Synopsys v. Ubiquiti Networks, Inc. et al, 2017 WL 3485881 (N.D. Cal. Aug. 15, 2017)
Despite making obvious errors in analysis and citation, the court denied in part the Defendant’s motion to dismiss civil RICO claims, the court addressed a panoply of issues involving civil RICO including (1) analyzing what is a proper RICO predicate for copyright infringement; (2) what is an association in fact enterprise; and (3) distinctness between person and enterprise.
Summary of Facts
Plaintiff Synopsys alleges that in 2013, defendants Tsai, Ubiquiti, and UNIL fraudulently induced Synopsys to grant them access to a subset of Synopsys’ software for a finite time for purposes of evaluation. Defendant Ubiquiti Networks International, Ltd. (UNIL) is alleged to be a subsidiary of Ubiquiti that is involved in the development and distribution of networking technology for Ubiquiti. Defendant Ching-Han Tsai is employed by Ubiquiti as a project lead and is a semiconductor professional who regularly works in California.
It is alleged that since 2014, Tsai, Ubiquiti, and UNIL have been “secretly using counterfeit keys” obtained or created through hacker websites to illegally use Synopsys’ EDA without a “valid license.”
Synopsys alleges that Tsai and others at Ubiquiti and UNIL “conspired to, and did, form an associated in fact enterprise (‘Piracy Enterprise’) with the purpose of pirating Synopsys’ software and that the defendants took wrongful acts in furtherance of their Enterprise.” It is alleged that all three defendants also used interstate internet communications to conduct the Enterprise, including extensive use of the counterfeit License Keys.
The Predicate Acts Were Alleged Properly
18 U.S.C. 1029 is a predicate act proscribing criminal copyright infringement occurs. The court accepted the Plaintiff’s view that RICO’s legislative history (showing a particular concern over piracy and counterfeiting enterprises), favored the application of the “plain language” of RICO which requires only “any” act of criminal copyright infringement, no matter its size or impact. See, e.g., ICONICS, Inc. v. Massaro, 192 F. Supp. 3d 254, 269 (D. Mass. 2016) (permitting allegations of copyright infringement stemming from a business dispute between two companies to be a predicate act under RICO). Synopsys’ allegations, especially when considered in the context of the scheme alleged, are sufficient to allege criminal copyright infringement. Note: Court discusses that 17 U.S.C. § 506 is the statute proscribing criminal copyright infringement; this is wrong as 17 U.S.C. 506 is NOT a RICO predicate, or even any violation. Hard to understand what Court is thinking here.
Wire Fraud Under 18 U.S.C. § 1343 Properly Alleged
The court found that Plaintiff sufficiently alleged the use of interstate wires to facilitate the fraud because emails themselves do not need to be stand-alone actionable frauds as long as they were in furtherance of the fraudulent scheme. The AC also sufficiently alleges that the defendants used the internet to send and access unauthorized copies of the software and the illegal keys.
Also, the court found that Rule 9(b) particularity is satisfied because the AC is replete with details regarding the fraudulent scheme; that Ubiquiti and UNIL, acting through Tsai, never intended to truly evaluate Synopsys’ software but instead sought access in order to pirate it and that they did exactly that once they secured access through the evaluation license keys. How the scheme was carried out thereafter – with the creation of counterfeit license keys, repeated access of Synopsys’ websites for documentation and support – is described in detail. The specific communications made by defendants to effectuate the scheme (emails and meetings) are repeatedly identified.
Enterprise Properly Alleged
Synopsys had two theories of RICO enterprise. First, Ubiquiti and UNIL as otherwise legitimate businesses joined with Tsai and “other employees” to conduct the affairs of Ubiquiti and UNIL through a course of racketeering activity. Second, an association-in-fact enterprise (Piracy Enterprise) was developed where Tsai, Ubiquiti, UNIL and others employees all came together to create the Piracy Enterprise and conduct the illegal acts.
The court accepted the Piracy Enterprise finding sufficient
distinctness between related corporate entities, and discussed this issue in depth, (1) “the formal, legal separation of the defendant entities satisfies the RICO distinctiveness requirement,” or (2) “something more” than mere legal distinctiveness, like different or uniquely significant role in the enterprise.
The court ruled the presence of a separate corporate entity –UNIL – takes this case a step away from cases finding insufficient distinctness where the alleged person is a corporate employee and the alleged enterprise is the corporation. Note: Court is mixing its person and enterprise as a corporate employee individual is always distinct from its corporation. Cedric Kushner. Ubiquiti and UNIL are separate corporate entities alleged to have engaged in separate acts in furtherance of the conspiracy. This question may be revisited on summary judgment after discovery about the governance and operation of the two corporate entities is conducted and as more evidence comes to light regarding whether the association-in-fact enterprise was simply conducting its own affairs (e.g., the affairs of the corporations) or the affairs of a distinct RICO enterprise. *16.
RICO Conspiracy Properly Alleged
Finally, in addition to arguing that because Synopsys fails to allege a substantive RICO violation there can be no conspiracy, Ubiquiti argues that Synopsys’ conspiracy claim fails for the independent reason that Synopsys has failed to allege that any of the defendants “agreed to facilitate” the scheme; in other words failed that all three reached an agreement to conduct the RICO enterprise. The court ruled that the allegations concern activities of all three, going far beyond the activities of Tsai. Given the scope of the alleged piracy here, agreement can be readily and plausibly inferred.
Note: David J. Stander is a civil RICO Attorney who regularly publishes insights into complex civil RICO issues. Despite obvious errors in citation and analysis, this is an interesting case because it shows that court will accept conduct which violates Title 18 when such acts are “indictable” under that section, regardless of the severity and gravity of the violations. All that is needed is sufficient allegation of the “indictable” conduct and any qualifying language.