Court: Court of Appeals for the Ninth Circuit; September 14, 2001; Federal Appellate Court
The case involves a dispute between JR International Corp. (JRI) and its subsidiary Jinro America, Inc. (JAI) against defendants including Brian Bishop and several companies, arising from a failed international trade agreement for frozen chicken. Jinro alleges breach of contract, fraud, and racketeering, while defendants contend the chicken deal was a facade for a high-risk investment scheme that violated Korean currency regulations. The district court bifurcated the trial, leading to a jury siding with the defendants, prompting the court to enter summary judgment against Jinro on all claims. Jinro's primary appeal point is the claim of prejudicial expert testimony characterized as "ethnically biased" and "xenophobic." The appellate court agrees this testimony was improper and reverses the judgment against Jinro. The district court had diversity jurisdiction, as Jinro is based in South Korea and Washington, while the defendants are from Arizona, with the amount in controversy exceeding $75,000.
Background details reveal the Jinro Group consists of nine companies engaged in various sectors, including international trade in commodities. The chicken trading agreement was JRI's first foray into the frozen chicken market. Brian Bishop, an Arizona businessman, and his companies, COBBI and Landmark, formed to facilitate the agreement, allege the deal was merely a cover for an illegal joint venture involving a risky investment program. Secure Investments, led by Burnett Watkins, was to provide $10 million in collateral as part of the agreement.
On November 16, 1994, Jinro, COBBI, and Landmark established the Joint Program Agreement (JPA) for trading frozen chicken, with COBBI and Landmark seeking financing from Jinro, which acted as an intermediary. The JPA outlined a scheme where Landmark would purchase chicken at low prices to sell to Jinro, which would then resell it to COBBI at a higher price, facilitating chicken arbitrage. Jinro agreed to advance $10 million to Landmark during the twelfth month of the year-long agreement, secured by $10 million in Treasury securities assigned to Jinro and held at Saratoga Investments, Inc. However, by June 1995, no transactions had occurred, prompting Jinro to declare default and seek repayment. Subsequent investigations revealed no Treasury securities were held at Saratoga, leading Jinro to amend its complaint to include racketeering and fraud claims against Bishop and Watkins, who provided false documentation regarding the securities and had undisclosed ties to Saratoga.
Conversely, Bishop claims he was approached by JRI to assist in a high-risk investment known as a "roll program," involving trading credit and commercial paper from foreign banks. He asserts that Jinro initiated the concept and requested his assistance in forming COBBI and Landmark to legally facilitate their activities, which he claims were necessary due to restrictions imposed by Korean law on Jinro's direct participation.
Bishop alleges that Jinro instructed him to avoid using the term "roll program" in communications and, following their agreement, he provided Jinro with fabricated chicken orders and issues to create legitimate documentation for the chicken trading contract. He claims Jinro aimed to circumvent strict Korean investment laws, engaging him to establish a cover transaction known as the JPA. Unsatisfied with returns from the roll program, Jinro initiated a lawsuit to reclaim its initial $10 million investment, treating the chicken deal as legitimate.
On appeal, Jinro challenges the district court's bifurcation of the trial, the allowance of extrinsic evidence regarding the JPA, the jury instructions on Korean law, and the admission of ethnically biased expert testimony. The court affirmed the district's discretion in bifurcating the trial and admitting parol evidence but found error in the admission of expert testimony, leading to a reversal on that basis. The bifurcation aimed to first determine the validity and terms of the parties' agreement before addressing other claims, which the court deemed a reasonable approach for clarity and judicial economy.
Jinro further contends that the court erred by permitting testimony about an oral agreement that contradicted the written agreement, invoking the parol evidence rule under Arizona law, which typically prohibits such extrinsic evidence to change an agreement but allows it for interpretation purposes.
Defendants contended that the Joint Partnership Agreement (JPA) was a sham contract designed for Jinro to evade scrutiny from Korean regulatory agencies, rather than evidence to alter the contract's terms. The pivotal legal question is whether Arizona's parol evidence rule permits evidence to demonstrate that a written contract was a façade for illegal activities. Although the Arizona Supreme Court has not definitively ruled on this matter, existing case law suggests that such evidence is admissible. In Arizona Cotton Ginning Co. v. Nichols, the court permitted evidence to reveal that a seemingly legal transaction was, in fact, a sham. Arizona generally adheres to the Restatement, which allows for the admission of evidence to establish illegality or fraud, irrespective of the contract appearing complete and binding. Jinro's argument that the sham exception does not permit the admission of evidence regarding parts of the contract being a sham was found unconvincing, as the defendants asserted that the entire JPA was a cover-up for an illicit investment scheme. Consequently, the district court appropriately allowed the jury to consider evidence that the JPA was a sham aimed at concealing Jinro's actual investment strategy.
Jinro argues that the court improperly disregarded its legal expert's unrebutted testimony when creating jury instructions on Korean law, referencing Universe Sales Co. Ltd. v. Silver Castle, Ltd., which emphasizes the importance of expert testimony in determining foreign law. However, the court has broad discretion under Fed. R. Civ. Pro. 44.1 to consider any relevant material regarding foreign law, not limited to expert testimony. Unlike Universe Sales, the district court did consider Jinro's expert and instructed the jury that Jinro's participation was legal under Korean law if the agreement was the JPA, which was the sole focus of the expert's testimony. The court independently concluded that Jinro's participation in the roll program would be impermissible under Korean law, as it sought assistance from both parties but received no relevant information. Thus, the court’s self-research and subsequent conclusions were deemed appropriate.
Jinro also claimed the court erred by not sharing the sources it used to determine Korean law. While the Advisory Committee Notes suggest that courts should inform parties of diverging materials, they do not mandate disclosure. In this case, since neither party presented relevant materials, the court's lack of disclosure did not constitute an error, despite the potential for a more meaningful appeal had it done so.
Finally, the court's admission of expert testimony from David Herbert Pelham, who discussed Korean law and business practices, particularly regarding alleged fraudulent activities, is reviewed under the abuse of discretion standard, reinforcing the court's broad authority in these matters.
Pelham served as the general manager of the Pinkerton Detective Agency's office in Korea since 1994, claiming familiarity with Korean business practices through work and personal interest, despite lacking formal education or training in business or cultural expertise. His background included experience as a private investigator providing commercial security for non-Korean corporations and previous training with the U.S. Air Force Office of Special Investigations. Although he had significant experience in Korea, including five tours and a Korean spouse, he had not investigated Jinro specifically. Defendants initially sought to use his testimony to explain Korean business practices but later shifted their defense to argue against claims of bias and waiver by Jinro. They asserted Pelham's marriage to a Korean woman negated any bias in his testimony, which was deemed irrelevant to the content being evaluated. Defendants also contended that Jinro waived any objection to Pelham's testimony by not raising issues during trial. However, Jinro had filed pretrial motions questioning Pelham’s qualifications under Fed. R. Evid. 702 and alleging he would provide biased and prejudicial testimony, which the district court denied in part, allowing Pelham's general testimony on Korean culture but not as an expert in Korean law. Throughout the trial, Jinro made repeated objections to Pelham's testimony and ultimately moved to strike it, which the court denied. The court's actions indicated that Jinro preserved its right to challenge Pelham's testimony on appeal.
Pelham's testimony at trial primarily focused on generalizations about the behavior of "Korean businessmen," lacking direct relevance to Jinro or personal knowledge of its practices. He suggested that these businessmen dislike laws that limit their business operations, which is a sentiment that could apply universally across various nationalities and does not imply illicit conduct. When discussing currency restrictions, he noted that while evasion attempts exist in Korea, this does not inherently indicate wrongdoing by Jinro. Pelham provided examples of potential illegal activities, such as smuggling and conspiracy, associating them with the notion of deceptive contracts. He claimed that the United States, particularly California due to its large Korean population, is a favored destination for the proceeds of such schemes. Despite being questioned about the legitimacy of Jinro’s agreements, Pelham's assertion that the written contract could have been approved by banking authorities was contradicted by his view that the unwritten "roll program" would not have been accepted, implying Jinro engaged in deceptive practices. Furthermore, when asked about oral contracts with Koreans, he advised against them, reinforcing the stereotype that Korean businessmen are untrustworthy, suggesting that such arrangements could lead to negative outcomes due to cultural differences.
Counsel for Jinro attempted to mitigate damage during cross-examination of Pelham by questioning his views on the ethics of Korean businesses. Pelham stated that while he could not claim all Korean businesses operated corruptly, he believed corruption was prevalent in that community, citing "newspaper articles" as a primary source for his opinion, including references to a Wall Street Journal article and a poll from the Korean Herald. However, his testimony lacked empirical data or rigorous research, relying instead on anecdotal evidence and unverified information from his staff. Consequently, the court concluded that Pelham should not have been allowed to testify due to two main reasons: his qualifications as an expert were questionable, and his testimony was unreliable under Rule 702, which governs the admissibility of expert testimony. Even if admissible, the testimony was deemed more prejudicial than probative, warranting exclusion under Rule 403. Pelham, presenting himself as an expert, was permitted to provide hearsay-based opinions that could unduly influence the jury. The court emphasized the importance of ensuring that witnesses genuinely qualify as experts under Rule 702, which allows testimony based on specialized knowledge if it aids the jury. The principles established in Daubert and Kumho guide the application of this rule, affirming that while expert witnesses have broad latitude in their opinions, their testimony must have a reliable foundation in their field of expertise.
The district judge possesses discretionary authority, subject to review for abuse, to evaluate the reliability of expert testimony based on specific case facts. This gatekeeping function is essential to ensure that expert testimony is both reliable and relevant. Adequate execution of this function is crucial; it is not merely a discretion to perform poorly, but a responsibility to exclude expert testimony that is false or lacks scientific validity. The principles established in Daubert regarding "scientific knowledge" apply equally to other forms of specialized knowledge, requiring that expert assertions be grounded in the scientific method and validated by reliable data. In Kumho, the Supreme Court expanded the Daubert reliability standard to all experts. Testimony must have a valid connection to the inquiry at hand, and if its reliability is sufficiently questioned, the trial judge must assess its basis in relevant expertise.
Furthermore, Rule 403 allows for the exclusion of relevant evidence if its probative value is substantially outweighed by risks such as unfair prejudice or jury confusion. Expert evidence can be particularly influential yet potentially misleading, which necessitates greater judicial control over expert witnesses compared to lay witnesses. In this case, the district court abused its discretion in admitting Pelham's testimony, finding it unreliable due to his insufficient qualifications as an expert on Korean business culture and currency laws. His background as a professional investigator did not provide the necessary legal, business, or financial expertise to properly evaluate the Jinro transaction. Consequently, his testimony should have been excluded under Rule 403 due to its unduly prejudicial nature.
Pelham lacked formal education or training as a cultural expert, specifically regarding Korean culture, and was not qualified as a sociologist or anthropologist. His testimony relied on personal experiences, informal study, input from staff, and his marriage to a Korean woman, which did not provide a sufficient basis for his generalizations about Korean businesses. He failed to present empirical evidence or studies to substantiate his claims, relying instead on newspaper articles and anecdotal examples, some classified as hearsay. While Pelham might have been able to offer insights related to the Korean governmental and banking systems as a commercial investigator, his testimony instead perpetuated cultural stereotypes, leading the jury to view a skewed subset of Korean individuals and companies as representative of the whole.
Furthermore, even if his testimony were admissible as expert opinion, it contained ethnic bias that warranted exclusion under Rule 403 due to the potential for unfair prejudice and confusion. The principles surrounding the exclusion of testimony linking a defendant's actions to racial or ethnic characteristics, although primarily derived from criminal cases, are relevant in civil litigation as well. Fairness and due process are essential in both contexts, and racial stereotyping is unacceptable. The integrity of legal proceedings is compromised when generalizations based on ethnicity or national origin influence the judicial process.
Allowing an expert witness to generalize that most Korean businesses are corrupt constitutes ethnic or cultural stereotyping, leading jurors to unfairly assume that a specific Korean litigant fits this stereotype. This reasoning is illustrated through a syllogism: (a) Korean businesses are generally corrupt; (b) Jinro is a Korean business; (c) therefore, Jinro is corrupt. This type of reasoning is deemed impermissible based on case law.
In Cabrera, a government witness made repeated references to the defendants' Cuban nationality, which was found to be largely irrelevant and unfairly prejudicial, as it implied that the defendants were drug dealers solely based on their ethnicity. Similarly, in Bains v. Cambra, a prosecutor suggested that Sikh individuals are predisposed to violence, which improperly invited the jury to conclude that the defendant acted violently merely due to his ethnicity.
Other circuits have also condemned the introduction of race or ethnicity into trials. For instance, the Eighth Circuit criticized the admission of testimony suggesting that individuals of Hmong descent are likely to be involved in opium smuggling, deeming such evidence either irrelevant or prejudicial and highly improper.
The court identifies a constitutional error in the trial due to the inclusion of ethnicity, which led the jury to weigh the Vues' racial and cultural background in determining guilt. Citing *United States v. Cruz*, the court highlights that references to a defendant's ethnicity, such as labeling individuals by their nationality, are deemed highly improper and prejudicial. The Second Circuit found such testimony, particularly when it suggests criminal behavior based on ethnicity, to be inherently biased. Similar findings were made in *United States v. Doe*, where expert testimony linking a defendant's ethnicity to criminal activity was ruled prejudicial under Rule 403. The court emphasizes the impropriety of appeals to class prejudice and the risk of racial stereotyping in trials, particularly through expert testimony.
While acknowledging that some expert testimony regarding cultural traits may be permissible, the court asserts that Pelham's ethnic generalizations were flawed as they invited juror distrust based on stereotypes. The case of *Vang v. Xiong* is presented as distinguishable, where cultural testimony was allowed to explain behavior in a rape case involving Hmong women, as it provided context rather than prejudice. Ultimately, the court criticizes the use of ethnic stereotypes in legal proceedings while recognizing that cultural context can sometimes be relevant if it does not evoke bias.
Several critical factors influenced the decision regarding the admissibility of expert testimony in this case. The district court had limited the scope of testimony, both pretrial and during the trial, which was a significant aspect. Expert Hurlich was the sole individual who could elucidate the behavior of certain individuals related to the case, specifically in the context of Hmong culture and their interaction with governmental agencies. Although his testimony was prejudicial to the defendant due to its alignment with the rape allegations, it was deemed relevant and not excessively prejudicial given its limited scope.
In contrast, Pelham's testimony regarding alleged corruption among Korean businesses lacked a foundation in cultural expertise, as there was no indication in the record of his qualifications in this area. Unlike Hurlich, who provided a non-inflammatory academic perspective, Pelham's statements implied a generalized corruption associated with Korean businesses, which constituted an appeal to ethnic bias and was considered unreliable and inflammatory. The court emphasized that such testimony could lead the jury to make adverse inferences based solely on ethnic identity, which is contrary to the principle of formal equality before the law.
Ultimately, the court concluded that the district court had made an error in allowing Pelham's testimony, as it invited prejudicial considerations regarding Jinro's cultural background. This flawed admission likely influenced the jury's findings related to the operative agreement between the parties. Consequently, the judgment against Jinro was reversed and the case remanded for further proceedings.
JRI, now known as Jinro Industries Co. Inc., contested the probative value of testimony regarding the integrity of Korean businesses, arguing that it was irrelevant and prejudicial, violating due process and equal protection rights. Jinro highlighted that witness Pelham had only heard of certain schemes, contradicting his assertion of personal knowledge. The defendants consistently referred to Jinro as "the Koreans," blurring the distinction between the company and Korean identity, which was also reflected in Landmark's brief. Although the court acknowledged the attempts by counsel to mitigate the effects of initial testimony, it found Pelham's statements to be unreliable and prejudicial, rendering the question of relevance moot. The excerpt also references a precedent involving expert testimony in a different case, illustrating the acceptable scope of expert explanations in court.
