Ninth Circuit Affirms Dismissal of Civil RICO Lawsuit Ruling that Shareholders are not Permitted to pursue RICO actions for Derivative Injuries

Uthe Technology Corp. v. Aetrium, 2018 WL 3215143 (9th Cir., July 2, 2018)

The Court affirmed an order granting summary judgment in favor of the Defendants in a civil action brought under “RICO.” Appellant Uthe Technology Corporation (“Uthe”) is a manufacturer of semiconductor products. Uthe conducted business in Asia through its wholly-owned subsidiary, Uthe Technology (Singapore) Pte Ltd. (“Uthe Singapore”). Uthe alleges that, in 1992, several employees, officers, and directors of Uthe Singapore, along with others—including Defendants-Appellees Aetrium, Inc. (“Aetrium”) and Harry Allen—(collectively, “the Conspirators”) conspired to steal Uthe Singapore’s business by diverting Uthe Singapore’s customers and orders to a newly created company, withholding payments, and taking other actions that harmed the business of Uthe Singapore. Ultimately, these alleged actions caused Uthe to sell Uthe Singapore to some of the Conspirators at a reduced price.

In 2012, arbitration in Singapore concluded that the Conspirators were liable to Uthe for the approximately $9 million difference between the sale price for Uthe Singapore and what Uthe Singapore would have been worth but for the Conspirators’ actions. After the arbitration award, Uthe sought to reopen the case against Aetrium and Allen. Uthe filed a Second Amended Complaint (the “SAC”) in 2012 alleging, among other claims, a treble damages claim under the civil RICO statute. The district court granted Defendants’ motion for summary judgment, finding that Uthe had been fully compensated by the Singapore arbitration award and was barred from seeking treble RICO damages by the “one satisfaction rule.” Uthe appealed and we reversed, holding that Uthe was entitled to pursue treble damages under RICO, provided that any award was offset by the amount of the Singapore arbitration award. Uthe Tech. Corp. v. Aetrium, Inc., 808 F.3d 755, 762 (9th Cir. 2015).

On remand, the case was stayed pending publication of the Supreme Court’s opinion in RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, 136 S.Ct. 2090, 195 L.Ed.2d 476 (2016), which concerned the extraterritorial application of civil RICO claims. After the Supreme Court issued its opinion, Defendants filed yet another summary judgment motion, arguing that Uthe’s remaining injury was not a “domestic injury” within the meaning of RJR Nabisco and, alternatively, that Uthe’s alleged injuries were derivative injuries that could not be redressed through a RICO action.

Derivative Injuries

The court discussed that a derivative injury occurs “[w]here all of a corporation’s stockholders are harmed … solely because they are stockholders,” i.e., the injury to the shareholders is indirect and is “derivative” of the injury to the corporation because the shareholders have been injured “solely because” of their shareholder status. In the RICO context, the court has held that a plaintiff may not use the civil RICO statute to recover for derivative injuries because the plaintiff has no standing to assert a claim for injuries inflicted on a different legal entity (in the case of a shareholder, the corporation in which he owns shares) that affect him only indirectly.

The court affirmed the district court’s order agreeing that Uthe’s remaining alleged injuries are derivative of its stake in Uthe Singapore. Thus, in short, Uthe’s theory below was based on a derivative injury, namely that the Conspirators stole Uthe Singapore’s customers and thus harmed Uthe Singapore’s business, thereby reducing the value of Uthe Singapore’s stock, and harming Uthe itself when Uthe sold its shares.

The court distinguished its holding from those cases which stand for the proposition that, at times, courts may allow a former shareholder to pursue a claim for a derivative injury as part of a direct action in order to avoid a situation in which the former shareholder is left without a remedy, but Uthe’s claim was a derivative injury and thus its argument failed to distinguish its claim from those barred by our precedent.

Accordingly, the Court concluded that because Uthe’s injury is a derivative injury, the district court correctly granted summary judgment on Uthe’s RICO claim.

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