Court Reverses Dismissal Finding Adequate Proximate Causation Finding Complaint Can Be Saved by Amendment; Conflicting Case Law in Circuit Regarding Whether Damage to Business Reputation Provides Standing

Hamoni International Spice Inc. v. Hume, 2019 WL 286923, __ F.3d __ (9th Cir. 1/23/19)

The appeals court reversed and remanded the district court’s denial of a civil RICO claim finding the plaintiffs 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.
Harmoni (plaintiff) 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 involves the filing of sham requests 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.

On appeal, Harmoni challenge only the dismissal of its RICO claim as to four of the defendants: Robert Hume, Joey Montoya, Stanley Crawford, and Huamei Consulting Co., Inc. on the ground that Harmoni had not adequately alleged proximate cause.

To prevail on a civil RICO claim, 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, which requires “some direct relation between the injury asserted and the injurious conduct alleged.”

Regarding scheme one, there is no proximate cause because the relationship between the defendants’ unlawful conduct and Harmoni’s alleged injury is too attenuated to support a finding of proximate cause.

Regarding the second scheme Harmoni has alleged, Harmoni sought 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 Court held:

Regarding (1) 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.” 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 Court also analyzed three factors to assess when considering whether proximate cause has been shown weigh in Harmoni’s favor. See *3.

Regarding (2), lost sales attributable to the defendants’ false accusations about Harmoni’s business practices—Harmoni may be able to allege proximate cause as well, relying on Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 128 S.Ct. 2131, 170 L.Ed.2d 1012 (2008), explaining why a plaintiff can be injured “by reason of” acts of mail fraud. 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.

Standing: Regarding (3) -harm to Harmoni’s business reputation—that issue would 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.

Because the complaint could potentially be saved by amendment, the district court should have granted Harmoni leave to amend.

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