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Garlic Exporter Gets Second Crack at Racketeering Claims Against Chinese Competitors

SAN FRANCISCO (CN) - The Ninth Circuit gave garlic exporter Harmoni International Spice another chance to prove it lost sales and suffered damage to its reputation in a sham public-filing scheme perpetrated by its Chinese competitors.

Harmoni International Spice, in the City of Industry, is the U.S. branch of co-plaintiff Zhengzhou Harmoni Spice, of Henan Province in China. In its 2016 lawsuit, Harmoni claimed its competitors’ scheme grew out of the U.S. government’s protectionist tariffs on fresh garlic imported from China to prevent below fair-market-value pricing, also known as “anti-dumping” duties. Most Chinese garlic remains subject to these tariffs – but Harmoni can bypass them due to a previous agreement with the government, allowing it an advantage over its competitors.

“Harmoni has been successful in the U.S. marketplace and these other competitors against Harmoni have not had success with the same inroads,” Harmoni’s attorney, George Mastoris, said in a phone interview Wednesday. “A lot of it is due to their own conduct. They have to pay high tariffs because of how they run their businesses.”

Competitors include lead defendant Wenxuan Bai, who owns and controls, directly or through family members, a number of co-defendant companies, including Qingdao Tiantaixing Co., Qingdao Lianghe International Trading Co., and Qingdao Xiantianfeng Foods Co. Bai also is “actively involved” in defendant Heibei Golden Bird Trading Co., whose business is “intertwined” with his companies, Harmoni says.

According to its lawsuit, the defendants conspired to defraud the United States, through false statements and forged documents, to obtain favorable duties for themselves and other companies under their control, “and to flood the U.S. market with garlic sold at less than fair value while severely eroding plaintiffs’ market share.” 

They also sought to defame Harmoni with the United States by inundating the Department of Commerce with fraudulent complaints against Harmoni to try to force it to pay millions of dollars in anti-dumping duties it did not owe, Harmoni claims.

On Wednesday, a three-judge panel of the Ninth Circuit found Harmoni’s claims that the alleged fraudulent funneling of imported garlic hurt its market share too weak to advance. However, the company did succeed in showing its competitors’ phony reports damaged it.

“If Harmoni’s allegations are true, all of the costs it incurred responding to the administrative review are attributable to the defendants’ unlawful conduct, for without the sham filings no administrative review would have occurred at all,” U.S. Circuit Judge Paul Watford wrote for the panel, noting that the Department of Commerce did not initiate an investigation of Harmoni on its own.

But the alleged scheme doesn’t end there. Harmoni also claims the defendants damaged its reputation by enlisting American lawyers and hobby farmers to defame Harmoni on behalf of the Chinese Garlic Association. Harmoni says its Chinese rivals recruited American growers like artisanal garlic farmer Stanley Crawford -- who doesn’t compete with Harmoni -- to file bogus complaints to regulators.

“The Department of Commerce found the review requests and allegations against Harmoni were baseless and that American farmers were being used as cat’s-paws to do their bidding,” Mastoris said.

The lawsuit also claims defendant fresh garlic reseller C. Agricultural Group Corp., run by defendants Jin Xia Wen and Mingju Xu and closely tied to Bai, sent one of Harmoni’s largest U.S. buyers Christopher Ranch a letter claiming it had colluded with Harmoni to import garlic prepared using Chinese prison labor. C. Agricultural group demanded $32 million to avoid a public lawsuit.

“C. Agriculture knew it had no basis to claim that Harmoni used prison labor in the garlic it imported,” Harmoni claimed in its complaint. “C. Agriculture also knew that the threat to include such claims in a public lawsuit was for the purpose of threatening to further defame Harmoni.”

But Watford said Harmoni needs to prove its lost sales and business reputation directly resulted from its competitors’ conduct.

“With respect to the second category of damages—lost sales attributable to the defendants’ false accusations about Harmoni’s business practices—Harmoni may be able to allege proximate cause as well,” Watford wrote in the 12-page opinion. “If Harmoni can prove that it lost sales as a direct result of the defendants’ predicate acts of mail and wire fraud, the proximate cause element of its RICO claim will be satisfied.”

The panel found that the district court should have given Harmoni a chance to amend its complaint before dismissing it.

“Harmoni just has to come back and provide a little bit more detail about those lost sales and how they were caused,” Mastoris said. “We think we should have no problem making those allegations and fleshing out the complaint.”

Only Harmoni’s claims against the American defendants will proceed, as the other defendants have been “hiding out in China,” Mastoris said.

“We haven’t been able to serve them yet, but we expect those efforts will continue and the claims have equal weight against the members of the Chinese growers association as their American helpers,” he added.

U.S. Circuit Judge John B. Owens, and U.S. District Judge Jennifer G. Zipps, sitting by designation from the District of Arizona, rounded out the panel.

Categories: Appeals Business International Law

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