Last week, the Second Circuit affirmed that U.S. courts should, and indeed must, defer to a foreign government’s interpretation of its own laws. That should hardly be a controversial proposition, but up until now, lower courts have treated the interpretations of foreign governments regarding their own laws with varying degrees of deference, ranging from strict deference to outright skepticism. But now, the Second Circuit has put litigants on notice that the principles of international comity have to be applied in cases implicating the laws of other sovereign nations.
The Second Circuit’s ruling will affect a wide spectrum of legal issues facing foreign companies and financial institutions, ranging from subpoenas to asset restraints, and from enforcement actions to discovery requests, as well as substantive matters such as antitrust law, intellectual property, and securities laws.
This client alert explores the Second Circuit’s decision and discusses its significant practical impact on companies and financial institutions with global operations.
In Re: Vitamin C Antitrust Litigation
On September 20, 2016, the United States Court of Appeals for the Second Circuit handed down its decision in In Re: Vitamin C Antitrust Litigation, 2016 WL 5017312 (2d Cir. Sept. 20, 2016), vacating a $147 million judgment against two Chinese vitamin C manufacturers (“Defendants”) for violation of U.S. antitrust laws.
Writing for a unanimous court, Judge Peter Hall found, as argued in an amicus brief submitted by the Chinese Ministry of Commerce (“MOFCOM”), that Defendants were required by the Chinese Government to “fix the price and quantity of vitamin C sold abroad.” Therefore, he reasoned, Defendants “could not simultaneously comply with Chinese law and U.S. antitrust laws,” and the “principles of international comity required the district court to abstain from exercising jurisdiction in the case.”
Plaintiffs’ Claims and MOFCOM’s Appearance
Proceedings in the case have lasted more than 10 years. In 2005, Animal Science Products, Inc. and the Ranis Company (“Plaintiffs”), as well as other U.S. vitamin C purchasers, all filed lawsuits—later consolidated into a multidistrict class action—against the Defendants, Hebei Welcome Pharmaceutical Company and North China Pharmaceutical Group Corporation. Plaintiffs alleged, in part, that Defendants had colluded with a third Chinese entity to limit vitamin C production and increase prices in order to create a worldwide shortage and protect China’s status as a leading vitamin C exporter.
Defendants moved to dismiss the action based, inter alia, on the act of state doctrine, the defense of foreign sovereign compulsion, and principles of international comity. Principally, the Defendants argued that they should not be punished for violating U.S. antitrust law because they had acted pursuant to Chinese export pricing regulations and had been compelled by MOFCOM to fix vitamin C prices and restrict supply.
In support of Defendants’ motion to dismiss, MOFCOM submitted an amicus brief explaining that all vitamin C legally exported during the relevant time period was required to be sold at industry-wide coordinated prices. MOFCOM also characterized the Chinese entity with which Defendants had colluded as an instrumentality of the Chinese Government that was required to implement MOFCOM’s administrative rules and regulations on vitamin C trade. (MOFCOM’s appearance before the district court marked the first time that an entity of the Chinese Government had appeared amicus curiae before a U.S. court.)
The Lower Court Rulings
Even with MOFCOM’s representations, however, the district court denied Defendants’ motion to dismiss, holding that Plaintiffs were entitled to discovery with respect to Defendants’ assertion that their actions were compelled by the Chinese Government. The district court then denied the Defendants’ subsequent motion for summary judgment, finding that “Chinese law did not compel Defendants’ anticompetitive conduct.”
The district court stated two principal reasons for denying Defendants’ motion for summary judgment. First, the court ruled that MOFCOM had failed to address inconsistencies between important aspects of the law and its position. Second, the court believed that it had “substantial discretion” to consider other evidence in addition to MOFCOM’s official statement, including the contradictory testimony of Plaintiffs’ expert, under Rule 44.1 of the Federal Rules of Civil Procedure (Rule 44.1). In re Vitamin C Antitrust Litig., 810 F. Supp. 2d 522 (E.D.N.Y. 2011).
Following the district court’s denial of Defendants’ motion for summary judgment, the case went to trial. The trial resulted in a $147 million judgment in favor of Plaintiffs. Defendants appealed.
The Second Circuit Decision
The Second Circuit reversed the district court’s decision, holding that the district court had abused its discretion by not abstaining from exercising jurisdiction on international comity grounds.
In order to conduct a proper abstention analysis, the Second Circuit found that it was necessary to determine, among other things, whether Defendants “could have sold and distributed vitamin C while in compliance with both Chinese and U.S. law.” To do so necessitated discerning what those laws actually require. The Second Court stated that Rule 44.1 does not address how courts should analyze materials or sources available to interpret foreign law. Accordingly, the Second Circuit concluded that Rule 44.1 had no bearing on the degree of deference afforded a foreign government’s interpretation of its own laws and regulations. Indeed, “[i]f deference by any measure is to mean anything, it must mean that a U.S. court could not embark on a challenge to a foreign government’s official representation to the court regarding its own laws or regulations, even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system.”
The Second Circuit noted that deference is especially important in cases involving the laws of countries like China, whose legal system is markedly different from that of the U.S. (As an important aside for members of the international bar, the Second Circuit also agreed with the district court’s observation that difficulties of translation can affect a court’s ability to accurately interpret foreign law. The Second Circuit stated that the “danger that ‘an interpretation suggested by the plain language of a governmental directive may not accurately reflect Chinese law’ is all the more plausible where the documents the district court relied upon are translations and use terms of art which are unique to the Chinese system.”)
Applying a stricter standard of deference to MOFCOM’s position, the Second Circuit found that the Chinese Government, through its “price verification and chop” regime, had required Defendants to violate U.S. antitrust law. Such a true conflict of law, in combination with other factors traditionally considered in the comity balancing test, clearly supported dismissal of the case. Therefore, the Second Circuit vacated the judgment with instructions that the district court dismiss the case with prejudice.
The Second Circuit’s opinion affirms that it is inclined to afford significant weight to a foreign government’s position vis-à-vis its country’s laws. The Second Circuit’s ruling will affect a broad spectrum of legal issues facing foreign companies and financial institutions.
Foreign financial institutions with U.S. operations, for example, often receive subpoenas seeking records located in their home countries. Those countries, in turn, often have data protection laws that forbid those institutions from disclosing the requested information. In such instances, the foreign financial institutions often find themselves caught between the proverbial rock-and-a-hard place, having to decide whether to comply with the U.S.-issued subpoena or with the law of their home jurisdiction. Courts applying the multifactor comity balancing test in these cases have gone both ways on the issue. Some courts have deferred to the law of the home jurisdiction forbidding the production of the information. Other courts have required financial institutions to comply with a U.S.-issued subpoena, even if the producing party must violate the laws of its home jurisdiction to do so.
The Second Circuit’s decision in the Vitamin C Antitrust Litigation offers important guidance to U.S. courts when conducting the traditional comity analysis. Specifically, it confirms that courts must defer to a foreign government’s interpretation of its own laws and regulations when determining whether they conflict with U.S. law. That should eliminate much of the subjectivity that often accompanies U.S. courts’ efforts to interpret foreign law. Moreover, such deference is likely to color a court’s analysis of the remaining comity factors. Indeed, in the instant case, MOFCOM’s official position led the Second Circuit to conclude that the other comity factors—including the effect that exercising jurisdiction would have on U.S.-China relations, the improbability that an injunction against Defendants would be enforceable in China, and the likelihood that a U.S. court would decline to enforce a similar injunction issued in China against a U.S. company—weighed against asserting jurisdiction. Consequently, the Second Circuit’s decision should benefit foreign companies and financial institutions by reducing the likelihood that U.S. courts applying the comity balancing test will place them in the impossible position of having to comply with conflicting legal requirements.
However, the Second Circuit did set some limitations on its decision that U.S. courts should defer to the views of a foreign government regarding the interpretation of its own laws. First, the Second Circuit made clear that the foreign government must “directly” participate in the U.S. court proceedings “by acting through counsel or otherwise.” That means the foreign government must make a formal appearance in the litigation. Second, the foreign government must provide a “sworn evidentiary proffer” regarding the “construction and effect” of its laws and regulations. And third, the foreign government’s proffer must be “reasonable under the circumstances presented.” While that third requirement would seem to provide U.S. courts with significant latitude, the Second Circuit noted that “we have yet to identify a case where a foreign sovereign appeared before a U.S. tribunal and the U.S. tribunal adopted a reading of that sovereign’s laws contrary to that sovereign’s interpretation of them.” So, the key is for the foreign government to show up and appear in the litigation if it wants its interpretation to be heard and ultimately prevail.
The Second Circuit decision in In Re: Vitamin C Antitrust Litigation can be found here.