Foreign Sovereign Compulsion, Act of State and Comity: Can They Save You?

Guest Commentary

Charles C. Moore, White & Case LLP

Companies doing business in jurisdictions with managed economies may encounter greater difficulty raising laws and regulations of those jurisdictions as a defense in U.S. antitrust (and other) actions.  On September 6, 2011, a New York federal court denied summary judgment to certain Chinese manufacturers of vitamin C in In re Vitamin C Antitrust Litigation, 06-MD-1738 (BMC) (“Vitamin C”), rejecting the manufacturers’ claims that the Chinese government compelled them to fix the prices of vitamin C or that Act of State or comity principles should apply.  While Judge Cogan’s rather detailed opinion (72 pages) may suggest that the ruling is limited to the specific Chinese regulatory scheme at issue, businesses operating in similar jurisdictions should take note of a few general principles suggested by the ruling:

Get clarity as to obligations.  Much of the court’s 72-page opinion compares the record evidence reflecting the earlier voluntary conduct by the defendants (alleged to be anticompetitive) to the conduct the relevant Chinese ministry later argues that the Chinese government compelled.  The court’s approach is not surprising, as claims of sovereign compulsion or act of state normally are closely scrutinized. 

The lesson: Non-U.S. companies should understand the domestic legal obligations before engaging in U.S.-directed conduct that might be in tension with U.S. law.  Before commencing any such conduct, contact local authorities to gain an understanding of what is required.  Also, obtain a good legal opinion — up front — that explains the regulatory scheme and any penalties for non-compliance.  Find out whether these penalties are in fact enforced, as that will be significant if the conduct is later challenged in court.  Indeed, one key point in Vitamin C was the lack of evidence that the Chinese government had enforced the regulatory directives to coordinate prices. 

Governmental submissions will not necessarily carry the day.  The court considered, but did not defer to, the Chinese ministry’s court filings supporting the foreign sovereign compulsion defense.  The court justified this diminished deference by citing to the Federal Rules of Civil Procedure and a trend toward according less deference to foreign governmental statements concerning their own law.   Indeed, the court viewed the ministry’s submissions skeptically:  “In sum, all of the points above suggest that the Ministry’s assertion of compulsion is a post-hoc attempt to shield defendants’ conduct from antitrust scrutiny rather than a complete and straightforward explanation of Chinese law during the relevant time period in question.”  Slip Op. at 47. 

In other words, businesses cannot count on assertions by a foreign government that it compelled the conduct to carry the day in a U.S. court.  The court is going to want to see evidence of compulsion.  Start building the record at the earliest possible time — particularly where it is clear that the compelled conduct may be contrary to U.S. law. 

Antitrust is not your only concernVitamin C is an antitrust case, but antitrust is not the only area of law in which the United States regulates extraterritorial conduct.  The Foreign Corrupt Practices Act, the Racketeer Influenced and Corrupt Organizations Act and U.S. securities laws, among others, are U.S. laws that are or may be applied to conduct occurring abroad.  The court’s detailed analysis of the foreign law’s requirements, the private businesses’ relationship with the foreign government and the foreign government’s previous statements about its own law certainly can be applied to other legal contexts.  Thus, in doing business in jurisdictions in which the governments compel certain conduct, businesses should bear these legal issues in mind.

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