Uniroyal Goodrich Tire Company v. Mutual Trading Corporation, Mohammad Shafiq and John P. Hauper
Docket: 94-2915, 94-3799
Court: Court of Appeals for the Seventh Circuit; September 7, 1995; Federal Appellate Court
A jury found Mutual Trading Corporation (MTC) and its officers, Mohammad Shafiq and John P. Hauper, liable for civil violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and various state laws, leading to Uniroyal Goodrich Tire Company being awarded attorneys' fees and costs. MTC appeals the verdict, the award of fees, and the rejection of its counterclaims, but the appellate court affirms the lower court's decision.
Throughout the 1980s, MTC purchased tires from Uniroyal and resold them in Saudi Arabia, with Shafiq as president and sole shareholder. Uniroyal accused MTC of bribing an employee to gain confidential information and aid in defrauding the company.
MTC's success stemmed from being granted exclusive sales rights to the Detroiter tire model, prompting it to report that flawed versions were being sold by Palmer Industries, leading to refund requests from customers. Uniroyal required MTC to provide serial numbers and hold the returned tires for inspection. MTC submitted a list of 4,896 serial numbers, which matched Uniroyal’s records, and was reimbursed. However, upon inspection, most returned tires were found discarded, and the remaining tires did not match the serial numbers provided. Uniroyal discovered that MTC's reimbursement claim was fraudulent, based on information from Richard Germano, a Uniroyal pricing administrator. Germano also aided MTC by facilitating the cooperative advertising program, which further compromised Uniroyal’s interests.
In 1988, with Uniroyal's approval, MTC entered the Nigerian tire market, partnering with Multiplex Globe, a company co-owned by Shafiq and MTC. MTC sought cooperative funds for advertising, receiving nearly $300,000 from Germano, who approved full reimbursements despite a 50% maximum limit. An investigation by Uniroyal's internal auditor revealed that actual advertising costs were only about $25,000, and the billboards were erected two years after reimbursements were requested.
Germano later confessed to being lax with MTC's advertising funds and admitted to receiving $20,000 in unreported payments from MTC, which he amended in his tax returns only after being deposed. Additionally, Germano manipulated MTC's volume bonus calculations by including nonexistent tire orders, resulting in an unearned credit exceeding $230,000.
Another scheme involved Germano mislabeling shipments of more expensive Reno tires as cheaper ADV tires. He also engaged in various fraudulent actions that benefited MTC at Uniroyal's expense, including selling tires below authorized prices and improperly writing off over $38,000 in interest charges. After confessing, Germano resigned, and Uniroyal terminated its relationship with MTC, filing a twelve-count complaint including civil RICO counts. MTC counterclaimed, alleging contract violations by Uniroyal related to production halts and tire quality issues.
The trial court granted Uniroyal summary judgment on some of MTC's counterclaims and ruled in Uniroyal's favor on the remaining claims at the close of evidence. The jury subsequently found in favor of Uniroyal on both RICO counts and state law claims, awarding approximately $2.8 million in damages and imposing $1.4 million in fees and costs against MTC.
On appeal, MTC challenges the jury verdict and the trial court's decisions regarding its counterclaims and the assessment of fees and costs. The appeal focuses on three state law claims: intentional interference with contractual relations, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and common-law fraud. The appellate review is conducted in a manner favorable to Uniroyal, which MTC fails to consider in its arguments.
MTC's defense against the claim of interference with contractual relations centers on payments made to Germano, which it asserts were for legitimate consulting work. However, evidence presented to the jury indicated that these payments were secretive and linked to favorable treatment of MTC's account, leading to a reasonable inference of improper conduct.
For the statutory and common-law fraud claims, Uniroyal cited various schemes (Detroiter tire, cooperative advertising, Reno tire, and volume bonus) to support its allegations. MTC disputes the verdict, arguing insufficient evidence of false statements. It claims the evidence regarding the Detroiter scheme was limited to Uniroyal representatives' observations during a visit to Saudi Arabia. However, testimony revealed that MTC had discarded blemished tires before the inspection and failed to clearly label those that remained. Additionally, MTC was shown to have obtained confidential information from Germano, aiding its fraudulent claims. The jury's finding of fraud was therefore substantiated by the evidence presented.
MTC's argument regarding the inadequacy of evidence for the Reno tire scheme is unconvincing, as it merely favors one interpretation over another. Germano admitted to rebilling MTC at lower ADV prices without confirming if the tires were indeed ADV, thus leaving the determination of his credibility and intent to the jury. The jury's conclusion was reasonable given Germano's significant price adjustments, sometimes against his superior’s orders.
Regarding the cooperative advertising scheme, Uniroyal presented evidence showing MTC's claimed advertising costs of approximately $300,000 greatly exceeded typical rates in Nigeria, around $25,000, and that Germano reimbursed MTC at 100% of costs rather than the standard 50%. Furthermore, MTC did not post billboards until Uniroyal's investigation. MTC challenged the admissibility of evidence on market rates as hearsay, but the court found the evidence admissible, dismissing MTC's request for reversal.
Uniroyal's case included testimonies from Martin Wynne-Brown and Olutora Senbore, who detailed MTC's excessive reimbursement requests compared to typical advertising costs in Nigeria. Two exhibits supported their claims, showing estimates from advertising agencies indicating charges significantly lower than those billed by MTC. MTC argued that this evidence was hearsay and should be excluded, but the court determined there was a proper foundation for the exhibits, affirming their trustworthiness and denying MTC's hearsay objections, thus allowing the testimonies to stand.
The jury had sufficient grounds to find fraud regarding MTC's advertising costs, as evidence showed MTC was reimbursed at twice the allowed rate, and the billboards were not erected until Uniroyal's investigation began. The determination of whether MTC's actions constituted a "pattern of racketeering activity" under RICO was also examined. RICO Section 1964 establishes civil liability for deriving money through racketeering, offering remedies such as treble damages and attorneys' fees. The Supreme Court has clarified that merely having two or more predicate acts is insufficient to demonstrate a pattern; there must be a connection between those acts and a threat of ongoing criminal activity. In *Sedima S.P.R.L. v. Imrex Co.*, the Court rejected the notion that two predicate acts alone equate to a pattern. Subsequently, in *H.J. Inc. v. Northwestern Bell Tel. Co.*, it was determined that a single scheme could suffice for RICO liability, emphasizing that long-term criminal conduct was the focus of the statute. The Court's decisions necessitate a fact-intensive analysis for each case. Defendants contended that the trial court wrongly denied their motion for judgment as a matter of law, asserting the evidence only indicated a fleeting instance of fraud within an otherwise successful business relationship.
MTC's portrayal of the situation as a singular fraud is noted to be common, particularly in RICO jurisprudence, where state fraud claims are often inappropriately classified as RICO violations through broad interpretations of mail and wire fraud. In the case of Lipin Enterprises v. Lee, the court clarified that the mere complexity of a fraudulent transaction involving multiple communications does not constitute the necessary ongoing criminal activity required for RICO. Similarly, in Olive Can Co. Inc. v. Martin, a fraudulent scheme aimed at satisfying a personal debt was deemed not continuous under RICO, leading to a ruling of no liability.
However, the existence of a single victim does not automatically negate the possibility of establishing a pattern of racketeering activity. In Liquid Air Corp. v. Rogers, the court determined that a single scheme causing repeated, independent economic injuries to one victim over several months constituted a pattern of racketeering. Key factors in assessing a pattern include the number and variety of predicate acts, duration, number of victims, separate schemes, and distinct injuries, with continuity and relationship being critical. In Uniroyal's case, most factors illustrate a pattern in its favor, as the acts were numerous and prolonged, involved multiple schemes, and caused distinct harms, while the single victim aspect alone does not outweigh these considerations.
The distinctions between the cases of Liquid Air v. Lee and Liquid Air v. Olive Can highlight the nuances in determining a pattern of racketeering under RICO. Unlike in Lee and Olive Can, where the predicate acts were interdependent and collectively contributed to one large fraud without causing discrete injuries, Liquid Air involved separate fraudulent invoices that individually deprived the plaintiffs of distinct amounts of revenue. This case presents a stronger basis for RICO liability, as it involves at least four separate schemes targeting Uniroyal, all utilizing mail and wire fraud over three years, resulting in separate and distinct injuries.
MTC's counterclaims against Uniroyal, specifically allegations of fraudulent misrepresentation regarding tire origin and breach of contract for discontinuing the Detroiter tire shipment, were largely rejected by the district court. MTC's argument that the claims warranted jury consideration was found unpersuasive. The court established that MTC received tires from both Canada and the U.S., and the invoices did not conclusively misrepresent the origin of the Canadian tires as U.S.-origin. MTC's fraud claim was deemed speculative, leading the district court to rule in favor of Uniroyal, a conclusion that MTC failed to effectively challenge on appeal.
In the fall of 1987, Uniroyal discontinued production of the Detroiter tire, which MTC claimed resulted in significant losses in the Saudi Arabian market. However, MTC was unable to substantiate its damages claims at trial. Hauper estimated future sales of 10,000 tires per month for late 1987, 15,000 for 1988, and 18,000 to 20,000 for 1989, calculating damages based on these projections and the average markup on the tire. These estimates lacked evidentiary support, as MTC failed to provide any orders or commitments to validate them and had not achieved such sales volumes historically. Additionally, evidence indicated that MTC's sales of other tires increased after the Detroiter's production halted, yet MTC did not consider this in its damages claim. Consequently, the trial court declined to present the case to the jury, leading to an affirmation of its decision to grant Uniroyal judgment as a matter of law.
Regarding Uniroyal's request for attorneys' fees and costs, this was based on several legal provisions, including Rule 54(d)(2) of the Federal Rules of Civil Procedure and the Illinois Consumer Fraud and Deceptive Business Practices Act. The trial court's discretion in determining the reasonableness of fees is upheld unless an abuse of discretion is evident. The court affirmed Uniroyal's entitlement to fees under RICO and the Illinois Act, noting that fees from one successful claim can extend to related claims. MTC contested the number of attorneys present during pretrial appearances, arguing only one attorney should be reimbursed per appearance. The trial court rejected this, finding it reasonable for multiple attorneys to attend given the case's complexity and length. MTC did not provide sufficient evidence to overturn this decision, and the court's ruling was deemed reasonable and within its discretion.
MTC challenges the award of attorneys' fees, arguing that Uniroyal overstaffed the case with two full-time attorneys and a part-time attorney. Judge Bucklo deemed this staffing reasonable given the trial's four-week duration and the involvement of over 1,300 exhibits. MTC contends the trial was straightforward, suggesting Uniroyal complicated it by framing simple tort claims as RICO claims. However, the court finds that Uniroyal presented a compelling RICO case, justifying the legal team's efforts.
MTC also argues that the trial court failed to deduct fees for "failed and useless activities," specifically motions that were denied. The court notes that MTC did not support this claim with authority. It distinguishes between frivolous and unsuccessful claims, asserting that reimbursement for reasonable fees associated with colorable claims is appropriate, as it encourages proper legal representation.
Regarding costs, MTC seeks to exclude expenses for computerized legal research, likening them to overhead costs. The court rejects this, referencing Haroco v. American Nat'l Bank, which treated computerized and manual research as indistinguishable for reimbursement purposes.
Lastly, MTC contests reimbursement for expert testimony and document copying expenses. The trial court found the expert fees necessary for Uniroyal's case and deemed MTC's argument that these fees should not be recoverable as baseless. The court affirms that the costs of expert witnesses are recoverable under RICO, supported by civil rights case precedents.
Uniroyal's copying costs were contested by MTC, which argued that Uniroyal should have provided original documents for MTC to copy instead of making copies themselves. The trial court found this argument irrelevant, emphasizing that Uniroyal's reluctance to share original corporate documents was justifiable. MTC also challenged the costs associated with duplicating and enlarging exhibits for trial demonstrations, but the court determined these aids were beneficial for jury comprehension. Consequently, the trial court's rulings on the verdict, dismissal of MTC's counterclaims, and the award of fees and costs to Uniroyal were upheld. Additionally, the document notes the merger between the Uniroyal Tire Company and BF Goodrich, outlines the consistent RICO counts in MTC's complaint, and details Shafiq's unconditional personal guarantee of MTC's obligations to Uniroyal, confirming the unlimited nature of his liability.
