NEW YORK, March 11 (Reuters Legal) - In a closely watched case that could test the reach of U.S. antitrust law, four Chinese companies face powerful evidence that they colluded to limit production and fix prices of vitamin C in the United States. The evidence is so convincing, in fact, that the defendants have not contested the allegations.

But they still have a potentially solid legal defense: the Chinese government made them do it. It's a position that has been bolstered by the Chinese government itself, which made an official appearance in the case -- believed to be its first ever in a U.S. court -- to file briefs in support of the defendants. After more than six years of litigation, a Brooklyn federal judge is expected to decide soon whether the case can be decided without a trial.

The legal theory underpinning the defendants' argument is known as the foreign sovereign compulsion doctrine, which protects foreign companies that were compelled by their own government to break U.S. law. As Chinese companies increasingly become the target of antitrust lawsuits in the United States, the doctrine is expected to undergo more legal scrutiny. In addition to the vitamin C case, Chinese companies have raised the sovereign compulsion defense in two other price-fixing cases.

The outcomes of those cases are not expected to have an immediate impact on U.S. trade relations with China, the largest supplier of goods imported into the United States. As China's economic power continues to grow, however, the disputes could be a sign of more trade fights ahead.

Shanker Singham, a partner at Squire, Sanders & Dempsey and the chairman of the International Roundtable on Trade and Competition Policy, said that a ruling for the defendants would undermine global competition. It would be a declaration of war on the market system where business competition on the merits is the organizing economic principle, Singham said.

PACT LIMITS EXPORT VOLUMES

Until recently, Chinese companies have been known for low production costs that have benefited consumers worldwide, and only in the last five years have they been accused of coordinating production in an effort to raise prices. The appearance of Chinese cartels that are hiding behind the state is a disturbing trend, said John Connor, a professor at Purdue University specializing in antitrust law enforcement.

Among the documents in the vitamin C case is a 2001 written production and price agreement among the four Chinese manufacturers, which together controlled around 60 percent of the world's vitamin C market. The pact explicitly limited each company to a specific volume for export. According to the plaintiffs, after the agreement was made, spot prices for vitamin C shot to as high as $7 per kilogram in December 2002 from $2.50 per kilogram in December 2001.

In an amicus brief filed in support of the defendants, China's Ministry of Commerce argued that the vitamin C manufacturers were compelled by Chinese law to coordinate their production and pricing. It also argued that a ruling against the manufactures would improperly penalize them for the sovereign acts of their government and would adversely affect implementations of China's trade policy.

The foreign sovereign compulsion defense has rarely been litigated and it has only been successful once, according to antitrust law experts. But the presence of the Chinese government in the vitamin C case could cause Judge Brian Cogan to look for a way to dismiss the case. You can see why a judge would be reluctant to keep the case when it's about foreign affairs and trade policy, said Spencer Waller, director of the Institute for Consumer Antitrust Studies at Loyola University Chicago School of Law.

NO U.S. ACTION

The Chinese government's participation may explain why neither the U.S. Department of Justice nor the Federal Trade Commission has taken any action against the Chinese companies. According to enforcement guidelines that the government issued in 1995, the DOJ and FTC will not take action against a company if a foreign government makes a sufficiently detailed presentation that a specific law compelled the defendant's actions. William Isaacson, a partner at Boies, Schiller & Flexner and the co-lead counsel for the plaintiffs, said that neither the Chinese government nor the defendants have been able to point to such a law.

Isaacson and his law firm have a unique perspective on the vitamin C market. In the late 1990s, they investigated a vitamin C cartel among European and Japanese companies. Their probe led to U.S. prosecutions that resulted in more than $900 million in corporate fines and several guilty pleas. Isaacson said he is bewildered that the U.S. government has not contacted him for more information about his case against the Chinese companies. I've never understood why they don't want to find out what's been happening. The Department of Justice's antitrust division and the FTC declined to comment.

The plaintiffs, two U.S. buyers of vitamin C, alleged in one of their briefs that the defendants fixed prices without any help from the government. It was only after the defendants were accused of price fixing that they invoked their government's involvement, according to the plaintiffs.

For their part, the Chinese manufacturers say that China's Ministry of Commerce directed an entity called the Chamber of Commerce of Medicines and Health Products Importers and Exporters to coordinate production. According to the brief submitted by the Ministry of Commerce, the action was taken in order to mitigate the exposure Chinese companies faced in potential antidumping investigations from other countries and to ensure China's orderly transition to a market-driven economy.

But that position could turn out to be problematic for China in a dispute with the United States at the World Trade Organization. In that proceeding, the United States has charged that China has played a role in limiting exports of certain raw materials, in violation of WTO rules. To bolster its case, the United States has pointed to China's admission in the vitamin C case that in fact it is involved in setting production limits.

The case is Animal Science Products and The Ranis Company v. Hebei Welcome Pharmaceutical Co. Ltd. et al, U.S. District Court for the Eastern District of New York, No. 05-00453.

(Reporting by Andrew Longstreth of Reuters Legal; Editing by Amy Singer and Eddie Evans)

(This article first appeared on Westlaw News & Insight, www.westlawnews.com)

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