Antitrust Law Daily Wrap Up, RICO—N.D. Cal.: Uthe’s claims against Aetrium dismissed; alleged harm was derivative of subsidiary’s injury, (Aug 30, 2016)

By Mark Engstrom, J.D.

Semiconductor products manufacturer Uthe Technology could not prevail on its RICO claims against Aetrium Inc. and former Aetrium officer Harry Allen (collectively, "the Aetrium defendants"), who allegedly conspired to divert business from Uthe’s wholly-owned subsidiary, Uthe Technology (Singapore) Private, the federal district court in San Francisco has ruled. Because the domestic injuries to Uthe—the reduced value of the subsidiary and the losses that Uthe had incurred from the sale of that subsidiary—were derivative harms, they were not cognizable injuries under RICO. Summary judgment was therefore granted to the Aetrium defendants (Uthe Technology Corp. v. Allen, August 26, 2016, Alsup, W.).

Uthe sued Aetrium, one of Aetrium’s officers, and several officers of Uthe Singapore for conspiring to withhold commissions from Uthe Singapore and for diverting the subsidiary’s business to a secret shell corporation—actions that allegedly resulted in the sale of Uthe Singapore at a depressed price. The lawsuit was stayed pending arbitration in Singapore.

After nineteen years of arbitration, Uthe was awarded more than $9 million, which represented the difference between: (1) the true value of Uthe’s shares in Uthe Singapore (absent the defendants’ conduct) and (2) the artificially depressed stock price that Uthe received for those shares. In this case, Uthe sought treble damages under RICO.

Uthe’s sole remaining injury was the diminution in the value of Uthe’s 100 percent stake in Uthe Singapore and the loss that Uthe had incurred from the sale of that stake. The defendants argued that Uthe lacked standing to assert a RICO claim because Uthe’s alleged injury was derivative of the injury to Uthe Singapore.

The court noted that, in Sparling v. Hoffman Construction Co., Inc., 864 F.2d 635 (1988), the Ninth Circuit ruled that a shareholder lacked standing to assert a RICO claim if the alleged harm was "derivative of the harm to the corporation," rather than an individual harm. The court further noted that the relevant inquiry in the instant case was the distinction between direct and derivative injuries, not the distinction between direct and derivative actions, as Uthe had alleged.

Uthe attempted to assert a direct injury by characterizing its harm as the "theft of a corporation." In the court’s view, however, the racketeering conduct at issue was not fraud on Uthe in connection with the sale of Uthe Singapore; the conduct at issue was the surreptitious depletion of the assets of Uthe Singapore, which caused a devaluation of Uthe’s shareholder interest in Uthe Singapore.

Because Uthe’s injury was derivative of the alleged injury to its former subsidiary, and because a derivative injury to a corporation could not support a civil RICO claim, summary judgment in favor of the Aetrium defendants was warranted.

The case is No. C 95-02377 WHA.

Attorneys: James Mitchell Lee (LTL Attorneys LLP) and Rishi Bhandari (Mandel Bhandari LLP) and Robert Yin Pong Chan for Uthe Technology Corp. Ann E. Johnston (Coblentz, Patch, Duffy & Bass LLP) and Archana Nath (Fox Rothschild LLP) for Harry Allen and Aetrium, Inc.

Companies: Uthe Technology Corp.; Aetrium, Inc.

Cases: RICO CaliforniaNews