Second Circuit Finds District Court Properly Denied Civil RICO Claim Finding Failure to Allege Proximate Causation

Laydon v. Cooperative Robobank, __U.A., ___ 4^th Cir. __, (2d Cir., 2022 WL 1020850 (Oct. 18, 2022)

Plaintiff Jeffrey Laydon brought this putative class action against more than twenty banks and brokers, alleging a conspiracy to manipulate two benchmark rates known as Yen-LIBOR and Euroyen TIBOR. He claimed that he was injured after purchasing and trading a Euroyen TIBOR futures contract on a U.S.-based commodity exchange because the value of that contract was based on a distorted, artificial Euroyen TIBOR.

Plaintiff brought claims under various federal statutes and sought leave to assert claims under RICO, and leave to add the RICO claims was denied.  Plaintiff appealed, arguing that the district court erred by holding that he failed to allege proximate causation for his proposed RICO claims.  The Second Circuit affirmed the lower court’s decision.

Proximate Causation

To establish a RICO claim, a plaintiff must show: (1) a violation of the RICO statute, 18 U.S.C. § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of [§] 1962.” Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 120 (2d Cir. 2013) (citation omitted). As for this last requirement, “a plaintiff must … establish that the underlying § 1962 RICO violation was the proximate cause of his injury.” Empire Merchs., LLC v. Reliable Churchill LLLP, 902 F.3d 132, 140 (2d Cir. 2018) (cleaned up). “[T]he central question … is whether the alleged violation led directly to the plaintiff’s injuries.” Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006). As with proximate causation in the antitrust context, we “rarely ‘go beyond the first step’ ” in the causal chain. Empire Merchs., LLC, 902 F.3d at 141 (citation omitted); see also Anza, 547 U.S. at 459–60, 126 S.Ct. 1991 (looking to the directness of injury, “speculative nature of the proceedings,” risk of duplicative recoveries, and existence of more immediate victims when analyzing proximate causation in the civil RICO context).

Plaintiff failed to allege that his proposed RICO claims, premised on wire fraud, see 18 U.S.C. § 1343, proximately caused his injury. Plaintiff’s alleged injury does not flow directly from the first step in the causal chain. Not only does Plaintiff fail to allege any direct dealings with Defendants, but his asserted injury (a change in the value of his domestically traded Euroyen TIBOR futures contract) is several steps removed from Defendants’ alleged conduct (sending fraudulent Yen-LIBOR submissions to the BBA). Plaintiff thus cannot establish proximate causation for purposes of his RICO claims.   

For these reasons, the Court found the district court properly dismissed Plaintiff’s CEA and antitrust claims and denied leave to add civil RICO claims.  The Court thus affirmed the judgment and orders of the district court and dismissed the cross-appeal.

Plaintiff Adequately Pleaded Standing but Failed to Adequately Allege Violation of RICO

Grow Michigan LLC v. LT Lender Co., 2022 WL 5434276, __4^th __, (6^th Cir. 2022)

Grow Michigan (GrowMI) extended a $5,000,000 loan to Michigan-based start-up Lightning Technologies. Lightning eventually defaulted on the loan. GrowMI believes that Lightning’s default was the result of the actions of individuals and entities associated with Lightning that intentionally drove the company into the ground as part of a scheme to seize control of the company.

To recoup the losses, GrowMI sued those allegedly scheming parties for violating the Racketeer Influenced and Corrupt Organizations Act. GrowMI’s claims, however, rest on its status as Lightning’s creditor, making its injury derivative of the harm incurred by Lightning. Because GrowMI does not plausibly allege that it was directly injured by reason of defendants’ alleged racketeering activities, the Court affirmed the district court’s dismissal of GrowMI’s complaint.

1. Constitutional Standing

The Court found that the allegations were sufficient to show a traceable connection between conduct and injury. See Air Evac EMS, Inc. v. Cheatham, 910 F.3d 751, 760 (4th Cir. 2018) (explaining that an injury is traceable where the defendant’s actions impair a third party’s ability to pay the plaintiff).

• Proximate Cause Not Necessary to Show RICO Standing

Proximate Causation is not a jurisdictional requirement, citing to Lerner, 318 F.3d at 122 & n. 8, 129 (collecting cases) (explaining that a plaintiff can satisfy “the lesser burden for constitutional standing” irrespective of whether defendants’ conduct “proximately caused [its] injuries”); 

• Plaintiff Failed to State a RICO Claim

To state a civil RICO claim, a plaintiff must allege (1) two or more predicate racketeering offenses, (2) the existence of an enterprise affecting interstate commerce, (3) a connection between the racketeering offenses and the enterprise, and (4) injury by reason of the above.  So long as GrowMI can plausibly allege two of those five predicate acts, and, from the foundation of those two acts, the remaining elements of a RICO claim, it can meet its pleading obligations. 

However, GrowMI has not alleged facts sufficient to show that it was injured by reason of those offenses, and must show “that the defendant’s violation was both a factual and proximate cause of his injury.”  And proximate cause, as an aspect of RICO’s “by reason of” standard, has been understood to require a RICO plaintiff to show that the defendant’s racketeering offense “led directly to the plaintiff’s injuries.”  In that way, RICO’s directness requirement elevates a plaintiff’s burden by requiring more than a showing of mere foreseeability, the crux of common law causation principles. The court explained reasons why “[t]here is no need to broaden the universe of actionable harms to permit RICO suits by parties who have been injured only indirectly.” Id.  Thus, as to at least four of the five purported predicate acts, GrowMI has failed to allege that it was injured “by reason of” those acts. The “by reason of” standard precludes recovery where a plaintiff’s injuries are merely the “derivative or passed-on” result of the alleged racketeering activity. Trollinger, 370 F.3d at 614. That description encapsulates the nature of GrowMI’s claimed injuries. According to GrowMI, it incurred injuries due to a cascading series of wrongful acts committed by defendants to harm Lightning.

The court discussed that these same considerations have likewise led sister circuits to conclude that a RICO claim is customarily unavailable to creditors following a corporate default, stating that , “[a]llowing every shareholder, employee and creditor a cause of action for injuries derivative of those suffered directly by a corporation” would both authorize “a vast amount of [federal] litigation … that previously could only have been brought in state court” and also “create[ ] a potential avalanche of suits that previously could not have been brought at all.” 

GrowMI argued that even putting aside the other alleged predicate acts, its wire fraud allegation can support RICO’s pattern of racketeering activity requirement. GrowMI insists that it in fact alleged multiple acts of wire fraud, acts that together establish a pattern of racketeering activity. Whether GrowMI is correct that, as a legal matter, multiple acts of wire fraud can establish a “pattern of racketeering activity” and, in turn, that in this case it was directly injured by defendants’ wire fraud, ordinarily would be fair points for discussion.  But, in light of the court’s rejection of the first four predicate acts, GrowMI was left with only “one predicate act: wire fraud in violation of 18 U.S.C. § 1343,” yet “at least two predicate acts are required to establish a pattern of racketeering activity.” The court thus declined to address GrowMI’s argument that the five predicate acts here constituted a pattern of racketeering. 

To sum up, because GrowMI was not directly injured by reason of defendants’ bank fraud, unlawful transactions, or trade secrets misappropriation, all that remains for predicate act purposes is one count of wire fraud. And as a RICO plaintiff must allege “at least two acts of racketeering activity, the district court properly dismissed GrowMI’s complaint on that basis.

Court Affirms Dismissal of Civil RICO Action Finding it Barred by Res Judicata

Healy v. Fox, __4^th ___, 2022 WL 3582653 (8^th Cir., Aug. 22, 2022)

The court of appeals affirmed the district court’s dismissal of plaintiff’s (Bret) Racketeer Influenced and Corrupt Organizations Act (“RICO”) action, see 18 U.S.C. § 1962(c)–(d), in which the district court concluded that res judicata and the four-year RICO statute of limitations barred the action.

In 2017, plaintiffs asserted causes of action for common law offenses connected to the 1995 transfer of the ranch from the partnership to HRI was made without Bret’s knowledge or consent even though he was a partner with 50 percent ownership.  On October 13, 2017, the court granted summary judgment for the defendants on the ground that Bret’s claims were barred by the statutes of limitations because Bret had at least constructive knowledge more than six years prior to filing suit of the facts that formed the basis for his claims. The South Dakota Supreme Court affirmed. 

While his appeal in Healy I was pending, the South Dakota Supreme Court concluded that Bret’s quiet-title counterclaim was precluded because it “is an overt effort to litigate the same cause of action that he litigated in [Healy I].” Id. at 799. In March 2021, Bret brought a RICO action in federal court alleging mail fraud, bank fraud, see § 1962(c), and conspiracy to engage in a pattern of racketeering.  The defendants filed motions to dismiss for failure to state a claim. The district court granted the motions on the grounds that the RICO action was barred by res judicata and the four-year RICO statute of limitations. See Hope v. Klabal, 457 F.3d 784, 790 (8th Cir. 2006) (RICO statute of limitations).

The court affirmed the district court’s dismissal on the ground that Bret’s federal suit is barred by res judicata. “We review de novo the district court’s grant of a motion to dismiss for failure to state a claim based on res judicata.” Laase v. Cnty. of Isanti, 638 F.3d 853, 856 (8th Cir. 2011). “To survive a motion to dismiss for failure to state a claim, a complaint must allege sufficient facts to state a facially plausible claim to relief.” Cook v. George’s, Inc., 952 F.3d 935, 938 (8th Cir. 2020). “To determine whether a complaint states a facially plausible claim, the court must accept the factual allegations in the complaint as true and draw all reasonable inferences in the nonmovant’s favor.” Id.

A federal court must give to a state court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered.”  The judgment here was rendered in South Dakota.  Additionally, to apply res judicata in South Dakota, “there must have been a full and fair opportunity to litigate the issues in the prior adjudication.”  The parties agree that Healy I is a final judgment on the merits and that the parties in the two actions are the same.

The court first found the cause of action is the same in both the state and federal action. To make this determination, South Dakota law requires we look to the underlying facts which give rise to each cause of action.” If the claims arose out of a single act or dispute and one claim has been brought to a final judgment, then all other claims arising out of that same act or dispute are barred.”  “This is true regardless of whether there were different legal theories asserted or different forms of relief requested in a subsequent action.” Id. The court found that Bret’s RICO action is the same cause of action as Healy I.  Here, as in Healy II, “Bret is again addressing the same wrong he identified in [Healy I]—the alleged wrongful conduct by members of his family to vest HRI with ownership of the Ranch.” Id.

Second, in determining whether sameness in both the state and federal action, this RICO action “arises out of the same nucleus of operative fact” as Healy I.  The court concluded that the wrong Bret primarily sought to redress in both actions is the defendants’ depriving him of his ownership interest in the ranch.

Accordingly, the cause of the action is the same and res judicata barred the civil RICO action.

Court Affirms Dismissal of GM Lawsuit Finding that GM Had Not Adequately Alleged RICO Violations Were Proximately Caused by Fiat Chrysler and UAW Bribery Schemes

General Motors LLC v. FCA US LLC, 44 F. 4^th 548 (6^th Cir. 2022)

For almost a decade, executives at FCA US, LLC and its parent company, Fiat Chrysler Automobiles N.V., engaged in a pattern of racketeering, involving bribery and corrupt labor relations with the United Auto Workers (UAW). General Motors (GM) believes that it was the intended victim of the scheme and says it has suffered billions of dollars in damages because of it. GM accordingly sued FCA, Fiat, and various executives under the Racketeer Influenced and Corrupt Organizations Act (RICO). The district court granted defendants’ motions to dismiss, concluding that GM had failed to establish that the alleged RICO violations proximately caused its injuries and the Court of Appeals affirmed.

On November 20, 2019, GM sued FCA, Fiat, Iacobelli, Durden, and Brown, asserting three RICO claims against all defendants, one claim each under 18 U.S.C. § 1962(b), (c), and (d) asserting injury by virtue of the bribery scheme involving Fiat and the UAW. The district court granted the motions to dismiss stating that even assuming that FCA had committed the alleged RICO violations, the district court held that FCA’s alleged RICO violations were either indirect or too remote to have proximately caused GM’s alleged injuries.

Jurisdiction

Regarding jurisdiction in the Court, the question was whether, by naming a labor law as a RICO predicate, Congress “expressly carved out an exception to” the NLRB’s jurisdiction and the court found it did. Like the court in Butchers’ Union, the Court found it “hard to imagine that Congress would have made § 186 a RICO predicate act without the intention of making violations of § 186, which necessarily arise in the labor context, the basis of a RICO action brought in the district court.” Id. at 558. Whether, by expressly designating § 186 as a RICO predicate, Congress “has expressly carved out an exception to the” NLRB’s jurisdiction.  Thus, GM’s claims were properly before the district court.

Injury

GM’s allegations can be grouped into three distinct categories of injuries. First, GM alleges that from 2009–2015, FCA bribed the UAW to secure “unique competitive advantages.” Second, GM alleges that, during the same period, FCA directed the UAW to withhold those same benefits from GM. Finally, GM alleges that, through its bribes, FCA weaponized the 2015 pattern-bargaining process to harm GM. We begin with the competitive-advantage injuries.

• As in Anza, GM’s theory raises complex apportionment problems: What share of GM’s (unspecified) marketplace injuries are attributable to FCA’s unfair labor advantage, rather than to “other,  independent[ ] factors”? Id. at 458, 126 S.Ct. 1991 (quoting Holmes, 503 U.S. at 269, 112 S.Ct. 1311). Thus, it is impossible to “trace a straight line” from FCA’s conduct in violation of RICO to these injuries, precluding a finding of proximate cause. See Wallace v. Midwest Fin. & Mortg. Servs., Inc., 714 F.3d 414, 420 (6th Cir. 2013). And, of course, there is a more “immediate” victim: FCA workers. Anza, 547 U.S. at 460, 126 S.Ct. 1991. What didn’t work in Anza can’t work here.

• In Hemi Group, the plurality found proximate cause lacking because the City’s harm did not flow directly from the RICO predicate act (the failure to file Jenkins Act reports) but rather from “the customers’ failure to pay their taxes.” Id. at 11, 130 S.Ct. 983. And there was a more immediate victim (the State). Id. at 12, 130 S.Ct. 983. GM’s competitive-advantage theory of proximate cause fails under Hemi Group for the same reasons that it fails under Anza.

GM argues that this case is different because FCA intended to harm GM. Whatever purchase that formulation of proximate cause had at common law, see Restatement (Second) of Torts § 435A; Hemi Grp., 559 U.S. at 23–25, 130 S.Ct. 983 (Breyer, J., dissenting), the Supreme Court has squarely rejected it in this context. “A RICO plaintiff cannot circumvent the proximate-cause requirement simply by claiming that the defendant’s aim was to increase market share at a competitor’s expense.” Anza, 547 U.S. at 460, 126 S.Ct. 1991; Hemi Grp., 559 U.S. at 13, 130 S.Ct. 983.  

The court discussed that many of the schemes, like many at the heart of RICO conspiracies, use a middleman to accomplish their goals. See 18 U.S.C. § 1961(1) (bribery, extortion, money laundering, murder-for-hire). But the presence of an intermediate victim forecloses injury sought

The court concluded that GM’s inability to recover for the alleged denial of benefits follows from a straightforward application of elementary causation principles. And its inability to recover for FCA’s illicit competitive advantage follows from binding Supreme Court precedent.   In conclusion, the chain of causation between FCA’s bribes and GM’s injury is still too attenuated.

Court Rejects RICO Section 1962c Claim While Finding RICO Conspiracy Claim Sufficient To Withstand Summary Judgment

Corman v. Nationwide, 2002 WL 2952219 (E.D. Pa. July 26, 2022); Spokane v. Nationwide, 2022 WL 2974711 (E.D. Pa. July 27, 2022); Morgen v. Nationwide, 2022 WL 3042764 (E.D. Pa. Aug. 1, 2022)

In a ruling made by the Court on three related cases, the District Court denied defendants’ summary judgment motion on the RICO conspiracy claims while having found insufficient evidence to support the section 1962(c) substantive provision of RICO.  The defendants generally argued that since the RICO 1962(c) substantive claim and RICO 1962(c) vicarious liability claim were disposed of on summary judgment the RICO 1962(d) conspiracy relief claim should be summarily disposed.  Defendant’s argument was rejected.  THIS IS AN IMPORTANT DECISION AS IT REAFFIRMS THE THIRD CIRCUIT’S POSITION, CONTRARY TO EVERY OTHER CIRCUIT, THAT A RICO CONSPIRACY CLAIM MAY BE SUFFICIENT EVEN IF THE SUBSTANTIVE RICO-SECTION 1962C CLAIM FAILS.

Summary of Facts

Plaintiffs contended that Defendant the Nationwide Life Insurance Company (“Nationwide”) violated two sections of the ERISA, and two sections of the RICO statute, 18 U.S.C. §§ 1962(c)–(d), by taking certain actions as the insurer of life insurance policies which were devalued through a larger, complex scheme to swindle funds from welfare benefit plans operated by one John Koresko. 

Conduct Element for Section 1962(c)-   Service Providers

Section 1962(c) claims are premised on Defendant’s directly liable for a RICO violation, and the others are for vicarious liability for the actions of the two Koresko brothers and their various companies. Plaintiffs’ Section 1962(c) direct liability claim fails at the first element—conduct. That is because they have not demonstrated that Defendant took “some part in directing the enterprise’s affairs” which is necessary for a finding that it “conduct[ed] or participate[d]” in the conduct of the Koresko’s enterprise under Section 1962(c). Reves v. Ernst & Young, 507 U.S. 170, 178-79 (1993). Indeed, there is consensus that Section 1962(c) claims against outside professionals providing important services to a racketeering enterprise do not constitute claims that these professions directed the affairs of the enterprise. See, e.g., Azrielli v. Cohen L. Offs., 21 F.3d 512, 521-22 (2d Cir. 1994) (provision of legal services related to fraudulent real estate transaction was not management of the RICO enterprise conducting the fraudulent transaction); Other cases cited, Accord.*11 (Corman).    

Plaintiffs contend that Defendant Nationwide’s role went beyond merely providing a policy because the plan documents incorporate the terms of the Policy, which provide that Nationwide has “ultimate control over whether and how death benefits are to be paid and the amount of the benefits.” Though Plaintiffs use a variety of verbs to describe what Defendant did, they do not provide competent evidence that Defendant directed or exercised control regarding the enterprise’s affairs. Even assuming that Defendant acted as Plaintiffs say it did—which Defendant disputes—these actions are more akin to a service provider whose support, though integral to the enterprise, does not provide the basis for RICO liability. Defendant’s Motion for Summary Judgment on Plaintiffs’ Section 1962(c) direct liability claim shall therefore be granted.

Aiding and Abetting Liability

Plaintiffs’ theory of vicarious liability under Section 1962(c) is based on Petro-Tech, Inc. v. W. Co. of N.A., 824 F.2d 1349 (3d Cir. 1987) [“Petro-Tech”], a Third Circuit decision whose reasoning was undermined by the Supreme Court in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) [“Central Bank”]. Following the Court’s decision in Central Bank, the Third Circuit reconsidered whether aiding and abetting liability existed under RICO, and twice concluded that it did not. *12, citing cases. The court concluded that though Petro-Tech’s holding on aiding and abetting liability under RICO has been overruled, the viability of its holding on vicarious liability remains an open question as it has not been raised since the Central Bank, Rolo, Pa. Ass’n. trilogy of decisions. It is evident, however, that Petro-Tech’s holding on vicarious liability is equally undermined by the reasoning found in that trilogy. As with aiding and abetting, the text of RICO Section 1962 itself “does not in terms mention” vicarious liability, Central Bank, 511 U.S. at 175, nor does it contain any “indication that Congress intended to impose [vicarious liability] under RICO.” Rolo, 155 F.3d at 657. Indeed, while Section 1962(c) prohibits a person from “conduct[ing] or participat[ing], directly or indirectly” in a RICO violation, indirect participation does not encompass vicarious liability. The term “directly or indirectly” does not reach “persons who do not engage in the proscribed activities at all.” Central Bank, 511 U.S. at 176 (emphasis added). Vicarious liability, however, extends to principals who did not themselves engage in the violation. It thus exceeds the activity contemplated by an “indirect” RICO violation. Id.; Hayden v. Paul, Weiss, Rifkind, Wharton & Garrison, 955 F. Supp. 248, 255-56 (S.D.N.Y. 1997) (applying Central Bank to aiding and abetting liability under RICO Section 1962(c)).

The text of Section 1962(c) therefore does not support a private civil cause of action under a theory of vicarious liability, “in accordance with the policies articulated in Central Bank”, and, taking into account the textualist approach, courts are generally proscribed from implying one. Rolo, 155 F.3d at 657 (internal citation and quotation marks omitted). Plaintiffs’ Section 1962(c) vicarious liability claim therefore fails as a matter of law and Defendant’s Motion for Summary Judgment on this claim shall be granted.*13. 

Conspiracy Claim Sufficient To Withstand Summary Judgment

Plaintiffs’ third RICO claim—for conspiracy under RICO Section 1962(d)—survives summary judgment as Defendant does not make any viable arguments against this claim. Instead, it points to the arguments raised in its briefing against Plaintiffs’ 1962(c) claim, arguing that, “Plaintiffs’ Section 1962(d) claim must be dismissed for the same reasons that their section 1962(c) claims fails.  Defendant’s Section 1962(c) arguments do not address the following two elements of liability under Section 1962(d): “1) knowledge of the corrupt enterprise’s activities and 2) an agreement to facilitate those activities.” Smith v. Berg, 247 F.3d 532, 535 (3d Cir. 2001) (internal citation and quotation marks omitted). Defendant’s defense against Plaintiffs’ Section 1962(d) claim thus fails because it did not argue it “in a manner that permits the court to consider its merits.” United States v. Dupree, 617 F.3d 724, 728 (3d Cir. 2010).

Conspiracy Claim-  Statute of Limitations

Defendant also argues that Plaintiffs’ 1962(d) claim is untimely because by its calculations the statute of limitations had run by either 2013 or 2016—well before Plaintiffs filed this suit in August 2017. Civil RICO claims are subject to a four-year statute of limitations which begins to run when “plaintiffs knew or should have known of their injury.”  Defendant’s “task is not an easy one.” Id.

Defendant has failed to carry its burden. Defendant concedes that issues of fact preclude a determination as to whether Plaintiffs’ claims are timely under the subjective standard. It contends, however, that Plaintiffs’ claim is untimely under the objective prong because there were “storm warnings” in the form of the Department of Labor’s 2009 suit against the Koresko, a 2012 amendment of the complaint filed in that suit, and three articles published in 2009 which advertised the suit. Defendant argues these “storm warnings” put Plaintiffs on notice of their claims in 2009 or 2012 and that they failed to exercise reasonable diligence to bring their claims. Plaintiffs counter that they did exercise reasonable diligence by regularly requesting information on the Policy from Koresko and his affiliates and the Defendant. They, however, contend that they could not learn of the racketeering conduct which gave rise to the instant action because Koresko, his affiliates, and Defendant (at Koresko’s and PPT’s instruction) did not respond to Plaintiffs’ requests for information about the Policy. On these facts, there exists a genuine issue of material fact as to whether Plaintiffs exercised due diligence on their RICO claims, which dispute must be left for the jury to resolve at trial. 

Court Finds “Common Sense Inference of Reliance” in Finding a Civil RICO Claim Properly Alleged

White v. Symetra Assigned Benefits Service Co., 2022 WL 3092849 (W.D. Wash., August 3, 2022)

Defendant Symetra Assigned Benefits Service Company’s (“SABSCO”) and Defendant Symetra Life Insurance Company’s (“Symetra”) purchased future payments under structured settlement annuities (“SSAs”) they administered. Plaintiffs are two individuals who settled personal-injury lawsuits for lump sum and periodic payments. The tortfeasors in those settlements assigned their obligations to make periodic payments to SABSCO. SABSCO then purchased an SSA from its affiliate Symetra to fund and administer the future payments. Plaintiffs later sold their rights to future payments to SABSCO in exchange for immediate lump sum payments at a significant discount. Plaintiffs alleged Defendants’ solicitation of their rights to the future payments under the SSAs was predatory and the result of an illegal business scheme designed to induce annuitants into selling their future payments at a steep discount. Plaintiffs pursued claims including RICO claims.  Plaintiffs bring this action individually and on behalf of others who similarly sold their right to future payments to Defendants.

Enterprise Elements Not Correctly Discussed

The court analyzed the civil RICO elements, first, for enterprise: (1) common or shared purpose between the individuals associated with it; (2) it must be an ongoing, functioning organization; and (3) there is an ascertainable structure distinct from the conduct the racketeering activity. See United States v. Turkette, 452 U.S. 576, 583 (1981).  Importantly, the court did not cite to the Supreme Court’s most recent opinion on association in fact enterprise, Boyle v. United States, which found the “ascertainable structure” element for an association in fact enterprise not relevant.  The Court found Plaintiffs have demonstrated that the elements to their 1962 RICO claim will be shown through common proof, which suffices to show predominance.

Reliance Can Be Inferred From the Facts

The court addressed the “reliance” element when alleging a mail or wire fraud.   The court found that Plaintiffs correctly asserted that a common sense inference of reliance should apply to the claims asserted. The court discussed that the Second, Fifth, Tenth, and Eleventh Circuits have applied a common sense inference of reliance when it follows logically from that nature of the alleged scheme. In In re U.S. Foodservice Inc. Pricing Litig., the Second Circuit affirmed a class of customers who were allegedly overbilled by a food distributer. 729 F.3d 108, 120 (2d Cir. 2013). The court reasoned that “customers who pay the amount specified in an inflated invoice would not have done so absent reliance upon the invoice’s implicit representation that the invoice amount was honestly. owed.” Id. Similarly, in Klay v. Humana, Inc., the Eleventh Circuit upheld the certification of a class of physicians claiming that health maintenance organizations misrepresented that they would pay them for services, but instead underpaid them. 382 F.3d 1241, 1259-61 (11th Cir. 2004). The Court explained that a jury could find a common inference of reliance on the misrepresentations by concluding that plaintiffs “in entering into contracts with defendants relied upon the defendants’ representations and assumed they would be paid the amount due.” Id. at 1259. The Court also reasoned that “while each plaintiff must prove reliance, he or she may do so through common evidence (that is, through legitimate inferences based on the nature of the alleged misrepresentations at issue).” Id. at 1258.

In CGC Holding Co., LLC v. Broad & Cassel, the Tenth Circuit approved a common sense inference of reliance to certify a class when a class of borrowers alleged that lender defendants fraudulently induced plaintiffs into paying up-front fees in exchange for loan commitments that the lenders had no intention of providing. 773 F.3d 1076, 1091–92 (10th Cir. 2014). In affirming the class certification, the Court explained that class wide payment of a nonrefundable up-front fee lended itself to a generalized inference of reliance on the misrepresentation and omissions regarding defendants’ ability or intent to actually fund the promised loan. Id. Lastly, in Torres v. S.G.E. Mgmt., L.L.C., the Fifth Circuit concluded that if plaintiffs could prove defendant’s company was a fraudulent pyramid scheme, they were entitled to use a common sense inference of reliance to prove causation. 838 F.3d 629, 643 (5th Cir. 2016). The court held that “a jury may reasonable infer that, in deciding to pay to [join the company], the Plaintiffs relied on [defendant’s] implicit representation that it is a legal multi-level marketing program …” Id.

These cases are distinguishable from the facts in the Ninth Circuit case Poulos in that the schemes alleged by plaintiffs in each respective case lends themselves to a logical inference of reliance and plaintiffs put forth common, circumstantial evidence that class members relied on the fraud. See also Kennedy v. Jackson Nat. Life Ins. Co., No. C 07-0371 CW, 2010 WL 2524360 (N.D. Cal. June 23, 2010) where Kennedy involved the purchasing of a deferred annuity that plaintiff later learned was worth substantially less. There, the court found that a common sense inference could be found because no reasonable person would have purchased “such an unsatisfactory investment product had [d]efendant disclosed the facts [p]laintiff alleges it either misrepresented or failed to disclose.” Id. at *2.

The Court finds that a common sense inference of reliance applies to Defendants’ misrepresentations and omissions. The Court finds the facts presented here are similar to those in Kennedy. There, the court reasoned that “[d]efendant’s uniform use of the term ‘bonus,’ its failure to disclose material information, and class members’ purchase of annuities that are high cost, illiquid and poorly performing …” was evidence of a class wide inference of reliance. 2010 WL 2524360 at *8. The court explained that “a reasonable inference could be drawn that class members would not have purchased [the annuities] had they been fully informed about material facts.” Id. The same logic applies here. Common, uniform marketing materials that are misleading and designed to capitalize on a pre-existing relationship give rise to a common sense inference that no individual would factor with a company whose rates are subpar and whose transactions are not in the individual’s best interest, unless that individual relied on the representations. Given the inference of reliance will be imparted to the class as a whole, individual issues of reliance will not predominate such that it defeats predominance and commonality.

Second Circuit Affirms Dismissal of Civil RICO Claims For Want of Subject-Matter and Personal jurisdiction

Daou v. BLC Bank, S.A.L., __4^th__, 2022 WL 2948910 (2d Cir., July 26, 2022)

Second Circuit Affirms Dismissal of Civil RICO Claims For Want of Subject-Matter and Personal jurisdiction

Plaintiffs alleged that Defendants-Appellees (together, “the Commercial Banks”) engaged in a scheme to cheat them out of millions of U.S. dollars (“USD”) by inducing them to deposit dollars in Lebanese bank accounts with the promise that they would be able to withdraw that money in the United States, only to renege on that promise and keep the money trapped in Lebanon. The Court found the district court properly dismissed the claims against certain banks because the Daous’ agreements with those banks included valid, enforceable forum selection clauses specifying Beirut as the proper forum; those against Bank CL because it lacked personal jurisdiction over that bank; and those against Bank BDL because that bank is an agency or instrumentality of the Lebanese state and no exception applied under the Foreign Sovereign Immunities Act (“FSIA”).   

The FAC had asserted claims of civil conspiracy, fraud, issuance of dishonored checks, violations of Florida statutes on collection instruments, breach of contract, conversion, unjust enrichment, promissory estoppel, and civil RICO violations, all of which turn on alleged measures taken by Lebanese banks in Lebanon to ensure that USD deposits remained in that country. The FAC, unlike the complaints in Licci and Rushaid, does not include a single allegation that any defendant used an actual, specific transaction through a New York correspondent account in the course of bringing about the injuries on which the claims are predicated – namely, that the Daous’ USD remained in Lebanon.

The Court thus held that the district court lacked personal jurisdiction over AM, BLC, and CL (together, “the Commercial Banks”) under the relevant provision of New York’s long-arm statute because there was insufficient connection between the Daous’ claims against the Commercial Banks and those banks’ business transactions in New York. Having so held, the court had no occasion to consider the enforceability of the forum selection clauses. The Court held further that BDL, an agency or instrumentality of a foreign sovereign, is entitled to sovereign immunity. Contrary to the Daous’ argument, the FSIA’s commercial activity exception does not apply, because any commercial activity on BDL’s part that forms part of the gravamen of the Daous’ complaint did not have a direct effect in the United States.

Court Finds Sufficient Concrete Monetary Losses for Plaintiff to Have Standing and Finds Plaintiff Adequately Alleged Civil RICO Violations

Bell v. Dave, 2022 WL 2667017 (D.N.J., July 11, 2022)

Defendants filed a motion to dismiss the class action complaint of plaintiffs for lack of jurisdiction and failure to state a claim under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).   The court rejected these claims.

Standing

To have standing, the Plaintiff must show concrete monetary losses, and the court did so find.  The court discussed that in sum, the Complaint alleges that “every bottle of Synergy Kombucha contains greater than 0.5% ABV by the time the product reaches consumers” that the beverage has “no legal market value on any legitimate markets” and that Plaintiffs “would not have purchased or consumed said products had [they] known the true alcohol contents of said beverages,” which was an illicit beverage.

The court disagreed with Defendant’s assertions, specifically stating the Court must accept Plaintiffs’ factual allegations as true and plaintiffs do not need to prove their case at the pleading stage. Defendants may ultimately prevail on this issue on summary judgment or at trial after having the benefit of discovery and a more substantial factual record. 

Regarding the concreteness of the injury, the Court also stated that a plaintiff may sufficiently plead injury-in-fact by alleging that the consumer product she purchased was worth less than what she paid for. See In re Johnson & Johnson Talcum Powder, 903 F.3d at 285. “Plaintiff[s] may rely on the testing results attached to [their] complaint to nudge [their] claims based on” defendant’s misrepresentations “across the line from conceivable to plausible.” 

The court concluded that plaintiffs have plausibly alleged a concrete and particularized injury, fairly traceable to the conduct of Defendants, that may be redressed by an award of monetary damages. Therefore, Plaintiffs had standing to pursue monetary damages. 

RICO Enterprise

Plaintiffs bring a RICO claim against GT Dave, as “a person who was employed by or associated with GT’s Living Foods, an enterprise,” for “conduct[ing] or participat[ing] directly or indirectly, in the conduct of that enterprise’s affairs through a pattern of racketeering activity.” The Complaint alleges that GT Dave, the sole shareholder and chief executive officer of GT’s Living Foods, “being a person who was employed by or associated with [GT’s Living Foods], an enterprise, conducted or participated, directly or indirectly, in the conduct of that enterprise’s affairs through a pattern of racketeering activity.” Plaintiffs allege that GT Dave “manages and exercises control over the day-to-day activities of Defendant GT’s Living Foods and he is the individual primarily responsible for the conduct of Defendant GT’s Living Foods and the continuing violations of federal and state law alleged herein.” (Id. ¶ 11). Therefore, Plaintiffs sufficiently allege GT Dave, the person, participated in a pattern of racketeering activity.

N.J. Statute

For the reasons discussed in Section II.B.(i), supra, the Court is satisfied that Plaintiffs sufficiently pleaded mail fraud and Travel Act violations as NJRICO predicate acts. As previously noted, Plaintiffs allege the following series of facts: GT Living Foods distributes Synergy Kombucha products to retail stores throughout New Jersey and the United States where it is sold among non-alcoholic beverages available to consumers of all ages and markets Synergy Kombucha as a health product on its label.  Plaintiffs would not have purchased and/or consumed Synergy Kombucha from retail stores had they known the true alcohol content and/or that Synergy Kombucha was an alcoholic beverage; both Defendants either knew or should have known that every bottle of Synergy Kombucha contains greater than 0.5% ABV by the time it reaches consumers; and GT Dave is the sole shareholder and chief executive officer of GT’s Living Foods. Accepting the allegations as true, Plaintiffs sufficiently alleged that Defendants are engaged in trade or commerce and that GT Dave participated in the conduct of the affairs of GT’s Living Foods through a pattern of racketeering activity that proximately caused Plaintiffs’ injuries.

The Sixth Circuit joined the majority of its sister circuits in adopting the forum-state approach and holding that § 1965(b) of the RICO statute governs service over out-of-district defendants

Peters Broadcasting Engineering Inc. v. 24 Capital LLC, 2022 WL 2708989, __ 4^th Cir. __ (6^th Cir.  July 13, 2022)

The court affirmed the lower court’s ruling holding that 18 U.S.C. § 1965(b) governs service over out-of-district defendants and requires that at least one defendant has minimum contacts with the forum state.  The Sixth Circuit joins the majority of circuits which have so held.

After forming a contract, 24 Capital, LLC (“24 Capital”) believed Peters Broadcast Engineering, Inc. (“Peters Broadcast”) breached their agreement. 24 Capital received a judgment by confession in New York state court. Then Peters Broadcast brought this suit in the Southern District of Ohio, alleging that 24 Capital and its Operations Manager, Jason Sankov, engaged in a scheme in violation of “RICO” 18 U.S.C. § 1962. The district court granted the defendants’ motion to dismiss for lack of personal jurisdiction. Peters Broadcast appeals, arguing the district court erred in interpreting the RICO provision authorizing nationwide exercise of personal jurisdiction in certain circumstances.

Following the majority approach, the district court found that no defendant had minimum contacts with Ohio, and thus Peters Broadcast did not establish personal jurisdiction under RICO. Because Peters Broadcast did not assert sufficient facts to establish that the court had personal jurisdiction over either defendant and did not specifically allege how the claims arose from conduct within Ohio, the court held it lacked personal jurisdiction under RICO and pendent jurisdiction for the state law claims.

The Sixth Circuit discussed why the majority approach was the proper approach discussing that reading § 1965(d) to allow service upon anyone with “nationwide contacts” to sufficiently confer jurisdiction would render § 1965(b) superfluous. The forum-state approach ensures that no subsection is redundant: it allows the exercise of jurisdiction over nonresident defendants to the extent due process and “the ends of justice” require only if there is another defendant with minimum contacts in the forum. *5.

The court provided a few clarifications to ensure meaning is conferred upon each subsection of the statute discussing that § 1965(a) provides for venue, not jurisdiction. Because subsection (a) is not jurisdictional, another rule—such as Federal Rule of Civil Procedure 4(k)(1)(A) and the relevant state’s long-arm statute—is required to establish personal jurisdiction over an initial defendant. Then, § 1965(b) extends personal jurisdiction through nationwide service of process over “other parties residing in any other district,” as long as venue is proper through (a) with that initial defendant and the “ends of justice” require it.*6.  Section 1965(c) is not jurisdictional and simply describes subpoena procedure. Similarly, § 1965(d) is not jurisdictional. Subsection (d) extends to “other process” that differs from a summons or subpoena, such as notifying a party of an injunction or an order committing a person for civil contempt of a decree. 

The court discussed that the majority approach ensures that there will be at least one federal forum for all defendants in a single civil RICO trial.

The Court thus joined the majority of our sister circuits in adopting the forum-state approach and holding that § 1965(b) governs service over out-of-district defendants.  In applying these principles to the facts at hand, the court found that Peters Broadcast bears the initial burden to make a prima facie case for personal jurisdiction by establishing that either 24 Capital or Sankov has minimum contacts with Ohio. Further, even if Peters Broadcast had established a prima facie case of personal jurisdiction under RICO, the burden then shifts to the defendants to support their motion to dismiss with evidence. See Malone, 965 F.3d at 504. 24 Capital and Sankov did precisely this in their motion to dismiss.*7.   

Thus, pursuant to the forum-state approach, Peters Broadcast may file its civil RICO action “in a district court where personal jurisdiction can be established over at least one defendant,” and then “summonses can be served nationwide on other defendants if required by the ends of justice.” See Laurel Gardens, 948 F.3d at 120 (citation omitted).*8. 

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.