Harmoni Int'l Spice, Inc. v. Robert Hume ( 2019 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
HARMONI INTERNATIONAL SPICE, No. 17-55926
INC., a California corporation;
ZHENGZHOU HARMONI SPICE CO., D.C. No.
LTD., a corporation, 2:16-cv-00614-
Plaintiffs-Appellants, BRO-AS
v.
OPINION
ROBERT T. HUME; JOEY C.
MONTOYA; STANLEY CRAWFORD;
HUAMEI CONSULTING CO., INC., a
corporation,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Beverly Reid O’Connell, District Judge, Presiding
Argued and Submitted October 12, 2018
Pasadena, California
Filed January 23, 2019
2 HARMONI INT’L SPICE V. HUME
Before: Paul J. Watford and John B. Owens, Circuit
Judges, and Jennifer G. Zipps, * District Judge.
Opinion by Judge Watford
SUMMARY **
Racketeer Influenced and Corrupt Organizations Act
The panel reversed the district court’s dismissal of a
RICO suit for failure adequately to allege proximate cause.
Plaintiffs alleged that, through two unlawful schemes,
rival importers of garlic from China conspired to eliminate
or reduce the competitive advantage plaintiffs enjoyed
because plaintiffs did not have to pay anti-dumping duties.
In the first alleged scheme, Chinese competitors submitted
fraudulent documents to U.S. customs officials in order to
evade applicable anti-dumping duties and then sold garlic in
the United States at less than fair value. In the second
alleged scheme, Chinese competitors recruited domestic
garlic growers to file sham administrative review requests
with the U.S. Department of Commerce to determine
whether plaintiffs were being subjected to appropriate anti-
dumping duties.
*
The Honorable Jennifer G. Zipps, United States District Judge for
the District of Arizona, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
HARMONI INT’L SPICE V. HUME 3
To prevail on a RICO claim, a plaintiff must establish
proximate cause by showing a direct relation between the
injury asserted and the injurious conduct alleged. The panel
held that the plaintiffs did not adequately allege proximate
cause with respect to the first scheme because the
relationship between defendants’ alleged conduct and
plaintiffs’ alleged injury was too attenuated. As to the
second scheme, plaintiffs adequately alleged proximate
cause with respect to damages for expenses incurred in
responding to the Department of Commerce’s administrative
review. With respect to damages for lost sales and harm to
business reputation, the complaint did not adequately allege
proximate cause, but the district court should have granted
leave to amend. The district court also should have granted
leave to amend as to a defendant dismissed for failure to
allege predicate acts constituting a pattern of racketeering
activity. The panel remanded the case to the district court.
COUNSEL
George E. Mastoris (argued), Seth C. Farber, Jeffrey L.
Kessler, and Paul Victor, Winston & Strawn LLP, New
York, New York; John E. Schreiber, Winston & Strawn
LLP, Los Angeles, California; Jeff Wilkerson, Winston &
Strawn LLP, Charlotte, North Carolina; for Plaintiffs-
Appellants.
Anthony L. Lanza (argued) and Brodie H. Smith, Lanza &
Smith, Irvine, California, for Defendants-Appellees.
4 HARMONI INT’L SPICE V. HUME
OPINION
WATFORD, Circuit Judge:
The main issue in this appeal is whether the plaintiffs
adequately alleged proximate cause under the Racketeer
Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. §§ 1961–68. We conclude that the plaintiffs have
adequately alleged proximate cause with respect to one
category of damages, and that they should have been granted
leave to amend their complaint with respect to at least a
second category.
The plaintiffs are Harmoni International Spice, Inc., and
Zhengzhou Harmoni Spice Co.; for ease of reference we will
refer to them both as Harmoni. According to the complaint’s
allegations, which we accept as true at this stage of the
litigation, Harmoni produces fresh garlic in China and
imports it into the United States. Harmoni is the only
importer of Chinese garlic with a “zero-duty rate,” meaning
it does not have to pay the hefty anti-dumping duties
imposed on other importers of Chinese garlic. Harmoni
alleges that some of these importers, jealous of the
competitive advantage Harmoni enjoys, conspired to
eliminate or reduce that advantage through two separate
unlawful schemes.
The first scheme involved efforts by Harmoni’s Chinese
competitors to funnel imported garlic into the United States
by submitting fraudulent shipping documents to U.S.
customs officials in order to evade applicable anti-dumping
duties. The defendants then sold that garlic in the United
States at less than fair value, resulting in increased sales for
them and a corresponding decrease in Harmoni’s sales.
HARMONI INT’L SPICE V. HUME 5
The second scheme is a bit more elaborate. Under the
Tariff Act of 1930, domestic producers may in certain
circumstances request an administrative review to determine
whether a company like Harmoni is being subjected to
appropriate anti-dumping duties. 19 U.S.C. § 1673a(b)(1);
19 C.F.R. § 351.213(b)(1). When such a request is filed, the
Department of Commerce is generally required to
commence an administrative review. 19 U.S.C.
§§ 1673a(b)(1), 1675(a)(1). Harmoni alleges that some of
its Chinese competitors recruited two small domestic garlic
growers to file sham administrative review requests with the
Department of Commerce. According to the complaint, one
of the purposes of these sham requests was to force Harmoni
to incur significant expenses defending itself during the
course of the administrative review process. In addition,
Harmoni alleges that its competitors used the administrative
review process as a public forum for falsely accusing
Harmoni of illegal and unethical business practices, such as
using prison labor to produce its garlic. Harmoni asserts
that, as a direct result of these false accusations, it suffered
lost sales and harm to its business reputation.
Harmoni sued nearly two dozen individuals and
companies for their alleged participation in one or both of
the schemes described above. A number of the defendants
are domiciled in China and have not yet been served. The
defendants who have been served moved to dismiss
Harmoni’s complaint under Federal Rule of Civil Procedure
12(b)(6). Following extensive motions practice, the district
court granted the defendants’ motions in full, resulting in the
dismissal of Harmoni’s claims against those defendants with
prejudice. The court entered final judgment under Rule
54(b) so that Harmoni could take an immediate appeal.
6 HARMONI INT’L SPICE V. HUME
On appeal, Harmoni challenges only the dismissal of its
RICO claim as to four of the defendants: Robert Hume, Joey
Montoya, Stanley Crawford, and Huamei Consulting Co.,
Inc. The district court dismissed the RICO claim against
Hume, Montoya, and Crawford on the ground that Harmoni
had not adequately alleged proximate cause; the court
dismissed the claim against Huamei Consulting on the
ground that Harmoni had not adequately alleged its
involvement in a pattern of racketeering activity. The parties
devote the bulk of their attention to the court’s proximate
cause ruling, and we will do the same here.
The RICO statute provides a cause of action to any
person “injured in his business or property by reason of” a
violation of the statute. 18 U.S.C. § 1964(c). To prevail, a
plaintiff must prove that the defendant’s unlawful conduct
was not only a “but for” cause of his injury but also the
“proximate cause” of the injury, as that concept has been
understood at common law. Holmes v. Securities Investor
Protection Corp., 503 U.S. 258, 268 (1992). Proximate
cause requires “some direct relation between the injury
asserted and the injurious conduct alleged.” Id.Most of the district court’s proximate cause analysis
focused on the first of the two illegal schemes, involving the
funneling of imported garlic into the United States through
fraudulent means. We agree with the district court that
Harmoni’s proximate cause allegations are fatally deficient
with respect to this scheme. Harmoni seeks to recover
damages for its loss of market share, on the theory that the
defendants’ misrepresentations to customs officials allowed
them to evade anti-dumping duties and to sell their imported
garlic at less than fair value, which in turn led to an increase
in their sales and a corresponding decrease in Harmoni’s
sales. The relationship between the defendants’ unlawful
HARMONI INT’L SPICE V. HUME 7
conduct and Harmoni’s alleged injury is too attenuated to
support a finding of proximate cause for the same reasons
given in Anza v. Ideal Steel Supply Corp., 547 U.S. 451,
457–60 (2006). The district court properly dismissed
Harmoni’s RICO claim to the extent it is predicated on the
alleged funneling scheme.
The defendants involved in this appeal—Hume,
Montoya, Crawford, and Huamei Consulting—were
involved in the second scheme Harmoni has alleged, not the
funneling scheme. Crawford is one of the small domestic
garlic growers who allegedly filed a sham administrative
review request; Hume and Montoya are the lawyers who
represented Crawford in connection with that filing; and
Huamei Consulting acted as an intermediary between Hume
and Harmoni’s Chinese competitors. The district court did
not separately analyze whether the complaint adequately
alleges proximate cause with respect to this second scheme.
In our view, the failure to do so resulted in reversible error.
Harmoni seeks to recover damages that fall into three
categories: (1) expenses incurred in responding to the
Department of Commerce’s administrative review; (2) lost
sales; and (3) harm to its business reputation. The proximate
cause analysis is somewhat different as to each category, so
we will address each of them in turn.
Harmoni has adequately alleged proximate cause with
respect to the first category of damages. As to the expenses
it incurred during the administrative review process, there is
a “direct relation between the injury asserted and the
injurious conduct alleged.” Holmes, 503 U.S. at 268. The
injurious conduct at issue is the defendants’ predicate acts of
mail and wire fraud—i.e., the sham filings requesting an
administrative review of Harmoni’s zero-duty rate. Harmoni
alleges that the defendants knew their sham filings would
8 HARMONI INT’L SPICE V. HUME
trigger an administrative review because the Department of
Commerce is required by law to initiate such a review
whenever it receives a request from a party with standing.
As a result, this is not a case in which the Department of
Commerce acted independently to initiate an investigation,
which would perhaps have been an intervening act that broke
the causal chain. According to the complaint, the defendants
also knew that Harmoni would be forced to incur significant
expenses responding to the administrative review because
refusing to respond was not a viable option. Refusing to
respond to the Department of Commerce’s inquiries would
have resulted in the loss of Harmoni’s zero-duty rate, thereby
subjecting its imported garlic to the same prohibitively high
anti-dumping duties that Harmoni’s rivals must pay. These
allegations establish a direct causal link between the
defendants’ allegedly wrongful conduct (filing sham
requests for an administrative review) and the injury
Harmoni asserts (being forced to incur expenses responding
to the review triggered by the sham filings).
The defendants’ only rejoinder is to assert that the
Department of Commerce, rather than Harmoni, was the
direct victim of the alleged sham-filing scheme. The
defendants stress that the sham filings were sent to the
Department of Commerce, and that the Department was the
entity required to act on them by initiating an investigation.
The defendants assume there can be only one direct victim
entitled to recover damages under RICO, but that is not
always the case. Even if the Department of Commerce could
have asserted its own RICO claim to recover the costs it
incurred in conducting the administrative review, that would
not preclude Harmoni from recovering the costs it incurred
as a direct result of the defendants’ unlawful conduct.
HARMONI INT’L SPICE V. HUME 9
The three factors we typically assess when considering
whether proximate cause has been shown weigh in
Harmoni’s favor. See Mendoza v. Zirkle Fruit Co., 301 F.3d
1163, 1169 (9th Cir. 2002). First, no more direct victim of
the defendants’ sham-filing scheme is better positioned to
sue. The Department of Commerce may itself be a direct
victim, but it would be unlikely to vindicate the law by
bringing its own claim, and indeed it has not done so.
Second, no difficulty will arise ascertaining what portion of
the claimed damages is attributable to the defendants’
unlawful conduct. If Harmoni’s allegations are true, all of
the costs it incurred responding to the administrative review
are attributable to the defendants’ unlawful conduct, for
without the sham filings no administrative review would
have occurred at all. And finally, there is no risk of
duplicative recoveries because no other plaintiff could seek
to recover any of the costs Harmoni incurred responding to
the administrative review.
With respect to the second category of damages—lost
sales attributable to the defendants’ false accusations about
Harmoni’s business practices—Harmoni may be able to
allege proximate cause as well. The Supreme Court’s
decision in Bridge v. Phoenix Bond & Indemnity Co.,
553 U.S. 639 (2008), is instructive on this point. There the
Court confronted an alleged RICO scheme in which the
defendants committed acts of mail fraud by submitting false
certifications to a county government in connection with the
county’s sale at auction of valuable tax liens. As a direct
result of the false certifications, the defendants acquired tax
liens that the plaintiffs—rival bidders at the auctions—
would otherwise have acquired for themselves. Id. at 643–
45. The Court concluded that the plaintiffs had adequately
alleged proximate cause, even though the defendants made
the false statements to the county, and the county rather than
10 HARMONI INT’L SPICE V. HUME
the plaintiffs relied on those statements in awarding liens to
the winning bidders. Id. at 655–58. In explaining why a
plaintiff can be injured “by reason of” acts of mail fraud even
if the plaintiff did not rely on the defendant’s
misrepresentations, the Court offered the following
hypothetical:
[S]uppose an enterprise that wants to get rid
of rival businesses mails misrepresentations
about them to their customers and suppliers,
but not to the rivals themselves. If the rival
businesses lose money as a result of the
misrepresentations, it would certainly seem
that they were injured in their business “by
reason of” a pattern of mail fraud, even
though they never received, and therefore
never relied on, the fraudulent mailings.
Id. at 649–50.
That hypothetical describes Harmoni’s allegations in this
case, with one immaterial difference. Harmoni alleges that
the defendants committed mail and wire fraud by making
misrepresentations in public filings submitted to the
Department of Commerce, rather than sending those
communications directly to Harmoni’s customers. Nothing
turns on that fact, however, because Harmoni alleges both
that the defendants knew their public filings would be
reviewed by Harmoni’s customers, and that the defendants
made the false statements with the specific intent of harming
Harmoni’s business reputation in the eyes of its customers.
See Lexmark International, Inc. v. Static Control
Components, Inc., 134 S. Ct. 1377, 1393 (2014) (“When a
defendant harms a plaintiff’s reputation by casting
aspersions on its business, the plaintiff’s injury flows
HARMONI INT’L SPICE V. HUME 11
directly from the audience’s belief in the disparaging
statements.”). If Harmoni can prove that it lost sales as a
direct result of the defendants’ predicate acts of mail and
wire fraud, the proximate cause element of its RICO claim
will be satisfied. See, e.g., Restatement (Second) of Torts
§ 633 (1977).
This same reasoning could potentially apply to the third
category of damages—harm to Harmoni’s business
reputation—although that issue will need to be litigated on
remand. The parties dispute whether damage to business
reputation constitutes a compensable injury under RICO.
Harmoni argues that harm to business reputation constitutes
an injury to a “specific business or property interest” under
California law and is therefore covered by RICO. See Diaz
v. Gates, 420 F.3d 897, 900 (9th Cir. 2005) (en banc) (per
curiam). The defendants argue that RICO precludes
recovery for harm to intangible property interests and that
the reputation of a business constitutes such an interest. See
Oscar v. University Students Co-operative Association,
965 F.2d 783, 785–86 (9th Cir. 1992) (en banc). Because
the district court has not yet addressed this issue and the
parties have not adequately briefed it on appeal, we decline
to resolve it here. The issue remains open for the district
court to take up on remand. 1
Nevertheless, as it stands now, Harmoni’s complaint
does not plausibly allege proximate cause with respect to
damages for lost sales or harm to its business reputation
1
We also decline to address in the first instance the defendants’
argument that Harmoni has not alleged a “domestic injury” under RJR
Nabisco, Inc. v. European Community, 136 S. Ct. 2090, 2111 (2016).
The defendants did not raise that argument below and the district court
therefore had no opportunity to address it.
12 HARMONI INT’L SPICE V. HUME
(assuming such harm is compensable under RICO).
Harmoni’s complaint merely asserts the bare conclusion that
it suffered these damages as a result of the defendants’
predicate acts of mail and wire fraud. To survive a motion
to dismiss, Harmoni’s complaint must allege “factual
content that allows the court to draw the reasonable
inference” that its lost sales and reputational injury were the
direct result of the defendants’ wrongful conduct. Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009). Although the complaint
does not meet that standard now, Harmoni could
conceivably amend the complaint to cure this deficiency by
alleging, for example, the circumstances under which its
customers learned of the defendants’ false accusations and,
in reliance on that false information, canceled purchases they
were otherwise planning to make. Because the complaint
could potentially be saved by amendment, the district court
should have granted Harmoni leave to amend. See Eminence
Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir.
2003) (per curiam).
Harmoni argues that it also should have been granted
leave to amend its allegations against Huamei Consulting.
The district court dismissed the RICO claim against Huamei
Consulting for failure to allege at least two predicate acts
constituting a pattern of racketeering activity. Harmoni did
not receive notice of this deficiency until the court’s
dismissal order, and the order did not explain why
amendment would be futile. As a result, Harmoni should
have been granted leave to amend its allegations against
Huamei Consulting as well. See id. at 1053.
REVERSED and REMANDED.