First Circuit Reverses RICO and RICO Conspiracy Convictions- Sets Forth RICO Conspiracy Analysis

United States v. Burhoe, __ F.3d ___, 2017 WL 3047056 (1st Cir., Sept. 8, 2017)

The Court reversed Hobbs Act and RICO convictions in a case which involves union members/defendants who allegedly extorted property from nonunion companies when they threatened to take certain actions, including picketing, if those companies did not give union members jobs. The government further obtained convictions under the Hobbs Act and RICO that the defendants extorted wages, benefits, and rights to democratic participation within the union from their fellow union members.
The court vacated the conviction for extortion of a nonunion company on count 4 and remanded for a new trial because the jury instructions allowed the jury to convict upon a finding that the work performed was merely unwanted, and on all other counts, the court reversed the convictions.

The court underwent a detailed analysis to find that the defendants did not commit or conspire to commit the Hobbs Act violations. As a result, it failed to find that Count 1, which alleged racketeering and count 2, which alleged racketeering conspiracy were proven. The government contended that Local 82 itself was a racketeering enterprise. Because the court reversed all but one of the extortion count convictions, the court was left with at most one racketeering act by defendant Burhoe. Because the government was required to prove a “pattern of racketeering activity,” which has been defined as requiring at least two predicates, it found insufficient evidence to support Burhoe’s and Perry’s convictions on count 1.

Regarding the conspiracy conviction, the court found insufficient evidence to meet the government’s burden.   The court stated that-
“While it is unnecessary to prove that the defendants committed two predicate offenses in order to prove a racketeering conspiracy, the government does have to prove that the defendants “agreed with one or more others that two predicate offenses be committed.” Id. at 1562.   Because we find that only one of the predicate acts might constitute extortion, we find that the government provided insufficient evidence that the defendants agreed to engage in a pattern of racketeering activity. We therefore reverse Burhoe and Perry’s convictions on count 2.”
Id. at *22.

Editor Analysis – The court is correct that the government does not have to prove that the defendants committed two predicate offenses in order to prove a racketeering conspiracy. The Court’s statement that “the government does have to prove that the defendants “agreed with one or more others that two predicate offenses be committed’” is also correct under a Salinas analysis. However, the application is puzzling. Is the Court saying that the proof of a RICO conspiracy when defendants “agreed with one or more others that two predicate offenses be committed’” is nullified when the actual commission of the offense (here, Hobbs Act) is legally impossible? Doesn’t this focus the onus on the actual commission of the predicate offense when the “agreement” that a conspirator would commit a violation of RICO is sufficient proof for RICO conspiracy?

Under this analysis, practitioners must be able to prove that the object predicate offenses which defendants agreed conspirators would commit are in fact actual predicate offenses. In civil RICO, but not criminal RICO, this is somewhat consistent with Beck v. Prupis, in which the commission of at least object predicate offense which causes an injury is required to prove RICO conspiracy.

David J. Stander is a civil RICO Attorney who focuses his practice on civil RICO litigation and consulting.

 

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Court Addresses When “Litigation Expenses” Constitutes RICO Injury

Sasmor v. Meisels, __ Fed. Appx. ___, 2017 WL 395768 (2d Cir., Sept. 8, 2017)

The Second Circuit affirmed the District Court’s grant of summary judgment concluding that Sasmor’s civil RICO claims failed because he failed to demonstrate that he suffered a cognizable RICO injury.

Sasmor contended that he suffered two RICO injuries: first, he asserted that he made a rental payment in May 2010 because of Defendants’ acts of wire fraud, mail fraud, and extortion; second, he asserts that he incurred litigation expenses during the eviction proceedings that Defendants pursued against him, and that those proceedings (and thus, the related expenses) resulted from Defendants’ acts of mail fraud and extortion.

Regarding the first alleged injury, Sasmor argued that his rental payment in May 2010 was an injury caused by a RICO violation when he “would not have moved in or paid any money” if Defendants had not misrepresented that his room was “legitimate, legal housing”—a misrepresentation that Sasmor argues constitutes “wire fraud.” But, Sasmor did not present any evidence suggesting that he would have paid lower rent, however, had Defendants not misrepresented the legal status of the room and, as a result, he had chosen to live elsewhere.

Regarding the second injury, similarly, the court found the record did not support the existence of a causal link between any alleged RICO predicate act and Sasmor’s litigation expenses. He argues that the eviction proceedings against him in state court constituted mail fraud and extortion, pointing primarily to the success of his technical defense during those proceedings. But, Sasmor did not present evidence sufficient to transform Defendants’ assertion of a losing legal position in state court into mail fraud or extortion. These “misrepresentations” during the eviction proceedings are no more than litigation positions taken on legal questions. Thus, the record did not support an inference that Defendants’ design was to defraud Sasmor by taking incorrect legal positions during eviction proceedings pursued by them when he refused to pay rent or vacate the premises.

Nor did Sasmor present evidence sufficient to establish that the very act of pursuing the eviction proceedings amounted to extortion stating improperly brought litigation without more, however, does not constitute the kind of “wrongful use of force” required for the offense of extortion. See, e.g., Deck v. Engineered Laminates, 349 F.3d 1253, 1257–58 (10th Cir. 2003) (“[M]eritless litigation is not extortion under § 1951.”) (collecting cases holding same). Accordingly, Sasmor did not incur these litigation expenses as a result of a RICO violation and in this respect, too, Sasmor has not shown that he suffered a RICO injury.

David J. Stander is a civil RICO Attorney who focuses on civil RICO litigation and consulting.

Seventh Circuit Addresses Association in Fact Enterprise Consisting of Defendant and Legal Defense Team

Sabrina Roppo v. Travelers Commercial Ins. Co., __ F.3d __, 2017 WL 3695205 (7th Cir., Aug. 28, 2017)

For various reasons, the court affirmed the district court’s dismissal of this civil RICO claim. However, in dicta, the Seventh Circuit followed the Ninth Circuit and made an important statement regarding the feasibility of an association-in-fact enterprise comprised of the Defendant and its legal defense team. This could be an important way to find “distinctness,” although the Boyle and Turkette tests would still have to be satisfied.

In this case, the Plaintiff failed to connect the legal dots between Travelers (the Defendant) and the association in fact enterprise consisting of Travelers and its outside counsel. But, the Seventh Circuit stated that:

the possibility that those players, together, could form a RICO enterprise is not without support in case law. One of our sister circuits has recognized that a corporation and its outside counsel can constitute an enterprise under RICO. See Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353, 362 (9th Cir. 2005) (observing that “[j]ust as a corporate officer can be a person distinct from the corporate enterprise, DuPont is separate from its legal defense team” and holding, therefore, that “the district court erred in concluding that Plaintiffs failed to allege a distinct RICO enterprise”). Moreover, the Supreme Court recently clarified what is required to show an “association-in-fact” enterprise: “a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.” Boyle v. United States, 556 U.S. 938, 946, 129 S.Ct. 2237, 173 L.Ed.2d 1265 (2009). Nothing in these requirements forecloses a RICO enterprise comprised of a corporation and its outside counsel.

Id., at *12, emphasis added.

The court thus could not conclude that Plaintiff’s allegations of a RICO enterprise, although lacking in detail, were wholly insubstantial or frivolous.

Ed Note:    This is the first post-Boyle decision addressing whether a legal defense team can be part of the association in fact enterprise. This decision that attorneys who are merely representing the Defendant can be part of the enterprise appears to be contrary to established law on distinctness in which the attorneys are functionally no different than corporate employees acting on behalf of the employer within the scope of their duties. But, those who function with Defendants to commit fraud, could fit in as part of an enterprise which would be distinct of the corporate employer or an association in fact enterprise consisting of the corporation and the attorneys. Of course, the facts and circumstances of each case need to be examined.
David J. Stander is a civil RICO Attorney who focuses his practice on civil RICO litigation and consulting.

 

Plaintiff’s RICO Claims Alleging Wire Fraud Apply Extraterritorially as Two-Part Test Was Satisfied [Corrected Copy]

Drummond Company Inc. v. Collingsworth, 2017 WL 3268907 (N.D. Ala., Aug. 1, 2017)

The court denied the Defendants’ motions to dismiss the civil RICO claims and found sufficient personal jurisdiction over the Defendants Van Bilderbeek and Ramirez. Also, in a case of first impression in the Eleventh Circuit, the court ruled that the wire fraud statute has extraterritorial reach provided there is domestic injury.
Personal jurisdiction Found Over Non-Resident Defendants
The court first stated that Plaintiff has alleged that defendant van Bilderbeek, a Dutch non-resident perpetrated intentional, tortious and/or criminal acts that were intended to cause, and actually caused, injury in Alabama. Plaintiff has alleged, and cited to evidence of, intentional acts by van Bilderbeek directed at Plaintiff, an Alabama resident. Where intentional acts are at issue, “ ‘the defendant may be held to have expected its conduct to have an effect in that state, and further to have expected that the victim will bring suit for redress there.’ ”
Van Bilderbeek is alleged to have intentionally paid witnesses for their testimony in a case that was being litigated in Alabama and it is further alleged he intended to cause harm to an Alabama business and this court (each located in Alabama). Licciardello, 544 F.3d at 1286; see also Calder, 465 U.S. at 791 (“jurisdiction over petitioners in California is proper because of their intentional conduct in Florida calculated to cause injury to respondent in California”).
The court ruled that because Plaintiff has established the relatedness and purposeful availment prongs of the specific jurisdiction inquiry, the burden shifts to van Bilderbeek to present a “compelling case” that the exercise of personal jurisdiction over him in Alabama would be unreasonable. The court concluded that van Bilderbeek’s argument failed to acknowledge that Plaintiff has alleged that his activities were “purposefully directed” at an Alabama resident and allegedly caused injuries to a resident in this forum. Therefore, van Bilderbeek had “fair warning” that his activities could subject him to jurisdiction in Alabama.
There was also personal jurisdiction over non-resident Ramirez as “‘[u]nder the “effects test,” even a nonresident defendant’s single tortious act can establish purposeful availment, without regard to whether the defendant had any other contacts with the forum’ if the intentional conduct has a direct impact on [an Alabama] resident.”. Ramirez is alleged to have been involved in more than one tortious act directed at an Alabama resident and causing damage there.

The court denied the Defendants’ motions to dismiss the civil RICO claims and found sufficient personal jurisdiction over the Defendants Van Bilderbeek and Ramirez. Also, in a case of first impression in the Eleventh Circuit, the court ruled that the wire fraud statute has extraterritorial reach provided there is domestic injury.
injuries to a resident in this forum. Therefore, van Bilderbeek had “fair warning” that his activities could subject him to jurisdiction in Alabama.
There was also personal jurisdiction over non-resident Ramirez as “‘[u]nder the “effects test,” even a nonresident defendant’s single tortious act can establish purposeful availment, without regard to whether the defendant had any other contacts with the forum’ if the intentional conduct has a direct impact on [an Alabama] resident.”. Ramirez is alleged to have been involved in more than one tortious act directed at an Alabama resident and causing damage there.
Plaintiff’s RICO Claims Alleging Wire Fraud Apply Extraterritorially

Van Bilderbeek argued that Plaintiff’s RICO claims should be dismissed because RICO does not apply extraterritorially. In RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090, 2102 (2016), the Supreme Court determined that, because some RICO predicates “plainly apply to at least some foreign conduct,” Section 1962 was intended to apply and, so long as a private RICO plaintiff alleges and proves a domestic injury to its business or property, does apply to racketeering conduct abroad “to the extent that the predicates alleged in the particular case themselves apply extraterritorially.” RJR Nabisco, Inc., 136 S.Ct. at 2102, 2106. The Court concluded that “[t]his unique structure makes RICO the rare statute that clearly evidences extraterritorial effect despite lacking an express statement of extraterritoriality.” Id. at 2103. That is, “the domestic and extraterritorial reach of the RICO statute is coterminous with that of the underlying predicate offenses in a given case.” United States v. Hawit, 2017 WL 663542, at *10 (E.D.N.Y. Feb. 17, 2017).

The Complaint alleges that van Bilderbeek paid Blanco on at least three separate occasions for his testimony and participation in cases filed in Alabama. Based on those allegations, it further asserts that “the Enterprise’s conduct with respect to Blanco violates 18 U.S.C. § 1343 (wire fraud), 18 U.S.C. § 201 (witness bribery), 18 U.S.C. § 1956(a)(2)(A) (money laundering), 18 U.S.C. § 1503 (obstruction of justice), and 18 U.S.C. § 1512 (witness tampering).” The Complaint further alleges that the “adverse effects” of van Bilderbeek’s witness bribery, witness tampering, money laundering, obstruction of justice and wire fraud were felt by Plaintiff here in Alabama, and thus asserted a domestic injury. Therefore, RICO may apply extraterritorially, depending on the underlying predicate offense.

The court ruled that all of the predicate offenses for Plaintiff’s RICO claims have extraterritorial application. “Congress expressly provided for extraterritorial application of jurisdiction in the obstruction of justice statute.” The money laundering statute also specifically provides for extraterritorial application where the alleged conduct is by a United States citizen. 18 U.S.C. § 1956(f) (“There is extraterritorial jurisdiction over the conduct prohibited by this section if—(1) the conduct is by a United States citizen.”). The Complaint alleges that van Bilderbeek is a United States citizen. Although his affidavit addresses his residence, it does not contradict the allegation regarding his citizenship. There is also authority for the proposition that the witness bribery statute (section 201) applies extraterritorially.

The key question is the extraterritorial application of the wire fraud statute,
While the Second Circuit has held that 18 U.S.C. § 1343 does not have extraterritorial application, European Cmty. v. RJR Nabisco, Inc.(RJR Nabsico, Inc. 2d Cir.), 764 F.3d 129, 140–41 (2d Cir. 2014) (finding the wire fraud statute does not overcome the presumption against extraterritoriality), rev’d on other grounds, RJR Nabisco, Inc., ––– U.S. ––––, 136 S.Ct. 2090, 195 L.Ed.2d 476, other courts have held to the contrary. Here, the First and Third Circuits, in recent year 2014 and 2015 decisions state “the wire fraud statute punishes frauds executed in ‘interstate or foreign commerce,’ ” and therefore can be applied extraterritorially because Congress did not have “only ‘domestic concerns in mind.’ ”) (quoting Pasquantino v. United States, 544 U.S. 349, 371–72 (2005), in turn quoting 18 U.S.C. § 1343).
The Eleventh Circuit has not ruled on this issue, but based on the case authority the court concluded that the First and Third Circuits have the better side of the debate. Therefore, van Bilderbeek’s argument that Plaintiff’s RICO claim fails due to its extraterritorial application is without merit.
Accordingly, based on the above, and finding that Plaintiff’s RICO claims are not conclusory and sufficiently pled, the RICO defendants’ motions to dismiss the civil RICO claims were denied.

Ed Note: Two subsequent SDNY decisions have followed this decision, i.e., Dandong Old North East, and Drummond Company, each of which involved fraud and money laundering cases but only addressed the “domestic injury” argument. Thus, given the Second Circuit decision on wire fraud not having extraterritorial effect may no longer be valid given the S.Court decision, it appears the two-part test of (1) domestic injury and (2) whether Congress expressly provided for extraterritorial application of the predicate offense need to be met.

 

Court Again Dismisses Civil RICO Complaint Finding No “Domestic Injury”

(1)  Yanchukov v. Finskiy, 2017 WL 3491965 (SDNY, Aug. 14, 2017)

The court found the complaint and the counterclaims failed to establish domestic injury for purposes of the RICO statute, and thus dismissed the RICO claims. The Court therefore declined to exercise supplemental jurisdiction over the state-law claims.

The court discussed RJR Nabisco wherein the Supreme Court concluded that § 1964(c) does not overcome the presumption against extraterritoriality, the Court held that “[s]ection 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.” Id. at 2111 (emphasis added).

The court discussed that since RJR Nabisco, courts in this district have consistently held that determining the location of a RICO injury depends on where the plaintiff suffered the injury—not where the injurious conduct took place. Citing cases including the recent Dandong Old N.-E. Agric. & Animal Husbandry Co. v. Gary Ming Hu, No. 15 Civ. 10015, 2017 WL 3328239, at *11 (S.D.N.Y. Aug. 3, 2017). The court stated that particularly after the Supreme Court’s decision in RJR Nabisco, putative RICO violations are construed narrowly to adhere to the well-established presumption against extraterritoriality.” Dandong, 2017 WL 3328239, at *11.

Court Finds that There is No Domestic Injury

The court thus analyzed Plaintiffs’ claims in the SAC, and found it was clear that the alleged injuries suffered by Plaintiffs were not suffered domestically. Plaintiff Yanchukov is a Russian businessman, and co-Plaintiff Unique Goals, Faith Union, and Mangazeya are all incorporated or registered in the British Virgin Islands. Plaintiffs argument was not sufficient to show they suffered an injury in the United States.

White Tiger was a gold producer with mining properties in Peru, Quebec, and Russia that is now known as Mangazeya. The fact that Defendant Finskiy conducted business in the United States, held White Tiger board meetings in the United States, and diverted the allegedly ill-gotten funds to the United States for his use (see Dkt. No. 96 at 27), is irrelevant to determining whether Plaintiffs suffered a domestic injury under the Bascuñan test. See Ablyazov, 226 F. Supp. 3d at 281 (rejecting “any suggestion that an alleged RICO injury may be deemed ‘domestic’ or ‘foreign’ purely by reference to the location of the predicate acts that purportedly caused it”).

Moreover, it is of no moment that White Tiger (now Mangazeya) allegedly “has been impeded from accessing the United States capital markets, and has seen its business prospects in the United States severely diminished.” (Dkt. No. 96 at 27 (citing SAC ¶ 158).) If reputational injury leading to loss of access to U.S. markets were sufficient to support a determination of domestic injury, the exception would swallow the rule: any company could demonstrate domestic injury by alleging a diminished capacity to participate in the markets of the United States.

Ed Note: In the Second Circuit, civil RICO Attorneys should obviously focus on the locus of the Plaintiff who is alleged to have incurred the injury; even where the defendant operates his businesses in the U.S., and the predicate acts occur in the U.S., “domestic injury” may not be found. All of the case authority is SDNY district court cases; it remains to see how the Second Circuit will analyze RJR Nabisco.

 

 

Court Does Not Find “Domestic Injury,” Dismisses Civil RICO Complaint

Dandong Old North-East Agricultural & Animal Husbandry Co., Ltd., v Gary Ming Hu, 2017 WL 3328239 (S.D.N.Y., August 3, 2017)

Plaintiff Dandong Old North-East Agriculture & Animal Husbandry Co., Ltd. (“Plaintiff” or “Dandong”) alleged civil RICO claims against its former executive, Gary Ming Hu, and others, contending that Hu conspired with individuals and entities to defraud Plaintiff into paying above-market prices for tons of soybeans, and then laundered proceeds of that fraud through New York real estate purchases involving his ex-wife, Yuhua Wang, and their daughter, Esther Hu Mangan.

The court granted the joint motion of two other individual defendants Wang and Mangan (collectively, “Defendants”) to dismiss the claims asserted against them for failure to state a claim under RICO because it does not properly allege that Defendants’ conduct caused a domestic injury to its business.

Civil RICO “Domestic Injury” Requirement

Plaintiff alleges domestic injury by cataloging: (i) the damage to its reputation in the U.S. soybean market; (ii) its strong business connection to the U.S., including during the period of the alleged fraud; (iii) the losses it incurred over the life of the fraud, both early (in the form of overpayment and increased soybean costs) and late (in the form of reduced production and layoffs); and (iv) the costs incurred by Plaintiff in investigating and litigating Defendants’ fraudulent conduct.

Defendants countered that even if Plaintiff suffered from losing its soybean supplier in the United States, it felt the effects of that loss only in China, its country of incorporation and principal place of business. Further, Defendants argue that damage to Plaintiff’s reputation is considered a “personal injury and … not an injury to business or property within the meaning of 18 U.S.C. § 1964(c).” (Id. at 7 (quoting Hamm v. Rhone-Poulenc Rorer Pharms., Inc., 187 F.3d 941, 954 (8th Cir. 1999))).

Legal Analysis of “Domestic Injury”

The Supreme Court’s decision in RJR Nabisco set forth that putative RICO violations are construed narrowly to adhere to the well-established presumption against extraterritoriality. RJR Nabisco, 136 S. Ct. at 2108. This presumption holds that “federal laws will be construed to only have domestic application.” Id. at 2100. As relevant here, the Court in RJR Nabisco held that a private cause of action under 18 U.S.C. § 1962 requires a plaintiff to prove—with attention to both the elements specified above and the extraterritoriality limitations on certain predicate acts—a domestic injury to the plaintiff’s business or property.

The Supreme Court left open the question of determining what constitutes a domestic injury, and federal district courts have adopted one of two lines of reasoning: “[t]he first line … focuses on where the alleged injury was suffered. The second line … focuses on where the conduct occurred that caused the injury.” Id. (citing Cevdet Aksüt Oğullari Koll. Sti v. Cavusoglu, Civ. No. 2:14-3362, 2017 WL 1157862, at *4 (D.N.J. Mar. 28, 2017)).

SDNY Adopts Option One

The SDNY has adopted the former, locus-of-effects approach which determines the existence of a domestic injury by focusing on where the plaintiff felt the effects of the injury, and not where the defendant committed the injury-inducing acts.

Under this analysis, the court concluded plaintiff has failed to allege a domestic Injury to Its business rejecting arguments that Defendants caused domestic injury by substantially damaging Plaintiff’s reputation in the United States soybean market. The court rejected the view of the Plaintiff, citing to a Ninth Circuit district court case (Tatung), that the “domestic injury” requirement is satisfied so long as “the actions causing the injury took place primarily in the United States.”

The court stated that it explicitly adopted the approach described in Bascuñan, which defined a domestic injury to occur “where the plaintiff suffered the injury, not at all where the defendant’s alleged conduct took place.” Id.; see also Elsevier III, 2017 WL 1843298, at *5. The court discussed that Plaintiff sought to find a domestic injury with regard to soybean contracts that shipped the commodity outside the United States. Any deprivation of Plaintiff’s money was felt in China. And, in sharp contrast to Elsevier, Plaintiff was not deprived of its property in the United States; indeed, Plaintiff received all of the soybeans for which it contracted with U.S. suppliers. And while Defendants’ conduct may have impaired Plaintiff’s later ability to secure soybean suppliers in the United States, such a loss of potential business opportunities is not a cognizable domestic injury. In other words, Plaintiff’s expectation of continued contract counterparties among U.S. soybean suppliers is far too attenuated to suffice as a domestic injury under RICO.

Also, costs to investigate and litigate are not “domestic” simply because the alleged conduct that produced them occurred in the United States. Defendants may have engaged in fraudulent conduct within the United States, but “it does not follow that [Plaintiff was] injured” there. Elsevier II, 199 F. Supp. 3d at 788. Similarly, a foreign corporation cannot allege a domestic injury to its business if it only experiences the effects of an alleged RICO scheme abroad. Cevdet, 2017 WL 1157862, at *6.

Plaintiff here only felt the effects of Defendants’ overpricing scheme in China. After Defendants allegedly overpriced the soybean contracts and siphoned the excess funds, Plaintiff terminated ninety employees and reduced its soybean production in its Dandong City factory. And while Plaintiff did incur attorneys’ fees in the United States, those expenses were paid from China.

The court concluded that regardless of where the conspirators’ conduct took place, Plaintiff’s injury was felt in China, the only place its business had ever been located. In short, the Amended Complaint failed to plead domestic injury, and thus fails to state a claim under 18 U.S.C. § 1962(c).

The court also discussed “comity,” stating the Chinese government has prosecuted Gary Hu and sentenced him to twenty years’ imprisonment for his role in this very fraud. The Court stated that –

“Allowing [Plaintiff’s] RICO claims to proceed under these circumstances would be at odds with the Supreme Court’s directive that the need to enforce the presumption against extraterritoriality is ‘at its apex’ when remedies available in United States courts may conflict with those available abroad.”

Court Finds Civil RICO Conspiracy Claim Thus Fails

The court uses Salinas language, but is wrong in its conclusion. The court stated that to state a cause of action under conspiracy, a plaintiff must allege facts demonstrating an intent to further “an endeavor which, if completed, would satisfy all of the elements” of the substantive offense under 18 U.S.C. § 1962(c). Ritchie v. N. Leasing Sys., Inc., No. 12 Civ. 4992 (KBF), 2016 WL 1241531, at *8 (S.D.N.Y. Mar. 28, 2016) (quoting Baisch v. Gallina, 346 F.3d 366, 376-77 (2d Cir. 2003)).

But the court erred in concluding a RICO conspiracy claim “necessarily must fail if the substantive claims are themselves deficient.” See Salinas etc.

Ed Note: The civil RICO Attorney practitioner must be able to thoroughly understand the complex rules governing “extraterritoriality” and recognize the split in the circuits (Second v. Third/Ninth) on the application of the “domestic injury” rules.

Despite Errors in Citation and Analysis, Court Upholds Civil RICO Claim Alleging Criminal Copyright Infringement

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.