District Court Addresses Several Novel Civil RICO Issues in Denying a Motion to Dismiss

In re Outlaw Laboratory LP Litigation, 2020 WL 1953584 (S.D. Cal., Apr. 23, 2020)

The District Court denied motions by third-party Defendants Michael Wear, Shawn Lynch, and Tauler Smith LLP (“Tauler Smith”) who argued that a Second Amended Countercomplaint (SACC) failed to plead RICO or rescission claims and is barred by the Noerr-Pennington doctrine.

The SACC asserted civil RICO violations as a result of settlement agreements entered into as a result of Outlaw’s extortionate demand letters. Specifically, Counterclaimants described a RICO enterprise between Outlaw, its attorneys, Tauler Smith LLP, and other as-yet-unnamed individuals, aimed at perfecting a legal “shakedown” of small-time San Diego convenience stores. Counterclaimants averred that the “TriSteel” products “were created as artifices” to “found the false advertising claims,” and that Outlaw itself was no more than a front for the unlawful enterprise.

Holding:   The Court found that the SACC adequately pleaded racketeering vis-à-vis mail fraud, the stores’ injury, and the “conduct” element as to Tauler Smith (law firm).

Issues:

  • Mail Fraud

The Court first discussed that the gravamen of the offense is the scheme to defraud, and any “mailing that is incident to an essential part of the scheme satisfies the mailing element,” Schmuck v. United States, 489 U.S. 705, 712 (1989).  Members of the Enterprise fielded a variety of arguments predicated on the mistaken notion that mail fraud must entail a false or misleading statement. Tauler Smith argued that the SACC fails to adequately plead the predicate acts of mail fraud because Outlaw’s demand letters allegedly contained no specific false statements, no actionable omissions, and no statements which together might be misleading.

The Court stated that the fact there is no misrepresentation of a single existing fact is immaterial.  It is only necessary to prove that it is a scheme reasonably calculated to deceive, and that the mail service of the United States was used and intended to be used in the execution of the scheme.*7.

  1. Pattern of Racketeering

The court stated that because the allegations of the SACC describe multiple instances of mail fraud, against different convenience stores, and in furtherance of the alleged scheme, the SACC adequately pleads a “pattern of racketeering activity” as required for RICO. *7.

  1. Injury –  Loss of Sales

The court had previously held the loss of sales by the stores constitutes an adequate injury finding a reduction to Plaintiff’s sales is a “business or property interest,” and the “alleged [RICO] violation led directly to the plaintiff’s ”loss of sales,   The court also found the stores incurred a “concrete financial loss,” and at the motions stage the Stores need not plead more specific facts as to which items were removed from the Stores shelves. *8, citing cases.

  1. Injury – Legal Fees

The court addressed whether legal fees and costs incurred by the Stores were legitimate injuries because it was an “express purpose of the Outlaw Enterprise’s scheme was to extract settlement money,” thus requiring the stores to obtain counsel. The Stores asserted that, the collection of settlements was central to the Enterprise’s scheme and thus the Stores’ attorneys’ fees incurred in pursuing settlement are a direct injury of the scheme.  Because the subject attorney fees were directly incurred by the convenience stores after receiving the demand letters, the Court found that they are cognizable as an injury to the Stores’ “business” for the purposes of RICO.  Thus, unlike some other district court cases, the Stores have alleged facts showing that the fraudulent scheme had caused them to incur attorney fees.

  1. Attorneys and Reves Violations

The Court considered the “conduct” element as challenged by Tauler Smith, attorneys who were part of the Enterprise and a third party defendant.   The court cited to the Ninth Circuit’s interpretation of the Reves test and found in light of this disjunctive, multi-factor test, Tauler Smith’s argument’s was unpersuasive.  For one, it is simply not true that the RICO claim fails if “Tauler Smith did not manage or control Outlaw Laboratory, LP  as a subordinate in the enterprise may satisfy the “conduct” element by demonstrating some control over the scheme.  Tauler Smith argued that “[s]imply performing [legal] services for the [association-in-fact] enterprise” could not create RICO liability but here the allegations against Tauler Smith repeatedly indicate that the firm was “giving, or taking, direction” and became “indispensable to achiev[ing] of the enterprise’s goal” and such conduct is enough to establish the firm’s influence and control over some of the operations of the Enterprise and exceeds the conduct inherent in a firm’s representation of Outlaw as a client. *11, citing cases.

  1. Noerr-Pennington Doctrine and Proximate Cause

Enterprise members’ argued that their alleged conduct was protected from suit by the Noerr-Pennington doctrine. Under the Noerr–Pennington doctrine, those who petition any department of the government for redress are generally immune from statutory liability for their petitioning conduct”  unless the letters are a “mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor.”  The court found the sham litigation exception applied and thus third-party defendants could not rely on the doctrine.  In this finding, the court rejected Tauler Smith’s argument that there was probable cause to threaten a RICO suit because, contrary to the Court’s prior rulings, Outlaw’s alleged harm could have been proximately caused by the Stores’ alleged misconduct.

 

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