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Federal Appeals Court Vacates a $147M Jury Award Based on Comity Principles

A U.S. federal appeals court recently issued an antitrust decision, which if it endures,[1] could provide a blueprint for how foreign companies exporting products to the U.S. may use principles of international comity to potentially avoid liability for alleged “antitrust violations that occur abroad and that involve the laws and regulations of a foreign nation.”[2]  In short, when an exporter engages in export practices from its home country, mandated by that country’s laws, as evidenced by a sworn proffer by the home country government, it may be able to avoid costly litigation based on claims that its export practices violated U.S. antitrust laws.

Litigants from time-to-time have relied on principles of international comity to short circuit litigation in U.S. courts.  To ensure “amicable working relationships between nations,” U.S. courts have developed comity “balancing” tests to determine when it is best to abstain from hearing a legal dispute that otherwise would be heard by U.S. courts.[3]  While U.S. courts may vary in the precise prongs of the balancing test, a key factor they all consider in assessing conduct that occurs entirely outside the U.S. is the “degree of conflict between U.S. and foreign law.”[4]  If there is a “true” conflict between the U.S. and foreign law – meaning it is “impossible” for a company’s trade practices to “compl[y] with the laws of both countries” – courts generally abstain from exercising jurisdiction in those circumstances.[5] 

In September 2016 the United States Court of Appeals for the Second Circuit reaffirmed these principles as they apply to the U.S. antitrust laws and sharpened the necessary prerequisites U.S. courts use to decide whether a conflict exists sufficient to trigger a comity defense.  In In re Vitamin C Antitrust Litigation, the Second Circuit addressed the issue of “how a federal court should respond when a foreign government, through its official agencies, appears before that court and represents that it has compelled an action that resulted in the violation of U.S. Antitrust laws.”[6]  The Second Circuit, after a review of substantive law on the topic, held:

When a foreign government, acting through counsel or otherwise, directly participates in U.S. court proceedings by providing a sworn evidentiary proffer regarding the construction and effect of its laws and regulations, which is reasonable under the circumstances presented, a U.S. court is bound to defer to those statements.[7]

Guided by that holding, the Second Circuit then turned to the instant dispute before it.  Based on the facts presented, it dismissed the plaintiffs’ action, post-trial, alleging two Chinese exporters violated U.S. antitrust law through their price-setting practices for Vitamin C.[8]  Consequently, the Second Circuit vacated a $147 million judgment that had been awarded against the exporters in the underlying district court proceeding.  Importantly, in that proceeding, the Chinese government had appeared before the district court and submitted a proffer (a legal brief) explaining it mandated the exporters’ challenged price-setting practices.  Because the Chinese government directly participated in the case and explicated the construction and effect of Chinese laws and regulations relevant to the subject, which explanation was reasonable in light of the facts, the Second Circuit deferred to the substance of the proffer.  In turn, because the proffer demonstrated the Chinese export regulations at issue mandated export compliance by the Chinese exporters inconsistent with U.S. antitrust laws, the appellate court determined the exporters could not simultaneously comply with Chinese and U.S. law.  This equated to a true conflict between the countries’ laws and when the Second Circuit then weighed that finding with other balancing test factors, it concluded “China’s ‘interests outweigh whatever antitrust enforcement interests the United States may have in this case as a matter of law.’”[9]

The Second Circuit’s decision reiterates the application of the comity defense in U.S. antitrust cases and gives guidance on how an exporter and the foreign government can potentially maximize the value of the foreign government’s assistance when propounding a comity defense:

  1. Appearance. The foreign government, through U.S. counsel, should appear before the U.S. court in which the matter is pending, most likely as an amicus.  In seeking deference from the court, appearances tend to be more effective than the submission of an affidavit or declaration.[10]  In those cases where a foreign government has appeared and provided an interpretation of its laws, the presiding U.S. court has followed the government’s interpretation.[11]  Conversely, in the Vitamin C case, if the Chinese government had not appeared, it would have been “entirely appropriate” for the U.S. district court to independently assess whether the contested export practices were compelled by government dictate.[12]
  2. Statement explicating law and indicating conflict with U.S. law. The foreign government should provide an “official statement explicating its own laws and regulations.”[13]  The primary purpose of the statement is to illustrate how the application of U.S. antitrust law conflicts with the foreign government’s law or policies.  Stated differently, it is critical for the statement to address the comity balancing test factor: “degree of conflict between U.S. and foreign law.”  To that end, the statement should consider the following factors:
    1. Identify the applicable statute, law or regulation pertaining to the exporter’s trade practices.[14]
    2. Identify how the foreign law applies to and mandates the contested trade practices, particularly any aspect of those practices, which on its face, does not wholly appear to be mandated by the law.[15]
    3. Identify why the proffered construction of the law and description of its effect on the exporter’s trade practices are reasonable.[16]  “Reasonable” is the key; the proffer must make logical sense.[17]
    4. Identify why the exporter could not comply simultaneously with its foreign government’s law and the U.S. antitrust laws.
  3. Addressing other comity factors. The statement also should address any other factors in the relevant comity balancing test for which the foreign government can competently comment in favor of the exporter.  For example, the foreign government likely will want to address the possible effect on “foreign relations if the [U.S.] court exercises jurisdiction and grants relief.”[18]
  4. Assistance of U.S. counsel. The foreign government’s statement, as well as associated strategic decisions, should be consistent with consultation with, and pursuant to legal advice of, U.S. counsel possessing subject-matter expertise.
  5. Motion to dismiss and tailored discovery. Unless tactical circumstances dictate otherwise, the statement should be submitted in conjunction with a defendant’s motion to dismiss.  As part of the dismissal consideration, it may be advantageous for the defendant to consider limited discovery tailored solely to the question of comity.  Creating a record, containing evidence pertinent to all relevant interests and policies implicated by a comity balancing test, likely will equip the district court with sufficient evidence to grant dismissal, saving all the parties considerable monies and resources.[19]

 

[1] Plaintiffs in the matter may petition the appellate court for a panel or en banc rehearing of the decision.  See, e.g.,  2d Cir. R. 35.1.  As an appeal of last resort, plaintiffs can petition the United States Supreme Court.

[2] Animal Science Prods., Inc. v. Hebei Welcome Pharm Co. Ltd. (In re Vitamin C Antitrust Litig.), 2016 U.S. App. LEXIS 17135, at *18 (2d Cir. Sept. 20, 2016).

[3] Id. at *17, *18 (quoting JP Morgan Chase Bank v. Altos Hornos de Mexico, 412 F.3d 418, 423 (2d Cir. 2005) and citing Timberlane Lumber Co. v. Bank of Am., N.T. & S.A., 549 F.2d 597, 614-15 (9th Cir. 1976) and Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287, 1297-98 (3d Cir. 1979)).

[4] Id. at *20.  See Hartford Fire Ins. Co v. California, 509 U.S. 764 (1993).  See generally Restatement (Third) of the Foreign Relations Law of the United States § 403 (1987) (listing factors to use in assessing whether exercise of jurisdiction is reasonable, including “likelihood of conflict with regulation by another state”).

[5] Id. at *21 (quoting Hartford Fire, 509 U.S. at 799).

[6] Id. at *3.

[7] Id. at *31-32.

[8] Plaintiffs alleged a violation of Sherman Act, Section 1 (15 U.S.C. § 1).

[9] In re Vitamin C at *46-47 (quoting O.N.E. Shipping Ltd. v. Flota Mercante Grancolombiana, S.A., 830 F.2d 449, 450 (2d Cir. 1987)).

[10] Id. at *28-29 (citing Villegas Duran v. Arribada Beaumont, 534 F.3d 142 (2d Cir. 2008)).

[11] Id. at *31.

[12] Id. at *37 n.10.

[13] Id. at *4.

[14] Deference may not be appropriate where the governmental entity does not identify a specific law.  Id. at *31 n.8.

[15]  In the Vitamin C case, for instance, the Chinese government explained the meaning of arguably vague and imprecise regulatory language (“industry-wide negotiated prices”) applicable to the exporters’ practices.  Id. at *24.

[16] Id. at *31-32.

[17] For example, in discussing “industry-wide negotiated” prices in the Vitamin C case, the Chinese government provided a “reasonable interpretation” of the term, which helped the exporters’ cause.  Id. at *34.

[18] Id. at *20.

[19] See id. at *47 n.14.

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