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LEXSEE 941 F.Supp. 528
IN RE AMERICAN HONDA MOTOR CO., INC. DEALERSHIPS RELATIONS
LITIGATION
Civil No. MDL-95-1069
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND
941 F. Supp. 528; 1996 U.S. Dist. LEXIS 14090; 1997-1 Trade Cas. (CCH) P71,806
August 30, 1996, Decided
August 30, 1996, filed
SUBSEQUENT HISTORY:
As Corrected.
DISPOSITION:
[**1] Defendants' motions to dismiss granted in part
and denied in part; and Plaintiffs granted leave to amend
their complaints.
CORE TERMS: dealer, bribery, dealership, bribes,
bribe-paying, conspiracy, mail fraud, manufacturer,
horizontal, predicate, boycott, racketeering, financial
loss, concrete, misallocated, entity, pled, motion to
dismiss, competitor, causation, anticompetitive,
fraudulent, antitrust, coercion, per se rule, Sherman Act,
out-of-pocket, participated, speculative, conspired
COUNSEL:
LIAISON COUNSEL:
Richard B. McNamara, Esq., WIGGIN & NOURIE,
Manchester, NH.
William A. Kershaw, Esq., KRONICK, MOSKOVITZ,
TIEDEMANN & GERARD, Sacramento, CA.
Robert B. Green, Esq., Baltimore, MD.
James Ulwick, Esq., KRAMON & GRAHAM,
Baltimore, MD.
JUDGES:
J. Frederick Motz, United States District Judge
OPINIONBY:
J. Frederick Motz
OPINION:
[*534] OPINION
The plaintiffs in this multidistrict litigation case are
current and former Honda dealers seeking recovery for
losses suffered as the result of fraudulent schemes
involving the sale and distribution of Honda and Acura
automobiles during the 1980's and early 1990's. The four
core defendant groups are: (1) American Honda Motor
Co., Inc. and Honda North America, Inc., the domestic
companies responsible for the distribution of Honda and
Acura automobiles to dealers; n1 (2) Honda Motor
Company, Ltd., a Japanese company and the corporate
parent of the domestic Honda entities ("Honda Japan")
n2; (3) a number of current and former Honda dealers,
including Richard Brooks, Dah Chong Hong Ltd. and
affiliated entities, [**2] Peter Epsteen, Joseph Hendrick,
Henry Khachaturian and Mid-Peninsula Motors, the
estate of Martin Lustgarten, Cliff Peck, John Rosati, and
WESH, Inc.; and (4) Lyon & Lyon, American Honda's
law firm. Four "representative" complaints have been
filed.
n1 Although the complaints generally allege
that Honda North America owned American
Honda and coordinated North American
distribution of Honda automobiles, there is a
perplexing lack of discussion from either
plaintiffs or defendants as to the specific role of
Honda North America in this case. My opinion
therefore focuses on the claims against American
Honda and Honda Motor Company, Ltd.
n2 Because of the distinctly different issues
presented by American Honda Motor Company,
Inc. and Honda Motor Company, Ltd. and the
possibility of confusion of names, I will for ease
of identification refer to Honda Ltd. as "Honda
Japan" throughout this opinion.
The Borman complaint is the central complaint in
this case. It has been individually brought by a handful of
dealers, [**3] including Borman Motor, a New Mexico
dealer. It also seeks relief on behalf of a broad class of
plaintiff dealers, although plaintiffs have not yet sought
class certification. Borman asserts claims against all of
the defendants, including American Honda, Honda
Japan, a number of dealers, a number of current and
former Honda executives, and Lyon & Lyon. The
complaint alleges a number of illegal acts involving these
defendants, including:
. that Honda wrongfully misallocated cars on the basis of
bribes paid by dealers (the "misallocation scheme")
[*535]
. that Honda pressured dealers to participate in sales
training seminars offered by a vendor that paid kickbacks
to Honda executives (the "sales training scheme")
. that Honda pressured dealers to participate in group
advertising activities provided by an advertising firm that
paid kickbacks to Honda executives (the "dealer ad group
scheme")
. that Honda awarded "Letters of Intent" for new
dealerships on the basis of bribes and kickbacks
. that Honda executives, prompted by attorneys at Lyon
& Lyon, committed perjury, tampered with witnesses and
otherwise obstructed criminal investigations of Honda
that took place [**4] in the early 1990's
. that Honda falsified tax records to cover up the bribery
activities of executives
Borman asserts a total of 19 counts. Of these, ten are
federal claims:
Counts 1-4: RICO . . 1962(a)-(d) against "all
defendants"
Counts 5-6: RICO . . 1962(c), (d) against Lyon & Lyon
Count 7: Dealers Day in Court Act against the Honda
entities
Count 8: Robinson-Patman . 13(c) against "all
defendants"
Count 9: Sherman Act . 1 against "all defendants"
Count 10: Sherman Act . 2 against the Honda entities n3
The remaining claims are for common law fraud,
negligence, breach of contract, tortious interference and
conspiracy.
n3 Plaintiffs since have voluntarily dismissed
this count. See infra section IV.
Breakaway is a complaint filed by a South Carolina
dealer, Breakaway Honda. Unlike Borman, this
complaint names only two sets of defendants: (1)
individuals and entities affiliated with Joseph "Rick"
Hendrick, a South Carolina [**5] dealer (Hendrick); and
(2) the Honda defendants. Breakaway otherwise mirrors
Borman. Like Borman, this complaint brings claims
against Honda for violations of RICO; the Dealers Day in
Court Act; the Robinson-Patman Act; and the Sherman
Act. In addition, Breakaway brings claims specifically
against Hendrick under RICO sections 1962(a)-(d).
Breakaway also asserts nine South Carolina law counts,
including common law fraud, negligence, breach of
contract, estoppel and violations of the state Unfair Trade
Practices and Manufacturers, Distributorships and
Dealers Acts.
Austin Motors is a complaint brought individually
by Austin Motors, Inc., a New York dealer. The
complaint is similar to Breakaway in that it names both
the Honda defendants and a competing New York/New
Jersey dealer, Dah Chong Hong Trading Corp. Unlike
Breakaway, however, Austin Motors also names Lyon &
Lyon and a number of Honda executives. Austin Motors
also offers some additional factual allegations about
specific ways that cars were misallocated in the New
York/New Jersey area. Like the other complaints,
however, Austin Motors asserts claims for violations of
RICO; the Dealers [**6] Day in Court Act; the
Robinson-Patman Act; and the Sherman Act. The
complaint also states seven common law counts, one
count for violation of New York's Franchised Motor
Vehicle Act and one count for unfair business practices
under California law.
Trans-Oceanic is a complaint brought individually
by Trans-Oceanic Motors, a Connecticut dealer doing
business as "Cardinal Honda." This complaint names
only the three Honda entities. It refers to the broad
nationwide bribery activities discussed in the other
complaints, but Trans-Oceanic focuses on Honda's role
in placing a competing dealership fifteen miles from
Cardinal's location. The complaint states only three
federal claims: violations of RICO sections 1962(a) and
(c), and of section 13(c) of the Robinson-Patman Act.
These claims are identical to those against Honda in the
Borman complaint. Trans-Oceanic also brings four
Connecticut law claims.
Currently at issue are fourteen motions to dismiss. In
keeping with my directive that the parties focus their
energies on the "heartland" issues in this complex case,
these motions seek dismissal only of the various federal
counts - including those arising under RICO, the
Sherman [**7] Act, the Robinson-Patman [*536] Act
and the Dealers Day in Court Act. Hearings were held on
May 3, 1996 and May 17, 1996.
I have divided this opinion into five parts. The first
addresses several general issues related to matters of
pleading form and procedure. The second considers
defendants' argument that plaintiffs lack standing to bring
their federal claims. The third discusses the RICO claims
against the various defendants, as well as the question of
plaintiffs' claims against Honda Japan. The fourth
addresses the antitrust claims. The fifth considers claims
brought under the Dealers' Day in Court Act.
I.
A. General Form of Pleading
I begin by addressing two problems of form that are
present throughout the representative complaints.
Defendants argue that the Borman and Breakaway
complaints have impermissibly pled that "Defendant
Honda" - "consisting of Defendant Honda Ltd., Honda
North America, and American Honda" - is a "person"
that can be liable under RICO or the antitrust laws. See.
e.g., Borman Compl. at PP 231, 253, 267, 282;
Breakaway Compl. at PP 225, 249, 264, 280. Defendants
argue that the three corporate Honda defendants cannot
be aggregated [**8] as a single "person" with shared
RICO liability.
The Borman and Breakaway plaintiffs essentially
concede this point. Case law also supports defendants'
position. See United States v. Bonanno Org. Crime
Family of La Cosa Nostra, 879 F.2d 20, 27-28 (2d Cir.
1989). In any event, plaintiffs later state that they intend
this allegation only as a shorthand way of stating that
each of the three Honda defendants is a RICO "person"
individually, something that defendants do not dispute.
This shorthand approach is inappropriate. Plaintiffs
accordingly should amend their complaints to delineate
the specific allegations against each of the named Honda
entities, with particular attention to distinguishing the
nature of plaintiffs' claims against Honda America from
those against Honda Japan.
The dealer defendants note a second, related
problem. The Borman complaint, which is the broadest
complaint in this action, contains a number of claims
which, according to their titles, purport to state claims
against "all defendants." These claims in Borman,
however, are substantively addressed only to the Honda
defendants. For example, the paragraphs of Borman's
section 1962(c) count, [**9] see Borman Compl. at PP
281-90, are devoid of any allegation against any non-
Honda defendant. This count cannot be construed as
implicitly stating claims against the dealer defendants;
every sentence of each paragraph specifically makes
claims about the conduct of "defendant Honda," not "all
defendants." I therefore dismiss these counts as to the
non-Honda defendants as a matter of basic pleading
specificity. Plaintiffs remain free to amend their
complaints, however, to delineate specific RICO claims
against the dealer defendants. n4
n4 For example, as I discuss below, the
Breakaway complaint has pled a valid section
1962(c) count against one of the dealer
defendants.
B. Choice of Circuit Law
A pending issue throughout the early stages of this
multidistrict case has been the question of which circuit's
law I should apply. Appendix A to American Honda's
memorandum in support of its motion to dismiss
summarizes the relevant issues and concludes that the
proper solution "is for the court to decide [**10] each
issue truly independently, using as the single overarching
guideline the court's best prediction of what the Supreme
Court would do with a given issue, bringing to bear
decisions from various circuits on that question." Id. at 3-
4. As I have indicated previously during the course of
hearings and conferences, this would be my general
preference, and my analysis below relies on a broad
range of case law from different circuits. However,
should an issue in this case arise in which I must
expressly decide whether to follow either the Fourth
Circuit or the well-reasoned view of another circuit, I
will follow the Fourth Circuit. As a conceptual matter,
this is the appropriate approach according to the
presumption that federal [*537] law is unitary. See
generally In re Korean Air Lines Disaster, 265 U.S. App.
D.C. 39, 829 F.2d 1171, 1175 (D.C. Dir. 1987)
(Ginsberg, J.), aff'd sub nom. on other grounds, Chan v.
Korean Air Lines, Ltd., 490 U.S. 122, 104 L. Ed. 2d 113,
109 S. Ct. 1676 (1989). As a practical matter, moreover,
given that the Fourth Circuit retains appellate jurisdiction
over my rulings, that court is perhaps better suited to hear
an argument that a controlling Fourth [**11] Circuit rule
is wrongly decided.
C. Statute of Limitations
Defendants argue that the statute of limitations under
both RICO and the antitrust laws limits plaintiffs to
damages incurred within four years of the filing their
respective complaints, citing the Fourth Circuit's "injury
discovery" rule. Plaintiffs responded in part at oral
argument on May 17, 1996, but because the bulk of
defendants' written argument was contained only in the
Schuiling defendants' reply memorandum, the issue has
not been extensively briefed.
I need not reach the limitations question at the
present time. Although limitations may play a significant
role later in this case, it is not dispositive of any claim at
this point. Also, as plaintiffs argue, any decision on
limitations grounds in this case will be fact-intensive, and
the record as it currently exists simply is insufficient.
Finally, the circuits are currently divided over the
appropriate limitations rule, an issue of considerable
potential importance in this case. See, e.g., Pocahontas
Supreme Coal Co. v. Bethlehem Steel, 828 F.2d 211,
218-20 (4th Cir. 1987) (injury rule); Caproni v.
Prudential Secs., Inc., 15 F.3d 614, 619-20 [**12] (6th
Cir. 1994) (injury and pattern discovery rule); Keystone
Ins. Co. v. Houghton, 863 F.2d 1125, 1126 (3rd Cir.
1988) (last predicate act rule). It is prudent for me to
await any further developments in the law while this
litigation in pending.
I briefly note, however, that if I ultimately apply the
Fourth Circuit rule, and if in fact some plaintiffs knew or
should have known of their injuries dating back to the
mid-1980's, they will have to demonstrate the exercise of
due diligence in attempting to discover the basis of their
claims, and that defendants took affirmative steps to
conceal the schemes. If plaintiffs have a good faith belief
in such facts, it would be advisable for them to so replead
in their amended complaints.
D. Primary Jurisdiction
Finally, defendants preemptively urge me to remand
consideration of all issues related to California
dealerships to the California Motor Vehicle Board.
Primary jurisdiction is a discretionary doctrine, however,
and I decline to carve issues and parties out of a case that
has been consolidated on a nationwide basis for the
express purpose of ensuring uniform resolution.
II.
I next move to the most overarching argument
[**13] made by all of the various defendants in support
of the present motions to dismiss. Defendants assert that
plaintiffs have failed to allege sufficient injury to have
standing under the RICO and antitrust statutes. n5
Defendants' position is that the RICO claims are
fundamentally flawed because each relies on a
hypothetical "what should have happened" point of
comparison as the basis for the various injuries allegedly
caused by the bribery scheme. For example, the claim of
injury common to all four representative complaints is
that plaintiff dealers lost profits because bribe-paying
dealers received unfair allotments of cars. Defendants
argue that, because such a claim of injury necessarily
assumes that a given plaintiff dealer would have received
some other ascertainable allocation of cars absent the
corrupt conduct, the inherent uncertainties involved in
Honda's allocation process n6 and the multiplicity of
[*538] possible legitimate outcomes makes such a
theory of injury too speculative to convey standing on
plaintiffs.
n5 American Honda's memorandum in
support of its motion to dismiss makes this
argument, with which all other defendants join.
Also, both defendants and plaintiffs agree that
standing analysis for both RICO and antitrust
claims, at least with respect to injury in fact and
proximate causation, is the same. See Holmes v.
Securities Investor Protection Corp., 503 U.S.
258, 267-68, 117 L. Ed. 2d 532, 112 S. Ct. 1311
(1992). I will therefore treat them the same, and
my analysis below applies equally to the RICO
and antitrust claims currently at issue. [**14]
n6 The parties agree that Honda's standard
dealership agreement provided for an "85/15"
allocation system: 85% of a dealer's monthly
allocation was based on that dealer's "travel rate,"
a rating based on the number of cars sold during
previous months, and 15% was allocated on a
discretionary basis by the Honda zone manager.
This 15% discretionary allocation was to be based
on commercially reasonable factors; for example,
a zone manager may decide to allocate extra
"discretionary" cars to a new dealership in order
to spur initial sales.
Plaintiffs claim that bribe-taking zone
managers initially misallocated cars out of the
discretionary allocation. Plaintiffs also allege,
however, that the 85% "travel rate" component of
the allocation formula multiplied the effect of the
initial "discretionary" misallocations. In other
words, each misallocated car sold by a bribe-
paying dealer increased that dealer's travel rate,
entitling that dealer to a greater unfair share of
cars in subsequent months.
Plaintiffs respond that they have adequately pled
injury and that any difficulties in proof, quantification,
[**15] or allocation of damages are matters for later
stages of this litigation. Plaintiffs' underlying position is
that because it is undisputed that bribe-paying dealers
received more cars than they should have, non-bribe-
paying dealers necessarily received fewer cars than they
should have. Plaintiffs argue that the logical
inescapability of this reasoning means that they have
been injured by the bribery scheme, even if it is not
currently known, for example, how many more cars any
given plaintiff dealer should have received.
RICO's civil damages provision, 18 U.S.C. .
1964(c), countenances suits by any person "injured in his
business or property by reason of a violation of section
1962." This language requires a plaintiff to make two
showings: "(1) that he has suffered injury to his business
or property; and (2) that this injury was caused by the
predicate acts of racketeering activity that make up the
violation of . 1962." Brandenburg v. Seidel, 859 F.2d
1179, 1187 (4th Cir. 1988); see also Mid Atlantic
Telecom, Inc. v. Long Distance Servs., Inc., 18 F.3d 260,
263 (4th Cir.), cert. denied, 130 L. Ed. 2d 283, 115 S. Ct.
323 (1994). These injury and causation [**16] elements
are aspects of standing that must be established as a
threshold matter by a civil RICO plaintiff. See Sedima,
S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-97, 87 L. Ed. 2d
346, 105 S. Ct. 3275 (1985).
Defendants challenge plaintiffs' standing in terms of
both the injury and the causation requirements. Although
the four representative complaints articulate several
different theories of injury, they agree on one basic
claim: that plaintiff dealers were deprived of profits when
bribe-paying dealers unjustly received extra cars. n7 I
accordingly focus on this claim in my analysis below. I
conclude that plaintiffs have satisfied the injury and
causation requirements. The complexity of quantifying
any given plaintiff dealer's loss will be of central concern
later in this litigation, but plaintiffs have alleged injury to
their businesses caused by the bribery scheme. That is
enough to survive defendants' motion to dismiss for lack
of standing.
n7 All four of the representative complaints
allege injury in the form of lost profits caused by
improper misallocation of cars. This "allocation
injury" is Borman's sole claim of injury;
moreover, the Borman complaint alleges only the
loss of direct profits that would have obtained
from the sale of each misallocated car. Borman
thus articulates the most basic claim of injury.
The other complaints contain additional
descriptions of related losses, such as lost profits
that would have obtained from aftermarket
activities associated with the sale of a new car.
In addition, Austin, Breakaway and Trans-
Oceanic - each of which are actions brought by
individual plaintiff dealers - also allege lost
profits caused by the bribe-influenced placement
of a competing dealer within a plaintiff dealer's
market. Breakaway additionally claims that the
improper placement of a competing dealer caused
the value of plaintiff's dealership to decline.
Finally, the complaints allege several
categories of out-of-pocket costs. Breakaway
claims injury for the costs it incurred to prepare
its bid for a "rigged" dealership award process;
defendants concede that this claim satisfies the
injury requirement. Borman also refers generally
to out-of-pocket costs in each of its injury
paragraphs, but is not more specific; these costs
may refer to fees paid by plaintiff dealers to
participate in the fraudulent advertising and sales
training schemes that plaintiffs allege were part of
the pattern of racketeering activity.
[**17]
A. Injury
Dismissal for lack of injury is appropriate where the
claimed injury is not cognizable as a legal matter, not
where the claimed injury is not easily susceptible to
proof. Whether plaintiffs' claims of "allocation [*539]
injury" are legally cognizable involves two distinct
issues. First, as in any federal case, plaintiffs must satisfy
the familiar "injury-in-fact" standard required by Article
III. Second, section 1964(c) expressly conditions
standing on "injury to business or property." Different
circuits accordingly have fashioned rules allowing
standing only, for example, to plaintiffs complaining of
commercial harm or "concrete financial loss." E.g., Town
of West Hartford v. Operation Rescue, 915 F.2d 92, 103-
04 (2d Cir. 1990) (holding that "business or property"
refers only to "commercial interests or enterprises");
Oscar v. University Students Co-op. Ass'n, 965 F.2d 783,
785 (9th Cir.) (requiring "concrete financial loss, and not
mere injury to a valuable intangible property interest"),
cert. denied, 506 U.S. 1020, 121 L. Ed. 2d 581, 113 S. Ct.
655 (1992).
Other than the statutory requirement that a plaintiff's
injury must be in the nature of harm [**18] to business
or property, however, RICO imposes no "heightened"
standing threshold. In Sedima, the Supreme Court held
that the statute's plain language requires only that the
plaintiff "has been injured in his business or property by
the conduct constituting the violation." 473 U.S. at 496.
"The statute requires no more than this." Id. at 497.
Sedima thereby foreclosed an attempt by several circuits
to limit the scope of RICO by granting standing only to
plaintiffs alleging a "racketeering injury" distinct from
any harm caused by predicate acts themselves. Id.; see
also Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1100
(2d Cir. 1988) (noting that section 1964(c) "contains no
special limitation on standing"), cert. denied, 490 U.S.
1007, 104 L. Ed. 2d 158, 109 S. Ct. 1642 (1989). Courts
have not hesitated, however, to dismiss RICO claims for
lack of standing where plaintiffs have failed to allege a
sufficiently palpable injury to business or property.
1. "Concrete Financial Loss"
Addressing RICO's statutory language first,
defendants do not directly argue that plaintiffs have
failed to allege injury to "business or property" as a
qualitative matter. Instead, [**19] defendants argue that
plaintiffs have failed to allege "concrete financial loss,"
the RICO injury requirement expressly imposed in the
Ninth Circuit. See Oscar, 965 F.2d at 785. Defendants
assert that "concrete financial loss" refers only to out-of-
pocket losses and cannot encompass plaintiffs' claims for
lost profits. See Am. Honda's Mot. to Dismiss at 26
("None of the plaintiffs ... assert that any identifiable
piece of property, sum of money, expenditure, identified
contract or out-of-pocket expense moved from their side
of a ledger to a defendant's.").
I do not find this argument convincing. Defendants
for the most part selectively rely on passages from cases
that, based on particular factual settings, discuss out-of-
pocket costs as a tangible contrast to more amorphous
theories of injury. n8 Moreover, in Oscar itself the
plaintiff claimed "decreased value of her apartment" and
"personal discomfort and annoyance" caused by the
conduct of an alleged drug-dealing conspiracy; the Ninth
Circuit held that these claims failed to satisfy the
"concrete financial loss" requirement because they at
most were to a "valuable intangible property interest" and
were more in the [**20] nature of personal injuries. The
allegations of injury in this case are obviously
distinguishable.
n8 For example, defendants emphasize that
Fleischhauer v. Feltner, 879 F.2d 1290, 1300-01
(6th Cir. 1989), cert. denied, 493 U.S. 1074, 107
L. Ed. 2d 1029, 110 S. Ct. 1122 (1990), a case
cited with approval by Oscar, limited RICO
recovery to "money paid out" as a result of
racketeering activity. Fleischhauer, however,
merely held that plaintiffs could recover only
their direct investment in a fraudulent scheme and
were not entitled to expectancy damages or lost
tax benefits. Similarly, in Steele v. Hospital Corp.
of Am., 36 F.3d 69 (9th Cir. 1994), the Ninth
Circuit found that plaintiffs had failed to allege a
"concrete financial loss" from an alleged
overbilling conspiracy that had caused their
medical insurance company to pay out too much
in claims; plaintiffs theorized that this had caused
them injury because their benefits were depleted
as a result of the scheme. The court noted,
however, that this was unduly speculative
because plaintiffs had not actually paid out any of
their own funds. Defendants, however, attempt to
rely on a passage from this discussion stating that
no "concrete financial loss" occurred "if the
patients have paid none of the allegedly excessive
charges out of their own pockets." Id. at 70-71.
[**21] [*540]
Based on these cases, I therefore do not interpret the
"concrete financial loss" requirement - even were I to
apply the Ninth Circuit rule in this case - as a per se rule
that confers standing only to plaintiffs alleging out-of-
pocket loss of funds. Instead, it restricts standing to
plaintiffs alleging that they have suffered a specific,
tangible financial injury. See Imagineering, Inc. v. Kiewit
Pacific Co., 976 F.2d 1303, 1310 (9th Cir. 1992) ("The
facts alleged do not establish 'proof of concrete financial
loss,' let alone show that money was paid out...."), cert.
denied, 507 U.S. 1004, 123 L. Ed. 2d 266, 113 S. Ct.
1644 (1993). n9 Here, plaintiffs have alleged a tangible
business loss: they claim that they should have received
more cars than they did, cars that would have been
immediately sold for a profit.
n9 I construe this statement as indicating that
"money paid out" is simply the most tangible
form of financial loss, not that it is the only
cognizable form of loss. I note, however, that
another court has interpreted this statement as a
"suggestion ... that the Ninth Circuit, to recognize
a cognizable RICO injury, might even require
proof that plaintiff actually paid money out as a
result of racketeering activity." Sheperd v.
American Honda Motor Co., Inc., 822 F. Supp.
625, 628 (N.D. Cal. 1993) (citing Imagineering,
976 F.2d at 1310). To the extent the "concrete
financial loss" rule would in fact require such a
showing, I would decline to follow it. Although
the RICO "injury to business or property"
requirement clearly gives courts some discretion
to adopt restrictive rules of standing, an "out-of-
pocket" rule goes beyond any plausible meaning.
Such a rule would, for example, deny standing to
a plaintiff alleging that racketeers demanded
property (Honda automobiles, for example)
instead of money as part of a protection racket.
Indeed, plaintiffs in this case effectively allege
that cars were "stolen" from them and given to
bribe-paying dealers.
[**22]
Defendants' "concrete financial loss" argument,
however, also has a second dimension. Although there is
no question that plaintiffs have alleged "financial loss,"
defendants also argue that plaintiffs' injuries are
insufficiently "concrete." For example, in the "concrete
financial loss" section of their argument they cite to First
Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763,
768 (2d Cir. 1994), cert. denied, 130 L. Ed. 2d 632, 115
S. Ct. 728 (1995), where the Second Circuit held that
plaintiffs claiming that they had been fraudulently
induced into issuing loans had not alleged injury because
none of the loans had actually gone into default.
Defendants quote from this opinion that "as a general
rule, a cause of action does not accrue under RICO until
the amount of damages becomes clear and definite." First
Nationwide is not a "concrete financial loss" case as that
rule is used in the Ninth Circuit, however, and the thrust
of the court's holding was that the plaintiffs had not
alleged "injury in fact," not that they had not alleged a
tangible financial loss. Indeed, defendants' core argument
is that, because of the uncertain nature of Honda's
allocation system, plaintiffs [**23] cannot claim any
"clear and definite" loss. This is an argument that
plaintiffs' claims are too speculative. I now consider this
second aspect of injury - whether plaintiffs have alleged
sufficiently real harm.
2. Injury in Fact
Injuries that are speculative or prospective in nature
are insufficient to confer standing. This fundamental
principle of federal court jurisdiction has been widely
applied in RICO cases. Defendants argue that plaintiffs'
alleged allocation injuries are too speculative in two
respects: (1) they rely on assumptions about past
consumer behavior, economic conditions and other
factors, and (2) they assume an unascertainable
"entitlement" to certain allocations of cars. The first
argument fails under established case law. I also find that
the second argument does not merit dismissal.
Defendants first posit that "in the Ninth Circuit
(whose analysis has not been disavowed or questioned by
any other decision of which defendants are aware), when
this kind of future profits comprise the sole claimed
injury, a RICO claim cannot proceed." Am. Honda's
Mot. to Dismiss at 26. They also cite cases holding that a
mere "lost opportunity" is not a sufficient injury to
[**24] confer standing under RICO. E.g. In re Taxable
Mun. Bond Litig., 51 F.3d 518, 522-23 (5th Cir. 1995)
(lost opportunity to obtain a low-interest loan too
speculative to constitute injury). Defendants attempt to
characterize plaintiffs' claims of injury as alleging a "lost
opportunity" to obtain "future profits" on misallocated
cars.
Plaintiffs, of course, do not allege that they have lost
the opportunity to obtain future [*541] profits; they
allege that they have lost past profits on cars they should
have received. Although not all circuits have expressly so
held, the clear trend is that lost profits are remediable in
RICO, notwithstanding the fact that any lost profits
calculation inherently involves some assumptions about
what would have happened in the past. E.g., Id. at 523
(noting as illustrative example that defendant had failed
to allege lost profits, and therefore had not pled injury);
Advanced Bus. Sys., Inc. v. Philips Information Sys. Co.,
750 F. Supp. 774, 778 (E.D. La. 1990) ("'injury to
business or property' ... can include lost profits, subject to
proof of such proximately caused damages"); see also
Mid Atlantic Telecom, 18 F.3d at 261 (allowing standing
[**25] based on alleged losses of revenues and
customers); Mylan Labs., Inc. v. Akzo, N.V., 770 F. Supp.
1053, 1084 (D. Md. 1991) (same). n10 Claims for lost
profits of course are subject to proof of causation and
amount, although in this case such concerns are perhaps
less troublesome as a pleading matter because plaintiffs
have claimed that during the time period at issue the
demand for Honda cars was so high that all dealers could
immediately sell any received cars.
n10 Mid Atlantic Telecom and Mylan Labs.
were decided on proximate causation grounds,
but they demonstrate that courts in the Fourth
Circuit have considered and allowed claims of
injury based on lost profits.
The crucial premise of plaintiffs' lost profits claim,
however, is the notion that they "should have received"
different allocations of cars than they in fact did receive.
This is defendants' second, and more compelling, basis
for arguing that plaintiffs have failed to allege injury in
fact. The parties rely on different lines of cases [**26] to
attack or support the cognizability of this theory of
injury. I conclude that neither side has presented directly
controlling case law, but that plaintiffs' claims should not
be dismissed because at least some sets of facts would
sustain their claims.
Defendants cite cases holding that speculative
injuries are not cognizable in RICO. For example, they
rely on In re Taxable Mun. Bond, 51 F.3d at 518, in
which the plaintiffs claimed that a fraudulent scheme
deprived them of the opportunity to apply for low-
interest subsidized loans and thereby forced them to
obtain higher-cost financing. As discussed, a mere "lost
opportunity" is not cognizable because it is speculative.
The court noted, however, that the very fact that the
plaintiffs in that case qualified for alternative (albeit
higher-cost) financing disqualified them under the terms
of the subsidized loan plan. Their claim of injury
therefore failed as a matter of internal inconsistency. In
this case, defendants have not offered any argument that
some overriding factor - e.g., a contractual term, or a
Honda corporate policy - in all cases would have
precluded all of the plaintiff dealers from receiving any
allocation [**27] of cars greater than they in fact
received. Instead, defendants attempt to cast the relevant
inquiry differently: they argue that dismissal is
appropriate because plaintiffs cannot assert some specific
entitlement to a greater allocation than they in fact
received.
Plaintiffs respond by relying on a number of cases
allowing standing to recover for injuries of an inherently
uncertain nature, such as lost profits. For example,
plaintiffs rely heavily on Mid Atlantic Telecom, 18 F.3d
260, where the Fourth Circuit upheld a phone company's
claim for lost profits. In Mid-Atlantic, it was alleged that
the defendant, a long distance telephone service provider,
had defrauded its customers by randomly adding minutes
to billed calls. The plaintiff, a competing company,
claimed that this fraud had allowed the defendant to
advertise low rates, forcing the plaintiff to cut its rates as
well, costing it profits. The Fourth Circuit held that this
pleading represented sufficient injury to confer RICO
standing and to allow discovery to proceed, despite the
inherently uncertain nature of the claim.
I recognize that this case is different. In addition to
the generally uncertain nature of a claim [**28] for lost
profits, depending as it does on assumptions about past
consumer behavior or economic conditions, here
plaintiffs' very entitlement to the cars is itself uncertain.
Defendants therefore distinguish each of the cases relied
on by plaintiffs on the following ground: each of those
cases involved [*542] a situation where, although the
amount of the claimed damages may have been
somewhat speculative because of the need to reconstruct
past events, it could be said with very high probability
that the plaintiff was the only party who was entitled to
recover. n11 In other words, in the two-competitor cases
on which plaintiffs rely, misappropriation by one party
can be reasonably equated to injury to the other. This
case, defendants argue, is not nearly as simple because
any given plaintiff dealer must show that it - and not any
other bribe-paying dealer nor any other plaintiff dealer -
should have received any given misallocated car.
n11 For example, in Mid Atlantic Telecom
the plaintiff alleged that some of its existing
customers had been lured away. Similarly, in
Bieter Co. v. Blomquist, 987 F.2d 1319 (8th Cir.),
cert. denied, 510 U.S. 823, 126 L. Ed. 2d 50, 114
S. Ct. 81 (1993), the court found a cognizable
injury in a developer's claim that it had lost a
project to a competitor because of bribes paid to
local officials; in that case, however, only two
developers had bid on the project - the plaintiff
and the allegedly corrupt developer. Finally, in
Cox v. Administrator United States Steel &
Carnegie, 17 F.3d 1386, modified on other
grounds, 30 F.3d 1347 (11th Cir. 1994), the court
found a cognizable injury in union members'
claims that union negotiators had made
concessions in exchange for bribes. Again, in that
case, there was no doubt that the conceded
advantages would have been retained by the
union members absent the alleged misconduct.
[**29]
As a matter of ultimate liability, defendants may be
correct. It is certainly arguable that plaintiffs cannot
recover by simply claiming that bribe-paying dealers as a
group received more cars than they should have, and that
plaintiff dealers as a group therefore received fewer cars
than they should have. Instead, each dealer plaintiff may
have to establish some reasonably certain entitlement to
cars that were misallocated. n12 This may prove to be a
daunting issue of proof for plaintiffs.
n12 Comparing the Borman complaint with
the Trans-Oceanic complaint illustrates the issues
plaintiffs face. In Trans-Oceanic, a dealer in
Rhode Island (Cardinal Honda) alleges that
Honda officials received bribes in exchange for
allowing the creation of a competing dealership in
Westerly, Rhode Island, just 15 miles from
Cardinal's location. Paragraphs 86, 88 and 89 of
Cardinal's complaint allege:
Once the Westerly dealership opened in
September, 1993, Honda favored the Westerly
dealership over Cardinal by allocating more cars
and more saleable cars to the Westerly
dealership....
The Westerly, Rhode Island Dealership
competed directly with Cardinal. The Westerly,
Rhode Island dealership sold cars and serviced
cars that otherwise would have been sold and
serviced by Cardinal had Westerly not conspired
with Honda in the bribery scheme.
The Westerly dealership opened in late
September, 1993. According to financial
statements, ... from January 1, 1993 to September
30, 1993, Cardinal sold 444 new Honda cars, 206
used cars, and turned a $ 369,230 profit. In the
nine months from October 1, 1993 until June 30,
1994, after the Westerly, Rhode Island dealership
opened, Cardinal sold 374 new cars, 179 used
cars, and earned a profit of $ 203,516.
Taken at face value, this allegation raises a
relatively strong inference that cars that were
misallocated to Westerly would otherwise have
gone to Cardinal.
On the other hand, the Borman class alleges
that each dealer plaintiff was individually injured
by the misallocation of cars to bribe-paying
dealers. As illustrated by the Trans-Oceanic
complaint, a showing of injury may be supported
by proof that a given plaintiff dealer was in the
same "zone of allocation" as a bribe-paying
dealer and that there is some reasonable basis for
identifying how may cars were misallocated. In
"one plaintiff dealer/one bribe-paying dealer"
settings, as is apparently the case with Cardinal,
this may be relatively simple. Such a showing
will be more difficult, however, where there are
multiple plaintiff dealers for every bribe-paying
dealer, or where there are multiple bribe-paying
dealers.
[**30]
At the present time, however, the issue does not
merit dismissal of plaintiffs' claims. In National Org. for
Women, Inc. v. Scheidler, 510 U.S. 249, 114 S. Ct. 798,
127 L. Ed. 2d 99 (1994) (hereinafter NOW), the Supreme
Court reviewed the principles governing a motion to
dismiss a RICO claim for lack of standing:
We have held that "at the pleading stage, general
factual allegations of injury resulting from the
defendant's conduct may suffice, for on a motion to
dismiss we presume that general allegations embrace
those specific facts that are necessary to support the
claim."...[Petitioners'] complaint must be sustained if
relief could be granted "under any set of facts that could
be proved consistent with the allegations."
Id. at 256 (quoting Lujan v. Defenders of Wildlife, 504
U.S. 555, 112 S. Ct. 2130, 2137, 119 L. Ed. 2d 351
(1992) and Hishon v. King & Spalding, 467 U.S. 69, 73,
81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984)). The NOW
Court accordingly rejected [*543] the argument that a
RICO claim brought by two health clinics should be
dismissed for lack of standing. "[Petitioners] alleged in
their complaint that the respondents conspired to use
force [**31] to induce clinic staff and patients to stop
working and obtain medical services elsewhere.
Petitioners claimed that this conspiracy 'has injured the
business and/or property interests of the [petitioners].'...
Nothing more is needed to confer standing ... at the
pleading stage." 510 U.S. at 256 (citations omitted).
Defendants' argument that plaintiffs have failed to
allege injury is summarized by a single sentence from
American Honda's moving papers: "To determine the
fact of injury, it is necessary to compare some single,
actual history with an invented model of a past which
never occurred." Am. Honda's Mot. to Dismiss at 20. At
the pleading stage, however, plaintiffs are not required
"to determine the fact of injury." To survive a motion to
dismiss, there need only be one set of facts consistent
with plaintiffs' allegations that would entitle them to
relief. Even if defendants are correct that plaintiffs will
have some difficulty establishing to which dealer certain
cars should have gone, it is clear that some sets of facts
could support plaintiffs' claims.
B. Causation
In Holmes, the Supreme Court held that section
1964(c)'s grant of standing to persons injured "by [**32]
reason of' a RICO violation "require[s] a showing that
the defendant's violation not only was a 'but for' cause of
his injury, but was the proximate cause as well." 503 U.S.
at 268. Holmes explains that "we use 'proximate cause' to
label generically the judicial tools used to limit a person's
responsibility for the consequences of that person's own
acts." Id. Thus, traditional tort law principles of
proximate causation apply to RICO cases.
The Fourth Circuit's decision in Brandenburg v.
Seidel, 859 F.2d at 1179, remains the leading case
describing proximate causation under RICO. As recently
reiterated by the Fourth Circuit:
In Brandenburg it was recognized that 'the legal cause
determination is properly one for the court, taking into
consideration such factors as the foreseeability of the
particular injury, the intervention of other independent
causes, and the factual directness of the causal
connection.'.... In conducting the traditional common-law
proximate cause analysis...courts should focus on the
temporal and circumstantial relationship between the
defendant's conduct and the injury suffered by the
plaintiff, and the foreseeability that intervening [**33]
events would cause injury to the plaintiff.
Mid Atlantic Telecom, 18 F.3d at 263 (citations
omitted). In addition, the "proximate" cause of an injury
need not be the sole cause. "Instead, a factor is a
proximate cause if it is a 'substantial factor in the
sequence of responsible causation.'" Cox, 17 F.3d at
1399 (quoting Hecht v. Commerce Clearing House, Inc.,
897 F.2d 21, 23-24 (2d Cir. 1990)).
Defendants argue that plaintiffs cannot even show
causation in fact, much less proximate causation. This
assertion essentially restates their above-discussed
argument that plaintiffs have not pled injury. Because no
plaintiff dealer can establish a specific entitlement to a
certain allocation of cars, defendants claim, no plaintiff
can show that any bribes received by Honda caused harm
to any specific plaintiff. Defendants attempt to support
this contention in three ways.
First, defendants argue that because no plaintiff
dealer was the intended victim of any of the predicate
acts alleged in the complaints, plaintiffs cannot show that
their claimed injuries were caused by those acts.
Defendants emphasize that any harm caused to plaintiff
dealers was an unintentional [**34] and indirect result of
the bribery scheme. Defendants therefore argue that no
plaintiff dealer can claim to have been "defrauded" or
otherwise directly duped out of property or money. n13
[*544] In response, plaintiffs point out that this position
has been flatly refuted by the Fourth Circuit:
"Brandenburg also explained that proximate causation
requires a nexus between the proscribed acts and the
injuries. We did not, however, intend to establish a rule
that only injuries suffered by the immediate victim of a
predicate act satisfied the 'by reason of requirement of .
1964(c)." Mid Atlantic Telecom, 18 F.3d at 263. Mid
Atlantic's analysis, moreover, is entirely consistent with
Holmes' holding that proximate cause is all that must be
established to sustain a RICO claim. n14
n13 This position is part of a broader theme
that defendants revisit periodically: that American
Honda and its corporate parent, not the plaintiff
dealers, are the direct victims in this case. Earlier
criminal mail fraud indictments have alleged that
bribe-taking Honda executives had defrauded
Honda of its "intangible right of honest services."
See 18 U.S.C. . 1346. Thus, Honda argues that
"while mail fraud and wire fraud certainly
occurred, as is clear from the guilty pleas and
convictions of the former American Honda
employees, the victim of those acts was American
Honda." Am. Honda's Mot. to Dismiss at 30.
[**35]
n14 Plaintiffs also argue that they have in
fact alleged certain kinds of direct and intended
harm; Borman, for example, alleges harm in the
out-of-pocket costs it paid to participate in the
advertising and sales training schemes.
Second, defendants recite the Holmes' Court's
discussion of the three considerations that justify a
proximate causation requirement as an element of RICO
standing: (1) "the less direct an injury is, the more
difficult it becomes to ascertain the amount of a
plaintiff's damages attributable to the violation;" (2)
"recognizing claims of the indirectly injured would force
courts to adopt complicated rules apportioning damages
among plaintiffs removed at different levels of injury
from the violative acts;" and (3) there is no need to
grapple with problems (1) and (2) because "directly
injured victims can generally be counted on to vindicate
the law." 503 U.S. at 269. Defendants attempt to
characterize these factors as the Holmes "test of
causation." They then argue that causation is not present
here because (1) it will be difficult to ascertain the
amount of [**36] plaintiffs' damages; (2) it will be
difficult to apportion damages among the plaintiffs; and
(3) the criminal prosecutions have already "vindicated
the law" in this case.
Plaintiffs correctly respond, however, that the
Holmes' factors are not themselves a "three part test" of
causation. Rather, Holmes' causation "test" is that the
alleged RICO violation must be a proximate cause of the
claimed injury (as opposed to a mere cause-in-fact, a less
exacting showing not literally precluded by the statute).
The three factors are but the reasons behind the rule, and
defendants' argument attempts to turn Holmes' holding
on its head. If plaintiffs have alleged a sufficiently direct
injury resulting from the bribery scheme, they have
satisfied the proximate causation requirement, difficulties
of quantification and allocation notwithstanding.
Third and finally, defendants place heavy reliance on
Sheperd v. American Honda Motor Co., Inc., 822 F.
Supp. 625 (N.D. Cal. 1993), a case in which a district
court dismissed a related RICO complaint against Honda
for lack of standing. Sheperd was a RICO action brought
by the owners of a Honda dealership alleging that their
business [**37] had been injured by a "turn and earn"
scheme involving dealers and Honda executives. n15 The
Sheperd plaintiffs' claim of injury was that, because they
refused to participate in the scheme, their dealership
received less desirable allocations of cars and fewer
allocations overall. To this extent, Sheperd is analogous
to this case, n16 and defendants therefore argue that
Sheperd's dismissal warrants dismissal here.
n15 The "turn and earn" scheme allegedly
sought to inflate the number of reported sales by
U.S. Honda dealers in order for American Honda
to receive higher allocations of cars from Honda's
corporate headquarters in Japan. Dealers who
inflated their reported sales received better
allocations of cars from American Honda.
n16 That is, rather than seeking the inflated
sales reports sought in Sheperd, the allegations
here are that corrupt Honda executives sought
direct bribes of money and property.
As plaintiffs point out, however, Sheperd is different
from this case in one crucial respect. [**38] The
plaintiffs in that case alleged injury in "the diversion of
popular makes, models, and colors of cars to other
dealerships, as well as lower allocations of cars, which
impeded their ability to compete effectively and resulted
in the sale of their dealership at a distressed price." 822
F. Supp. at 630 (emphasis added). The Sheperd court
concluded that although there was little doubt that the
plaintiffs suffered some harm from the scheme, "a
multitude of imaginable factors may have contributed to
the diminished profitability of the Sheperds' dealership
[*545] and its diminished market value." Id. Here, the
plaintiffs' claims of "allocation injury" are not based on
the downstream results of the bribery scheme. n17
Instead, the plaintiffs' core allegations stop at the claim
that the scheme caused the misallocation of cars and that
these diversions amounted to the direct denial of profits
to plaintiff dealers.
n17 I note, however, that some of the
subsidiary claims of injury asserted in the
Breakaway, Austin and Trans-Oceanic
complaints do offer such downstream theories.
For example, Breakaway claims that unfair
allocations of cars and the unfair placement of a
dealership in close proximity to plaintiffs'
dealership caused the value of the Breakaway
dealership to decline.
These complaints also seem to allege injury
in the very existence of adjacent dealerships that
were granted in exchange for bribes. In other
words, beyond claiming that a corruptly granted
dealership received unfairly high allocations of
cars that plaintiff dealers would otherwise have
received, these complaints claim injuries for lost
market share, pirated sales and other "competitive
injuries."
Finally, the Breakaway complaint also
alleges injury in that it was denied the right to
open a new dealership that was instead awarded
to a bribe-paying dealer; plaintiff Breakaway
alleges that it participated in a purportedly
competitive application process that was in fact
rigged from the start. Defendant does concede
that Breakaway's out-of-pocket costs spent
preparing its application are cognizable injuries.
However, absent some fixed contractual
entitlement to the new dealership, Breakaway's
claim that it would have received the dealership
absent the bribes would seem to be rather
speculative.
[**39]
I therefore conclude that plaintiffs' allegations of
allocation injury satisfy the proximate causation element
required for RICO standing. Assuming plaintiffs'
allegations of injury to be true, they have pled an obvious
causal connection between their lost profits and the
predicate acts constituting the bribery scheme. That
plaintiff dealers would be deprived of profits is the direct
and foreseeable result of the alleged scheme to give and
receive bribes in exchange for higher allocations of cars.
See Mylan Labs., 770 F. Supp. at 1084 ("The bribes
given and received were allegedly received for the
purpose of advancing the bribing company's [interests] at
the expense of other companies .... Thus, the injury
caused those other companies ... is a foreseeable
recognizable result of the predicate actions."). Even if
other factors played a role in the allocation of cars, there
is no doubt that plaintiffs have alleged that the bribery
scheme played a "substantial role" in causing the
allocation injuries they claim.
III.
I next consider the various defendants' motions to
dismiss plaintiffs' RICO claims. I will consider the
claims against each group of defendants in turn. Three
[**40] Honda corporate entities - American Honda,
Honda North America and Honda Motor Company, Ltd.
- are named as RICO defendants in each of the four
representative complaints. American Honda does not
dispute for present purposes that it is subject to
respondeat superior liability for the acts of its executives.
American Honda instead challenges the sufficiency of
plaintiffs' allegations of predicate acts of mail fraud and
of the claims under 18 U.S.C. . . 1962(a), (b), & (d).
Honda Motor Company, Ltd. ("Honda Japan"), the
domestic defendants' Japanese corporate parent, first
joins in the domestic defendants' arguments. Honda
Japan then offers a separate set of arguments that it has
no connection to the U.S. activities of American Honda
and therefore cannot be held vicariously or directly liable
in this case.
A number of current and former Honda dealers are
also named as defendants. They echo several of the
Honda defendants' positions with respect to standing and
pleading sufficiency. They also offer separate arguments
for dismissal of the RICO claims.
Finally, the law firm of Lyon & Lyon argues that
plaintiffs have failed to adequately allege RICO claims
against it based on its role [**41] representing American
Honda.
A. American Honda
1. Predicate Acts of Mail Fraud
American Honda argues that the allegations of mail
and wire fraud in the complaints are fatally flawed
because "plaintiffs do not identify any defrauded party
within the proscriptions of the mail fraud and wire fraud
statutes." Am. Honda's Mot. to Dismiss at 30 (emphasis
omitted). Many other defendants join in this argument.
Defendants' underlying point is that the acts of bribery
that plaintiffs characterize as mail fraud were not
fraudulent at all; because both the bribe-paying dealers
and the bribe-taking Honda [*546] executives knew
exactly what sort of exchanges they were engaging in,
defendants argue, it can not be said that any party was
defrauded of money or property. n18
n18 Plaintiffs in part respond that they have
sufficiently pled various predicate acts that are
distinct from the bribery scheme. Borman, for
example, asserts that various plaintiff dealers paid
money based on mailed representations that those
sums would go to pay for group dealer
advertising, when in fact some money was
diverted to corrupt Honda officials. Austin
Motors, to take another example, points out that
defendants have not challenged the allegations of
obstruction of justice or tax fraud. Plaintiffs' core
allegation of harm, however, is that plaintiff
dealers have suffered allocation injury as the
result of the bribery scheme, and Sedima holds
that a civil RICO plaintiff's "compensable injury
necessarily is the harm caused by the predicate
acts sufficiently related to constitute a pattern."
473 U.S. at 497.
[**42]
The federal mail fraud statute, 18 U.S.C. . 1341,
provides: "Whoever, having devised or intending to
devise any scheme or artifice to defraud, or for obtaining
money or property by means of false or fraudulent
pretenses, representations, or promises, ... [uses the mails
to further the scheme, shall be guilty of mail fraud]." The
elements of mail fraud derived from this definition are
clearly established: "(1) the devising of a scheme or
artifice either (a) to defraud or (b) for obtaining money
by means of false or fraudulent pretenses,
representations, or promises, (2) the specific intent to
defraud, and (3) the use of the United States mails to
execute the scheme." United States v. Kennedy, 64 F.3d
1465, 1475 (10th Cir. 1995); see also United States v.
Altman, 48 F.3d 96, 101 (2d Cir. 1995). Defendants do
not dispute that plaintiffs have adequately alleged use of
the mails, nor do they dispute that the bribe-paying
dealers and Honda executives knowingly engaged in the
scheme. Instead, defendants argue that the bribery
scheme was not entered into with an intent to defraud.
n19
n19 Several of plaintiffs' memoranda seem to
misunderstand defendants to argue that no mail
fraud occurred because plaintiffs have not alleged
that they specifically relied on any mailed
representation or statement. Plaintiffs therefore
offer citations to a line of cases that clearly
establish that a mailing need only be a necessary
step in furtherance of a scheme, and need not be
fraudulent in and of itself. E.g., Tabas v. Tabas,
47 F.3d 1280, 1294 n.18 (3d Cir.), cert. denied,
132 L. Ed. 2d 275, 115 S. Ct. 2269 (1995).
Defendants do not attack plaintiffs' mail fraud
allegations on this ground, however; instead,
defendants argue that, even if plaintiffs were
deceived as to the fairness of the allocation
system, they did not give up any money or
property as a result of that deception.
[**43]
The Supreme Court has held that "the words 'to
defraud' in the mail fraud statute have the 'common
understanding' of 'wronging one in his property rights by
dishonest methods or schemes,' and 'usually signify the
deprivation of something of value by trick, deceit,
chicane, or overreaching.'" Carpenter v. United States,
484 U.S. 19, 98 L. Ed. 2d 275, 108 S. Ct. 316 (1987)
(quoting McNally v. United States, 483 U.S. 350, 358, 97
L. Ed. 2d 292, 107 S. Ct. 2875 (1987) (quoting in turn
Hammerschmidt v. United States, 265 U.S. 182, 188, 68
L. Ed. 968, 44 S. Ct. 511 (1924))) (internal quotation
marks omitted). Courts have read this language
differently in different contexts. Defendants rely heavily
on United States v. Lew, 875 F.2d 219 (9th Cir. 1989),
where the Ninth Circuit interpreted this definition to
"make it clear that the intent [of a "scheme to defraud"]
must be to obtain money or property from the one who is
deceived." Id. at 221 (emphasis added). Based on Lew
and similarly-reasoned cases, defendants assert that,
because plaintiffs have not alleged that they gave up
money or property in reliance on any representation by
defendants, they have failed [**44] to allege mail fraud.
See also Mylan Labs., 770 F. Supp. at 1073.
Defendants' argument that Lew compels dismissal of
plaintiffs' claims is not persuasive. In Lew, the Ninth
Circuit reversed the mail fraud convictions of an attorney
who was found to have made misrepresentations to the
INS in order to obtain employment certifications for his
non-citizen clients. The indictment in that case charged
the defendant with defrauding his clients out of legal
fees, however, and did not allege that he received any
money or property from the INS. The court therefore
held that no party had been "defrauded" under section
1341 - not the INS because it had not paid out money or
property, and not the defendant's clients because they had
not been deceived.
[*547] First, I note that this case involves a
different factual setting. Defendants here do not assert a
"disconnect" between the target of false statements and
the transferor of money or property. Defendants concede
in their reply that plaintiff dealers were deceived by
Honda's representations that cars would be allocated on a
"fair and reasonable" basis. Instead, defendants' real
point is (as discussed at length in the previous section
[**45] on RICO standing) that plaintiffs have suffered
no injury from the bribery scheme. From this position
follows their conclusion that no "money or property" was
given in return, and that therefore no fraud took place.
This argument fails for the same reasons as
defendants' contention that plaintiffs lack standing.
Plaintiffs have asserted a contractual entitlement to fair
and reasonable allocations of cars and have alleged that
defendants engaged in a scheme to deprive them of this
property right. Taking this claim as true, even Lew
supports the validity of plaintiffs' mail fraud allegations.
The Ninth Circuit noted in Lew that the crucial element
missing from the government's case was "an intent to
obtain money or property from the victim of the deceit."
Lew, 875 F.2d at 222; see also United States v. Leonard,
61 F.3d 1181, 1187 (5th Cir. 1995) (defining "intent to
defraud" as intending "some harm to the property rights
of the victim"). Here, plaintiffs have alleged that the
purpose of the bribery scheme was to deprive plaintiff
dealers of fair allocations of cars in order to enrich bribe-
paying dealers, Honda executives and the Honda
defendants. They therefore have [**46] adequately pled
a "scheme to defraud" in violation of section 1341. n20
n20 Plaintiffs also argue that they have
satisfied even a strict "convergence" requirement.
They claim that they relied on misrepresentations
from Honda (in dealership agreements, for
example) that cars would be allocated on a fair
and reasonable basis, and that in exchange they
paid money in the form of dealership fees and
new car purchases, and that they gave up their
"contractual rights" by agreeing to, e.g., only
distribute Honda cars. The Supreme Court has
determined that "property" does include
intangible property rights for purposes of section
1341. Cf. Carpenter, 484 U.S. at 19 (finding
right to the secrecy of proprietary information
within scope of statute).
Although this posits a different theory of
property injury than the allocation injuries
plaintiffs seek to recover for under section
1964(c), the underlying mail fraud theory is
irrelevant for purposes of RICO causation. As
discussed in cases such as Mid Atlantic Telecom,
plaintiffs need only show that the allocation
injuries were proximately caused by the bribery
scheme, not that they were the immediate result
of the predicate acts. Thus, even if plaintiffs' mail
fraud theories rely on the fact that they gave up
"contractual rights" based on Honda's
misrepresentations, plaintiffs can still claim that
their allocation injuries were the proximate result
and therefore are remediable under RICO.
[**47]
I also note that, at best, defendants' argument that an
admitted bribery ring - one in which Honda executives
took bribes to divert cars from plaintiff dealers to bribe-
paying dealers - is not a "scheme to defraud" rests on a
technical definition of what it means "to defraud."
Although cases such as Lew have identified certain
categories of conduct beyond the reach of section 1341,
n21 in general courts have broadly interpreted the
Supreme Court's statement that "the words 'to defraud'
commonly refer to wronging one in his property rights by
dishonest methods or schemes." E.g., Altman, 48 F.3d at
101 (noting that the Supreme Court has long given mail
fraud "a broad interpretation, construing it 'to include[]
everything designed to defraud by representations as to
the past or present, or [*548] suggestions and promises
as to the future'") (quoting Durland v. United States, 161
U.S. 306, 313, 40 L. Ed. 709, 16 S. Ct. 508 (1896)). n22
As stated by the Eighth Circuit, "the crime of mail fraud
is broad in scope and its fraudulent aspect is measured by
a nontechnical standard, condemning conduct which fails
to conform to standards of moral uprightness,
fundamental honesty, and [**48] fair play." Atlas Pile
Driving Co. v. DiCon Fin. Co., 886 F.2d 986, 991 (8th
Cir. 1989).
n21 In particular, a number of cases involve
settings, such as the one in Lew, in which
defendants have made misrepresentations or
offered bribes to government officials in order to
obtain favorable regulatory actions, not to directly
obtain money or property from the government.
These cases have declined to find "intent to
defraud" within the scope of section 1341 in such
cases because the mail fraud statute protects
money and property interests, not an "intangible
right to good government." See generally
McNally, 483 U.S. at 350. In particular, the
bribery cases defendants rely on such as Mylan
Laboratories and Lancaster Community Hosp. v.
Antelope Valley Hosp. Dist., 940 F.2d 397 (9th
Cir. 1991), cert. denied, 502 U.S. 1094, 117 L.
Ed. 2d 414, 112 S. Ct. 1168 (1992) - cases in
which a court found no mail fraud violation when
an entity bribed a public agency to obtain a
competitive advantage - are distinguishable
because the allegedly injured plaintiffs in those
cases had no discernable property right to
favorable government action. Here, plaintiff
dealers have alleged a contractual right to fair
allocations of cars. [**49]
n22 Courts also have noted that section
1341's prohibition on "schemes to defraud"
therefore reaches far beyond narrow common law
definitions of fraud. See Richards v. Combined
Ins. Co. of Am., 55 F.3d 247, 251 (7th Cir. 1995).
Similarly, a "scheme to defraud" need not rise to
the level of an independent violation of any other
state or federal law. See United States v. Bryan,
58 F.3d 933, 940 (4th Cir. 1995).
2. Claims Under Sections 1962(a), 1962(b) and
1962(d)
American Honda finally argues that the complaints
fail to properly plead claims under sections 1962(a),
1962(b) and 1962(d). I will consider these claims in turn.
a. Section 1962(a)
Section 1962(a) states, in relevant part, "it shall be
unlawful for any person who has received any income
derived ... from a pattern of racketeering activity ... to use
or invest ... any part of such income ... [in] the
establishment or operation of ... any enterprise which is
engaged in ... interstate or foreign commerce." Most
circuits require that section 1962(a) plaintiffs plead "a
specific injury to the plaintiff caused [**50] by the
investment of income into the racketeering enterprise,
distinct from any injuries caused by the predicate acts of
racketeering." Vemco, Inc. v. Camardella, 23 F.3d 129,
132 (6th Cir.), cert. denied, 130 L. Ed. 2d 495, 115 S. Ct.
579 (1994); see also Ouaknine v. MacFarlane, 897 F.2d
75, 82 (2d Cir. 1990); Glessner v. Kenny, 952 F.2d 702,
708-10 (3d Cir. 1991); Parker & Parsley Petroleum v.
Dresser Indus., 972 F.2d 580, 584 (5th Cir., 1992);
Grider v. Texas Oil & Gas Corp., 868 F.2d 1147 (10th
Cir.), cert. denied, 493 U.S. 820, 107 L. Ed. 2d 43, 110 S.
Ct. 76 (1989); Danielsen v. Burnside-Ott Training Ctr.,
291 U.S. App. D.C. 303, 941 F.2d 1220, 1229-30 (D.C.
Cir. 1991). Defendants argue that each of the section
1962(a) counts in the complaints should be dismissed for
failure to allege such "investment use" injury.
Plaintiffs initially argue that the Fourth Circuit has
declined to adopt the "investment use" injury
requirement. See Busby v. Crown Supply, Inc., 896 F.2d
833, 837-38 (4th Cir. 1990). Busby requires only that a
section 1962(a) claim allege injury from the predicate
acts that generated income that, in turn, was subsequently
[**51] "used or invested." Plaintiffs therefore argue that,
under Busby, their allegations of allocation and other
injuries caused by the bribery scheme support their
respective claims under section 1962(a). Although I
question the soundness of Busby, because the Fourth
Circuit's interpretation of federal law is binding upon me,
I would find that plaintiffs' section 1962(a) claims
survive on this basis alone. n23
n23 The Fourth Circuit's rule has not been
adopted by any other circuit, and Busby has been
widely and persuasively criticized. E.g., Nugget
Hydroelectric v. Pacific Gas & Elec., 981 F.2d
429, 437 (9th Cir. 1992) (arguing that clear
meaning of section 1964(c)'s "by reason of"
language is that plaintiffs must allege injury from
violation of section 1962(a), which prohibits use
or investment, and not just from element of
violation), cert. denied, 508 U.S. 908, 124 L. Ed.
2d 247, 113 S. Ct. 2336 (1993).
Recognizing that Busby is not the prevailing rule,
however, plaintiffs also argue [**52] that they have
sufficiently pled "investment use" injury. Each of the
complaints' section 1962(a) counts alleges specific ways
in which the domestic Honda defendants received
income from the bribery scheme and invested such
income in ways that injured plaintiffs. In particular,
plaintiffs offer two primary allegations of "use or
investment" of racketeering proceeds: (1) that corrupt
Honda executives used the bribes and kickbacks they
received to obtain ownership interests in existing or new
dealerships, and (2) that Honda received income in that it
was able to pay its executives substantially less than
other manufacturers, and that Honda used this income,
directly or indirectly, to finance its [*549] sales and
allocation network. Plaintiffs allege that the various
injuries already discussed - misallocations of cars,
competitive injuries from the unfair placement of nearby
bribe-paying dealers, etc. - therefore were caused by
Honda's "use or investment" of racketeering income.
Defendants offer two arguments in response. First,
defendants argue that the literal injury allegations in the
section 1962(a) counts are almost identical to those of the
section 1962(c) counts, and that therefore the [**53]
section 1962(a) allegations must be viewed as failing to
allege any distinct injury. See, e.g., Breakaway Compl. at
PP 245, 276. Second, defendants note that courts have
supplemented the "investment use" injury requirement
with the following rule: a plaintiff cannot allege
investment injury merely by claiming that subsequent
racketeering acts would not have happened but for the
use of prior racketeering income to maintain the
existence of the enterprise itself. Because a RICO pattern
requires at least two predicate acts, allowing plaintiffs to
artfully plead such allegations of "reinvestment injury"
would effectively allow any section 1962(c) claim also to
be brought as a section 1962(a) claim, thereby
circumventing the very purpose of the "investment use"
injury requirement. See Lightning Lube, Inc. v. Witco
Corp., 4 F.3d 1153, 1188-89 (3d Cir. 1993).
I find, however, that plaintiffs have alleged
"investment use" injury. First, the allegations in the
Borman and Austin Motor complaints that plaintiffs were
injured when corrupt Honda executives used bribes and
kickbacks to obtain ownership interests in bribe-paying
dealerships clearly allege a distinct injury. As [**54] the
Borman plaintiffs argue, "beyond sustaining and
perpetuating the conspiracy, the illicit ownership
interests resulted in further wrongful diversions of cars.
But for the Honda executives' investment of racketeering
income in Bribe-paying Dealerships, the Plaintiffs'
damages would have been less." Borman Opp'n at 39. In
other words, plaintiffs allege that these bribe-paying
dealerships received particular favoritism because they
were owned by Honda executives, not just because they
paid bribes. This is a distinct allegation of injury caused
by the investment of racketeering income. n24
n24 Indeed, this is an allegation that perhaps
could be construed as a claim that corrupt
executives laundered the bribes they received by
converting them into profits from ostensibly
legitimate dealerships. Courts have noted that
section 1962(a) "was primarily directed at halting
the investment of racketeering proceeds into
legitimate businesses, including the practice of
money laundering." Brittingham v. Mobil Corp.,
943 F.2d 297, 303 (3d Cir. 1991).
[**55]
Moreover, I also find that defendants' "reinvestment"
argument - that plaintiffs have not alleged distinct
investment injury because the injury allegations in their
section 1962(a) and section 1962(c) counts are somewhat
circular as to the overall alleged enterprise n25
misapprehends the purpose of the "investment use"
injury pleading requirement. This rule does not force
plaintiffs to choose whether to bring a given claim of
injury either under section 1962(a) or section 1962(c);
instead, it requires allegations under section 1962(a) to
be supported by distinct allegations of how the use or
investment of illicit income played a causative role.
Similarly, the rule against "reinvestment" allegations is
not a per se rule that the use of proceeds from predicate
acts chargeable under section 1962(c) can never support
a separate claim under section 1962(a). Instead, this rule
requires only that plaintiffs do more than allege that
income received from one predicate act was used in the
operation of an enterprise and thereby facilitated the
commission of later predicate acts. Cf. Newmyer v.
Philatelic Leasing, Ltd., 888 F.2d 385, 396 (6th Cir.
1989) (holding that injury caused by [**56] predicate act
of financial fraud could also support claim under section
1962(a) because plaintiffs had alleged that enterprise was
itself funded by proceeds illegally obtained from prior
victims of same fraudulent [*550] scheme), cert.
denied, 495 U.S. 930, 110 S. Ct. 2169, 109 L. Ed. 2d 499
(1990).
n25 "Circular" in the sense that plaintiffs
claim that they suffered "allocation injury" not
only from the predicate acts of bribery
themselves, but also from Honda's use or
investment of bribery proceeds (i.e., amounts
saved in executive salaries) to run its nationwide
operations so as to cause additional allocation
injury. And so on.
These pleading rules do not, however, prevent a
plaintiff from alleging that the same injuries were caused
by violations of both section 1962(a) and section
1962(c). Here, plaintiffs have alleged that Honda (1)
received racketeering income by encouraging sales
executives to rely on the "supplemental income system;"
(2) that Honda invested this income by its financing of its
nationwide sales and allocation system; [**57] and (3)
that plaintiffs suffered various injuries - including
allocation injuries, competitive harms and out-of-pocket
losses - as the result of the operation of that system. This
claim satisfies the pleading requirements of section
1962(a), even to the extent that plaintiffs claim the same
kinds of injuries as were caused by the predicate acts
themselves. In effect, plaintiffs' section 1962(a) counts
represent an alternate theory of liability against the
Honda corporate defendants: in addition to asserting
violations of section 1962(c) on a theory of respondeat
superior liability, plaintiffs also allege direct violations of
section 1962(a) based on the Honda defendants' use of
the income it indirectly received.
b. Section 1962(b)
18 U.S.C. . 1962(b) makes it "unlawful for any
person through a pattern of racketeering activity ... to
acquire or maintain, directly or indirectly, any interest in
or control of any enterprise which is engaged in ...
interstate or foreign commerce." Defendants restate their
section 1962(a) argument in challenging plaintiffs' claims
under section 1962(b): because the plaintiffs have
articulated the same claims of injury in each of their
RICO [**58] counts, they necessarily have failed to
plead the "acquisition injury" required under section
1962(b).
Although section 1962(b) case law is sparse, the
clear direction of courts in requiring an "investment use"
injury under section 1962(a) indicates that section
1962(b) plaintiffs must plead a specific causal nexus
between defendants' acquisition or maintenance of
control over an enterprise and claimed injuries. I find that
plaintiffs have done so. Plaintiffs have alleged that high-
ranking Honda executives "maintained their control"
over Honda's nationwide sales operation by manipulating
the allocation and dealership award processes,
encouraging zone managers to participate in the
"supplemental income system," by directing executives
to carry out fraudulent schemes such as the "dealer ad
group" campaigns that funneled funds to corrupt
officials, and by threatening to demote or fire any Honda
whistleblowers. Plaintiffs' claimed injuries directly
resulted from these activities. Plaintiffs therefore have
properly stated their counts for violation of section
1962(b).
c. Section 1962(d)
18 U.S.C. . 1962(d) makes it "unlawful for any
person to conspire to violate any of the provisions [**59]
of subsection (a), (b), or (c) of this section." The circuits
are split over whether a section 1962(d) claim must
allege injury caused by a predicate act of racketeering,
see Miranda v. Ponce Fed. Bank, 948 F.2d 41 (1st Cir.
1991); Hecht v. Commerce Clearing House, Inc., 897
F.2d 21 (2d Cir. 1990); Bowman v. Western Auto Supply,
985 F.2d 383 (8th Cir.), cert. denied, 508 U.S. 957, 124
L. Ed. 2d 674, 113 S. Ct. 2459 (1993); Reddy v. Litton
Indus., Inc., 912 F.2d 291 (9th Cir. 1990), cert. denied,
502 U.S. 921, 116 L. Ed. 2d 272, 112 S. Ct. 332 (1991),
or only injury caused by some overt act in furtherance of
the conspiracy, see Shearin v. E.F. Hutton Group, Inc.,
885 F.2d 1162 (3d Cir. 1989); Gagan v. American
Cablevision, Inc., 77 F.3d 951 (7th Cir. 1996).
Defendants' challenge to plaintiffs' section 1962(d)
claims implicitly urges for adoption of the rule of the
First, Second, Eighth and Ninth Circuits, and then
restates the general argument that plaintiffs lack RICO
standing: "The conspiracy claims do nothing to overcome
the general failure to allege adequately any predicate act
directed at plaintiffs that caused any injury to them." Am.
Honda's Mot. [**60] to Dismiss at 36.
Plaintiffs correctly respond that they have, as
discussed above, properly alleged numerous injuries
caused by violations of sections 1962(a)-(c). There is no
dispute that plaintiffs have alleged that Honda executives
conspired to defraud plaintiff dealers [*551] on a
nationwide basis. Because I have already determined that
plaintiffs have properly pled the underlying claims, I find
that plaintiffs have stated a claim under section 1962(d).
B. Honda Japan
Honda, Ltd., American Honda's Japanese corporate
parent, (Honda Japan), both has joined in the arguments
in support of the motion to dismiss by the domestic
Honda defendants and has filed a separate brief. The
major issues separately presented by Honda Japan are:
(1) whether plaintiffs have adequately alleged a basis for
holding Honda Japan liable through the doctrine of alter
ego liability; (2) whether Honda Japan could be held
liable vicariously on the basis of the alleged activities of
persons who were officers or directors of both American
Honda and Honda Japan; and (3) whether plaintiffs have
adequately alleged aiding and abetting claims against
Honda Japan.
One of the underlying questions with respect to
[**61] Honda Japan is the extent to which the corporate
parent can be held liable for the activities of American
Honda and its employees. As I noted earlier, however,
each of the complaints attempts to sidestep this issue by
referring generically to Honda Ltd., Honda N.A. and
American Honda as the "defendant Honda." Plaintiffs of
course cannot pierce the corporate veil simply through a
pleading device, and I have already directed plaintiffs to
replead their complaints to delineate the specific claims
against each of the Honda defendants. See supra section
I.A.
1. "Alter Ego" Liability
Honda Japan first challenges plaintiffs' attempt to
assert an "alter ego" theory of liability. Defendant argues
that "piercing the corporate veil" requires an
extraordinary showing that plaintiffs have not alleged
and could not possibly prove. Plaintiffs do not dispute
defendant's basic legal arguments, but they argue that
alter ego liability is a factual issue that is not properly
resolved by motion to dismiss.
The corporate form will be disregarded only where
upholding it would lead to a patently unjust result. Courts
therefore evaluate factors such as (1) the amount of
respect given to the separate [**62] identity of the
subsidiary by the parent; (2) the fraudulent intent of the
incorporators; and (3) the degree of injustice that will
result if the two companies are treated as separate
entities. See Orloff v. Allman, 819 F.2d 904, 909 (9th
Cir. 1987) (listing federal common law factors). Honda
Japan agrees that this is a fact-specific inquiry that courts
often wait until summary judgment to decide.
There are cases however, as Honda Japan asserts, in
which courts have dismissed alter ego claims against
corporate parents. In Resolution Trust Corp. v. Driscoll,
985 F.2d 44 (1st Cir. 1993), the First Circuit affirmed the
dismissal of a complaint as to a corporate defendant
where the complaint offered only "naked assertions" that
the subsidiary was the alter ego of the parent. Id. at 48
(noting that complaint "alleges no facts that, if proved,
would even arguably permit a court to impose liability ...
under an alter ego theory"); see also Haskell v. Time,
Inc., 857 F. Supp. 1392, 1403 (E.D. Cal. 1994)
(dismissing complaint because plaintiff "has failed to
allege sufficient facts to warrant piercing the corporate
veil"). The Borman and Trans-Oceanic complaints
[**63] summarily refer to Honda, Ltd. as the "alter ego"
of American Honda and Honda North America several
times, but the complaints offer only limited factual
allegations related to this assertion: that "the consolidated
financial statements of Defendant Honda Ltd. ... treat
Defendants American Honda and Honda North America
as structurally interlocked affiliates by eliminating inter-
corporate accounts and transactions and reflect the fact
that the various affiliates ... operate as interrelated
departments of Honda Ltd." Borman Compl. at P 15; see
also Trans-Oceanic Compl. at P 3. Borman also alleges
that high-ranking American Honda executives also were
directors of Honda Ltd. E.g., Borman Compl. at P 17.
Plaintiffs' allegations are not sufficient to permit
them to proceed on a theory of alter ego liability. Their
allegation that [*552] the various Honda entities use
consolidated financial statements and have interlocking
directorates, taken as true, would be insufficient to justify
piercing the corporate veil. Moreover, there is no
suggestion that American Honda was incorporated for
fraudulent purpose, that American Honda is not
adequately capitalized, or that any other [**64] factor
would justify disregarding the corporate separateness of
the Honda defendants on equitable grounds. Plaintiffs'
allegations that Honda Japan knew about and endorsed
the bribery scheme, that Honda Japan benefited from the
scheme and that Honda Japan exercised control over
American Honda may be relevant to plaintiffs' other
theories of liability, but they do not merit piercing the
corporate veil. n26
n26 Plaintiffs also seem to suggest that the
"intercorporate agency" between Honda Japan
and American Honda is sufficient to impute
liability from American Honda to Honda Japan.
"Intercorporate agency" can be established for
some purposes - service of process, for example -
by showing that a subsidiary is completely
controlled by the parent, or that a separately
incorporated subsidiary is but a conduit for that
the parent would otherwise have to do for itself.
E.g., Wells Fargo & Co. v. Wells Fargo Express
Co., 556 F.2d 406, 419 (9th Cir. 1977)
(describing required relationship as one of
common law agency). Such a showing, however,
falls far short of the fraudulent intent/gross
inequity showing required to pierce the corporate
veil. Because allowing respondeat superior
liability on the basis of a purported agency
relationship between parent and subsidiary would
eviscerate the alter ego doctrine, courts have
refused to allow countenance such a theory. E.g.,
Miller v. Honda Motor Co., Ltd., 779 F.2d 769,
772 (1st Cir. 1985).
[**65]
2. Liability Based Upon Activities of Persons Acting
in Dual Capacities
Plaintiffs allege that certain corrupt executives were
acting in their capacities both as officers and directors of
American Honda and Honda Japan when they
participated in the bribery scheme. Most notably,
plaintiffs allege that Koichi Amemiya, who during a
relevant time period was both the president of American
Honda and a director of Honda Japan, masterminded the
scheme. Plaintiffs argue that their allegations are
sufficient to establish that Honda Japan is vicariously
liable for what occurred. n27 As I have indicated above,
the specificity of the complaints are clouded by plaintiffs'
use of "defendant Honda" as a pleading device.
Nevertheless, I am of the view that plaintiffs have stated
claims against Honda Japan.
n27 Ordinary principles of vicarious liability
apply in RICO cases. See generally Petro-Tech.
Inc. v. Western Co., 824 F.2d 1349, 1356-62 (3d
Cir. 1987) (reasoning that common law vicarious
liability doctrines apply to RICO because they
advance statutory goal of facilitating recovery by
victims of racketeering). Such liability is most
easily established if a corporation benefitted from
the acts of racketeering alleged. See Davis v.
Mutual Life Ins. Co. of N.Y., 6 F.3d 367, 379-80
(6th Cir. 1993), cert. denied, 510 U.S. 1193, 127
L. Ed. 2d 650, 114 S. Ct. 1298 (1994). Plaintiffs
here claim that Honda Japan was directly
benefitted at least by the passing through to it of
the benefits accruing to American Honda from
the "supplemental income system." Alternatively,
plaintiffs rely upon two theories of vicarious
liability that do not require benefit to the
corporation, apparent authority and ratification.
See generally American Soc. of Mechanical
Eng'rs v. Hydrolevel Corp., 456 U.S. 556, 566, 72
L. Ed. 2d 330, 102 S. Ct. 1935 (1982) (discussing
apparent authority); Cox, 17 F.3d at 1409
(ratification).
I also note that because of the manner in
which plaintiffs have framed their pleadings
against Honda Japan it is unclear whether they
are asserting claims for direct liability against it.
If they are, several technical and difficult issues
are raised, particularly in regard to any claims
under sections 1962(a) and (b). I will not consider
these issues now but will wait to see if plaintiffs
assert direct claims against Honda Japan when
they file their amended complaints.
[**66]
If what plaintiffs assert is true, Amemiya and others
who served American Honda and Honda Japan in dual
capacities were fully aware of the bribery scheme and
directly participated in it. Honda Japan contends that this
is not enough. It points out that plaintiffs' artful pleading
reflects that plaintiffs are unable to distinguish between
the roles which Amemiya and his fellows were playing.
Further, it asks "where was the benefit that we (Honda
Japan) were receiving? We simply manufacture vehicles
and how they are allocated to dealers is of no
consequence to us as long as we are able to sell (as
plaintiffs assert we were able to do during the relevant
period) all of the vehicles that we produced."
Honda Japan's arguments are not without their force.
However, they are essentially [*553] factual in nature.
It may be that those who were serving in dual capacities
were acting only on behalf of America Honda and not
Honda Japan. But it was Honda Japan who chose to
structure its management as it did, having its executives
cross corporate lines with regular frequency. That alone,
of course, will be far from sufficient ultimately to
establish Honda Japan's liability. But when it has clothed
the [**67] top level management of one of its
subsidiaries with the appearance of parent-corporation
authority, it can hardly ask those not within its inner
circle to distinguish between the capacities in which its
executives were acting when (as must be assumed to be
the fact on a motion to dismiss) they participated in a
widespread bribery scheme. Likewise, as to the question
of benefit to Honda Japan, plaintiffs at this stage of the
litigation cannot specify the precise manner in which the
parent corporation may have seen its interests being
served by the culture of corruption which its
representatives allegedly knew of and actively
engendered. It may be, as Honda Japan asserts, that there
was no immediate economic incentive for it to participate
in the alleged scheme. That question, however, is a fair
matter for discovery. And discovery might reveal that
Honda Japan blessed the scheme with longer-term goals
in mind, goals that would be furthered by having a
compromised and compliant dealer network.
This is a difficult area of the law, one that
simultaneously calls for a proper respect for legitimate
corporate formalities and a wariness against permitting
form to prevail over substance. Generalized [**68] and
vague pleadings cannot be allowed to circumvent the
statutes and common-law rules that protect corporate
separateness. Here, however, even recognizing the
pleading deficiency in telescoping all of the "Honda
defendants" into one, plaintiffs have done more than
simply allege that Honda Japan should be held liable for
the actions of its American subsidiary and its agents. It
has particularized individuals who were closely
associated and identified with Honda Japan, who were
chosen by it to run a major portion of its worldwide
distribution network and who actively participated in
what, if plaintiffs' allegations are accepted to be true, can
only be characterized as egregious misconduct.
It is facts, not allegations, that will finally determine
the outcome of this litigation. Plaintiffs bear the burden
of proving not only the underlying bribes and the
damages that they suffered therefrom but also the part
played by each of the defendants whom they have
named. This will be no easy task. If, however, they
produce facts that demonstrate that Honda Japan officials
situated in the United States actively were involved in a
bribery scheme, that they advised other high-ranking
officers and [**69] directors of Honda Japan about it
and that Honda Japan did nothing to stop the scheme,
they will have gone a long way in meeting their burden.
They will have gone even further if they can prove that
the scheme broadened because of the involvement of
executives who were identified with Honda Japan
because, for example, dealers were more likely to pay
bribes based on their perception that the bribery system
was endorsed by the Japanese parent, or that dealers or
Honda employees declined to inform anyone about the
scheme out of despair or fear of retaliation. And
presumably even Honda Japan would concede its liability
if plaintiffs could establish that it directed and
encouraged the scheme for reasons of its own. These and
similar issues must be explored through discovery, and
the adequacy of plaintiffs' proof under their various legal
theories tested by summary judgment.
3. Aiding and Abetting
As a third alternative theory of liability, plaintiffs
also assert claims against Honda Japan for aiding and
abetting. Honda Japan first argues that the Supreme
Court's decision in Central Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct.
1439, 128 [**70] L. Ed. 2d 119 (1994), which held that
section 10(b) of the Securities Exchange Act does not
create a private cause of action for aiding and abetting,
should be extended to the civil RICO context. In several
recent cases that have considered this argument, courts
have agreed that Central Bank of Denver should be so
extended. E.g., In re Lake States Commodities, Inc.,
[*554] 936 F. Supp. 1461, 1996 WL 432409, *9-*11
(N.D. Ill. 1996); Department of Economic Dev. v. Arthur
Andersen & Co., 924 F. Supp. 449, 475-77 (S.D.N.Y.
1996). My holding in Park v. Jack's Food Sys., Inc., 907
F. Supp. 914, 918 (D. Md. 1995), notwithstanding, I find
the analysis of these cases somewhat persuasive. I need
not, however, reach the issue presently. Plaintiffs have
adequately alleged other bases of liability, and at least
one recent circuit case, as well as a number of other post-
Central Bank of Denver cases, continue to recognize
aiding and abetting liability under RICO. E.g., Jaguar
Cars, Inc. v. Royal Oaks Motor Car Co., 46 F.3d 258,
270 (3d Cir. 1995). n28
n28 Honda Japan alternatively argues that
plaintiffs have failed to adequately plead facts
that would support aiding and abetting liability
under existing case law. Plaintiffs rely on Jaguar
Cars, where the Third Circuit stated the elements
of aiding and abetting liability: "(1) that the
substantive act [i.e., the commission of two or
more predicate acts] has been committed, and (2)
that the defendant alleged to have aided and
abetted the act knew of the commission of the act
and acted with intent to facilitate it." 46 F.3d at
270. The first element is not in dispute. As to the
second element, the Jaguar Cars court noted that
"a plaintiff need not offer direct evidence of
intent. Rather, the fact finder may infer a
defendant's knowledge and intent from
circumstantial evidence." Id. Plaintiffs argue that
the same allegations that support their vicarious
liability theories - that Honda Japan officials,
including defendant Amemiya, knew about and
endorsed the bribery scheme because of the
beneficial effects it had on Honda's affairs in the
United States - support an inference of intent to
facilitate the scheme.
Defendant refers to the Third Circuit's
statements of aiding and abetting liability as the
"minority view." Defendant also points to two
cases finding mere "negative acquiescence"
insufficient to prove the intent required for aiding
and abetting liability. See Armco Indus. Credit
Corp. v. SLT Warehouse Co., 782 F.2d 475, 485-
86 (5th Cir. 1986); In re Sahlen & Assocs., Inc.
Sec. Litig., 773 F. Supp. 342, 368 (S.D. Fla.
1991). Here, however, plaintiffs have alleged that
Amemiya and other Honda Japan officials knew
about the "supplemental income system,"
encouraged its widespread use, and personally
oversaw some of the fraudulent transactions. See
Borman Compl. at 97-107. Moreover, in Cox, a
case on which defendant relies as the proper
alternative to the Third Circuit's view, the
Eleventh Circuit stated that "the defendant's
knowledge may be shown by circumstantial
evidence, or by reckless conduct. The same
evidence that would support a jury's finding that
[defendant] 'knowingly tolerated' [the primary
violator's] actions pursuant to the plaintiffs'
ratification theory ... will also support a jury's
finding that [defendant] was aware of its general
role in the scheme." Cox, 17 F.3d at 1410.
Plaintiffs' allegations would satisfy this test.
[**71]
C. Dealer Defendants
Of the many dealer defendants filing motions to
dismiss, only three have filed substantive memoranda:
the Hendrick defendants, Schuiling defendants n29 and
Lustgarten defendants. All of the other dealer defendants
filing motions to dismiss join the arguments of at least
one of these three. The dealer defendants echo the Honda
defendants' arguments with respect to plaintiffs' standing,
the sufficiency of the predicate acts of mail fraud and the
adequacy of the Borman complaint's allegations against
"all defendants." My analysis of these issues set forth
above applies equally to the dealer defendants. The
dealers also offer several independent challenges to the
adequacy of the complaints' claims under sections
1962(a)-(d).
n29 Plaintiffs have recently reached a final
settlement of their claims against the Schuiling
defendants that has received Court approval. To
the extent any other dealer defendant has relied
on Schuiling's motion to dismiss, however, I have
considered those arguments in my discussion
below.
[**72]
My analysis in this section will focus on the claims
against the various individuals and corporate entities
associated with the Hendrick Automotive Group
(Hendrick), who are named in each of the Borman,
Breakaway and Austin Motor complaints. Hendrick
allegedly owned more than 25 Honda dealerships during
the time period at issue in this case and is allegedly one
of the largest dealers to participate in the various bribery
schemes. Of the three complaints, Breakaway is the
primary complaint stating claims specifically against
Hendrick. n30 I therefore focus my separate analysis of
the claims against the dealer defendants on the
Breakaway [*555] complaint's allegations against
Hendrick. Other plaintiffs are free to amend their
complaints in conformance with my discussion below.
n30 The Borman complaint, although
purportedly stating claims against "all
defendants," focuses its allegations and
arguments against the Honda defendants. Austin
Motors states only one claim against Hendrick -
for violation of section 1962(d) - and its
pleadings and arguments echo those offered in
Breakaway.
[**73]
Hendrick challenges the sufficiency of each of
plaintiffs' three substantive RICO violations. With one
possible exception, n31 all of the complaints allege the
same "enterprise" in their claims against Hendrick:
Defendant Honda, consisting of Defendants Honda Ltd.,
Honda North America, and American Honda, constituted
an enterprise within the meaning of . 1961(4) of RICO.
Defendant Honda was and is an ongoing corporate
organization subdivided into a managerial structure with
Defendant Honda Ltd. at the top, which wholly owns
Defendant Honda North America, which in turn wholly
owns Defendant American Honda. At all times stated in
this Complaint, Defendant Honda operated as a cohesive
continuing unit for the purpose of manufacturing,
promoting, distributing and selling Honda and Acura
automobiles.
Breakaway Compl. at P 379; see also id. at PP 394, 407;
Borman Compl. at PP 234, 256. Thus, in its claims under
sections 1962(a)-(c), Breakaway alleges that Hendrick:
(1) "used or invested" racketeering income in the
management or operation of the Honda enterprise's
activities; (2) "acquired an interest" in Honda; and (3)
participated in the conduct of Honda's [**74] affairs. I
conclude that, even if true, the payment of bribes to
obtain influence over an enterprise's activities falls short
of "investing in" or "acquiring an interest in" the
enterprise. However, as clearly stated in controlling case
law, payment of bribes is sufficient to "participate in the
conduct" of the enterprise.
n31 The exception is the Borman complaints'
section 1962(c) allegation of an enterprise
consisting of the "Honda Dealer Network,"
consisting of the corporate entities and
individuals who owned Honda and Acura
dealerships. Borman Compl. at PP 270-73.
Borman alleges that the Honda Dealer Network is
both a formal entity and an association in fact. It
is clear that any dealer defendant subject to such
a claim could be said to have "participated in the
conduct of the affairs of" this enterprise. As
described supra section I.A, however, the Borman
complaint's counts 1-4 cannot properly be
construed as stating claims against Hendrick (or
any other defendant aside from the three Honda
entities).
[**75]
1. Sections 1962(a) & (b)
Plaintiffs' section 1962(a) and 1962(b) allegations
are for the most part identical. As an initial matter,
plaintiffs have adequately alleged that Hendrick
"received income" from racketeering activity. For
example, they allege that Hendrick received extra profits
on cars misallocated on the basis of bribes and
kickbacks. Plaintiffs then claim that Hendrick "used or
invested" this income "by paying bribes to Defendant
Honda employees to obtain more LOIs [i.e., "Letters of
Intent" for new dealerships], dealerships and cars from
Defendant Honda." Breakaway Compl. at 385. The
complaint then adds that Hendrick "used and invested
this income in the 'supplemental income system' at
Defendant Honda for Defendant Honda executives." Id.
at 386. Plaintiffs' section 1962(b) claims against
Hendrick repeat this "indirect investment" allegation:
plaintiffs claim that Hendrick "maintained a direct and
indirect interest in and control of the RICO enterprise of
Defendant Honda" by "bribing Defendant Honda
executives and employees." Breakaway Compl. at 398.
Plaintiffs claim that by paying bribes, Hendrick
"manipulated the system for awarding dealerships and
[**76] allocating cars, and thus maintained direct and
indirect control over the enterprise of Defendant Honda."
Id. In other words, plaintiffs characterize Hendrick's
payment of bribes as an "investment" intended to obtain
partial control over Honda's allocation and dealership
award activities.
Defendant dealers argue that paying bribes to obtain
influence over allocation decisions does not constitute
"investing" or "acquiring or maintaining an interest" in
the Honda enterprise. Defendants rely on Moffatt Enters.,
Inc. v. Borden, Inc., 763 F. Supp. 143 (W.D. Pa. 1990),
one of the few cases to extensively consider the meaning
of "invest" or "control" in this context. The Moffatt
court, after noting that section 1961 does not define
"control," first turned to the language of section 1962(a),
which offers an exception [*556] to that provision's
prohibition on "investing" the proceeds of racketeering:
"A purchase of securities on the open market for
purposes of investment, and without the intention of
controlling or participating in the control of the issuer ...
shall not be unlawful under this subsection if the
securities ... do not amount in the aggregate to one
percent [**77] of the outstanding securities of any one
class, and do not confer ... the power to elect one or more
directors of the issuer."
Id. at 143 (quoting section 1962(a)). Thus, section
1962(a) uses "control" to refer to a proprietary interest in
an enterprise, and not simply some degree of influence
over the enterprise's affairs. Moffatt reasons that the
same meaning should be used for purposes of section
1962(b), absent express congressional intent to the
contrary.
Moffatt then describes how RICO's legislative
history in fact confirms that the two subsections are to be
read together.
Subsection (b) prohibits acquisition or maintenance
of an enterprise through the proscribed pattern of
racketeering activity or collection of unlawful debt.
There is no 1 percent limitation here as in subsection (a)
because (a) focuses on legitimate acquisition with
illegitimate funds. Subsection (b) focuses on illegitimate
acquisition with illegitimate funds. ... Consequently, any
acquisition meeting the test of subsection (b) is
prohibited without exception.
Id. (quoting H.R. Rep. No 1549, 91st Cong., 2d Sess.,
reprinted in 1970 U.S. Code Cong. & Admin. News
4007, [**78] 4033). Moffatt therefore concludes that
"the 'interest' contemplated in both sections 1962(a) and
1962(b) is in the nature of a proprietary one, such as the
acquisition of stock, and that the 'control' contemplated is
in the nature of the control one gains through the
acquisition of sufficient stock to affect the composition
of a board of directors." Id. The opinion carefully notes,
however, that it is not purporting to announce a per se
rule that section 1962(b) applies only to acquiring stock
or controlling directors. Instead, it holds that actions
cognizable under section 1962(b) must be "in the nature"
of these activities.
Defendants argue that plaintiffs' allegation that
paying bribes constituted "investing" or "acquiring an
interest" in Honda is not in the nature of obtaining such a
proprietary interest. I agree. n32 I therefore adopt
Moffat's reasoning that sections 1962(a) and (b) properly
apply to activities in the nature of acquiring a proprietary
stake in an enterprise, not simply obtaining some
influence over discretionary activities. See also NCNB
Nat'l Bank v. Tiller, 814 F.2d 931, 936 (4th Cir. 1987)
(affirming dismissal of section 1962(b) claim alleging
[**79] that secured lender "controlled" a borrower,
stating that "actual day to day involvement in
management and operation of the borrower" would be
required to state a claim under section 1962(b)).
Plaintiffs' allegations that Hendrick paid bribes as
investments or to obtain control over Honda's allocation
activities fails to meet this standard. Plaintiffs' section
1962(a) and 1962(b) claims against Hendrick accordingly
are dismissed, although plaintiffs are granted leave to
replead these counts. n33
n32 Plaintiffs argue in opposition that the
language of section 1962(b) broadly refers to
"acquiring, directly or indirectly, any interest or
control" in an enterprise, and that the provisions
of RICO are to be construed liberally. See
generally United States v. Vogt, 910 F.2d 1184,
1194 (4th Cir. 1990), cert. denied, 498 U.S. 1083,
112 L. Ed. 2d 1043, 111 S. Ct. 955 (1991). In
light of Moffat's persuasive analysis, plaintiffs'
general reliance on liberal construction principles
is insufficient.
n33 As suggested by my discussion of
plaintiffs' section 1962(a) claims against
American Honda, plaintiffs could replead valid
section 1962(a) claims against the dealer
defendants by alleging an enterprise - such as a
dealer network - in which they could be found to
have "invested." For example, a claim against a
dealer who allegedly used profits from
misallocated cars to obtain a new dealership that
won customers away from a plaintiff dealer could
satisfy section 1962(a). Alternatively, an
allegation that a dealer used illicit profits to fund
his existing dealership's efforts to woo additional
customers (by, for example, launching a
legitimate advertising campaign using extra
profits obtained from misallocated cars) could
also state a claim under section 1962(a). Of
course, as discussed supra note 16, such theories
would run into the possibly insurmountable
problem of proving such "competitive harm" to a
reasonably certain degree.
[**80]
[*557] 2. Section 1962(c)
Hendrick next argues that plaintiffs have failed to
allege that Hendrick "participated in the conduct" of the
Honda enterprise. Hendrick relies on Reves v. Ernst &
Young, 507 U.S. 170, 122 L. Ed. 2d 525, 113 S. Ct. 1163
(1993). In Reves, the Court held that "'to conduct or
participate, directly or indirectly, in the conduct of such
enterprise's affairs,' [as required by] . 1962(c), one must
participate in the operation or management of the
enterprise itself." Id. at 185. This "operation or
management" test does limit section 1962(c) liability to
those playing "some part in directing the enterprise's
affairs." Id. at 179. Defendant argues that plaintiffs'
"control through bribery" allegation fails to satisfy the
"operation or management" test of Reves. n34
n34 Hendrick also argues that the "control
through bribery" allegation is inconsistent with
other allegations that Honda executives engaged
in extortion by threatening some dealers with low
allocations if they did not pay bribes. Plaintiffs
have alleged, however, that dealers such as
Hendrick willingly participated in order to
manipulate the dealer allocation system.
[**81]
Plaintiffs do allege that Hendrick, a major bribe-
paying dealer, paid bribes not only to receive specific
reciprocal benefits, but also to obtain a general degree of
influence over Honda executives. n35 Moreover, the
Reves Court noted that the operation or management test
does not necessarily limit section 1962(c) liability to an
enterprise's "insiders." Specifically, the Court stated that
"an enterprise also might be 'operated' or 'managed' by
others 'associated with' the enterprise who exert control
over it as, for example, by bribery." Id. At 184. This case,
as alleged, falls squarely within this example. I therefore
find that plaintiffs have stated a claim under section
1962(c).
n35 I note that this allegation is offered only
at a general level in the complaints. It was
discussed more clearly at oral argument and in
plaintiffs' opposition memoranda. Plaintiffs
should amend their complaints to more
specifically outline these claims.
3. Section 1962(d)
The parties' arguments with respect to the [**82]
RICO conspiracy count address familiar issues of
conspiracy liability. The parties do not dispute that
plaintiffs have pled the elements of a section 1962(d)
claim: the dealer defendants allegedly committed
predicate acts of mail fraud in furtherance of their
agreements with various specific bribe-taking Honda
executives. The only disputed issue is whether plaintiffs
have properly pled facts supporting the scope of the
conspiracy they allege. Plaintiffs allege a "global"
conspiracy: that "[Hendrick] conspired with Defendant
Honda and certain other bribe-paying Honda and Acura
dealers, some of whom are named above and others
whom are yet unknown to Plaintiffs ... to violate RICO .
1962(a), (b) and (c)." Breakaway Compl. at P 420; see
also Borman Compl. at 385; Austin Motor Compl. at P
220.
Hendrick argues that plaintiffs have not alleged that
any of the dealer defendants communicated with each
other in connection with the alleged schemes, nor that
Hendrick had any knowledge of or an intent to further a
global conspiracy to defraud plaintiff dealers as a group.
Hendrick thus invokes the familiar "hub and spoke"
conspiracy analysis: although there is no question that
[**83] plaintiffs have alleged the existence of a "hub"
(i.e., Honda) and of "spokes" (i.e., the individual
conspiracies between specific bribe-paying dealers and
Honda), plaintiffs have alleged no facts supporting the
existence of a "rim" to the conspiracy (i.e.,
communication among the various bribe-paying dealers).
Plaintiffs' main response is that specific facts indicating a
"rim" to the conspiracy are not necessary because they
have pled that Hendrick knew about the scope of the
global conspiracy and intended to further it. Plaintiffs'
contention really amounts to a claim that Hendrick,
allegedly a major bribe-paying dealer, must have known
about the conspiracy because it was so widespread. See
generally Kotteakos v. United States, 328 U.S. 750, 752-
55, 90 L. Ed. 1557, 66 S. Ct. 1239 (1946); Blumenthal v.
United States, 332 U.S. 539, 556-58, 92 L. Ed. 154, 68 S.
Ct. 248 (1947).
[*558] Although plaintiffs' allegations may be
somewhat conclusory, Hendrick's motion to dismiss the
section 1962(d) claim will be denied. As I described at
the May 3 hearing, the underlying concern of the dealer
defendants with respect to the section 1962(d) claims is
whether there is a possibility they may [**84] be
exposed to liability for all of the damages allegedly
caused by a nationwide, "global" conspiracy. That is an
issue that need not be resolved at the pleading stage. As
drafted, plaintiffs' claims sufficiently allege a global
conspiracy. As with a number of other issues in this case,
however, after the completion of discovery plaintiffs will
be required to point to specific facts indicating some
knowledge of a global conspiracy on the part of dealer
defendants in order to sustain their section 1962(d)
claims as alleged.
4. Miscellaneous Issues
The remaining group of dealer defendants filing
separate memoranda are the individuals named in their
capacities as executors of the estate of Martin Lustgarten,
an alleged bribe-paying dealer who died in 1989
(Lustgarten). Lustgarten is named only in the Borman
complaint.
Lustgarten argues that plaintiffs failed to comply
with Pennsylvania probate requirements and therefore
cannot assert claims against Martin Lustgarten's estate.
n36 Plaintiffs filed their claims against the Lustgarten
estate by serving one executor, Raymond Hovsepian, in
1995. The Lustgarten defendants argue that plaintiffs'
claims against the estate are deficient [**85] for two
reasons: (1) under Pennsylvania law, all executors must
be jointly sued to state a claim against an estate, see 21
Standard Pa. Practice 2d . 115:28; Gram v. May, 41
F.R.D. 52 (E.D. Pa. 1966), and (2) under Pennsylvania
probate procedures, any claims not presented at the final
"audit" of an account are barred, see 20 Pa. Cons. Stat. .
. 3386-89.
n36 Lustgarten also argues that plaintiffs'
civil RICO claims are punitive in nature and
therefore do not survive the death of Martin
Lustgarten. "Courts that have considered the
question of claim survival in the context of civil
RICO have adopted a common law rule that
remedial claims survive while punitive claims
abate upon the death of the defendant."
Confederation Life Ins. Co. v. Goodman, 842 F.
Supp. 836, 837 (E.D. Pa. 1994). In one of the few
reported decisions addressing this issue, the
Fourth Circuit has held that "we think that civil
RICO claims should survive. Certainly, the
primary purpose of the private right of action
created by RICO is remedial." Faircloth v.
Finesod, 938 F.2d 513, 518 (4th Cir. 1991).
[**86]
Plaintiffs respond that they should not be penalized
(1) for serving the only executor reasonably known to
them at the time of filing, or (2) for failing to act on
notice of a probate proceeding published only in a local
newspaper. Putting aside the procedural sufficiency of
plaintiffs' service on the estate, I find that defendants are
correct that plaintiffs' claims against the estate are time-
barred. In Tulsa Professional Collection Servs. v. Pope,
485 U.S. 478, 99 L. Ed. 2d 565, 108 S. Ct. 1340 (1988),
the Court held that state probate nonclaim statutes can
extinguish rights of action as long as due process
minimums are met. Id. at 489-91. The Pope Court also
noted that "for creditors who are not 'reasonably
ascertainable,' publication notice can suffice." Id. at 490.
n37
n37 In any event, the sufficiency of the
publication notice in Lustgarten's probate
proceedings is not really at issue. According to
plaintiffs themselves, they could not even have
asserted a claim in 1989; they contend for statute
of limitations purposes that they did not become
aware of the facts in this case until years later.
[**87]
In any event, plaintiffs seem to concede that
Lustgarten's estate is not the proper party. In their
opposition, plaintiffs state that "the Lustgarten Executors
have ignored the Borman Plaintiffs' allegation that it was
Lustgarten's entities through which bribes and kickbacks
flowed to various Honda agents. The Lustgarten
Dealerships, which are not 'deceased', conducted
Lustgarten's business affairs and acted, for all practical
purposes, as conduits for Lustgarten's bribe-paying
activity. Plaintiffs have requested leave to add those
entities as defendants once they are identified." Such
leave is granted.
D. Lyon & Lyon
Roland Smoot, a partner in the California-based law
firm of Lyon & Lyon, served on [*559] the board of
directors of American Honda during the time period at
issue in this case. The firm served as American Honda's
general counsel. Lyon & Lyon also allegedly oversaw
American Honda's conflict of interest policies (related to,
for example, the receipt of gifts and favors by Honda
employees from dealers) and advised various American
Honda executives during the criminal investigations in
the early 1990's. Plaintiffs' basic allegation against Lyon
& Lyon is that it helped [**88] perpetuate the bribery
scheme throughout the 1980's and by committing acts of
obstruction of justice during the criminal investigations.
Lyon & Lyon and Smoot are named as defendants in
the Borman and Austin Motors complaints. Borman
asserts violations of sections 1962(c) and (d); Austin
Motors brings a claim under section 1962(d) that is
effectively the same as Borman's count under that
section. I evaluate these counts below. I find that, as
currently alleged, these claims are insufficient. Because
they may be properly restated, however, plaintiffs are
granted leave to amend.
1. Section 1962(c)
Plaintiffs offer the following section 1962(c)
allegations: (1) that there was an enterprise consisting of
the association of the three Honda entities; (2) that Lyon
& Lyon "participated in the conduct" of the Honda
enterprise's affairs because Lyon & Lyon attorneys held
management positions with American Honda, covered up
reports of bribe-taking and conflicts of interest by
executives and advised Honda executives to withhold
information during the criminal investigation; and (3)
that defendants engaged in a pattern of activity by
committing predicate acts of obstruction [**89] of
justice, witness tampering and mail fraud. Plaintiffs
allege that defendants knew about the bribery scheme,
played a central role within Honda to further the scheme
by "keeping the lid" on complaints from non-bribe-
paying dealers and then carried out a cover-up that
prolonged the scheme's duration.
a. "Participation" by Lyon & Lyon
Defendants first argue that they did not "participate
in the conduct of" Honda's affairs. They rely on Reves v.
Ernst & Young, 507 U.S. 170, 122 L. Ed. 2d 525, 113 S.
Ct. 1163 (1993), where the Court held that an outside
accounting firm could not be liable under section 1962(c)
because it did not "operate or manage" the enterprise.
Lyon & Lyon's basic contention is that it was an outside
professional adviser with no authority to stop the scheme.
In response, plaintiffs argue that they have alleged that
Smoot served on Honda's board of directors, that several
Lyon & Lyon partners received salaries from Honda
apart from any fees for professional services, that Lyon
& Lyon attorneys knew about the scheme and acted to
further it, and that Lyon & Lyon had management-like
responsibility for overseeing Honda's activities with
respect to conflicts of [**90] interest and other dealer
relations issues.
Defendants cite several post-Reves cases finding that
somewhat similar allegations against attorneys fail to
constitute "operation or management" of the enterprise.
In Bowdoin Constr. Corp. v. Rhode Island Hosp. Trust
Nat'l Bank, 869 F. Supp. 1004, 1009 (D. Mass. 1994), the
court found insufficient an allegation that "with full
knowledge of the fraud being perpetrated, the law firms
counseled their respective clients to continue to
participate in the fraudulent transactions and to keep
them hidden from the victims of the fraud." Id. at 1009;
see also Biofeedtrac v. Kolinor Optical Enters., 832 F.
Supp. 585, 591 (E.D.N.Y. 1993) (noting that "corporate
counsel customarily [serve as corporate directors or
officers] without becoming a part of the operation or
management of the enterprise"). n38 Plaintiffs, on the
other hand, point to cases upholding section 1962(c)
allegations against professionals acting to further a
fraudulent scheme. See, e.g., Clark v. Milam, 847 F.
Supp. 409, 417 (S.D. W. Va. 1994) (declining to dismiss
allegation that accountants "knowingly concealed the
activity of [*560] other defendants who exercised
[**91] day-to-day control over the enterprise. The
concealment of the other defendants' conduct is alleged
to have been integral to the continuing operation of the
RICO enterprise.").
n38 I note, however, that in Biofeedtrac the
attorney-defendant's directorship was more in the
nature of a transactional formality; he had no vote
as a shareholder and had no employment contract.
Here, plaintiffs have alleged that Smoot was a
full-fledged director of American Honda, with
full voting power and a monthly salary.
These cases reveal an underlying distinction between
acting in an advisory professional capacity (even if in a
knowingly fraudulent way) and acting as a direct
participant in corporate affairs. E.g., Bowdoin Constr.,
869 F. Supp. at 1009 (noting that firm only "counseled"
clients to continue fraud) (emphasis added); Biofeedtrac,
832 F. Supp. at 591 (noting that attorney-defendant's
"role was confined, at all times, to providing legal advice
and legal services" and "at no time does he appear to
[**92] participate in or even offer an opinion regarding a
business point"); see also Department of Economic Dev.,
924 F. Supp. at 465-69. Here, plaintiffs have alleged that
Lyon & Lyon attorneys played a direct management role
"with respect to policy and procedure for handling" the
bribery scheme, Borman Compl. at P 297, in particular to
the extent plaintiffs claim that Lyon & Lyon attorneys
fielded complaints from non-bribe paying dealers,
handled Honda's internal investigations and assisted in
covering up the scheme. Plaintiffs also allege that Smoot
and other Lyon & Lyon were paid directors with a full
voice on the American Honda.
I find that allegations of this kind do assert
"participation" in the Honda enterprise. Unfortunately, as
drafted, the current complaints do not offer sufficiently
specific allegations to put Lyon & Lyon's notice as to
precisely how it allegedly played such a direct role; much
of my above discussion derives from plaintiffs'
opposition memoranda and oral argument. Plaintiffs are
accordingly directed to amend their complaints.
b. Pattern Requirement
Lyon & Lyon's second argument under section
1962(c) is that plaintiffs have failed to allege a "pattern"
[**93] of racketeering. Obviously, that argument is
mooted if plaintiffs properly re-plead to allege Lyon &
Lyon's direct role in the bribery scheme as discussed
above. In that event plaintiffs' present allegations that
between 1990 and 1992 various Honda executives
committed perjury or otherwise obstructed criminal
investigations on the advice of Lyon & Lyon will simply
supplement its allegations concerning Lyon & Lyon's
earlier involvement. n39 If, on the other hand, plaintiffs
conclude that they cannot properly allege facts sufficient
to support their presently conclusory averment regarding
Lyon & Lyon's direct participation, but that they can
properly allege facts to support an averment of Lyon &
Lyon's direct management of a cover-up in the later
years, I will then consider the issues raised by this more
limited theory.
n39 I note, however, that based upon the
information contained in the parties' memoranda,
it appears that at least some of the activities that
plaintiffs have characterized as "obstruction of
justice" may have been an entirely proper course
of legal representation.
[**94]
2. Section 1962(d)
The elements of a claim under section 1962(d)
traditionally have been stated to be: (1) knowledge of the
general nature of the conspiracy; (2) agreement by the
defendant: (a) to personally commit a violation of
sections 1962(a)-(c); (b) to aid or abet a violation; or (c)
that another co-conspirator commit a violation; and (3)
injury caused by an act in furtherance of the conspiracy.
See United States v. Pryba, 900 F.2d 748, 760 (4th Cir.),
cert. denied, 498 U.S. 924, 112 L. Ed. 2d 258, 111 S. Ct.
305 (1990). To the extent that this formulation refers to
aiding and abetting a substantive RICO violation, it will
have to be reconstituted, at least as to outside advisors, in
the event that courts adopt what appears to be the
emerging rule in post-Reves and post-Central Bank of
Denver cases. Indeed, courts eventually will have to
analyze more closely than they have thus far the inter-
relationship between Reves and section 1962(d) claims in
the outside advisor context. n40 Again, however,
resolution [*561] of these issues can await another day.
If plaintiffs' amended complaints allege Lyon & Lyon's
direct involvement in the affairs of Honda with regard
[**95] to the bribery scheme, that will suffice for section
1962(d) purposes just as it will under section 1962(c).
n40 What I mean by this is that under
traditional conspiracy theory it appears clear that
an outside advisor who intentionally lent her
services to an illegal scheme knowing of its
purpose could be held criminally culpable and
civilly liable for the conspiracy. This would
include, for example, an attorney who, without
any direct participation, knowingly advised her
client to prepare false materials for public
distribution to further a scheme to defraud - the
type of conduct which post-Reves is not within
the scope of section 1962(c).
Of course, section 1962(d) cases could be
treated differently from those arising under
section 1962(c) on the very ground that different
subsections of the statute are involved. Such
technical distinctions abound in decisions
interpreting other RICO provisions, particularly
with regard to the differences between sections
1962(a) and (b) and section 1962(c). Perhaps for
that reason several post-Reves opinions
upholding criminal convictions of advisors under
section 1962(d) have not seemed to be very
troubled by the issue. E.g., MCM Partners v.
Andrews-Bartlett & Assoc., 62 F.3d 967, 979-80
(7th Cir. 1995). However, to permit advisors,
particularly outside professionals, to be held
liable in civil RICO cases under a section 1962(d)
theory when, in the wake of Reves, a section
1962(c) claim could not be maintained against
them would seem to eviscerate the Supreme
Court's apparent purpose of permitting outside
professionals to extricate themselves from RICO
actions by way of a motion to dismiss or for
summary judgment. If, as is true under
conventional conspiracy analysis, knowledge and
intent are the critical issues to be decided, only
rarely could such motions be granted.
The Third Circuit focused more closely upon
these concerns than have other courts in United
States v. Antar, 53 F.3d 568, 580-81 (3d Cir.
1995). However, the distinction which the court
drew between "conspiring to operate or manage
an enterprise," on the one hand, and "conspiring
with someone who is operating and managing the
enterprise," on the other, while appealing on its
face and sensible in the context of the facts which
the court was addressing, may prove difficult to
apply in practice.
[**96]
IV.
Plaintiffs assert claims under two antitrust statutes:
(1) The Sherman Act, 15 U.S.C. . 1, n41 and (2) the
Robinson-Patman Act, 15 U.S.C. . 13(c). Each will be
addressed in turn. n42
n41 While the plaintiffs originally asserted
Sherman Act claims under sections 1 and 2, they
have since consented to the dismissal of their
section 2 claims. They also have consented to the
dismissal of their rule of reason claims under
section 1 as well as their per se theory alleging
resale price maintenance. Remaining for
consideration, therefore, is their per se claim
under section 1 resting on a "group boycott"
theory.
n42 While Honda Japan argues separately
that the antitrust claims should be dismissed at
least as to it, the vicarious liability principles
outlined in my discussion of plaintiffs' RICO
claims against Honda Japan, see supra section
III.B, also apply to the plaintiffs' antitrust claims.
See generally American Soc'y of Mechanical
Eng'rs, 456 U.S. at 565-76 (principles of agency
and vicarious liability apply to antitrust claims);
see also Big Apple BMW, Inc. v. BMW of N. Am.,
Inc., 974 F.2d 1358, 1373 (3rd Cir. 1992), cert.
denied, 507 U.S. 912, 122 L. Ed. 2d 659, 113 S.
Ct. 1262 (1993).
[**97]
A. Sherman Act Claims
Section 1 of the Sherman Act provides: "Every
contract, combination in the form of a trust or otherwise,
or conspiracy in restraint of trade or commerce among
the several states ... is declared to be illegal." (emphasis
added). The Supreme Court has long since interpreted the
statute as applying only to those restraints that
unreasonably restrain trade and competition. See
Standard Oil Co. v. United States, 221 U.S. 1, 58-61, 55
L. Ed. 619, 31 S. Ct. 502 (1911). Unlike section 2 of the
Sherman Act, a violation of section 1 requires a showing
of concerted action or an agreement between two or more
persons to restrain trade. See, e.g., R.D. Imports Ryno
Indus., Inc. v. Mazda Distrib., Inc., 807 F.2d 1222, 1224
(5th Cir.), cert. denied, 484 U.S. 818, 98 L. Ed. 2d 38,
108 S. Ct. 75 (1987). The elements that generally
establish a section 1 violation include: (1) joint or
concerted action, (2) that unreasonably restrains trade,
(3) in interstate commerce. Id.
While most restraints require elaborate inquiry under
the rule of reason, n43 [*562] the Supreme Court has
recognized that "there are certain agreements or practices
which because [**98] of their pernicious effect on
competition and lack of any redeeming virtue are
conclusively presumed to be unreasonable ...." Northern
Pac. Ry. Co. v. United States, 356 U.S. 1, 5, 2 L. Ed. 2d
545, 78 S. Ct. 514 (1958). Such "per se" rules evolved
out of the need for business certainty and litigation
efficiency. Arizona v. Maricopa County Medical Soc'y,
457 U.S. 332, 344, 73 L. Ed. 2d 48, 102 S. Ct. 2466
(1982). Certain categories of restraints are so inherently
and facially anticompetitive that elaborate inquiry into
the competitive effects on the relevant market is not
required. Northern Pacific Ry., 356 U.S. at 5. Those
categories of restraints that have traditionally received
per se treatment include horizontal price fixing, vertical
resale price maintenance, group boycotts, and territorial
allocations. See, e.g., George R. Whitten, Jr., Inc. v.
Paddock Pool Builders, Inc., 508 F.2d 547, 559 (1st Cir.
1974), cert. denied, 421 U.S. 1004, 44 L. Ed. 2d 673, 95
S. Ct. 2407 (1975). Whether to apply a per se rule or the
rule of reason is a question of law. See Gregoris Motors
v. Nissan Motor Corp., U.S.A., 630 F. Supp. 902, 906
(E.D.N.Y. 1986). [**99]
n43 Under the rule of reason, "the fact finder
weighs all of the circumstances of a case in
deciding whether a restrictive practice should be
prohibited as imposing an unreasonable restraint
on competition." Continental T.V., Inc. v. GTE
Sylvania Inc., 433 U.S. 36, 49, 53 L. Ed. 2d 568,
97 S. Ct. 2549 (1977). Inquiry must be made into
the relevant product and geographic markets to
determine the effects of the restraint on
competitive forces. The rule of reason inquiry is
fact-intensive and generally requires elaborate
analysis of the relevant market, the ultimate test
being whether the restraint harms competition,
not whether it hurts competitors. See, e.g.,
Cemar, Inc. v. Nissan Motor Corp., U.S.A., 678 F.
Supp. 1091, 1098 (D. Del. 1988) (citing
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,
429 U.S. 477, 488, 50 L. Ed. 2d 701, 97 S. Ct.
690 (1977)).
Plaintiffs attempt to invoke the per se rule by
classifying the bribery scheme as a "group boycott." In
their representative complaints, plaintiffs [**100] allege
that the bribery scheme was illegal since it acted as a
horizontal agreement among the defendants and co-
conspirators giving favorable allocations to defendant
dealers. See Borman Compl. P 329; Breakaway Compl. P
304; Austin Compl. P 236. As a result, plaintiffs were
excluded from access to products and competition on an
equal basis. Determining whether concerted action
qualifies as a group boycott, thus meriting per se
treatment, has historically been the most difficult issue
facing courts in the context of the per se rule. As the
Supreme Court noted: "There is more confusion about
the scope and operation of the per se rule against group
boycotts than in reference to any other aspect of the per
se doctrine." Northwest Wholesale Stationers v. Pacific
Stationery, 472 U.S. 284, 294, 86 L. Ed. 2d 202, 105 S.
Ct. 2613 (1985) (citing L. Sullivan, Law of Antitrust
229-30 (1977)).
The Supreme Court has cautioned against
application of the per se rule by pigeonholing certain
conduct as a group boycott. Id. (noting that types of
conduct that fall within category of group boycotts is far
from certain and thus courts must use great care); FTC v.
Indiana [**101] Fed'n of Dentists, 476 U.S. 447, 458,
90 L. Ed. 2d 445, 106 S. Ct. 2009 (1986) ("We decline to
resolve this case by forcing the Federation's policy into
the 'boycott' pigeonhole and invoking the per se rule.").
The Court noted in Indiana Federation of Dentists:
The category of restraints classed as group boycotts is
not to be expanded indiscriminately, and the per se
approach has generally been limited to cases in which
firms with market power [at the same level of
distribution] boycott suppliers or customers in order to
discourage them from doing business with a competitor.
476 U.S. at 458. If the economic impact of a certain
business practice is not immediately obvious, the per se
rule should not be used by classifying the conduct as a
group boycott. Id. at 458-9. "The mere allegation of a
concerted refusal to deal does not suffice because not all
concerted refusals to deal are predominantly
anticompetitive." Northwest Wholesale Stationers, 472
U.S. at 298.
Some courts have used the phrase "classic group
boycotts" to describe the type of boycotts obviously
anticompetitive and thus deserving of per se treatment.
"Classic" boycotts essentially [**102] have two
characteristics. First, they involve horizontal agreements
among competitors at the same level of distribution
refusing to deal with suppliers or customers who deal
with their competitors. See, e.g., Weiss v. York Hosp.,
745 F.2d 786, 819 (3rd Cir. 1984) ("classic example" of
group boycott when businesses at one level of [*563]
distribution agree among themselves not to deal with
manufacturer who deals with their competitor), cert.
denied, 470 U.S. 1060, 84 L. Ed. 2d 836, 105 S. Ct. 1777
(1985). Second, they involve anticompetitive purpose or
animus; that is, the specific purpose behind the restraint
is to exclude competitors and to quell price competition.
See Seaboard Supply Co. v. Congoleum Corp., 770 F.2d
367, 374 (3rd Cir. 1985); Commonwealth of Pa. v.
Pepsico, Inc., 836 F.2d 173, 183 (3rd Cir. 1988);
Charley's Taxi Radio Dispatch Corp. v. SIDA of Hawaii,
Inc., 810 F.2d 869, 877 & n.8 (9th Cir. 1987); Kreuzer v.
American Academy of Periodontology, 237 U.S. App.
D.C. 43, 735 F.2d 1479, 1491 (D.C. Cir. 1984).
Plaintiffs in this case have failed to allege facts that
demonstrate a classic group boycott by the Honda
defendants and the defendant dealers. [**103] First,
despite their conclusory allegations that the bribery
scheme was a horizontal restraint, the agreements
between individual defendant dealers and the Honda
defendants were vertical in nature. Honda is a
manufacturer and the defendant dealers act as
distributors. Plaintiffs make no allegation that the dealers
conspired among themselves to exclude the plaintiffs
from competition. Second, they have failed to adequately
allege anticompetitive purpose. Indeed, the facts alleged
demonstrate that Honda executives participated in the
scheme in order to receive supplemental income in the
form of bribes. The defendant dealers wanted more
favorable allocations, in both numbers and "mix," in
order to reap extra profits. See, e.g., Borman Compl. P
137. While it is true that the defendant dealers allegedly
intended to injure the plaintiffs through the bribery
scheme, the complaints make clear that they intended to
do so only to the extent they would receive extra profits
from misallocated cars rather than the plaintiffs. See id.
Plaintiffs contend that the bribery scheme was a
horizontal restraint, and thus deserves per se treatment,
since the anticompetitive effects were [**104] horizontal
in nature. Both Borman and Breakaway rely heavily on
Com-Tel, Inc. v. DuKane Corp., 669 F.2d 404 (6th Cir.
1982), for this proposition. In DuKane, two distributors
competed for the installation of sound and telephone
systems at a school. Id. at 406. One distributor asked the
manufacturer not to sell equipment to the plaintiff
distributor for installation. Id. at 407. The first
distributor also conspired with other competing
distributors not to sell equipment to the plaintiff. Id.
Citing the Third Circuit's decision in Cernuto, Inc. v.
United Cabinet Corp., 595 F.2d 164 (3rd Cir. 1979), the
Court ruled the restraint a per se group boycott since the
"'desired impact [of the restraint was] horizontal and on
the dealer, not the manufacturer, level.'" DuKane Corp.,
669 F.2d at 411 (quoting Cernuto, 595 F.2d at 168).
While the restraints may have been applied vertically, the
thrust and effect of the restraint was to protect the
defendant distributors from horizontal competition. 669
F.2d at 412.
DuKane is distinguishable from the facts here, and
the plaintiffs' reliance on DuKane is otherwise
misplaced. First, the defendants [**105] in DuKane
conspired to rid plaintiff, in totality, as a competitor by
agreeing not to sell any equipment to the plaintiff. Here,
there is no allegation that the defendants conspired to
completely exclude the plaintiffs from the relevant
markets. Second, DuKane did involve a horizontal
agreement since the defendant distributors, in addition to
conspiring with the manufacturer, conspired among
themselves to exclude plaintiff as a competitor. Here,
there has been no allegation that the defendant dealers
conspired among themselves. See Dunn & Mavis, Inc. v.
Nu-Car Driveaway, Inc., 691 F.2d 241, 244-45 (6th Cir.
1982) (holding no per se group boycott where restraint,
unlike DuKane, involved no horizontal component since
agreement existed only between manufacturer and
retailer of transport services). Third, the restraint in
DuKane was clearly a "naked restraint" intended to
destroy competition. Plaintiffs have failed to adequately
allege anticompetitive animus in this case. The bribery
scheme was designed to steal profits, not destroy
competition. n44 See, e.g., [*564] Borman Compl. P
137. Finally, DuKane's reasoning that the restraint was
horizontal because its [**106] effects stifled competition
at the same level of distribution is unpersuasive.
n44 Plaintiffs do allege, in conclusory
fashion within its section 2 claim, that defendant
Honda intended to drive plaintiffs out of the
competing market in an attempt to monopolize.
See, e.g., Borman Compl. P 335. Since Honda is
not a competitor of plaintiffs, this allegation alone
is insufficient to demonstrate that anticompetitive
animus was at the heart of the bribery scheme.
This last point was explicitly addressed by the
Supreme Court in Business Electronics v. Sharp
Electronics, 485 U.S. 717, 99 L. Ed. 2d 808, 108 S. Ct.
1515 (1988). A retailer of electronic equipment
complained to the manufacturer that the plaintiff, a
competing retailer, was price cutting. Id. at 721. The
retailer threatened the manufacturer with termination if
the manufacturer did not terminate its distribution
arrangement with plaintiff. Id. The manufacturer
terminated the plaintiff, and the other retailer became the
exclusive dealer [**107] in the relevant geographic area.
Id. The Court held the per se approach inappropriate with
respect to such a restraint. Id. at 724-36. In rejecting the
plaintiff's argument that the restraint was really
horizontal in nature, the Court reasoned:
Restraints imposed by agreement between competitors
have traditionally been denominated as horizontal
restraints, and those imposed by agreement between
firms at different levels of distribution as vertical
restraints. ... The dissent apparently believes that whether
a restraint is horizontal depends upon whether its
anticompetitive effects are horizontal, and not upon
whether it is the product of a horizontal agreement. That
is of course a conceivable way of talking, but if it were
the language of antitrust analysis there would be no such
thing as an unlawful vertical restraint, since all
anticompetitive effects are by definition horizontal
effects .... [A] restraint is horizontal not because it has
horizontal effects, but because it is the product of a
horizontal agreement.
Id. at 730 & n.4 (citation omitted). The Court rejected
the group boycott theory outright since the agreement
was not between [**108] competitors, but between
manufacturer and retailer. Id. at 734 & n.5.
On its facts, Business Electronics involved a far
more egregious restraint designed to exclude competition
than the bribery scheme at issue in this case. Indeed, the
very goal of the restraint in Business Electronics was to
eliminate price competition, a goal ultimately fulfilled.
Here, no agreement has been alleged by which defendant
dealers sought to restrain price competition or to entirely
exclude plaintiffs from competing. The preferential
allocations occasioned by bribes might constitute fraud
and common law violations in this case, but they do not
constitute per se violations of the Sherman Act. See also
Gregoris, 630 F. Supp. at 906 (finding that bribery
scheme between car manufacturer and dealers by which
dealers received favorable allocations was vertical non-
price fixing restraint and therefore not per se violation);
Jim Forno's Continental Motors, Inc. v. Subaru, 649 F.
Supp. 746, 753-54 (N.D.N.Y. 1986) (finding unlawful car
allocations to dealers not to be per se violation).
B. Robinson-Patman Act Claims
Plaintiffs' second antitrust theory arises under
section [**109] 2(c) of the Robinson-Patman Act.
Section 2(c) provides as follows:
It shall be unlawful for any person engaged in commerce,
in the course of such commerce, to pay or grant, or to
receive or accept, anything of value as a commission,
brokerage, or other compensation, or any allowance or
discount in lieu thereof, except for services rendered in
connection with the sale or purchase of goods, wares, or
merchandise, either to the other party to such transaction
or to an agent, representative, or other intermediary
therein where such intermediary is acting in fact for or in
behalf, or is subject to the direct or indirect control, of
any party to such transaction other than the person by
whom such compensation is so granted or paid.
15 U.S.C. . 13(c).
The Robinson-Patman Act was enacted to curb
tactics that had been developed by large buyers and
sellers to circumvent the discriminatory price provisions
of [*565] the Clayton Act. See generally Stephen Jay
Photography, Ltd. v. Olan Mills, Inc., 903 F.2d 988, 991-
93 (4th Cir. 1990). Rather than forcing direct price
concessions which violated the Clayton Act, monopolists
were using indirect price concessions to achieve the same
[**110] goal. Id. at 992. Section 2(c) was particularly
directed at the use of "dummy" brokerage fees whereby
suppliers would pay commissions to persons employed
by large chain store buyers when no service was actually
rendered by such employees. Seaboard Supply, 770 F.2d
at 371. Such conduct allowed sellers to secure sales, and
buyers to secure price rebates in the form of
commissions. See id.
Although "dummy" brokerage fees constituted the
species of the problem that the Robinson-Patman Act
addressed, section 2(c) is broadly phrased and covers a
generic practice: discrimination in the pricing and
distribution of goods because of a buyer's or a seller's
demand for a receipt of benefits below or above the
stated price by way of rebate, discount, payment (direct
or indirect) or otherwise. The Act also makes unlawful
the conferral of such benefits by the other party. The
course of conduct alleged by plaintiffs in this case is an
iteration of this practice and falls squarely within the
literal terms and the intendment of the statute. According
to plaintiffs, Honda executives, acting within the scope
of their authority, demanded that dealers make payments
or provide gifts to them [**111] in order to purchase
vehicles which Honda zone managers had the
discretionary authority to allocate. The defendant dealers
at least acquiesced in (and perhaps encouraged) these
demands and therefore received more of the allocated
vehicles to plaintiffs' detriment. This, in effect, mirrors
the practice of charging "dummy" brokerage fees. Here,
it is the manufacturer/supplier who is alleged to have
possessed leverage and demanded payments to third
parties (the executives in their personal capacity) that
ultimately benefitted the manufacturer/supplier itself.
The alleged benefit was the reduction in compensation
that American Honda had to pay to its executives by
virtue of the payments and gifts that they were receiving
from dealers.
Defendants argue that plaintiff's claim is flawed
because they have failed to allege any independent
antitrust injury. While I recognize that there is a split of
authority on the issue, compare Federal Paper Bd. Co.,
Inc. v. Amata, 693 F. Supp. 1376, 1388-89 (D. Conn.
1988), with, Metrix Warehouse v. Daimler-Benz
Aktiengesellschaft, 716 F.2d 245, 247 (4th Cir. 1983), in
my judgment such an allegation is unnecessary. In
enacting section 2(c) of [**112] the Robinson-Patman
Act, Congress legislatively declared that the practices
which it prohibited were anticompetitive. In order to
establish a claim under the Act all that a plaintiff need
show is that as a result of such a practice he suffered
identifiable harm proximately caused by the statutory
violations. Plaintiffs have done so here. According to
their allegations, they lost profits on the sale of vehicles
that were allocated to other dealers for payments and
gifts that were made in violation of the Act. Of course,
plaintiffs ultimately will have to present competent
evidence of concrete loss in regard to their Robinson-
Patman claims just as they will have to do in regard to
their RICO and other claims. See. e.g., Capital Ford
Truck Sales, Inc. v. Ford Motor Co., 819 F. Supp. 1555,
1569-70 (N.D. Ga. 1992). However, such evidence alone
will suffice for Robinson-Patman purposes. See, e.g.,
Metrix Warehouse, 716 F.2d at 247. n45
n45 Citing Stephen Jay Photography,
defendants contend that in a commercial bribery
case such as this the Robinson-Patman Act does
not apply unless the alleged payment was made to
someone who has breached a fiduciary duty that
she owes to her principal. From this it flows, so
argue defendants, that plaintiffs have failed to
state a claim since, according to their own
allegations, Honda executives did not breach any
fiduciary duty that they owed to their employer
but, instead, were acting within the scope of their
authority. Defendants have misread Stephen Jay
Photography and created a false syllogism. In that
case the Fourth Circuit ruled that in determining
whether a person to whom payments are made in
connection with a sales transaction is acting as a
purchasing agent or similar intermediary for the
buyer, it is appropriate to examine whether she
stands in a fiduciary relationship to the buyer. See
Stephen Jay Photography, 903 F.2d at 992-93.
The court did not suggest that there had to be a
breach of that relationship in order for a
Robinson-Patman violation to be established. Nor
could such a holding be feasible. In the classic
"dummy broker" situation which clearly falls
within the purview of the Act, the broker who on
behalf of a large-scale purchaser receives
payments from a supplier and then turns them
over to her principal has breached no fiduciary
duty to the latter.
[**113]
[*566] V.
Plaintiffs assert claims under the Dealers' Day in
Court Act ("DDCA"), 15 U.S.C. . . 1221 et seq. The
DDCA provides a cause of action for automobile dealers
against automobile manufacturers who fail to "act in
good faith in performing or complying with any terms or
provisions of the franchise, or in terminating, canceling,
or not renewing the franchise." Id. . 1222. "Good Faith"
is narrowly defined by the Act:
The term "good faith" shall mean the duty of each party
to any franchise, and all officers, employees, or agents
thereof to act in a fair and equitable manner toward each
other so as to guarantee the one party freedom from
coercion, intimidation, or threats of coercion or
intimidation from the other party.
Id. . 1221(e) (emphasis added).
Courts have universally concluded that lack of "good
faith" has a limited and restricted meaning; it does not
mean simple unfairness or breach of a franchise
agreement, but rather "actual or threatened coercion or
intimidation" imposed upon the dealer by the
manufacturer. See, e.g., Wallace Motor Sales v.
American Motor Sales Corp., 780 F.2d 1049, 1056 (1st
Cir. 1985) ("The mere fact that a dealer [**114] may
have felt it had been coerced or intimidated is not
sufficient."). In keeping with the intended narrow scope
of the Act, and to prohibit a broadened definition of
"coercion," several circuits have also concluded that
coercion or intimidation must include a "wrongful
demand" which will result in sanctions if not complied
with. See id. (citations omitted). "Coercion" and a
"wrongful demand" necessarily require a showing that a
dealer perceived a threat of sanction if it did not embark
on a course of conduct intended by the manufacturer. See
Sherman v. British Leyland Motors, Ltd., 601 F.2d 429,
445 (9th Cir. 1979) (noting that courts must consider
"not only whether a manufacturer has brought pressure to
bear on the dealer, but its reason for doing so"); H.D.
Corp. of Puerto Rico v. Ford Motor Co., 791 F.2d 987,
991 (1st Cir. 1986) ("That plaintiffs may have felt
'forced' to cover by attempting to sell parts and
accessories on the open market does not alter this
conclusion, because there is nothing in the complaint to
suggest that defendants refused to repurchase the parts
and accessories in order to compel such a sale.").
Despite their conclusory allegations that they
[**115] felt "coerced and intimidated" into purchasing
vehicles from dealer defendants at high prices because of
the bribery scheme, plaintiffs' complaints are plainly
insufficient to establish a DDCA claim against any
Honda defendant. Plaintiffs have made no allegation that
Honda executives threatened them with termination, or
that other dealers would get more cars, if they did not
embark on a certain course of conduct. Nor have they
alleged that they felt "forced" or "compelled" to purchase
cars from other dealers because they thought they would
be sanctioned. They purchased vehicles from other
dealers because they were not getting enough to keep up
with demand, not because they felt they would be
sanctioned by Honda if they did not. If Honda executives
had elicited bribes from plaintiffs with the threat that
allocations would go to other dealers if not paid, then the
elements of coercion and wrongful demand necessary to
establish a claim would be present. But plaintiffs make
no allegation that Honda executives approached them
with a quid pro quo. Indeed, they specifically aver that
they had no knowledge regarding the alleged bribery
scheme until certain Honda executives pleaded guilty to
[**116] criminal indictments after a criminal
investigation. See, e.g., Borman Compl. P 225.
Plaintiffs contend that an explicit "wrongful
demand" is not required to state a claim. Rather, coercion
and wrongful demand can be inferred from a course of
conduct. See Borman Opp'n at 58-9. In support of this
proposition, plaintiffs rely heavily on Marquis v.
Chrysler Corp., 577 F.2d 624 (9th Cir. 1978), which
held that a wrongful demand can be implicit and inferred
from the facts and circumstances "without a showing of
formal [*567] demand." Id. at 633. While Marquis is
against the weight of authority, it is inapposite since
there was evidence of at least implied coercion in that
case. The dealer was compelled to meet certain sales
quotas or face the threat of franchise termination, all in
furtherance of the manufacturer's unlawful motives. See
id. at 634-35. The dealer was in fact terminated. Here,
there is no evidence of an implied coercion. Again,
according to plaintiffs' own allegations, plaintiffs had no
idea they were required to pay bribes or face the threat of
decreased allocations and inadequate "mixes." Their
argument that they were "forced" to purchase vehicles
[**117] from other dealers as the result of the scheme,
n46 a scheme they had no knowledge of, fails to establish
the coercive relationship between them and Honda
necessary to make out a DDCA claim. See H.D. Corp. of
Puerto Rico, 791 F.2d at 991; see also Lawrence
Chrysler Plymouth, Inc. v. Chrysler Corp., 461 F.2d 608,
610 (7th Cir. 1972) ("The [DDCA] does not provide a
new remedy for breach of contract but creates a new
cause of action, an indispensable element of which is ... a
lack of good faith in which coercion, intimidation, or
threats thereof, are at least implicit"), cert. denied, 409
U.S. 981, 34 L. Ed. 2d 245, 93 S. Ct. 317 (1972).
n46 Plaintiff Breakaway also alleges that it
was "coerced" into withdrawing its application
for an additional dealer point. If it did not submit
a "weaker" application, Breakaway claims it
would have no chance at receiving the award.
Breakaway Opp'n at 96. Breakaway's complaint
makes no allegation that Honda executives made
any threats to this effect. See Breakaway Compl.
PP 169-175. Breakaway also argues in its
opposition that Honda "coerced" it into falsifying
sales reports and into buying unpopular models.
These allegations, however, are not contained in
Breakaway's complaint.
[**118]
VI.
For the foregoing reasons, the motions to dismiss are
granted in part and denied in part, and plaintiffs are
granted leave to amend. A separate order is being entered
herewith.
Date: August 30, 1996
J. Frederick Motz
United States District Judge
ORDER
For the reasons stated in the memorandum entered
herewith, it is, this 30th day of August, 1996,
ORDERED:
1. Defendants' motions to dismiss are granted in part
and denied in part; and
2. Plaintiffs are granted leave to amend their
complaints.
J. Frederick Motz
United States District Judge
.