Their comments came as Brian Cogan, a judge at the US District Court for the Eastern District of New York, rejected arguments by the four Chinese defendants that the case was beyond the jurisdiction of US courts because they had been made to act illegally by their own government.
A settlement, not a trial, now most likely
The Chinese firms, who are accused of colluding to limit production and fix Vitamin C prices in the US from 2001, claimed they were compelled to do so by the Chinese Ministry of Commerce, which took the unprecedented step of submitting a written document to the court supporting the defendants - believed to be the first time the Chinese government has officially appeared in a US court.
Lawyers for the defendants claimed the doctrines of ‘foreign sovereign compulsion’ (which protects foreign firms compelled by their governments to break US law) and ‘act of state’ (which says a foreign government can’t be questioned by another country’s courts for actions within its own borders), should therefore apply.
A welcome precedent?
But Cogan was not persuaded, which means the case can now proceed, and would most likely conclude with a settlement rather than a lengthy and expensive trial, predicted John Connor, Professor of Industrial Economics at Purdue University.
Connor, who has written extensively about global vitamin production, told NutraIngredients-USA that the ruling set an important precedent and would likely trigger a wave of similar lawsuits.
”I think Cogan’s decision is a gutsy one. In the past US courts have been quite shy of violating comity - the principle that courts of one nation ought not to interfere with the sovereign rights of another nation.
“This will probably bring about other suits in areas such as minerals, especially if this results in a positive outcome for the plaintiffs. There are so many commodities sourced from China now.”
While the Chinese government had argued that the trade association to which the Chinese vitamin manufacturers belonged was a vehicle of its national planning apparatus and had been compelled to co-ordinate manufacturing and prices, Cogan disagreed, “I think rightly”, said Connor.
“As far as I know, the central and provincial governments of China have guided development through loans, government ownership, export subsidies - now abolished -, land ownership, and many other levers. However, direct price setting by government entities was abandoned decades ago.“
‘You need to prove flat-out compulsion’
Professor Spencer Waller, director of the Institute of Consumer Antitrust Studies at the Chicago School of Law, said that in such cases, it was not enough to argue that a foreign government had permitted, suggested or even encouraged anti-competitive behavior. The Chinese firms had to prove they were compelled to fix prices, he said.
"You need to prove flat out compulsion. That is, you have to be able to prove 'they made me do it'…”
Raising the foreign compulsion argument was clearly the defendants’ strongest card, so it was not clear where Cogan's ruling left them given that they had not contested the US firms' allegations that they had violated anti-trust laws, he added.
Meanwhile, it was likely the ruling would be cited by others seeking to make anti-trust cases against Chinese firms, he said.
What happens next?
William Isaacson, partner at Washington DC-based Boies, Schiller & Flexner and co-lead counsel for the plaintiffs, told NutraIngredients-USA that a status conference with the judge was scheduled for October 4, when he would ask for a trial date.
According to Isaacson, the Chinese firms had originally argued that they acted independently. “They only brought in the government later when they were accused of price fixing.”
Judge: No rock and no hard place
The actions of the firms - Northeast Pharmaceutical Group Co, Jiangsu Jiangshan Pharmaceutical Co, Hebei Welcome Pharmaceutical Co and China Pharmaceutical Gr - contributed to a sharp rise of the US price of vitamin C as they controlled such a large share of the market (more than 60%) between them, claimed Isaacson.
The plaintiffs alleged that the defendants agreed to fix prices in 2001, after which spot prices for vitamin C shot up rapidly.
In his ruling, Cogan said: “Although defendants and the Chinese government argue to the contrary, the provisions of Chinese law before me do not support their position, which is also belied by the factual record.”
He added: “There is no rock and no hard place. The Chinese law relied upon by the defendants did not compel their illegal conduct.”