Harmoni Int'l Spice, Inc. v. Hume

• Decision Date: 23 January 2019
• Docket Number: No. 17-55926,17-55926
• Citation: 914 F.3d 648
• Parties: HARMONI INTERNATIONAL SPICE, INC., a California Corporation; Zhengzhou Harmoni Spice Co., Ltd., a Corporation, Plaintiffs-Appellants, v. Robert T. HUME; Joey C. Montoya; Stanley Crawford; Huamei Consulting Co., Inc., a Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

914 F.3d 648

HARMONI INTERNATIONAL SPICE, INC., a California Corporation; Zhengzhou Harmoni Spice Co., Ltd., a Corporation, Plaintiffs-Appellants,

v.Robert T. HUME; Joey C. Montoya; Stanley Crawford; Huamei Consulting Co., Inc., a Corporation, Defendants-Appellees.

No. 17-55926

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 12, 2018 Pasadena, California

Filed January 23, 2019

George E. Mastoris (argued), Seth C. Farber, Jeffrey L. Kessler, and A. 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.

Before: Paul J. Watford and John B. Owens, Circuit Judges, and Jennifer G. Zipps,^* District Judge.

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.

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.

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, 112 S.Ct. 1311, 117 L.Ed.2d 532 (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 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, 126 S.Ct. 1991, 164 L.Ed.2d 720 (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, 112 S.Ct. 1311. 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 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...