Jepson, Inc. v. Makita Corp.

• Decision Date: 13 September 1994
• Docket Number: No. 93-1606,93-1606
• Citation: 34 F.3d 1321
• Parties: RICO Bus.Disp.Guide 8645 JEPSON, INC. and Ko Shin Electric and Machinery Company, Ltd., Plaintiffs-Appellants, v. MAKITA CORPORATION (f/k/a Makita Electric Works, Ltd.), et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1321

34 F.3d 1321

RICO Bus.Disp.Guide 8645

JEPSON, INC. and Ko Shin Electric and Machinery Company, Ltd., Plaintiffs-Appellants, v. MAKITA CORPORATION (f/k/a Makita Electric Works, Ltd.), et

al., Defendants-Appellees.

No. 93-1606.

United States Court of Appeals,

Seventh Circuit.

Argued Feb. 17, 1994.

Decided Sept. 13, 1994.

Jeffrey A. Orr, Frederick J. Sujat, Richard J. Burke, Larry Klayman, Paul J. Orfanedes (argued), Klayman & Associates, Washington, DC, for plaintiffs-appellants.

James K. Gardner, Phil C. Neal, Peter B. Newton, Ralph T. Russell, Bradley C. Twedt, Neal, Gerber & Eisenberg, Chicago, IL, William A. Zeitler (argued), Douglas J. Colton, Verner, Liipfert, Bernhard, McPherson & Hand, Washington, DC, Terry Ross, Catherine J. Pratt, Jodi Cohen, Claire P. McGreal, Keesal, Young & Logan, Long Beach, CA, for defendants-appellees.

Before CUMMINGS, KANNE, and ROVNER, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

Ko Shin Electric and Machinery Co. ("Ko Shin") and Jepson, Inc. ("Jepson") sued Makita Corporation, Makita USA, Inc., and Makita Corporation of America for alleged violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1961 et seq. ("RICO"). ¹ The district court dismissed the plaintiffs' amended complaint, concluding that it failed to state a RICO claim. We affirm.

I. BACKGROUND

We assume the following facts, which we have culled from the amended complaint, to be true. Hammes v. AAMCO Transmissions Inc., 33 F.3d 774, 777-778 (7th Cir.1994); Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 775 (7th Cir.1994). Ko Shin is a Taiwanese manufacturer of power tools, and Jepson is its distributor in the United States. Makita Corporation (formerly Makita Electric Works, Ltd.) and its wholly-owned subsidiary, Makita Corporation of America, also manufacture power tools in Japan and the United States, respectively. Makita USA, Inc. distributes Makita products throughout the United States. We shall refer to the Makita defendants collectively as "Makita."

On April 1, 1988, Makita filed a complaint with the U.S. International Trade Commission ("ITC") alleging that Jepson and some thirty other firms had engaged in a variety of unfair trade practices in connection with the importation and marketing of power tools and accessories manufactured in Taiwan. These practices allegedly included trademark infringement, false representation, false advertising, and passing off. On August 9, 1988, pursuant to Makita's complaint, the ITC commenced an investigation into possible violations of section 337 of the Tariff Act of 1930 in the importation or sale of power tools and accessories manufactured in Taiwan.

Prior to and during the ITC's ensuing investigation, Makita contacted existing and prospective customers of Jepson, apprised them of the ITC complaint, described Jepson's products as low quality copies that infringed Makita's trademarks, and predicted that the ITC would order Jepson products removed from their shelves. Makita was also responsible for the following stories appearing in the press:

^* In April 1988, the trade journal Metalworking News ran an article about Makita's complaint stating: "Covered in the Makita complaint were specific descriptions of about a dozen power tools ... and battery cartridges and chargers..... Most of the products are being manufactured in Makita's Buford, Ga. plant, with componentry sourced mainly in the U.S....." (The article attributed this information to William Zeitler, a Bell, Boyd & Lloyd attorney representing Makita in the ITC proceeding.) The Administrative Law Judge presiding over Makita's complaint subsequently found that only three of the fifteen Makita products at issue in the proceeding were manufactured in the United States.

^* In May 1988, an article entitled "Makita Petitions to Halt Import of Taiwanese Lookalikes" appeared in another trade journal, National Home Center News. The article attributed statements to Makita's counsel identifying Jepson and Ko Shin as two of the companies that Makita was attempting to prevent from importing lookalike products into the United States. It also featured a photograph of a sign displayed by Makita at the 1988 National Hardware Show in Chicago that warned customers: "BEWARE OF IMITATIONS! Make sure you are purchasing and promoting genuine Makita Power Tools, not low quality copies!"

^* In July 1988, a second article appeared in the National Home Center News quoting Makita's General Counsel, Gerald Margolis, as stating that the ITC's decision to accept Makita's complaint "means Makita Corp. of America would be judged a U.S. industry and entitled to protection" from lookalike imports.

^* Margolis amplified on that sentiment in a letter to the editor published in the September 1988 edition of National Home Center News:

In its meeting on Aug. 9, 1988, the U.S. International Trade Commission unanimously voted to institute an investigation in response to Makita's complaint against the manufacturers, importers and distributors of the offending Taiwanese tools. This vote means that the ITC has recognized that Makita U.S.A. and Makita Corp. of America are U.S. industries entitled to protection by the U.S. government, even though their parent company is in Japan.

Makita is confident that the ITC investigation will prove that its allegations are correct, and the U.S. government will prohibit the offending products from entering the country.

^* In the February 1989 edition of Wood Magazine, Patrick Griffin, Makita's Vice President of Marketing, was quoted as claiming: "Our national sales force began spotting rip-offs of Makita Products at trade shows and in retail outlets and advertising.... The Taiwanese tools are poor-quality copies, and the public is being duped into believing otherwise."

Makita's predictions that it would prevail in the ITC proceeding proved overly optimistic. In a final decision rendered on July 31, 1989, the ITC found that Jepson had committed no violation of section 337. The Commission likewise found in favor of all but one of the other firms that Makita had cited in its complaint. Makita appealed the ITC's decision to the Federal Circuit, but that court affirmed in a decision rendered May 1, 1990.

Despite its loss before the ITC, Makita displayed the following sign at the National Hardware Show in Chicago in August 1989:

BEWARE!

Be sure you are buying

and promoting genuine

Makita power tools!

Copies of Makita Tools are

under investigation by the

International Trade Commission

To the extent the sign suggested that the ITC was still investigating Makita's competitors (and might find in Makita's favor), of course, it was misleading.

According to plaintiffs, all of these acts were part of a calculated campaign dating back to 1986 by Makita and other Japanese power tool manufacturers to drive their Taiwanese competitors out of the market. Purportedly as a consequence of Makita's conduct, Jepson and Ko Shin lost substantial sales from 1986 through 1990 and suffered an erosion of their market position, customer base, and potential for growth. Jepson and Ko Shin claim damages of $10 million, which they seek to be trebled to $30 million under RICO. 18 U.S.C. Sec. 1964(c).

II. RICO CLAIMS

In their amended complaint, ² the plaintiffs charge Makita with five separate violations of RICO, including the use of income derived from racketeering activity in the operation of a racketeering enterprise, 18 U.S.C. Sec. 1962(a), conducting the affairs of a racketeering enterprise through racketeering activity, Sec. 1962(c), and conspiring to commit these acts, Sec. 1962(d). Each of the RICO claims rests on the same predicate acts of racketeering, in this case purported acts of mail and wire fraud. See Sec. 1961(1); 18 U.S.C. Secs. 1341, 1343.

In essence, Jepson and Ko Shin contend that Makita set about to damage Jepson's reputation and thus reduce its sales by disparaging the plaintiff's products (and those of other Taiwanese manufacturers) in the eyes of their U.S. customers. This Makita allegedly did principally by two means: fostering stories in the trade press that were adverse to Jepson and Ko Shin and contacting current and potential customers to discourage them from purchasing Jepson products. ³ These acts were, in turn, allegedly accomplished through a series of mail and wire communications that conveyed purported misrepresentations about the nature, quality, and characteristics of Jepson's products, about the potential consequences of buying Jepson products in light of the pending ITC investigation, and about the origin of Makita's own products.

III. PROCEEDINGS BELOW

Makita moved to dismiss the amended complaint, contending that Jepson and Ko Shin had failed to adequately allege violations of RICO. The motion was referred to Magistrate Judge Edward A. Bobrick, who agreed with the defendants that the RICO claims were inadequate and, in a well thought out report, recommended dismissal of the amended complaint with prejudice. The district judge later adopted the report and recommendation in full. Although the district court found the RICO claims defective for multiple reasons, we focus on its rationale with respect to the predicate acts of mail and wire fraud.

Looking first at the purported acts of wire fraud, the court found that many had not been pleaded with the particularity required by Fed.R.Civ.P. 9(b). For example, Jepson and Ko Shin alleged that there were various telephone conversations with and facsimile transmissions to trade magazines and Jepson customers in furtherance of the purported scheme to defraud. Yet:

[P]laintiffs' broad allegations of how the communications furthered the defendants' alleged scheme fail to provide any indication of who made the communications or when they took place; what plaintiffs do in their allegations of who made the communications is simply to "lump" all the defendants together, in violation of Rule 9(b)....