In May, after seven years of litigation in Brooklyn federal district court, Chinese vitamin C manufacturer Aland (Jiangsu) Nutraceutical Co. Ltd. agreed to pay $10.5 million to settle civil antitrust claims. The proposed settlement, which at press time was still subject to approval from a federal district judge, is notable more for its novelty than its size: This marks the first time that a Chinese company has agreed to pay to dispose of civil charges in a U.S. antitrust cartel case. What’s more, in the first price-fixing settlement with a company from mainland China, the U.S. Department of Justice is notably absent. The enforcement effort that brought Aland to the settlement table was headed up entirely by the private antitrust bar, a fact that baffles some of the veteran attorneys who have been pursuing the case.
The case dates back to 2005, when plaintiffs co–lead counsel at Hausfeld LLP; Boies, Schiller & Flexner; and Susman Godfrey filed multiple suits on behalf of direct purchasers of vitamin C accusing Aland and three other Chinese companies of colluding to fix prices in the market. Those suits were consolidated in multidistrict litigation with cases brought by indirect purchaser plaintiffs who are represented in the case by Gustafson Gluek, Straus & Boies, and Saveri & Saveri.
Michael Hausfeld of Hausfeld LLP says that he’s “shocked” that the government hasn’t brought its own criminal charges, given the exhibits in the record of the civil case—many of which were publicly available on the Web site of the Chinese trade association that the vitamin C manufacturers belonged to. (The companies were “able to reach a self-regulated agreement successfully, whereby they would voluntarily control the quantity and pace of exports, to achieve the goal of stabilization while raising export prices,” says one Web page that was translated and submitted to the court.)
The Chinese companies, moreover, have yet to directly fight the plaintiffs’ price-fixing allegations, opting instead to base their defense on a simple assertion: Chinese regulations forced us do it. Hausfeld’s cocounsel, William Isaacson of Boies Schiller, says, “We prosecute companies from all of our major allies. Why would [the government] give China a walk?” (A spokesperson for the antitrust division declined to comment.)
The vitamin C litigation came on the heels of a massive government and private effort in the late 1990s to bust up cartels of Swiss, German, Canadian, and Japanese companies that manufactured a variety of vitamins. The initial round of vitamin litigation, often regarded as a high point in antitrust enforcement for Justice, netted more than $875 million in criminal fines. The Justice Department labeled the vitamin cartel “the most pervasive and harmful criminal antitrust conspiracy ever uncovered by the [antitrust] division.”
The international vitamin C cartel was the first of those initial price-fixing conspiracies to fail, in part because competitors from China grew to dominate the market. By 2001, Chinese firms produced more that 60 percent of the world’s supply of vitamin C. The plaintiffs in the case against the Chinese companies allege that as those companies grew to take over the market, they set production limits and price floors that artificially raised prices to U.S. consumers. John Connor, a professor emeritus of agricultural economics at Purdue University who has tracked cartel cases since the early 1990s, says the vitamin C case marked a turning point for the Chinese companies that have traditionally shied away from such tactics. “Chinese firms have been the friends of American consumers for a long time, and it’s distressing to see this potential reversal of the role,” he says.
Plaintiffs in the vitamin C case crossed a major hurdle last September, when Judge Brian Cogan rejected the companies’ summary judgment argument that Chinese regulations forced them to act as a cartel. Aland is represented by Orrick, Herrington & Sutcliffe in the litigation. The remaining defendants, Hebei Welcome Pharmaceutical Co., Northeast Pharmaceutical Group, and Weisheng Pharmaceutical Co., are represented by Baker & McKenzie; Greenberg Traurig; and Zelle, Hofmann, Voelbel & Mason, respectively. (Defense counsel either declined to comment or did not respond to our calls.) In an unprecedented move, the Chinese Ministry of Commerce appeared in the case as an amicus, and its lawyers at Sidley Austin argued that the manufacturers were compelled to follow a “government mandated price and output control regime.” Although Cogan found that the ministry did “encourage” the cartel, he wrote that it did “not establish that Chinese law ‘required’ defendants to follow their anticompetitive predilections.”
Even though the plaintiffs have reached their first settlement, James Southwick of Susman Godfrey, another co–lead counsel for the direct purchasers, says he’s less surprised than his colleagues that the government has remained on the sidelines in the case, given the limited resources of the antitrust division. “The antitrust laws recognize there’s a limit to the government’s ability to do it all,” Southwick says. Since the beginning of the vitamin C case, the division has actively pursued more lucrative price-fixing cases against foreign manufacturers in the dynamic random access memory (DRAM) and flat-panel LCD industries. According to the Justice Department, DRAM prosecutions have resulted in more than $700 million in criminal fines against companies in Germany, South Korea, and Japan, and the LCD cases have netted nearly $900 million in fines against companies from South Korea, Taiwan, and Japan as of this March.
Professor Connor is also less alarmed by the government’s absence than Isaacson and Hausfeld. He says that federal prosecutors tend to target companies with significant U.S. assets in price-fixing cases, and none of the Chinese defendants fit that description. According to Connor, only about half of all antitrust cases that end in a settlement involve government action. For example, in the initial vitamin cartel prosecutions, the U.S. government only filed criminal charges against the manufacturers of eight of the 16 vitamins where some sort of settlement was reached. (The others involved foreign government enforcement actions abroad or private litigants pursuing civil cases in the United States and Canada.) Another possible deterrent for the Justice Department, he adds, is that federal prosecutors face the extra burden of having to prove a criminal case beyond a reasonable doubt rather than the lower civil standard of a preponderance of the evidence that private lawyers face.
Hausfeld, for his part, has one other possible explanation for the government’s inaction: “One of the explanations might be that the government felt that Bill’s firm, my firm, and Jim’s firm could adequately deal with this issue,” he says. “Other than that, you have to ask the government.”