District Court Provides Road-Map To Find Civil RICO Allegations Sufficient Finding, Inter Alia, Sufficiently Alleged Predicate Fraud Acts, Enterprise, and Pattern of Racketeering

David Starr, Sandi Cook, Bernadette et. al., v. VSL Pharmaceuticuls et al., 2020 WL 769480 (D. Md., Dec. 28, 2020)

The court denied Defendants motion to dismiss the civil RICO claims finding the complaint sufficient. Here, Plaintiffs’ allegations involve a single product—VSL#3—and largely focus on a scheme to pass off a new formulation of VSL#3 as containing the De Simone Formulation when it does not. Defendants, together with members of the Cavazza Family and the Italian manufacturers of VSL#3, continued to market and sell VSL#3 as containing the De Simone Formulation despite knowing that they no longer had access to that formulation, and as having the same clinical effectiveness as the De Simone Formulation despite research findings to the contrary. The scheme consisted of unsuccessfully attempting to reverse engineer the De Simone Formulation and then developing a different formulation and establishing a manufacturing process in Italy; affirmatively marketing VSL#3 as the same product as the De Simone Formulation; falsely citing clinical studies on the De Simone Formulation as studies of their new formulation; and affirmatively concealing information about the differences between the products.

The court addressed the issues raised by Defendants. 

Scheme to Defraud/Predicates

The court found the scheme to defraud and predicate mailings and wiring were adequately alleged. the court found that the Plaintiffs adequately and specifically alleged that Defendants engaged in a scheme to deceive consumers by selling the new VSL#3 through the use false representations that it was the same as the prior version that used the De Simone Formulation, and they sought to obtain money in the form of increased profits from sales.  As for the use of the mails and interstate wires, Plaintiffs assert that the scheme was furthered by the shipping of VSL#3 packages and the sending of marketing materials and other correspondence to prescribing physicians by U.S. mail, and by the distribution by wire, specifically the internet, of marketing and advertising materials with false or fraudulent misrepresentations, such as the false or misleading statements on the VSL#3 website.

The court discussed that a defendant need not personally mail or transmit by a wire; it is sufficient to have acted in way that caused such a mailing or transmission. See 18 U.S.C. §§ 13411343. Moreover, there is no requirement that the mailed VSL#3 packages or electronically transmitted materials actually contained false statements relied upon by consumers. These elements can be satisfied by, for example, “ ‘innocent’ mailings—ones that contain no false information,” or mail or wire communications that are “routine,” as long as they are in furtherance of the overall unlawful scheme. Schmuck v. United States, 489 U.S. 705, 714–15 (1989). Here, Plaintiffs have alleged that VSL participated in the scheme to defraud and worked with Alfasigma on misleading content for the VSL#3 website, and they have alleged facts supporting the conclusion that Defendants used both the U.S. mail and interstate wires in furtherance of a scheme to defraud, including that VSL#3 packages with inserts containing false claims were mailed and false statements about the current formulation of VSL#3 were posted on the VSL#3 website. The Court therefore finds the allegations sufficient on these points, and found Plaintiffs pleaded Defendants’ criminal intent to defraud with requisite specificity to meet the plain text of Rule 9(b), which states that “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).

Sufficient Association in Fact Enterprise

The court then found that Plaintiffs sufficiently alleged an association in fact enterprise consisting of different entities and persons, i.e., Defendants, members of the Cavazza Family, and CSA and Nutrilinea, two Italian manufacturers of VSL#3.   The court found that Plaintiffs properly alleged an enterprise separate from the “persons” alleged to be at the center of the racketeering activity, the Cavazza Family. Plaintiffs have adequately alleged both that Defendants were “persons” and that there was a separate “enterprise.” 

Next, the court found that regarding the conduct test, the enterprise must be a “truly joint enterprise where each individual entity acts in concert with the others to pursue a common interest,” and plaintiffs adequately alleged such a joint enterprise where Plaintiffs have plausibly alleged that Defendants were not just separate, stranger businesses engaged in independent commercial activity. The allegations here thus differ from those in United Food and Commercial Workers Union and Employers Midwest Health Benefits Fund v. Walgreen, Co., 719 F.3d 849 (7th Cir. 2013), relied on by Defendants, in which a complaint asserting that the defendants jointly participated in a drug substitution and overcharging scheme contained no allegations that either defendant was “involved … in the affairs of the other,” but instead described conduct “entirely consistent” with each company “going about its own business” to “advance their individual self-interests.” Id. at 854-55.*7 

Because the Amended Complaint alleged facts showing that Defendants engaged in coordinated efforts and were not simply engaged in “parallel conduct” which may be insufficient to establish an enterprise under RICO. 

Conduct of the Enterprise

The court found that where the Amended Complaint contains ample allegations that Defendants, even if under the direction of the Cavazza Family, participated extensively in the operation of the enterprise, the Reves “conduct and management” test is met.  this purported flaw in the Amended Complaint provides no basis for dismissal.

Pattern of Racketeering Activity

The court discussed that acts constitute “continued criminal activity” if there is a “closed period of repeated conduct…extending over a substantial period of time.” Citing to H.J. Inc. The period of time to establish this “closed-ended” form of continuity typically must last over a year. There is also “continued criminal activity” if there has been repeated conduct “that by its nature projects into the future with a threat of repetition.” H.J. Inc., 492 U.S. at 241–42. This form of continuity, focusing on the possibility of future conduct, is “open-ended” and can be established by, for example, evidence that “the predicate acts or offenses are part of an ongoing entity’s regular way of doing business.” Id. at 241-42.

The court found that where Plaintiffs have alleged that the scheme lasted for three years—they have plausibly alleged closed-end continuity. Moreover, Plaintiffs also properly allege open-ended continuity by asserting that Defendants and the other enterprise members effected this scheme through a series of related acts that posed and continue to pose a threat of criminal activity, and that Defendants have shown that they would do so indefinitely. The court added that it has nowhere endorsed the idea that forced cessation of activity brings with it the boon of foreclosing liability under an open-ended continuity theory. Plaintiffs’ allegations, when credited, permit the inference that selling VSL#3 as “the same” as the De Simone Formulation was part of Defendants’ “regular way of doing business,” and that, in the absence of the permanent injunction, “by its nature” such conduct would “project[ ] into the future with a threat of repetition.” H.J., Inc., 492 U.S. at 241-42. The Court thus concludes that Plaintiffs have adequately alleged continuity, and the permanent injunction did not foreclose a finding of open-ended continuity.

The court also examined previous case law in which the 4th circuit examined “factors relevant to this inquiry include the number and variety of predicate acts and the length of time over which they were committed, the number of putative victims, the presence of separate schemes, and the potential for multiple distinct injuries.” Id. Although the existence of only a single illegal scheme is relevant and weighs against a finding of continuity, “[p]redicate acts which arise under a single scheme … may be a pattern for RICO purposes if they are continuous and related.” Menasco, 886 F.2d at 684.  The court stated that presence of only one scheme, however, does not alone preclude a finding of a pattern. *8.   Upon consideration of these facts, the Court found that while Plaintiffs allege a single scheme, its duration, the number and variety of forms of predicate acts, and the number of victims place it beyond the single schemes referenced by Defendants that were of limited duration or involved only one or a limited number of victims and the alleged scheme was not comparable to the “ordinary or garden-variety fraud claims better prosecuted under state law” that are insufficient to support a RICO claim. *9.  The Plaintiffs allegations could be viewed as the kind of “open-ended scheme contemplating the repeated infliction of independent economic injuries on an indiscriminate number of victims” that “may well pose a special threat to social well-being.” 

Ed Note:    In finding for Plaintiffs on the civil RICO claims, the court makes some very important findings  (1) the elements of mail and wire fraud can be satisfied by, for example, “ ‘innocent’ mailings—ones that contain no false information,” or mail or wire communications that are “routine,” as long as they are in furtherance of the overall unlawful scheme; (2)  an association in fact can be found when the enterprise must be a “truly joint enterprise where each individual entity acts in concert with the others to pursue a common interest;  (3) persons acting under the direction of others in the operation of the enterprise is sufficient to meet the Reves “conduct and management test; (4) the court added that it has nowhere endorsed the idea that forced cessation of activity brings with it the boon of foreclosing liability under an open-ended continuity theory: (5) the court stated that presence of only one scheme, however, does not alone preclude a finding of a pattern.*8-*9 but to be sufficient allegations should be viewed as the kind of “open-ended scheme contemplating the repeated infliction of independent economic injuries on an indiscriminate number of victims” that “may well pose a special threat to social well-being.” 

 

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