Court Grants Motion to Dismiss RICO and RICO Conspiracy Claims Finding Continuity Not Adequately Alleged 

AMA Systems, LLC et al. v. 3B Tech, Inc., 2022 WL 2133905 (D. Md., June 14, 2022).

Plaintiffs AMA Systems, LLC (“AMA”) and Bluemar Promotions, LLC (“Bluemar”) filed suit against defendants 3B Tech, Inc. (“3B Tech”), Pro-Com Products, Inc. (“Pro-Com”), Salusen, Inc. (“Salusen”), Jian Qing “Johnny” Zhu, Brett Barbour, and Michael Johnson alleging defendants engaged in and continue to engage in a conspiracy to manufacture, market, and sell fraudulently certified personal protective equipment during the COVID-19 pandemic.  Plaintiffs claim a civil violation of the RICO statute section 18 U.S.C. § 1962(c) (Count I); conspiracy to violate RICO (Count II); and common law fraudulent misrepresentation (Count III). Against 3B Tech, plaintiffs claim breach of contract (Count IV). Plaintiffs also claim breach of contract against 3B Tech, Salusen, Zhu, and Barbour (Count V).  The court granted the motion to dismiss the RICO claims.

As background, the court discussed that the Fourth Circuit has advised courts should “not lightly permit ordinary business contract or fraud disputes to be transformed into federal RICO claims.” Flip Mortg. Corp. v. McElhone, 841 F.2d 531, 538 (4th Cir. 1988). Rather, civil RICO is “a unique cause of action that is concerned with eradicating organized, long-term, habitual criminal activity.” Awappa, 615 F.3d at 317 (quoting Gamboa v. Velez, 457 F.3d 703, 705 (7th Cir. 2006)). 

Issue 1- The Enterprise is Distinct From the Defendants

Plaintiffs allege the unnamed enterprise “consists of persons associated together for the common and shared purpose of the fraudulent manufacture, marketing and sale of PPE goods,” with defendants “directly engaged in the production, distribution, and/or acquisition of goods and services in interstate and international commerce.” ECF 33, ¶ 209.*4. Defendants argue the entity defendants are not distinct from the alleged RICO enterprise. They highlight allegations that the entity defendants are owned, in whole or in part, by Zhu, that the racketeering activity of the individual defendants was undertaken in a representative capacity on behalf of one or more of the entity defendants, and that the entity defendants work together (e.g., Salusen and 3B Tech share offices).

The question of whether a defendant corporation is distinct from an alleged RICO enterprise that includes the corporation is more complicated than it first appears. “[F]ederal courts have encountered significant conceptual difficulties when attempting to apply the distinctness requirement in the context of complex relationships among affiliated and non-affiliated corporations and individuals.” In re ClassicStar Mare Lease Lit., 727 F.3d 473, 490 (6th Cir. 2013). *5. 

Defendant cited to cases, i.e., Riverwoods etc., which support the proposition that a corporation may not be liable under § 1962(c) for associating in an alleged enterprise that consists only of its own employees, agents, subdivisions, subsidiaries, franchises, or members. See U1it4less, 871 F.3d at 206 (discussing the distinctness or “non-identity” requirement); ClassicStar, 727 F.3d at 490 (same).

Rather, the enterprise consists of separate entities with some common owners and officers. Together, these actors allegedly make up an association-in-fact enterprise with the purpose of manufacturing, marketing, and selling fraudulently certified PPE.  *6.  Even though 3B Tech, Salusen, Pro-Com, and SCT are allegedly owned by Zhu and/or Barbour, this common ownership does not necessarily foreclose distinctness. *6, discussing Securitron case. Citing to another district case which found the defendants distinct because the plaintiffs alleged “each [defendant], as a separate entity, took its own specific acts separate from other acts taken by the Cavazza Family.” 

The court found that such is the case here, where the entity defendants are separate entities—albeit connected to the same individuals—that allegedly engage in transactions apart from the joint scheme to sell fraudulently certified PPE. *6.  Drawing all reasonable inferences in favor of the plaintiffs, the Court views the entity defendants as members of a team, not just the arms and legs of a single player. Plaintiffs’ allegations satisfy the distinctness requirement. *7. 

Issue 2- State Theft Crimes Are Not Racketeering Activity

The court first found that state theft crimes are not racketeering activity because they do not fall within the generic definition of the enumerated state law crimes of murder, kidnapping, gambling, arson, robbery, bribery, or extortion. *7. 

Issue 3- Court Found That Mail Fraud and Wire Fraud Adequately Alleged

The court analyzed the mail and wire fraud statutes and discussed that “the interplay of the more liberal notice pleading standard of Rule 8” and Rule 9(b) in the context of RICO mail fraud, this Court has “acknowledged the difficulty that arises in pleading a RICO suit against multiple defendants[.]” Chambers, 43 F. Supp. 3d at 595. In such cases, this Court has “determined that it is ‘not necessary that a plaintiff elucidate every single detail of the alleged fraud.’ ” *8, citing cases. Rather, the critical question is “how much detail is necessary to give adequate notice to an adverse party and enable him to prepare a responsive pleading.” *8, citing case. The court found Plaintiffs allege enough detail to meet Rule 9(b)’s heightened pleading standard.

Issue 4- Court Found a Pattern of Racketeering Was Not Adequately Alleged

Closed Ended Continuity

Defendants argue plaintiffs allege only a run-of-the-mill contract dispute that took place over several months, and that the Fourth Circuit has not allowed such incidents to be transformed into civil RICO claims, citing to Menasco.*10.  Plaintiffs do not plausibly allege closed-ended continuity. At bottom, they allege a single scheme, occurring over a six-month period, with the objective of defrauding plaintiffs through the sale of fraudulently certified PPE. This scheme involved acts of mail and wire fraud, committed almost exclusively by Zhu and Barbour as representatives of the entity defendants. The predicates occurred between late March and August 2020, mostly concentrated before July. The variety of the alleged fraud evolved from lying about certification to falsifying test results. These allegations do not describe repeated conduct “extending over a substantial period of time,” H.J. Inc., 492 U.S. at 241–42, or “ongoing unlawful activities whose scope and persistence pose a special threat to social well-being,” citing Zepkin, 812 F.2d at 155

Open-Ended Continuity

The Plaintiffs also did not meet the open-ended test for continuity. While a close call, the court stated that plaintiffs allege “defendants’ related acts of racketeering activity have occurred on numerous occasions” since early 2020 and have injured “other market participants,” including “SB Richards Company, hospitals, and government entities—all of which Defendants claimed to have sold PPE to and which may have purchased the fraudulently certified products[.]” *11.   They also allege defendants’ websites continue to represent that the face masks they sell are certified, which plaintiffs allege remains untrue.  the Court cannot plausibly infer open-ended continuity from plaintiffs’ vague allegations of other victims and ongoing sales. These allegations, which comprise only a fraction of the more than 300 allegations in the complaint, appear to be an afterthought to plaintiffs’ focus on their own transaction. Plaintiffs do not allege any other entity purchased fraudulently certified PPE from defendants, only that some “may” have. The complaint contains no information about any potential racketeering activity related to other sales of PPE by defendants. Moreover, the existence of other victims appears to be based on Barbour’s alleged statement to Bluemar that defendants were selling face masks to governmental agencies and private customers, a statement plaintiffs allege was in fact false.

The court concluded that more detail is required to allege open-ended continuity and the threat of future criminal conduct. * 11 citing Menasco.  The court stated that without other victims, the totality of the circumstances described by plaintiffs’ allegations do not reflect criminal activity “above the routine.” *12   

Thus, plaintiffs failed to allege the requisite continuity to establish a pattern of racketeering activity. “Accordingly, Counts I and II (RICO conspiracy) are dismissed.”

Ed Note:   The Order accompanying the opinion stated that the dismissal was “without prejudice.”   The common law claims were answered and are currently being litigated.   

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