Tuesday, December 09, 2008

Chinese Firms Not Immune from Vitamin Price Fixing Claims

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Chinese manufacturers of vitamin C were not entitled to dismissal of price fixing conspiracy claims against them on the basis of any of three doctrines of foreign sovereign immunity—act of state, foreign sovereign compulsion, or international comity, the federal district court in Brooklyn has ruled.

Although each of the doctrines is different, all were premised on an act by a foreign government, the court noted. The manufacturers failed to allege facts showing that the Chinese government required the defending corporations to fix prices in violation of the Sherman Act, the court determined.

The manufacturers' motion for dismissal on those grounds was therefore denied. A second amended complaint, adding a direct purchaser class representative and two additional defendants, was dismissed with leave to replead to add factual allegations against the proposed new defendants.

Role of Chinese Government

An amicus curiae brief submitted by the Chinese Ministry of Commerce allegedly detailing the Ministry’s role in orchestrating and maintaining the vitamin C cartel would not have sufficed to establish that the manufacturers’ activities were compelled by the Chinese government.

The brief described the creation and operation of an organization—characterized by the defendants as a trade association—that facilitated the actions of the alleged cartel, explaining that the organization was an entity under its direct and active supervision that had a central role in regulating China's vitamin C industry.

Although the Ministry noted that it did not itself decide what specific prices for vitamin C should be, it (along with the defending manufacturers) asserted that they could not have exported vitamin C that did not conform to an agreed-upon price.

Compulsion of Anti-Competitive Acts?

While the Ministry’s brief merited substantial deference, it could not be taken as conclusive evidence of compulsion, particularly given that the plain language of other documents relied upon by the manufacturers to demonstrate governmental compulsion of their anti-competitive acts directly contradicted the Ministry’s position by suggesting that the manufacturers’ acts were voluntary rather than compelled.

If the documents were to be credited, they suggested a complex interplay that made it difficult at the pleading stage to determine the degree of the manufacturers' independence in making pricing decisions.

It was not clear from the record at the dismissal stage of the case whether the defending manufacturers were performing government function, whether they were acting as private citizens pursuant to governmental directives, or whether they were acting as unrestrained private citizens, in the court's view.

Numerous cases cited by the defending manufacturers in support of their motion to dismiss on sovereign immunity grounds involved much clearer examples of government compulsion or were decided on a fuller record.

Chinese Law

By the Ministry’s own acknowledgment, Chinese law was not as transparent as that of the United States or other constitutional or parliamentary governments, the court observed. Rather than codifying its statutes, the Chinese government apparently frequently governed
by regulations promulgated by various ministries.

According to the Ministry, private citizens or companies could be authorized under Chinese regulations to act in certain circumstances as government agents. Even the formation of the “vitamin C subcommittee”—characterized by the complaining purchasers as a trade association—was shrouded in mystery, as it was apparently authorized in response to a request by unidentified applicants who were quite likely the defendants themselves.

Accordingly, the record was “simply too ambiguous to foreclose further inquiry into the voluntariness of defendants' actions.”

Amended Complaint

The court also held, however, that two California-based vitamin resellers were entitled to dismissal of a second amended complaint filed by the putative class of vitamin purchasers adding them as defendants to the suit. While the second amended complaint was quite detailed in its pleading of a conspiracy among the Chinese manufacturers, it did not explain how the California resellers could have been part of the manufacturer cartel. Instead, it merely described them as a subsidiary and an affiliate, respectively, of one of the defending
manufacturers during the class period.

Thus, the second amended complaint both failed to provide notice to the resellers as to what they were alleged to have done wrong and changed the nature of the originally-charged conspiracy. The purchasers were directed to remedy these shortcomings by alleging what actions the resellers took that harmed the plaintiffs.

The decision is In re Vitamin C Antitrust Litigation, 2008-2 Trade Cases ¶76,406.

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