Does 2nd Circuit give foreign defendants an escape hatch via Vitamin C decision?

September 21, 2016

In a way, the 2nd U.S. Circuit Court of Appeals decision Tuesday to toss a $147.8 million price-fixing judgment against two Chinese manufacturers of Vitamin C was just a reaffirmation of a principle the U.S. Supreme Court established back in 1942. But has the appeals court given foreign defendants – especially those from countries where the rule of law is suspect – a way to get out of litigation in the U.S.?

In the Vitamin C case, the 2nd Circuit, like the Supreme Court in its decades-only decision in U.S. v. Pink, held that when foreign sovereigns appear in private litigation in the U.S. to explain their country’s laws and regulations, U.S. judges must yield to those explanations.

“If deference by any measure is to mean anything, it must mean that a U.S. court not embark on a challenge to a foreign government’s official representation to the court regarding its laws or regulations, even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system,” the 2nd Circuit said in an opinion by Judge Peter Hall for a unanimous panel that also included Judges Jose Cabranes and Richard Wesley. “Not extending deference in these circumstances disregards and unravels the tradition of according respect to a foreign government’s explication of its own laws, the same respect and treatment that we would expect our government to receive in comparable matters before a foreign court.”

The 2nd Circuit said that the trial judge in the Vitamin C case, U.S. District Judge Brian Cogan of Brooklyn, erred when he inferred a “softening” in the appellate court’s allegiance to Pink. Judge Cogan, the panel said, should not have engaged in his own analysis of whether Chinese law required Vitamin C suppliers to work together to control supply and prices. After the Chinese government’s Ministry of Commerce filed an amicus brief in the case – marking the first-ever appearance of China as an amicus in the U.S. court system – Judge Cogan should have bowed to the sovereign’s explanation and dismissed the antitrust case, the appeals court said.

I can think of more than a few hypotheticals in which a foreign sovereign might want to ride to the rescue of a private defendant stuck in U.S. litigation. How about a money laundering case? Anti-Terrorism Act suits? Or even litigation that affects the foreign government directly, like court orders directing financial institutions to make payments to sovereign debtholders. Can a foreign government end such litigation by showing up as an amicus and assuring U.S. judges that defendants were just following the law of their land? And if so, is the 2nd Circuit providing a loophole for despotic regimes and their corporate cronies?

Two lawyers who know the Vitamin C case inside out – Jonathan Jacobson of Wilson Sonsini Goodrich & Rosati, who represents the Chinese Vitamin C suppliers accused of manipulating the market and Carter Phillips of Sidley Austin, who represents the Chinese Ministry of Commerce – told me in interviews Wednesday that U.S. court appearances by foreign sovereigns like China are ever more likely, not just because of the 2nd Circuit’s ruling but because of globalization.

Jacobson emphasized that the 2nd Circuit ruling didn’t really expand the influence of foreign sovereigns, since the Supreme Court already granted them deference in the Pink ruling, which involved a legal interpretation by the recently recognized Soviet Union. And while it’s true that some courts since Pink have looked at evidence beyond foreign sovereigns’ statements of their law, Jacobson said, no court except for the trial judge in the Vitamin C case has ended up discarding a foreign country’s interpretation when the sovereign appears in U.S. court to provide it.

Jacobson also noted that if foreign sovereigns have agreed to submit to the jurisdiction of U.S. courts – like, for instance, Argentina in the long-running litigation over its defaulted bonds – the 2nd Circuit’s Vitamin C decision should be distinguishable. “This is an important decision, and it will have widespread application, but the context is narrow.”

Phillips, meanwhile, disputed my suggestion that nations with malleable legal systems could be able to take advantage of the 2nd Circuit decision. The appellate panel in the Vitamin C case, he said, was persuaded that the Chinese Ministry’s interpretation of the country’s regulations was backed by contemporaneous evidence. So the 2nd Circuit’s holding, Phillips said, is not necessarily that U.S. judges must accede to bald statements by foreign sovereigns but that deference is due to well-supported legal interpretations by foreign sovereigns.

He highlighted a footnote in Tuesday’s decision that anticipates my rogue sovereign concern: “To the extent there is no documentary evidence or reference of law proffered to support a foreign sovereign’s interpretation of its own laws, deference may be inappropriate,” the 2nd Circuit said. In fact, according to the panel, that scenario was in play in Karaha Bodas v. Pertamina, one of the 2nd Circuit rulings Judge Cogan relied upon when he declined to rely on China’s legal explanation in the Vitamin C case.

Redress for U.S. plaintiffs who believe they’ve been harmed by foreign defendants, Phillips said, should be through diplomacy or legislation, not litigation. He gave as an example a 1980s agreement between Britain and the U.S. that granted American law enforcement officials access to bank records in the Cayman Islands, after a case involving Cayman bank secrecy laws went to the U.S. Supreme Court. “The world is getting smaller and smaller,” Phillips said. “But there is no reason to deviate from the core principles we have in place.”

I left a message for the lead plaintiffs’ lawyer in the Vitamin C case, William Isaacson of Boies Schiller & Flexner, but he didn’t get back to me.

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