Jinro America Inc., a Washington Corporation Jr International Corporation, a Korean Corporation v. Secure Investments, Inc., an Arizona Corporation Brian Bishop, an Individual Burnett Watkins, an Individual Bishop, Mrs., Individually Watkins, Mrs., Individually Brian W. Bishop Inc., an Arizona Corporation, Dba Cobbi International Food Products Landmark Forward Companies, Inc.
Docket: 99-16133
Court: Court of Appeals for the Ninth Circuit; December 4, 2001; Federal Appellate Court
The case involves Jinro America Inc. and JR International Corp. (collectively "Jinro"), which are appealing against multiple defendants including Brian Bishop and Landmark Forwarding Companies, Inc., following a failed business deal related to the international trade of frozen chicken. Jinro alleges breach of contract, fraud, and racketeering, while defendants claim the transaction was a façade to disguise a high-risk investment scheme violating South Korean currency regulations.
The district court bifurcated the trial to first address the defendants' allegation of a sham contract. The jury sided with the defendants, leading the court to enter summary judgment against Jinro on all claims. Jinro's appeal raises several issues, notably the claim that the trial was tainted by prejudicial expert testimony deemed "ethnically biased" and "xenophobic." The appellate court agrees with this assessment and reverses the judgment against Jinro.
Jurisdiction was established under diversity jurisdiction due to the parties being from different states and countries, with the amount in controversy exceeding $75,000. The Jinro Group, a consortium of nine companies, has a diverse international trade portfolio and was attempting to enter the frozen chicken market through this agreement.
Brian Bishop, an Arizona businessman with a background in commodities trading, established COBBI in April 1994 to facilitate a chicken trading agreement with Jinro. He asserts that this agreement was a façade for a joint venture involving a risky "roll program," which would have been illegal under Korean law. Burnett Watkins, Bishop's associate and president of Secure Investments, Inc., was to provide $10 million in U.S. Treasury notes as collateral for Jinro.
On November 16, 1994, Jinro, COBBI, and Landmark formalized the "Joint Program Agreement" (JPA), which outlined a simple contract for the trading of frozen chicken, with Jinro acting as an intermediary. The JPA stipulated that Landmark would purchase chicken at low prices and sell it to Jinro, which had pre-secured higher sales orders from COBBI. Jinro agreed to advance $10 million to Landmark during the twelfth month of the JPA, with the Treasury securities serving as collateral, held in a blocked account at Saratoga Investments, Inc.
However, by June 1995, no chicken transactions had occurred. Bishop provided various excuses for the delays but maintained that the deal was proceeding. Eventually, Jinro declared Bishop and his companies in default and sought repayment of the advance. In August 1995, Jinro filed a lawsuit to prevent the transfer of the Treasury collateral and discovered that no securities were held as promised. Subsequently, Jinro amended its complaint to include allegations of racketeering and fraud against Bishop, Watkins, and Secure Investments, revealing that Watkins was an undisclosed principal of Saratoga Investments. Jinro contends that it entered into a valid agreement for the international chicken trade and was defrauded of its $10 million advance by the defendants.
Bishop alleges that JRI approached him to invest in a high-risk "roll program," which involves trading credit and commercial paper from foreign state banks. Jinro introduced this concept and requested Bishop to form a company for a joint venture, promising significant profits while avoiding Korean laws that restricted such investments. Bishop established companies, COBBI and Landmark, at Jinro's request to create a façade for the investment, and he was instructed to avoid using the term "roll program" in communications. To maintain the illusion of legitimacy, Bishop fabricated chicken orders and issues related to a chicken trading contract. Following disappointing returns, Jinro sought to recover its $10 million investment, treating the chicken transaction as legitimate.
On appeal, Jinro challenges the district court's bifurcation of the trial, the admission of extrinsic evidence, the instructions on Korean law, and the inclusion of biased expert testimony. The court upheld the bifurcation and the admission of parol evidence but found an error in allowing the biased expert testimony. The district court has broad discretion to bifurcate trials under Rule 42(b) to expedite proceedings and minimize costs, determining that an initial ruling on the existence and terms of the agreement was crucial before addressing other claims.
The district court's decision to bifurcate the trial was deemed reasonable, as the validity of the contract was central to resolving other claims, demonstrating judicial economy. Jinro contended that the court wrongly allowed testimony regarding an oral "true" agreement that contradicted the written contract. The parol evidence rule in Arizona, which generally prohibits extrinsic evidence that alters a contract's terms, does allow for evidence that a contract was a sham or entered for illegal purposes. Although the Arizona Supreme Court has not specifically addressed this, prior case law suggests that evidence indicating a contract is a cover-up for fraudulent or illegal activity is admissible, aligning with the Restatement of Contracts. The Restatement permits the introduction of evidence regarding illegality, fraud, or other invalidating causes even if there appears to be a valid agreement. Jinro's argument that the sham exception does not apply to partial contracts was rejected, as it mischaracterizes the situation; the opposing party claimed the entire agreement was a cover-up for a different agreement, not just portions of it.
Parol evidence was introduced to demonstrate that the Joint Participation Agreement (JPA) was a facade for an aggressive investment strategy to circumvent Korean currency laws, rather than to alter the contract's terms. The court allowed the jury to consider evidence that the JPA was a sham, reflecting the true nature of Jinro's investment agreement. Regarding jury instructions on foreign law, Jinro argued that the court failed to consider the unrebutted testimony of its legal expert when formulating instructions based on Korean law, citing Universe Sales Co. Ltd. v. Silver Castle, Ltd. The district court's formulation of jury instructions is reviewed for abuse of discretion. While Jinro’s legal expert testified that the JPA was approved under Korean law, he did not address the legality of Jinro's participation in the roll program. The court independently concluded that such participation would have been illegal under Korean law, as neither party provided assistance in resolving this question. The district court also did not disclose its sources for its conclusions on Korean law; while the Advisory Committee Notes suggest disclosure is preferable, they do not mandate it. The court's actions were deemed appropriate, and it did not err in its instructions on foreign law.
The district court's admission of expert testimony from David Herbert Pelham, a private investigator with no formal training in business or law, is under scrutiny for potential abuse of discretion. Pelham, who has managed the Pinkerton Detective Agency's office in Korea since 1994, provided testimony about Korean law and business practices, particularly focusing on alleged fraudulent activities and currency law violations. Defendants initially relied on his expertise to inform the jury about the general operations of Korean businesses, but on appeal, they shifted arguments to assert that Pelham's testimony was free from bias due to his marriage to a Korean woman. This argument was deemed irrelevant, as marital status does not validate the content of his testimony.
Additionally, defendants claimed that Jinro waived any objections to Pelham's testimony by not raising concerns during the trial. However, Jinro had filed pretrial motions arguing Pelham's lack of qualification as an expert and the potential for biased generalizations, which the district court initially denied for his general testimony on Korean culture, although it restricted him from testifying on Korean law. Jinro consistently objected to Pelham's testimony during the trial and subsequently renewed its objections, successfully preserving the issue for appeal. Pelham's testimony primarily consisted of generalizations about Korean businessmen's behavior, lacking specific relevance to Jinro itself.
Korean businessmen generally oppose laws that restrict their business operations and investment opportunities, expressing frustration over currency regulations. However, this sentiment does not imply that they are prone to illegal activities; discontent with laws is common across various nationalities and does not justify assumptions of unlawful behavior, such as those directed towards Jinro. Pelham indicated that evasion of currency regulations is widely recognized in Korea, citing potential illegal activities like theft and smuggling, suggesting that such actions are not unique to any specific group. He identified the U.S., particularly California, as a favored destination for the proceeds of these activities, due to its significant Korean population.
Pelham was allowed to suggest that a written agreement between Jinro and the defendants could be accepted by Korean banking authorities, while implying that an alleged unwritten agreement would not be approved, insinuating dishonesty on Jinro's part. When questioned about the reliability of oral contracts with Koreans, Pelham discouraged such agreements, claiming they are inherently risky, particularly in Korea due to cultural differences. His responses reinforced a negative perception of trustworthiness among Korean businessmen, a viewpoint that Jinro's counsel attempted but failed to mitigate during cross-examination.
Pelham, when questioned about the integrity of Korean businesses, asserted that while he wouldn't claim all operate corruptly, there is significant corruption within the Korean business community, primarily supported by newspaper articles, including a Wall Street Journal piece and a poll from the Korean Herald, as well as unspecified information from his staff. His testimony lacked empirical evidence or formal research, relying instead on anecdotal experiences and hearsay, particularly regarding the "phony trade contract" tactic, which he had only "heard of" rather than witnessed. The document argues that Pelham's testimony should not have been admitted for two main reasons: his qualifications as an expert were questionable, making his testimony unreliable under Rule 702, and even if admissible, it was overly prejudicial compared to its probative value, warranting exclusion under Rule 403. As an expert, Pelham's status allowed him to present hearsay as opinion, potentially biasing the jury, highlighting the necessity for rigorous adherence to expert qualifications per Rule 702, which permits specialized knowledge to assist the jury if the witness is suitably qualified. The Supreme Court's rulings in Daubert and Kumho emphasize that while expert testimony can have a liberal application, it must still be grounded in reliable knowledge and experience within the relevant discipline.
The district judge possesses discretionary authority to assess the reliability of expert testimony, a critical function to ensure such testimony's relevance and reliability. This discretion must be exercised adequately, allowing for the exclusion of unreliable or unscientific expertise. The Supreme Court's Daubert decision emphasized that "scientific knowledge" must be based on the scientific method and supported by validation. This standard of "evidentiary reliability" has been extended by Kumho to all expert testimony, requiring a valid connection to the relevant inquiry. The trial judge must scrutinize the factual basis and methods of the expert if they are questioned.
Moreover, Rule 403 allows for the exclusion of relevant evidence if its probative value is outweighed by potential prejudice or confusion. Expert evidence, though powerful, can mislead due to its complexity, necessitating greater judicial control over expert testimony compared to lay testimony.
In applying these principles, the court determined that Pelham's testimony should not have been admitted. His qualifications as an expert on Korean business culture and currency laws were insufficient, lacking the necessary legal, business, or financial expertise. He had no relevant education or training in cultural studies, rendering his testimony unreliable and prejudicial.
Pelham's testimony regarding Korean businesses lacked a solid foundation for expert opinion, as it stemmed from personal experiences, anecdotal evidence, and generalizations rather than empirical data. His insights were primarily based on his role as a commercial investigator and personal connections, which led to cultural stereotyping of Korean businesses. This bias resulted in unfounded claims that suggested a pervasive corruption among such businesses, thus misrepresenting the majority based on a limited sample. Even if his testimony were deemed admissible, it risked unfair prejudice and confusion under Rule 403, which allows exclusion of evidence if its probative value is outweighed by the potential for bias or misunderstanding. The legal standards emphasize that ethnic stereotyping is unacceptable in civil cases, paralleling principles established in criminal proceedings. The flawed reasoning presented by Pelham effectively equated the nationality of a business with corrupt behavior, which is an impermissible logical fallacy. This reasoning mirrors concerns from case law regarding the implications of ethnic bias in judicial proceedings.
Testimony indicated that the round, flat wafers of cocaine purchased from Cabrera were characteristic of how cocaine is prepared within the Cuban community. When questioned about whether this cocaine shape suggested a Cuban origin, Brooks acknowledged that while he had not seen non-wafer cocaine in non-Cuban cases, it was indicative of the Cuban community. The court found Brooks' references to "Cubans" largely irrelevant and unfairly prejudicial under Federal Rules of Evidence 401 and 403, emphasizing that the defendants' national origin should not have been introduced in the trial. This injection of ethnicity unduly influenced the jury's perception, making it seem more likely that the defendants were drug dealers due to their ethnicity.
The document cites precedents, including Bains v. Cambra, where the court condemned the argument that generalized all Sikhs as predisposed to violence due to cultural beliefs, thus unfairly linking ethnicity to criminal behavior. Similar rulings from other circuits, such as United States v. Vue, highlighted the improper admission of evidence implying ethnic groups were prone to criminal activity, which was deemed irrelevant or unfairly prejudicial. The Second Circuit in United States v. Cruz also criticized the introduction of a defendant's ethnicity as evidence of criminal conduct, reinforcing that such practices are inherently improper and prejudicial.
Expert testimony regarding the retail crack and cocaine market in Washington, D.C., which indicated that Jamaicans essentially control the market, was deemed unfairly prejudicial under Rule 403. It suggested guilt based on the defendants’ ethnicity, echoing concerns highlighted in United States v. Socony-Vacuum Oil Co. Inc. about the impropriety of appeals to class prejudice. While expert testimony related to race, ethnicity, or nationality can be admissible, it must avoid racial or ethnic stereotyping that could evoke bias or guilt by association. The testimony by Pelham was criticized for inviting the jury to distrust the defendants based on ethnic stereotypes.
Defendants referenced Vang v. Xiong to argue for the admissibility of cultural testimony, but this case was distinguished as it involved specific cultural context relevant to the plaintiffs' behavior in a civil suit regarding sexual assault. In Vang, the court allowed expert testimony on Hmong culture that was strictly limited and directly relevant to the case, providing necessary context for understanding the plaintiffs' actions. The court noted the expert’s unique qualifications and the limited scope of his testimony, which mitigated its prejudicial nature, unlike Pelham's ethnic generalizations in the current case.
The district court failed to evaluate Pelham's qualifications to provide expert testimony regarding corruption in Korean businesses, lacking any indication of his expertise in cultural matters. Unlike the academic approach taken in Vang, where cultural explanations were offered to clarify behavior, Pelham's testimony suggested inherent corruption among Korean businesses, constituting prejudicial ethnic bias. This bias prompted the jury to form negative inferences about Jinro solely based on its ethnic identity, contrary to principles of equal treatment under the law. The court recognized that Pelham's unqualified and inflammatory testimony led to an improper conclusion by the jury regarding the parties' agreement, which was critical to the district court's decision to grant summary judgment for the defendants. Consequently, the judgment against Jinro was reversed and the case was remanded for further proceedings.
Appellee Landmark uses "the Koreans" and "Jinro" interchangeably, suggesting a synonymous relationship. Jinro contends that Pelham's testimony lacks relevance and probative value, as it does not pertain directly to Jinro's actions in this case. The court finds Pelham's testimony unreliable and prejudicial, rendering the question of relevance moot. Expert witnesses typically provide technical explanations, as illustrated in United States v. Mohrbacher, where a government expert clarified the workings of computer bulletin boards in a child pornography case. The court reverses the district court's summary judgment on Jinro's fraud claim, which assumed that all claims were based on the parties' intent to be bound by the Joint Participation Agreement (JPA). Circuit Judge Wallace concurs with the majority's decision to reverse due to the improper admission of Pelham's expert testimony, but he criticizes the majority for addressing unnecessary issues surrounding race and ethnicity without evidentiary support. At trial, Pelham's testimony aimed to associate Jinro with other corrupt Korean businesses that violate financial regulations. Evidence must be relevant under Federal Rule of Evidence 401, which states that evidence is relevant if it makes a consequential fact more or less probable. The specific facts of the case dictate the relevance of any evidence presented.
Pelham's testimony was deemed irrelevant to the case, as it lacked a direct connection to Jinro or the specific transaction in question. The testimony focused on generalizations about Korean businessmen, which did not establish any pertinent facts about Jinro's actions or character. The court noted that no substantial effort was made to relate Pelham's broad statements to the specifics of the case. Under Rule 401 of the Federal Rules of Evidence, Pelham's testimony was inadmissible as it did not illuminate Jinro's activities. The majority opinion incorrectly overlooked the critical relevancy issue, allowing the case to continue despite the lack of pertinent evidence. The testimony created a prejudicial association, suggesting that because Jinro is a Korean business, it must be dishonest, which improperly influenced the jury's perception. The district court was found to have abused its discretion in admitting this testimony. Additionally, the majority's conclusion about the district court's gatekeeping role regarding expert testimony was incorrect, as judges have broad discretion in these matters. The majority seemed to question Pelham's qualifications for testifying about Korean business practices because he lacked formal education in business or related fields.
Testimony under Rule 702 does not strictly require adherence to the Daubert factors when the reliability of the expert opinion is based on the expert's knowledge and experience rather than methodology. Pelham's extensive background in investigating Korean businesses and transactions counters the assertion of his inadequacy based on a lack of academic credentials. His qualifications include 22 years in the U.S. Air Force, multiple tours in Korea, and a leadership role in the Office of Special Investigations, where he focused on Korean commercial practices. After retiring, he became general manager of Pinkerton Korea Limited, a firm specializing in security for companies operating in Korea, further deepening his expertise in Korean business practices and regulations.
The court found no abuse of discretion in allowing Pelham's testimony, which was deemed to provide reliable "special knowledge" relevant to the case. The majority's dismissal of Pelham's qualifications based on defense counsel's references to his personal interest in Korean culture was criticized. Additionally, the majority's concerns regarding ethnic prejudice in Pelham's testimony were deemed unfounded. The testimony, while potentially unfavorable to the defendant Jinro, was characterized as an observation rather than ethnic stereotyping. Jinro had the opportunity to challenge Pelham's assertions but did not present counter-evidence, raising the question of the relevance of Pelham's testimony rather than its reliability.
The reversible issue in the case is not Pelham's alleged ethnic bias, but rather the improper reliance on Bird and the criminal cases Cabrera and Cambra to raise due process concerns regarding testimony in a civil trial. Bird involved a civil dispute with significant racial overtones, where the plaintiff's closing argument invoked historical racial oppression and was emotionally charged, unlike the current case. Pelham's testimony, while unfair to Jinro, was not intended to inflame ethnic prejudice. Additionally, relying on criminal cases to argue that Pelham's testimony was unduly prejudicial is questionable, as criminal defendants enjoy greater constitutional protections than civil parties. The cases cited also involved repeated ethnic references that prejudiced the defendant, which is not applicable here; Pelham's testimony only implicated Jinro in the alleged behaviors of other Korean businesses without putting Koreans on trial as a whole. The conclusion aligns with the outcome based on Pelham's irrelevant testimony.
