China Vitamin C Price-Fixing Verdict Scrutinized by Court

A U.S. price-fixing verdict against Chinese makers of a common dietary supplement faced scrutiny by an appeals court as a judge expressed doubt whether companies regulated by China’s government should be subject to American competition law.

China’s Ministry of Commerce made the first appearance by any government agency from that country before a U.S. court in 2006, arguing in support of two Chinese vitamin C makers that a Brooklyn, New York, jury eventually found liable for violating American antitrust law. The companies, whose products are used in everything from energy drinks to livestock feed, were ordered to pay $147.8 million.

Hebei Welcome Pharmaceutical Co. and its state-owned parent, North China Pharmaceutical Group Corp., were required by law to coordinate export prices and volumes, the ministry said in a filing to the U.S. Court of Appeals in Manhattan, which on Thursday heard the Chinese companies’ request to throw out the verdict.

Appeals judges questioned a lawyer for U.S. vitamin C buyers, William Isaacson, about how the lower court came to discount the ministry’s assertion that the vitamin makers were following their country’s regulations.

It “creates a problem if we all start doing that to each other,” Judge Peter Hall said, referring to courts abroad and respect for other governments’ statements about their laws. Conflicting antitrust regulations may be better “handled by treaty,” Hall said.

‘Deeply Troubled’

Earlier, the ministry sent a diplomatic note to the U.S. State Department saying it was “deeply troubled” by the case.

“Antitrust liability under U.S. law does not extend to one circumstance where that conflict would be especially acute: where a foreign sovereign compelled a private party to engage in anticompetitive conduct within that sovereign’s borders,” the ministry said in court papers. “The district court’s approach and result have deeply troubled the Chinese government.”

North China Pharmaceutical Group, a leading Chinese drugmaker, said it shouldn’t even be implicated in the case because it had no contact with U.S. vitamin C buyers and didn’t exert day-to-day control over Hebei Welcome. Both companies are based in Shijiazhuang, China.

“This is a case which should never have gone to a jury,” said Jonathan Jacobson, a lawyer for the companies. “When the government of China comes in and says, ‘I compel the conduct,’ that should be the end of it.”

Global Market

Worth about $500 million globally, the market for vitamin C is important to China, which developed a novel manufacturing technique for the product in the 1960s.

The country’s dominance in the industry grew after the U.S. Justice Department cracked down on a European-led vitamin-making cartel in the late 1990s. Companies in China supply about 80 percent of the vitamin C used in the U.S., according to court filings.

In the lawsuit, filed by Animal Science Products Inc., a livestock-supplement firm based in Nacogdoches, Texas, and Ranis Co., a food company based in Elizabeth, New Jersey, Chinese firms were accused of manipulating prices by constricting supplies.

Prices rose as high as $15 a kilogram ($6.82 a pound) from about $2.50 a kilogram during the scheme, which lasted from about 2001 to 2006, the U.S. companies claimed.

The Brooklyn jury found in favor of the U.S. companies in March 2013. The jurors awarded $54.1 million in damages, tripled to $162.3 million under U.S. law. The judgment was later reduced to account for settlements.

Two Remaining

While more companies were sued, only North China and Hebei Welcome remained in the case by the time of the verdict. Hong Kong-based CSPC Pharmaceutical Group Ltd. and its Weisheng Pharmaceutical unit, along with Aland (Jiangsu) Nutraceutical Co. and Shenyang-based Northeast Pharmaceutical Group Co. settled out of court.

The Chinese Ministry of Commerce and the vitamin makers misrepresented the legal requirements that companies were subject to, lawyers for the U.S. companies said in their filing to the appeals court. China went through substantial deregulation of the industry in 2002 ahead of its admission to the World Trade Organization, the lawyers said.

Qiao Haili, a retired ministry employee who was formerly in charge of vitamin C exports and testified on behalf of the companies, “admitted at trial that ‘on the whole,’ the government did not involve itself in price fixing,” the lawyers for the U.S. companies said.

‘Fabricated’ Testimony

He was also “shown to have fabricated” testimony about a 2003 memo he wrote to the ministry in which he described a lack of control over the vitamin companies, they said.

In the memo, he concluded rules of a ministry organization overseeing vitamin C became a “formality,” the lawyers said.

Coordination of prices among competitors is generally illegal under U.S. antitrust law, although companies based outside the U.S can argue that the law doesn’t apply if they are forced to engage in those activities under their countries’ regulations.

A Washington-based lawyer representing the ministry, Carter Phillips, said in arguments Thursday that the Chinese regime, requiring companies to set prices that are enforced by the government, is “a practice that takes place exclusively inside of China” that should not be subject to U.S. antitrust law.

In court filings, the ministry called the Brooklyn court’s rejection of its assertion that the companies had no choice “profoundly disrespectful.”

Kirby Behre, a Washington-based competition lawyer who is not involved in the case, said in a phone interview Thursday that while appeals courts often show a level of deference to trial judges, the Manhattan appeals court may take a harder look in this instance because of the international implications.

There are “so many issues swirling below the surface here,” he said. “Diplomacy and international law seem to be on a collision course with U.S. law.”

The case is In Re Vitamin C. Antitrust Litigation, 13-4791, U.S. Court of Appeals for the Second Circuit (Manhattan).

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