The Supreme Court and Animal Science Products: Sovereignty and Export Cartels

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The Supreme Court and Animal Science Products: Sovereignty and Export Cartels

February 13, 2018 Download Report
Alden Abbott
Deputy Director, Meese Center for Legal and Judicial Studies
Alden Abbott serves as Deputy Director of Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.

Summary

In 2018, the U.S. Supreme Court will decide whether a U.S. federal court is free not to apply a federal law that protects Americans from economic harm imposed by a foreign cartel. Consistent with the rule of law under our constitutional system, the Court should strongly hold in favor of the application of U.S. law in order to reaffirm American sovereign interests. More broadly, U.S. courts should recognize that Congress establishes federal law under our Constitution, and that the judiciary is not empowered to displace federal law in favor of foreign legal principles based merely on notions of “comity.” This case also underscores the importance of additional Executive Branch initiatives to combat export cartels around the world.

Key Takeaways

The Supreme Court should reverse the Second Circuit’s decision in Animal Science Products.

It is the constitutional role of the federal courts to say what the law is, not to avoid applying it.

Agreements by exporting nations not to defend their exporters’ cartel conduct that causes harm overseas would lift roadblocks to recoveries for cartel-related harm.

 

I. Introduction

In 2018, the U.S. Supreme Court will decide whether a U.S. federal court is free not to apply a federal law that protects Americans from economic harm imposed by a foreign cartel merely because a foreign government claims that its own law “compelled” the harmful conduct. Consistent with the rule of law under our constitutional system and in order to reaffirm American sovereign interests, the Court should strongly hold in favor of the application of U.S. law in this case. More broadly, U.S. courts should recognize that Congress establishes federal law under our Constitution, and that the judiciary is not empowered to displace federal law in favor of foreign legal principles based merely on notions of “comity.” This case also underscores the importance of additional executive branch initiatives to combat export cartels around the world. One key initiative would involve securing foreign nations’ agreement not to take any action in defense of cartel activity within their borders that imposes antitrust harm outside their jurisdictions.

II. Factual Background[REF]

The Supreme Court will decide a case that raises the right of American consumers to receive legal redress in U.S. courts for harm due to cartel conduct hatched abroad. Specifically, Animal Science Products, Inc., v. Hebei Welcome Pharmaceutical Co. Ltd. (Animal Science Products)[REF] involves a decision by a federal appeals court to prevent American Vitamin C importers (petitioners)[REF] from obtaining legal redress for harmful price fixing by a cartel[REF] comprised of Chinese Vitamin C manufacturers and exporters (respondents) and operating under the auspices of a membership organization known as the China Chamber of Commerce of Medicines and Health Products Importers and Exporters (hereafter “Chamber”).

In 2005, petitioners filed suit in federal district court alleging that respondents had conspired to fix Vitamin C export prices in violation of Section 1 of the Sherman Antitrust Act,[REF] which the U.S. Supreme Court has called “the Magna Carta of [American] free enterprise.”[REF] Respondents did not deny that they had fixed the prices and quantities of Vitamin C exports. They moved to dismiss the suit, however, arguing that because respondents’ actions had been required by Chinese law, the suit was barred by certain doctrines of judicial deference, including the “act of state” doctrine, the “foreign sovereign compulsion” doctrine, and principles of international comity. The Ministry of Commerce of the People’s Republic of Commerce (“Ministry”) filed an amicus curiae brief supporting respondents. The brief claimed that the Chamber was a state-supervised entity authorized to regulate Vitamin C exports and that the alleged conspiracy had been “a regulatory pricing regime mandated by the government of China.”

The district court refused to dismiss the case. It held that though the Ministry’s description of Chinese law was “entitled to substantial deference,” it was not “conclusive,” because “the plain language of the documentary evidence submitted by [petitioners] contradict[ed] the Ministry’s position.” That documentary evidence included public statements by the Chamber that the cartel arrangement was a “self-regulated agreement” that was adopted “voluntarily” and “without any government intervention.” Petitioners also cited documents in which China had represented to the World Trade Organization (WTO) that it “gave up export administration of…[V]itamin C” in 2002. The court noted that the Ministry had not cited legal authorities “to support its broad assertions” and its brief read like a “carefully crafted and phrased litigation position” rather than a “straightforward explanation of Chinese law.” The district court then held that Chinese law did not require respondents to fix the price and quantity of Vitamin C exports.

The case was then tried to a jury, which found that respondents had conspired to fix the price and limit the output of Vitamin C. The district court entered judgment for petitioners, awarding $147 million in damages and permanently enjoining respondents from further violations of the Sherman Act.

Respondents appealed, and the U.S. Court of Appeals for the Second Circuit reversed. The Second Circuit explained that to abstain from asserting jurisdiction on comity grounds, a court should apply a “multi-factor balancing test” set forth in two 1970s appeals court cases.[REF] The Second Circuit focused primarily on one factor, whether there was a “true conflict” between U.S. and Chinese law. According to the appeals court, a true conflict “hinges on the amount of deference” that was owed to the Ministry’s characterization of Chinese law. The court held that when a foreign sovereign “directly participates in U.S. court proceedings” and “offers an interpretation that is reasonable under the circumstances,” a “U.S. court is bound to defer.” The court construed the Ministry’s submissions as showing that “Chinese law required [respondents] to engage in activities in China that constituted antitrust violations in the United States.” The court ignored the evidence to the contrary identified by the district court. Accordingly, the appeals court found a true conflict, and summarily determined that the remaining comity factors “clearly weigh in favor of U.S. courts abstaining from asserting jurisdiction.”[REF] Petitioners successfully filed for Supreme Court review of the Second Circuit’s decision. The Supreme Court framed the issue for review as whether a federal court is bound to defer to a foreign government’s legal statement:

Whether a court may exercise independent review of an appearing foreign sovereign’s interpretation of its domestic law (as held by the U.S. Court of Appeals for the 5th, 6th, 7th, 11th and District of Columbia Circuits), or whether a court is “bound to defer” to a foreign government’s legal statement, as a matter of international comity, whenever the foreign government appears before the court (as held by the opinion below in accord with the U.S. Court of Appeals for the 9th Circuit).[REF]

III. Legal Discussion

The Second Circuit’s decision in Animal Science Products is wrong, both as a matter of constitutional principle and as a matter of applicable antitrust law.

First, under the U.S. Constitution, it is the role of the federal courts to interpret what federal law means, not to displace federal legal rules, duly enacted by Congress, at the behest of foreign sovereigns.

Article I of the U.S. Constitution plainly states: “All legislative Powers herein granted shall be vested in a Congress of the United States.”[REF] Thus Congress, not the federal judiciary, makes federal law. More specifically, the “role assigned to [federal] judges in our [constitutional] system [i]s to interpret the Constitution and lesser laws, not to make them.”[REF] As a general matter, a federal judge’s refusal to apply a congressionally enacted and constitutional federal law in a specific case[REF] in effect unmakes the law in question and runs afoul of this basic constitutional constraint on the role of the judiciary.

Consistent with the basic constitutional requirement that federal courts apply congressional enactments, the Supreme Court repeatedly has stressed that the federal courts have a “virtually unflagging obligation…to exercise the jurisdiction given them.”[REF] As Justice Antonin Scalia put it in the W.S. Kirkpatrick case, “The short of the matter is this: Courts in the United States have the power, and ordinarily the obligation, to decide cases and controversies properly presented to them.”[REF] Although there are a few very narrow exceptions to the courts’ obligation to rule on legal controversies properly before them, none of them applies to this case.[REF]

Second, the Second Circuit erred as a matter of statutory antitrust law. It ignored Supreme Court precedent in ruling that the district court was “bound to defer” to the Chinese Ministry’s statement and thus refused to apply antitrust law to redress antitrust harm suffered by American parties in the United States. The Supreme Court has specifically recognized that it is entirely appropriate (and consistent with principles of comity) for a federal court to apply the Sherman Act to provide redress for domestic antitrust injury due to foreign conduct[REF]—the very set of circumstances presented by the Animal Science Products case.

The Second Circuit’s effort to avoid the Supreme Court’s teachings regarding the applicability of the Sherman Act was based solely on two 1970s cases—Mannington Mills and Timberlane Lumber.[REF] Those cases invented out of whole cloth multi-factor balancing tests to assess whether comity considerations could justify a failure to apply otherwise applicable antitrust law. The Supreme Court implicitly rejected such open-ended tests in its 2004 Empagran decision, which described their case-by-case balancing approach as “too complex to prove workable.”[REF] In ignoring this clarification, the Second Circuit rejected clear Supreme Court guidance.

In sum, the Second Circuit’s Animal Science Products decision ignores Supreme Court teachings and, even more fundamentally, is at odds with the general constitutional command that federal courts apply federal statutes and decide cases and controversies properly brought before them. Indeed, the Second Circuit’s repudiation of statutory antitrust redress based merely on one statement by a foreign government’s ministry—a statement that is at odds with other evidence of that government’s position—is a travesty. It places one foreign pronouncement regarding particular commercial conduct above the substantive interests of American citizens to have their rights vindicated in federal court, consistent with the U.S. Constitution.

It follows that, in deciding this case, the U.S. Supreme Court should do more than merely state that a lower court is not “bound” to defer to a foreign government’s legal statement in court. In addition, the Court should take the opportunity to state that “foreign comity balancing tests” are entirely inappropriate and must be rejected, with respect to all applicable federal statutory schemes that come before a federal court. Such a holding, which would be fully in line with recent Supreme Court pronouncements regarding various statutes,[REF] would clarify that it is the constitutional role of the federal courts to say what the law is, not to avoid applying it.[REF] It would also reaffirm the constitutional principle, recognized by the Supreme Court, that foreign policy authority is committed to the federal government’s political branches, not to the judiciary.[REF] International law scholar, Professor Joel R. Paul, put it thus: “Courts, out of respect for the separation of powers, as well as respect for foreign sovereigns, should apply jurisdiction as the lawmakers intended it to be applied and leave the interest-balancing [of comity analysis] to the political process.”[REF]

IV. Economic Policy Assessment: Cracking Down on Harmful Export-Cartel Actions—A Pathway to Possible Reform

In addition to raising provocative legal issues, Animal Science Products tees up a question of key economic policy importance: how to better combat harmful hard-core cartel conduct, which (as the U.S. Supreme Court has stated) is regarded as “the supreme evil of antitrust.”[REF] The proliferation of antitrust laws around the world in recent decades has been accompanied by general support for cooperative efforts to crack down on cartels, promoted by prominent international economic institutions such as the Organization for Economic Co-operation and Development (OECD, a multinational economic research organization),[REF] the International Competition Network (ICN, a network of national antitrust enforcement agencies and expert nongovernmental advisers that supports convergence toward best practices),[REF] and the World Bank (an international financial institution that seeks to combat poverty by providing financial and technical assistance to developing countries around the world).[REF] As recognition of the severity of the harm due to cartel conduct has grown, national antitrust agencies around the world have made cartel detection and prosecution a top priority. Indeed, consistent with other nations’ antitrust laws, Section 13 of China’s antitrust statute, the Antimonopoly Law, strictly forbids cartel conduct that fixes prices and restricts the sale of products.[REF]

Despite antitrust authorities’ increased emphasis on combating cartels, including international cartels—and despite growing cooperation among national antitrust enforcers directed to that end[REF]—export-cartel conduct, such as that highlighted in Animal Science Products, remains a bit of an outlier. Because hard-core cartel conduct (price fixing and output reduction) by exporters imposes harm on foreign parties, national governments have far less incentive to be concerned about them than about those other cartels that cause harm within their borders.

A nation’s toleration of its own export cartels, however, should not justify its imposition of serious antitrust harm on its trading partners.[REF] Indeed, the U.S. government has made it clear that the two federal statutes (the Export Trading Company Act and the Webb–Pomerene Act) that limit the scope of U.S. antitrust liability for certain export-related joint conduct by American entities provide no shield for antitrust liability imposed by other countries.[REF]

In short, the substantial reduction (if not total elimination) of anticompetitive harm due to export cartels would bestow substantial benefits on the economy of the United States and other nations as well. However, achieving international cooperation toward this end may prove difficult, because exporting coalitions within each country that benefit from the anticompetitive status quo may be expected to interpose objections to reform.[REF] What, then, should be done?

A pragmatic multilateral approach to diminishing the harm of export cartels would be to avoid focusing (at least initially) on the elimination of national statutes that appear to promote or facilitate such cartels. Instead, the U.S. government might seek to achieve international cooperation through a multilateral agreement or through bilateral accords under which each signatory nation would agree not to seek to have its exporters shielded from cartel-related antitrust enforcement actions, brought under the law and within the jurisdiction of another signatory. Under such an agreement, each signatory would be precluded from intervening on behalf of its export cartelists before the courts or agencies of other signatories (whether on the grounds of “comity,” “act of state,” “sovereign compulsion,” or any other legal defense).

If new, freestanding agreements proved too complicated, existing bilateral antitrust cooperation agreements between the U.S. federal antitrust agencies (the Justice Department and the Federal Trade Commission) and foreign antitrust authorities could serve as a vehicle for reform.[REF] In a related vein, the Justice Department and Federal Trade Commission should work to “deepen” cooperative agreements with other jurisdictions to ensure that they extend to export cartels as well—and to enter new agreements, where necessary, to advance this objective.

Agreements by exporting nations not to defend their exporters’ cartel conduct that causes harm overseas would lift serious roadblocks to recoveries for cartel-related harm. Such agreements, combined with enhanced international enforcement cooperation directed against export cartels, would also predictably reduce the incentives for forming and running such cartels. This would diminish the incidence and baleful effects of export cartel conduct—a “win-win” for competitive forces and economic welfare in the United States and abroad.

V. Conclusion

In deciding the Animal Science Products case, the U.S. Supreme Court will have the opportunity to reject the notion that a court should accede to a foreign government’s effort to nullify the invocation of clearly applicable constitutional federal law, based on vague notions of “international comity.” Such a ruling would vindicate the rule of law and reaffirm that it is the role of the federal courts to apply the law, not to decline to apply it.

In addition, Animal Science Products, which involves China’s effort to shield an anticompetitive Chinese export cartel from American antitrust liability, raises broad economic policy concerns which justify federal government action. Specifically, the executive branch of the U.S. government should seek international agreements under which signatories would agree: (1) not to defend their export controls from the reach of other signatories’ antitrust laws; and (2) to cooperate with other signatories in investigating anticompetitive export cartel activity. Successful implementation of these policy initiatives would reduce the anticompetitive harm attributable to export cartels and redound to the benefit of the United States and world economies.

Alden F. Abbott is Deputy Director of, and John, Barbara, and Victoria Rumpel Senior Legal Fellow in the Edwin Meese III Center for Legal and Judicial Studies, of the Institute for Constitutional Government, at The Heritage Foundation.

Authors

Alden Abbott
Alden Abbott

Deputy Director, Meese Center for Legal and Judicial Studies