584 F.Supp.2d 546 (E.D.N.Y. 2008), 06-mdl-1738, In re Vitamin C Antitrust Litigation

Docket Nº:06-mdl-1738 (DGT).
Citation:584 F.Supp.2d 546
Party Name:In re VITAMIN C ANTITRUST LITIGATION.
Case Date:November 06, 2008
Court:United States District Courts, 2nd Circuit, Eastern District of New York
 
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584 F.Supp.2d 546 (E.D.N.Y. 2008)

In re VITAMIN C ANTITRUST LITIGATION.

No. 06-mdl-1738 (DGT).

United States District Court, E.D. New York.

November 6, 2008

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Charles Edgar Tompkins, Besrat J. Gebrewold, Cohen, Milstein Hausfeld & Toll, Washington, DC, James Quadra, Sylvia Sokol, Moscone, Emblidge & Quadra, LLP, Daniel Mason, Joseph W. Bell, Zelle, Hofmann, Voelbel, Mason & Gette LLP, Ric B. Fastiff, Joseph R. Saveri, Lieff Cabraser Heimann & Bernstein LLP, Ian P. Otto, Glancy Binkow & Goldberg LLP, San Francisco, CA, Alanna Rutherford, Boies, Schiller & Flexner LLP, Rebecca Bedwell-Coll, Lieff, Cabraser, Heimann & Bernstein, LLP, New York, NY, Joseph G. Veenstra, Johns, Flaherty & Collins, S.C., La Crosse, WI, Patricia K. Oliver, Liner Yankelevitz Sunshine & Regenstreif LLP, Los Angeles, CA, Suyash Agrawal, Susman Godfrey LLP, Houston, TX, for In Re Vitamin C Antitrust Litigation.

MEMORANDUM AND ORDER

TRAGER, District Judge.

Plaintiffs in this case allege that defendants, Chinese corporations that manufacture and sell vitamin C,1 formed an illegal

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cartel to fix prices and limit supply for exports of vitamin C, including those to the United States. Plaintiffs bring this action under Section 1 of the Sherman Act and Sections 4 and 16 of the Clayton Act, 15 U.S.C. § § 4, 16. Defendants now move to dismiss, on the grounds that their price-fixing activities were compelled by the Chinese government.

Background

The following facts, which are drawn from the complaints,2 are assumed to be true for purposes of this motion to dismiss.

China began producing vitamin C in the late 1950s, and by 1969 its scientists had developed a two-stage fermentation process to manufacture vitamin C, resulting in a significant cost advantage compared to European producers. China began employing this technology commercially in the 1980s. Chinese vitamin C manufacturers were able to overcome an early reputation for poor product quality, and now supply a full range of vitamin C products at premium prices. Most sales of vitamin C are of bulk ascorbic acid.

In the early 1990s, European manufacturers F. Hoffmann LaRoche, Ltd., Merck KgaA, and BASF AG and the Japanese company Takeda Chemical Industries, Ltd. dominated the worldwide vitamin C market. From 1990 to 1995, these companies conspired to suppress competition and fix prices for vitamin C. They were sued in In re Vitamins Antitrust Litigation, MDL No. 1285, Misc. No. 99-0197 (D.D.C.) (Hon. Thomas F. Hogan). Competition from Chinese manufacturers of vitamin C undermined this early conspiracy during the 1990s, until it reportedly disbanded in late 1995.

During 1995, it was reported that thirteen Chinese manufacturers of vitamin C met and agreed to form their own cartel to limit production of vitamin C to stabilize prices. This attempt at market control reportedly failed. From the end of 1995, world vitamin C prices slumped and were cut in half by early 1996. By 1997, there were as many as 22 competitors in the Chinese vitamin C manufacturing market. Strong competition by Chinese competitors during this period allowed the Chinese to drive European manufacturers from the market. By the end of the 1990s, the reduction in vitamin C prices and other factors resulted in industry consolidation in China to four major manufacturers, all of which are defendants in this case-Hebei Welcome Pharmaceutical Co. Ltd. (“ Hebei Welcome" ), Jiangsu Jiangshan Pharmaceutical Co. Ltd. (“ Jiangsu Jiangshan" ), Northeast Pharmaceutical Group Co. Ltd. (“ NEPG" ) and Weisheng Pharmaceutical Co. Ltd. (“ Weisheng" ) (collectively, the “ defendant manufacturers" ).

The price of vitamin C remained relatively low in 2001, by which time Takeda had withdrawn from the market and sold its manufacturing capacity to BASF. Merck and Roche also announced their intention to withdraw from the vitamin C market. BASF announced that it would halt its new production line in Takeda, Japan. By 2001, defendants had captured approximately 60 percent of the worldwide market for vitamin C. Currently, defendants control 82 thousand metric tons, or approximately 68 percent, of the worldwide production capacity for vitamin C.

According to the complaints, beginning in December 2001, defendants and their co-conspirators formed a cartel to control

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prices and the volume of exports for vitamin C. At a meeting of the Western Medicine Department of the Association of Importers and Exporters of Medicines and Health Products of China (the “ Association" ) in December 2001, defendants and the Association reached an agreement for Chinese manufacturers of vitamin C in which they agreed to control export quantities and raise prices. The cartel members agreed to restrict their exports of vitamin C in order to create a shortage of supply in the international market. Specifically, the cartel members agreed to “ restrict quantity to safeguard prices, export in a balanced and orderly manner and adjust dynamically." The complaints further allege that the agreements of the cartel members were facilitated by the efforts of their trade association.

According to the complaints, the formation of the cartel in December 2001 led to price increases of vitamin C in the United States from approximately $2.50 per kilogram in December 2001 to as high as $7 per kilogram in December 2002. Defendant China Pharmaceutical reported in its 2003 annual report that average prices during 2002 rose from $3.20 per kilogram to $5.90 per kilogram, an 84 percent increase. China Pharmaceutical also allegedly reported that gross profit margins for its vitamin C production were 60.2 percent in 2002, an increase of 28.1 percent.

Plaintiffs allege that together, defendants' sales constitute approximately 60 percent of the worldwide vitamin C market and “ virtually 100 percent of the manufacturers who can produce vitamin C for a cost below $4.50 to $5 per kilogram." Plaintiffs acknowledge that non-cartel members BASF and DSM control 30 to 40 percent of the worldwide market for vitamin C, but note that the European manufacturers have higher manufacturing costs for vitamin C than Chinese manufacturers.

The complaints allege that following the collusive price increases in 2002, during 2003 the combination of the cartel's supply restrictions and increases in world demand for vitamin C-attributable in part to the outbreak of SARS in Spring and Summer of 2003-allowed the cartel to achieve prices as high as $15 per kilogram in April 2003. By the third quarter of 2003, however, cartel members began reducing prices to increase their sales. According to the complaints, despite the price cuts, prices remained substantially above competitive levels.

Plaintiffs allege that the Association called an “ emergency meeting" in late November or December 2003 to address the price cutting, which was attended by representatives of each of the defendants. At the meeting, the Association discussed with defendants how they would rationalize the market and limit the production of vitamin C to increase prices.

In December 2003, defendants and members of the Association also met at the annual China Exhibition of World Pharmaceutical Ingredients, where they devised plans to rationalize the market and limit production levels and increase prices. The Association warned defendants that it was impossible for any of them to monopolize the market to the detriment of the others. As a result of the meetings and other efforts by cartel members, prices for vitamin C in December 2003 increased from $4.20 per kilogram at the beginning of the month to over $9 per kilogram by the end of the month.

In June 2004, following some price declines, defendants agreed to shut down production for equipment maintenance in order to boost prices back toward their December 2003 highs. Defendants also agreed to restrict exports to the United States to further stabilize prices. Plaintiffs allege that defendants' anticompetitive activities are ongoing.

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Defendants move to dismiss on grounds of act of state, foreign sovereign compulsion and international comity. In addition, plaintiffs have filed a second amended complaint adding a direct purchaser plaintiff and two defendants. The two newly added defendants and, separately, the original defendants, move to dismiss the second amended complaint for failure to include any factual allegations regarding the newly added defendants or to explain how their addition affects the conspiracy alleged in the second amended complaint.

Discussion

(1)

Motion to dismiss under act of state, foreign sovereign compulsion and international comity doctrines

Defendants do not deny the allegations in the complaints for purposes of their motion to dismiss. Rather, they argue that their actions were compelled by the Chinese Ministry of Commerce (“ Ministry" ).3 They invoke the doctrines of act of state, foreign sovereign compulsion and international comity as defenses to suit. Each of these defenses rests on different doctrinal underpinnings, but they are all premised on an act by a foreign government.

The act of state doctrine derives from both separation of powers and respect for the sovereignty of other nations. It holds that the courts of one nation may not sit in judgment of the public acts of another sovereign within its own borders. See Republic of Austria v. Altmann, 541 U.S. 677, 700, 124 S.Ct. 2240, 159 L.Ed.2d 1 (2004). The reasons for the doctrine were outlined by the Supreme Court over a century ago:

Every sovereign state is bound to respect the independence of every other sovereign state and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory...

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