Court Affirms Dismissal of RICO Claim Finding Inadequate Allegations of a RICO Association in Fact Enterprise and RICO Conspiracy

Omnipol, A.S. v. Multinational Defense Services, LLC,  __4th __, 2022 WL 1311596 (11th Cir. 2000)

The court affirmed the dismissal of various claims, including a RICO claim. The complaint had alleged that the defendants had engaged in two fraudulent schemes. First, the complaint alleged that the defendants had conspired to defraud the government by tricking SOCOM into accepting defective arms, ammunition, and supplies. Second, the complaint alleged that the defendants induced Omnipol and Elmex into contracting with Purple Shovel to supply and deliver the 7,500 assault rifles, all the while intending to divert the SOCOM payment into their own coffers and leave Omnipol and Elmex unpaid.

Association in Fact Enterprise

In addressing the civil RICO claims, the court concluded the amended complaint failed to properly allege the existence of an enterprise finding the second prong of Boyle v. United States, i.e., (2) ‘relationships among those associated with the enterprise,’ was not satisfied

The court stated that the amended complaint failed to adequately plead “relationships among those associated with the enterprise,’ as the amended complaint merely alleged that the various defendants “knew each other” and “associated with each other in public and private” at some point in time prior to the formation of Purple Shovel. Although “proving sufficient relationships for an associated-in-fact enterprise is not a particularly demanding task,”  it certainly requires more than suggesting that at some unknown point in past the defendants “knew” and “associated” with each other.  Such allegations certainly do not plausibly suggest that this group of five individuals acted as a “continuing unit.” Turkette, 452 U.S. at 583, 101 S. Ct. at 2528. As such, the amended complaint failed to state a claim for either state or federal RICO violations.

RICO Conspiracy 

Section 1962(d) of the RICO statutes makes it illegal for anyone to conspire to violate one of the substantive provisions of RICO, including § 1962(c)18 U.S.C. § 1962(d). Direct evidence of a RICO conspiracy is not required; “the existence of conspiracy ‘may be inferred from the conduct of the participants.’ ” A complaint must, however, offer more than “mere[ ] legal conclusions.”  In this case, the allegations in the amended complaint did not support an inference of an agreement to violate the substantive provisions of RICO. The complaint simply alleges that the defendants “intentionally conspired” and “agreed to the commission of [the racketeering acts] to further the scheme” outlined in the complaint. This is the kind of “formulaic recitations” of a conspiracy claim that the Supreme Court declared insufficient in Twombly and Iqbal

Accordingly, the court concluded that the District Court did not err in dismissing the RICO conspiracy claim in the amended complaint.

Court Affirms Dismissal of RICO Claim Finding Inadequate Allegations of a RICO Association in Fact Enterprise and RICO Conspiracy

Omnipol, A.S. v. Multinational Defense Services, LLC,  __4th __, 2022 WL 1311596 (11th Cir. 2000)

Court Affirms Dismissal of RICO Claim Finding Inadequate Allegations of a RICO Association in Fact Enterprise and RICO Conspiracy

The court affirmed the dismissal of various claims, including a RICO claim,  The complaint had alleged that the defendants had engaged in two fraudulent schemes. First, the complaint alleged that the defendants had conspired to defraud the government by tricking SOCOM into accepting defective arms, ammunition, and supplies. Second, the complaint alleged that the defendants induced Omnipol and Elmex into contracting with Purple Shovel to supply and deliver the 7,500 assault rifles, all the while intending to divert the SOCOM payment into their own coffers and leave Omnipol and Elmex unpaid.

Association in Fact Enterprise

In addressing the civil RICO claims, the court concluded the amended complaint failed to properly allege the existence of an enterprise finding the second prong of Boyle v. United States, i.e., (2) ‘relationships among those associated with the enterprise, was not satisfied. .

The court stated that the amended complaint failed to adequately plead “relationships among those associated with the enterprise,’ as the amended complaint merely alleged that the various defendants “knew each other” and “associated with each other in public and private” at some point in time prior to the formation of Purple Shovel. Although “proving sufficient relationships for an associated-in-fact enterprise is not a particularly demanding task,”  it certainly requires more than suggesting that at some unknown point in past the defendants “knew” and “associated” with each other. Such allegations certainly do not plausibly suggest that this group of five individuals acted as a “continuing unit.” Turkette, 452 U.S. at 583, 101 S. Ct. at 2528. As such, the amended complaint fails to state a claim for either state or federal RICO violations.

RICO Conspiracy  

Section 1962(d) of the RICO statutes makes it illegal for anyone to conspire to violate one of the substantive provisions of RICO, including § 1962(c)18 U.S.C. § 1962(d). Direct evidence of a RICO conspiracy is not required; “the existence of conspiracy ‘may be inferred from the conduct of the participants.’ ” A complaint must, however, offer more than “mere[ ] legal conclusions.”  In this case, the allegations in the amended complaint do not support an inference of an agreement to violate the substantive provisions of RICO. The complaint simply alleges that the defendants “intentionally conspired” and “agreed to the commission of [the racketeering acts] to further the scheme” outlined in the complaint. This is the kind of “formulaic recitations” of a conspiracy claim that the Supreme Court declared insufficient in Twombly and Iqbal

Accordingly, the court concluded that the District Court did not err in dismissing the RICO conspiracy claim in the amended complaint.

Court Approves Amendment to Include RICO Claim in Third Amended Complaint Finding That It Would Not Be Futile

Pizana v. Sanmedica Int’l LLC, 2022 WL 1241098 (E.D. Cal., 4/21/2022)

The court granted plaintiff’s pending motion for leave to file a third amended complaint, which would include a civil RICO claim alleging mail and wire fraud allegations. Specifically, plaintiff claimed new facts revealed in the litigation to date, primarily in depositions, reveal that defendant is part of a web of affiliated entities and individuals operating a single enterprise (referred to by plaintiff as the “Basic Research Enterprise”) with a unified aim to manufacture, market, and sell the same product under different brand names based on the same purportedly faulty science and false representations. The court specifically addressed the amendment of the complaint to include a civil RICO claim.

RICO Elements

To state a civil RICO claim, “a plaintiff must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (known as ‘predicate acts’) (5) causing injury to the plaintiff’s ‘business or property.’ ” Abcarian v. Levine, 972 F.3d 1019, 1028 (9th Cir. 2020).

“Racketeering activity … requires predicate acts,” which can include “mail and wire fraud under 18 U.S.C. §§ 1341 and 1343.” Eclectic Props. E., LLC v. Marcus & Millichap Co., 751 F.3d 990, 997 (9th Cir. 2014); see also 18 U.S.C. § 1961(1)(B) (stating that “racketeering activity” includes both mail fraud and wire fraud). “The mail and wire fraud statutes are identical except for the particular method used to disseminate the fraud, and contain three elements: (A) the formation of a scheme to defraud, (B) the use of the mails or wires in furtherance of that scheme, and (C) the specific intent to defraud.” Eclectic Props., 751 F.3d at 997.

The court described the requirements for the heightened pleading requirements of Rule 9(b) stating that a Plaintiff must ‘detail with particularity the time, place, and manner of each act of fraud, plus the role of each defendant in each scheme.’ 

In opposing the pending motion, defendant contends that granting plaintiff leave to amend in order to add the proposed RICO claim would be futile because that claim as proposed has not been plausibly pled under the Rule 9(b) heightened pleading standard. Focusing on the “specific intent to defraud” element, defendant argues that plaintiff’s proposed RICO allegations are speculative and not sufficiently detailed.  According to defendant, because plaintiff’s allegations “regarding mail and wire fraud prerequisites state only that defendants used these mediums to set up its corporate scheme,” one would have “to assume the illegality and corrupt nature of the corporate structure” in order to draw an inference of defendant’s specific intent to defraud. *16 

An inference of specific intent to defraud can be drawn from plaintiff’s factual allegations. The proposed TAC alleged that defendant and the newly proposed defendants “have unlawfully increased their profits by making fraudulent claims that the Products—under the guise of multiple different brand and entity names—increase HGH and provide anti-aging benefits when they do not.” That core allegation is buttressed by several factual allegations. The court stated that the proposed TAC not only alleges that “[d]efendants each had the specific intent to participate in the overall RICO enterprise and the scheme to defraud Plaintiffs and the Class, and each participated in the enterprise,” but also provides the details of each defendant’s particular role in the alleged Basic Research Enterprise.

Viewing the foregoing allegations together, the court found that the proposed TAC adequately alleges that a scheme existed, that the scheme was reasonably aimed at deceiving ordinary persons by marketing and selling identical products under different brand names through different entities, and that the products sold as part of the scheme were allegedly no more effective than a placebo despite explicit representations to the contrary. Thus, the court can infer from these allegations that the defendant and the newly proposed defendants had a specific intent to defraud. See Andrews Farms v. Calcot, Ltd., 527 F. Supp. 2d 1239, 1255 (E.D. Cal. 2007) (quoting Odom v. Microsoft Corp., 486 F.3d 541, 554 (9th Cir. 2007)) (“[T]he third requirement—specific intent to deceive or defraud—requires only a showing of the defendants’ state of mind, for which general allegations are sufficient.”).

Accordingly, the court found that allowing an amendment to include plaintiff’s proposed RICO claim would not be futile.

Court Denies Defendants Motion to Dismiss Finding Sufficient Allegation of Management of Enterprise and RICO Conspiracy; and Extraterritorial Application of RICO

Google LLC v. Dmitry Starovikov et al, 2022 WL 1239656 (S.D.N.Y., April 27, 2022)

Google alleges that the defendants control the Glupteba botnet. A botnet is a network of private computers infected with malware. This malware hijacks the infected computers, instructing them to execute commands issued by a command-and-control server (also called a “C2 server”), which controls the botnet. Google alleges that the defendants used the Glupteba botnet as part of a criminal scheme (the “Glupteba Enterprise”) to hijack victims’ computers and steal their personal information.

The Glupteba Enterprise’s schemes are carried out through websites owned by a set of related corporate entities, all sharing the same address. Google alleges that the defendants have used email addresses and physical addresses associated with these entities, and that they signed up for their Google accounts using devices with the same IP addresses as the Glupteba Botnet’s C2 servers.

RICO Issues

Among procedural issues addressed, Defendants sought a motion to dismiss based on failure to state a claim. The defendants’ arguments were found unavailing as they presented no meritorious defense that Google’s complaint failed to state a claim, and failed to argue against extraterritorial application of RICO.

  1. Operation and Management Test

The court stated that “t]he ‘operation or management’ test presents a relatively low hurdle for plaintiffs to clear, especially at the pleading stage.”  The defendants argued that Google has not sufficiently alleged their “operation and management” of any RICO enterprise. But Google’s complaint contains detailed allegations of the defendants’ criminal schemes to use the Glupteba botnet to steal victims’ personal information and sell access to their computers. Additionally, Google has alleged that the defendants each possess email accounts associated with websites that sell the Glupteba Enterprise’s services. Finally, Google alleges that the defendants operate the Glupteba botnet’s C2 servers, which enable exploitation of the infected computers in the first instance. These allegations are sufficient to plead the defendants’ operation and management of the Glupteba Enterprise.

The defendants nevertheless insist that these allegations are insufficient because they do not properly identify the defendants’ specific roles in the Glupteba Enterprise’s chain of command. But a RICO enterprise does not need to have a “hierarchical structure or a ‘chain of command’ ”, and members need not have “fixed roles” within the enterprise. Boyle v. United States, 556 U.S. 938, 948 (2009). Instead, it is sufficient to allege that the enterprise “function as a continuing unit and remain in existence long enough to pursue a course of conduct.” Id.  Google allegations, detailing an extended course of unlawful conduct reliant on continuing online infrastructure, are sufficient to satisfy this test.

2,         RICO Conspiracy

Defendants also argue that Google has not sufficiently alleged that they conspired to commit a RICO violation. To state a RICO conspiracy claim, a plaintiff must “allege the existence of an agreement to violate RICO’s substantive provisions.” Butcher v. Wendt, 975 F.3d 236, 241 (2d Cir. 2020) (citation omitted). A plaintiff can satisfy this requirement by plausibly alleging that “the defendant knew of, and agreed to, the general criminal objective of a jointly undertaken scheme.” United States v. White, 7 F.4th 90, 99 (2d Cir. 2021).*9 

Google’s complaint plausibly alleges that each of the defendants agreed to commit a RICO violation. Google alleges that the defendants knowingly agreed to commit multiple predicate offenses as part of the Glupteba Enterprise, including wire fraud, identity fraud, and violations of the CFAA. And this allegation is supported by further allegations that the defendants jointly operated multiple websites that formed part of the enterprise, and that they operated the C2 servers controlling the Glupteba botnet. These allegations are sufficient to plausibly plead that the defendants knowingly agreed not only to the “general criminal objective” of the Glupteba Enteprise, but also many of the specific means by which it would be carried out. 

3. Extraterritorial application

Finally, the defendants argue that Google has failed to state a RICO claim because RICO does not apply extraterritorially. This argument, however, misconstrued the relevant precedent. A plaintiff may bring a RICO claim arising from foreign activity so long as the plaintiff plausibly alleges “a domestic injury to business or property.” Bascuñán v. Elsaca, 874 F.3d 806, 809 (2d Cir. 2017) (quoting RJR Nabisco, Inc. v. European Cmty., 579 U.S. 325, 346 (2016)). Injuries to property may be domestic for the purposes of RICO even when the property owner does not reside in the United States. Id. at 824. Here, however, Google has alleged a number of domestic injuries to United States residents, including the theft of personal information, and unauthorized access to Google accounts and electronic devices belonging to individuals within the United States. Accordingly, Google’s claim does not seek impermissible extraterritorial application of RICO.

Court Dismissed Plaintiffs’ Civil RICO Complaint Finding Inadequate Proximate Causation

Meridian Treatment Services, v. United Behavioral Health, 2022 WL 1105071, N.D. Cal., April 13, 2022).

The court dismissed the plaintiffs’ allegations that UBH violated civil RICO.   In brief, Plaintiffs are behavioral healthcare providers who provide services for substance abuse and mental health disorders. Plaintiffs allege that UBH makes coverage and level of care determinations using proprietary Level of Care Guidelines (“LOGCs”) and Coverage Determination Guidelines (“CDGs”) (collectively “UBH Guidelines”). According to Plaintiffs, the UBH Guidelines use actuarial predictability rather than generally accepted standards of medical care, including “ASAM” criteria, to determine medical necessity.3 Plaintiffs’ theory of the case is that UBH falsely presents the UBH Guidelines as consistent with generally accepted standards of medical care and uses them to deny coverage for services that are, in fact, medically necessary. Plaintiffs allege this conduct deprives them of reimbursements to which they would otherwise be entitled.

UBH argues that Plaintiffs fail to show they have statutory standing to pursue their RICO claims. The Court concludes this argument is dispositive and, therefore, does not reach UBH’s alternative arguments. To establish RICO standing, a plaintiff must allege injury to their business or property and that the harm was “by reason of” the alleged RICO violation. Hemi Grp., LLC v. City of New York, 559 U.S. 1, 9 (2010). UBH does not dispute that Plaintiffs allege an injury to their business or property. Instead, it argues the facts are not sufficient to show Plaintiffs suffered an injury “by reason of” the alleged violations. The Supreme Court has interpreted the phrase “by reason of” to mean that a plaintiff “must show that a predicate offense not only was a but for cause of [their] injury, but was the proximate cause as well.” Id. (internal citations and quotations omitted).

Within the Ninth Circuit, courts apply the same three-factor test used to determine if a plaintiff has antitrust standing to determine standing under RICO.  That test examines: “(1) whether there are more direct victims of the alleged wrongful conduct who can be counted on to vindicate the law as private attorneys general; (2) whether it will be difficult to ascertain the amount of the plaintiff’s damages attributable to defendant’s wrongful conduct; and (3) whether the courts will have to adopt complicated rules apportioning damages to obviate the risk of multiple recoveries.” Pacific Recovery.  Drawing from its analysis on the plaintiffs’ antitrust claim, the court concluded the plaintiffs failed to allege RICO standing:

T]he proximate cause of plaintiffs’ injury is the non-payment by their patients of any amounts that [UBH] did not reimburse. Plaintiffs’ injury is, therefore, derivative of their patients’ injuries and too remote to confer them with RICO standing. Further the risk of duplicative recoveries and having to engage in fact-intensive damages calculations to prevent such duplication is high to the extent that plaintiffs and their patients sue defendants for the same conduct.” *4, citing Pacific Recovery, 508 F. Supp. 3d at 618

Plaintiffs here argue Pacific Recovery is distinguishable because it involved balance billing and the rate at which the plaintiffs would be reimbursed. In contrast, Plaintiffs contend the allegations here show that because UBH determined treatment was not medically necessary, there were no claims to submit and “since there was never a submission, there was no balance bill.” Plaintiffs originally alleged that “[a]s is industry practice, Plaintiffs and the putative class have assignment of benefits and financial responsibility agreements with all patients that entitle them to direct payment of claims by UBH.”

The court stated that although Plaintiffs may not have been given an opportunity to issue a balance bill to their patients, the allegations from the original complaint give rise to the inference that they had a right to do so. Further, even though Plaintiffs allege that UBH denied every claim at issue, Plaintiffs’ original allegations suggest the proximate cause of their injury is their inability to collect payment for services from their patients after UBH denied the claims. Their current allegations also raise that inference. Accordingly, the Court considers the allegations about the assignments as part of its “ ‘context-specific’ endeavor” drawing on its “judicial experience and common sense” to determine if Plaintiffs state a plausible claim.  Taking those facts as true, the allegations regarding UBH’s conduct as a whole does not give rise to a plausible, rather than possible, inference that Plaintiffs were the direct targets of the alleged RICO violations.

Accordingly, the Court concludes Plaintiffs failed to allege sufficient facts to show they have standing to pursue their RICO claims. UBH raised this issue when it moved to dismiss Plaintiffs’ first amended complaint, and Plaintiffs amended as a matter of right. Because this is the third iteration of Plaintiffs’ complaint, the Court concluded that further amendment would be futile.

Court Upholds Jury Award of Lost Profits to RICO Plaintiffs

Diane Creel and Lynn Creel v. Dr. Says LLC, 2022 WL 991568 (E.D. Tex., March 31, 2022)

The Court denied Defendants’ Renewed Joint Motion for Judgment as a Matter of Law in which a jury had awarded expectancy damages.  The court discussed that lost profits are expectancy damages. *10.  “[E]xpectancy damages may be appropriate in some RICO cases in the form of lost profits, subject to proof of proximate causation and that the damages are not speculative.”  The evidence supporting lost profits to Display Graphics is substantial. Diane’s RICO standing for lost profits turns on whether the jury awarded damages for foreseeable, concrete lost profits (as opposed to speculative profits) and whether it was reasonable for the jury to conclude that the lost profits resulted from Defendants’ racketeering activity.

The jury heard evidence from both Lynn and Plaintiffs’ expert on lost profit damages. The expert explained how he arrived at his final numbers and his calculation methods. The expert also testified that, in his model, he specifically did not account for Diane’s loss of earning capacity— he only considered the lost profits, which he considered “a separate damage to business”. The jury also heard days’ worth of evidence regarding the specific activities of Defendants and the financial state of Display Graphics following Plaintiffs’ entanglement with the conspiracy. Further, both the jury instructions and the verdict form delineated what the jury must consider and determine in order to award damages to Plaintiffs on the RICO claim. The Court instructed the jury:

If you find that Defendants violated the RICO act, you must decide whether that violation caused an injury and damages to Plaintiffs. The damages that Plaintiffs may recover are damages, if any, caused by the predicate acts constituting the pattern of racketeering activity if they injure Plaintiffs’ business or property. It isn’t necessary that every predicate act caused damage to Plaintiffs. But Plaintiffs can only recover damages caused by predicate acts that are part of the pattern of racketeering activity. Injury to mere expectancy interests or injury to an intangible property interest, such as an injury to the value of intangible property assets, is not sufficient. An unjust gain or enrichment to Defendants is also not sufficient to award damages under RICO. You may award as damages only the amount of concrete financial loss, if any, that Plaintiffs prove, by a preponderance of the evidence, that they suffered to their business or their tangible property caused by the pattern of racketeering activity.

According to the verdict, the jury found that “[t]he amount of damages to Plaintiffs’ business or property” was $300,000 and was “specifically and proximately caused by and attributable to Defendants’ violation of RICO.” Further, the jury was not to “include in this amount damages, if any, that flow[ed] from Diane Creel’s other claims.”

The court stated that importantly, not a single RICO case that Defendants cite in their JMOL is a decision following a jury verdict. But because determining “whether a given party has suffered a RICO injury is a fact-heavy” inquiry—and the jury is the finder of fact—the Court must be “especially deferential” to the jury’s verdict and must not reverse the jury’s findings unless substantial evidence does not support the findings.”  citing cases.  Accordingly, the Court found that the jury reasonably awarded damages for foreseeable, concrete lost profits (as opposed to speculative profits) and determined that the lost profits resulted from Defendants’ racketeering activity.

Court Holds That “Distinctness” of RICO Enterprise Satisfied Even When There is Complete Overlap of Defendants/Person and Enterprise

Alitsource S.A.R.L. v. Martin Szumanski,  2022 WL 909872 (D.N.J. Mar. 29, 2022)

Defendants argued, among other things, Plaintiffs failed to plead the existence of a “distinct” RICO enterprise.

Section 1962(c) prohibits a “person employed by or associated with any enterprise” from engaging in certain illegal activity. 18 U.S.C. § 1962(c). Courts have derived a “distinctness” requirement from the language of § 1962(c)See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). To establish liability under § 1962(c), one must allege and prove the existence of two distinct entities: (1) a “person”; and (2) an “enterprise” that is not simply the same “person” referred to by a different name. Id. A RICO person must be distinct from the RICO enterprise because a person cannot “associate” with themself. See id. at 161 (“In ordinary English one speaks of employing, being employed by, or associating with others, not oneself.”).

Defendants argue that Plaintiffs’ FAC failed to meet RICO’s “distinctness requirement.” The FAC states: “Each of the Defendants is a ‘person’ within the meaning of [RICO],” and the alleged “enterprise” is the “association-in-fact of the Buying Agent Defendants, the Buyer Defendants and the Conspiring Employee Defendants.”  According to Defendants, the alleged facts fail to meet the distinctness requirement because there cannot be complete overlap between the members of the RICO enterprise and the RICO persons named as defendants. * 5 (citing Zavala v. Walmart Stores, Inc., 447 F.Supp.2d 379 (D.N.J 2006).)

Although the court stated that there is some support for Defendants’ theory, the court did not agree.  The court reasoned that district courts in the Third Circuit have treated “overlap” between the RICO persons and the members of a RICO “association-in-fact” enterprise inconsistently. Some courts have taken Defendants’ view and disallowed complete overlap between the alleged wrongdoers and the members of the association-in-fact enterprise. *5 citing cases.  Other courts have found that a RICO enterprise may be an association of RICO persons.  On the latter view, “distinctness” requires only that “no one corporate defendant is alleged to be the enterprise and a person.” Id. (citing Jaguar Cars, Inc. v. Royal Oaks Motor Car Co., Inc., 46 F.3d 258, 262-64 (3d Cir. 1995)).

This Court takes the latter view: a RICO enterprise may be an association of RICO persons. One commentator illustrated the implausibility of Defendants’ theory:

Taken to its logical extreme, the notion that an association-in-fact enterprise composed exclusively of defendants does not satisfy the person / enterprise distinctness principle would mean that an association-in-fact composed of every member of an organized crime gang was not distinct from the gang and therefore immune from RICO liability. This is clearly wrong. Moreover, it would make little sense to say that if separate suits are brought against each of multiple defendants, there is person / enterprise distinctness, but that distinctness is lost if all of the individuals composing the enterprise are sued in the same case.

Gregory P. Joseph, Civil RICO: A Definitive Guide § 9 (5th ed. 2018).

The court further stated that “if defendants band together to commit [violations] that they cannot accomplish alone … then they cumulatively are conducting the association-in-fact enterprise’s affairs, and not [simply] their own affairs.” In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 383 (3d Cir. 2010) (alterations in original). In other words, the cumulative association between defendants is the enterprise. Each RICO person associates with that collective enterprise. Distinctness requires only that no single defendant is alleged to be “the” enterprise and “a” person. See Jaguar Cars, Inc., 46 F.3d at 262–64.

Thus, the court stated that the FAC satisfied the distinctness requirement as no Defendant is alleged to be both a RICO person and the RICO enterprise. Rather, each Defendant is a RICO person and one component part of the larger RICO enterprise.  Because the alleged RICO enterprise is not simply a RICO person “referred to by a different name,” Plaintiffs properly plead an enterprise “distinct” from the individual RICO persons named as defendants. *6. 

Court Denies Defendants’ Motion to Dismiss Civil RICO Claim As It Declined Sua Sponte to Consider Defenses Not Raised

AEPA Architect Engineers P.C. v. Ali Aziz, 2022 WL 35618 (D.C. Jan. 4, 2022)

Defendants Ali Aziz, Bilal Aziz, and their company, Archi Design Associates, LLC (collectively, the Azizes), move to dismiss AEPA Architect Engineers, P.C.’s (AEPA) Complaint for damages stemming from various business disagreements. AEPA alleges it partnered with the Azizes on a project for the Egyptian Embassy and that during the project Alfred Liu, AEPA’s owner, fell ill. AEPA contends that the Azizes exploited Liu’s illness to steal business opportunities and assets from it. 

AEPA brought a claim for civil conspiracy/RICO violations. AEPA claims that the Azizes “collaborated and acted in concert to execute a scheme and pattern of deceit” directed at converting AEPA’s business identities, technical skills, and licenses to conduct business in D.C.  The Azizes argued in their Motion to Dismiss that “the Complaint musters only a threadbare recital of the elements” and fails to allege that the Azizes collaborated among themselves.

The court found that as AEPA pointed out in its opposition, the Complaint, taken as a whole, alleges the necessary elements for the predicate acts of mail and wire fraud.  AEPA maintains the Azizes violated these statutes by, among other things, adding Ali Bilal to the partnership bank account and then draining it; redirecting payments bound for AEPA to themselves; sending a demand letter for payment to the Embassy using AEPA letterhead; using the corporate debit card and issuing checks without authorization; and overbilling AEPA’s clients while keeping the excess billings for themselves. The Azizes neither rebutted these predicate acts in their motion to dismiss nor filed a reply to AEPA’s opposition. Thus, the Court thus decline to dismiss the RICO count.

Ftnote 3– The court noted, at ftn. 3, that the Azizes did not raise a Rule 9(b) defense here, so the Court did not consider it. Nor did the defendant raise an argument of continuity for pattern of racketeering noting that the Azizes are, presumably, unable to continue any alleged racketeering activity against AEPA now that AEPA suspects the Azizes of defrauding it. But the Azizes did not raise this argument, and the Court declined to consider it sua sponte.

Ed Note:  Assuming the Defendants did raise the continuity argument, it is unclear whether the court would have found that “continuity” was adequately pleaded if relying on an open-ended continuity theory.   The court does not discuss the closed ended substantial period of time theory. 

Second Circuit Vacates District Court Ordering Attorney to Pay Rule 11 Sanctions in Civil RICO Case

Sidney N. Weiss v. David Benrimon Fine Art et al., 2021 WL 6128437 (S.D.N.Y., Dec. 28, 2021)

The Second Circuit vacated an order of the District Court which had ordered a $20,000 sanction based on Rule 11 in an underlying civil RICO case.  The Court agreed with Plaintiff Attorney (Attorney) that the District Court erred, or “abused its discretion,” when the district court reasoned that it was frivolous to allege that the appellees were involved in “the business of” making usurious loans based on “a single allegation of a single usurious transaction.”  The court found the District Court relied on the Court’s prior opinion in Durante Bros. & Sons v. Flushing Nat. Bank, 755 F.2d 239 (2d Cir. 1985) which was dicta. Accordingly, Attorney made colorable arguments supporting a broader standard than the one suggested in Durante. Most significantly, Attorney cited a district court case that rejected the appellees’ argument that “one loan cannot constitute a ‘business,’” and indeed, “[t]he mere fact that” a court in a different jurisdiction agreed with Attorney “is enough, in the absence of controlling authority to the contrary, to support a good faith argument for extension . . . of existing law.”  Thus, the court held that it was error to sanction Attorney for bringing Plaintiff’s RICO unlawful debt collection claims while alleging only one usurious loan as such contention was not a frivolous legal argument.

The Court however rejected Attorney’s argument that the District Court erred or abused its discretion in sanctioning him for alleging that the appellees committed fraud on the court by failing to disclose a fact involving a document known as “Shtar Ikso,” but the Court took no position on whether sanctions were appropriate based on his claims’ lack of “factual basis.” The Court stated that it is not apparent that the District Court would have ordered Attorney to pay $20,000—or anything at all—based solely on his signing a pleading with reckless factual claims.

Accordingly, the Court vacated the District Court order imposing sanctions and remanded the cause for further proceedings consistent with this order.

Court Found Standing For State Civil RICO Claims Under the Indirect Purchaser Rule When Based on Viability of Federal Civil RICO Action Claims

In re Insulin Pricing Litigation, 2021 WL 5980629, D. N.J., Dec. 17, 2021)

In summary, the court granted defendants’ Partial Motions to Dismiss State RICO Claims under the laws of Colorado, Georgia, Utah, and Wisconsin.  Because the state racketeering claims were dismissed, Plaintiffs’ state-law civil conspiracy claims failed to the extent they are based on violations of state racketeering laws, with the exception of Plaintiffs’ civil conspiracy claim under Arizona law because it was based on violations of Arizona’s state racketeering law.

Plaintiffs are 80 individuals who filed the Third Amended Complaint on behalf of themselves and a proposed nationwide class of analog insulin consumers. Plaintiffs bring this action on behalf of themselves and all others similarly situated under Federal Rule of Civil Procedure 23(a) and 23(b)(3).

Plaintiffs defined their class as:

All individual persons in the United States and its territories who paid any portion of the purchase price for a prescription of Apidra, Basaglar, Fiasp, HumalogLantus, Levemir, Novolog, Tresiba, and/or Toujeo at a price calculated by reference to a list price, AWP (Average Wholesale Price), or WAC (Wholesale Acquisition Price) for purposes other than resale. Specifically, the class includes uninsured consumers, consumers in high-deductible health plans, consumers who reach the Medicare Part D donut hole, and consumers with high coinsurance rates. Defendants are pharmaceutical companies headquartered in the United States.

  1. Standing/Application of Indirect Purchaser Rule

Defendants argued that Plaintiffs, as indirect purchasers, lack standing to pursue the state racketeering claims. Defendants contend because the state racketeering statutes Plaintiffs invoke are modeled after the federal RICO statute, the indirect purchaser rule barring Plaintiffs’ federal RICO claims also bars the state racketeering claims. Id. Plaintiffs argue the indirect purchaser rule is a judicially-created federal rule that applies to federal RICO claims but not the state racketeering claims. Plaintiffs assert Defendants incorrectly “assume that the Third Circuit’s interpretation of the indirect purchaser rule to federal RICO claims should apply to these state racketeering claims.”  Plaintiffs contend the Court “must interpret state law according to each state’s authority or otherwise predict how that state’s courts would interpret” the statute. (Id. at 6–7.)

As an initial matter, the Court is not aware of, nor have the parties identified, federal or state authority opining on the applicability of the indirect purchaser rule to the state racketeering statutes at issue. The Court begins with examining the relevant statutory language. In re Harvard Indus., Inc., 568 F.3d at 451. RICO’s civil action provision provides:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter [18 U.S.C. § 1962] may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee ….

The court then compared this provision to the State laws and found the language in the civil action provisions of these state racketeering statutes is substantially similar to the language in the civil action provision of the federal RICO statute. Indeed, it is well-established the state racketeering statutes of Colorado, Georgia, Utah, and Wisconsin are modeled after the federal RICO statute.  Thus, courts have looked to federal case law construing federal RICO for guidance in interpreting these state racketeering statutes.*7.   

While the federal RICO statute does not explicitly state indirect purchasers lack standing, federal courts have construed the language of RICO’s civil action provision to bar indirect purchaser actions based on the anti-trust statute. Based on the Supreme Court’s message in Holmes, *8.  And circuit law finding because RICO’s civil action provision was modeled on the Clayton Act, “antitrust standing principles apply equally to allegations of RICO violations.” *9.

The Court was led to predict the highest court in the state of Arizona would permit indirect purchaser actions to proceed under Arizona’s Civil Racketeering Statute. The court concluded that absent legislative intervention, the Court is led to predict the state’s highest court would continue to interpret its respective state racketeering statute consistent with its federal counterpart. Accordingly, the court granted Defendants’ Partial Motion to Dismiss as to the State RICO Claims under the laws of Colorado, Georgia, Utah, and Wisconsin (Counts Four, Six, Eight, and Nine), and denied as to the State RICO Claim under the laws of Arizona.

2. State Law Conspiracy

Defendants assert the state-law civil conspiracy claims fail without a viable underlying claim as a predicate for liability. Specifically, Defendants argue the state-law civil conspiracy claims fail to the extent they are based on violations of federal or state racketeering laws that have already been dismissed. Plaintiffs argue any surviving state racketeering or state consumer fraud claim can serve as viable underlying claim for their state-law civil conspiracy claims.

“The established rule is that a cause of action for civil conspiracy requires a separate underlying tort as a predicate for liability.” Id. at 13, citing cases that state that underlying tort that must be independently actionable against a single defendant.” Id.  Plaintiffs cannot base their state-law civil conspiracy claims on underlying claims that “would not be actionable against an individual defendant.”  Because the federal racketeering claims were dismissed, the state-law civil conspiracy claims fail to the extent they are based on violations of federal racketeering law. Similarly, because the state racketeering claims were dismissed, Plaintiffs’ state-law civil conspiracy claims fail to the extent they are based on violations of state racketeering laws, with the exception of Plaintiffs’ civil conspiracy claim under Arizona law is denied to the extent Plaintiffs base their civil conspiracy claim under Arizona law on violations of Arizona’s state racketeering law.

Accordingly, Defendants’ Partial Motion to Dismiss Plaintiffs’ state-law civil conspiracy claims was granted in part and denied in part.