set export prices to promote industry self-discipline and facilitate the healthy development of Chinese exports.  

Several years later, in 2005, a group of American vitamin C purchasers brought a class action lawsuit that accused the Chinese manufacturers of engaging in a cartel to manipulate the supply, and fix prices of, vitamin C in violation of U.S. antitrust law — a claim that carries the risk of treble damages. In response, the Chinese manufacturers and MOFCOM itself asserted arguments based on what is known as the “foreign sovereign compulsion doctrine” and international comity, arguing that the companies should not be held liable for violating US antitrust laws because MOFCOM — a unit of the Chinese state — specifically directed their actions. The U.S. trial court rejected that argument and, in a strongly worded decision, concluded that MOFCOM’s position was “a post-hoc attempt to shield [the Chinese] defendants’ conduct from antitrust scrutiny rather than a complete and straightforward explanation of Chinese law.” On appeal, the Court of Appeals reversed the decision, holding that the trial court must afford binding deference to the Chinese government’s characterization of Chinese law so long as the characterization is facially reasonable.

After winding its way through the U.S. courts over the past 13 years, the case has finally reached the U.S. Supreme Court, which will determine whether international comity requires U.S. courts to defer to MOFCOM’s interpretation of a Chinese regulatory scheme, or whether those courts can independently interpret China’s relevant regulatory regime and take other factors into consideration in determining whether to credit such defenses. 

Whatever the Supreme Court decides, its ruling should be of great interest to Chinese companies doing business in the United States. International comity issues arise in many contexts and the court’s decision is likely to have implications well beyond antitrust, including in areas such as intellectual property, securities and business torts, to name just a few.  

If the court adopts the views of the claimants and the U.S. government, U.S. courts will have to give a foreign government’s characterization of its own law substantial weight, but will not be required to afford that characterization binding deference. This would appear to place Chinese companies subject to government industrial policy directives between “a rock and a hard place” if they seek to engage in business in the United States. Consequently, if the Chinese government issues a regulation that affects a company’s conduct in relation to U.S. markets, Chinese companies would be wise to work with U.S. counsel to document precisely what the regulation requires and how the company is complying. More than just MOFCOM’s say-so would be required for a U.S. court to be persuaded that international comity requires application of the foreign sovereign compulsion doctrine; the facts surrounding the conduct would have to support the conclusion that the compulsion was real and left no discretion to the affected companies. 

But even if the Chinese defendants prevail before the Supreme Court, the same guidance still stands. With the ever-increasing business ties between China and the United States, and the aggressive American plaintiffs’ bar, the question may well be not whether a Chinese company will face a lawsuit in the United States, but when.  As such lawsuits become more common, it is unlikely that Chinese companies will be able to rely on the Chinese government to intervene at every stage of every case. They should therefore pay the same close attention and work with U.S. counsel to carefully document any government directives that impact their conduct that takes place in the United States or that may affect US markets. Although this may strike some as unfairly burdensome to those companies, the prospect of treble-damage fines and the threat of jail time for company executives mean that these issues cannot be ignored. 

While it is dangerous to predict the outcome of a U.S. Supreme Court decision — especially before the oral argument — I believe that in this case the court is likely to reverse the court of appeals, at least in part. I expect the Supreme Court will recognize that, in most cases, great deference should be afforded to a foreign sovereign’s interpretation of its laws and regulations, but I believe the court is unlikely to adopt an extreme rule that such deference must be binding and absolute. U.S. antitrust jurisprudence has been moving away from absolute presumptions toward permitting lower courts to consider all relevant facts when examining an issue. Therefore, I think it unlikely that the Supreme Court would impose a rule that would, in effect, strip lower courts of their ability to consider all relevant facts and instead compel them to accept the word of a foreign sovereign without question. A district court’s ability to consider additional facts is particularly important in a context like this, where the foreign law interpretation at issue has the potential to completely exonerate the defendants. Requiring binding deference in these circumstances would effectively allow foreign governments to place their nations’ companies beyond the reach of U.S. antitrust law with a simple filing and declaration. I therefore expect the Supreme Court to reaffirm strongly the general principle of deference to foreign sovereigns, but to stop short of ruling that such deference is absolute and unqualified.

This very interesting case arises during a period of uncertainty and instability in U.S.-Chinese relations. The U.S. executive branch has threatened import tariffs, and talks of a trade war between China and the U.S. abound, including by U.S. President Donald Trump himself. A decision denying MOFCOM deference could further heighten tensions, and recent consolidation of Chinese political decision-making could facilitate new regulations and directives in response to U.S. policy changes. Amidst this potentially thorny landscape, Chinese companies should be mindful of the legal and commercial risks inherent in doing business that impacts the US economy — even if they are following the rules and directives imposed by their own government. 

Eric Mahr is a partner in Freshfields Bruckhaus Deringer’s antitrust, competition and trade group, based in Washington, DC.  He served as director of litigation of the U.S. Department of Justice’s Antitrust Division from 2015 to 2017.

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