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LEXSEE 958 F.Supp. 1045
IN RE AMERICAN HONDA MOTOR CO., INC. DEALERSHIPS RELATIONS
LITIGATION
MDL 95 - 1069
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND
958 F. Supp. 1045; 1997 U.S. Dist. LEXIS 3538
March 11, 1997, Decided
March 11, 1997, filed
CORE TERMS: dealer, kickback, subsidiary,
predicate, pattern of racketeering activity, indirectly,
mail fraud, obstruction, illegal activities, discovery,
dealership, manager, aiding and abetting, sole
stockholder, bribery, bribe, racketeering activity, claims
asserted, corporate veil, extortion, commit, motions to
dismiss, participated, ownership, illegal activity,
predicate act, perpetuate, inferred, pierced, vice
president
COUNSEL:
[**1] Attorney(s) for plaintiff: James Ulwick, Esq.,
Kramon & Graham, Baltimore, MD. Richard
McNarmara, Esq., Wiggin & Nourie, Manchester, NH.
Lawrence Silver, Esq., Fred Galante, Esq., Mark Fields,
Esq., Lawrence, Silver & Associates, Long Beach, CA.
William A. Kershaw, Esq., Thomas H. Keeling, Esq.,
Kronick, Moskovitz, Tiedemann & Girard, Sacramento,
CA. Mark P. Rapazzini, Esq., M. Elizabeth Graham,
Esq., Rapazzini & Graham, San Francisco, CA. Harvey
G. Sanders, Jr., Esq., Natalma M. McKnew, Esq., James
T. Hewitt, Esq., Leatherwood, Walker, Todd & Mann,
Greenville, SC. Thomas F. Schrag, Esq., James S. Baum,
Esq., Deborah Kemp, Esq., Schrag & Baum, Berkeley,
CA.
Attorney(s) for defendant: Jeremiah T. O'Sullivan, Esq.,
Sarah Chapin Columbia, Esq., Raymond A. O'Brien,
Esq., Choate, Hall & Stewart, Boston, MA. Ty Cobb,
Esq., Douglas R.S. Nazarian, Esq., Hogan & Hartson,
Baltimore, MD. Norman C. Hile, Esq., Andrew W.
Stroud, Esq., Orrick, Herrington & Sutcliffe, Sacramento,
CA, Gerard P. Martin, Esq., Gregg L. Bernstein, Esq.,
Martin, Junghans, Snyder & Bernstein, Baltimore, MD.
Richard A. Cirillo, Esq., Rogers & Wells, New York,
NY.
JUDGES:
J. Frederick Motz, United States District Judge
OPINIONBY:
J. [**2] Frederick Motz
OPINION:
[*1047] OPINION
This multidistrict litigation arises from allegations
that during the 1980s and early 1990s certain high-level
executives of American Honda received kickbacks and
other payments from various Honda dealers in the form
of cash and secret ownership interests in Honda
dealerships in return for various favors, primarily
increased allocation of automobiles or the award of new
dealerships. The defendants are American Honda Motor
Co., Inc. ("American Honda"); Honda Motor [*1048]
Co., Ltd. ("Honda Motor"), American Honda's Japanese
parent; Honda North America; Honda dealers who are
alleged to have paid kickbacks; and Lyon & Lyon, a law
firm which allegedly participated in managing the
concealment of the illegal scheme, and Roland Smoot, a
partner in Lyon & Lyon (collectively "Lyon & Lyon").
The plaintiffs are dealers who did not pay kickbacks.
Following in the wake of the successful criminal
prosecution of five former American Honda executives
(which itself stemmed from a civil action filed by a
Honda dealer in the United States District Court for the
District of New Hampshire), numerous civil actions have
been filed around the country. The federal actions were
transferred [**3] to the District of Maryland by order of
the panel on multidistrict litigation in August, 1995.
Discovery has been proceeding simultaneously with the
briefing of motions to dismiss.
On August 30, 1996, I issued an opinion in which
for the most part I denied motions to dismiss filed by
defendants. In re American Honda Motor Co.
Dealerships Relations Litigation, 941 F. Supp. 528 (D.
Md. 1996) (Honda I). However, I ruled that plaintiffs'
allegations against Honda Motor and Lyon & Lyon were
deficient in some respects. I granted plaintiffs leave to
amend their complaints against those defendants,
indicating that if the pleading deficiencies I identified
were cured, I would permit plaintiffs to proceed with
their claims. Plaintiffs have filed amended complaints,
and Honda Motor and Lyon & Lyon have renewed their
motions to dismiss.
The motions to dismiss will be granted in part and
denied in part. Plaintiffs' claims against both Honda
Motor and Lyon & Lyon under the Robinson-Patman Act
are dismissed for the simple reason that neither Honda
Motor nor Lyon & Lyon was a party or an intermediary
for a party to the relevant transactions as required by .
2(c) of the Act. 15 U.S.C. . [**4] 13(c). As to
plaintiffs' claims under the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C. . 1961 et seq.
("RICO"), Honda Motor's motion is granted as to the
claims asserted under 18 U.S.C. . . 1962(a) and (b) but
is denied as to the claims asserted under . . 1962(c) and
(d). Lyon & Lyon's motion is denied as to the claims
asserted under . . 1962(c) and (d), the only RICO
claims asserted against it.
Sections I, II and III of this opinion discuss the
RICO claims against Honda Motor; Sections IV and V
discuss the RICO claims against Lyon & Lyon; and
Section VI states the reasons I am granting a motion filed
by Honda Motor pursuant to 28 U.S.C. . 1292(b) for
certification of an interlocutory appeal.
I.
A.
At the times relevant to this case Honda Motor was
(as it continues to be) the corporate parent of American
Honda. All of the officers and directors of American
Honda were appointed by Honda Motor, and decisions
concerning the compensation to be paid to the top
managers of American Honda were made by Honda
Motor. Four of the eight members of American Honda's
board of directors, including its president, were also
members of Honda Motor's board. Each of the shared
directors [**5] received approximately 70 percent of his
salary from American Honda and 30 percent from Honda
Motor. All of the shared directors were Japanese
nationals, and the salary and certain other benefits that
they received from Honda Motor were paid to them or
their families in Japan. Each of them also received year-
end bonuses and pension contributions paid partially by
Honda Motor, based upon Honda Motor's performance.
Honda Motor and American Honda have two
different functions. Honda Motor manufactures motor
vehicles; American Honda distributes them in the United
States. Nevertheless, Honda Motor rotated its executives
to the United States to serve as officers and directors of
American Honda on a regular basis. In addition, other
Honda Motor executives and employees came to the
United States frequently to oversee the operations of
American Honda's regional offices. They visited Honda
dealerships to collect information and reported what they
learned to Honda Motor.
[*1049] During the period the alleged wrongful
activities occurred, the persons who served
simultaneously as directors of Honda Motor and directors
and executives of American Honda were Koichi
Amemiya, Tetsuo Chino, Takeo Okusa, Yoshihide [**6]
Munekuni and Michiaki Shinkai. Amemiya, Chino and
Munekuni each served at one time as American Honda's
president; Munekuni became the chairman of American
Honda in 1989; Okusa was the executive vice-president
of American Honda from 1989 to 1992; Shinkai was
American Honda's vice-president of administration from
at least 1983 through 1989. Chino, Munekuni and Okusa
have also served as directors of Honda North America,
another Honda entity. Munekuni has been its chairman
since 1989.
According to plaintiffs' allegations, the kickback
scheme was of substantial economic benefit both to
American Honda and to Honda Motor. Because
American Honda executives were receiving kickbacks,
American Honda was able to pay them substantially less
compensation than their counterparts with other
companies in the industry. This savings in executive
compensation was in turn passed on to Honda Motor
which, as the sole stockholder of American Honda,
received all of its net profits.
B.
Plaintiffs assert that Amemiya, Chino, Munekuni,
Okusa and Shinkai were fully aware of the illegal
activities in which American Honda executives and
various Honda dealers engaged. Plaintiffs make
numerous specific allegations [**7] in that regard,
including the following:
. In the early 1980s J.D. Power, an auto market
researcher hired by American Honda, heard reports that
American Honda executives were taking kickbacks from
dealers in return for favored treatment in the allocation of
cars. He passed these reports on to Munekuni by a letter
dated March 14, 1983. After receiving the letter,
Munekuni did not cause any serious investigation to be
conducted.
. In 1984 Power met with Munekuni and others, warning
them about reports of bribery and kickbacks within the
Honda sales organization. Jack Billmyer, a senior vice
president of American Honda, was questioned by
Japanese management about the allegations. Billmyer
told his interrogators that if they did not like the way he
was running the business they could hire someone else.
Billmyer was retained in his position and no action was
taken against him.
. In late 1984 or early 1985 Chino and Shinkai were told
by Tony Piazza, an American Honda employee, and Don
English, the head of American Honda's personnel
administration department, that Billmyer was soliciting
and taking bribes from certain dealers. They told Chino
that they had discovered that Billmyer [**8] held secret
ownership interests in several Honda dealerships and had
solicited a bribe from a dealer for between $ 30,000 and
$ 100,000. Chet Hale, an executive vice president and
director of American Honda, also informed Chino that
Billmyer held secret ownership interests in Honda
dealerships.
. In or about August 1986 Shinkai discussed with English
and Piazza another complaint, received by Piazza from a
dealer, that Billmyer had demanded bribes. These
allegations later were discussed in a meeting attended by
Chino, Shinkai and English. This meeting did not result
in any remedial action, and Chino later recommended
that Billmyer be made a director of American Honda.
The recommendation was followed.
. Between 1986 and 1988 Doug Divall, the senior
manager of American Honda's and Honda North
America's audit group, learned of the alleged kickback
scheme, reported it to Chino and asked if he could
conduct an investigation. Chino would not allow him to
do so.
. During the 1980s Cecil Proulx, American Honda's
procurement manager, having heard of the kickbacks and
improper gratuities, discussed his concerns about them
with Shinkai and asked him whether Shinkai and Chino
would [**9] do anything to stop the corruption. Shinkai
told Proulx that the kickback scheme was tolerated by
American Honda because American Honda could not
afford to pay its executives what [*1050] Ford, General
Motors or Chrysler would pay them.
. Christiaan Walker, an American Honda sales
representative, reported to management that he had
learned that Stanley J. Cardiges and Edward Temple,
respectively the vice president for auto field sales and an
American Honda zone manager, had taken a bribe for
awarding a Honda dealership. During early 1991,
Amemiya and Robert Rivers, a senior American Honda
executive, telephoned Robert Mazzitelli, another
American Honda zone manager, about Walker's
allegations. Amemiya told Mazzitelli not to discuss the
matter with Cardiges for fear that it would prompt
Cardiges to leave American Honda.
. In January 1992 Amemiya met with Rivers at American
Honda's corporate headquarters to discuss Walker's
allegations and stated: "That is not important now. We
have to concentrate on selling cars .... Our priority is
sales."
. In the mid 1980s Robert Estes, a new Honda dealer,
received a telephone call from another Honda dealer,
Richard Brooks. Brooks told Estes [**10] that Estes
would be expected to contribute to a fund for American
Honda executives. Estes immediately called a
managerial-level executive at Honda Motor in Tokyo and
informed him of the alleged fund. No investigation was
conducted by Honda Motor as a result of this report.
. In or about 1991 Amemiya acknowledged to Roger
Novelly, a zone manager for American Honda, that he
was aware of the kickback scheme and other corrupt
activities.
. Subsequently, Amemiya and Okusa met with Rivers
again regarding Cardiges' activities. Amemiya asked
Rivers to continue to cover up the matters because
Amemiya needed to keep Cardiges happy to enable
Honda to continue "to sell cars." Amemiya and Okusa
also promised Rivers that he would be transferred to the
position of vice president of marketing if he cooperated
in the coverup.
. In June 1992 Okusa was deposed in an action instituted
against American Honda by International Automobiles,
Inc. before a New Jersey administrative agency. During
his testimony Okusa committed perjury when he
answered "I do not know" to the question "Has it ever
come to your attention that anybody in the employ of
American Honda Motor Company has ever received
[**11] anything of value from any dealer in return for
granting of a franchise?"
. In September 1994 Munekuni falsely told the FBI that
he was not aware of ever having received a letter from
Power reporting allegations about the scheme. n1
n1 Amemiya, Chino, Munekuni and Okusa
are also alleged to have accepted gifts of
substantial value from several Honda dealers. It is
not alleged, however, that they gave preferential
treatment to those dealers in return.
II.
In Honda I I stated the following concerning
plaintiffs' claims against Honda Motor n2:
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 and vague
pleadings cannot be allowed to circumvent the statutes
and common-law rules that protect corporate
separateness. Here, however, ... plaintiffs have done
more than simply allege that Honda Japan should be held
liable for the actions of its American subsidiary [**12]
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 [*1051] 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 highranking
officers and 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 [**13] 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.
941 F. Supp. at 553.
n2 It should be noted that in Honda I I
referred to the Honda Motor Co. as "Honda
Japan," as distinguished from "American Honda."
On further consideration, I do not believe it
creates any confusion to refer to Honda's
Japanese parent simply as "Honda Motor."
I adhere to the views I then expressed. However, I
covered a wide spectrum of conduct in describing what
plaintiffs might be able to allege and prove against
Honda Motor, and I have concluded that I should state
with [**14] more precision the reasons I believe
plaintiffs have stated viable claims against Honda Motor.
n3
n3 In the discussion that follows I have not
used such terms as ratification, apparent
authority, respondent superior and the like. These
doctrines define the law and provide structure to
it in many factual contexts. However, so many
different meanings have accreted to them over
time that I find that they confound analysis in
addressing issues that need to be refined.
Similarly, I am not at all sure (although I
referred to them briefly in Honda I, 941 F. Supp.
at 552 n.27) that the terms "direct" and
"vicarious" liability further understanding in
discussing RICO issues. Whatever name is given
to the theory of liability, the critical question is
whether the illegal conduct alleged was known to
and participated in by sufficiently high-level
employees within a corporation and/or was
sufficiently pervasive within the corporation as to
be fairly attributable to the corporation. Compare
Gruber v. Prudential-Bache Sec., Inc., 679 F.
Supp. 165, 180-81 (D. Conn. 1987) with R.E.
Davis Chem. Corp. v. Nalco Chem. Co., 757 F.
Supp. 1499, 1522 (N.D. Ill. 1990) (extent of high-
level participation in illegal activity determines
corporation's vicarious (Gruber) or direct (R.E.
Davis) liability). See also Volmar Distribs., Inc.
v. New York Post Co., 899 F. Supp. 1187, 1192
n.5 (S.D.N.Y. 1995) (labeling liability direct or
vicarious "superfluous," as focus should instead
be on theory imputing liability).
[**15]
In considering the broad issue of whether a sole
stockholder (individual or corporate) can be held liable
for the wrongful acts of its subsidiary, it is helpful to
pose several narrower questions. First, can the parent be
held liable for the subsidiary's conduct solely by virtue of
its ownership of and control over the subsidiary?
Obviously, the answer to this question is no, unless the
corporate veil can be pierced under conventional
doctrines because of inadequate capitalization of the
subsidiary, gross disregard of corporate formalities, and
the like. De Jesus v. Sears, Roebuck & Co., 87 F.3d 65,
69-70 (2d Cir.), cert. denied, 117 S. Ct. 509, 136 L. Ed.
2d 399 (1996). Second, can the parent be held liable if it
can be proved that the parent's ultimate decision-makers
regarding the subsidiary's affairs, e.g. the board of
directors, executive committee or chairperson of the
board, expressly authorized and directed the subsidiary's
wrongful acts? The answer to this question is rather
clearly yes, since in such an instance the parent is not
being held derivatively responsible for the subsidiary's
conduct but for its own independent acts as a principal.
A third and more difficult question is [**16]
whether the parent can be held liable for failing to
exercise the power it has over the subsidiary to stop
illegal conduct engaged in by the subsidiary after having
obtained knowledge of it. Common sense suggests that
the failure to exercise the strategic control a parent has
over a subsidiary to make the latter comply with the law
is functionally the equivalent of the parent committing
the illegal acts itself. However, well established
principles of corporate law dictate that a [*1052]
subsidiary is presumed to possess a free will, stemming
from its corporate separateness, even on occasions of sin,
and adoption of a "knowledge plus failure to remedy"
approach would be to destroy legal fictions which have
become business realities.
If this were the end of the inquiry, Honda Motor
would be entitled to prevail on its motion to dismiss. For
the reasons I stated in Honda I, 941 F. Supp. at 551-52,
the corporate veil between American Honda and Honda
Motor cannot be pierced under traditional doctrine.
Likewise, plaintiffs have not alleged sufficient facts from
which it could reasonably be inferred that Honda Motor
exercised its power as corporate parent to direct
American Honda to perpetuate [**17] the alleged
kickback scheme. It is not sufficient for that purpose
merely to assert that several of Honda Motor's directors
knew of the scheme and that Honda Motor benefited
from it. Although directors' knowledge might well be
imputed to Honda Motor, such knowledge would not be
sufficient to give rise to an inference of corporate action
since a single director or a minority of directors cannot
alone control a parent's board in directing the affairs of
the subsidiary. Finally, for the reasons just stated, I reject
the theory that a parent can be held liable solely for
failing to stop its subsidiary's wrongful acts of which it
has knowledge.
However, if a parent is not accountable for the sins
of its offspring (unless it authorizes and directs them), it
is responsible for its own transgressions. Thus, a fourth
question that must be asked is whether a parent can be
held liable for its subsidiary's wrongs if the parent joins
in the commission of those wrongs. The answer to this
question is yes, provided that the parent's own conduct is
encompassed by the law giving rise to the cause of
action. I will address the particular issues raised by the
proviso in this case in Section III, infra [**18] . Before
doing so, however, I will explain why this theory of
liability is viable even if the subsidiary is a legitimate
corporation whose veil cannot be pierced and even if
there are insufficient allegations to establish that the
parent exercised its control over the subsidiary to direct
the subsidiary to engage in the alleged unlawful conduct.
Let me start with a simple hypothetical. Assume that
an individual businessperson, Jacqueline Jones, a
resident of Texas, is the sole stockholder of a
corporation, XYZ, Inc. Assume further that although
Jones may be said to have effective control over XYZ
because she appoints its directors who, in turn, choose its
officers, XYZ's corporate veil could not be pierced to
hold Jones liable for torts or other wrongs committed by
XYZ because XYZ is adequately capitalized and
corporate formalities have been scrupulously followed.
Make the following assumptions as well. Officers of
XYZ embark upon a course of unlawful activity in
Maryland which enhances the company's profitability.
Jones learns about this activity and is not displeased
because it increases the dividends XYZ pays to her as its
sole stockholder. Thus, instead of bringing the activity
[**19] to an end, she directs John Smith, one of her
agents from whom she has learned about the activity and
who works for her in Maryland, to encourage its
perpetuation. Smith is not an officer or director of XYZ
but he is widely known among XYZ's employees and
dealers as a person quite close to Jones, one who has her
ear and carries out her bidding. Over time reports are
made to XYZ's management personnel about the illegal
activities but, at least partially because of the perception
that in light of Smith's involvement the activities have
Jones' blessing, nothing is done to curtail those activities.
To the contrary, an organized effort, in which Smith
himself directly participates, is made to conceal that
which has occurred, resulting in the continuation of the
illegal activity to the harm of various innocent victims.
Under these circumstances can there be doubt about
Jones' liability for damages which were caused by the
unlawful activities after she authorized Smith to
perpetuate them? Her liability would not be derivative
through XYZ. Instead, it would rest upon the fact that
she contributed to the continuation of the illegal activities
through her direct agent. Neither the formality [**20] of
the relationship between Jones and XYZ nor the
regularity of their finances would be germane to [*1053]
the theory of liability. Rather, the fact that Jones is the
sole shareholder of XYZ and, as such, receives all of its
net profits by way of dividends would be relevant only to
prove her motivation for participating in the illegal
scheme through Smith.
This hypothetical differs from what plaintiffs allege
against Honda Motor in only three respects: (1) Honda
Motor is a citizen of a foreign country rather than a
citizen of a state different from the one where the illegal
activities are being conducted; (2) Honda Motor is itself
a corporation instead of an individual like Jones; and (3)
unlike Smith, who is hypothesized to hold no position in
XYZ, Amemiya, Chino, Munekuni, Okusa and Shinkai
were officers and directors of American Honda as well as
being directors of Honda Motor itself. The first
difference clearly is immaterial. No doctrine of
international law or consideration of comity requires one
nation to tolerate the citizen of another sending agents
within its borders to promote the conduct of illegal
activity. n4
n4 The effectiveness of service of process
upon the foreign citizen and the enforceability of
any judgment that might ultimately be rendered
are, of course, separate questions. However,
neither of these questions is before me now. All
that I am now called upon to decide is whether
plaintiffs have stated a claim against Honda
Motor.
[**21]
The second difference is an important one but its
importance makes the case against Honda Motor easier
to prove than the case against Jacqueline Jones. Because
Jones is an individual, in order to state a claim against
her, allegations would have to be made that Smith
reported the illegal activities to her and that she directed
him to encourage their continuation. Since Honda Motor
is a corporation and Amemiya, Chino, Munekuni, Okusa
and Shinkai were its directors, their own knowledge of
the illegal activities and encouragement of the
perpetuation of the activities would, rather clearly, seem
to be directly imputable to Honda Motor. n5 See
generally United States v. One Parcel of Land, 965 F.2d
311, 316-17 (7th Cir. 1992); Restatement (Second) of
Agency . 275 (1958).
n5 Even if it were to be argued that Honda
Motor's liability depended upon Amemiya,
Chino, Munekuni, Okusa and Shinkai reporting
back to management in Japan, Honda Motor's
motion to dismiss should be denied. Although
plaintiffs make no express allegation to that
effect, it may be reasonably inferred, based on
allegations that at least five Honda Motor
directors had knowledge of the kickback scheme
and that executives were regularly rotated
between Japan and the United States, that reports
of the scheme were made to high management
officials in Japan. This is a matter that lies within
the exclusive knowledge of the Honda defendants
and if it is an element of plaintiffs' claims (which
is doubtful), plaintiffs are entitled to discovery on
it.
[**22]
The third difference is one which on the surface
obfuscates analysis since it brings the question of
corporate interrelatedness to the fore. Because Amemiya,
Chino, Munekuni, Okusa and Shinkai were officers and
directors of American Honda as well as being directors
of Honda Motor (unlike John Smith, who is not
hypothesized to be an officer and director of XYZ),
Honda Motor posits that it cannot bear responsibility for
the directors' activities. It takes but little reflection,
however, to realize that this change in the hypothesized
facts is likewise immaterial to sound analysis. Clearly, a
defendant cannot immunize herself from wrongful
conduct beneficial to her personally and insulate herself
from liability that she would otherwise incur simply by
also designating her personal agent as an officer and
director of a corporation of which she is the sole
stockholder. Although sometimes a phrase of uncertain
meaning, the familiar maxim that the corporate veil can
be used only as a shield and not as a sword expresses an
essential truth which protects the law from being so
easily manipulated.
In summary, plaintiffs have not alleged sufficient
facts either to hold Honda Motor liable under [**23] a
corporate veil piercing theory or to show that Honda
Motor, as American Honda's parent, caused American
Honda to embark on or perpetuate its illegal course of
conduct. However, plaintiffs have alleged sufficient facts
to demonstrate that Amemiya, Chino, Munekuni, Okusa
and Shinkai joined in the kickback scheme in their
capacity as directors of Honda Motor, and for its benefit,
by encouraging, concealing and obstructing
investigations of the scheme. These actions are imputable
to Honda Motor [*1054] by virtue of its directors' status
in that corporation.
III.
The next question that must be considered is one
upon which I deferred ruling in Honda I: whether the acts
allegedly committed by Amemiya, Chino, Munekuni,
Okusa and Shinkai and imputable to Honda Motor are
sufficient to establish violations by Honda Motor of the
RICO provisions upon which plaintiffs rely. I find that
plaintiffs' allegations are not sufficient as to the claims
asserted under . . 1962(a) and (b) because there are
elements of those claims that the conduct of Amemiya,
Chino, Munekuni, Okusa and Shinkai does not satisfy.
Since no substantive allegations are made against Honda
Motor other than those relating to the conduct [**24] of
its directors, this is a fatal pleading defect. However, I
find that the conduct of Messrs. Amemiya et al. satisfies
each element of plaintiffs' . . 1962(c) and (d) claims.
A.
Section 1962(a) requires plaintiffs to demonstrate,
inter alia, that Honda Motor (1) received income directly
or indirectly from a pattern of racketeering activity, and
(2) used or invested, directly or indirectly, any part of
that income in the operation of an enterprise engaged in
or affecting interstate commerce. United States v. Vogt,
910 F.2d 1184, 1194 (4th Cir. 1990). The income that
Honda Motor is alleged to have received was the increase
in the net profits it earned from American Honda, by
virtue of the fact that American Honda allegedly had to
pay its executives less compensation because of the
benefits they derived from the kickback scheme. I remain
of the view expressed in Honda I that this is a sufficient
allegation of income indirectly received from the alleged
unlawful activity. Plaintiffs fail, however, to allege
sufficiently that Honda Motor, rather than its American
subsidiary, used or invested this income in a RICO
enterprise. n6 In this regard, plaintiffs improperly engage
[**25] in the aggregated pleading I rejected in Honda I.
941 F. Supp. at 536.
n6 The four representative complaints name
several different enterprises in their . 1962(a)
allegations. Borman and Breakaway describe the
enterprise as a combination of Honda Motor,
Honda North America, American Honda and the
bribe-paying dealers. Austin alleges four different
enterprises: (1) the "Honda Enterprise,"
composed of Honda Motor, Honda North
America and American Honda; (2) the "Honda
Dealer Network Enterprise"; (3) the "Honda
Conspiracy Enterprise," consisting of the corrupt
Honda employees and dealers; and (4) the
"Honda Association-In-Fact Enterprise,"
consisting of the three Honda corporations and
the conspiring dealers. Finally, Trans-Oceanic
names each of the three Honda corporations as a
separate enterprise. These pleading variations
notwithstanding, as I discuss infra all of the
complaints suffer from the same fundamental
deficiency, negating plaintiffs' . 1962(a) claims.
Plaintiffs allege that [**26] corrupted American
Honda executives used the income they derived from
their illegal activities to obtain ownership interests in
bribe-paying dealerships. However, it is not alleged that
any of the Honda Motor directors were involved in this
conduct. Plaintiffs further allege that "Honda" used the
income that it derived from paying its executives reduced
compensation to finance its sales and distribution
network. Assuming this allegation to be true, it is not an
allegation against Honda Motor, since it is undisputed
that distribution and sales were exclusively within
American Honda's corporate province. There is no
allegation that Honda Motor invested the net profits it
earned from American Honda back into American
Honda. For these reasons plaintiffs have failed to state a
claim against Honda Motor under . 1962(a).
They also have failed to state a claim against Honda
Motor under . 1962(b). Only infrequently can one
receive definitive guidance from the statutory language
itself when engaging in the casuistry which analysis of
RICO's provisions requires. This is such an occasion.
Section 1962(b) makes it "unlawful for any person
through a pattern of racketeering activity ... to acquire
[**27] or maintain, directly or indirectly, any interest in
or control of any enterprise which is engaged in ...
interstate or foreign commerce." The alleged "enterprise"
identified for . 1962(b) purposes in two of the
representative complaints (Borman and Breakaway) is
American Honda. No reasonable basis whatsoever exists
for inferring that Honda Motor has [*1055] maintained
control over American Honda through the kickback
scheme or any other pattern of racketeering activity.
Honda Motor maintains control over American Honda by
virtue of the fact that it is American Honda's sole
stockholder and, as such, has ultimate power over it.
Austin alleges four different enterprises, the "Honda
Enterprise," the "Honda Dealer Network Enterprise," the
"Honda Conspiracy Enterprise" and the "Honda
Association-In-Fact Enterprise," for the purpose of .
1962(b) just as it does for the purpose of . 1962(a). See
note 6, supra. As Honda Motor properly argues, the
"Honda Conspiracy Enterprise" is not a valid RICO
enterprise since it is alleged to exist solely to carry out
the predicate acts alleged. See United States v. Turkette,
452 U.S. 576, 583, 69 L. Ed. 2d 246, 101 S. Ct. 2524
(1981). [**28] As for the other three enterprises, the
Austin allegations are insufficient either because (1) (like
the allegations in Borman and Breakaway) they ignore
the fact that Honda Motor lawfully has control over
American Honda, or (2) they fail to show that Honda
Motor, as opposed to American Honda, actually
controlled the dealer network.
B.
Section 1962(c) provides that "it shall be unlawful
for any person employed by or associated with any
enterprise engaged in ... interstate or foreign commerce,
to conduct or participate, directly or indirectly, in the
conduct of such enterprise's affairs through a pattern of
racketeering activity." Honda Motor argues that plaintiffs
have failed to state a claim against it under . 1962(c)
because they have not sufficiently alleged that it
committed any acts of "racketeering activity." n7
n7 Honda Motor also argues that it cannot be
held liable under . 1962(c) because as a "person"
alleged to have committed racketeering activity it
is not sufficiently distinct from the "enterprise"
through which the activity was conducted. In
support of this contention, it cites Entre
Computer Centers, Inc. v. FMG of Kansas City,
Inc., 819 F.2d 1279, 1287 (4th Cir. 1987),
overruled on other grounds, 896 F.2d 833, 841
(4th Cir. 1990), where the Fourth Circuit held
that the person/enterprise distinction was not met
when a franchisor was named as the person and
its separately incorporated franchisees as the
enterprise. Frankly, I question the precedential
value of Entre Computer. The court reached its
conclusion virtually without analysis and the
underlying allegations concerning RICO
misconduct were quite weak. In any event, Entre
Computer is clearly distinguishable from the
present case since, as Honda Motor emphasizes
throughout its various arguments, it has an
existence and function (vehicle manufacturing)
entirely separate and apart from American Honda.
American Honda, as the corporate entity
responsible for vehicle distribution, is more
analogous to the franchisor in Entre Computer
than is Honda Motor.
[**29]
Although plaintiffs originally alleged five categories
of predicate acts sufficient to establish RICO liability -
mail fraud, wire fraud, bribery, extortion and obstruction
of justice - it is only the mail fraud allegations that
effectively remain. n8 In their opposition memorandum
plaintiffs concede that they are not relying upon a theory
of commercial bribery, and they have not countered
Honda Motor's argument that the wire fraud allegations
lack sufficient specificity. Further, the only specific
allegation made by plaintiffs concerning alleged
obstruction of justice under 18 U.S.C. . 1503 by a
Honda Motor director relates to false deposition
testimony given by Okusa during the course of a state
administrative proceeding. Because . 1503 applies only
to obstruction of federal judicial proceedings, Okusa's
actions cannot constitute a predicate act under RICO.
See, e.g., O'Malley v. New York City Transit Auth., 896
F.2d 704, 707-08 (2d Cir. 1990). Similarly, although
plaintiffs allege that Munekuni lied to the FBI during the
course of a criminal investigation, that cannot constitute
a predicate act since 18 U.S.C. . 1510 requires [*1056]
that obstruction of a criminal investigation [**30] be
accomplished by bribery and no allegations of bribery of
an FBI agent are made.
n8 I focus on the mail fraud allegations
because they are the only surviving predicate acts
common to all of the complaints. Austin and
Breakaway also contain allegations of extortion
by the Honda Motor executives. Under plaintiffs'
theory, the executives committed extortion by
receiving gifts from dealers who feared adverse
economic consequences if they did not comply,
as well as directing other Honda employees to
pressure dealers into complying. Discovery may
demonstrate that the transactions at issue were not
motivated by fear, and therefore extortion has not
been made out. For the purposes of this motion,
however, plaintiffs have adequately alleged
extortion as a predicate act.
Plaintiffs' mail fraud allegations are, however,
sufficient. It is true, as Honda Motor argues, that all of
the fraudulent mailings alleged, e.g., dealer agreements
which falsely represented that American Honda would
deal with plaintiffs fairly [**31] and distribute Honda
products to them in a fair and reasonable manner, were
effected under the auspices of American Honda and
related to sales and distribution, matters falling within
American Honda's exclusive bailiwick. However,
according to plaintiffs' allegations, when Amemiya,
Chino, Munekuni, Okusa and Shinkai encouraged and
concealed the fraudulent scheme pursuant to which the
mailings were made, they were serving the interests not
only of American Honda but of Honda Motor as well. If
this is true, when they committed predicate acts, they
were acting in a dual capacity for both corporations. n9
n9 At the very least, plaintiffs have
sufficiently alleged that Amemiya, Chino,
Munekuni, Okusa and Shinkai aided and abetted
the commission of the predicate acts, which is
sufficient to constitute a pattern of racketeering
activity. See Section V, infra.
C.
The only specific challenge that Honda Motor makes
to plaintiffs' . 1962(d) claim is that under New Beckley
Mining Corp. v. International Union, [**32] United
Mine Workers, 18 F.3d 1161 (4th Cir. 1994), an
allegation of intracorporate conspiracy is insufficient as a
matter of law. If plaintiffs had alleged simply that Honda
Motor conspired with American Honda, this argument
might have merit. However, plaintiffs have alleged that
Honda Motor conspired with Honda dealers to further the
illegal kickback scheme. There simply can be no doubt
that Honda Motor and Honda dealers are separate entities
capable of conspiring with one another.
IV.
I will now turn to plaintiffs' claims against Lyon &
Lyon. According to plaintiffs' allegations, from 1977
through 1995 Lyon & Lyon was American Honda's
general counsel, and Lyon & Lyon attorneys served as
voting directors of the company. In addition, in the 1980s
and early 1990s, Lyon & Lyon assumed two
management responsibilities: (1) conducting regular
training sessions at the national sales meetings on
American Honda's conflict of interest policy and on
dealer communications; and (2) handling all allegations
of misconduct in the auto field sales division, including
conflict of interest complaints involving dealers or
potential dealers.
Plaintiffs assert that in this capacity between 1979
and [**33] 1991 Lyon & Lyon received numerous
complaints about the kickback scheme. For example, in
1979 Cliff Schmillen, an American Honda director and
its executive vice president, acquired a ten percent
hidden interest in a Honda dealership. Before acquiring
this interest, Schmillen allegedly consulted with Lyon &
Lyon and was told that his hidden ownership interest
"was acceptable as long as he did not tell anyone." In
subsequent years Lyon & Lyon allegedly received at
least four other credible complaints about the illegal
kickbacks from J.D. Power, Don English, Cecil Proulx
and Christiaan Walker. Lyon & Lyon allegedly took no
action to end the corrupt activities reported to it.
Plaintiffs further allege that beginning in 1991, after
various Honda dealers had filed civil actions, Lyon &
Lyon took actions to conceal the kickback scheme that
amounted to obstruction of justice. Plaintiffs focus
particularly upon the seminal case instituted in the
District of New Hampshire by Richard Nault against
American Honda. See Nault's Auto, Sales, Inc. v.
American Honda Motor Co., 148 F.R.D. 25 (D.N.H.
1993). Factual issues as to plaintiffs' allegations of
obstruction of justice abound, [**34] and the duty that
plaintiffs apparently would impose upon Lyon & Lyon
attorneys to disclose their own knowledge about illegal
activities when a witness was asked about them on
deposition is a highly questionable one (at least as to the
[*1057] depositions of witnesses other than corporate
designees). However, plaintiffs allege that Lyon & Lyon
lawyers went further, counseling witnesses to give
evasive or incomplete testimony, for example, by telling
them that if they lied on the witness stand "a bolt of
lightning wasn't going to come out of the sky and strike
[them] dead." Further, plaintiffs allege that in response to
increasing pressure from the plaintiffs and the court in
the Nault litigation, Lyon & Lyon and American Honda
conducted an investigation of the alleged kickback
scheme but intentionally limited that investigation by not
interviewing certain key players, including Amemiya,
Chino, Munekuni and Okusa. Finally, Lyon & Lyon
attorneys allegedly directed American Honda to make
false and misleading assertions about the results of the
investigation in an evidentiary hearing in the Nault case.
V.
Against the background of these allegations
plaintiffs assert claims against [**35] Lyon & Lyon
under . . 1962(c) and (d). I will address the . 1962(c)
claim first.
A.
There is one phrase of one sentence of . 1962(c)
which is critical in analyzing this claim: "it shall be
unlawful for any person to conduct or participate,
directly or indirectly, in the conduct of such enterprise's
affairs through a pattern of racketeering activity ...."
Short though this phrase may be, for proper analysis it
must be further parsed into two sub-phrases: (1) whether
a person "participated, directly or indirectly, in the
conduct of such enterprise's affairs," and (2) whether this
participation was "through a pattern of racketeering
activity."
The first of these two sub-phrases was interpreted by
the Supreme Court in Reves v. Ernst & Young, 507 U.S.
170, 122 L. Ed. 2d 525, 113 S. Ct. 1163 (1993). The
Court held that in order to be found "to conduct or
participate, directly or indirectly, in the conduct of [an]
enterprise's affairs," a person must have had an
operational or management role in the enterprise. Id. at
185. I have no difficulty in concluding that, assuming
plaintiffs' allegations to be true, Lyon & Lyon played
such a role in the enterprise here alleged. According
[**36] to plaintiffs, for over ten years Lyon & Lyon took
on the responsibility of pretending to enforce American
Honda's conflict of interest policy and of not following
up on dealer complaints in order to perpetuate the
kickback scheme. Concealment is a necessary element of
any ongoing illegal activity, and a person who is in
charge of the coverup plays an operational and
management role in the enterprise conducting that
activity.
It is not enough, however, for a defendant to have
"conducted or participated directly or indirectly, in the
conduct of [an] enterprise's affairs" in order for him to be
held liable under . 1962(c). He also must have done so
"through a pattern of racketeering activity." On the
surface this prepositional phrase appears to present an
insurmountable obstacle to plaintiffs' claim in this case,
at least as to any allegation based upon Lyon & Lyon's
alleged activities prior to the Nault litigation. "Pattern of
racketeering activity" is defined to mean the commission
of at least two predicate acts of various federal crimes
listed in . 1961(1), here mail fraud. n10 Plaintiffs do not
allege that Lyon & Lyon mailed any of the fraudulent
materials. Thus, unless [**37] aiding and abetting
principles apply, Lyon & Lyon cannot be said to have
engaged in "racketeering activity." And, although there is
some disagreement among the courts on the issue,
compare Department of Economic Development v.
Arthur Andersen & Co., 924 F. Supp. 449, 477 (S.D.N.Y.
1996) with 131 Main Street Associates v. Manko, 897 F.
Supp. 1507, 1529 n.20 [*1058] (S.D.N.Y. 1995), it is
becoming conventional wisdom that aiding and abetting
liability under . 1962(c) does not survive the Supreme
Court's ruling in Central Bank of Denver v. First
Interstate Bank of Denver, 511 U.S. 164, 128 L. Ed. 2d
119, 114 S. Ct. 1439 (1994), that there is no aiding and
abetting liability in a civil action brought under . 10(b)
of the Securities Act of 1934.
n10 In addition, the predicate acts must be
related and there must be a threat of continuing
activity in order to constitute a "pattern of
racketeering activity." H.J. Inc. v. Northwestern
Bell Tel. Co., 492 U.S. 229, 239, 106 L. Ed. 2d
195, 109 S. Ct. 2893 (1989). Because the
predicate acts allegedly committed by Lyon &
Lyon, discussed infra, had similar purposes and
significantly contributed to a long-term criminal
enterprise, I hold that these elements have been
met.
[**38]
There is a subtle but profound flaw in this logic. It
lies hidden in the breadth of the statement of the premise
that aiding and abetting liability does not survive Central
Bank. I have no quarrel with that proposition to the
extent it refers to applying 18 U.S.C. . 2 n11 directly to
. 1962(c). Indeed, Central Bank aside, the proposition
must be true in light of Reves itself. For if . 2 were held
to apply directly to . 1962(c), the Supreme Court's
painstaking analysis in Reves of the "participate, directly
or indirectly, in the conduct of [an] enterprise's affairs"
language would have been all for naught and the
"operation or management" test the Court adopted would
be drowned in a sea of aiding and abetting allegations.
This does not mean, however, that aiding and abetting
principles do not apply in considering whether a
defendant has participated in the enterprise "through a
pattern of racketeering activity," i.e., whether he has
committed at least two predicate acts. See Jaguar Cars,
Inc. v. Royal Oaks Motor Car Co., 46 F.3d 258, 270 (3d
Cir. 1995). Although 18 U.S.C. . 2 is not separately
listed in . 1961(1), presumably when that section refers
to various [**39] substantive criminal statutes it also
encompasses within them . 2 which, by its terms and by
long established case law, is sufficient to establish
substantive liability. See Manko, 897 F. Supp. at 1529
n.20.
n11 18 U.S.C. . 2, entitled "Principals,"
states, in full, that
(a) Whoever commits an offense against the
United States or aids, abets, counsels, commands,
induces or procures its commission, is punishable
as a principal.
(b) Whoever willfully causes an act to be done
which if directly performed by him or another
would be an offense against the United States, is
punishable as a principal.
The distinction I am drawing between finding direct
application of . 2 to . 1962(c) (which I believe to be
implicitly prohibited by Reves) and applying . 2 to the
substantive offenses listed in . 1961(1) for the purpose
of determining whether a defendant has committed a
predicate act may seem sophistic, bringing through the
back door that which Reves bars at the front. In my view,
however, [**40] the distinction is key to a proper
understanding of Reves, and it brings within the ambit of
. 1962(c) precisely those defendants who belong there.
Unless the distinction is recognized, in most cases there
would be no principled basis for imposing . 1962(c)
liability upon a class of defendants whom Congress
surely intended should be within the statute's purview:
leaders of enterprises who do not themselves commit
predicate acts but who cause others to do so. n12 This is
so because the liability of such principals is created by .
2(b) just as aiding and abetting liability is created by .
2(a). Thus, if . 2 is read out of . 1961(1), the highest-
level managers of a criminal enterprise who leave the
hands-on [*1059] work to others would be excluded
from liability under . 1962(c) by virtue of the "through a
pattern of racketeering activity" phrase.
n12 I say "in most cases" because some of
the statutes listed in . 1961(1) themselves render
culpable not only persons who commit the
prohibited acts but also persons who cause the
acts to be committed. For example, the principal
predicate acts in this case are violations of the
mail fraud statute, 18 U.S.C. . 1341, which uses
the words "causes to be deposited" and "causes to
be delivered" within its own terms, as do several
of the other offenses contained within . 1961(1)
(e.g., 18 U.S.C. . . 1343 (wire fraud), 1461
(mailing obscene material), and 2251(c) (printing
or publishing child pornography)). Although it
could be inferred that such language was intended
to implicate those who direct or cause others to
commit those criminal acts, it is at least equally
likely that these phrases were included because
those infractions frequently or necessarily involve
innocent actors who actually do the delivering or
printing. For example, it is the postal service that
actually "delivers" a piece of mail--the sender
only "causes" it to be delivered by dropping it in
a mailbox. In any event, several of the other
predicate acts listed in . 1961(1) do not contain
similar language, yet RICO is clearly intended to
implicate persons who repeatedly direct others to
commit such crimes (e.g., 18 U.S.C. . . 1503
(obstruction of justice) and 1512 (witness
tampering)). The only way for such persons to be
prosecuted under . 1962(c) is to find that they
are principals under . 2(b).
[**41]
Of course, it is the relatively rare case in which a
person who can be held liable for a substantive offense
only as an aider and abetter would meet the "operation or
management" test of Reves for determining the necessary
level of "participation." If plaintiffs' allegations are true,
however, this is such a case. Although Lyon & Lyon may
only have aided and abetted the commission of the
predicate acts of mail fraud, as indicated above its
management role in concealing the scheme is sufficient
to meet the "operation and management" test of Reves.
Plaintiffs have therefore stated a viable . 1962(c) claim
against Lyon & Lyon.
B.
Plaintiffs also argue that, aside from Lyon & Lyon's
alleged role as manager of the concealment aspect of the
kickback scheme, Lyon & Lyon committed various
predicate acts of racketeering during the course of the
Nault litigation, primarily obstruction of justice. Lyon &
Lyon argues that these allegations are insufficient in
various respects, including (1) the failure of the factual
allegations to make out a substantive offense, (2) the
insufficiency of the allegations to meet . 1962(c)'s
"pattern" requirement, and (3) the absence of any
causative [**42] connection between Lyon & Lyon's
alleged misconduct in Nault and the harm allegedly
suffered by plaintiffs.
All of these are knotty issues; the sufficiency of the
allegations concerning causation are particularly
conclusory and weak. However, I need not decide these
questions at the present time because, as I have indicated,
I find the plaintiffs' allegations sufficient to state a .
1962(c) claim against Lyon & Lyon for its asserted
management role in the concealment of the kickback
scheme throughout the scheme's purported existence.
Thus, plaintiffs' allegations concerning the Nault
litigation need not separately and independently state a
RICO claim. It is sufficient that, if true, they serve to
prove the continuing management role played by Lyon &
Lyon in the enterprise's affairs.
C.
In Honda I, I deferred ruling upon the question of
"the interrelationship between Reves and . 1962(d)
claims in the outside advisor context" until another day.
941 F. Supp. at 560-61 n.40. I will continue to do so
since plaintiffs have made sufficient allegations to show
that Lyon & Lyon was not simply an outside advisor. I
did not, however, mean to suggest in Honda I that a
[**43] defendant can escape a conspiracy claim simply
by characterizing herself as an "outside advisor." The
ultimate issue in any . 1962(d) case is whether a
defendant's knowledge of the nature, scope and
operations of the illegal scheme are such that it can be
inferred "that he agreed that another violate [. ] 1962(c)
by committing two acts of racketeering activity." United
States v. Pryba, 900 F.2d 748, 760 (4th Cir. 1990)
(quoting United States v. Joseph, 781 F.2d 549, 554 (6th
Cir. 1986)). This is as true now as it was before Reves
was decided, and plaintiffs have alleged sufficient facts
from which it can be inferred that Lyon & Lyon for many
years knew and agreed that acts of mail fraud would be
committed in furtherance of the alleged kickback
scheme.
VI.
Honda Motor has filed a motion asking that I certify
my order denying its motions to dismiss for an
interlocutory appeal pursuant to 28 U.S.C. . 1292(b).
The motion will be granted. I am satisfied that the order
"involves a controlling question of law as to which there
is substantial ground for difference of opinion and that an
immediate appeal from the order may materially advance
the ultimate termination of the [**44] litigation." I also
believe it appropriate that a ruling by a single judge on
issues of far-ranging importance to a citizen of a foreign
nation, such as Honda Motor, be subject to effective and
prompt review to prevent the [*1060] appearance that
power has been arbitrarily exercised.
Whether I should stay discovery against Honda
Motor during the pendency of the appeal involves
balancing conflicting interests. On the one hand, the type
of discovery to which Honda Motor can be subjected
turns upon whether it remains as a party defendant.
Therefore, denial of a stay would deprive Honda Motor
of substantial rights were it ultimately to prevail on
appeal. On the other hand, this litigation is extremely
complex and involves the rights and potential liability of
numerous parties. The wrongs alleged are said to have
begun more than 15 years ago, and it is time for them to
be remedied if, in fact, they were committed. I have a
duty to the litigants, the transferor courts, and the
multidistrict panel to keep the litigation moving at a brisk
pace and on a steady course.
Against this background I believe it appropriate that
I enter a stay for the limited period of 45 days. This will
provide sufficient [**45] time for the Fourth Circuit to
decide after hearing from the parties whether the
interlocutory appeal should be allowed and, if so,
whether the stay of discovery should be extended. If the
Fourth Circuit does not permit the appeal, or if it
determines that discovery should not be stayed in any
event, the depositions of Messrs. Munekuni, Okusa and
Shinkai which have been scheduled for this spring (after
considerable negotiations among the parties) can
proceed.
A separate order effecting the rulings made in this
opinion is being entered herewith.
Date: March 11, 1997
J. Frederick Motz
United States District Judge
.