RICO — Neither Shareholder Nor Creditor Has Standing to Sue for Injuries Resulting from Injury Sustained in First Instance by Corporation
Harris v. Orange S.A., 2015 U.S. App. LEXIS 22905 (11th Cir. Dec. 30, 2015):
Marcia Harris appeals the district court's dismissal of her complaint against Orange Business Services U.S., Inc. ("OBS"), a Delaware corporation located in Georgia; Orange S.A. ("Orange"), a corporation located in France; Almerys S.A.S. ("Almerys"), a corporation located in France; Dr. Patrice Cristofini; Dr. Yves Miaux; Barbara Ngouyombo; Hammond Bale Solicitors L.L.P. ("HB"), a law firm located in the United Kingdom; Griffin and King Ltd ("GK"), a law firm located in the United Kingdom; and Landwell & Associés/Partners ("Landwell"), a partnership located in France, in her action alleging violations of the Georgia Trade Secrets Act, Ga. Code Ann. §§ 10-1-760 et seq. ("GTSA"), the federal Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. §§ 1961 et seq., the Georgia RICO Act, Ga. Code Ann. §§ 16-14-1 et seq., and common law fraud.
On appeal, [*2] Harris argues that the district court erred in dismissing her claims against the non-OBS defendants for failure to serve them. She further argues that the district court erred in concluding that she lacked standing to bring federal RICO claims, state RICO claims, and claims under the GTSA against OBS. Finally, as to her fraud claims, she argues--for the first time on appeal--that the district court erred in dismissing her fraud claims for failure to state a claim on the basis that OBS did not owe her a fiduciary duty. After careful consideration, we affirm.
Harris, who proceeds pro se but is licensed to practice law, filed a complaint alleging violations of the GTSA against all defendants (Count 1), violations of the federal RICO Act against all defendants (Count 2), violations of the Georgia RICO Act against all defendants (Count 3), and common law fraud against OBS and Orange (Count 4).
Harris was a director, shareholder, and employee of Anoigma Ltd. ("Anoigma"), a British high tech health care company. Initially, she, Ngouyombo, and Miaux were the company's only shareholders.1 During her time at Anoigma, the company developed medical-records software that constituted new [*3] intellectual property (the "IP"). Harris and Ngouyombo presented the IP to Cristofini, who represented Orange at the time. She alleges that Orange then discussed the IP with OBS, Orange's United States affiliate.
1 At the motion to dismiss stage, we accept the well-pleaded allegations in the complaint as true and view them in the light most favorable to Harris. See Chaparro v. Carnival Corp., 693 F.3d 1333, 1335 (11th Cir. 2012).
After OBS discovered the IP's profit potential, it encouraged Orange to express interest in Anoigma and to install Cristofini as a shareholder and officer there. Not long after, Cristofini became the fourth shareholder of Anoigma and obtained a director position in the company. Sometime after Cristofini joined Anoigma, he, Miaux, and Ngouyombo secretly created a new company, Cloud Sante S.A.S. ("CS"), and transferred the IP to CS. The defendants then began efforts to remove Harris from her directorship of Anoigma, which they ultimately succeeded in doing.
Harris brought an action in England against Anoigma and CS, alleging, among other things, wrongful termination. Neither Anoigma nor CS appeared to contest Harris's allegations. The English court awarded Harris a monetary judgment consisting of loss of earnings, loss of statutory [*4] rights, improperly deducted wages, and other costs.
After her removal as director, Harris entered negotiations to purchase the IP, with the intention of setting up a company to market it in the United States. She became aware of the IP's transfer to CS during the course of these negotiations. Before Harris could collect her wrongful termination judgment or complete her purchase of the IP, the defendants deliberately moved Anoigma into bankruptcy. The defendants then transferred the IP from CS to Almerys, a subsidiary of Orange, and engineered the bankruptcy of CS.
Harris filed suit against Orange, Cristofini, Miaux, Ngouyombo, and HB in the Northern District of Illinois (the "Illinois Action") alleging claims similar to those she alleges here. The district court in that case dismissed the action on the basis of forum non conveniens, noting that Harris should have brought her complaint in a foreign court. Harris did not appeal the district court's judgment.
Harris then filed the current action, contending that both transfers of the IP were fraudulent. Her complaint alleges that, as a result of the fraudulent transfers of the IP and the bankruptcies, she was deprived "of the value of her [*5] shares," prevented from collecting on the money judgment awarded to her by the English court, and prevented from purchasing the IP "for commercialization in the U.S." She seeks to distinguish this action from the Illinois Action by naming additional defendants and adding allegations of fraud arising from declarations made during the Illinois Action. She alleges that these declarations "were designed to divert attention away from the central role of OBS, a U.S. company," in the alleged conspiracy, thereby compelling dismissal of the action on forum non conveniens grounds and allowing the defendants to further the conspiracy. She also contends that she relied on fraudulent omissions the defendants committed during the Illinois Action in deciding not to appeal the court's dismissal of that action, and "was damaged thereby in terms of the costs of the previous lawsuit, and the loss of time (and potential loss of evidence) in pursuing the present lawsuit."
OBS moved to dismiss Harris's claims against it. The district court granted OBS's motion to dismiss on November 28, 2014 (the "November Order"). The court noted that Harris had not addressed the issue of standing in opposing dismissal [*6] and concluded that she lacked standing to assert a federal or Georgia RICO claim because "to the extent that there is a plausible RICO claim . . . it belongs to Anoigma, not the Plaintiff." The court also concluded that Harris lacked standing to assert her GTSA claim because she had no legal interest in the trade secret. Finally, the district court ruled that Harris had failed to state a claim for fraud, noting that the only fraud she alleged concerned OBS's failure to disclose certain facts, and that she had failed to establish that OBS owed her any duty to disclose. Harris appealed the November Order.
The district court next issued an order to show cause why the action as to the remaining defendants should not be dismissed for lack of service, observing that the action had, at that point, been pending for more than eight months without any proof of service or substantial proceedings of record taking place with respect to any defendant other than OBS. Harris argued in response that the six-month time limit to effectuate service in the Federal Rules of Civil Procedure does not apply to service in a foreign country. She also requested that the district court not enter its proposed order [*7] due to her pending appeal of the November Order.
The district court dismissed the action against the non-OBS defendants, noting that Harris's only response to the show cause order was that the rules of service do not apply in a foreign country. The court ruled that Harris was required to show diligence in serving foreign defendants and had failed to do so. The court then entered a final judgment dismissing the action against all remaining defendants.2
2 Apparently not having received the final judgment, Harris subsequently filed a motion requesting that the district court amend the November Order to state that it presented a controlling question of law to allow Harris to file an interlocutory appeal in the event the November Order was not considered a final judgment. She also filed a separate motion requesting that, in the event the district court did not amend the November Order as requested, the court transform the November Order into a final judgment pursuant to Federal Rule of Civil Procedure 54(b). The court denied both motions as moot, as it had already entered final judgment of dismissal. We issued to the parties a question regarding the finality of the order under appeal. The appeal ultimately was allowed to proceed [*8] because, even if Harris's Notice of Appeal from the November Order was premature, it was cured by the subsequent entry of final judgment.
We first address the district court's dismissal of Harris's federal and Georgia RICO and GTSA claims against OBS for lack of standing. When a district court dismisses a plaintiff's claim for lack of standing, we review the court's legal conclusions de novo, and its factual findings for clear error. McCullum v. Orlando Reg'l Healthcare Sys., Inc., 768 F.3d 1135, 1141 (11th Cir. 2014).
The federal RICO act makes it illegal "for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c). As relevant here, the Georgia RICO statute makes it "unlawful for any person, through a pattern of racketeering activity or proceeds derived therefrom, to acquire or maintain, directly or indirectly, any interest in or control of any enterprise, real property, or personal property of any nature, including money." Ga. Code Ann. § 16-14-4(a). It also makes it "unlawful for any person employed by or associated with any enterprise to conduct or [*9] participate in, directly or indirectly, such enterprise through a pattern of racketeering activity." Ga. Code Ann. § 16-14-4(b).
In order to state a civil claim under either statute, a plaintiff must establish that the alleged injury directly was caused by the RICO violation. Bivens Gardens Office Bldg., Inc. v. Barnett Banks of Florida, Inc., 140 F.3d 898, 906 (11th Cir. 1998).3 The plaintiff must have been injured in her business or her property by the racketeering conduct constituting the violation, and the damages must flow from commission of the predicate acts. Williams v. Mohawk Indus., Inc., 465 F.3d 1277, 1291 (11th Cir. 2006). Thus, "a party whose injuries result 'merely from the misfortunes visited upon a third person by the defendant's acts' lacks standing to pursue a claim under RICO." Bivens, 140 F.3d at 906 (quoting Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 267 (1992)). Applying this principle, we have held that "losses suffered by a company's stakeholders as a result of racketeering activity against the company do not give them standing under RICO" because "[s]uch an injury is too indirect or 'derivative' to confer RICO standing." Bivens, 140 F.3d at 906. Notably, "[a] plaintiff's status as a creditor or stockholder, however, does not preclude standing for RICO violations if the plaintiff has alleged an injury proximately caused by the defendants' acts of racketeering that target the plaintiff." Beck v. Prupis, 162 F.3d 1090, 1096 n.10 (11th Cir. 1998) aff'd, 529 U.S. 494 (2000).
3 Because the Georgia RICO statute was modeled on and is analogous [*10] to the federal RICO statute, we look to federal authority in determining standing to sue under the state statute. Williams v. Mohawk Indus., Inc., 465 F.3d 1277, 1294 (11th Cir. 2006).
The critical question in determining whether a shareholder has standing to file a RICO action is whether or not the plaintiff suffered a harm that stands separate and distinct from the harm suffered by the corporation. Bivens, 140 F.3d at 908. Our precedent is clear that a shareholder lacks RICO standing "if the injury alleged was suffered only as a result of harm to the corporation." Id. In other words, the harm suffered by the plaintiff shareholder cannot be "purely contingent" on the harm suffered by the corporation. Holmes, 503 U.S. at 271.
Harris's claims fail this test. Each of Harris's primary alleged injuries flowed from her status as a shareholder and the diminution in the value of her shares.4 Indeed, she explicitly stated as much eight times in her complaint, alleging that her injuries were "based on her shareholding." Her complaint principally alleged that she received no compensation as a shareholder of Anoigma when the company's IP was transferred to CS, was deprived of the value of her shares in Anoigma, and was prevented from purchasing the IP.
4 In her brief, Harris asserts that the defendants also "wrested" [*11] her shares from her. Though this injury arguably may be sufficiently distinct to confer standing, see Bivens, 140 F.3d at 907, Harris raises this argument for the first time on appeal. We therefore do not consider it. See Timson v. Sampson, 518 F.3d 870, 874 (11th Cir. 2008).
Accepting Harris's allegations as true, her injuries are indistinguishable from the injuries inflicted on Anoigma. In the absence of injury to Anoigma, Harris would not have been harmed. By fraudulently transferring the IP to CS, the defendants irreparably damaged Anoigma's value, and in so doing, necessarily harmed the proportionate value of Anoigma owned by Harris. In a very real sense, as the owner of approximately 19% of Anoigma's outstanding shares, Harris suffered approximately 19% of the same harm Anoigma suffered. Similarly, Harris's injury in being unable to benefit from purchasing the IP mirrors Anoigma's injury in being unable to benefit from selling it. In either case, Harris alleged no injury distinct from that suffered by Anoigma.
In apparent recognition of this Court's clear precedent as regards shareholder standing, Harris attempts to distinguish her circumstances by arguing that she suffered a distinct and peculiar injury not suffered by Anoigma's other shareholders. She [*12] reasons that Miaux, Ngougombo, and Cristofini all became shareholders of CS, the entity to whom the IP was transferred. As such, in a sense, she was the only party deprived of the value of the IP. She contends that suffering an injury distinct from other shareholders (but not the corporation) is sufficient to confer standing.
We are unpersuaded by Harris's argument because it misconstrues the relevant case law. True, some courts have recognized standing in situations "where the shareholder suffers an injury which is separate and distinct from that of other shareholders." Grafman v. Century Broad. Corp., 727 F. Supp. 432, 435 (N.D. Ill. 1989). However, far from creating an exception to the general rule that a shareholder must suffer an injury distinct from that of the corporation to have standing, these cases are wholly consistent with it. Tellingly, none of the cases Harris cites held that a plaintiff shareholder has individual standing to sue for an injury suffered by a corporation. In fact, most of the cases Harris cites explicitly note the general rule "that there is no shareholder standing to assert RICO claims where the harm is derivative of harm to the corporation." Sparling v. Hoffman Constr. Co., 864 F.2d 635, 640 (9th Cir. 1988); see also Leach v. FDIC, 860 F.2d 1266, 1273-74 (5th Cir. 1988) (recognizing cases holding that "minority shareholders lacked standing [*13] under RICO to sue because they had not alleged any injury to their property that was distinct from any injury the corporation may have suffered"); Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 849 (2d Cir. 1986) (holding that plaintiffs lacked standing because "[t]he legal injury, if any, was to the firm").
The few cases Harris cites that have recognized a plaintiff shareholder's standing to sue concerned injuries inflicted directly on the plaintiff shareholder, not the corporation. In Bivens, for example, we recognized standing for a creditor to sue for the undervaluation of a company's assets during bankruptcy proceedings because "[t]he sale of the [asset] for a higher price would have directly benefitted major creditors . . . because they would have been able to recover a greater percentage of the debts owed to them. In contrast, the sale of the [asset] for a higher price would have little impact on the shareholders and the corporation, since the additional funds from the sale would have been used to satisfy creditors instead of going to shareholders." 341 F.3d at 908 (emphasis added). Another case, Grafman, recognized a plaintiff's standing to sue defendants who had acted to dilute his voting shares. 727 F. Supp. at 434. These actions singled out the plaintiff from other shareholders [*14] and harmed him. Importantly, however, they did not harm the corporation at all. In fact, the district court in that case explicitly dismissed any "allegations concern[ing] harm to [the corporation]." Id. at 435. Unlike the plaintiffs in Bivens and Grafman, Harris has not suffered a distinct injury. She therefore lacks standing to pursue her claims.
This result becomes clear when considering the policy goals governing RICO standing requirements. In evaluating whether a plaintiff has suffered a direct injury sufficient to confer standing, we consider the motivating principles animating the injury requirements in RICO cases. See Williams, 465 F.3d at 1288 (quoting Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 458 (2006)) (discussing the proximate cause standard in RICO cases).5 These principles include (1) reducing the difficulty in ascertaining the amount of damages attributable to the RICO violation as distinct from other independent factors and (2) reducing the risk of duplicative recoveries. Id. Granting standing to Harris in this case would advance neither of these principles. First, it would be difficult, if not impossible, to determine accurately the proportionate reduction in Anoigma's value attributable to the defendants' conduct as opposed to factors like market conditions, poor [*15] business practices, or failure to anticipate developments in the financial markets. See Holmes, 503 U.S. at 272-73. Second, to the extent that the defendants' conduct has harmed Anoigma's value, Anoigma can be counted on to vindicate that interest. See id. Recognizing Harris's right to sue for the same injury would only increase the risk of duplicative recovery, particularly since she proposes no method of apportioning a possible recovery between herself and Anoigma. See id.
5 There is "significant overlap" between proximate cause and standing requirements in RICO cases. Williams, 465 F.3d at 1287. "[A] plaintiff who lacks standing to vindicate a derivative injury also will be unable to show proximate cause." Id. at 1287 n.4 (quoting Trollinger v. Tyson Foods, Inc., 370 F.3d 602, 613 (6th Cir. 2004)).
Harris did allege one injury that is unrelated to her status as an Anoigma shareholder. She pled that the defendants' racketeering activity moved Anoigma and CS into bankruptcy, thus preventing her from collecting on her English judgment for wrongful termination. Although this injury does not arise out of Harris's status as a shareholder, it does arise out of her status as a creditor. It thus raises analogous standing issues as her other injuries. Like a shareholder, "[a] creditor will have RICO standing only when his injury [*16] passes the directness test . . . which will not be the case if the injury alleged was suffered only as a result of harm to the corporation. Bivens, 140 F.3d at 908. This injury, like the others Harris alleges, is insufficient to confer RICO standing. Harris's inability to collect on her English judgment is a direct result of harm to Anoigma and CS. Had the defendants never harmed Anoigma and CS by deliberately moving them into bankruptcy, Harris would have collected her judgment and suffered no injury.
To file a claim under the GTSA, Ga. Code Ann. § 10-1-760 et seq., a plaintiff must prove that "(1) it had a trade secret and (2) the opposing party misappropriated the trade secret." Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284, 1290-91 (11th Cir. 2003) (internal quotation marks omitted). The GTSA defines "misappropriation" as "[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means." Ga. Code Ann. § 10-1-761(2)(A) (emphasis added). The precise meaning of "a trade secret of another" is unclear. In fact, "whether ownership is a necessary element for standing to bring a GTSA claim is an open question in Georgia." Candy Craft Creations, LLC v. Gartner, No. CV 212-091, 2015 WL 1541507, at *17 (S.D. Ga. Mar. 31, 2015).
But we need not decide that issue here. Regardless of whether mere possession of misappropriated [*17] property is sufficient to confer standing or whether ownership is required, Harris failed to allege that she had an actionable interest in the IP. She admitted in her complaint that "the actual owner of the trade secret was Anoigma." Moreover, she alleged neither that she is in possession nor that she was ever in possession of the IP. Indeed, such an allegation seemingly would conflict with her claim that she was injured by deprivation of an opportunity to purchase that same IP. Further, Harris advances no legal authority supporting her assertion that the deprivation of an opportunity to purchase property is an interest sufficient to confer standing. Absent any actionable interest in the IP, Harris's GTSA claim fails for lack of standing.
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