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2009 U.S. Dist.

LEXIS 33143, *

GRANGE MUTUAL CASUALTY CO., et al., Plaintiffs, v. JONI L. MACK, Defendant.

Civil Action No. 6: 06-555-DCR

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF


KENTUCKY, SOUTHERN DIVISION

2009 U.S. Dist. LEXIS 33143

April 17, 2009, Decided


April 17, 2009, Filed

PRIOR HISTORY: Grange Mut. Cas. Co. v. Mack, 2007 U.S. Dist. LEXIS 59903 (E.D.
Ky., Aug. 14, 2007)

CORE TERMS: conspiracy, conspirator, post-2002, predicate act, racketeering activities,


statute of limitations, accrual, co-conspirator, limitations period, discovery rule, cause of
action, summary judgment, continuity, racketeering, fraudulent, billing, insurance law,
overt act, physical therapy, citation omitted, material fact, furtherance, discovery, joined,
patients, independent acts, management position, nonmoving party, wire fraud, favorable

COUNSEL: [*1] For Grange Mutual Casualty Co., Grange Indemnity Insurance Co.,
Plaintiffs: Amy Denise Cubbage, Christopher S. Burnside, Robert W. Dibert, LEAD
ATTORNEYS, Frost Brown Todd LLC - Louisville, Louisville, KY.

For Trustgard Insurance Co., Plaintiff: Christopher S. Burnside, Robert W. Dibert, LEAD
ATTORNEYS, Frost Brown Todd LLC - Louisville, Louisville, KY.

For Joni L. Mack, Defendant: Russell B. Morgan, LEAD ATTORNEY, Jonathan D.


Rose, Bradley Arant Boult Cummings LLP - Nashville, Nashville, TN.

JUDGES: Danny C. Reeves, United States District Judge.

OPINION BY: Danny C. Reeves

OPINION

MEMORANDUM OPINION AND ORDER

This matter is pending for consideration of Defendant Joni Mack's ("Mack") motion to
dismiss or, in the alternative, motion for summary judgment. [Record No. 23] Plaintiffs
Grange Mutual Casualty Company, Grange Indemnity Insurance Company, and

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Trustguard Insurance Company oppose the motion and ask that the Court allow their suit
to go forward. For the reasons discussed herein, the Court will deny Mack's motion to
dismiss and her alternative motion for summary judgment.

I. Background

At issue is an alleged conspiracy involving expenses charged to Plaintiffs for unnecessary


or nonexistent medical supplies and procedures. [*2] Members of the conspiracy include
health care providers, medical diagnostics centers, medical technicians, and various
affiliated individuals who are claimed to have submitted fraudulent bills to Plaintiff
insurance companies beginning in at least 1998. Specifically, these bills were for
electrodiagnostic nerve studies ("NCV tests"), magnetic-resonance imaging tests
("MRIs"), medical equipment, and physical therapy services, all of which were
improperly rendered to patients being treated for vehicle accident-related injuries. The
conspirators allegedly "coached" referring physicians to document patients' records in
such a way as to justify NCV tests and MRIs. Thereafter, the physicians leased the NCV
and MRI testing equipment from the conspirators -- a number of whom are NCV
technicians -- and these technicians conducted the tests. As part of this alleged scheme,
the conspirators operated clinics, like the Injury & Rehab Centers of KY ("IRC"), which
catered specifically to victims of automobile accidents. The IRC overcharged Plaintiff
insurance companies through double-billing, manipulating billing codes, providing
unnecessary supplies, and billing for services provided by unlicensed, [*3] rather than
licensed, medical practitioners. Plaintiffs paid these charges pursuant to Kentucky's "no-
fault" insurance law, which requires insurance companies to pay for certain "reasonable
charges incurred" from motor vehicle accidents. [Record No. 1] However, they allege
that the tests were of no diagnostic value for the patients, and that the tests did not assist
or change the physicians' medical opinion or care of the patients. In short, the physicians,
together with the conspirators, formed a scheme to exploit Kentucky insurance laws
through fraudulent billing and medical testing practices, all for their own financial gain.

Plaintiffs earlier initiated a civil RICO cause of action against Mack's husband and other
members of the alleged conspiracy. See Grange Mut. Cas. Co. v. Mack, No. 3: 02-110
(E.D. Ky., filed Dec. 4, 2002) [hereafter, Grange I]. Here, Plaintiffs allege that Mack
joined this conspiracy in January 2003 when she became an employee and assumed a
management position with the IRC, a named co-conspirator in Grange I. In her role as a
co-conspirator, Mack allegedly instructed IRC employees to bill for specific treatments
whether or not they had been prescribed or properly [*4] performed. It was further
alleged that she caused computers and documents to be removed, withheld, and/or
destroyed during discovery in Grange I. As a result, Plaintiffs filed a Complaint with this
Court on December 28, 2006, stating claims against Mack under (1) the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(c) - (d); (2)
common law fraud and conspiracy; (3) theft by deception, K.R.S. §§ 514.040, 446.070;
and (4) fraudulent insurance acts, K.R.S. § 304.47-020. [Record No. 1] These claims
stem from Mack's above-described post-2002 acts, as well as from her joint and several
liability for other co-conspirators' acts.

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On December 22, 2008, Mack filed the present motion to dismiss or, in the alternative,
for summary judgment. She argues that Plaintiffs' claims are barred by the four-year
statute of limitations for RICO claims and that the acts attributed to her cannot constitute
a civil RICO claim.

II. Standard of Review

This Court will grant a motion to dismiss under Rule 12(b)(6) "only if it is clear that no
relief could be granted under any set of facts that could be proved consistent with the
allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 81 L. Ed. 2d
59 (1984). [*5] A court must construe the complaint in a light most favorable to the
plaintiff, accept all the factual allegations as true, and determine whether the plaintiff
undoubtedly can prove no set of facts in support of his claims that would entitle him to
relief. See Ley v. Visteon Corp., 540 F.3d 376, 380 (6th Cir. 2008); Lillard v. Shelby
County Bd. of Educ., 76 F.3d 716, 724 (6th Cir. 1996). "Factual allegations contained in
a complaint must raise a right to relief above the speculative level." Bassett v. Nat'l Coll.
Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008) (citing Bell Atl. Corp. v. Twombly, 550
U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). In other words, the plaintiff's
arguments "require[] more than labels and conclusions, and a formulaic recitation of the
elements of a cause of action will not do." Twombly, 127 S. Ct. at 1964-1965. However,
heightened fact pleading of specifics is not required -- only enough facts to state a claim
to relief that is plausible on its face. See Bassett, 528 F.3d at 426. The Court may
consider the Complaint, as well as "any exhibits attached thereto, public records, [and]
items appearing in the record of the case." Amini v. Oberlin Coll., 259 F.3d 493, 502 (6th
Cir. 2001) [*6] (citation omitted).

The standard for summary judgment differs significantly. Instead of focusing solely on
the Complaint and relevant attachments, a court must consider whether "the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c); Celotex
Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Chao v.
Hall Holding Co., 285 F.3d 415, 424 (6th Cir. 2002). A dispute over a material fact is not
"genuine" unless a reasonable jury could return a verdict for the nonmoving party. That
is, the determination must be "whether the evidence presents a sufficient disagreement to
require submission to a jury or whether it is so one-sided that one party must prevail as a
matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S. Ct. 2505,
91 L. Ed. 2d 202 (1986); Harrison v. Ash, 539 F.3d 510, 516 (6th Cir. 2008).

The party moving for summary judgment bears the burden of showing conclusively that
no genuine issue of material fact exists. CenTra, Inc. v. Estrin, 538 F.3d 402, 412 (6th
Cir. 2008). Once a moving [*7] party has met its burden of production, "its opponent
must do more than simply show that there is some metaphysical doubt as to the material
facts." Sigler v. American Honda Motor Co., 532 F.3d 469, 483 (6th Cir. 2008) (citing
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348,
89 L. Ed. 2d 538 (1986)). The nonmoving party cannot rely upon the assertions in its

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pleadings; rather, that party must come forward with probative evidence such as sworn
affidavits, to support its claims. Celotex, 477 U.S. at 324. In making this determination,
the Court must review all the facts and the inferences drawn from those materials in the
light most favorable to the nonmoving party. Matsushita, 475 U.S. at 587.

III. Analysis

RICO authorizes a civil cause of action for any person injured in his business or property
by reason of a violation of 18 U.S.C. § 1962. 18 U.S.C. §§ 1961 et seq. In turn, § 1962
lays out a list of prohibited "racketeering activities," which includes mail or wire fraud, as
well as conspiracy to commit those offenses. To allege a RICO violation, a plaintiff must
establish that the defendants engaged in a "pattern of racketeering activities," defined as
"at least two acts of racketeering [*8] activity, one of which occurred after the effective
date of this chapter and the last of which occurred within 10 years . . . after the
commission of a prior act of racketeering activity." 18 U.S.C. § 1961(5). The two acts of
racketeering activity Mack is alleged to have committed are mail or wire fraud and
withholding or destroying evidence, both violations of 18 U.S.C. § 1341 or 1343, and 18
U.S.C. § 1512(b) or (c), respectively. Both are contemplated as "racketeering activity"
under 18 U.S.C. § 1961(1). However, Mack urges the Court to dismiss the suit against
her based on application of the four-year statute of limitations and failure of the acts
alleged to constitute a valid civil RICO claim.

A. Civil RICO Statute of Limitations

Because RICO does not actually contain a statute of limitations provision, both the
limitations period and its accrual have been the subject of some debate and confusion in
past years. See PAUL BATISTA, CIVIL RICO PRACTICE MANUAL § 4.13 (3d ed.
2008). However, the Supreme Court has stated that civil RICO actions are subject to a
four-year statute of limitations. See Agency Holding Corp. v. Malley-Duff & Associates,
Inc., 483 U.S. 143, 156, 107 S. Ct. 2759, 97 L. Ed. 2d 121 (1987). In Klehr v. A.O. Smith
Corp., 521 U.S. 179, 117 S. Ct. 1984, 138 L. Ed. 2d 373 (1997), [*9] and Rotella v.
Wood, 528 U.S. 549, 120 S. Ct. 1075, 145 L. Ed. 2d 1047 (2000), the Supreme Court
rejected both the "last predicate act" accrual rule and the "injury and pattern discovery"
accrual rule used by a number of federal appellate courts.

The Sixth Circuit had previously applied the "injury and pattern discovery rule" which
dictates that "a civil RICO cause of action begins to accrue as soon as the plaintiff
discovers, or reasonably should have discovered, both the existence and source of his
injury and that the injury is part of a pattern." Isaak v. Trumbull Sav. & Loan Co., 169
F.3d 390, 399 (6th Cir. 1999) (internal citations omitted). However, in Klehr and Rotella,
the Supreme Court rejected the last predicate act rule and the injury and pattern discovery
rule, leaving open the possibility of two remaining accrual rules: the "injury discovery"
rule and the "injury occurrence" rule. Rotella, 528 U.S. at 554.

Under the injury discovery rule, the statute of limitations is activated "when a plaintiff
knew or should have known of his injury." Id. at 553. Although the Sixth Circuit has not

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explicitly adopted a new accrual rule, it has applied the injury discovery rule in its few
post-Rotella civil RICO cases. See Taylor Group v. ANR Storage Co., 24 F. App'x 319,
325 (6th Cir. 2001) [*10] (unpublished); Sims v. Ohio Cas. Ins. Co., 151 F. App'x 433
(6th Cir. 2005) (unpublished). Accordingly, the Court will apply that rule to the foregoing
analysis.

Because the Plaintiffs' Complaint details injuries identical to the injuries asserted in
Grange I, Mack argues that Plaintiffs knew of their injury in the present case by at least
December 4, 2002 (the time of the Grange I filing). At that time, Mack held a
management position with the IRC and was married to co-conspirator Greg Mack. Mack
argues that this information should have alerted Plaintiffs that Mack -- along with other
implicated conspirators -- had violated RICO and other state laws. As a result, Mack
contends that the present action which was filed on December 26, 2006, is outside the
four-year statute of limitations for a civil RICO claim. In support, Mack has provided an
affidavit from the payroll administrator at IRC which states that Mack held a
management position with the IRC before and on December 4, 2002. [Record No. 23,
Attach. 2]

The Plaintiffs allege that Mack joined the conspiracy in January 2003 and since then,
personally committed two acts of racketeering in furtherance of the Grange I conspiracy.
The [*11] specific acts include Mack instructing IRC employees to bill Plaintiffs for
physical therapy treatments that were not actually or properly conducted, as well as Mack
causing computers to be removed from the IRC and replaced with computers that did not
contain Grange I information. [Record No. 1] Plaintiffs acknowledge that illegal acts
committed by Mack's co-conspirators occurred more than four years before their filing
the current suit; however, they argue that Mack is liable for the damages based on the
common-law principle that co-conspirators may be held liable for acts committed prior to
their joining the conspiracy. See United States v. Gravier, 706 F.2d 174, 177 (6th Cir.
1983). Plaintiffs also argue that their claim against Mack eludes the statute of limitations
because her post-2002 acts started the running of a new limitations period.

1. Mack's Post-2002 Acts as Independent Acts Triggering a New Statute of Limitations

The Plaintiffs allege that Mack's post-2002 acts were a new set of racketeering activities
that triggered the running of a new statute of limitations separate from any statute of
limitations that may have accrued as a result of Grange I. In support, they cite [*12] the
Supreme Court's decision in Zenith Radio Corp. V. Hazeltine Research, Inc., 401 U.S.
321, 91 S. Ct. 795, 28 L. Ed. 2d 77 (1971): "[E]ach time a plaintiff is injured by an act of
the defendants a cause of action accrues to him to recover the damages caused by that act
and that, as to those damages, the statute of limitations runs from the commission of the
act." Zenith, 401 U.S. at 338. However, in Zenith itself, and later in Klehr, the Supreme
Court clarified this language by pointing out that "a separate new overt act generally does
not permit the plaintiff to recover for the injury caused by old overt acts outside the
limitations period." Klehr, 521 U.S. at 190. In essence, Plaintiffs are asking the Court to
apply the last predicate act accrual rule which starts the limitations period running anew

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each time a predicate act of racketeering is committed. The Supreme Court clearly
rejected this accrual rule in Klehr:
[S]ome Circuits have adopted a 'separate accrual' rule in civil RICO cases, under which
the commission of a separable, new predicate act within a 4-year limitations period
permits a plaintiff to recover for the additional damages caused by that act. But, as in the
antitrust cases, the plaintiff cannot [*13] use an independent, new predicate act as a
bootstrap to recover for injuries caused by other earlier predicate acts that took place
outside the limitations period.
Klehr, 521 U.S. at 190.

This accrual rule was rejected in large part because it struck at the heart of one of the
main objectives of civil RICO -- by discouraging plaintiffs from exercising diligence in
their private investigations. Id. at 187. "The object of civil RICO is thus not merely to
compensate victims but to turn them into prosecutors, private attorneys general, dedicated
to eliminating racketeering activity." Rotella, 528 U.S. at 557-558 (citation omitted).
Civil RICO actions are intended to have a "public benefit" that should be realized through
"prompt litigation." Id. The last predicate act accrual rule lengthens the period of time
that plaintiffs have to file their causes of action, therefore allowing plaintiffs to "sit" on
their claims for an indefinite period. To discourage such behavior and encourage
diligence, the Supreme Court has strongly and repeatedly emphasized its preference for a
shorter accrual period.

However, recognizing the need for a counterpoint to a perhaps inflexible strict accrual
rule, the [*14] Supreme Court at every turn has affirmed the availability of equitable
tolling in civil RICO cases. See Klehr, at 194-196; Rotella, 528 U.S. at 560-561. This
doctrine allows a plaintiff to assert a civil RICO claim where a defendant has taken steps
to conceal his existence or activities through fraud, and the plaintiff, "without any fault or
want of diligence or care on his part," is unable to discover the injury within the
limitations period. Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S. Ct. 582, 90 L. Ed.
743 (1946). Plaintiffs have alleged no such equitable doctrine here. Thus, Mack's post-
2002 actions can only trigger the running of a new limitations period if they led to
injuries separate from the injuries alleged in Grange I.

The claimed damages in this case total over $ 1 million. This sum is a combination of
money Plaintiffs paid as a result of fraudulent billing charges, as well as the cost of legal
fees expended to pursue their claims in various courts. [Record No. 33, Attach. 1] Under
the treble damages provision of the RICO statute, Plaintiffs claim over $ 3 million in
damages as a result of this conspiracy. See 18 U.S.C. §1964(c). The portion of these
damages attributable to Mack's conduct, however, [*15] is unclear. The Plaintiffs weakly
assert that her post-2002 actions produced "increased litigation expenses." [Record No.
33] Their attached damages worksheet details nine state court lawsuits with associated
expenses, along with a listing of the Grange I defendants, and a notation that "Defendant
Joni Mack is alleged to be jointly and severally liable . . . for all of these elements of
damages." [Record No. 33, Attach. 1]

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Although courts do not require a civil RICO plaintiff to quantify the exact amount of her
injury in order to allege such injury, the specific argument that Plaintiffs espouse here
requires some showing that a new injury outside of the earlier injuries has been incurred.
See Potomac Elec. Power v. Elec. Motor & Supply, 262 F.3d 260 (4th Cir. 2001).
Plaintiffs, in fact, make almost no attempt to distinguish the injuries from Grange I from
the injuries alleged here. Therefore, this Court cannot endorse Plaintiffs' argument that
Mack's post-2002 actions prompted the running of a new limitations period.

2. Mack's Post-2002 Acts as Part of a Continuing Conspiracy

The Plaintiffs seek another route around the statute of limitations by relying on the theory
of joint and several [*16] conspirator liability. Under this theory, they concede that
Mack's post-2002 acts led to the injuries asserted in Grange I, but argue that they did not
and could not have known at the initiation of the Grange I suit that Mack was a co-
conspirator. Mack counters that she was at that time employed by one co-conspirator and
married to another. Therefore, she claims that under the injury discovery accrual rule, the
Plaintiffs had the requisite knowledge in early 2002 to trigger the running of the
limitations period.

The Plaintiffs' argument reveals faint traces of the equitable tolling doctrine. Since they
had no way of knowing that Mack was involved in the conspiracy, they argue that they
should not be punished for not having asserted a cause of action against her earlier. In
other words, they knew of their injury well before they were aware of all of its sources.
Although the Supreme Court and the Sixth Circuit have not explicitly formulated it as
such, the injury discovery rule requires not only that the plaintiff know of his injury, but
also that the plaintiff know the source of his injury. See Rotella, 528 U.S. at 556-557
(analogizing the injury discovery rule in civil RICO cases to [*17] the discovery rule in
medical malpractice cases); Prudential Ins. Co. of Am. v. U.S. Gypsum Co., 359 F.3d
226, 233 (3d Cir. 2004) ("In addition to the injury, the plaintiffs must also have known or
should have known of the source of their injury.").

Assuming, arguendo, that Plaintiffs did not know Mack was a conspirator in 2002, the
Court is forced to turn to the question of whether Plaintiffs should have known she was a
conspirator. Based on the current record, it is impossible for the Court to make that
determination. The only evidence Mack provides in support of her position is an affidavit
from a payroll administrator stating that Mack was an IRC employee at the time of the
Grange I filing. The unadorned fact that she was employed by co-conspirator IRC does
not necessitate the conclusion that Mack herself was a conspirator.

Under common law notions of conspiracy, "knowledge and intent to join the conspiracy"
are still required to confer co-conspirator liability on a defendant. United States v. Driver,
535 F.3d 424, 429 (6th Cir. 2008). Proof of knowledge can be satisfied by a showing that
"the defendant knew the essential object of the conspiracy." United States v. Morrison,
220 F. App'x 389, 393 (6th Cir. 2007) [*18] (unpublished). Although these rules are
culled from criminal conspiracy cases that have no connection with civil RICO, they still
apply. The Supreme Court has stated that "conspiracy" as employed and described in the

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RICO statute should be applied in its "conventional sense" with its accompanying "well-
established principles"; "[w]hen Congress uses well-settled terminology of criminal law,
its words are presumed to have their ordinary meaning and definition." Salinas v. United
States, 522 U.S. 52, 63-65, 118 S. Ct. 469, 139 L. Ed. 2d 352 (1997).

Mack has presented no evidence showing that she actually joined or had an idea of the
object of the conspiracy at the time of the Grange I filing. Simply serving as an employee
within one of the conspirator organizations cannot serve the basis for conspirator liability.
Although Mack may be in the delicate position of arguing for a statute of limitations
defense while asserting her innocence of the underlying substantive claim, without more,
the Court is unable to find that Plaintiffs did or should have known of her involvement in
the conspiracy before January 2003. At this pre-discovery stage in the proceedings,
finding for Mack on this issue would require extensive speculation [*19] based on facts
that are not before the Court.

B. Civil RICO Claim Requirements

Mack attacks the validity of the Plaintiffs' substantive civil RICO claim based on two
arguments: (1) the post-2002 acts do not constitute a "pattern of racketeering activity";
and (2) the post-2002 acts did not cause the Plaintiffs any injury.

1. Civil RICO's Pattern Requirement

Like its statute of limitations, civil RICO's pattern requirement has spawned some
confusion throughout the years. Am. Eagle Credit Corp. v. Gaskins, 920 F.2d 352, 352
(6th Cir. 1990). The statute itself requires that a plaintiff allege that the defendants acted
through a "pattern of racketeering activity," but courts have been hard-pressed to flesh
out the text's actual meaning. 18 U.S.C. § 1962. The Supreme Court has stated that the
touchstone the pattern requirement is known as the "continuity plus relationship" test.
H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 109 S. Ct. 2893, 106 L. Ed. 2d 195
(1989). The continuity plus relationship test dictates that the alleged predicate acts must
be continuous for a sufficiently long period of time and the acts must be related. See
BATISTA, supra, at § 4.03[B]. Regarding continuity -- the first prong -- the Supreme
[*20] Court references either "a closed period of repeated conduct, or [] past conduct that
by its nature projects in to the future with a threat of repetition." H.J. Inc., 492 U.S. at
241-242; see also Michalak v. Edwards, 124 F.3d 198 (6th Cir. 1997) (unpublished).

Mack argues that the two predicate acts she is alleged to have committed were neither a
part of a closed period of repeated conduct nor a set of actions projecting the threat of
repetition in the future. However, the Plaintiffs allege that the Grange I conspirators
committed numerous acts of mail and wire fraud over a period of at least six year and that
Mack's post-2002 acts were a continuation of that same conspiracy. The issue is whether
Mack's acts can be tacked on to the acts of the alleged co-conspirators or whether they
should be viewed in isolation. Based on the Court's finding that Mack has not presented
evidence showing that Plaintiffs knew of her involvement in the conspiracy before

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January 2003, the Court will assume that Mack joined an already-existing conspiracy
within the applicable statute of limitations.

The two acts attributed to Mack are destroying evidence and directing employees to
commit fraud. Viewed together [*21] with the earlier-alleged conspiratorial acts, her acts
satisfy the continuity plus relationship test. In Midwest Grinding Co., Inc. v. Spitz, 976
F.2d 1016 (6th Cir. 1992), the Sixth Circuit found that a "one-shot scheme that lasted, at
most nine months," did not meet the continuity requirement. Midwest Grinding, 976 F.2d
at 1024. Here, however, the Plaintiffs allege that the overall scheme began at least in
1999 and lasted through Mack's post-2002 acts. It was a complex operation spanning
numerous individuals and organizations, with the sole alleged purpose of defrauding
Plaintiffs by exploiting the Kentucky no-fault insurance laws. In H.J. Inc., the Supreme
Court recognized that "the threat of continuity may be established by showing that the
predicate acts or offenses are part of an ongoing entity's regular way of doing business."
H.J. Inc., 492 U.S. at 242; see also Brown v. Cassens Transport. Co., 546 F.3d 347, 354-
355 (6th Cir. 2008) (finding the continuity plus relationship test satisfied by defendants'
scheme to deprive workers of worker's compensation through fraud on the part of
doctors, employer, and claims adjuster). Mack's claimed predicate act of submitting
fraudulent [*22] bills was one part of the complex scheme that the Grange I conspirators
are alleged to have carried out as a daily course of their business. In fact, Plaintiffs allege
that some of the organizations that comprise the conspiracy were established solely to
carry out the alleged illegal activities. Submitting fraudulent physical therapy bills is
clearly a part of and related to that earlier activity.

Next, Mack's alleged effort to destroy evidence in Grange I can also be viewed as a part
of the overall scheme to defraud the Plaintiffs. The act is clearly related to the conspiracy.
Moreover, it qualifies as an act of racketeering within the meaning of 18 U.S.C. §
1961(1). See also United States v. Corrado, 304 F.3d 593, 608 (6th Cir. 2002) (discussing
destruction of evidence as a predicate act in the criminal RICO context). However, the
Sixth Circuit's decision in Midwest Grinding does suggest that predicate acts related to
concealment of evidence are not acts in furtherance of the civil RICO conspiracy. In
making this suggestion, the Sixth Circuit pointed out that such acts do nothing to extend
the duration of the underlying . . . scheme. A conspiracy ends when the design to commit
substantive [*23] misconduct ends; it does not continue beyond that point merely
because the conspirators take steps to bury their traces, in order to avoid detection and
punishment after the central criminal purpose has been accomplished. Midwest Grinding,
976 F.2d at 1024.

Although it is unclear whether the acts of concealment in Midwest Grinding were also
acts of racketeering as defined by the RICO statute, the same rationale may be applied
here. Removing computers containing data requested during discovery in Grange I does
not necessarily threaten ongoing future harm. In fact, it is arguable whether the act can be
considered part of the conspirators' overall scheme to defraud Plaintiffs through the
Kentucky insurance laws. However, even if destruction of evidence is not considered an
act in furtherance of the pattern of racketeering activity, Mack's argument still fails. Only
one overt act in furtherance of the conspiracy is required to place co-conspirator liability

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on a defendant. 18 U.S.C. § 1962(d); Beck v. Prupis, 529 U.S. 494, 506-507, 120 S. Ct.
1608, 146 L. Ed. 2d 561 (2000) (stating that a plaintiff could sue a civil RICO conspirator
who committed at least one overt act of racketeering); Grange Mut. Cas. Co. v. Mack,
290 F. App'x 832, 835-836 (6th Cir. 2008) [*24] (unpublished). Because Mack also
allegedly committed one other overt racketeering act, she may still be held liable as a
conspirator. Moreover, her acts cannot be viewed as isolated and independent acts, but as
part of a larger conspiracy. Viewed as a whole, the conspiracy satisfies civil RICO's
pattern requirement.

2. Civil RICO's Injury Requirement

Finally, Mack argues that Plaintiffs have not satisfied the elements of a civil RICO claim
because they have not suffered injury by reason of Mack's post-2002 acts. Specifically,
since the Plaintiffs stopped paying any bills sent to them by the IRC after filing suit in
Grange I, Mack contends that they cannot show any injury as a result of Mack's post-
2002 physical therapy billings. To show "injury by reason of a RICO violation," the
plaintiff must allege "some direct relation between the injury asserted and the injurious
conduct alleged." Brown, 546 F.3d at 357 (internal citations omitted). Plaintiffs need not
prove reliance in order to satisfy the causation requirement. See Bridge v. Phoenix Bond
& Indem. Co., 128 S. Ct. 2131, 170 L. Ed. 2d 1012 (2008).

It is unclear whether Plaintiffs have shown any damage as a result of her post-2002 acts,
on their own. [*25] However, as with the earlier analysis, the Court must view her acts
as part of the overall Grange I conspiracy -- not as isolated and independent acts. As a
result, Plaintiffs have sufficiently alleged injury as a result of the overall conspiracy. The
Sixth Circuit does not require that each alleged predicate act directly harm a plaintiff in
order for the acts to constitute a civil RICO cause of action. Brown, 546 F.3d at 353
(citing Vild v. Visconsi, 956 F.2d 560, 567 (6th Cir. 1992)). This caselaw is supported by
a reading of the statutory language.

Section 1964(c) creates a private right of action for "any person injured in his business or
property by reason of a violation of section 1962." 18 U.S.C. § 1964(c). In turn, § 1962
makes it unlawful to operate or participate in an enterprise through a "pattern of
racketeering activity." 18 U.S.C. § 1962. Reading these two sections together, a plaintiff's
cause of action comes to life when a pattern, rather than a single act of racketeering
activity, causes injury to his business or property. Requiring a plaintiff to show injury as
a result of each predicate act alleged to be part of the pattern of racketeering activity
would be a very [*26] restrictive reading of the civil RICO statute. "RICO is to be read
broadly. This is the lesson not only of Congress' self-consciously expansive language and
overall approach, but also of its express admonition that RICO is to be liberally construed
to effectuate its remedial purposes." Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479,
497-498, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985). Thus, even though Mack's post-2002
acts may not have resulted in a separate, identifiable set of injuries, her acts are claimed
to be part of a conspiracy that has injured the Plaintiffs in their business. The Plaintiffs'
Complaint sufficiently alleges a cause of action under the civil provisions of the RICO
statute.

10
IV. Conclusion

Viewing the filed Complaint in the light most favorable to the Plaintiffs, Mack's motion
to dismiss fails. In addition, the factual record is not developed to the extent necessary to
support Mack's motion for summary judgment. Accordingly, it is hereby

ORDERED that Defendant Joni Mack's motion to dismiss or, in the alternative, her
motion for summary judgment [Record No. 23] is DENIED.

This 17th day of April, 2009.

Signed By:

Danny C. Reeves

United States District Judge

2008 U.S. Dist. LEXIS 114461, *

PEARL LANIER BRYAN, Plaintiff, v. RONALD F. LILLY, et al., Defendants.

Case No.: 8:08-CV-794-T-23EAJ

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF FLORIDA,


TAMPA DIVISION

2008 U.S. Dist. LEXIS 114461

October 10, 2008, Decided


October 10, 2008, Filed

CORE TERMS: default, default judgment, racketeering activity, predicate acts, money
laundering, mail fraud, racketeering, well-pleaded, mail, clerk's, per curiam, amend,
unlawful activity, enumerated, defraud, notice, state law claims, final judgment,
frivolous, fraud allegations, power of attorney, supplemental jurisdiction,
recommendation, particularity, participated, statutorily, conceal, quiet, admit, theft

COUNSEL: [*1] Pearl Lanier Bryan, Plaintiff, Pro se, Polk City, FL.

For Ronald F. Lilly, Shirley Wine Lilly, Defendants: Tanya M. Comparetto, LEAD
ATTORNEY, Tanya M. Comparetto, PA, Lakeland, FL.

JUDGES: ELIZABETH A JENKINS, United States Magistrate Judge.

11
OPINION BY: ELIZABETH A JENKINS

OPINION

REPORT AND RECOMMENDATION

Before the court are Plaintiff's First Amended Motion for Entry of Final Judgment by
Default Against Defendants Ronald F. Lilly and Shirley Wine Lilley (Dkt. 20) and
Request for Entry of Final Judgment (Dkt. 30). These matters have been referred to the
undersigned for consideration and a report and recommendation (Dkt. 33). See 28 U.S.C.
§ 636(c); Local Rules 6.01(b) and 6.01(c), M.D. Fla. For the reasons set forth herein, the
undersigned recommends that Plaintiff's motions for entry of final judgment (Dkts. 20,
30) be denied.

I. Background

On April 24, 2008, Plaintiff filed a fourteen-count complaint against eleven defendants
for damages, declaratory judgment, and injunctive relief (Dkt. 1 at 1). In Counts 1
through 13 of the complaint, Plaintiff alleged that three corporate defendants had engaged
in, inter alia, fraud, securities fraud, and racketeering (Id. at 7-32). In Count 14, Plaintiff
alleged that from 1994 [*2] to 2008 her ex-husband, Ronald F. Lilly, had "abuse[d] [her]
power of attorney as part of a continuing pattern of racketeering [and] scheme to defraud"
(Id. at 3, 34). 1 Plaintiff further claimed that Shirley Wine Lilly, Ronald Lilly's new wife,
and Nicholas J. Troiano ("Troiano"), Ronald Lilly's personal attorney, along with several
other individuals, had participated in the scheme (Id. at 4-5, 33-39). Plaintiff asserted that
the court had federal question jurisdiction over the racketeering claims in Count 14
pursuant to the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.
§§ 1961-1968, and supplemental jurisdiction over alleged violations of Florida probate,
property, and consumer protection laws (Id. at 6). As relief, Plaintiff asked the court to
quiet title to real estate jointly owned by Plaintiff and Ronald Lilly "as part of their
marital estate" and grant her $ 1,140,000 in civil RICO damages (Id. at 1, 41). 2

FOOTNOTES

1 Despite these allegations, Plaintiff has not revoked her power of attorney (Dkt. 1 at 33).

2 Plaintiff estimated her actual losses as $ 380,000 and requested treble damages pursuant
to 18 U.S.C. § 1964(c) (Dkt. 1 at 41).

On April 29, 2008, Plaintiff filed [*3] returns of service indicating that Ronald and
Shirley Lilly ("the Lillys") and Troiano had each been served with a summons and copy
of the complaint on April 25, 2008 (Dkts. 7, 8, 9). On May 20, 2008, Plaintiff moved for

12
entry of a clerk's default against each of the served individuals for failure to file an
answer (Dkt. 11). On May 22, 2008, the clerk entered the defaults pursuant to Rule 55(a),
Fed. R. Civ. P. (Dkts. 12, 13, 14).

On May 23, 2008, Troiano filed a motion to dismiss in which he argued that Plaintiff had
failed to state a claim in her complaint and that the court lacked subject matter
jurisdiction (Dkt. 15 at 1-2). Moreover, Troiano submitted that Plaintiff's claims had been
addressed by a Florida state court in a dissolution of marriage case and were res judicata
(Id. at 2-3). On June 10, 2008, the court vacated the clerk's entry of default as to Troiano,
but denied Troiano's motion to dismiss for failure to incorporate a memorandum of law
as required by Local Rule 3.01(a), M.D. Fla. (Dkt. 17).

On July 1, 2008, Plaintiff filed a motion for entry of final default judgment against the
Lillys (Dkt. 20), an affidavit of damages (Dkt. 21 at 1-14), and 121 pages of exhibits
[*4] detailing various financial transactions (Dkts. 21 at 15-127, 22 at 2-9). Plaintiff
reasserted her demands that the court quiet title to her residence and award her $
1,140,000 in civil RICO damages (Dkt. 20 at 7-8). On August 20, Plaintiff filed a second
motion for entry of final judgment against the Lillys, again asking the court to quiet title
to her residence and award her civil RICO damages (Dkt. 30). 3 On the same date,
Plaintiff filed a notice of voluntary dismissal of all non-defaulting defendants (Dkt. 31),
which the court approved on August 27, 2008 (Dkt. 32). Thus, the Lillys were the only
remaining defendants in this case.

FOOTNOTES

3 In her second motion for final judgment, Plaintiff re-calculated her actual damages as $
385,144.14 and asked for treble RICO damages of $ 1,155,432.42 (Dkt. 30 at 2).

On September 10, 2008, the court noticed a status conference for September 25, 2008 and
ordered the clerk to mail copies of the notice to the Lillys (Dkt. 34). On September 15,
2008, Plaintiff filed a motion to strike the notice (Dkt. 37), which the court denied (Dkt.
38). On September 25, 2008, Plaintiff and the Lillys appeared for the status conference, at
which neither side was represented [*5] by counsel.

The court informed Plaintiff that in order to succeed on a default judgment in federal
court, she would need to assert well-pleaded allegations stating a claim under federal law.
Plaintiff asserted the court had jurisdiction over her case solely due to her civil RICO
claim. Plaintiff was unable to elaborate on the allegations of mail fraud and money
laundering in her complaint when asked by the court to do so.

Offered an opportunity to respond to Plaintiff's claims, the Lillys denied Plaintiff's


allegations in the complaint and stated that Troiano had represented Ronald Lilly in the
dissolution of marriage action in state court, but had advised he was unable to represent
them in this matter. The court informed the Lillys that as the case now stood, a clerk's

13
default had been entered due to their failure to timely respond to the complaint. It appears
the default against the Lillys is attributable to a combination of factors: lack of counsel,
medical difficulties, and lack of legal experience. However, the court advised the Lillys
that they would have to seek any appropriate relief to set aside the default.

II. Default Judgment Standard

"When a party against whom a judgment for [*6] affirmative relief is sought has failed to
plead or otherwise defend … the clerk must enter the party's default." Rule 55(a), Fed. R.
Civ. P.; see also Varnes v. Local 91, Glass Bottle Blowers Ass'n of the U.S. and Can.,
674 F.2d 1365, 1368 n.3 (11th Cir. 1982) (noting that a party failing to appear is in
default regardless of whether a court has adjudicated the default). Once in default, a
defendant "admits the plaintiff's well-pleaded allegations of fact." Nishimatsu Constr. Co.
v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). The defendant does not,
however, admit allegations that are not well-pleaded or admit conclusions of law. Id.
Rather, the defendant may "contest the sufficiency of the complaint and its allegations to
support the judgment." Id.

Thus, prior to entering a default judgment, the court "must ensure that the well-pleaded
allegations in the complaint, which are taken as true due to the default, actually state a
substantive cause of action and that there is a substantive, sufficient basis in the pleadings
for the particular relief sought." Tyco Fire & Sec., LLC v. Alcocer, 218 F. App'x 860,
863 (11th Cir. 2007) (per curiam) (unpublished). Where a complaint [*7] fails to state a
claim, a default judgment on the complaint may not stand. United States v. Kahn, 164 F.
App'x 855, 858 (11th Cir. 2006) (per curiam) (unpublished).

III. Pleading a Civil RICO Claim

To state a claim under the civil RICO statutes, a plaintiff must allege "(1) conduct (2) of
an enterprise (3) through a pattern (4) of racketeering activity." Langford v. Rite Aid of
Ala., Inc., 231 F.3d 1308, 1311 (11th Cir. 2000). A "pattern of racketeering activity"
consists of "at least two acts of racketeering activity … the last of which occurred within
ten years … after the commission of a prior act of racketeering activity." 18 U.S.C. §
1961(5) (2006). Consequently, a well-pleaded civil RICO claim "must allege facts
sufficient to support each of the statutory elements for at least two of the pleaded
predicate acts." Republic of Pan. v. BCCI Holdings (Lux.) S.A., 119 F.3d 935, 949 (11th
Cir. 1997). A predicate act could be, inter alia, "any act or threat involving murder,
kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or
dealing in a controlled substance or listed chemical," or any act indictable under certain
enumerated statutes. 18 U.S.C. § 1961(1) (2006).

Among [*8] these enumerated statutes are 18 U.S.C. §§ 1341 (mail fraud) and 1956
(laundering of monetary instruments). Id. Where mail fraud is asserted as a predicate act
for a civil RICO claim, a plaintiff must establish not only the statutory elements of mail
fraud, but also that the defendant "had a conscious, knowing intent to defraud and that a
reasonably prudent person would have been deceived by [the defendant's]

14
misrepresentations." Green Leaf Nursery v. E.I. DuPont De Nemours and Co., 341 F.3d
1292, 1306 (11th Cir. 2003) (citation and internal quotations omitted).

Moreover, a civil RICO claim predicated on fraud must be pled with the increased level
of specificity required by Rule 9(b), Fed. R. Civ. P. 4 Ambrosia Coal & Constr. Co. v.
Pages Morales, 482 F.3d 1309, 1316 (11th Cir. 2007). Thus, such a claim "must allege:
(1) the precise statements, documents, or misrepresentations made; (2) the time and place
of and person responsible for the statement; (3) the content and manner in which the
statements misled the Plaintiffs; and (4) what the [d]efendants gained by the alleged
fraud." Id. at 1316-17. Where multiple defendants are named, the complaint must also
"plead fraud with the requisite [*9] specificity as to each of the [defendants]." Brooks v.
Blue Cross and Blue Shield of Fla., Inc., 116 F.3d 1364, 1381 (11th Cir. 1997) (per
curiam).

FOOTNOTES

4 Rule 9(b) requires a party alleging fraud or mistake to "state with particularity the
circumstances constituting fraud or mistake." Rule 9(b), Fed. R. Civ. P.

When a plaintiff alleges money laundering under 18 U.S.C. § 1956(a)(1) as a predicate


act for a civil RICO claim, the plaintiff must first set forth facts showing (1) that the
defendant(s) conducted or attempted to conduct a financial transaction; (2) that the
transaction involved the proceeds of "specified unlawful activity"; and (3) that the
defendant(s) knew the proceeds were from some form of unlawful activity. 5 18 U.S.C. §
1956(a)(1) (2006); see also United States v. Majors, 196 F.3d 1206, 1212 (11th Cir.
1999) (outlining elements of 18 U.S.C. § 1956(a)(1)(B)(i) in a criminal case). The
allegations must then satisfy either § 1956(a)(1)(A) or (a)(1)(B). Id. The former may be
satisfied by showing that the defendant(s) acted "with the intent to promote the carrying
on of specified unlawful activity." 18 U.S.C. § 1956(a)(1)(A)(i). The latter may be
satisfied by showing that the defendant(s) [*10] knew a purpose of the transaction was to
conceal or disguise the nature, location, source, ownership, or control of the proceeds. 18
U.S.C. § 1956(a)(1)(B)(i). Unlike mail fraud allegations, money laundering allegations
underlying a civil RICO claim need not satisfy the heightened particularity standard in
Rule 9(b), Fed. R. Civ. P. See Liquidation Comm'n of Banco Intercontinental, S.A. v.
Renta, 530 F.3d 1339, 1355-56 (11th Cir. 2008).

FOOTNOTES

5 "Specified unlawful activity" is statutorily defined and includes acts of racketeering as


well as offenses under certain enumerated statutes. 18 U.S.C. § 1956(c)(7).

15
In addition to establishing the elements of the predicate acts underlying a civil RICO
claim, a plaintiff must also ensure the claim is brought within the four-year statute of
limitations period. Brooks, 116 F.3d at 1380. The limitations period begins to run "when
the injury was or should have been discovered, regardless of whether or when the injury
is discovered to be a part of a pattern of racketeering." Maiz v. Virani, 253 F.3d 641, 676
(11th Cir. 2001).

Finally, as with any claim, a civil RICO claim must have merit. Thus, where federal
jurisdiction rests on a frivolous civil RICO claim, [*11] the court may dismiss the
complaint and refuse to exercise jurisdiction over any remaining state law claims. See 28
U.S.C. § 1367(c)(3) (1990) ("The district courts may decline to exercise supplemental
jurisdiction over [related state law claims] if … the district court has dismissed all claims
over which it has original jurisdiction"); Estate of Cosio v. Alvarez, 181 F. App'x 894,
896 (11th Cir. 2006) (per curiam) (unpublished) (holding a district court has the power,
on its own motion, to dismiss a claim against a defendant who never moved for
dismissal); see e.g. Smart Science Labs., Inc. v. Promotional Mktg. Servs., Inc., No. 8:07-
CV-1554-T-24EAJ, 2008 WL 2790219, at *12 (M.D. Fla. July 18, 2008) (cautioning that
failure to file an amended complaint could result in court's refusal to exercise
supplemental jurisdiction over remaining state law claims); Kindred v. Murphy, No.
8:07-CV-1002-T-30EAJ, 2008 U.S. Dist. LEXIS 11874, 2008 WL 476220, at *2, 4
(M.D. Fla. Feb. 19, 2008) (warning that failure to timely file an amended complaint could
lead to dismissal of remaining counts where defective civil RICO claim provided the sole
basis for subject-matter jurisdiction).

Moreover, sanctions may be appropriate where [*12] the court determines a civil RICO
complaint is frivolous. See e.g. Martinez v. Martinez, 62 F. App'x 309, 311, 315 (10th
Cir. 2003) (unpublished) (upholding district court's decision to impose sanctions on
plaintiff's counsel in a civil RICO case where counsel filed essentially the same
complaint after the original complaint was dismissed as frivolous); Kindred, 2008 U.S.
Dist. LEXIS 11874, 2008 WL 476220, at *3-4 (allowing plaintiffs to amend their
complaint to state a valid civil RICO claim but warning that unwarranted or frivolous
allegations could lead to Rule 11 sanctions).

IV. Discussion

Returning to the case at hand, it is indisputable that the Lillys failed to timely answer
Plaintiff's complaint, and thus have admitted any well-pleaded allegations. It is therefore
incumbent upon the court to determine which, if any, of Plaintiff's allegations are well-
pleaded before entering a default judgment in Plaintiff's favor. Plaintiff's civil RICO
claim derives from her allegation that "[t]hroughout the years 1994-2008, Ronald F. Lilly
utilized his power of attorney to convert funds and otherwise defraud [Plaintiff] of
hundreds of thousands of dollars, some of which was acquired by and through fraudulent
loans utilizing [*13] Plaintiff's credit, other quanta of which were acquired by direct
theft" (Dkt. 1 at 34). Nevertheless, the only acts Plaintiff specifically alleges that could
potentially support a valid civil RICO claim are mail fraud and money laundering. 6

16
FOOTNOTES

6 Plaintiff suggests her civil RICO claim is supported by the Lillys' alleged violation of
other federal statutes. For instance, Plaintiff contends that Ronald F. Lilly "committed
predicate acts of racketeering by violations of 18 U.S.C. § 1708 (theft of the U.S. mail by
stealing taking, or by fraud or deception)" (Dkt. 1 at 3). Plaintiff further asserts that the
Lillys are liable under the RICO statutes for their breach of fiduciary duties in violation
of 18 U.S.C. § 1346 (Dkt. 1 at 3, 4). Section 1346, however, merely states that a "'scheme
or artifice to defraud' includes a scheme or artifice to deprive another of the intangible
right of honest services." 18 U.S.C. § 1346 (1988). Regardless, neither § 1708 nor § 1346
is among the statutes enumerated in 18 U.S.C. § 1961(1), which defines "racketeering
activity" for purposes of a civil RICO claim. 18 U.S.C. § 1961(1) (2006).

a. Allegations of Mail Fraud

Plaintiff first attempts to support her civil [*14] RICO claim with assertions that the
Lillys committed predicate acts of mail fraud. Plaintiff states that Ronald Lilly injured her
through "a pattern of racketeering centering on repetitive violations of [18 U.S.C. § 1341]
in connection with the administration of that certain Power of Attorney granted by
Plaintiff to [Ronald Lilly] during 1994" (Dkt. 1 at 3). Plaintiff also attests that the Lillys
and others "engaged in a conspiracy … for the common purpose of defrauding Plaintiff
… by aiding and abetting Ronald F. Lilly's multiple and repeated violations of 18 U.S.C.
§ 1341 "(Dkt. 1 at 4). Plaintiff further claims that Ronald Lilly acquired or maintained an
interested in the "Ronald F. Lilly Trust" which itself allegedly engaged in activities that
violated the mail fraud statute (Dkt. 1 at 35). Finally, Plaintiff submits that Shirley Lilly
and several other individuals "conducted or participated, directly or indirectly, in the
conduct of [the Ronald F. Lilly Trust's] affairs through a pattern of racketeering activity
including but not limited to violations of 18 U.S.C. [§ 1341]" (Dkt. 1 at 35-36).

Despite Plaintiff's insistence that the Lillys engaged in mail fraud, Plaintiff offers [*15]
no supporting facts indicating what statements or representations were made; the time
and place of, or person responsible for, the alleged statements; or how Plaintiff was
misled by the alleged statements. See Ambrosia, 482 F.3d at 1316. Plaintiff does not even
identify the elements of a mail fraud claim, much less assert facts to satisfy them.
Moreover, Plaintiff has "simply lumped together" the Lillys and several other individuals
in her allegations of mail fraud. See Brooks, 116 F.3d at 1380-81 (citation and internal
quotation marks omitted). The allegations "provide no basis in fact upon which the
[court] could conclude that any specific act of any specific [defendants] is indictable for
mail … fraud." Id. at 1381. In sum, Plaintiff's mail fraud allegations are conclusory and
insufficient to sustain her civil RICO claim. See e.g. Rogers v. Nacchio, 241 F. App'x
602, 608 (11th Cir. 2007) (per curiam) (unpublished) (affirming dismissal of civil RICO

17
claim predicated on fraud where plaintiff failed to allege sufficient facts); Am. United
Life Ins. Co. v. Martinez, 480 F.3d 1043, 1066-67 (11th Cir. 2007) (same).

b. Allegations of Money Laundering

In like fashion, Plaintiff also asserts [*16] the Lillys engaged in predicate acts of money
laundering. Plaintiff accuses the Lillys and others of "aiding and abetting Ronald F.
Lilly's multiple and repeated violations of … 18 U.S.C. § 1956" (Dkt. 1 at 4). Plaintiff
further claims that these individuals were involved in illegal financial transactions and
"individually, jointly, and severally agreed to conceal and did in fact conceal the money
received from Ronald F. Lilly in defraud of Plaintiff's business and property rights" (Dkt.
1 at 5). Finally, Plaintiff submits that Shirley Lilly and several other individuals
"conducted or participated, directly or indirectly, in the conduct of [the Ronald F. Lilly
Trust's] affairs through a pattern of racketeering activity including but not limited to
violations of 18 U.S.C. [§ 1956]" (Dkt. 1 at 35-36).

Again, no supporting factual details are provided. Indeed, Plaintiff's allegations


concerning money laundering are little more than restatements of the statutory text of 18
U.S.C. § 1956. Although Plaintiff's money laundering claims need not be pleaded with
the particularity required by Rule 9(b), Fed. R. Civ. P., Plaintiff's allegations are
nevertheless insufficient because they fail to [*17] articulate specific facts that satisfy the
essential elements of § 1956. 7 Like her mail fraud allegations, Plaintiff's money
laundering allegations do not establish the Lillys committed any acts that might support a
valid civil RICO claim. See e.g. Zavala v. Wal-Mart Stores, Inc., 393 F. Supp. 2d 295,
315-16 (D. N.J. 2005) (finding allegations of money laundering were too vague and
insufficient to support a RICO claim where they "largely recite[d] the elements of
different money laundering provisions, but [did] not identify the relevant financial
transactions or conduct").

FOOTNOTES

7 For instance, § 1956(a)(1) requires a showing that a financial transaction involved the
proceeds of "specified unlawful activity." 18 U.S.C. § 1956(a)(1) (2006). This phrase is
statutorily defined to include "racketeering activity" as defined in 18 U.S.C. § 1961(1) or
the violation of certain enumerated statutes. 18 U.S.C. §§ 1956(c)(7)(A) and (D). One
such statute is 18 U.S.C. § 1708, which prohibits the theft or receipt of stolen mail.
Although Plaintiff alleges that Ronald Lilly" committed predicate acts of racketeering by
violations of [§ 1708]" (Dkt. 1 at 3), the allegation is conclusory and unsupported by
[*18] any facts whatsoever.

c. Pattern of Racketeering Activity

18
Plaintiff's complaint is also deficient because it fails to establish that the Lillys engaged
in a "pattern of racketeering activity" within the statutorily prescribed time period. The
complaint merely states that the alleged illegal activities occurred over a period of
fourteen years between 1994 and 2008 (Dkt. 1 at 34). Plaintiff does not assert that two
predicate acts constituting a "pattern of racketeering activity" occurred within a ten-year
period, which is necessary to sustain her civil RICO claim. See 18 U.S.C. § 1961(5).
Thus, Plaintiff has failed to state a valid civil RICO claim on this basis as well.

d. Statute of Limitations

Finally, the vagueness of Plaintiff's allegations raises concerns regarding the four-year
statute of limitations period applicable to civil RICO claims. Because Plaintiff filed her
complaint on April 24, 2008 (Dkt. 1), the claim is time-barred if Plaintiff knew or should
have known of the alleged racketeering activity prior to April 24, 2004. See Maiz, 253
F.3d at 676. Plaintiff's failure to provide any specifics whatsoever concerning when the
alleged acts of racketeering occurred leaves the court [*19] unable to determine when
she knew or should have known of the acts. Nevertheless, if Plaintiff knew or should
have known of the alleged acts of racketeering before April 24, 2004, a default judgment
in Plaintiff's favor may properly be denied. See e.g. Stegeman v. Georgia, 290 Fed. Appx.
320, 2008 WL 3906839, at *2 (11th Cir. 2008) (per curiam) (affirming denial of default
judgment, despite defendant's failure to answer, where claim was time-barred).

V. Conclusion

Because Plaintiff failed to establish the elements of the predicate acts underlying her civil
RICO claim, Plaintiff's allegations that the Lillys engaged in a "pattern of racketeering
activity" are not well-pleaded. 8 See Am. United Life, 480 F.3d at 1068 (finding a RICO
claim cannot be maintained where the underlying predicate acts lack legal validity).
Moreover, Plaintiff has not alleged the Lillys committed two predicate acts within a ten-
year period, as required by statute. Plaintiff has failed to provide "a substantive, sufficient
basis in the pleadings for the particular relief sought." Tyco, 218 F. App'x at 863.
Accordingly, the court should not enter a default judgment in favor of Plaintiff on her
civil RICO claims. [*20] See e.g. Cosio, 181 F. App'x at 896 (affirming trial court's
decision not to enter default judgment where complaint contained no viable federal
claim); Lusby v. Hill, No. 2:05-CV-529-FTM-29DNF, 2006 U.S. Dist. LEXIS 94652,
2006 WL 3842196, at *2 (M.D. Fla. Dec. 13, 2006) (denying motion for default
judgment, despite entry of clerk's default, where plaintiff failed to adequately assert a
civil RICO claim); accord Anderson v. Found. for Advancement, Educ. and Employment
of Am. Indians, 155 F.3d 500, 506 (4th Cir. 1998) (finding district court erred in entering
a default judgment where complaint did not state a claim for civil RICO).

FOOTNOTES

8 There is also a substantial issue regarding whether Plaintiff is litigating or has litigated
the same or similar claims before the state court. Due to their pro se status, neither

19
Plaintiff nor the Lillys were able to shed much light on this issue. If Plaintiff is seeking to
relitigate a claim or an issue which was decided or could have been decided by another
court, her claim could be barred under principles of res judicata and collateral estoppel.
Under that scenario, sanctions could be imposed for asserting such a claim in this court.

Consequently, Plaintiff's motions for final default [*21] judgment should be denied and
she should be offered an opportunity to amend her complaint to state a federal claim.

Although Plaintiff should be afforded an opportunity to amend her complaint, Plaintiff is


advised that if she chooses to continue to proceed pro se, she must comply with this
court's Local Rules as well as the Federal Rules of Civil Procedure. See Moon v.
Newsome, 863 F.2d 835, 837 (11th Cir.), cert. denied, 493 U.S. 863, 110 S. Ct. 180, 107
L. Ed. 2d 135 (1989). Further, Plaintiff is also on notice that failure to prosecute her case
in compliance with court orders and procedural rules could result in dismissal of her case
and the possibility of sanctions. Finally, if Plaintiff amends her complaint to state a
federal RICO claim, she must comply with the above requirements for articulating a
claim of this sort.

Plaintiff's failure to amend her complaint to state a valid claim under federal law should
result in her civil RICO claim being dismissed with prejudice and the court declining to
exercise supplemental jurisdiction over any remaining state law claims.

Accordingly and upon consideration, it is RECOMMENDED that:

(1) Plaintiff's First Amended Motion for Entry of Final Judgment by Default Against
Defendants [*22] Ronald F. Lilly and Shirley Wine Lilley (Dkt. 20) and Request for
Entry of Final Judgment (Dkt. 30) be DENIED; and

(2) Plaintiff be afforded a final opportunity amend her complaint to state a valid claim
under federal law.

Date: October 10, 2008

/s/ Elizabeth A Jenkins

ELIZABETH A JENKINS

United States Magistrate Judge

NOTICE TO PARTIES

Failure to file written objections to the proposed findings and recommendations


contained in this report within ten (10) days from the date of this service shall bar an
aggrieved party from attacking the factual findings on appeal. See 28 U.S.C. § 636(b)(1).

20
2010 U.S. Dist. LEXIS 16104, *

ELSEVIER INC., BLACKWELL PUBLISHING, LTD., WILEY PERIODICALS, INC.,


WILEY-LISS, INC., INFORMA UK LTD., INFORMA USA, INC., and AMERICAN
CHEMICAL SOCIETY, Plaintiffs, -against- W.H.P.R., INC., RICHARD B. HAYAT,
RANDI HAYAT, EDUCO PERIODICALS CO., INC., BARBARA PESSINA,
RUSSELL PESSINA, PATRICIA ANSPACH, THOMAS ANSPACH, KLAVDIYA A.
LOKSHIN, and JOHN DOE NOS. 1-50, Defendants.

09 Civ. 6512 (CM)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW


YORK

2010 U.S. Dist. LEXIS 16104

February 19, 2010, Decided


February 19, 2010, Filed

CASE SUMMARY:PROCEDURAL POSTURE: Plaintiffs publishers sued defendants, a


subscription agent, its owner, and individuals, for civil claims under the Racketeer
Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. § 1961 et seq., and
breach of contract, fraud, conspiracy to defraud, and conversion. Defendants moved to
dismiss the RICO claims under Fed. R. Civ. P. 12(b)(6) and 9(b), and out-of-state
defendants moved to dismiss for lack of personal jurisdiction.

OVERVIEW: Defendants ordered subscriptions at a lower individual rate and resold


them to institutions subject to a higher institutional rate. Fraud was alleged against
individuals with enough particularity because they allegedly subscribed to specific
journals for specific years. The complaint was insufficient against the agent because it did
not say what the agent did to further the fraud. An 18 U.S.C.S. § 1962(c) RICO claim had
to be dismissed because (1) defendants' interpersonal relationships were not pled, (2)
control of an association in fact was not pled, and (3) no defendant allegedly engaged in a
pattern of racketeering activity, although lost profits recoverable under 18 U.S.C.S. §
1964(c) were pled. An 18 U.S.C.S. § 1962(d) RICO conspiracy claim had to be dismissed
because the complaint only alleged individuals committed discrete acts of fraud. The
motion to dismiss for lack of personal jurisdiction was denied because, if a viable RICO
claim were stated, (1) 18 U.S.C.S. § 1965(b) "ends of justice" jurisdiction was proper, (2)
at least one defendant was subject to personal jurisdiction, and (3) no other district could
hear the RICO claims against all defendants.

21
OUTCOME: The motion was granted as to substantive and conspiracy RICO claims
without prejudice and with leave to amend. The motion to dismiss for lack of personal
jurisdiction was denied.

CORE TERMS: subscription, fraudulent, personal jurisdiction, racketeering activity,


conspiracy, racketeering, mail, state law claims, pleaded, cause of action, tending, higher
rates, lost profits, wire fraud, subscribed, predicate acts, breach of contract, false
pretenses, illicit, viable, leave to amend, factual allegations, fraudulently induced,
particularity, participated, nationwide, publisher, reselling, purchaser, renewal

LexisNexis(R) Headnotes
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to
State Claims
HN1 When deciding a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), a district
court must liberally construe all claims, accept all factual allegations in a complaint as
true, and draw all reasonable inferences in favor of the plaintiff.

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to
State Claims
Civil Procedure > Pleading & Practice > Pleadings > Complaints > Requirements
HN2 To survive a motion to dismiss, a complaint must contain sufficient factual matter to
state a claim to relief that is plausible on its face. A claim has facial plausibility when a
plaintiff pleads factual content that allows a court to draw a reasonable inference that a
defendant is liable for the misconduct alleged. While a complaint attacked by a Fed. R.
Civ. P. 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's
obligation to provide the grounds of his entitlement to relief requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.
Thus, unless a plaintiff's well-pleaded allegations have nudged its claims across the line
from conceivable to plausible, the plaintiff's complaint must be dismissed.

Civil Procedure > Pleading & Practice > Pleadings > Heightened Pleading Requirements
> Fraud Claims
HN3 Claims sounding in fraud must meet Fed. R. Civ. P. 9(b)'s heightened pleading
standard. To comply with Rule 9(b), a complaint must: (1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent. Rule 9(b)
provides that intent, knowledge, and other conditions of a person's mind may be averred
generally.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN4 Under 18 U.S.C.S. § 1962(c), it is unlawful for any person employed by or
associated with any enterprise engaged in interstate or foreign commerce to conduct or
participate, directly or indirectly, in the conduct of such enterprise's affairs through a
pattern of racketeering activity. To plead a civil claim under this section, a plaintiff must
allege facts showing the existence of an enterprise affecting interstate commerce, as well

22
as facts tending to show that the defendants were persons employed by or associated with
the enterprise, and that they conducted such enterprise's affairs through a pattern of
racketeering activity.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN5 An association in fact is a group of persons associated together for a common
purpose of engaging in a course of conduct. An association in fact enterprise, for
purposes of a claim under the Racketeer Influenced and Corrupt Organizations Act, 18
U.S.C.S. § 1961 et seq., must have a "structure" exhibiting three features: a purpose,
relationships among the individuals associated with the enterprise, and longevity
sufficient to permit the associates to pursue the purpose of the enterprise.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN6 The concept of association, for purposes of a claim under the Racketeer Influenced
and Corrupt Organizations Act, 18 U.S.C.S. § 1961 et seq., requires both interpersonal
relationships and a common interest. An association of individuals can be an enterprise if
it is formed for the purpose of engaging in any type of illicit activity and it need not have
any existence apart from the predicate acts committed by its employees and/or associates.
Such a group need not have a hierarchical structure or a chain of command. Members of
the group need not have fixed roles; different members may perform different roles at
different times. The group need not have a name, regular meetings, dues, established
rules and regulations, disciplinary procedures, or induction or initiation ceremonies.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN7 A plaintiff making a claim under the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C.S. § 1961 et seq., must allege something more than the fact
that individuals were all engaged in the same type of illicit conduct during the same time
period.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN8 Having identified an enterprise, a civil Racketeer Influenced and Corrupt
Organizations (RICO), 18 U.S.C.S. § 1961 et seq., plaintiff must also plead facts from
which it can be inferred that each of the defendants participated, directly or indirectly, in
the conduct of the enterprise's affairs. When alleging a violation of 18 U.S.C.S. §
1962(c), a complaint must set out facts tending to show that each individual defendant
participated in the operation or management of the enterprise itself. For purposes of civil
RICO, it is not enough to allege that a defendant provided services that were helpful to an
enterprise, without alleging facts that, if proved, would demonstrate some degree of
control over the enterprise.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Coverage

23
HN9 Civil Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. § 1961 et
seq., liability is limited to persons who have some part in directing an enterprise's affairs.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Remedies
HN10 See 18 U.S.C.S. § 1964(c).

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN11 To state a civil Racketeer Influenced and Corrupt Organizations (RICO), 18
U.S.C.S. § 1961 et seq., claim, a plaintiff must plead an injury to his business or property
that was proximately caused by a substantive RICO violation.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Remedies
HN12 A plaintiff can adequately plead damages under the Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C.S. § 1961 et seq., by alleging lost profits where they
constitute an injury to the plaintiff's business, were proximately caused by the alleged
racketeering, and are not merely speculative.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Remedies
HN13 A civil Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. § 1961
et seq., plaintiff may recover lost profits, subject to the traditional limitations of
proximate cause and lack of speculativeness.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Remedies
HN14 Damages under the Racketeer Influenced and Corrupt Organizations Act, 18
U.S.C.S. § 1961 et seq., cannot place plaintiffs in a better position than they would have
been in if racketeering had not occurred.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Remedies
HN15 A civil plaintiff under the Racketeer Influenced and Corrupt Organizations Act, 18
U.S.C.S. § 1961 et seq., can only recover to the extent that he has been injured in his
business or property by the conduct constituting a violation.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN16 18 U.S.C.S. § 1962(d) makes it unlawful for any person to conspire to violate 18
U.S.C.S. § 1962(c). The core of a conspiracy under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C.S. § 1961 et seq., is an agreement to commit
predicate acts, and a RICO civil conspiracy complaint must specifically allege such an
agreement. The United States Court of Appeals for the Second Circuit has held that a
complaint alleging a violation of 18 U.S.C.S. § 1962(d) must contain allegations of some

24
factual basis for a finding of a conscious agreement among the defendants. These
allegations may not be conclusory, but must set forth specific facts tending to show that
each of the defendants entered into an agreement to conduct the affairs of a particular,
identified enterprise through a pattern of racketeering activity - not simply that each
defendant committed two or more acts that would qualify as predicate acts, without
regard to whether those acts were committed in furtherance of the activity of the
enterprise. Parallel conduct by different defendants affords an insufficient basis for
inferring that an agreement was reached.

Civil Procedure > Jurisdiction > Personal Jurisdiction & In Rem Actions > In Personam
Actions > Challenges
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Motions to
Dismiss
Evidence > Procedural Considerations > Burdens of Proof > Allocation
HN17 On a Fed. R. Civ. P. 12(b)(2) motion to dismiss for lack of personal jurisdiction, a
plaintiff bears the burden of showing that a court has jurisdiction over a defendant.
Where the court does not conduct an evidentiary hearing on the issue of personal
jurisdiction, the plaintiff need only make a prima facie showing that the court possesses
personal jurisdiction over the defendant. In deciding whether a plaintiff has met this
burden, the court must construe the pleadings and affidavits in the light most favorable to
the plaintiff, resolving all doubts in the plaintiff's favor. However, conclusory allegations
are not enough to establish personal jurisdiction.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
Civil Procedure > Jurisdiction > Personal Jurisdiction & In Rem Actions > In Personam
Actions > General Overview
Civil Procedure > Venue > General Overview
HN18 See 18 U.S.C.S. § 1965(a), (b), (d).

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Coverage
Civil Procedure > Jurisdiction > Personal Jurisdiction & In Rem Actions > In Personam
Actions > General Overview
HN19 The law in the United States Court of Appeals for the Second Circuit is clear that
the Racketeer Influenced and Corrupt Organizations (RICO) statute, 18 U.S.C.S. § 1961
et seq., does not provide for nationwide personal jurisdiction over every defendant in
every civil RICO case, no matter where the defendant is found.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Coverage
Civil Procedure > Jurisdiction > Personal Jurisdiction & In Rem Actions > In Personam
Actions > General Overview
HN20 18 U.S.C.S. § 1965(a) grants personal jurisdiction over an initial defendant in a
civil case under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18
U.S.C.S. § 1961 et seq., to a district court for the district in which that person resides, has

25
an agent, or transacts his or her affairs. In other words, a civil RICO action can only be
brought in a district court where personal jurisdiction based on minimum contacts is
established as to at least one defendant. Then, 18 U.S.C.S. § 1965(b) provides for
nationwide service and jurisdiction over "other parties" not residing in the district,
including co-defendants. This jurisdiction is not automatic but requires a showing that the
"ends of justice" so require. 18 U.S.C.S. § 1965(b). Meanwhile, 18 U.S.C.S. § 1965(d)
applies only to "all other process," meaning process other than a summons of a defendant
or subpoena of a witness. 18 U.S.C.S. § 1965(d). In sum, in the United States Court of
Appeals for the Second Circuit, a civil RICO action can only be brought in a district court
where personal jurisdiction based on minimum contacts is established as to at least one
defendant. Then, jurisdiction can be obtained on a showing that the "ends of justice" so
require.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Coverage
Civil Procedure > Jurisdiction > Personal Jurisdiction & In Rem Actions > In Personam
Actions > General Overview
HN21 The United States Court of Appeals for the Second Circuit has not offered an
explanation as to what exactly the Racketeer Influenced and Corrupt Organizations
(RICO) statute, 18 U.S.C.S. § 1961 et seq., means by "ends of justice," for purposes of
jurisdiction under 18 U.S.C.S. § 1965(b). However, it is generally accepted that "ends of
justice" jurisdiction is authorized where a RICO claim could not otherwise be tried in a
single action because no district court could exercise personal jurisdiction over all
defendants.

COUNSEL: [*1] For Elsevier Inc., Blackwell Publishing, Ltd., Wiley Periodicals, Inc.,
Wiley-Liss, Inc., Informa UK Ltd., Informa USA, Inc., American Chemical Society,
Plaintiffs: Laura Jean Scileppi, William Irvin Dunnegan, LEAD ATTORNEYS,
Dunnegan LLC, New York, NY.

For W.H.P.R., Inc., Richard B. Hayat, Randi Hayat, Defendants: Michael S. Re, LEAD
ATTORNEY, Robert Stephen Cohen, Moritt Hock Hamroff & Horowitz LLP (Nassau),
Garden City, NY; Stephen Justin Ginsberg, Moritt Hock Hamroff & Horowitz LLP,
Garden City, NY.

For Educo Periodicals Co., Inc., Barbara Pessina, Russell Pessina, Patricia Anspach,
Thomas Anspach, Defendants: Terence Joseph Gallagher, LEAD ATTORNEY, Jones
Garneau, L.L.P.(CT), Stamford, CT.

For Klavdiya A. Lokshina, Defendant: Michael C. Rakower, LEAD ATTORNEY, David


Emanuel Miller, Law Office of Michael C. Rakower, New York, NY.

JUDGES: Colleen McMahon, United States District Judge.

OPINION BY: Colleen McMahon

26
OPINION

MEMORANDUM DECISION AND ORDER DISMISSING THE COMPLAINT


WITHOUT PREJUDICE AND WITH LEAVE TO AMEND

McMahon, J.:

INTRODUCTION

This case alleges, in substance, that Defendants conspired to defraud Plaintiffs--the


publishers of many of the world's leading scientific, technical and medical journals--by
placing [*2] orders for the purchase of thousands of these journals at a lower or
discounted "individual" subscription rate, rather than the higher "institutional" rate, and
then reselling the journals to institutions for more than the individual rate. Plaintiffs assert
a variety of state law claims-- breach of contract, fraud, even conversion--and then wrap
them in the trappings of the Racketeering and Corrupt Organizations Act, 18 U.S.C. §
1961 et seq. ("RICO").

Allegations of racketeering have been described as a "thermonuclear device." Katzman v.


Victoria's Secret Catalogue, 167 F.R.D. 649, 655 (S.D.N.Y. 1996) (quoting Miranda v.
Ponce Fed. Bank, 948 F.2d 41, 44 (1st Cir. 1991)), aff'd 113 F.3d 1229 (2d Cir. 1997).
The mere assertion of a RICO claim has an almost inevitable stigmatizing effect on those
named as defendants. As a result, courts are charged with flushing out frivolous RICO
allegations at the earliest possible stage of litigation.

All of the remaining defendants, W.H.P.R., Inc. ("W.H.P.R."), Richard B. Hayat


("Hayat"), Randi Hayat, Thomas Anspach, Patricia Anspach and Klavdiya Lokshina
(collectively, "Defendants"), have moved to dismiss the RICO claims on the ground that
they are [*3] defectively pleaded, in that they are both lacking in particulars (and thus
fail Federal Rule of Civil Procedure 9(b)), and in failing to state a claim (Rule 12(b)(6)).
Additionally, defendants Thomas and Patricia Anspach (the "Anspachs" or "Anspach
Defendants") move to dismiss on the ground that the Court lacks personal jurisdiction
over them. AU Defendants also move to dismiss the various state law claims that have
been asserted against them, with the exception that W.H.P.R. and the Hayats do not move
to dismiss the breach of contract claims asserted against them in Counts V and VI.

Because there is at least one defect in the RICO pleading as to each defendant, the
motions to dismiss the RICO claims are granted, and the complaint is dismissed, albeit
without prejudice and with leave to replead. The other motions are denied without
prejudice to their renewal once an amended pleading is served.

BACKGROUND

I. Allegations in the Complaint and RICO Case Statement

27
The following allegations are found in Plaintiffs' complaint (the "Complaint") and/or
their RICO Case Statement.

Plaintiffs publish journals that consist primarily of peer-reviewed articles, written by one
or more scholars, often [*4] based on original research. (Compl. P 19.) Plaintiffs invest
heavily in publishing their journals, incurring substantial costs for producing their
products. (Id. P 20.) Plaintiffs sell their journals almost entirely through annual
subscriptions, on a calendar year basis. They charge institutions "full" rates (or higher
prices) and individuals "discounted" rates (or lower prices). They do the latter often as an
accommodation to members of scholarly societies that sponsor or own the journals. (Id. P
21.)

Plaintiffs are the "sole source" of their journals, which I gather means that they control
the distribution of these journals. (Id. P 22.) However, they do sell subscriptions through
subscription agents, including defendant W.H.P.R. Subscription agents act as
intermediaries between institutions (their customers) and journal publishers, (Id. P 24.)

When an individual orders a subscription to one of Plaintiffs' journals, the invoice and
purchase order form (the contract) contains a clause that forbids the purchaser from
reselling the journal to an institution or from using it as a library copy (i.e., accessible to
persons other than the purchaser). (See id. P 23.) When a subscription agent [*5] places
an order, Plaintiffs rely on the agent to identify truthfully the type of subscription needed,
based on whether the ultimate purchaser is an individual or institution. (Id. P 24.) The
terms and conditions for orders placed on behalf of "library customers" (institutional
purchasers) require that the agent identify the end user of each journal ordered at the time
the order is placed. (Id. P25.) W.H.P.R.'s trade association strictly forbids a subscription
agent from taking out personal subscriptions on behalf of institutions, rather than
charging the institutional rate. (Id. P 26.)

Plaintiffs allege that they take orders for subscriptions by mail, telephone, facsimile and
the internet. (Id. P 28.)

Plaintiffs allege that Defendants have engaged in fraud and conspiracy by purchasing
individual subscriptions from Plaintiffs at discounted rates and then selling them to
institutions at "higher rates," while pocketing the difference. (Id. P 29.) The Complaint
does not specify whether these "higher rates" were below, at or above the institutional
rate charged by Plaintiffs. W.H.P.R.'s owner, defendant Richard Hayat, is the alleged
leader of the fraud. (Id. P30.)

The first claim for relief [*6] alleges that W.H.P.R. is an enterprise for purposes of the
RICO statute, as is an association in fact among Hayat and the other individual
defendants, which association in fact has as its purpose the securing of journal
subscriptions at lower rates and reselling them at higher rates. (Id. P 35.) The Complaint
alleges that between 2001 and 2008, Hayat and the other individual defendants engaged
in acts of mail and wire fraud in furtherance of their scheme, using false names and

28
addresses and obtaining subscriptions to a variety of magazines under false pretenses. (Id.
PP 30, 37.)

This conclusory allegation is buttressed by a list of journals that were allegedly obtained
by each individual defendant during specified subscription years. For example, paragraph
38 of the Complaint alleges that Richard Hayat secured forty-eight separate individual
subscriptions to Plaintiffs' journals between 1998 and 2006, with the intent to resell them
to institutions at higher rates. The journals and the subscription years, as well as the
affected plaintiff, are listed in the Complaint. The Complaint does not allege the exact
date (day, month and year) on which each subscription was ordered; or whether [*7] the
order was placed by use of the mails, wire, facsimile or internet; or what (if any) false
names were used to obtain the subscriptions.

Paragraph 39 contains identical allegations against defendant Randi Hayat, who is


Richard Hayat's wife; only the list of journals to which subscriptions were obtained is
different. Paragraph 42 contains identical allegations (with a different list of journals and
years) as against Patricia Anspach; paragraph 43 as against Thomas Anspach; and
paragraph 44 as against Klavdiya Lokshina.

There is also a Schedule A to the Complaint, and paragraph 45 alleges, albeit on


information and belief, that Hayat and/or one of the other individual defendants secured
individual subscriptions to every journal on that list, under real or fictitious names of
some third party, intending to resell the subscriptions at a higher price. Schedule A is
thirteen pages long and lists the first and last name of the purported subscriber, the
journal subscribed to, the year of the subscription and the name of the plaintiff publisher.
There are forty or more listings on each page. There is no allegation that these
subscriptions were sent to the address of any of the named defendants; [*8] there is no
allegation whether the subscriptions were obtained by use of the mail, the internet, the
telephone or facsimile.

There is no allegation in the Complaint that the mail or wires were used to deliver the
journals subscribed to, although common sense dictates that this must be so. And indeed,
Plaintiffs' RICO Case Statement indicates, as to the subscriptions allegedly ordered by
each defendant, that each defendant intended that Plaintiffs would deliver the journals
subscribed to via the U.S. Mail. (RICO Case Stmt., Jan. 29, 2010, at 3-9.)

These subscriptions are alleged to have been obtained with the intent to defraud the
plaintiff into providing an institutional subscription at an individual rate. (Compl. P 46.)
By reason of these predicate acts of mail fraud and wire fraud, Plaintiffs allegedly
suffered a loss of subscription revenue that constitutes injury to their business or
property, all in violation of 18 U.S.C. § 1962(c). (Id. 148.)

Plaintiffs identify Hayat as a recidivist, alleging that the publisher John Wiley & Sons,
Inc. asserted a claim against him in 2005 for doing exactly the same thing Plaintiffs
allege. The claim was allegedly settled, but the RICO Case Statement [*9] avers that
Hayat is in breach of that settlement agreement. (RICO Case Stmt. at 19-20.)

29
The second cause of action alleges conspiracy to violate RICO in violation of 18 U.S.C. §
1962(d). The Complaint alleges that Defendants have conspired to conduct or participate
in the affairs of W.H.P.R. and the association in fact (the two alleged enterprises) through
a pattern of racketeering activity, which includes the acts of mail or wire fraud alleged in
the first cause of action and another act of wire fraud (by use of emails). This last
allegedly fraudulent communication was the response given to an inquiry from an agent
of Plaintiffs about the source of certain journals. The inquiry was directed to Richard
Hayat, who identified originally named defendant Educo Periodicals Co., Inc. ("Educo")
as the source of the journals. The email was sent by originally named defendant Barbara
Pessina on behalf of Educo and allegedly falsely represented that the journals had been
obtained second-hand, from libraries, chemical and pharmaceutical companies,
consignments, or backserv lists located online. (Compl. PP 52-54.)

The remaining causes of action are state law claims, for common law fraud and
conspiracy [*10] to defraud, breach of contract and conversion. They are predicated on
the allegations that underlie the RICO counts.

II. The Motions to Dismiss

Defendants have moved to dismiss the Complaint in its entirety. Insofar as they seek
dismissal of the RICO Claims (Counts I and II), Defendants argue the following:
(1) The Complaint fails to plead the predicate acts of fraud with particularity in
compliance with Rule 9(b).

(2) The Complaint fails to plead the existence of a RICO "enterprise."

(3) The Complaint fails to plead that any of the Defendants operated or controlled any
purported enterprise.

(4) The Complaint fails to plead that the affairs of any enterprise were conducted through
a pattern of racketeering activity.

(5) The Complaint fails to allege damages that are compensable under RICO.

(6) The RICO conspiracy count must be dismissed because the RICO count itself must be
dismissed.

As noted above, Defendants also seek dismissal of the state law claims (with the
exception that W.H.P.R. and the Hayats do not seek dismissal of the breach of contract
claims asserted against them). Because the Court will not be discussing the motions to
dismiss insofar as they are directed to the various state [*11] law claims, it is not
necessary to list Defendants' arguments here.

DISCUSSION

30
I. Standard of Review

HN1When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court must
liberally construe all claims, accept all factual allegations in the complaint as true, and
draw all reasonable inferences in favor of the plaintiff. See Cargo Partner AG v.
Albatrans, Inc., 352 F.3d 41, 44 (2d Cir. 2003); see also Roth v. Jennings, 489 F.3d 499,
510 (2d Cir. 2007).

HN2To survive a motion to dismiss, "a complaint must contain sufficient factual
matter . . . to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.
Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). "A claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly,
550 U.S. at 556). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does
not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his
entitlement to relief requires more than labels and conclusions, and a formulaic recitation
[*12] of the elements of a cause of action will not do." Twombly, 550 U.S. at 555
(internal quotations, citations and alterations omitted). Thus, unless a plaintiffs well-
pleaded allegations have "nudged [its] claims across the line from conceivable to
plausible, [the plaintiffs] complaint must be dismissed." Id. at 570; Iqbal, 129 S. Ct. at
1950-51.

Additionally, HN3claims sounding in fraud must meet Rule 9(b)'s heightened pleading
standard. See Fed. R. Civ. P. 9(b). To comply with Rule 9(b), "the complaint must: (1)
specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker,
(3) state where and when the statements were made, and (4) explain why the statements
were fraudulent." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006) (quoting
Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). Rule 9(b) provides
that "intent, knowledge, and other conditions of a person's mind may be averred
generally."

II. Fraud Is Pleaded with Sufficient Particularity Except as Against W.H.P.R.

All Defendants urge that the Complaint fails to plead the predicate acts of mail and wire
fraud with sufficient particularity. W.H.P.R.'s motion to dismiss on that [*13] ground is
granted; the other defendants' motions to dismiss on that ground are denied.

As set forth above, the Complaint, at paragraphs 38-44, identifies the journals to which
each named individual defendant subscribed for allegedly fraudulent purposes, as well as
the year in which the subscription was entered, and alleges that Plaintiffs accepted
subscription orders by mail and wire (Compl. P 28). The subscription orders placed are
alleged to be the false statements, in that each of the subscriptions was allegedly placed
as an individual subscription, with the intention that the journal received by the
subscriber would be resold to an institution at a higher rate. Plaintiffs allegedly would not

31
have accepted the subscriptions and entered into the transactions had they known what
the subscriber intended to do with the journals.

Contrary to the contentions in the various motions to dismiss, these paragraphs tie each
remaining individual defendant to subscriptions for specified journals during a specified
subscription year; this sufficiently informs each individual defendant about what it is that
he or she is supposed to have done to further the alleged fraud. The fact that the
subscription [*14] orders are identified only by year, rather than by the specific day and
month in which they were placed, does not render the pleading insufficiently specific;
each individual defendant is sufficiently advised of his or her allegedly fraudulent acts
(placing subscription orders under false pretenses), and those acts are identified by both
the name of the journal and the approximate time the subscription was placed. The law
requires only that each defendant be apprised of the circumstances surrounding the
fraudulent conduct with which he or she stands charged, Dietrich v. Bauer, 76 F. Supp.
2d 312, 329 (S.D.N.Y. 1999), and the allegations outlined above do precisely that for
each of the individual defendants. For this reason, the motions by defendants Richard and
Randi Hayat, Patricia and Thomas Anspach, and Klavdiya Lokshina to dismiss the
Complaint on the ground of failure to plead fraud with particularity are denied.

The Court turns next to the remaining corporate defendant, W.H.P.R. Surprisingly, the
Complaint contains not a single allegation about what W.H.P.R. did to further the
fraudulent scheme, or to commit an act of mail or wire fraud, directly or indirectly. There
is no allegation, [*15] for example, that W.H.P.R. was the vehicle through which the
fraudulently obtained journals were resold to institutions. There is an allegation that
Richard Hayat is the owner of W.H.P.R. and that Hayat himself obtained subscriptions
through false pretenses; but that is a far cry from alleging that the corporation (either
through Hayat or others) took some action to further the fraudulent scheme. W.H.P.R.'s
motion to dismiss the Complaint for failure to comply with Rule 9(b) must, therefore, be
granted, although the Court grants the motion without prejudice, so that Plaintiffs can try
to cure this pleading defect by amendment.

III. Plaintiffs' Substantive RICO Claim Must Be Dismissed

HN4Under 18 U.S.C. § 1962(c), it is unlawful for any person "employed by or associated


with any enterprise engaged in . . . interstate or foreign commerce, to conduct or
participate, directly or indirectly, in the conduct of such enterprise's affairs through a
pattern of racketeering activity." To plead a civil claim under this section, the plaintiff
must allege facts showing the existence of an enterprise affecting interstate commerce, as
well as facts tending to show that the defendants were persons "employed [*16] by or
associated with" the enterprise, and that they "conduct[ed] such enterprise's affairs
through a pattern of racketeering activity."

Defendants proffer a variety of reasons why the Complaint presently before the Court is
lacking. Some of their arguments are meritless, but others are correct.

A. The Existence of a RICO Enterprise

32
Defendants argue first that the Complaint fails to allege the existence of any enterprise. In
fact, the Complaint alleges the existence of two enterprises--and does so adequately as to
one of them.

The first alleged enterprise is defendant W.H.P.R., a Long Island-based subscription


agent--a corporate purveyor of subscriptions to professional journals. There are numerous
factual allegations in the Complaint from which one can infer that professional journals
are sold in interstate and foreign commerce--starting with the allegation that Plaintiffs,
several of which are non-New York corporations, use W.H.P.R. as their agent to solicit
and sell subscriptions to the various journals that they sell in interstate commerce. The
enterprise is sufficiently pleaded under Rule 8, which is all that is required. In re
Sumitomo Copper Litig., 995 F. Supp. 451, 454 (S.D.N.Y. 1998).

The [*17] second enterprise identified in the Complaint is a so-called "association in


fact" enterprise, consisting of Hayat and the other individual defendants.

HN5An association in fact is a group of persons associated together for a common


purpose of engaging in a course of conduct. Under the recent case of Boyle v. United
States, 129 S. Ct. 2237, 2244, 173 L. Ed. 2d 1265 (2009), an association in fact enterprise
must have a "structure" exhibiting three features: a purpose, relationships among the
individuals associated with the enterprise, and longevity sufficient to permit the
associates to pursue the purpose of the enterprise. The association in fact enterprise
identified in the Complaint has two of those features, and may have the third.

The Complaint alleges that Hayat and the other individual defendants associated together
for the common purpose of carrying out the scheme of buying journal subscriptions at
lower rates, based on false representations about the identity of the purchasers, and then
reselling the journals to institutions at a higher rate. (See Compl. P 35.) That takes care of
Boyle's purpose requirement.

The Complaint also alleges that this association in fact carried out its activities between
[*18] 1998 and 2009 (id. PP 38-44)--a sufficient period of time to satisfy the requirement
of longevity. The fact that not every individual defendant is alleged to have engaged in
fraudulent activity for that entire period is of no moment for longevity purposes, since (as
is well known) a person can join in some ongoing fraudulent activity at any point.

The question is whether there are allegations in the Complaint--including the allegations
that Hayat is the "leader of the fraud" (id. P 30), that the other individual defendants
comprising the association in fact regularly identified their address as that of W.H.P.R.,
and that all of the defendants in the association in fact were working together on a
common scheme to defraud Plaintiffs--to satisfy the "relationship" requirement for an
association in fact at the pleading stage. I conclude that there are not.

In Boyle, the Supreme Court announced that HN6the concept of association "requires
both interpersonal relationships and a common interest." 129 S. Ct. at 2244. An

33
association of individuals can be an enterprise if it is formed for the purpose of engaging
in any type of illicit activity--such as, for example, the activity alleged in Plaintiffs' [*19]
Complaint--and it need not have any existence apart from the predicate acts committed
by its employees and/or associates. See id. at 2245. Such a group "need not have a
hierarchical structure or a 'chain of command'; …. Members of the group need not have
fixed roles; different members may perform different roles at different times. The group
need not have a name, regular meetings, dues, established rules and regulations,
disciplinary procedures, or induction or initiation ceremonies." Id. The high Court
emphasized the "breadth" of the concept of an "enterprise" under RICO, and rejected the
dissenters' argument that Congress intended RICO to apply only to business-like entities
that have some existence apart from their illicit activity. See id. at 2243, 2247. The Boyle
Court thus declined to overturn the defendant's conviction on the ground that his trial
judge had failed to charge the jury that an association in fact enterprise had to have an
ascertainable structure beyond that inherent in the pattern of racketeering activity in
which it engages. Id. at 2247.

Here, Plaintiffs have alleged that there existed an association in fact, headed by Richard
Hayat and formed for the purpose of [*20] fraudulently obtaining individual
subscriptions to journals--at the discounted individual rate--and then reselling those
journals to institutions at a higher rate. There are no facts pleaded tending to show any
relationship among the individual defendants other than through their participation in the
affairs of the association in fact enterprise; but no additional relationship is necessary, as
long as facts are alleged tending to make it plausible that the Court is confronted with
something more than parallel conduct of the same nature and in the same time frame by
different actors in different locations.

However, not a single fact is pleaded tending to show that the various sets of named
defendants--the Hayats and their corporation in Long Island, the Pessinas and their
corporation in the Hudson Valley, the Anspachs in Indiana and Lokshina in
Massachusetts--had any interpersonal relationships. Only one pleaded fact--that all of the
individual defendants "regularly stated their address as 99 Sherwood Avenue,
Farmingdale, New York, the business address of W.H.P.R." (Compl. P 30)--admits of an
inference that all of the individual defendants were somehow associated; and even that
allegation [*21] does not specifically contend that they used W.H.P.R.'s address in
furtherance of the fraud (it does not, for example, contend that the individual defendants
used that address as the mailing address to which the journals should be sent).

The Boyle Court made a point of noting that an association required proof of
interpersonal relationships. Nothing in the Complaint explains how these particular
people, located in different parts of the country, came to an agreement to act together--or
even how they knew each other. Indeed, the Complaint does not even allege that they
each other--although one could fairly infer that originally named defendant Russell
Pessina knew Hayat, because Hayat allegedly asked him/Educo to respond to Plaintiffs'
2008 inquiry about the source of certain journals. Facts are asserted in support of the
Anspachs motion to dismiss that support an inference that Thomas Anspach knew

34
originally named defendant Barbara Pessina, but those facts do not appear in the
pleadings.

In this post-Twombly era, I conclude that HN7a plaintiff must allege something more
than the fact that individuals were all engaged in the same type of illicit conduct during
the same time period. Indeed, [*22] Twombly's precise holding was that an antitrust
complaint containing not a single factual allegation to support the existence of a
conspiracy--nothing more than parallel conduct by separate actors--was insufficiently
pleaded as a matter of law. Given the exceptional seriousness of racketeering allegations,
a complaint pleading a RICO violation cannot be held to a lesser standard.

I thus accept Defendants' argument that Plaintiffs have failed to plead the existence of an
enterprise insofar as the Complaint deals with the so-called association in fact enterprise.
Because this pleading defect could be cured by amendment, I dismiss the RICO claim on
this ground without prejudice and with leave to amend. It is not necessary for the
amended complaint to lay bare every single detail about how the association in fact
enterprise came into being, as Defendants' moving papers suggest. However, there has to
be something that ties together the various defendants allegedly comprising the
association in fact into a single entity that was formed for the purpose of working
together--acting in concert--by means of mail and wire fraud.

B. Participation in the Conduct of the Enterprise's Affairs

HN8Having identified [*23] an enterprise, a civil RICO plaintiff must also plead facts
from which it can be inferred that each of the defendants participated, directly or
indirectly, in the conduct of the enterprise's affairs. When alleging a violation of §
1962(c), the complaint must set out facts tending to show that each individual defendant
"participated in the operation or management of the enterprise itself." Reves v. Ernst &
Young, 507 U.S. 170, 183, 113 S. Ct. 1163, 122 L. Ed. 2d 525(1993). For purposes of
civil RICO, it is not enough to allege that a defendant provided services that were helpful
to an enterprise, without alleging facts that, if proved, would demonstrate some degree of
control over the enterprise. City of N.Y. v. Smokes-Spirits.com, Inc., 541 F. 3d 425, 449
(2d Cir. 2008), rev'd on other grounds. 175 L. Ed. 2d 943, 130 S. Ct. 983, 2010 U.S.
LEXIS 768 (Jan. 25, 2010).

The Complaint before the Court sufficiently pleads that Richard Hayat had some degree
of control over the operation and management of the enterprise W.H.P.R., in that he is
alleged to own that corporation. For that reason, his argument that the Complaint fails to
allege his participation in the operation or management of an enterprise cannot succeed.

However, the Complaint does not specifically [*24] allege any facts tending to show that
Hayat controlled the operation or management of any association in fact. For example,
the Complaint does not allege that it was at Hayat's behest that other members of the
association in fact engaged in fraudulent conduct, or that Hayat coordinated their efforts
or provided a common repository for the fruits of their illicit labors. Therefore, Hayat's

35
motion to dismiss must be granted to the extent that the Complaint alleges that Hayat is
liable under § 1962(c) for the conduct of the affairs of the association in fact enterprise.

Insofar as the remaining individual defendants other than Richard Hayat are concerned,
the Complaint alleges only that they provided services that were helpful to the association
in fact enterprise--by ordering subscriptions under false pretenses. Not a single fact is
alleged as to any of these defendants tending to show that they exercised the slightest
degree of control over either of the claimed enterprises. Under Reves, HN9civil RICO
liability is limited to persons who have "some part in directing the enterprise's affairs."
507 U.S. at 179. Thus, the motions to dismiss made by the individual defendants other
than Richard [*25] Hayat must be granted, albeit without prejudice and with leave to
amend to allege facts that would place those defendants within the ambit of Reves.

C. Pattern of Racketeering Activity

The Complaint also must allege facts tending to show that the affairs of each of the
pleaded enterprises were conducted through a pattern of racketeering activity. In alleging
this as to W.H.P.R., the Complaint is wholly insufficient--not because it fails to allege
fraud with particularity, but because it fails to connect the fraud to the affairs of the
enterprise. The Complaint fails to allege that Richard Hayat (or anyone else, for that
matter) conducted the affairs of the corporation he owned through any pattern of
racketeering activity. The Complaint alleges that Hayat (not the corporation) and the
other individual defendants personally secured a number of individual subscriptions to
journals in their own names (not in the corporation's name) under false pretenses and
with the intent to resell those subscriptions to institutions at higher rates. There is no
allegation that Hayat caused W.H.P.R. to do anything in relation to this scheme, or that
the corporation's operations were in any way connected [*26] to the fraudulent obtaining
of subscriptions. Again using an obvious example, there is no specific allegation that
W.H.P.R. participated in the resale of the fraudulently obtained subscriptions, or that the
corporation realized any portion of the illicit profits from the scheme.

The Complaint as it stands (even taking into account the allegations of the RICO Case
Statement) alleges nothing more than that a person who happens to be the owner of a
corporation, and his wife, and some other people who are not alleged to have anything
whatever to do with running the affairs of that corporation, all obtained subscriptions
from Plaintiffs during a ten-year period, under false pretenses and with the intention of
diverting profits away from Plaintiffs and into their own pockets. Even pre-Twombly,
that would not be sufficient to allege that the affairs of the enterprise known as W.H.P.R.
were conducted through a pattern of racketeering activity. Post-Twombly, the pleading's
insufficiency cannot be challenged. 1

FOOTNOTES

1 The Complaint further alleges upon information and belief that Hayat and/or the other
individual defendants secured the individual subscriptions identified on Schedule A. This

36
does not [*27] implicate Hayat in running the affairs of the corporation W.H.P.R.
through any pattern of racketeering activity.

Because the pleading does not adequately allege the existence of the association in fact
enterprise, it is not strictly necessary to address Defendants' motions to dismiss on the
ground that the Complaint fails to allege that the association's affairs were conducted
through a pattern of racketeering activity. However, where, as here, it is alleged that the
association in fact was formed for the purpose of engaging in mail and wire fraud, and
the association is defined solely and exclusively by its illicit racketeering activity, it
appears that this particular pleading requirement has been met.

Defendant Lokshina raises the specter of "open-ended" versus "closed-ended" continuity


in connection with her assertion that the Complaint does not plead any "pattern of
racketeering activity." But there is no continuity problem in this case. The Complaint
alleges that the fraudulent activity extended over roughly a decade. It thus alleges a
closed period of repeated conduct lasting well more than two years. See Vicon Fiber
Optics Corp. v. Scrivo, 201 F. Supp. 2d 216, 220-21 (S.D.N.Y. 2002). [*28] Even if
Lokshina herself made her fraudulent purchases over a much shorter period, it is the
length of time over which the affairs of the association in fact enterprise were illicitly
conducted that matters--not the length of time that any one individual who was involved
in racketeering committed predicate acts.

D. RICO Damages

Finally, all Defendants argue that Plaintiffs have not adequately pleaded damages
recoverable under RICO. That argument fails.

The RICO statute provides that:


HN10Any person injured in his business or property by reason of a violation of section
1962 of this chapter may sue therefor in any appropriate United States district court and
shall recover threefold the damages he sustains and the cost of the suit, including a
reasonable attorney's fee . . . .
18 U.S.C. § 1964(c). Thus, HN11to state a civil RICO claim, a plaintiff must plead an
injury to his "business or property" that was proximately caused by the substantive RICO
violation. See First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 767 (2d Cir.
1994).

Here, Plaintiffs allege that they sell journals to two classes of subscribers at two different
rates, with institutions paying more than individuals; that Defendants [*29] fraudulently
obtained subscriptions at the lower individual rate by representing that individuals were
subscribing to the journals for their own individual use, only to turn around and resell
those same journals at a higher price to institutions; and that Plaintiffs were deprived of
the income they would have received if the institutions had subscribed to the journals at
the institutional rate, with Defendants pocketing what should have been Plaintiffs' profit.

37
The loss incurred by Plaintiffs came about by virtue of the RICO conspiracy, and
constituted an injury to Plaintiffs' business. The literal language of the statute--which the
Supreme Court found controlling in Boyle, see 129 S. Ct. at 2246-47--makes those
damages compensable under RICO. Finding otherwise would require the Court to adopt
Defendants' argument that nothing more is pleaded here than breach of contract-- which
is simply not the case.

Defendants are correct that the Complaint does not allege the sort of "out-of-pocket" loss
often present in a fraud-based RICO action. Instead, Plaintiffs allege that, as a result of
Defendants' fraudulent scheme, they suffered "a loss of subscription revenue" (Compl. P
48)-- specifically, [*30] the difference between the individual rates Plaintiffs actually
received, and the higher rates they would have received if the institutional end users had
subscribed to the journals. In other words, Plaintiffs allege lost profits. Defendants are not
correct in presuming that Plaintiffs cannot recover such lost profits under RICO.

A careful reading of Second Circuit case law supports this Court's conclusion that HN12a
plaintiff can adequately plead RICO damages by alleging lost profits where, as here, they
constitute an injury to plaintiff's business, were proximately caused by the alleged
racketeering, and are not merely speculative. For example, in Terminate Control Corp. v.
Horowitz, 28 F.3d 1335 (2d Cir. 1994), the Second Circuit upheld a jury award of "lost
profits" from construction contracts plaintiff "might have obtained but for the
racketeering," where plaintiff had proceeded on the theory that the lost profits constituted
"business injury caused by a racketeering conspiracy." See id. at 1343; see also Den
Hollander v. Flash Dancers Topless Club. 173 F. App'x 15, 17-18 (2d Cir. 2008)
(rejecting RICO plaintiff's claims of lost business profits not because they are
unrecoverable under [*31] RICO, but because plaintiff had failed to allege they were
proximately caused by defendants' racketeering); Commercial Cleaning Servs, v. Colin
Serv. Sys., Inc., 271 F.3d 374, 384 (2d Cir. 2001) (concluding that RICO plaintiff had
adequately pled RICO injury by alleging lost business profits directly caused by
defendant-competitor's fraudulent hiring scheme).

Numerous district courts in this Circuit have also reached the conclusion that HN13a civil
RICO plaintiff may recover lost profits, subject to the traditional limitations of proximate
cause and lack of speculativeness. See, e.g., 3947 Austin Blvd. Assocs.. LLC v. M.K.D.
Capital Corp., No. 04 Civ. 8596, 2007 U.S. Dist. LEXIS 39762, at * 10 (S.D.N.Y. May
30, 2007); Mayes v. Local 106. Int'l Union of Operating Eng'rs, No. 93 Civ. 716, 1999
U.S. Dist. LEXIS 1118, at *14 (N.D.N.Y. Feb. 5, 1999); Sound Video Unlimited. Inc. v.
Video Shack. Inc., 700 F. Supp. 127, 142 (S.D.N.Y. 1988). This Court agrees; the plain
language of the RICO statute does not bar Plaintiffs from recovering lost profits
proximately caused by a racketeering enterprise engaged in subscription fraud.

Defendants' argument that Plaintiffs have failed to plead RICO injury [*32] because
"[b]enefit of the bargain damages are not recoverable under § 1964(c)" (Mem. in Supp, of
Defs. W.H.P.R., Richard Hayat and Randi Hayat's Mot. to Dismiss, Sept. 25, 2009, at
14), is misplaced. This is not a "benefit of the bargain" case, as that phrase has been used
by certain courts finding such damages unrecoverable under RICO. Two of the cases

38
cited by Defendants illustrate the distinction. See Academic Indus., Inc, v. Untermeyer
Mace Partners, Ltd., No. 90 Civ. 1052, 1992 U.S. Dist. LEXIS 3953, 1992 WL 73473
(S.D.N.Y. Apr. 1, 1992); Henkind v. Brauser, No. 87 Civ. 4072, 1989 U.S. Dist. LEXIS
5344, 1989 WL 54109 (S.D.N.Y. May 17, 1989). In both Academic Industries and
Henkind, plaintiffs alleged that they had been fraudulently induced to make an
investment, and sought RICO damages not only for their out-of-pocket investment, but
also for the falsely promised--and entirely illusory--fruits of the fraudulent transaction.
See Academic Indus., 1992 U.S. Dist. LEXIS 3953, 1992 WL 73473, at *1-2 (holding
that plaintiff companies, which had been fraudulently induced to enter into an agreement
under which defendant would provide investment banking services, could recover their
"out-of-pocket expenditures," but not "any profits plaintiffs would have earned had
[defendant] [*33] carried through on its promises"); Henkind, 1989 U.S. Dist. LEXIS
5344, 1989 WL 54109, at * 1, 6 (holding that plaintiffs, who had been fraudulently
induced to invest in defendants' sham partnership, could recover their out-of-pocket
investment, but not the falsely promised profits).

Thus, in both cases, plaintiffs ran afoul of the rule that HN14RICO damages cannot place
plaintiffs in a better position than they would have been in if the racketeering had not
occurred. See Commercial Union Assurance Co. PLC v. Milken, 17 F.3d 608, 612 (2d
Cir. 1994). Put differently, the American Industries and Henkind plaintiffs failed to show
proximate cause-- defendants' misrepresentations induced plaintiffs to invest, but did not
cause plaintiffs to lose the supposed benefits of the fraudulent investments. Indeed, in
Academic Industries, Judge Sand expressly noted that if plaintiffs had also declined to
pursue other business opportunities in reliance on defendants' misrepresentations, those
lost profits would be recoverable. See 1992 U.S. Dist. LEXIS 3953, 1992 WL 73473, at
*2. In essence, both cases simply reinforce the principle that, as stated by the Supreme
Court, HN15a RICO plaintiff "can only recover to the extent that . . . he has been injured
in his business [*34] or property by the conduct constituting the violation" Sedima,
S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985)
(emphasis added); cf. McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 228-29 (2d Cir.
2008) (reasoning that a RICO plaintiff cannot recover benefit of the bargain or
"expectancy" damages in "fraud in the inducement" cases because RICO "compensates
only for injury to 'business or property,'" not for injury to an expectation interest that
would not have existed absent the alleged RICO violation (quoting 18 U.S.C. § 1964(c))).

Here, by contrast, Plaintiffs do not seek to recover lost profits that would have been
generated by the fraudulent subscription agreements with Defendants. Instead, they allege
that Defendants' subscription fraud--their racketeering--directly caused Plaintiffs to lose
revenues that they otherwise would have earned by selling the subscriptions at the higher,
institutional rate. In other words, Plaintiffs' RICO claim seeks to recover profits that they
allegedly would have earned if the racketeering had not occurred.

The other two cases cited by Defendants in support of their "benefit of the bargain"
argument, First Nationwide Bank and Commercial Union, are more [*35] easily
disposed of, as they are wholly inapposite. In both cases, the RICO claim was not ripe
because the plaintiffs still had a chance of recouping--or, indeed, had already recouped--

39
their fraudulently induced investments. In Commercial Union, the Second Circuit
affirmed the dismissal of plaintiffs' RICO claim because their investment had been fully
repaid through liquidation; thus, plaintiffs "ha[d] already been placed" in "the position
they would have been in but for the illegal conduct" and, "without provable damages, no
viable RICO cause of action [could] be maintained." 17 F.3d at 612.

In First Nationwide Bank, the plaintiff bank sought to recover RICO damages for loans
fraudulently induced by defendants' misrepresentations regarding the value of the
collateral properties. 27 F.3d at 766-67. However, because the bank had not yet
foreclosed on several of the loans, the Second Circuit concluded that its "actual damages .
. ., if any, are yet to be determined," and held that plaintiff's claims therefore were not
"ripe for suit . . . under RICO." Id. at 768-69 (holding that plaintiff-creditor "can only
pursue the RICO treble damages remedy after his contractual rights to payment have
[*36] been frustrated"); accord Goldfine v. Sichenzia, 118 F. Supp. 2d 392, 397-98
(S.D.N.Y. 2000) (finding that plaintiff-creditors had failed to plead cognizable RICO
damages because they had made no effort to recover the loans in question through the
underlying mortgages and notes).

Here, the ripeness of Plaintiffs' RICO claims is not in doubt. Plaintiffs are not creditors
likely to recoup some or all of their losses through foreclosure or some other remedy;
instead, Plaintiffs are publishers alleging that they have lost definite profits--the
difference between the individual and institutional subscription rates--on scores of
subscriptions over a period of about ten years as a result of Defendants' fraudulent
scheme.

In sum, the Court concludes that Plaintiffs have adequately pled RICO damages, as they
have alleged lost business profits caused by Defendants' racketeering. Of course, if
Plaintiffs succeed in amending their Complaint to assert a viable RICO claim and this
case proceeds, Plaintiffs will have to contend with the limitation of speculativeness. But
at the pleading stage, it suffices that Plaintiffs have alleged damages potentially
recoverable under the RICO statute. Accordingly, [*37] Defendants' motion to dismiss
on this ground is denied.

For all of the reasons set forth above, the first cause of action--the substantive RICO
count--is dismissed without prejudice as against all Defendants. Plaintiffs have thirty
days from the date of this opinion to file an amended complaint addressing the
deficiencies noted herein, and containing factual allegations (not conclusions) tending to
show (1) that there is some relationship between and among defendants, such that one
could infer the existence of an association in fact among them, as opposed to merely the
fortuity of parallel conduct; (2) that any defendant other than Richard Hayat participated
in the operation or management of the two alleged enterprises; (3) that Richard Hayat
participated in the operation or management of any association in fact enterprise; and (4)
that the affairs of W.H.P.R were conducted, directly or indirectly, through a pattern of
racketeering activity. Thereafter, Defendants will have thirty days to make whatever
motions to dismiss they deem appropriate--provided they are consistent with this opinion,
which means that Defendants may not reargue issues already decided against them.

40
IV. The RICO [*38] Conspiracy Claim Is Dismissed Without Prejudice

Defendants move to dismiss the second cause of action, which alleges conspiracy to
commit racketeering activity in violation of 18 U.S.C. § 1962(d). Their principal ground
for moving is that the Court's dismissal of the § 1962(c) claim mandates dismissal of the
conspiracy claim. This is, of course, correct. Discon, Inc., v. NYNEX Corp., 93 F.3d
1055, 1064 (2d Cir. 1996), vacated on other grounds, 525 U.S. 128, 119 S. Ct. 493, 142
L. Ed. 2d 510 (1998); Maddaloni Jewelers. Inc. v. Rolex Watch U.S.A.. Inc., 354 F.
Supp. 2d 293, 300 (S.D.N.Y. 2004). Therefore, the second cause of action is dismissed.

But because I have given Plaintiffs thirty days to try to cure the defects in their pleading
of a § 1962(c) claim, the RICO conspiracy claim is dismissed without prejudice and with
leave to amend. And because amendment will be forthcoming, it is appropriate to head
off another motion to dismiss (if that be possible, which I doubt) by making some
comments about the sufficiency of the § 1962(d) claim as presently pleaded.

HN16Section 1962(d) makes it unlawful for any person to conspire to violate § 1962(c).
The core of a RICO conspiracy is an agreement to commit predicate acts, and a RICO
[*39] civil conspiracy complaint must specifically allege such an agreement. Hecht v.
Commerce Clearing House, Inc., 897 F.2d 21, 25 (2d Cir. 1995).

The Second Circuit has held that a complaint alleging a violation of § 1962(d) must
contain allegations of "some factual basis for a finding of a conscious agreement among
the defendants." Id. at 26 n.4. Even before Twombly, and certainly after Twombly, these
allegations may not be conclusory, but must set forth specific facts tending to show that
each of the defendants entered into an agreement to conduct the affairs of a particular,
identified enterprise through a pattern of racketeering activity--not simply that each
defendant committed two or more acts that would qualify as predicate acts, without
regard to whether those acts were committed in furtherance of the activity of the
enterprise. Again, parallel conduct by different defendants affords an insufficient basis
for inferring that an agreement was reached.

The Complaint presently before the Court violates this rule. It contains nothing more than
a conclusory allegation of an agreement among defendants and a further allegation that
each of the individual defendants committed certain discrete [*40] acts of fraud. The
second cause of action would have been dismissed on this ground even if the first cause
of action had not also been dismissed. Any amended pleading must address this
deficiency, or the RICO conspiracy claim will be dismissed with prejudice and without
leave to replead.

V. The Anspach Defendants' Motion to Dismiss for Lack of Personal Jurisdiction Is


Denied Without Prejudice to Renewal

The Anspach Defendants, residents of Indiana (Compl, PP 15-16), move separately to


dismiss pursuant to Rule 12(b)(2) on the ground that the Court lacks personal jurisdiction

41
over them. Plaintiffs claim that Thomas and Patricia Anspach "conspired" with Richard
Hayat, and that they subscribed to several specified journals at the individual rate
intending to resell them to institutions at higher rates. (Id. PP 30, 42-43.) For the reasons
stated below, the Court concludes that if the current Complaint stated a viable RICO
claim against Defendants, exercising jurisdiction over the Anspachs would be proper
pursuant to 18 U.S.C. § 1965(b) because it would serve the "ends of justice."
Accordingly, the Anspachs' motion to dismiss for lack of personal jurisdiction is denied,
without prejudice to [*41] its renewal after the filing of an amended complaint.

HN17On a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, the plaintiff
"bears the burden of showing that the court has jurisdiction over the defendant." In re
Magnetic Audiotape Antitrust Litig., 334 F.3d 204, 206 (2d Cir. 2003). Where, as here,
the court does not conduct an evidentiary hearing on the issue of personal jurisdiction,
"the plaintiff need only make a prima facie showing that the court possesses personal
jurisdiction over the defendant." DiStefano v. Carozzi N.A., Inc., 286 F.3d 81, 84 (2d Cir.
2001). In deciding whether a plaintiff has met this burden, the court must "construe the
pleadings and affidavits in the light most favorable to [plaintiff], resolving all doubts in
[plaintiff's] favor." Id. at 84. "However, conclusory allegations are not enough to
establish personal jurisdiction." Galerie Gmurzynska v. Hutton, 257 F. Supp. 2d 621, 625
(S.D.N.Y. 2003) (internal quotations omitted), aff'd, 355 F.3d 206 (2d Cir. 2004).

The RICO statute's jurisdiction and venue section, 18 U.S.C. § 1965, provides, in relevant
part:
HN18(a) Any civil action or proceeding under this chapter against any person may be
instituted [*42] in the district court of the United States for any district in which such
person resides, is found, has an agent, or transacts his affairs.

(b) In any action under section 1964 of this chapter in any district court of the United
States in which it is shown that the ends of justice require that other parties residing in
any other district be brought before the court, the court may cause such parties to be
summoned, and process for that purpose may be served in any judicial district of the
United States by the marshal thereof.

***

(d) All other process in any action or proceeding under this chapter may be served on any
person in any judicial district in which such person resides, is found, has an agent, or
transacts his affairs.

Inexplicably, and much to Plaintiffs' delight, the Anspach Defendants adopt the position
that § 1965(d) provides for nationwide service of process in civil RICO actions--the
Anspachs assert only that the exercise of personal jurisdiction over them would not
comport with due process. (See Mem. in Supp, of Mot. to Dismiss by Anspach Defs.,
Oct. 9, 2009, at 3-4.) That, however, is not the law in this Circuit. Instead, HN19"The law
in this Circuit is clear that the RICO [*43] statute 'does not provide for nationwide

42
personal jurisdiction over every defendant in every civil RICO case, no matter where the
defendant is found."' Team Obsolete Ltd. v. A.H.R.M.A. Ltd., No. 01 Civ. 1574,2002
U.S. Dist. LEXIS 10737, at *20 (E.D.N.Y. 2002) (quoting PT United Can Co.. Ltd. v.
Crown Cork & Seal Co., Inc., 138 F.3d 65, 71 (2d Cir. 1998)).

In PT United, the Second Circuit examined the meaning of § 1965, and expressly rejected
the position--which had been adopted by at least one other circuit court, see Republic of
Panama v. BCCI Holdings (Luxembourg') S.A., 119 F.3d 935, 942 (11th Cir. 1997)--that
§ 1965(d) confers nationwide jurisdiction over RICO defendants. PT United, 138 F.3d at
70-72. Instead, the PT United court held that:
HN20[Section] 1965(a) grants personal jurisdiction over an initial defendant in a civil
RICO case to the district court for the district in which that person resides, has an agent,
or transacts his or her affairs. In other words, a civil RICO action can only be brought in a
district court where personal jurisdiction based on minimum contacts is established as to
at least one defendant.
Id. at 71. Then, "§ 1965(b) provides for nationwide service and [*44] jurisdiction over
'other parties' not residing in the district,… including co-defendants …. This jurisdiction
is not automatic but requires a showing that the 'ends of justice' so require." Id. (quoting
18 U.S.C. § 1965(b)). Meanwhile, § 1965(d) applies only to "'all other process,'
mean[ing] process other than a summons of a defendant or subpoena of a witness." Id. at
72 (quoting 18 U.S.C. § 1965(d)),

In sum, in this Circuit, "a civil RICO action can only be brought in a district court where
personal jurisdiction based on minimum contacts is established as to at least one
defendant. Then, jurisdiction can be obtained on a showing that the 'ends of justice' so
require." Ritchie Capital Memt., L.L.C, v. Coventry First LLC, No. 07 Civ. 3494, 2007
U.S. Dist. LEXIS 51081, at *30 (S.D.N.Y. July 17, 2007) (internal quotations and
citation omitted); accord Zito v. LeasecommCorp., No. 02 Civ. 8074, 2004 U.S. Dist.
LEXIS 19778, at *62 (S.D.N.Y. Sept. 30, 2004) (Lynch, J.).

In PT United, HN21the Second Circuit did not offer an explanation as to what exactly the
RICO statute means by "ends of justice." See 138 F.3d at 71-72. However, it is generally
accepted that "ends of justice" jurisdiction is authorized [*45] where the RICO claim
could not otherwise be tried in a single action because no district court could exercise
personal jurisdiction over all of the defendants. See Nuevo Mundo Holdings v.
PriceWaterhouseCoopers LLP, No. 03 Civ. 613, 2004 U.S. Dist. LEXIS 24900, at *21
(S.D.N.Y. Dec. 9, 2004); Zito, 2004 U.S. Dist. LEXIS 19778, at *62; Gates v. Wilkinson,
No. 01 Civ. 3145, 2003 U.S. Dist. LEXIS 9417, at *9 (S.D.N.Y. June 4, 2003); Anderson
v. Ind. Black Expo. Inc., 81 F. Supp. 2d 494, 505 (S.D.N.Y. 2000); Daly v. Castro
Llanes, 30 F. Supp. 2d 407, 413 (S.D.N.Y. 1998).

Here, there does not seem to be any dispute that at least one (and likely several) of the
Defendants is initially subject to personal jurisdiction in New York pursuant to § 1965(a).
(See Compl, PP 9-11 (alleging that W.H.P.R. is a New York corporation, and that both
Hayats are New York residents).) Further, the Anspach Defendants do not contend--and it
certainly does not appear--that any other district would be able to hear the RICO claim

43
against all of the Defendants. Finally, the Anspach Defendants have not raised any
legitimate constitutional objection to this Court's exercise of "ends of justice" [*46]
jurisdiction over them.

Accordingly, the Court concludes that if the allegations in the Complaint stated a viable
RICO claim, it would be proper to exercise "ends of justice" RICO jurisdiction over the
Anspachs pursuant to § 1965(b). The Court does not address the question of whether the
Anspachs are also subject to personal jurisdiction for Plaintiffs' state law claims pursuant
to New York's long-arm statute. For if the RICO claim were present, the Court likely
could exercise pendent personal jurisdiction over the Anspachs, see IUE AFL-CIO
Pension Fund v. Herrmann. 9 F.3d 1049, 1056-57 (2d Cir. 1993); and, as this opinion
makes clear, the Court will not attempt to exercise supplemental jurisdiction over the
state law claims in the absence of the RICO claim.

Thus, the Court denies the Anspach Defendants' motion to dismiss for lack of personal
jurisdiction. The Anspachs may renew their motion upon the filing of an amended
complaint, making arguments that are not inconsistent with the law as discussed in this
opinion.

VI. The Motions to Dismiss the State Law Claims Are Denied Without Prejudice to
Renewal

The remainder of everyone's motion to dismiss addresses the adequacy of the various
[*47] state law claims--for fraud, conspiracy, breach of contract and conversion--that are
asserted against Defendants. These motions are all denied without prejudice to renewal.

The parties are advised that the Court will decline to hear the state law claims if Plaintiffs
fail to plead any viable federal claim, and will allow a state court judge to adjudicate the
viability of Plaintiffs' common law claims. If, however, Plaintiffs manage to plead a
viable RICO claim under either or both sections invoked, the Court will assert
supplemental jurisdiction over the pendent claims and will act on any renewed motion to
dismiss those claims.

If Plaintiffs decline to replead within thirty days, the instant Complaint will be dismissed
without prejudice so that the state law claims can be asserted in a more appropriate
forum.

CONCLUSION

Because there exists some pleading defect in the RICO claims as against each and every
defendant, the Court dismisses the Complaint as against all Defendants, without prejudice
and with leave to amend in accordance with the instructions set forth above.

The Clerk of the Court shall remove the following motions from the Court's list of
pending motions; Docket Nos. 30, 36 [*48] and 40.

44
This constitutes the decision and order of the Court.

Dated; February 19, 2010

/s/ Colleen McMahon

U.S.D.J.

628 F. Supp. 2d 475, *; 2009 U.S. Dist. LEXIS 52598, **

HERMAN GROSS et al., Plaintiffs, - against - RODERICK WAYWELL et al.,


Defendants.

08 Civ. 9498 (VM)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW


YORK

628 F. Supp. 2d 475; 2009 U.S. Dist. LEXIS 52598

June 16, 2009, Decided


June 17, 2009, Filed

CASE SUMMARY:PROCEDURAL POSTURE: Plaintiffs, an individual and a


corporation, filed suit against defendants, including a chief executive, a comptroller, and
a bookkeeper, alleging violations of the Racketeer Influenced and Corrupt Organizations
Act (RICO), 18 U.S.C.S. §§ 1961-1968, as well as various state law claims. Defendants
opposed plaintiffs' filing of a proposed first amended complaint and renewed their
motions to dismiss it for lack of subject matter jurisdiction.

OVERVIEW: The unlawful conduct the complaint described arose from defendants'
operation of plaintiffs' tennis club and related premises in New York. Defendants argued
that the pleadings failed to state a plausible RICO claim and that no other recognized
ground existed to litigate the case in federal court. Plaintiffs asserted that defendants'
fraudulent scheme involved over 100 instances of mail and/or wire fraud carried out in
furtherance of looting the corporation's assets and extended over a period of more than
four years. While the temporal duration and relatedness of the predicate acts claimed
might have been enough to satisfy one aspect of the RICO pattern requirement, the
factual pleadings were otherwise insufficient to satisfy the closed-ended continuity prong.
Insofar as plaintiffs' RICO claims were grounded on mail and wire fraud, a multiplicity of
such predicate acts without more did not necessarily constitute a pattern of racketeering

45
activity. The pleadings did not indicate individually which of the three defendants
actually engaged in the particular predicate acts of mail or wire fraud offenses that
plaintiffs alleged constituted a pattern of racketeering.

OUTCOME: Plaintiffs' request to file a proposed first amended complaint was denied
and defendants' renewed motions to dismiss were granted.

CORE TERMS: continuity, predicate acts, mail, racketeering, wire, wire fraud, societal,
duration, entity, dimension, treble damages, racketeering activities, closed-ended,
predicate, furtherance, punitive, organized crime, criminal activity, fraudulent schemes,
factual allegations, multifactor, gravity, amend, citation omitted, unlawful conduct,
statutes of limitations, criminal offenses, number of victims, mail fraud, pattern of
racketeering activity'

LexisNexis(R) Headnotes
Civil Procedure > Parties > Substitutions > Death of Party
HN1 An action against a deceased defendant abates unless the court authorizes the
substitution of another proper party. Fed. R. Civ. P. 25(a).

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to
State Claims
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Motions to
Dismiss
HN2 In assessing a motion to dismiss under Fed. R. Civ. P. 12(b)(1) and (6), dismissal of
the complaint is appropriate if the plaintiff has failed to offer sufficient factual allegations
making any asserted claim plausible on its face. A court should not dismiss a complaint
for failure to state a claim if the factual allegations sufficiently raise a right to relief above
the speculative level. The task of the court in ruling on a motion to dismiss is to assess
the legal feasibility of the complaint, not to assay the weight of the evidence which might
be offered in support thereof. The court must accept all well-pleaded factual allegations
in the complaint as true, and draw all reasonable inferences in the plaintiff's favor.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN3 To state a plausible civil claim for violation of 18 U.S.C.S. § 1962(c) of the
Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. §§ 1961-1968,
a plaintiff's pleadings must demonstrate, as to each defendant, that while employed by or
associated with an enterprise engaged in interstate or foreign commerce, and through the
commission of at least two predicate acts constituting a pattern of racketeering, the
defendant directly or indirectly conducted or participated in the conduct of the affairs of
such enterprise. 18 U.S.C.S. § 1962(c). The specific predicate acts that constitute
racketeering activity are defined as the criminal offenses enumerated in the statute, which
include mail and wire fraud. 18 U.S.C.S. § 1961(1).

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview

46
HN4 A plaintiff must show that they were injured in their business or property by reason
of the alleged Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. §§ 1961-
1968, violation. 18 U.S.C.S. § 1964(c). To satisfy the pattern requirement, the factual
allegations must meet two standards: relatedness and continuity. The pleadings must
show that the predicate acts asserted are related and amount to or pose a threat of
continuing criminal activity. The relatedness test requires that the predicate acts relied
upon share the same or similar purposes, results, participants, victims or methods, or
otherwise are interrelated by distinguishing characteristics and are not isolated events.
The continuity element may take either of two forms: closed-ended or open-ended. These
concepts refer either to a closed period of repeated conduct, or to post-conduct that by its
nature projects into the future with a threat repetition. Closed-ended continuity may be
demonstrated by a series of related predicate acts which occurred over a substantial
period of time. Open-ended continuity requires a showing of the existence of a threat of
containing criminal activity beyond the period during which the predicate acts were
performed.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN5 In the context of the Racketeer Influenced and Corrupt Organizations Act, 18
U.S.C.S. §§ 1961-1968, it is not the number of predicates, but the relationship that they
bear to each other or to some external organizing principle that renders them ordered or
arranged so as to constitute a pattern. On this point, the United States Court of Appeals
for the Second Circuit, while stating that closed-ended continuity is primarily a temporal
concept, has recognized that other considerations, such as the number and variety of
predicate acts, the number of participants and victims and the presence of separate
schemes, may also be germane to this inquiry.

Governments > Legislation > Interpretation


HN6 In discerning congressional intent courts may look to legislative history and other
considerations, such as the identity of the class for whose benefit the statute was enacted,
the overall legislative scheme, and the traditional role of the states in providing relief.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN7 Meritorious Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. §§
1961-1968, actions ordinarily would encompass claims involving criminal conduct of
sufficient gravity not only to injure the plaintiff's business or property, but to cause some
public harm or pose a threat of injury to larger societal interests reflecting the magnitude
of those articulated in the statute's Statement of Findings and Purpose.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > Fraud
HN8 Mere common-law fraud does not constitute racketeering activity for Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C.S. §§ 1961-1968, purposes.

47
Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN9 The illegal activities must fall within the list of crimes specified in the statute. The
racketeering offenses must be related and continuous. The criminal pattern must extend
over a substantial period of time; sporadic or isolated wrongdoing does not suffice. The
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. §§ 1961-1968,
violations must cause injury to business or property, 18 U.S.C.S. § 1964(c), thus personal
or emotional damages do not qualify.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN10 Continuity does not constitute solely a temporal concept based only on a numerical
sum of predicate acts occurring over a given period of time. Rather, the element is
measured by the interrelationship that exists among the various requirements the statute
imposes to narrow its range, or to trim off the excesses in civil Racketeer Influenced and
Corrupt Organizations Act, 18 U.S.C.S. §§ 1961-1968, suits. The variables considered do
not all carry the same weight. In consequence, not all predicate acts are equal; one
incident of mail fraud and one of murder would not count the same on a scale of criminal
values. Under some circumstances, therefore, a large number of some predicate acts
occurring over a substantial period of time may not necessarily suffice to constitute a
pattern, while a lesser number of another offense committed during a shorter time could
satisfy the standard. The concept of continuity cannot be viewed as a disembodied
abstraction analyzed in a vacuum, nor as an indefinite tautology, as implied by cases
holding that continuity exists simply when a sufficient number of predicate acts has
continued long enough.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN11 The racketeering activities alleged should be of sufficiently serious dimensions
and degree, both qualitatively and quantitatively, not only to cause the private injury the
victim claims, but to produce some public harm or pose a societal threat that extends
beyond the narrow interests of a few victims or the limited scope of some Racketeer
Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. §§ 1961-1968, predicate
acts. Conversely, a simple scheme of restricted scope and effects would fail to satisfy the
concept of continuity more comprehensively defined because the underlying conduct
would not add up to the sum of its parts. That is, the wrongdoing would not implicate
other essentials that serve RICO's larger purpose and justify its extreme remedies.

Civil Procedure > Remedies > Damages > Punitive Damages


HN12 As a general principle, the law authorizes the recovery of punitive damages only
when the injury complained about is produced by extreme misconduct whose effects
transcend private interests, not only damaging a particular victim but causing or
threatening more generalized harm to larger societal concerns.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview

48
HN13 The multifactor analysis holds that the greater the elements of continuity--the
number, duration, dimensions, degree, complexity, gravity or nature of the Racketeer
Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. §§ 1961-1968, predicate
acts weighed as a whole--the greater is the likelihood that the unlawful conduct charged
will define a pattern of racketeering activity sufficiently serious not only to produce
injury to the victim, but also to cause public harm or pose threats to larger societal
interests of the type and magnitude Congress contemplated in enacting RICO, and for
which the law's severe punitive and deterrent purposes are justifiable.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN14 Unlike the other criminal offenses the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C.S. §§ 1961-1968, enumerates as racketeering, use of
the mail or wires is not inherently criminal. 18 U.S.C.S. § 1961(1). Thus, to find the
necessary criminality in those activities requires substantive inquiry beyond the mere fact
of the communication, ordinarily by reference to other relevant considerations such as the
extent to which the mailings were part of an intentional scheme to defraud, and in fact
deceived, the victim. And even in connection with an actual fraudulent scheme, there
may be substantial innocent or incidental use of the mail or wires that may not relate to
the any unlawful activity of the enterprise or that involves no deception of the plaintiff.
Some of these communications, even if integral to the alleged fraud, may be entirely
intrastate, and thus if transmitted by wire would fall outside the scope of RICO.
Moreover, virtually every ordinary fraud is carried out in some form by means of mail or
wire communication. Thus, the potential for transforming garden-variety common law
actions into federal cases is greater if grounded entirely on these predicates. For these
reasons RICO claims premised on mail or wire fraud must be scrutinized because of the
ease with which a plaintiff may mold a RICO pattern from allegations that do not support
it.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN15 In Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. §§ 1961-
1968, cases that as predicate acts assert only mail and wire fraud, courts hold that a
multiplicity of mailings may be no indication of the requisite continuity of the underlying
fraudulent activity and thus does not necessarily translate into a pattern of racketeering
activity.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN16 Courts in the Second Circuit have held repeatedly that allegations of Racketeer
Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. §§ 1961-1968, violations
involving solely mail and wire fraud or little other variety in the predicate acts, a limited
number of participants or victims, a discrete scheme with a narrow purpose or a single
property--as opposed to complex, multi-faceted schemes--are generally insufficient to
demonstrate closed-ended continuity, and thus to satisfy to pattern element of a plausible
RICO claim.

49
Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN17 In addition to relatedness and continuity, a Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C.S. §§ 1961-1968, claim must satisfy an element of
causation. This standard requires a showing of some direct relation between the injury
asserted and the injurious conduct alleged. In turn, as it pertains to 18 U.S.C.S. § 1962(c),
a plaintiff must demonstrate injury in his property or business that stems from a pattern of
racketeering activity through which the defendant commits criminal acts by conducting
or participating in the conduct of the affairs of any "enterprise" engaged in interstate or
foreign commence. 18 U.S.C.S. § 1962(c). To establish the enterprise requirement, the
plaintiff must show the existence of two distinct entities: (1) a person; and (2) an
enterprise that is not simply the same person referred to by a different name. The
enterprise is a group of persons associated together for a common purpose of engaging in
a course of conduct. The existence of an enterprise may be proved by evidence of an
ongoing organization, formal or informal, and by evidence that the various associates
function as a continuing unit.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN18 An enterprise within the purview of Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C.S. §§ 1961-1968, encompasses two types of organizations:
legal entities such as corporations and partnerships, and any union or group of individuals
associated in fact although not a legal entity. 18 U.S.C.S. § 1961(4). In consequence, this
definition includes both legitimate and illegitimate enterprises. These definitional rules
further elaborate the congressional concerns that the legislation evinces. From them two
principles emerge that are reflected in the activities the statute sought to reach and the
interests it sought to protect by the concept of enterprise as embodied in 18 U.S.C.S. §§
1962(a)-(c): (1) the infiltration and corruption of legitimate enterprises such as
corporations or unions by criminals for unlawful purposes and the use of such entities as
vehicles in furtherance of predicate offenses; and (2) the organization or existence of
illegitimate entities used for criminal purposes. In either event, the criminal activities
conducted by the specified enterprise causes injury to the plaintiff's business or property
in a manner also detrimental to the public interest.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
HN19 A central aspect of the causation element under 18 U.S.C.S. § 1964(c) is to
establish that the injury to business or property that the plaintiff complains of must derive
from the racketeering activities of the defendants, functioning as a continuing unit and for
a common purpose in conducting or participating in the operation or management of the
affairs of the relevant enterprise. By this analysis, defendants who allegedly constitute an
illegal enterprise and engage in predicate offenses in furtherance of the defendants' own
affairs or purposes, as opposed to the affairs or purposes of their common enterprise,
would fail to satisfy the requirements of Racketeer Influenced and Corrupt Organizations
Act, 18 U.S.C.S. §§ 1961-1968.

50
Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > Statutes of Limitations
HN20 The statute of limitations of the Racketeer Influenced and Corrupt Organizations
Act, 18 U.S.C.S. §§ 1961-1968, is four years. The action accrues and the limitations
clock begins to run from the date that the plaintiff knew or should have known of his
injury.

COUNSEL: [**1] For Herman Gross, R.A.K. Tennis Corp., Plaintiffs: A. Jared
Silverman, LEAD ATTORNEY, Law Offices of A. Jared Silverman, West Orange, NJ;
James Bruce Daniels, LEAD ATTORNEY, Budd Larner, P.C., New York, NY; Alfred
Michael Covino, Budd Larner Rosenbaum Greenberg & Sade, P.C., Short Hills, NJ.

For Roderick Waywell, Lisa Dennison Waywell, Defendants: Gail Mclemore Rodgers,
Palmina M. Fava-Pastilha, LEAD ATTORNEYS, DLA Piper US LLP (NY), New York,
NY.

For Hugo Costa, Defendant: Claudia Alejandra Costa, LEAD ATTORNEY, Stryker
Tams & Dill, LLP(NYC), New York, NY.

For Eric R. Kaufman, Kaufman & Kaufman, Defendants: Eric Roger Kaufman, LEAD
ATTORNEY, Kaufman & Kaufman, New York, NY.

JUDGES: VICTOR MARRERO, United States District Judge.

OPINION BY: VICTOR MARRERO

OPINION

[*478] DECISION AND ORDER

VICTOR MARRERO, United States District Judge.

Plaintiffs Herman Gross ("Gross") and R.A.K. Tennis Corp. ("RAK") (collectively
"Plaintiffs") brought this action against defendants Roderick Waywell ("Waywell") and
Lisa Waywell (together, the "Waywells"), Hugo Costa ("Costa"), Barbara Errigo 1
("Errigo"), and Jeffrey Shapiro 2 ("Shapiro") (collectively, "Defendants") alleging
violations of the Racketeer Influenced and Corrupt Organizations Act [**2] ("RICO"),
18 U.S.C. §§ 1961-1968, as well as various state law causes of action. The unlawful
conduct the complaint describes arises from Defendants' operation of Plaintiffs' tennis
club and related premises in Long Island City, New York. Arguing that the pleadings fail
to state a plausible RICO claim and that no other recognized ground exists to litigate this
case in federal court, the Waywells and Costa oppose Plaintiffs' filing of a proposed First
Amended Complaint and renew their motions to dismiss it for lack of subject matter
jurisdiction. For the reasons stated below, the Plaintiffs' request to file a proposed First

51
Amended Complaint is DENIED and Defendants' renewed motions to dismiss are
GRANTED.

FOOTNOTES

1 Plaintiffs' proposed First Amended Complaint (the "Amend. Compl.") states that Errigo
is now deceased. (See Amend. Compl. P 6.) HN1An action against a deceased defendant
abates unless the Court authorizes the substitution of another proper party. See Fed. R.
Civ. P. 25(a). Plaintiffs never sought leave to amend the complaint to substitute Errigo's
estate but in the amended complaint continued to name Errigo as a defendant. On this
ground alone the complaint must be dismissed as to Errigo. [**3] Because the federal
claims Plaintiffs assert against Errigo are dismissed on other substantive and
jurisdictional grounds discussed below, no further leave to amend the complaint is
warranted.

2 Shapiro has not answered the complaint or otherwise appeared in this action. Because
all of the claims Plaintiffs assert against Shapiro are grounded on state law, and the
dismissal of Plaintiffs' federal claims leaves no other basis for the Court's exercise of
jurisdiction as regards Plaintiffs' remaining causes of action, the complaint must be
dismissed as to Shapiro as well.

I. BACKGROUND

Samuel Johnson, upon learning that a gentleman who had been very unhappy in marriage
had rewed immediately after his wife's death, characterized the husband's new vows as
"the triumph of hope over experience." 3 Plaintiffs' pursuit of their RICO claims in this
suit, repeating the similarly failed experiences of a large majority of RICO plaintiffs,
illustrates the litigants' version of Johnson's insight. [*479] These introductory notes
provide the historical backdrop that served as context for the Court's assessment of the
underlying dispute.

FOOTNOTES

3 James Boswell, The Life of Samuel Johnson (David Wormersley, ed. 2008), [**4] at
327.

At the initial conference with the parties, following Defendants' filing of a motion to
dismiss the original complaint and before considering any further briefing, the Court
expressed concurrence with Defendants' objections challenging the sufficiency of
Plaintiffs' pleadings of their RICO counts. Based on its review of the controversy as

52
portrayed in the complaint and elaborated at the conference, the Court also voiced
substantial doubt about the likelihood that -- other than through lawyerly sleight of hand,
shoehorned pleadings or Procrustean means -- Plaintiffs would be able to reshape their
factual allegations enough to cure the fundamental deficiencies that flawed their original
complaint, and thus to satisfy the standards that govern the statement of plausible RICO
claims. Since RICO comprises the only ground for federal jurisdiction that Plaintiffs
invoked, the Court warned that if the litigation were to advance on the basis of the RICO
counts as pled, a dismissal of the complaint at a later stage of the proceedings would be
wasteful of the parties' and the Court's time, energies and resources, and in addition
potentially could place at risk Plaintiffs' ability to further [**5] prosecute their arguably
viable state law claims.

As regards those other causes of action, the Court notes that even if only a portion of the
egregious wrongs Plaintiffs complain about were borne out by a trial on the merits, the
adjudication conceivably could yield recovery, counting possible punitive damages,
approaching any award Plaintiffs might obtain if their RICO claims were sufficient and
ultimately prevailed in this Court. With these observations and admonitions, the Court
granted Plaintiffs time to ponder whether to seek to amend their complaint, or withdraw it
in favor of proceeding with the litigation of their common law claims in state court.
Plaintiffs, as do so many other claimants enticed by the charm of a RICO verdict, chose
to try again to fit insufficient factual allegations into RICO's complex pleading standards.
They submitted the proposed Amended Complaint, prompting Defendants' opposition to
the filing of the amended pleadings and a renewal of their motions to dismiss. Here, the
Court denies Plaintiffs request to file the Amended Complaint and grants Defendants'
motions.

Not surprisingly, RICO's enchantment, like the siren's song, has again drawn another
crew of [**6] spellbound plaintiffs foundering against the rocks. This outcome should
come as no surprise to any counsel versed in the formidable intricacies and pitfalls
inherent in RICO litigation. These challenges bear out in the minimal rate of success
plaintiffs have achieved in prosecuting RICO actions. A survey of 145 appellate
decisions nationwide rendered from 1999 to 2001 in connection with RICO civil actions
provides hard evidence of those failed expectations. It revealed that about 70 percent of
the cases were finally disposed of on defendants' motions to dismiss or for summary
judgment, and that in about 80 percent of those in which the appellate Court resolved a
RICO issue the ruling was favorable to defendants. See Pamela H. Bucy, Private Justice,
76 S. Cal. L. Rev. 1, 22 (2002). Of the 9.6 percent of the suits in which plaintiffs obtained
a favorable verdict after a jury trial, only 25 percent of the judgments were affirmed on
appeal. See id. In consequence, plaintiffs achieved a final victory in only three of 145
cases -- a or final success rate of a mere two percent.

[*480] Framed another way, the statistical record indicates that in 98 percent of the
RICO appellate cases surveyed, which [**7] do not include RICO actions dismissed by
the district courts but not appealed, plaintiffs and counsel invested extensive time and
energies in litigation only to come away with a total loss. Arguably, in some of these
actions the resources plaintiffs expended were probably far greater, and yielded poorer

53
outcomes, than the potential corresponding outlays and results had they litigated any
related common law claims in state courts.

To further examine this statistical record with more recent data, and also contrast it with a
sample of RICO results at the district court level, this Court conducted a rough survey of
the 145 cases filed in the Southern District of New York from 2004 through 2007 in
which the complaints asserted civil RICO claims. The study revealed that of the 36 cases
that to date have been resolved on the merits, all resulted in judgments against the
plaintiffs. Thirty were dismissed on defendants' motions pursuant to Fed. R. Civ. P. 12(b)
(6), three dismissed by the district court sua sponte for lack of merit, and three dismissed
on summary judgment for the defendants. Only four of the 30 Rule 12(b)(6) dismissals
were appealed and each was affirmed by Second Circuit. Two [**8] of the three
dismissals on summary judgment were appealed and both were affirmed. 4 Hence,
experience bears out that overwhelmingly the RICO plaintiffs' gilded vision of threefold
damages and attorney's fees dispels into a mirage.

FOOTNOTES

4 Forty-eight of the remaining 109 actions were voluntarily dismissed, 22 were


transferred to another district or dismissed on procedural grounds, and 31 are still
pending. Of the 48 voluntary dismissals, 11 occurred following a motion to dismiss.
Oddly, the only cases in which plaintiffs achieved some measure of success are eight in
which no defendant appeared and default judgments were entered. In four of these the
plaintiffs obtained an award of damages that specifically referred to the RICO claims. For
defendants, a lesson that may be drawn from the overall RICO litigation experience
supports Woody Allen's theory that a major part of success in life is just showing up. The
details of this Court's survey are contained in the Chambers file for this case.

Of course, Plaintiffs' perseverance against such heavy odds derives predominantly from
RICO's prospect of treble damages and attorneys fees for the successful claimant.
Litigants' general preference for proceeding [**9] in federal courts adds another
consideration. Tactical and economic reasons also play a role. The terrorizing aspect of a
RICO charge conjures dreadful images of the defendant's involvement in the racketeering
schemes of the prototypical colorful mobsters and violent thugs who ordinarily fill the
plots of organized crime. For plaintiffs seeking to score a tactical edge or to deal the
heaviest possible vengeful blow to the defendant's personal reputation, shocking RICO
accusations may serve to strengthen their hand or induce sooner capitulation in any
settlement discussions. The extraordinary costs associated with defending complex
charges may also inflict added pain and provide defendants greater incentive to curtail
RICO litigation.

Ironically, the attractions that explain the magnetlike pull which induces plaintiffs into
filing RICO charges also generate counter-forces that repel them. In the final analysis,

54
these pluses and minuses point to some reasons why the incidence of favorable
judgments for RICO plaintiffs is so "stunningly awful." Id. Fundamentally, as many
courts and commentators have noted, RICO plaintiffs have overreached well beyond the
bounds of the law's reasonable [**10] construction and fair-game litigation. RICO
simply was not designed by [*481] Congress to encompass many of the creative, and
even "extraordinary, if not outrageous uses" for which plaintiffs have labored the statute.
Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482, 487 (2d Cir. 1984), rev'd on other
grounds, 473 U.S. 479, 500, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985); see also William
H. Rehnquist, Diversity Jurisdiction and Civil RICO, 21 St. Mary's L.J. 5, 11 (1989)
(noting that "civil RICO claims have been raised in actions relating to divorce, trespass,
legal and accounting malpractice, inheritance among family members, employment
benefits, and sexual harassment by a union."); see also id. at 9 ("Virtually everyone who
has addressed the question agrees that civil RICO is now being used in ways that
Congress never intended when it enacted the statute in 1970."); Sedima, 473 U.S. at 500
(recognizing that "in its private civil version, RICO is evolving into something quite
different from the original conception of its enactors.").

Rather, as manifested by the references to "racketeer" and "racketeering" in the


legislation act as well as by its exceptional treble damages remedy, Congress signaled
that the legislation was [**11] meant as both "preventive and remedial." United States v.
Turkette, 452 U.S. 576, 593, 101 S. Ct. 2524, 69 L. Ed. 2d 246 (1981). This dual purpose
demonstrates a design not only to compensate victims, but also to punish and deter
criminal offenses. For these purposes, RICO serves as a law enforcement tool
supplementing the government's efforts to protect the general public and the common
good from felonious conduct by encouraging and enlisting the civil litigation services of
"private attorneys general." Agency Holdg. Corp. v. Malley-Duff & Assocs., 483 U.S.
143, 151, 107 S. Ct. 2759, 97 L. Ed. 2d 121 (1987). Instead, experience reveals that many
plaintiffs, rather than fostering RICO's mission as "private attorneys general" aiding
public law enforcement, actually appear as private prospectors digging for RICO's
elusive gold, and more often than not generating substantial costs rather than net gains to
the public. Among other ways, the negative yield from this reality stems inherently from
the gravity of RICO accusations. The more defendants in civil suits are tarnished with
serious charges as racketeering criminals the more it stiffens their indignant resistance,
extending the duration and thus the private and public costs of litigation, and contributing
[**12] to plaintiffs' counterproductive outcomes. In significant part, the public outlays
incurred accrue in the form of time and other resources courts devote to adjudicating
significant numbers of meritless RICO claims that, as the numbers bear out, should never
have been seriously litigated in the first place.

As this Court reads RICO's text and legislative history, as elaborated below, the act
sought to strike at criminal conduct characterized by at least two consequential
dimensions. The offenses must be of a degree sufficiently serious not only to inflict
injury upon its immediate private victims, but also to cause harm to significant public
processes or institutions, or otherwise pose threats to larger societal interests worthy of
the severe punitive and deterrent purposes embodied in the statute. These aims and
structure are somewhat akin to those reflected in the Clayton Act, 15 U.S.C. § 15, after

55
which RICO civil remedies were patterned. See Agency Holding, 483 U.S. at 151
(describing the similarity of RICO and the Clayton Act, the Supreme Court noted that
both "are designed to remedy economic injury by providing for the recovery of treble
damages, costs, and attorney's fees. Both [**13] statutes bring to bear the pressure of
'private attorneys general' on a serious national problem for which public [*482]
prosecutorial resources are deemed inadequate"); see also Sedima, 473 U.S. at 489;
Genty v. Resolution Trust Co., 937 F.2d 899, 912 (3d Cir. 1991) ("Congress obviously
had much more in mind than merely providing compensation for individual RICO
victims when it authorized RICO civil actions. Indeed, the harm of racketeering is
dispersed among the public at large, including draining resources from the economy,
subverting the democratic process and undermining the general welfare.")

This construction accords with the legislative intent of RICO. As explained by the
Supreme Court, the purpose of the Act was to address a problem which Congress
perceived "was of national dimensions." Turkette, 452 U.S. at 586. Specifically, in the
Statement of Findings and Purpose of the Organized Crime Control Act of 1970, Title IX
of which encompassed RICO, Congress declared that the activities of organized crime
that prompted the legislation "weaken the stability of the Nation's economic system, harm
innocent investors and competing organizations, interfere with free competition, seriously
burden [**14] interstate and foreign commence, threaten the domestic security, and
undermine the general welfare of the Nation and its citizens." Statement of Findings and
Purpose, Organized Crime Control Act of 1970, Pub. L. No. 91-452, 84 Stat. 922, 923
(1970).

Branding defendants in civil actions with searing accusations of racketeering activities


and thus prolonging ill-considered litigation to promote the private interests of only one
or a few victims, and in lawsuits arising from alleged fraudulent schemes limited to
localized impacts and wrongful conduct far afield from the dimensions and degree of
serious criminal offenses Congress had in mind as RICO violations, is bound to engender
disfavor from courts and juries alike. In such circumstances, the courts' responses to
litigants' efforts to stretch the contours of the law beyond reasonable bounds "emerges
from a desire to make the statute make sense and have some limits." Fitzgerald v.
Chrysler Corp., 116 F.3d 225, 226 (7th Cir. 1997).

Moreover, in some cases involving related state law causes of action, improper
invocation of RICO implicates a question of federalism. By filing actions in federal
courts that fall short of RICO's substantive [**15] threshold, plaintiffs often seek the
courts' exercise of federal jurisdiction over litigation that more properly falls within the
province of state law remedies. Exercise of federal court jurisdiction in such cases,
especially those that rely on nothing more than incidental use of the mails or wires in
furtherance of a simple fraudulent scheme with few victims and narrow impacts, would
threaten to federalize garden-variety state common law claims, and offer a remedy
grossly out of proportion to any public harm or larger societal interests associated with
localized wrongful conduct ordinarily involved in such actions. Moreover, insofar as
RICO plaintiffs consistently lose in federal court and may later be foreclosed by statutes
of limitations or preclusion rules from pursuing common law causes of action, they

56
diminish the ability of state courts to redress what might otherwise represent viable state
law claims. With regard to these considerations, as the Seventh Circuit has noted, "When
a statute is broadly worded in order to prevent loopholes from being drilled in it by
ingenious lawyers, there is a danger of its being applied to situations absurdly remote
from the concerns of the [**16] statute's framers." Id.

In sum, the combination of these circumstances translates into the RICO plaintiffs'
woeful failure rate. The boundaries of RICO simply do not encompass the oversize
[*483] capacity or elasticity to accommodate the many ill-fitting suits with which
plaintiffs seek to outfit the statute. As a consequence, in the inordinate lawyerly tailoring
that has ensued, even if artful, it is the plaintiffs who end up bare.

The case at hand prompted these observations because it again brought to light the extent
to which plaintiffs' visions of RICO awards are out of touch with the dismal empirical
reality borne out by RICO litigation. The bewildering disconnect, illustrated by the
statistical surveys described above, suggested to this Court yet another explanation that
might account in part for plaintiffs' tenacity in pursuing RICO claims in the face of the
highly improbable odds of prevailing on the merits, or indeed of achieving any other
meaningful favorable result: lack of sufficient awareness. Perhaps the grim statistical
record documenting plaintiffs' limited success rate in RICO litigation has not adequately
penetrated the plaintiffs' bar. Perhaps the elements of a RICO action, [**17] the
applicable pleading standards, and the rigorous evidentiary requirements that must be met
to ultimately prevail in establishing a RICO claim are inadequately known or not
properly understood. Perhaps, too, greater judicial clarity in articulating the governing
rules and highlighting the types of pleading and evidentiary deficiencies that produce
widespread failure to satisfy the elements of RICO -- potentially depriving plaintiffs of
valid state law claims that might stand a greater likelihood of favorable results if litigated
in state court -- might better inform Plaintiffs in this action as well as other prospective
litigants about the pitfalls, risks and slim chances of prevailing in all stages of RICO
litigation.

Judicial decisions generally serve several informative ends. They apprise the parties,
counsel, appellate courts and the interested public about the law as interpreted and
applied by the trial judge. They open a window into the court's method, bringing to view
the judicial considerations that map out and illuminate the judge's reasoned pathway to
the law of the case. And they instruct the parties in the immediate action as well as in
future litigation about the legal [**18] concepts one court applied in adjudicating a given
dispute, by means of such precedents providing guidance that could inform the
substantive and procedural course of subsequent litigation. In calling attention to the
decisive issues and considerations that resulted in the dismissal of this action, the Court
envisions that the lessons drawn from the experience might be instructive at least in these
ways, and that this teaching might propagate, by encouraging Plaintiffs here as well as
other parties contemplating RICO suits to give more sober assessment to their factual
allegations and their prospects, and thus potentially deter wasteful litigation of
fundamentally deficient, futile or even frivolous claims. Admittedly, by indulging above
in a dark analysis, here laced with this silver lining, the Court recognizes that its

57
aspiration might reflect just self-beguilement, that on this occasion, once again, hope
trumps experience.

II. FACTS

Gross, now over 90 years old, is a director and 90 percent owner of RAK, a New York
corporation that until 2003 owned a parcel of real estate located at 44-02 Vernon
Boulevard, Long Island City, New York (the "Premises"). RAK operated the Premises as
a [**19] tennis club until about September of 2004. Waywell was the president, treasurer
and a director of RAK. Costa, reporting to Waywell, acted as the controller and, at times,
as secretary of RAK. Errigo, now deceased, was RAK's bookkeeper and accounts payable
clerk and reported to Costa and Waywell. [*484] Shapiro was the membership director
and also reported to Waywell.

Plaintiffs seek to recover funds they allege Defendants looted from RAK over a period of
about five years from 2000 to 2004. According to Plaintiffs, the monies wrongfully taken
from RAK were used by the Waywells to pay for various personal expenses, including
costs associated with the renovation and maintenance of their homes in Manhattan and
Southampton, New York, as well as their automobiles, private club memberships and
children's transportation. Plaintiffs claim that these payments were concealed by Costa
and Errigo on RAK's books as legitimate RAK business expenses. To this end, Waywell,
Costa and Errigo (collectively the "Management Defendants") collaborated from 2000 to
2004 for the purpose of looting the assets of RAK for their personal gains.

Specifically, Errigo prepared checks which Waywell signed that were made out [**20]
to Errigo, or to cash or unknown vendors, and that Errigo endorsed, cashed and retained
the proceeds. For his part, Costa allegedly decided how the unlawful payments to
Waywell and Errigo would be posted in RAK's books so as to disguise the transactions as
legitimate RAK business expenses. Costa also allegedly benefitted from the scheme by
directing payments of RAK funds to a computer company he owned and to pay for a
personal automobile, none of which expenses related to services provided to or for RAK.
Plaintiffs claim that in connection with the winding down of RAK's operations in
September 2004, Waywell, Costa and Errigo caused unlawful payments to be made for
membership refunds that were so recorded in RAK's books although the monies were not
intended for such purposes, but for the benefit of Defendants or other entities designated
by them. According to Plaintiffs, to engage in these activities the Management
Defendants formed an association-in-fact enterprise controlled by Waywell for the
purpose of stealing RAK funds for their personal use, and their unlawful conduct
constituted a pattern of racketeering through predicate acts of wire and mail fraud in
violation of RICO.

As to [**21] Shapiro, Plaintiffs allege that as RAK's tennis club membership director, he
conducted an unlawful membership drive, offering memberships at a discount to cash-
paying customers that would extend even after the Premises had been sold and the club
would have ceased operations. Because of customers' complaints, RAK had to make

58
refunds to members. Plaintiffs claim the Management Defendants knew or should have
known of Shapiro's activities.

The Waywells and Costa filed separate opposition to Plaintiffs' proposed Amended
Complaint and renewed their motions to dismiss. Because the Court granted Plaintiffs
leave to submit a proposed Amended Complaint and finds that the revised pleadings
remain fundamentally deficient for the reasons described below, and that further briefing
or repleading would be futile, the Court denies Plaintiffs' request to file the Amended
Complaint and grants Defendants' renewed motions to dismiss the Amended Complaint.

II. DISCUSSION

A. STANDARD OF REVIEW

HN2In assessing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) and
(6), dismissal of the complaint is appropriate if the plaintiff has failed to offer sufficient
factual allegations making any asserted [**22] claim "plausible on its face." Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). A
court should not dismiss a complaint for [*485] failure to state a claim if the factual
allegations sufficiently "raise a right to relief above the speculative level." Id. at 555. The
task of the court in ruling on a motion to dismiss is to "assess the legal feasibility of the
complaint, not to assay the weight of the evidence which might be offered in support
thereof." In re Initial Publ. Offer. Secs. Litig., 383 F. Supp. 2d 566, 574 (S.D.N.Y. 2005)
(internal quotation marks and citation omitted). The court must accept all well-pleaded
factual allegations in the complaint as true, and draw all reasonable inferences in the
plaintiff's favor. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).

B. RICO SUBSTANTIVE CLAIM

1. Pattern of Racketeering

Plaintiffs allege that the Management Defendants scheme to defraud RAK and Gross
constituted a substantive violation of RICO under 18 U.S.C. §§ 1962(c) ("§ 1962(c)").
HN3To state a plausible civil claim for violation of RICO § 1962(c), Plaintiffs' pleadings
must demonstrate, as to each defendant, that while employed by or associated with an
enterprise [**23] engaged in interstate or foreign commerce, and through the
commission of at least two predicate acts constituting a "pattern of racketeering," the
defendant directly or indirectly conducted or participated in the conduct of the affairs of
such enterprise. 18 U.S.C. § 1962(c); see Spool v. World Child Int'l Adoption Ag., 520
F.3d 178, 183 (2d Cir. 2009) (citing Cofacredit, S.A. v. Windsor Plumbing Supply Co.,
187 F.3d 229, 242 (2d Cir. 1999)); see generally Gregory P. Joseph, Civil RICO: A
Definitive Guide, (2d ed. 2000). The specific predicate acts that constitute racketeering
activity are defined as the criminal offenses enumerated in the statute, which include mail
and wire fraud. See 18 U.S.C. § 1961(1).

59
HN4Plaintiffs must also show that they were injured in their business or property by
reason of the alleged RICO violation. See 18 U.S.C. § 1964(c); Moss v. Morgan Stanley,
719 F.2d 5, 17 (2d Cir. 1983). To satisfy the "pattern" requirement, the factual allegations
must meet two standards: relatedness and continuity. The pleadings must show that the
predicate acts asserted are related and amount to or pose a threat of continuing criminal
activity. See Cofacredit, 187 F.3d at 242 [**24] (citing H.J. Inc. v. Northwestern Bell
Tel. Co., 492 U.S. 229, 239, 109 S. Ct. 2893, 106 L. Ed. 2d 195 (1989)); GICC Capital
Corp. v. Technology Fin. Group, Inc., 67 F.3d 463, 465 (2d Cir. 1995). The relatedness
test requires that the predicate acts relied upon "share the same or similar purposes,
results, participants, victims or methods, or otherwise are interrelated by distinguishing
characteristics and are not isolated events." H.J. Inc., 492 U.S. at 240. The continuity
element may take either of two forms: "closed-ended" or "open-ended." These concepts
refer "either to a closed period of repeated conduct, or to post-conduct that by its nature
projects into the future with a threat repetition." Id. at 241. Closed-ended continuity may
be demonstrated by a series of related predicate acts which occurred over a substantial
period of time. See id. Open-ended continuity requires a showing of the existence of a
threat of containing criminal activity beyond the period during which the predicate acts
were performed. See Cofacredit, 187 F.3d at 243.

a. Multifactor Test

Here, Plaintiffs contend that the Management Defendants' unlawful conduct satisfied the
closed-ended continuity concept [*486] because it consisted of many predicate [**25]
acts of wire and mail fraud occurring over a period of more than four years. However,
neither the number nor duration of the alleged unlawful conduct, without more, is
necessarily determinative of continuity. See H.J. Inc., 492 U.S. at 238 (declaring that
HN5"[i]t is not the number of predicates, but the relationship that they bear to each other
or to some external organizing principle that renders them 'ordered' or 'arranged'" so as to
constitute a pattern). On this point, the Second Circuit, while stating that closed-ended
continuity is primarily a temporal concept, has recognized that other considerations, such
as the number and variety of predicate acts, the number of participants and victims and
the presence of separate schemes, may also be germane to this inquiry. See Spool, 520
F.3d at 184; Cofacredit, 187 F.3d at 242 (noting that "other factors such as the number
and variety of predicate acts, the number of both participants and victims, and the
presence of separate schemes are also relevant in determining whether closed-ended
continuity exists" (citing GICC, 67 F.3d at 468)); see also GICC, 67 F.3d at 468-69
(noting that the plaintiff's allegations "do not present a 'complex, [**26] multi-faceted
conspiracy to defraud executed by numerous officers and stockholders'" (citation
omitted)).

Other Circuit Courts look to similar or even more expansive multiple factors in assessing
whether the closed-ended concept of continuity has been satisfied. See, e.g., Tabas v.
Tabas, 47 F.3d 1280, 1292, 1296 n.21 (3d Cir. 1995) (determining continuity by the
number of unlawful acts, the length of time over which the predicates were committed,
the similarity of the acts, the number of victims, the number of perpetrators, and the
character of the unlawful activity (citing Bartichek v. Fidelity Union Bank/First Nat'l

60
State, 832 F.2d 36 (3d Cir. 1987))); Columbia Natural Res., Inc. v. Tatum, 58 F.3d 1101,
1110 (6th Cir. 1995) (duration of the racketeering activity, the number of different
schemes, the number of predicates, the types of injury, and the number of victims and
perpetrators); Edmondson & Gallagher v. Alban Towers Tenants Ass'n, 48 F.3d 1260,
1265, 310 U.S. App. D.C. 409 (D.C. Cir. 1995) (same as Bartichek); Vicom, Inc. v.
Harbridge Merchant Servs., Inc., 20 F.3d 771, 780 (7th Cir. 1994) (the number and
variety of predicate acts and their duration, the number of victims, the presence of
separate [**27] schemes, and the occurrence of distinct injuries (citing Morgan v. Bank
of Waukegan, 804 F.2d 970, 975 (7th Cir. 1986))); HMK Corp. v. Walsey, 828 F.2d
1071, 1073-74 (4th Cir. 1987) (in addition to the number of predicate acts and their
duration, the existence of a pattern "depends on context, particularly on the nature of the
underlying offenses"); Resolution Trust Corp. v. Stone, 998 F.2d 1534, 1543-44 (10th
Cir. 1993) (duration of the predicate acts and extensiveness of the scheme, including the
number of victims, the number and variety of the predicates, the complexity and size of
the scheme, and the nature or character of the enterprise or unlawful activity); cf. Fleet
Credit Corp. v. Sion, 893 F.2d 441, 446 (1st Cir. 1990) (evaluating continuity solely by
the number of predicate acts and their duration).

The courts' consideration of multiple factors beyond mere arithmetic number of predicate
acts or their temporal duration as a test of continuity finds some grounding in H.J. Inc.
There, the Supreme Court recognized that the precise methods by which continuity may
be proved "cannot be fixed in advance with such clarity that it will always be apparent
whether in a particular case [**28] a 'pattern of racketeering activity' exists," and that
further development of the concept would await future [*487] cases. 492 U.S. at 243;
see also id. at 241 (noting that proving continuity "may be done in a variety of ways, thus
making it difficult to formulate in the abstract any general test for continuity"); United
States Textiles, Inc. v. Anheuser-Busch Cos., Inc., 911 F.2d 1261, 1266 (7th Cir. 1990)
("[A] concrete definition for precisely what activity will constitute a 'pattern' for purposes
of the RICO statute has eluded the federal courts.") However, other than listing the
relevant considerations weighed, and the vague comfort that the determination depends
on the "context" and circumstances of the particular case, the courts' multifactor test
analysis offers little guidance as to what fundamentally makes a pattern a RICO pattern.

The Supreme Court has instructed that HN6in discerning congressional intent courts may
look to legislative history and other considerations, such as "the identity of the class for
whose benefit the statute was enacted, the overall legislative scheme, and the traditional
role of the states in providing relief." Texas Indus., Inc. v. Radcliff Materials, Inc., 451
U.S. 630, 639, 101 S. Ct. 2061, 68 L. Ed. 2d 500 (1981) [**29] (emphasis added) (citing
California v. Sierra Club, 451 U.S. 287, 101 S. Ct. 1775, 68 L. Ed. 2d 101 (1981); Cort v.
Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975)). RICO's overall scheme
suggests another consideration implicit in a finding of closed-ended continuity by
reference to a contextual assessment of various factors: the relationship that the alleged
predicate acts bear in particular circumstances to an "external organizing principle"
common to all RICO cases, specifically the congressional intent embodied in the
definition of "pattern of racketeering activity." H.J. Inc., 492 U.S. at 238-39. The
imposition of a standard requiring both a "pattern" and "racketeering activities" defined

61
by specific crimes yields a predictable effect; it narrows the application of the statute.
Congress thus evinced a view that HN7meritorious RICO actions ordinarily would
encompass claims involving criminal conduct of sufficient gravity not only to injure the
plaintiff's business or property, but to cause some public harm or pose a threat of injury to
larger societal interests reflecting the magnitude of those articulated in the statute's
Statement of Findings and Purpose. See Statement of Findings and Purpose, Organized
Crime Control Act of 1970, Pub. L. No. 91-452, 84 Stat. 922, 922-923 (1970).

By [**30] the same token, in part reflecting concerns over federalism, the legislation
sought to exclude actions not serious enough to warrant providing remedies at the level of
federal law, to the extent the alleged offenses implicate narrow substantive scope and
limited local effects that bring into play "the traditional role of the states in providing
relief." Texas Indus., 451 U.S. at 639; see also Cofacredit, 187 F.3d at 242 (noting that
HN8"[m]ere common-law fraud does not constitute racketeering activity for RICO
purposes"); HMK Corp., 828 F.2d at 1076 ("Congress chose the 'pattern requirement' …
as the mechanism by which 'ordinary claims of fraud best left to 'the state common law of
fraud'' are distinguished from those activities of such a 'criminal dimension and degree' as
to warrant the extraordinary remedies of RICO." (citation omitted)); see also Menasco,
Inc. v. Wasserman, 886 F.2d 681, 683 (4th Cir. 1989) (noting that the pattern requirement
acts to ensure that "RICO's extraordinary remedy does not threaten the ordinary run of
commercial transactions; that treble damage suits are not brought against isolated
offenders for their harassment and settlement value; and that the multiple [**31] state
and federal laws bearing on transactions … are not eclipsed or preempted").

[*488] This statutory design manifests in several provisions of the legislation that reflect
both qualitative and quantitative measures, elements of dimensions and degrees that,
working as a whole, operate to confine the range of RICO's remedies. The activities
about which Congress was concerned must be long-term. See H.J. Inc., 492 U.S. at 242.
Such conduct must entail at least two predicate acts. HN9The illegal activities must fall
within the list of crimes specified in the statute. The racketeering offenses must be related
and continuous. The criminal pattern must extend over a substantial period of time;
sporadic or isolated wrongdoing does not suffice. See id.; Sedima, 473 U.S. at 497 n.14;
GICC, 67 F.3d at 467. The RICO violations must cause injury to "business or property,"
18 U.S.C. § 1964(c), thus personal or emotional damages do not qualify. See Genty, 937
F.2d at 918-19.

The constraints thus incorporated into RICO's pattern requirement serve several filtering
and preventive ends: that wrongdoers committing only widespread frauds or other major
criminal offenses are subject to the statute's severe penalties; [**32] that RICO's extreme
remedies are not disproportionate to the gravity of the misconduct; and that RICO does
not work to preempt other state or federal laws, or to federalize garden-variety state
common-law causes of action. See Midwest Grinding Co., Inc. v. Spitz, 976 F.2d 1016,
1025 (7th Cir. 1992) ("[I]t is … evident that RICO has not federalized every state
common-law cause of action available to remedy business deals gone sour."); U.S.
Textiles, 911 F.2d at 1268 ("[W]e … think it unlikely that Congress intended the
draconian measures of RICO to apply to this allegation of 'garden-variety' fraud.");

62
Menasco, Inc., 886 F.2d at 683 (noting that by means of the pattern requirement and
treble damages remedy "Congress contemplated that only a party engaging in widespread
fraud would be subject to such serious consequence").

In construing the reach of RICO's application, the Supreme Court has counseled that
Congress had in mind a "natural and commonsense approach to RICO's pattern element."
H.J. Inc., 492 U.S. at 237, 238 (rejecting the view that a pattern may be established
merely by proving two predicate acts, and explaining that it is not the number of
predicate acts but the relationship [**33] they bear to each other and to other relevant
external principles that properly determine the existence of a RICO pattern of
racketeering.) To comport with this practical guidance, the statute's various prerequisites
must of course be read together as interrelated. Accordingly, the multifactor tests various
Circuit Courts apply in assessing the existence of continuity suggest several strands that
perhaps reflect a unifying thread.

First, HN10continuity does not constitute solely a temporal concept based only on a
numerical sum of predicate acts occurring over a given period of time. Rather, the
element is measured by the interrelationship that exists among the various requirements
the statute imposes to narrow its range, or, as the Seventh Circuit characterized it, "to
trim off the excesses in civil RICO suits." United States v. O'Connor, 910 F.2d 1466,
1468 (7th Cir. 1990). Second, the variables considered do not all carry the same weight.
See, e.g., Edmondson, 48 F.3d at 1265 (noting that in some cases "some factors will
weigh so strongly in one direction as to be dispositive"). In consequence, not all predicate
acts are equal; one incident of mail fraud and one of murder would not count [**34] the
same on a scale of criminal values. Under some circumstances, therefore, a large number
of some predicate acts occurring [*489] over a substantial period of time may not
necessarily suffice to constitute a pattern, while a lesser number of another offense
committed during a shorter time could satisfy the standard. 5 See Tabas, 47 F.3d at 1305
(Greenberg, J., dissenting) (stating that it seems "self-evident that there are three-month
long schemes that clearly fall within RICO's purview and three-year schemes that clearly
do not").

FOOTNOTES

5 A simple hypothetical may further illustrate the point. If in order to defraud a partner
and take control of a local real estate business one partner had deposited twelve deceptive
documents in the mail on a monthly basis during a period of one year, some courts would
find these activities insufficient to establish the existence of a RICO pattern of
racketeering in some circumstances. See, e.g., GICC, 67 F.3d at 468 (citing cases). But if
the offender had instead deposited six bodies in the river, for the same purpose and
during the same or even a shorter timeframe, a finding that a pattern existed is more
likely. Arguably, by reason of the greater gravity of [**35] the crimes and their larger
dimensions of public harm and societal threats, the likelihood that the courts would find
the existence of a RICO pattern is greater under these circumstances, and explains why,
though applying identical statutory language, courts more readily find RICO patterns in

63
criminal prosecutions than in civil cases. See e.g., United States v. Aulicino, 44 F.3d
1102, 1113-14 (2d Cir. 1995) (pattern and threat of its continuity found in seven
kidnappings committed over a period of three and one-half months); O'Connor, 910 F.2d
at 1468 (finding a sufficient pattern in a RICO criminal case in which the defendant, a
police officer, agreed to take monthly bribes over a two-month period to provide corrupt
services); United States v. Indelicato, 865 F.2d 1370, 1383 (2d Cir. 1989) (en banc)
(holding that three almost simultaneously acts of murder in furtherance of an activity of a
criminal enterprise constituted a pattern of racketeering). On the other hand, under some
circumstances a complex fraudulent scheme that entails a mailing of deceptive
documents to thousands of victims could constitute a pattern. See, e.g., Beauford v.
Helmsley, 865 F.2d 1386 (2d Cir.) (en banc), [**36] vacated and remanded, 492 U.S.
914, 109 S. Ct. 3236, 106 L. Ed. 2d 584, original decision adhered to, 893 F.2d 1433 (2d
Cir.), cert. denied, 493 U.S. 192, 110 S. Ct. 539, 107 L. Ed. 2d 537 (1989); cf.
Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 239, 107 S. Ct. 2332, 96 L.
Ed. 2d 185 (1987) (noting that "'[T]he makings of a 'pattern of racketeering' are not yet
clear, but the fact remains that a 'pattern' for civil purposes is 'a pattern' for criminal
purposes'" (quoting Page v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 806 F.2d
291, 299 n.13 (1st Cir. 1986))).

Third, the concept of continuity cannot be viewed as a disembodied abstraction analyzed


in a vacuum, nor as an indefinite tautology, as implied by cases holding that continuity
exists simply when a sufficient number of predicate acts has continued long enough. See,
e.g., Fleet Credit, 893 F.2d at 447. This seemingly circular notion raises conceptual
questions because, insofar as grounded on a simple formula of counting months and
predicates, it relies on less than the whole of RICO's overall legislative scheme. In doing
so, the approach overlooks that in construing the continuity concept as a prong of RICO's
pattern requirement, the Supreme Court was not enunciating continuity for the sake of a
formulaic fascination [**37] with symmetry, but instead reading two essential aspects of
congressional concern: the external effects of certain criminal activities, and the internal
framework of the statute.

b. Societal Threat

Under the more comprehensive, commonsense analysis, related racketeering activity


comprised of a sufficient number of predicate acts extending over a substantial period of
time would form a RICO pattern at some point along a continuum when a particular
threshold is crossed or a critical mass of something is reached that causes a sufficient
degree of unwanted external effects. That eventuality should be determined in relation to
other RICO [*490] measures and the statute's overall framework.

Specifically, what the courts' multifactor tests suggest is that alleged RICO criminal acts
become properly "arranged" by reference to another "external organizing principle," and
thus continuity gives rise to a pattern, when the criminal offenses committed align with
other facts to present the elements of a prototypical RICO case, and thereby result in

64
injury of the dimension and degree the statute sought to deter and punish. H.J. Inc., 492
U.S. at 238; see also Fitzgerald, 116 F.3d at 227 (describing the prototypical [**38]
RICO case as one in which "a person bent on criminal activity seizes control of a
previously legitimate firm and uses the firm's resources, contacts, facilities, and
appearance of legitimacy to perpetrate more, and less easily discovered, criminal acts
than he could do in his own person, that is, without channeling his criminal activities
through the enterprise that he has taken over" (citing Turkette, 452 U.S. at 591; Cenco
Inc. v. Seidman & Seidman, 686 F.2d 449, 457 (7th Cir. 1982); United States v. Carson,
52 F.3d 1173, 1176-77 (2d Cir. 1995))). In identifying and evaluating actual and potential
harmful results, this principle necessarily implicates a normative weighing of private and
public injuries and interests. At bottom, the test holds that there is a direct correlation, on
one side of the equation, between the duration, number and gravity of the criminal acts
committed, and, on the other, the dimension and degree of injury caused. At some point
along this measure of continuity, a quantum of injury caused by certain crimes rises to a
level at which it produces larger societal impacts, and at that point the wrongdoing
transforms from a mostly private affair to one that justifies [**39] the extraordinary
legislative response RICO provides.

To warrant RICO's severe penalties brings into play the legislation's overall internal
framework. HN11The racketeering activities alleged should be of sufficiently serious
dimensions and degree, both qualitatively and quantitatively, not only to cause the private
injury the victim claims, but to produce some public harm or pose a societal threat that
extends beyond the narrow interests of a few victims or the limited scope of some RICO
predicate acts. Conversely, a simple scheme of restricted scope and effects would fail to
satisfy the concept of continuity more comprehensively defined because the underlying
conduct would not add up to the sum of its parts. That is, the wrongdoing would not
implicate other essentials that serve RICO's larger purpose and justify its extreme
remedies. To apply RICO to such a case would bring the statute's heavy remedial arsenal
to bear upon what is predominantly a private injury, rather than one which, either because
it reflects similar injuries to large numbers of other victims and/or because of the inherent
gravity of the underlying crimes, expands the dimensions and degree of wrong committed
into a [**40] realm implicating greater societal concerns, thereby supporting corrective
public intervention in the form provided by the statute. To the extent an application of
RICO is sought primarily to vindicate an individual injury devoid of some grounding
with a larger public dimension, the role of "private attorney general" in aid of public law
enforcement would drop from the equation. In that event RICO's treble damage remedy
would not serve its design as an inducement for the victim to undertake a costly role with
a broader public purpose in mind, nor would the remedy adequately operate, as do all
penalties in criminal conduct, both to punish and deter. An award of threefold damages
under these circumstances would be disproportionate [*491] to the offense and amount
to a windfall for the victim.

The Second Circuit has not addressed the actual or potential societal harms of the
unlawful conduct as distinct aspects of its multifactor test. But, whether the larger
societal concern is expressly articulated as a distinct element, as some courts do by
weighing the character or seriousness of the charged criminal conduct, or embodied in the

65
courts' decisions as an unstated result of the circumstances [**41] taken into account in
the particular case, the broader consideration emerges as an aspect of the pattern analysis
in numerous cases from other Circuits. See, e.g., Midwest Grinding Co., 976 F.2d at 1025
(noting the Supreme Court's "refocusing the pattern requirement on the sort of long-term
criminal activity that carries some quantum of threat to society"); U.S. Textiles, 911 F.2d
at 1269 (declaring that "we do not believe that Congress intended RICO to apply to
allegations of fraud such as this absent a showing of criminal activity which presents a
'more significant social threat'" (citing Marshall-Silver Constr. Co., Inc. v. Mendel, 894
F.2d 593, 597 (2d Cir. 1990))); Genty, 937 F.2d at 912 (noting "Congress' overall
purpose in passing RICO, to redress serious harm to the nation as a whole"); Meade v.
Meade, Civ. No. 91-5515, 1991 U.S. Dist. LEXIS 16654, 1991 WL 243539, at *5 (E.D.
Pa. Nov. 18, 1991) ("This is a dispute between a small number of parties, and neither
directly affects nor has wider implications for a large number of people. Actual and
threatened societal injury is little, if any."), aff'd, 998 F.2d 1004 (3d Cir. 1993) (table).
But see Tabas, 47 F.3d at 1293 n.17, 1297 n.22; 6 id. at 1301 (Becker, [**42] J.,
concurring) (rejecting the notion that RICO's pattern requirement incorporates a
"normative evaluation of the seriousness of the predicate acts" grounded on a showing of
societal threat).

FOOTNOTES

6 Tabas was an en banc decision in which the judgment of the Third Circuit reflected
only a plurality opinion on the section of the decision that purportedly overruled
Marshall-Silver. See Weaver v. Mobile Diagnostech, Inc., Civ. No. 02-1719, 2007 U.S.
Dist. LEXIS 45777, 2007 WL 1830712, at *14 (E.D. Pa. June 25, 2007).

Support for this construction may be drawn from application of some fundamental legal
doctrines, and from analogies to similar legislative schemes. HN12As a general principle,
the law authorizes the recovery of punitive damages only when the injury complained
about is produced by extreme misconduct whose effects transcend private interests, not
only damaging a particular victim but causing or threatening more generalized harm to
larger societal concerns. See Huntington v. Attrill, 146 U.S. 657, 667, 668, 13 S. Ct. 224,
36 L. Ed. 1123 (1892) (noting that the test whether a law is penal "is whether the wrong
sought to be redressed is a wrong to the public or a wrong to the individual" and that in
this context the terms "penal" and "penalty" are "commonly [**43] used as including any
extraordinary liability to which the law subjects a wrongdoer in favor of the person
wronged, not limited to the damages suffered"); Ciraolo v. City of New York, 216 F.3d
236, 245 (2d Cir. 2000) (Calabresi, J., concurring) (noting that "while traditional
compensatory damages are assessed to make the individual victim whole, [punitive]
damages are, in a sense, designed to make society whole by seeking to ensure that all of
the costs of harmful acts are placed on the liable actor"); Murphy v. Household Fin.
Corp., 560 F.2d 206, 209 (6th Cir. 1977).

66
Consistent with this doctrine, Congress has enacted several statutes employing the same
legislative scheme, treble damages provisions to encourage private lawsuits that in part
serve punitive and deterrent [*492] functions. These laws all embody an expression that
the wrongdoing legislated against demands an extreme civil remedy both in recognition
of the gravity of the conduct and of the need to protect the general public from its
particular harms. Typical of these provisions are those prescribed in the antitrust laws,
after which RICO's civil remedy was modeled. See Shearson/Am. Exp., 482 U.S. at 241
("Antitrust violations [**44] generally have a widespread impact on national markets as
a whole, and the antitrust treble-damages provision gives private parties an incentive to
bring civil suits that serve to advance the national interest in competitive economy….
RICO's drafters likewise sought to provide vigorous incentives for plaintiffs to pursue
RICO claims that would advance society's fight against organized crime." (citing Sedima,
473 U.S. at 498)); Texas Indus., 451 U.S. at 639 ("The very idea of treble damages
reveals an intent to punish past, and to deter future, unlawful conduct …."); see also
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 485-86, 97 S. Ct. 690, 50 L.
Ed. 2d 701 (1977); Lyons v. Westinghouse Elec. Corp., 222 F.2d 184, 189 (2d Cir. 1955).

Because RICO's treble damages remedy serves a punitive and deterrent purpose, the
statute implicitly incorporates this guiding principle. See Genesco, Inc. v. T. Kakiuchi &
Co. Ltd., 815 F.2d 840, 851 (2d Cir. 1987) (noting that one purpose of RICO's treble
damages remedy "was to deter organized crime"); Genty, 937 F.2d at 914 (holding that
RICO's treble damages provision serves predominantly a punitive purpose in part because
of RICO's "overall purpose to thwart the generalized [**45] harm wrought by
racketeering activity"); Abell v. Potomac Ins. Co., 858 F.2d 1104, 1141 (5th Cir. 1988),
vacated on other grounds by Fryar v. Abell, 492 U.S. 914, 109 S. Ct. 3236, 106 L. Ed. 2d
584 (1989).

c. Normative Balancing

To summarize, HN13the multifactor analysis holds that the greater the elements of
continuity -- the number, duration, dimensions, degree, complexity, gravity or nature of
the RICO predicate acts weighed as a whole -- the greater is the likelihood that the
unlawful conduct charged will define a pattern of racketeering activity sufficiently
serious not only to produce injury to the victim, but also to cause public harm or pose
threats to larger societal interests of the type and magnitude Congress contemplated in
enacting RICO, and for which the law's severe punitive and deterrent purposes are
justifiable.

The warrant for this test has been questioned on the ground that it calls for a normative
balancing and a subjective judgment that lack explicit textual basis in the statute. See
Tabas, 47 F.3d at 1301 (Becker, J., concurring). But the type of adjudication the
multifactor analysis entails is not unlike other common analogous circumstances in which
Congress leaves it to the courts to discern legislative [**46] intent and construe abstract
terms through general guidance from contextual factors -- such as the overall legislative
scheme of a statute -- that fundamentally rely on subjective evaluations. See Texas
Indus., 451 U.S. at 639. Under the antitrust laws, for instance, courts, serving a

67
gatekeeper function, routinely perform assessments of the extent of private and public
harms, and make corresponding normative judgments, in determining whether a
particular restraint of trade is unreasonable or whether, as in the words of Section 7 of the
Clayton Act, the effect of a merger "may be substantially to lessen competition, or to tend
to create a monopoly." 15 U.S.C. § 18. The same concepts apply under common law
principles in judicial rulings concerning whether a claim for punitive [*493] damages is
adequately supported in a complaint, or warranted by the evidence produced in discovery,
or whether a verdict awarding such damages is justifiable or excessive. See, e.g., TVT
Records v. Island Def Jam Music Group, 412 F.3d 82, 94-96 (2d Cir. 2005) (analyzing
whether punitive damages were warranted by determining whether there was a
sufficiently public component). And more generally, courts engage in [**47] similar
evaluations of variable factors and tallying their relative values when performing the
intangible aspect of analysis and judgment they often explain under the catchall rubric of
"the totality of the circumstances."

d. Mail and Wire Fraud as Only Predicates

The interplay of the pattern prerequisites as they define and limit RICO's application
often comes sharply into focus in litigation, such as the instant action, in which the
predicate acts the plaintiff asserts to support the existence of a pattern of racketeering
involve only allegations of mail and wire fraud. A number of courts have noted that, for
several reasons, mail and wire fraud are "unique" among the various RICO predicate acts.
See, e.g., U.S. Textiles, 911 F.2d at 1268. HN14Unlike the other criminal offenses the
statute enumerates as racketeering, use of the mail or wires is not inherently criminal. See
18 U.S.C. § 1961(1). Thus, to find the necessary criminality in those activities requires
substantive inquiry beyond the mere fact of the communication, ordinarily by reference
to other relevant considerations such as the extent to which the mailings were part of an
intentional scheme to defraud, and in fact deceived, [**48] the victim. And even in
connection with an actual fraudulent scheme, there may be substantial innocent or
incidental use of the mail or wires that may not relate to the any unlawful activity of the
enterprise or that involves no deception of the plaintiff. See Ashland Oil, Inc. v. Arnett,
875 F.2d 1271, 1278 (7th Cir. 1989) (noting that the mail and wire fraud offenses at issue
were "only tangentially related to the underlying fraud, and can be a matter of
happenstance"). Some of these communications, even if integral to the alleged fraud, may
be entirely intrastate, and thus if transmitted by wire would fall outside the scope of
RICO. See Cofacredit, 187 F.3d at 243.

Moreover, virtually every ordinary fraud is carried out in some form by means of mail or
wire communication. See Al-Abood ex rel. Al-Abood v. El-Shamari, 217 F.3d 225, 238
(4th Cir. 2000) (noting that "[i]t will be the unusual fraud that does not enlist the mails
and wires in its service at least twice.") (internal quotation marks and citations omitted).
Thus, the potential for transforming garden-variety common law actions into federal
cases is greater if grounded entirely on these predicates. For these reasons "RICO [**49]
claims premised on mail or wire fraud must be particularly scrutinized because of the
relative ease with which a plaintiff may mold a RICO pattern from allegations that, upon

68
closer scrutiny, do not support it." Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d
12, 20 (1st Cir. 2000).

In light of these concerns, HN15in RICO cases that as predicate acts assert only mail and
wire fraud, courts hold that a multiplicity of mailings "may be no indication of the
requisite continuity of the underlying fraudulent activity" and thus "does not necessarily
translate into a 'pattern' of racketeering activity." U.S. Textiles, 911 F.2d at 1268 (internal
quotation marks and citations omitted); Shields Enters., Inc. v. First Chicago Corp., 975
F.2d 1290, 1295 (7th Cir. 1992) ("Repeated mailings in furtherance of a single scheme to
inflict one fraudulent injury may be no [*494] indication of the underlying fraud's
continuity."); Airlines Reporting Corp. v. Aero Voyagers, Inc., 721 F. Supp. 579, 584-85
(S.D.N.Y. 1989) (fifty acts of mail fraud furtherance of a simple, single-victim scheme
held insufficient to constitute a pattern); see also Vicom, 20 F.3d at 781.

Consistent with the case law applying the multifactor [**50] continuity test, HN16courts
in this Circuit have held repeatedly that allegations of RICO violations involving solely
mail and wire fraud or little other variety in the predicate acts, a limited number of
participants or victims, a discrete scheme with a narrow purpose or a single property -- as
opposed to complex, multi-faceted schemes -- are generally insufficient to demonstrate
closed-ended continuity, and thus to satisfy to "pattern" element of a plausible RICO
claim. See, e.g., Lefkowitz v. Bank of NY, No. 01 Civ. 6252, 2003 U.S. Dist. LEXIS
19520, 2003 WL 22480049, at *8 (S.D.N.Y. Oct. 31, 2003) ("[S]chemes involving a
single, narrow purpose and one or few participants directed towards a single victim do
not satisfy the RICO requirement of a closed or open pattern of continuity"), rev'd on
other grounds, 528 F.3d 102 (2d Cir. 2007); Weizmann Inst. of Science v. Neschis, 229
F. Supp. 2d 234, 257 (S.D.N.Y. 2002) (holding that a scheme of four predicate acts of
mail fraud committed by one participant against a limited number of victims in
furtherance of a single fraudulent scheme aimed at stealing the assets of a foundation and
its principal was too discrete and limited to satisfy closed-ended continuity); Lopresti v.
Merson, No. 00 Civ. 4255, 2001 U.S. Dist. LEXIS 16062, 2001 WL 1132051, at *13
(S.D.N.Y. Sept. 21, 2001) [**51] (holding that an alleged scheme of less than two years'
duration and six wire fraud predicate acts with a unitary purpose did not support a finding
of closed-ended continuity); Feirstein v. Nanbar Realty Corp., 963 F. Supp. 254, 259
(S.D.N.Y. 1997) (noting that in determining continuity, the court should not "'limit its
consideration to the duration of the scheme, but should also look at the overall context in
which the acts took place' … including the number of victims and participants, and the
number, variety and extent of the defendant's goals, and whether there are separate
schemes.") (internal citations omitted); Airlines Reporting, 721 F. Supp. at 584-85; see
also Spool, 520 F.3d at 184 (noting that conduct persisting for less than two years is
insufficient to establish close-ended continuity particularly where the activities alleged
"'involved only a handful of participants' and do not involve a 'complex, multifaceted
conspiracy'") (citations omitted).

e. Application

69
Plaintiffs assert that the Management Defendants' fraudulent scheme involved over 100
instances of mail and/or wire fraud carried out in furtherance of looting RAK's assets and
extending over a period of more than [**52] four years. While the temporal duration and
relatedness of the predicate acts claimed may be enough to satisfy one aspect of the
RICO pattern requirement, the Court finds that the factual pleadings are otherwise
insufficient to satisfy the closed-ended continuity prong as elaborated above. First, the
Court notes that insofar as Plaintiffs' RICO claims are grounded on mail and wire fraud, a
multiplicity of such predicate acts without more does not necessarily constitute a pattern
of racketeering activity. See Spool, 520 F.3d at 184; Airlines Reporting, 721 F. Supp. at
584-85; see also U.S. Textiles, 911 F.2d at 1268.

(i) Particularity

A finding of failure to adequately plead the continuity prong is warranted in this case for
several reasons. Plaintiffs' reliance on "mail and/or wire fraud" as the predicate offenses,
by operation of Twombly's [*495] plausibility test and the particularity requirement of
Federal Rule of Civil Procedure 9(b) ("Rule 9(b)"), demands greater specificity in the
pleadings. Such particularity would require more details regarding the alleged predicate
acts in which each particular defendant was directly or indirectly involved or had
responsibility, as well as information [**53] concerning where, when and by which
defendant any representations involved in the alleged fraudulent scheme constituting
deception of Plaintiffs were communicated by use of the mail and/or wires, and how such
statements actually deceived Plaintiffs. See Fed. R. Civ. P. 9(b); Knoll v. Schectman, 275
Fed. Appx. 50, 51 (2d Cir. 2008) (in civil RICO suit, applying Rule 9(b) to predicate acts
of mail and wire fraud); Anatian v. Coutts Bank (Switzerland), Ltd., 193 F.3d 85, 88 (2d
Cir. 1999).

In describing the details pertaining to the predicate acts of mail and wire fraud that
comprise the alleged RICO scheme, Plaintiffs state that "the Management Defendants"
transferred RAK funds "by mail and/or wire" to various vendors between 2001 and 2004
to pay for numerous personal expenses or other personal purposes, while booking the
payments as legitimate RAK business expenses. Specifically, Plaintiffs itemize and attach
documents for payments by mail and/or wire bills related to electricity, telephone, cable
television glazier, air conditioning, heating, security, landscaping, plumbing, swimming
pool, water and garbage removal services related to the Waywells' homes in Manhattan
and Southampton. [**54] Thus, the pleadings do not indicate individually which of the
three defendants actually engaged in the particular predicate acts of mail or wire fraud
offenses that Plaintiffs allege constitutes a pattern of racketeering. Such "group pleading"
does not comply with the requirements of RICO or the particularity standards of Rule
9(b).

In particular, lumping the defendants into collective allegations results in a failure to


demonstrate the elements of § 1962(c) with respect to each defendant individually, as
required. See DeFalco v. Bernas, 244 F.3d 286, 306 (2d Cir. 2001); United States v.
Persico, 832 F.2d 705, 714 (2d Cir. 1987) (noting that the focus of § 1962(c) "is on the
individual patterns of racketeering engaged in by a defendant, rather than the collective

70
activities of the members of the enterprise"); Mills v. Polar Molecular Corp., 12 F.3d
1170, 1175 (2d Cir. 1993) (declaring that "Rule 9(b) is not satisfied where the complaint
vaguely attributes the alleged fraudulent statements to 'defendants'"; see also Vicom, 20
F.3d at 777-78. The particulars of these transactions are important not only to establish
whether substantively each predicate act alleged constituted an offense [**55] within the
meaning of the underlying wire/mail fraud statutes, but also whether, as to each
defendant, the number, duration and timing of such offenses would be sufficient to satisfy
the continuity element of the RICO pattern of racketeering requirement, as well as the
statute of limitations.

(ii) Waywell

The Court notes, for example, that in itemizing and documenting the instances in which
the Management Defendants used the mail and/or wires to transfer RAK funds to pay
personal expenses in furtherance of the alleged fraudulent scheme, all except three of the
transactions relate to the Waywells. (See Amend. Compl. PP 80-95). Reviewing the
exhibits corresponding to these transactions it appears that most or all of the vendors,
contractors or utilities to which RAK funds were transferred were local entities.
Accordingly, to the extent these alleged fraudulent transfer of funds occurred solely by
wire, which the pleadings do not clarify, the transactions [*496] would be classified as
intrastate and thus would not qualify as predicate acts for RICO purposes. See Cofacredit,
187 F.3d at 243; Lopresti, 2001 U.S. Dist. LEXIS 16062, 2001 WL 1132051, at *13.

(iii) Costa and Errigo

Of the balance of the transactions, two pertain [**56] to wire transfers of funds to Errigo
(see id. PP 96-97), and one to Costa (see id. P98). Certainly, insofar as these acts relate
only to Errigo and Costa, one or two predicate offenses spread out over a period of over
four years would fail the continuity prong on temporal grounds alone, not taking into
account multiple other considerations that bear upon the existence of a sufficient pattern
of racketeering. See GICC, 67 F.3d at 467; Weizmann Inst., 229 F. Supp. 2d at 257;
Lopresti, 2001 U.S. Dist. LEXIS 16062, 2001 WL 1132051, at *13. Moreover, as in the
case of Waywell, there is no clear indication that the wire transfers were interstate.

(iv) Contextual Assessment

Rather than a pattern of racketeering sufficient to satisfy the requirements of the statute,
what Plaintiffs portray is essentially a single, relatively simple fraudulent scheme with a
single purpose: to deceive and steal from two identified victims: Gross and RAK, 90
percent of which was owned by Gross. And the participants were all employees of RAK,
a chief executive and two underlings - the comptroller and a bookkeeper. The predicate
acts were all identical - mail and/or wire fraud; at bottom there was no variety in the
underlying transactions. As [**57] described in the amended complaint, Waywell looted
the assets of RAK and used the funds to pay numerous personal expenses. Similarly,
Costa and Errigo allegedly made improper payments to themselves and relatives.
Moreover, no threat of continuing or renewed criminal activity existed at the end of the

71
alleged scheme because RAK ceased doing business when the Premises were sold in
September 2004. See Spool, 520 F.3d at 185-86; Cofacredit, 187 F.3d at 244).

Viewed as whole, Defendants' scheme as pled entailed a single goal: to steal from Gross
and RAK. And the aim of all of the thefts appears to have been to advance the purposes
and personal gains of each of the Management Defendants individually rather than to
promote the shared objectives of the common racketeering enterprise as defined by
Plaintiffs. Thus, applying the various factors the Second Circuit holds relevant to a
determination of closed-ended continuity, the Court concludes that the proposed
Amended Complaint fails to allege sufficient facts to satisfy the pattern element of a
plausible RICO claim. See Spool, 520 F.3d at 184; Cofacredit, 187 F.3d at 242; GICC, 67
F.3d at 467.

Although not as a distinct factor, but merely as [**58] a contextual and analytic point of
reference to RICO's overall framework, the Court notes that beyond the financial injuries
to Gross and RAK that Plaintiffs claim, there is no indication that the criminal activities
encompassed by the alleged scheme to defraud Gross and RAK produced any manifest
public harm - such as hurting competition, undermining law enforcement, fostering
violence, or deceiving innocent public investors - or that the predicate acts posed any
other threat to larger societal interests of the dimensions and degree that would justify
RICO's extraordinary mandatory treble damages remedy. See Statement of Findings and
Purpose, Organized Crime Control Act of 1970, Pub. L. No. 91-452, 84 Stat. 922, 922-
923 (1970); Turkette, 452 U.S. at 591-92 (citing RICO legislative history expressing
congressional intent to deal with individuals who, through criminality, "constitute such a
serious threat to the economic well-being of the Nation") [*497] (quoting S. Rep. No.
91-617, at 79 (1969); Malley-Duff, 483 U.S. at 151-52; Genty, 937 F.2d at 912-14. What
Plaintiffs' proposed amended pleadings describe amounts merely to ordinary claims of
common law fraud and other state law causes of [**59] action for which state remedies
provide adequate redress. Like numerous other courts presented with similar
circumstances, the Court doubts that Congress designed RICO's draconian sanctions to
reach a simple fraudulent scheme, such as that asserted here, which relies solely on the
use of mail or wires to inflict or threaten relatively limited injury only to the narrow and
localized private interests of a few victims.

2. Causation of Injury by an Enterprise

a. Elements

HN17In addition to relatedness and continuity, a RICO claim must satisfy an element of
causation. This standard requires a showing of "some direct relation between the injury
asserted and the injurious conduct alleged." Holmes v. Securities Investors Prot. Corp.,
503 U.S. 258, 268, 112 S. Ct. 1311, 117 L.Ed. 2d 532 (1992). In turn, as it pertains to §
1962(c), a plaintiff must demonstrate injury in his property or business that stems from a
pattern of racketeering activity through which the defendant commits criminal acts by
conducting or participating in the conduct of the affairs of any "enterprise" engaged in

72
interstate or foreign commence. See 18 U.S.C. §§ 1962(c); Cedric Kushner Promotions
Ltd. v. King, 533 U.S. 158, 161, 121 S. Ct. 2087, 150 L. Ed. 2d 198 (2001). To establish
the "enterprise" [**60] requirement, the plaintiff must show "the existence of two
distinct entities: (1) a 'person'; and (2) an 'enterprise' that is not simply the same 'person'
referred to by a different name." Cedric, 533 U.S. at 161. The enterprise, the Supreme
Court has explained, "is an entity, for present purposes a group of persons associated
together for a common purpose of engaging in a course of conduct." Turkette, 452 U.S. at
583. The existence of an enterprise may be proved "by evidence of an ongoing
organization, formal or informal, and by evidence that the various associates function as a
continuing unit." Id.

HN18Further, an "enterprise" within the purview of RICO encompasses two types of


organizations: "legal entities" such as corporations and partnerships, and "any union or
group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4);
Turkette, 452 U.S. at 581-82. In consequence, this definition includes both legitimate and
illegitimate enterprises. See Turkette, 452 U.S. at 580. These definitional rules further
elaborate the congressional concerns that the legislation evinces. From them two
principles emerge that are reflected in the activities the statute sought [**61] to reach
and the interests it sought to protect by the concept of "enterprise" as embodied in 18
U.S.C. §§ 1962(a)-(c): (1) the infiltration and corruption of legitimate enterprises such as
corporations or unions by criminals for unlawful purposes and the use of such entities as
vehicles in furtherance of predicate offenses; and (2) the organization or existence of
illegitimate entities used for criminal purposes. See Turkette, 452 U.S. at 591. In either
event, the criminal activities conducted by the specified enterprise causes injury to the
plaintiff's business or property in a manner also detrimental to the public interest. See
Cedric 533 U.S. at 165 (noting that RICO's legislative history reflects not only "the
importance of undermining organized crime's influence upon legitimate businesses
[*498] but also … the need to protect the public from those who would run
"organization[s] in a manner detrimental to the public interest.'") (quoting S. Rep. No. 91-
617, at 82); see also Reves v. Ernst & Young, 507 U.S. 170, 185, 113 S. Ct. 1163, 122 L.
Ed. 2d 525 (1993) (holding that to conduct or participate in the conduct of the affairs of
an enterprise for the purposes of § 1962(c) "one must participate in the operation or
management [**62] of the enterprise itself.").

In some circumstances, which generally apply to the activities of "outsider" persons


covered by §§ 1962(a) and (b), the enterprise, whether legal or illegal, becomes the
victim or target of the defendants' racketeering purposes and activities. In other cases,
addressed by § 1962(c), the enterprise itself becomes the illegal tool or vehicle of the
defendants, generally insider employees of the entity and any associated outsiders who
use the enterprise to engage in racketeering activities through their operation or
management of the affairs of the enterprise itself. See Cedric, 533 U.S. at 162 (noting that
"the person and the victim, or the person and the tool, are different entities, not the
same").

In sum, HN19a central aspect of the causation element under § 1964(c) is to establish that
the injury to business or property that the plaintiff complains of must derive from the

73
racketeering activities of the defendants, functioning as a continuing unit and for a
common purpose in conducting or participating in the operation or management of the
affairs of the relevant "enterprise." By this analysis, defendants who allegedly constitute
an illegal enterprise and engage [**63] in predicate offenses in furtherance of the
defendants' own affairs or purposes, as opposed to the affairs or purposes of their
common "enterprise," would fail to satisfy the requirements of RICO. See Reves, 507
U.S. at 185 (noting that RICO liability "depends on showing that the defendants
conducted or participated in the conduct of the 'enterprise's affairs, not just their own
affairs") (emphasis in original); Tenamee v. Schmukler, 438 F. Supp. 2d 438, 449
(S.D.N.Y. 2006).

b. Application

In the case at hand Plaintiffs assert that the Management Defendants as a group
constituted "an association-in-fact 'enterprise'" directed and controlled by Waywell. 7
(Amend. Comp. P 75). They claim as well that at all relevant times RAK itself also
constituted an "enterprise" because "it was the means through which the Management
Defendants carried out their racketeering activity." (id. P 76). Plaintiffs' characterization
of the enterprise element presents several conceptual issues. First, the RICO enterprise
Plaintiffs describe comprises not one but two separate organizations - an illegal entity of
the Management Defendants functioning as a unit to engage in racketeering activities, as
well as the [**64] legitimate entity of RAK itself, of which all of the Management
Defendants were employees and which they used as the means to carry out racketeering
activities. In the alternative, Plaintiffs' allegations may be read as essentially positing the
existence of a RICO enterprise operating within another RICO enterprise. Either way,
these allegations blur the necessary distinction between the "person" who unlawfully
conducts the affairs of an "enterprise" and the enterprise itself. To this extent, the
pleadings raise substantial confusion as to who constitutes [*499] "the person and the
victim, or the person and the tool." Cedric, 533 U.S. at 162. Under the § 1962(c)
jurisprudence, these entities must be different, not the same. See id.

FOOTNOTES

7 As noted above, because this action abated as to Errigo by reason of her death, the
Court assesses the viability of Plaintiffs' enterprise theory only in light of the allegations
relating to Waywell and Costa.

Positing the Management Defendants as the RICO enterprise raises other pleading
deficiencies. Specifically, the criminal scheme Plaintiffs ascribe to the illegal entity
appears to involve discrete transactions in which each of the three persons engaged in
[**65] what Plaintiffs themselves characterize as "self-dealing," the intended victims of
which were solely Gross and RAK. (Amend. Compl. PP 99-100.) For example, Plaintiffs
enumerate multiple instances, supported by documentary exhibits as discussed above, in

74
which the Management Defendants allegedly used the mails and/or wires to carry out
transfers of RAK funds to numerous vendors and contractors intended as payments of
bills for services and other personal expenses that actually related to Waywell's personal
debts and to the Waywells' residences in Manhattan and Southampton, and that were
booked in RAK's accounts as legitimate business expenses of RAK. (See id. PP 80-95.)
Similarly, as to Errigo and Costa, Plaintiffs specify two instances in which RAK funds
were allegedly transferred to Errigo and her husband, and in one instance to Costa, for
unauthorized personal purposes, though the payments were recorded in RAK's books as
legitimate business expenses. (See id. PP 96-98.)

The gist of these transactions is that each of the Management Defendants was involved in
swindling and looting RAK for his or her own benefit. To this extent Plaintiffs' factual
allegations demonstrate that the Management [**66] Defendants were participating in or
conducting their own affairs rather than the affairs of an illegal enterprise constituted of
the Management Defendants as Plaintiffs defined it; in other words, Plaintiffs have
demonstrated that Management Defendants were not functioning as a continuing unit for
a common purpose of the alleged enterprise. See Turkette, 452 U.S. at 583. Nor is there
any indication that in committing the alleged acts of mail and/or wire frauds the
Management Defendants were engaging in a regular way of conducting RAK's ongoing
legitimate business with the company's customers. See Tabas, 47 F.3d at 1295 (citing
H.J. Inc., 492 U.S. at 243 and applying by analogy a test for open-ended continuity stated
there). Rather, the alleged scheme Plaintiffs portray suggest individual acts of self-
dealing by each of the Management Defendants, or at best separate parallel acts between
Waywell and Costa, Waywell and Errigo, and/or Costa and Errigo - again each in
furtherance of his or her own affairs rather than the affairs of the enterprise Plaintiffs
allege under either of their enterprise theories. See Feinberg v. Katz, No. 99 Civ. 0045,
2002 U.S. Dist. LEXIS 13771, 2002 WL 1751135, at *15 (S.D.N.Y. July 26, 2002)
[**67] (dismissing an amended complaint where the pleadings did not adequately
demonstrate that two individuals constituting an alleged association-in-fact enterprise
worked together as a continuing unit for the common purpose of looting a business).

Accordingly, under either formulation, Plaintiffs' allegations concerning the existence of


a RICO "enterprise" fails to demonstrate the requirements of the statute.

3. Statute of Limitations

Defendants also argue that the RICO claims should be dismissed as well based on the
statute of limitations. The Court need not rule on this defense because it has found
adequate deficiencies in the Amended Complaint that warrant dismissal on the
substantive grounds addressed above. However, if the pleadings were to [*500] survive
a substantive analysis, the Court finds that a substantial basis exists to support dismissal
of this action as time-barred.

HN20RICO's statute of limitations is four years. See Malley-Duff, 483 U.S. at 156. The
action accrues and the limitations clock begins to run from the date that the plaintiff knew
or should have known of his injury. See Rotella v. Wood, 528 U.S. 549, 554, 120 S. Ct.

75
1075, 145 L. Ed. 2d 1047 (2000). The original complaint in this action was filed on
November 5, [**68] 2008. Thus, the statute of limitations would bar any alleged
violations that occurred more than four years prior to the commencement of this action,
or November 5, 2004. Here, all of the activities Plaintiffs describe as constituting RICO
violations occurred prior to the sale of the Premises in September 2004, thus predating
the date when the period of limitations commenced.

A majority shareholder or principal of a corporation involved in the operations of the


business "cannot seriously contend" that he did not know about or could not reasonably
have discovered RICO violations he complains about long after the expiration of the
statute of limitations. Feinberg, 2002 U.S. Dist. LEXIS 13771, 2002 WL 1751135, at *9.
As the owner of 90 percent of RAK, a principal and one of the directors of the
corporation, Gross would be hard-pressed to seriously maintain that, prior to
commencing this lawsuit, he was unable to discover the unlawful activities by which he
claims the Management Defendants violated RICO. However, because this matter would
be best decided with the support of a fuller factual record, the Court will not address it
further.

C. RICO CONSPIRACY

The dismissal of a RICO action because the substantive claims are [**69] deficient
compels that related charges under § 1962(c) of conspiracy to violate RICO also must
fail. See Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996), vacated on
other grounds, 525 U.S. 128, 119 S. Ct. 493, 142 L. Ed. 2d 510 (1998). Accordingly, by
reason of the Court's conclusion that Plaintiffs have failed to state a sufficient substantive
claim of RICO violations, their allegations of RICO conspiracy must also be dismissed.

IV. ORDER

For the reasons stated above, it is hereby

ORDERED that the request of plaintiffs Herman Gross and R.A.K. Tennis Corp.
("Plaintiffs") to file a proposed First Amended Complaint (Docket No. 42) is DENIED,
and the motions of Defendants' Roderick Waywell and Lisa Waywell (Docket No. 44)
and of defendant Hugo Costa (Docket No. 43) opposing Plaintiffs' filing the proposed
First Amended Complaint and renewing their motions to dismiss the complaint herein are
GRANTED.

The Clerk of Court is directed to withdraw any pending motions and to close this case.

SO ORDERED.

Dated: New York, New York

16 June 2009

76
/s/ Victor Marrero

VICTOR MARRERO

U.S.D.J.

2010 U.S. Dist. LEXIS 16514, *

PAUL STOSS and LINDA STOSS, Plaintiffs v. SINGER FINANCIAL


CORPORATION, et al, Defendants

CIVIL ACTION NO. 08-5968

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF


PENNSYLVANIA

2010 U.S. Dist. LEXIS 16514

February 24, 2010, Decided


February 24, 2010, Filed

CORE TERMS: racketeering activity, confession of judgment, racketeering, predicate,


mail, wire, fraudulent, continuity, entity, farm, criminal conduct, period of time, cows,
civil proceedings, federal claim, confessed judgment, interstate, conducting, open-ended,
fraud claims, mortgage, payoff, predicate acts, wrongful use, subject matter jurisdiction,
leave to amend, erroneously, confession, extending, defaulted

COUNSEL: [*1] For PAUL STOSS, LINDA STOSS, INDIVIDUALLY & AS H/W,
Plaintiffs: MATTHEW B. WEISBERG, LEAD ATTORNEY, WEISBERG LAW PC,
MORTON, PA; REBECCA STEIGER, PROCHNIAK WEISBERG PC, MORTON, PA.

For SINGER FINANCIAL CORPORATION, PAUL SINGER, Defendants: WALTER


WEIR, JR., LEAD ATTORNEY, MARC J. ZUCKER, WEIR & PARTNERS LLP,
PHILADELPHIA, PA.

JUDGES: LAWRENCE F. STENGEL, UNITED STATES DISTRICT JUDGE.

OPINION BY: LAWRENCE F. STENGEL

OPINION

MEMORANDUM

77
STENGEL, J.

Paul and Linda Stoss secured a mortgage on their farm with Singer Financial
Corporation. After defaulting on their payments, they sold the farm to pay off the loan.
They now claim that Singer Financial and Paul Singer committed fraud, RICO violations,
and wrongful use of civil proceedings in connection with the loan extension and default.
Defendants filed a motion to dismiss the Stosses' complaint. For the reasons set forth
below, I will grant the motion.

I. BACKGROUND 1

FOOTNOTES

1 Because this is a motion to dismiss, the facts are adopted from the plaintiffs' amended
complaint and are viewed in the light most favorable to the plaintiffs.

The Stosses owned a dairy farm in Lehighton, Pennsylvania and early in 2006, decided to
seek a loan for the purchase of cows which would cost them $ [*2] 60,000. Pls.' First
Am. Compl. PP 10-12. The Stosses contacted Singer Financial in July, 2006 in response
to an advertisement in a local farming paper and spoke with Paul Singer, President of
Singer Financial, about a loan. Id. at PP 13, 16. Singer advised the Stosses that Singer
Financial would lend them the $ 60,000 they needed for the purchase of the cows if they
refinanced their mortgage with Singer Financial. Id. at P 17.

In response to their inquiry, Singer required the Stosses to send Singer Financial certain
documents, including tax returns and financial statements, towards underwriting the loan;
he also required that they pay a $ 500 non-refundable loan application fee, a commitment
fee of $ 25,000, and a legal fee of $ 1,000. Pls.' Am. Compl. at PP 21, 23, Ex. B. The
Stosses allege that Singer promised the loan from Singer Financial would be $ 400,000
and that they would receive the $ 60,000 they needed for the purchase of cows. Id. at P
25. After the loan and refinancing were approved and not including the $ 25,000
commitment, the Stosses received $ 47,000 in proceeds from the loan, an amount
insufficient to cover the cost of the cows. Id. at PP 29-30.

The Stosses made interest [*3] payments on the loan at 12% per month and at some
point missed a payment, causing the interest rate to increase to a default rate of 24%. Pls.'
First Am. Compl. at P 32. The Stosses allege that Singer and Singer Financial knew at the
time of approving the loan that it was unaffordable to them and intended, by extending
the loan, to collect "unlawful fees and interest and non-incurred costs . . . via pay-off, or a
property and business with significant equity via foreclosure." Id. at P 28.

The Stosses eventually defaulted on the loan and claim now that this was defendants'
intention all along. Pls.' First Am. Compl. at PP 33-35. On July 16 and again on August

78
13, 2007, Singer Financial mailed plaintiffs a payoff demand signed by Paul Singer. Id. at
P 36-37, Ex. D, E. On August 17, 2007, the Stosses sold the farm for $ 600,000 at a
closing after which Singer Financial received $ 591,000 as payoff of the loan. Id. at P 38.

The Stosses claim the payoff amount was inaccurately calculated by Singer Financial and
contained unlawful charges including concealed compound interest. Pls.' First Am.
Compl. at P 39. They also claim that defendants filed a confession of judgment against
plaintiffs [*4] in state court after receiving the payoff for the loan, doing so only to
"retroactively justify its unlawful charges." Id. at P 40. A civil case docket from Carbon
County attached to the amended complaint as exhibit F shows that Singer Financial filed
a complaint and confession of judgment against Paul and Linda Stoss on August 17,
2007. Plaintiffs' Ex. F. It shows that judgment was entered in favor of Singer Financial
Corporation for $ 598,755.61 and that notice of the judgment and a copy of the judgment
were sent to the Stosses on August 17, 2007. Id. The docket report indicates that the
judgment was satisfied on September 19, 2007. Id.

The Stosses filed a complaint against Paul Singer, Singer Financial, and John Doe
Defendants 1-10 on December 24, 2008. After defendants filed a motion to dismiss, the
Stosses filed an amended complaint on June 8, 2009 which contained three counts: civil
RICO, fraud, and wrongful use of civil proceedings.

Defendants claim in the current motion to dismiss that plaintiffs' claims are barred by the
res judicata effect of the confession of judgment entered in Carbon County Court; that the
Rooker-Feldman doctrine divests this court of subject-matter jurisdiction [*5] over the
dispute; that plaintiffs have failed to state their fraud and RICO claims with sufficient
specificity; and that plaintiffs' failure to state a federal claim divests this court of
jurisdiction over their pendant state law claims.

II. STANDARD OF REVIEW

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of a complaint. In
ruling on a motion to dismiss, a federal court must construe the complaint liberally,
accept all factual allegations in the complaint as true, and draw all reasonable inferences
in favor of the plaintiff. D.P. Enters. v. Bucks County Cmty. Coll., 725 F.2d 943, 944 (3d
Cir. 1984).

The Federal Rules of Civil Procedure mandate that a plaintiff's complaint contain "a short
and plain statement of the claim showing that the pleader is entitled to relief." Fed. R.
Civ. Pro. 8(a)(2). While detailed factual allegations are not necessary to survive a motion
to dismiss, the plaintiff must state the grounds for relief by way of more than "a formulaic
recitation of the elements" and must instead plead facts sufficient "to raise a right to relief
above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127
S.Ct. 1955, 1964-65, 167 L. Ed. 2d 929 (internal [*6] citations omitted).

In a motion to dismiss, the moving party is permitted to plead and the reviewing court
permitted to consider an affirmative defense "if the predicate establishing the defense is

79
apparent from the face of the complaint." Bethel v. Jendoco Constr. Corp., 570 F.2d
1168, 1174 n.10 (3d Cir. 1978). In determining what affirmative defenses arise on the
face of a complaint, a court generally must consider only the pleadings themselves and
refrain from examining extraneous matters. In re Burlington Coat Factory Sec. Litig., 114
F.3d 1410, 1426 (3d Cir. 1997) (citing Angelastro v. Prudential-Bache Sec. Inc., 764 F.2d
939, 944 (3d Cir. 1985)). However, a court may consider a document that is "integral to
or explicitly relied upon in the complaint" without converting the motion to dismiss into
one for summary judgment. Id.

III. DISCUSSION

A. Plaintiffs' Fraud Claim

1. Confession of Judgment

In Pennsylvania, a creditor may file a complaint and confession of judgment action in


order to obtain judgment in his favor. See P a. R. Civ. P. 2951. The confession of
judgment complaint must be in the form provided for in Pennsylvania Rule of Civil
Procedure 2962 and only if it contains the [*7] required information in the proper format
may the prothonotary enter judgment in favor of the plaintiff. Pa. R. Civ. P. 2955(a),
2956; Crum v. FL. Shaffer Co., 693 A.2d 984, 985 n.1 (Pa.Super. 1997). If a confession
of judgment is entered, it is considered a final judgment on the merits. Zhang v.
Southeastern Financial Group, Inc., 980 F.Supp. 787, 792 (E.D. Pa. 1997) (citing Klecha
v. Bear, 712 F. Supp 44, 46 (M.D. Pa. 1989)).

A party seeking relief from a judgment by confession must do so by filing a petition to


open or strike the confessed judgment. Pa. R. Civ. P. 2959. "A petition to strike a
judgment is a common law proceeding which operates as a demurrer to the record" and it
"may be granted only for a fatal defect or irregularity appearing on the face of the
record." Resolution Trust Corp. v. Copley Qu-Wayne Assocs., 683 A.2d 269, 273, 546
Pa. 98 (Pa. 1996) (internal citations omitted). A petition to open will be granted where the
defendant to a confession of judgment produces evidence in his defense "which in a jury
trial would require the issues to be submitted to the jury." Riverside Mem'l Mausoleum,
Inc., v. UMET Trust, 581 F.2d 62, 67 (3d Cir. 1978). The proceeding to open [*8] a
confessed judgment is an adversarial one. Id.

2. Effect of the Rooker-Feldman Doctrine on Plaintiffs' Fraud Claims

The Rooker-Feldman doctrine 2 prevents lower federal courts from sitting "in direct
review of the decisions of a state tribunal." Flannery v. Mid-Penn Bank, No. 1-CV-08-
0685, 2008 U.S. Dist. LEXIS 97978, 2008 WL 5113437 at *3 (M.D.Pa. Dec. 3, 2008)
(quoting Gulla v. North Strabane Twp., 146 F.3d 168, 171 (3d Cir. 1998)). Because only
the Supreme Court has jurisdiction to review a state court's decision, a federal district
court necessarily lacks subject matter jurisdiction over an action that is the "functional
equivalent of an appeal of a state court judgment." Id. (citing Marran v. Marran, 376 F.3d
143, 149 (3d Cir. 2004)). The Rooker-Feldman doctrine applies to cases "brought by state

80
court losers complaining of injuries caused by state-court judgments rendered before the
district court proceedings commenced and inviting district court review and rejection of
those judgments." Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284,
125 S.Ct. 1517, 161 L. Ed. 2d 454 (2005).

FOOTNOTES

2 The Rooker-Feldman doctrine takes its name from two Supreme Court cases, Rooker v.
Fidelity Trust Co., 263 U.S. 413, 44 S. Ct. 149, 68 L. Ed. 362 (1923) [*9] and D.C.
Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L. Ed. 2d 206 (1983).

The Third Circuit, interpreting the Supreme Court's decision in Exxon-Mobil, ruled that a
claim is barred by Rooker-Feldman under only two circumstances: "first, if the federal
claim was actually litigated in state court prior to the filing of the federal action or,
second, if the federal claim is inextricably intertwined with the state adjudication,
meaning that federal relief can only be predicated upon a conviction that the state court
was wrong." Knapper v. Bankers Trust Co., 407 F.3d 573, 580 (3d Cir. 2005). "A federal
claim is inextricably intertwined with an issue adjudicated by a state court when: (1) the
federal court must determine that the state court judgment was erroneously entered in
order to grant the requested relief, or (2) the federal court must take an action that would
negate the state court's judgment." Id. (quoting Walker v. Horn, 385 F.3d 321, 330 (3d
Cir. 2004)).

"A confessed judgment . . . would necessarily imply a determination that [the defendant
to the confessed judgment] was in default in the stated amount under a valid and
enforceable note." Zhang v. Haven-Scott Assoc., Inc., No. 95-2126, 1996 U.S. Dist.
LEXIS 8738, 1996 WL 355344 at *8 (E.D.Pa. June 21, 1996) [*10] (citing Riverside
Mem'l Mausoleum, Inc., 581 F.2d at 66-68); see also Flannery, 2008 U.S. Dist. LEXIS
97978, 2008 WL 5113437 at *5. Therefore, allowing a plaintiff to attack the validity of a
state court confession of judgment in a federal district court proceeding would violate the
Rooker-Feldman doctrine. In Flannery, the defendant bank sought and was granted
judgment by confession in Pennsylvania state court against the plaintiff after the plaintiff
defaulted on a loan administered by the bank. 2008 U.S. Dist. LEXIS 97978, 2008 WL
5113437 at *1. Judge Rambo determined that the plaintiff was barred by Rooker-
Feldman from then asserting fraud, fraudulent inducement, and deceit claims against the
bank in federal District Court, reasoning that, "[f]or the court to find that Defendants
procured the guaranty by fraud would necessarily imply that the state court erroneously
entered the confession of judgment." 2008 U.S. Dist. LEXIS 97978, [WL] at *5.

The same reasoning applies here. For this court to determine that Singer committed fraud
in extending the loan to the Stosses would necessarily require this court to find that the
Northampton County Court erroneously entered the confession of judgment against the
Stosses for the amount due under the terms of the loan. Doing so [*11] would constitute

81
a review of that judgment that this court does not have jurisdiction to undertake.
Therefore, Singer's motion to dismiss the Stosses' fraud claims on Rooker-Feldman
grounds is granted.

B. Plaintiffs' RICO Claim

Generally under the Federal Rules of Civil Procedure, a plaintiff need submit notice
pleadings, which require "only a short and plain statement of the claim showing that the
pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). However, Rule 9(b) imposes
heightened pleading requirements in fraud cases, requiring that "[i]n all averments of
fraud or mistake, the circumstances constituting fraud or mistake shall be stated with
particularity." Fed.R.Civ.P. 9(b).

The Racketeer Influenced and Corrupt Organizations Act, codified at 18 U.S.C. § 1961-
1968, allows plaintiffs "injured in [their] business or property by reason of a violation of
section 1962" to file civil suit against the alleged violators. 18 U.S.C. § 1964. Section
1962 contains four subsections, and a violation of any one is sufficient to create RICO
liability.

To plead a claim for relief under Section 1962(a), a plaintiff must allege that the
defendant has (1) received money from a pattern of racketeering [*12] activity, (2)
invested that money in an enterprise, and (3) that the enterprise affected interstate
commence. See 18 U.S.C. § 1962(a). To state a cause of action under Section 1962(b),
the plaintiff must allege that the defendant has employed the racketeering conduct or
proceeds to "acquire or maintain, directly or indirectly, any interest in or control any
enterprise" affecting interstate commerce." 18 U.S.C. § 1962(b). To successfully establish
a civil RICO claim under Section 1962(c), a plaintiff must show "(1) conduct (2) of an
enterprise (3) through a pattern (4) of racketeering activity." Warden v. McLelland, 288
F.3d 105, 114 (3d Cir. 2002) (citing Sedima, S.P.R.L v. Imrex Co., 473 U.S. 479, 496,
105 S.Ct. 3275, 87 L.Ed.2d 346 (1985)). Section 1962(d) prohibits a defendant from
conspiring to violate subsection (a), (b), or (c). 18 U.S.C. § 1962(d).

The Stosses have failed to state a claim for a civil RICO violation. They have failed to
allege a RICO enterprise separate and distinct from the defendants and they have failed
sufficiently to allege a pattern of racketeering activity.

The Stosses' RICO count does not specify which subsection of Section 1962 any
defendant is alleged [*13] to have violated, and consists of the following five
paragraphs:
"50. Plaintiffs and Defendants are persons within the meaning of 18 U.S.C. § 1961(3).

51. Defendants collectively and/or individually, and/or including and by and through
others, constitute an association in fact enterprise within the meaning of 18 U.S.C. §
1961(4).

82
52. Defendants through their agents, servants, workmen and employees, in their
statements, conversations, and communications between Defendants, among other
conduct and including between other persons, utilizing the internet, mail, telephone
wires, and facsimile transmittals through the telephone wires, constitute violations of the
Federal Mail and Wire Fraud Statutes, 18 U.S.C. § 1341 and § 1343, in that they make
use of the United States interstate mail and wires in furtherance of a scheme to defraud,
and contain numerous false statements, as alleged herein.

53. Defendants have committed more than two (2) predicate acts of racketeering activity,
as defined by 18 U.S.C. § 1961(1), thereby constituting a pattern of racketeering activity,
as defined by 18 U.S.C. § 1961(5).

54. The Enterprise is engaged in or affects interstate commerce."


Pl.'s Am. Compl. PP 50-54. [*14] Because the Stosses do not adopt the operative
language of Section 1962(a) or (b) by alleging that Singer or any other defendant has
invested the proceeds from the alleged racketeering activity or has used the proceeds to
acquire or maintain an interest in the enterprise, their complaint will be construed to
allege a violation of Section 1962(c). Section 1962(c) imposes liability for conducting an
enterprise through a pattern of racketeering activity. The Stosses allege in their RICO
count that defendants "constitute an association in fact enterprise" and that their actions
"[constitute] a pattern of racketeering activity."

1. Existence of An Enterprise

"To state a claim under section 1962(c), the plaintiff must allege that (1) a person
conducted (2) an enterprise through (3) a pattern of (4) racketeering activity." Kolar v.
Preferred Real Estate Investments, No. 07-3864, 2008 U.S. Dist. LEXIS 48781, 2008 WL
2552860 at *4 (E.D.Pa. June 19, 2008) (citing Sedima, 473 U.S. at 496). The RICO
statute defines a "person" as "any individual or entity capable of holding a legal or
beneficial interest in property." 18 U.S.C. § 1961(3). An "enterprise" is "any individual,
partnership, corporation, association, or other legal [*15] entity, and any union or group
of individuals associated in fact although not a legal entity." Id. § 1961(4). Section
1962(c) requires that the RICO defendant or "person" is separate and distinct from the
alleged RICO "enterprise." Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1411
(3d Cir. 1991). In other words, the RICO "enterprise" cannot simply be the "person"
referred to by a different name. Cedric Kushner Productions, Ltd. v. King, 533 U.S. 158,
161, 121 S.Ct. 2087, 150 L. Ed. 2d 198 (2001). In the context of an allegation involving a
corporate entity, a plaintiff asserts a valid claim under Section 1962(c) when he alleges
that a corporate owner or employee who is distinct from the corporation itself "conducts
the corporation's affairs in a RICO-forbidden way." Kushner, 533 U.S. at 163. In such a
situation, the owner or employee is the "person" and the corporation is the "enterprise."
Id. However, a claim that the corporation is the "person" and the corporation together
with its employees and agents is the "enterprise," will not withstand a motion to dismiss.
Id. at 164 (citing Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d
339, 344 (2d Cir. 1994)). Similarly, a reference [*16] to the corporation as both the

83
"person" and as the "enterprise" within a complaint is a fatal defect. See Zavala v. Wal-
Mart Stores, Inc., 447 F.Supp.2d 379, 383-84 (D.N.J. 2006).

The Stosses' amended complaint identifies Singer Financial as the originating lender and
Paul Singer as an individual "acting individually and/or doing business as an officer
and/or member of the originating lender." Pl.'s Am. Compl. PP 7-8. It alleges that
"Singer, Singer Financial, and the Board of Directors as well as their investors constitute
an enterprise." Id. P 43. It is not clear from the complaint whether Singer or Singer
Financial is the "person" accused of conducting the enterprise in such a way as to commit
RICO violations, and the complaint's only reference to a "person" as defined in the RICO
statute states that "Plaintiffs and Defendants are persons within the meaning of 18 U.S.C.
§ 1961(3)." Because the Stosses fail to even attempt to distinguish the alleged enterprise
from the person accused of RICO violations and because it appears from the complaint
that the "person" and the "enterprise" are one and the same, Singer's motion to dismiss
will be granted on this ground.

2. Allegation of a Pattern [*17] of Racketeering Activity

In order to plead a violation of Section 1962(c), the plaintiff must also allege that
defendants engaged in a pattern of racketeering activity. "A 'pattern' of racketeering
activity requires commission of at least two predicate offenses on a specified list." Kehr
Packages, 926 F.2d at 1411-12 (3d Cir. 1991). "Where acts of mail and wire fraud
constitute the alleged predicate racketeering acts, those acts are subject to the heightened
pleading requirement of Rule 9(b)." Warden, 288 F.3d at 114 (citing Rolo v. City
Investing Co. Liquidating Trust, 155 F.3d 644, 657-58 (3d Cir.1998)). If mail and wire
fraud are asserted as the basis for RICO liability, "plaintiffs must plead with particularity
the 'circumstances' of the alleged fraud in order to place the defendant on notice of the
precise misconduct with which they are charged, and to safeguard defendants against
spurious charges of immoral and fraudulent behavior." Lum v. Bank of America, 361
F.3d 217, 223 (3d Cir. 2004) (citing Seville Indus Mach. Corp. v. Southmost Mach.
Corp., 742 F.2d 786, 791 (3d Cir. 1984)). "[I]n determining the duration of a scheme
involving mail fraud, the relevant criminal conduct is [*18] the defendant's deceptive or
fraudulent activity, rather than otherwise innocent mailings that may continue for a long
period of time." Kehr Packages, 926 F.2d at 1418.

The Stosses claim Singer and Singer Financial violated the mail and wire fraud statutes
by "[making] use of the United States mail and wires in furtherance of a scheme to
defraud" by sending the Stosses communications that "contain numerous false statements
as alleged herein." Pl.'s Am. Compl. P 52. Within the body of their amended complaint,
the Stosses claim that Singer "demanded unearned and non-incurred fees and costs,"
represented that the mortgage would be affordable to the Stosses even though it was not,
and represented that the Stosses would receive enough money to purchase cows from the
proceeds of the loan when they would not. Pl.'s Am. Compl. PP 23, 47, 48.

Even if I assume that these misrepresentations constitute predicate racketeering acts for
purposes of RICO, the Stosses' claim must be dismissed because they have failed to

84
allege a pattern of racketeering activity in violation of Section 1962(c). In the leading
case explaining this requirement, H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 109
S.Ct. 2893, 106 L. Ed. 2d 195 (1989), [*19] the Supreme Court stated that a plaintiff
alleging violations of the civil RICO provisions "must show that the racketeering
predicates are related, and that they amount to or pose a threat of continued criminal
activity." (emphasis in original). The relatedness inquiry focuses on whether the alleged
predicate acts "are interrelated by distinguishing characteristics and are not isolated
events." Id. at 240. "'Continuity' is both a closed- and open-ended concept, referring
either to a closed period of repeated conduct, or to past conduct that by its nature projects
into the future with a threat of repetition." Id. at 241. The Court observed that "Congress
was concerned in RICO with long-term criminal conduct" and ruled therefore that
"[p]redicate acts extending over a few weeks or months and threatening no future
criminal conduct do not satisfy [the continuity] requirement."

A plaintiff alleging a closed-ended or closed-period RICO scheme "must prove a series of


related predicates lasting a 'substantial period of time.'" Hughes v. Consol-Pennsylvania
Coal Co., 945 F.2d 594, 609 (3d Cir. 1991). Although the Third Circuit has refused to set
a "litmus test" to measure duration, it has held [*20] that twelve months is not a
substantial period of time. Id. at 611. More broadly, it has observed that in cases where
the object of the fraudulent activity is a "single piece of real estate," (citing Banks v.
Wolk, 918 F.2d 418 (3d Cir. 1990)), or an attempt "to force a single business entity
bankrupt," (citing Marshall-Silver Construction Co. v. Mendel, 894 F.2d 593 (3d Cir.
1990)), is "directed at a single entity," (citing Kehr Packages, 926 F.2d at 1418) or can
generally be characterized as a "single-scheme, single-victim" transaction, there is no
"pattern" of racketeering activity. Id. at 610-611.

A plaintiff may also allege a claim in terms of open-ended continuity. In this situation,
the plaintiff is unable to establish the continuity of a past, closed-ended scheme, but can
instead allege conduct that poses "a threat of continuity." H.J., 492 U.S. at 242. "A threat
of continuity exists when the predicate acts are a part of defendant's 'regular way of doing
business.'" Hughes 945 F.2d at 610 (citing H.J., 492 U.S. at 242).

The Stosses have failed to allege a scheme that qualifies under either closed- or open-
ended continuity. The "scheme" they describe in the amended complaint is [*21] based
on one allegedly fraudulent transaction directed at the Stosses and their farm. It is, as
described by the court in Hughes, a "single-scheme, single-victim" transaction.
Moreover, the Stosses contacted Singer about the loan in July of 2006 and defaulted on
the loan one year later. In their complaint, they do not even attempt to set forth the dates
of the predicate fraudulent racketeering acts and do not allege that such acts took place
over the course of this year. They have not alleged that a year separated any two alleged
predicate racketeering acts and therefore have failed to allege that Singer's scheme took
place over a substantial period of time. They would be unable to make such allegations
since only thirteen months elapsed between the initial contact between the Stosses and
Singer and the sale of their farm.

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The most specific allegation concerning Singer's alleged pattern of racketeering is the
conclusory statement that "the enterprise engages in the above activities as its pattern and
practice which improper charges constitute a scheme and artifice to defraud through use
of the mail and wires in the advertising, communication, funding, credit inquiries and
lending with [*22] regards to its hard money loans." Pl.'s Am. Compl. P 46. This
statement simply fails to describe a threat of continued criminal conduct qualifying as an
"open-ended pattern of racketeering." It contains no facts supporting such a bald
assertion.

In sum, the Stosses attempt to do exactly that which the Supreme Court and the Third
Circuit have repeatedly ruled is insufficient. They seek to proceed with a RICO count
against Singer and Singer Financial for conducting an enterprise via a pattern of
racketeering activity by alleging, with almost no specificity, predicate acts that occurred
over a limited period of time and that threaten no future criminal conduct. They have
failed to state a claim for RICO liability.

C. Leave to Amend

Courts shall give a party leave to amend a complaint "when justice so requires."
Fed.R.Civ.P. 15(a)(2). "If the underlying facts or circumstances relied upon by a plaintiff
may be a proper subject of relief, he ought to be afforded an opportunity to test his claim
on the merits." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L. Ed. 2d 222 (1962).
However, a court "may deny leave to amend on grounds such as undue delay, bad faith,
dilatory motive, and prejudice, as well as [*23] on the ground that an amendment would
be futile." Smith v. NCAA, 139 F.3d 180, 190 (3d Cir.1998). "An amendment is futile if
the complaint, as amended, would not survive a motion to dismiss for failure to state a
claim." Id.

I will deny the Stosses leave to amend Counts I and II of their complaint alleging civil
RICO and fraud. No amendment to the Stosses' complaint will cure this court's lack of
subject matter jurisdiction over their fraud claim. Their civil RICO claim would not
withstand a motion to dismiss even with an amendment to cure such deficiencies as their
failure properly to allege the existence of a person separate and distinct from the RICO
enterprise. There are no facts within their complaint to support a RICO claim for
conducting an enterprise through a pattern of racketeering activity. No amendment would
cure or change the fact that the allegedly fraudulent mortgage and foreclosure on which
they base their RICO claim was a single transaction directed at a single piece of property
affecting only the Stosses. They have similarly failed to allege any facts which might
support a claim that Singer and Singer Financial pose a continuing criminal threat.
Simply put, there is [*24] nothing more the Stosses can add to their complaint that will
render it viable.

D. Plaintiffs' State Law Claim for Unlawful Use of Civil Proceedings

Because I will grant Singer's Motion to Dismiss the fraud and civil RICO claims in
counts I and II, I dismiss Count III for lack of subject matter jurisdiction. The state claim

86
for Wrongful Use of Civil Proceedings in violation of 42 Pa.C.S.A. § 8351 was brought
pursuant to 28 U.S.C. § 1367, which grants supplemental jurisdiction to other claims "so
related to the claims in action within such original jurisdiction that they form part of the
same case or controversy." Subsection (c) grants the district court discretion to decline to
exercise supplemental jurisdiction if it has dismissed all claims over which it had original
jurisdiction.

IV. CONCLUSION

I will therefore dismiss Counts I and II with prejudice and dismiss Count III without
prejudice. An appropriate order follows.

ORDER

STENGEL, J.

AND NOW, this 24th day of February, 2010, upon careful consideration of the
defendants' motion to dismiss (Document # 19), the plaintiffs' response thereto
(Document # 25), and the oral argument held in this matter on November 16, 2009, IT IS
HEREBY ORDERED [*25] that the defendants' motion is GRANTED.

Clerk of Court is directed to close this case.

BY THE COURT:

/s/ Lawrence F. Stengel

LAWRENCE F. STENGEL, J.

2009 U.S. Dist. LEXIS 22443, *

ALLSTATE INSURANCE COMPANY, et al., Plaintiffs, -against- AHMED HALIMA,


M.D., et al., Defendants.

06-CV-1316 (DLI) (SMG)

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW


YORK

2009 U.S. Dist. LEXIS 22443

March 19, 2009, Decided

87
March 19, 2009, Filed

PRIOR HISTORY: Allstate Ins. Co. v. Halima, 2008 U.S. Dist. LEXIS 49414 (E.D.N.Y.,
June 26, 2008)

CORE TERMS: fraud claim, No-Fault Laws, unjust enrichment, reasonable reliance,
medically, pled, diagnostic tests, nonphysicians, citations omitted, particularity,
fraudulent, licensed, fraudulent claims, contract claim, prescribing, diagnostic, no-fault,
insurer's, doctor, fraudulent scheme, proximate causation, mail fraud, prescribed,
conspiracy, provider, medical services, medical professionals, summary judgment, cause
of action, quotation marks

COUNSEL: [*1] For Allstate Insurance Company, Allstate Indemnity Company,


Deerbrook Insurance Company, Plaintiffs: Barry I. Levy, LEAD ATTORNEY, Bonnie
Porzio, Rivkin Radler LLP, Uniondale, NY; Jill Catherine Owens, Meiselman, Denlea,
Packman, Carton & Eberz P.C., White Plains, NY.

For Allstate New Jersey Insurance Company, Plaintiff: Barry I. Levy, LEAD
ATTORNEY, Rivkin Radler LLP, Uniondale, NY.

For M.D. Ahmed Halima, Diagnostics Medical Testing, P.C., Defendants: Matthew J.
Conroy, LEAD ATTORNEY, Matthew J. Conroy & Associates, P.C., Garden City, NY.

For M.D. Colin Clarke, Defendant: Neil S. Torczyner, Friedman, Harfenist & Langer,
Lake Success, NY; Steven J. Harfenist, Friedman, Harfenist, Langer & Kraut, Lake
Success, NY.

For D.C. Laurie Lamare, Defendant: Mark L. Furman, Hoffman Einiger & Polland
PLLC, New York, NY.

For Bernard Glassman, GB Associates, INC., Defendants: Barry B. Cepelewicz, Jill


Catherine Owens, John B. Dawson, Meiselman, Denlea, Packman, Carton & Eberz P.C.,
White Plains, NY.

For GB Medical Management, Inc., Defendant: Barry B. Cepelewicz, Jill Catherine


Owens, John B. Dawson, Meiselman, Denlea, Packman, Carton & Eberz P.C., White
Plains, NY.

For Tremont Professional Professional [*2] Management, Inc., Health Care Data
Processing, Inc., Defendants: Jill Catherine Owens, Meiselman, Denlea, Packman, Carton
& Eberz P.C., White Plains, NY.

For inna palter, Objector: Jill Catherine Owens, Meiselman, Denlea, Packman, Carton &
Eberz P.C., White Plains, NY.

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For M.D. George Krementsov, Cross Claimant: Jude Roberto Cardenas, Cardenas &
Associates, New York, NY.

For Bernard Glassman, GB Associates, INC., Bernard Glassman, GB Associates, INC.,


Cross Defendants: Barry B. Cepelewicz, Jill Catherine Owens, John B. Dawson,
Meiselman, Denlea, Packman, Carton & Eberz P.C., White Plains, NY.

For D.C. Andrew Lopedote, Counter Claimant: Mitchell C. Elman, Ozone Park, NY.

For Allstate Insurance Company, Allstate Indemnity Company, Counter Defendants:


Barry B. Cepelewicz, LEAD ATTORNEY, Jill Catherine Owens, Meiselman, Denlea,
Packman, Carton & Eberz P.C., White Plains, NY; Bonnie Porzio, Rivkin Radler LLP,
Uniondale, NY.

For Deerbrook Insurance Company, Counter Defendant: Barry B. Cepelewicz, LEAD


ATTORNEY, Jill Catherine Owens, Meiselman, Denlea, Packman, Carton & Eberz P.C.,
White Plains, NY; Bonnie Porzio, Rivkin Radler LLP, Uniondale, NY.

For Allstate New Jersey Insurance Company, Counter Defendant: Barry [*3] I. Levy,
LEAD ATTORNEY, Rivkin Radler LLP, Uniondale, NY.

For M.D. Ahmed Halima, Cross Claimant: Matthew J. Conroy, LEAD ATTORNEY,
Matthew J. Conroy & Associates, P.C., Garden City, NY.

For GB Associates, INC., Bernard Glassman, GB Associates, INC., Cross Defendants:


Barry B. Cepelewicz, Jill Catherine Owens, John B. Dawson, Meiselman, Denlea,
Packman, Carton & Eberz P.C., White Plains, NY.

JUDGES: Dora L. Irizarry, United States District Judge.

OPINION BY: Dora L. Irizarry

OPINION

MEMORANDUM AND ORDER

DORA L. IRIZARRY, United States District Judge:

Plaintiff Allstate Insurance Company and the remaining plaintiffs ("Allstate" or


"Plaintiffs") are nationwide automobile insurers. Plaintiffs allege that defendants
conspired to abuse New York's No-Fault laws, N.Y. Ins. Law §§ 5101-109, and the
regulations promulgated under those laws, 11 N.Y.C.R.R. § 65-3.1 to .20 (collectively,
"New York's No-Fault Laws"), to obtain payment for diagnostic tests that were medically
unnecessary. The diagnostic tests at issue comprise current perception tests ("CPT Tests")
and digital range of motion tests ("J-Tech Tests"). Plaintiffs seek damages under the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1964(c)-(d),

89
[*4] and under state law claims of fraud and unjust enrichment. Additionally, Plaintiffs
seek a declaration that they are not liable for any unpaid charges under the Declaratory
Judgment Act, 28 U.S.C. § 2201.

The complaint groups Defendants into four categories: (i) the doctors and chiropractors at
clinics who treat parties insured by Plaintiffs for injuries sustained in automobile
accidents ("Prescribing Doctors"), (ii) Ahmed Halima, a doctor who purportedly reviews
the CPT and J-Tech tests and interprets them for the Prescribing Doctors, (iii)
Diagnostics Medical Testing, P.C. ("DMT"), a professional medical corporation that
submits bills for the tests to Allstate, and (iv) several individuals who are nonphysicians
and the corporate entities, which, collectively, own and operate DMT ("Management
Defendants"). Defendants Jake Palter a/k/a Jake Palterovich and Health Care Data
Processing, Inc. (the "Palter Defendants") fall into the Management Defendants category.
While Plaintiffs have settled with several Defendants, the Palter Defendants remain in the
action and have filed a motion to dismiss under Rules 12(b)(6) and 9(b) of the Federal
Rules of Civil Procedure. Plaintiffs oppose this [*5] motion in its entirety. For the
reasons set forth more fully below, the motion is denied. 1

FOOTNOTES

1 By an order dated September 30, 2008, the court consolidated the instant motion with
Plaintiffs' motion for partial summary judgment against defendants Halima and DMT
(Docket Entry No. 127). Plaintiffs have since indicated that settlement with Halima and
DMT is likely. (See Status Rep. Jan. 16, 2009, Docket Entry No. 165.) As such, the court
terminates the motion for partial summary judgment without prejudice and with leave to
renew or reinstate should the parties fail to settle.

BACKGROUND

The facts as described below are drawn from the complaint, which the court accepts as
true solely for purposes of this motion to dismiss. In accordance with New York's No-
Fault Laws, Plaintiffs must pay for medically necessary diagnostic tests. See N.Y Ins.
Law §§ 5101-109. These benefits may also be assigned for payment of services rendered
to qualified "providers of health care services." See 11 N.Y.C.R.R. § 65-3.11. A proper
assignment requires that the health care provider submit either (1) "a properly executed
Authorization to Pay Benefits" or (2) "a properly executed assignment on . . . the
prescribed [*6] Verification of Treatment" using New York State Form NF-3. Id. The
services performed must be "necessary for the treatment of the injuries sustained." Id. at §
65-3.16(a)(6) (emphasis added). Within thirty days of receiving a valid claim, an
insurance company must pay the claim in full or incur interest charges at two percent per
month. Id. at §§ 65-3.8 to 3.9. Only properly licensed professional corporations--those
owned and operated by medical professionals--are eligible for reimbursement under New
York's No-Fault Laws. See N.Y. Bus. Corp. Law §§ 1507-508; State Farm Mut. Auto.

90
Inc. Co. v. Mallela, 4 N.Y.3d 313, 321-22, 827 N.E.2d 758, 794 N.Y.S.2d 700 (2005)
(holding that medical professional services corporations must be owned and operated
solely by licensed physicians). The purpose of this requirement is to discourage
nonphysicians from fraudulently taking advantage of New York's No-Fault Laws. See
Mallela, 4 N.Y.3d at 320 n.2 (accepting the finding by New York's Superintendent of
Insurance that this requirement was "promulgated . . . to combat rapidly growing
incidences of fraud in the no-fault regime . . . identified as correlative with the corporate
practice of medicine by nonphysicians").

Plaintiffs allege that, [*7] on or around June 2001, Defendants began a scheme to
defraud Plaintiffs of over one million dollars by submitting thousands of claims for
medical services and diagnostic tests that were medically unnecessary. (Am. Compl. PP
29-33.) According to Plaintiffs, Management Defendants, including the Palter
Defendants, were central to this fraudulent scheme. Because Management Defendants are
nonphysicians but wanted the professional corporation to be eligible under New York's
No-Fault Laws, Plaintiffs allege that Management Defendants used Dr. Halima as a
figurehead for the professional corporation when, in fact, Management Defendants are
the true owners, managers and operators of the professional corporation. (Id. PP 89-92.)

With the professional corporation licensed to perform services under New York's No-
Fault Laws, Management Defendants were able to perpetrate their scheme. First,
Prescribing Doctors authorized the CPT and J-Tech tests using boilerplate letters of
medical necessity that attested to the diagnostic value of these tests. 2 (Id. P 29.)
Management Defendants, through the professional corporation, then submitted these
letters to Plaintiffs along with reports by Dr. Halima and [*8] bills for the performance
and interpretation of these tests. (Id. PP 30-31.) Plaintiffs claim, however, that
Defendants knew that the CPT and J-Tech tests had little-to-no diagnostic value and were
ordered solely to take advantage of New York's No-Fault Laws.

FOOTNOTES

2 Plaintiffs allege that these letters were boilerplate because invariably they were
undated, unsigned or signed with irregular signatures and contained identical language
that never referred to a patient's specific condition. (Id. PP 62-63.)

According to Plaintiffs, the CPT and J-Tech were medically unnecessary for two reasons.
First, Plaintiffs challenge the independent diagnostic value of these tests. (Id. PP 54-58,
70-72.) Second, even if these tests have minimal diagnostic value, Plaintiffs allege that
nearly every insured customer that the Management Defendants' allegedly tested had
received, at or around the same time, equally informative diagnostic tests--Nerve
Conduction Velocity ("NCV"), Electromyography ("EMG"), and Magnetic Resonance
Imaging ("MRI") tests and manual range of motion tests--thereby rendering the CPT and
J-Tech tests superfluous. (Id. PP 43, 69.) Plaintiffs further allege that Defendants

91
submitted forms [*9] using incorrect billing codes to "materially misrepresent the nature
of the tests purportedly performed . . . ." (Id. P 3.) Moreover, with respect to the J-Tech
tests, in addition to being medically unnecessary, Plaintiffs allege that Defendants
submitted bills for fourteen separate tests when, under New York law, several of these
tests should have been "bundled" into tests of individual "trunk section[s]." ( Id. PP 78-
80.) Plaintiffs have presented a representative sample of 916 allegedly fraudulent
reimbursement claims submitted by the Palter Defendants to Plaintiffs. (Id. Ex. A, Ex. B.)
Additionally, Plaintiffs have submitted affidavits of two physicians who Management
Defendants represented to Plaintiffs as having prescribed CPT and J-Techs tests. (Id. P
62, Ex. F, Ex. G.) In the affidavits, however, these physicians deny having prescribed, or
having knowledge of, these tests. (Id. P 62, Ex. F, Ex. G.)

DISCUSSION

I. Standard of Review

Rule 12(b)(6) of the Federal Rules of Civil Procedure provides that a defendant may
make a motion to dismiss a complaint for "failure to state a claim upon which relief can
be granted." Fed. R. Civ. P. 12(b)(6). On a motion to dismiss under Rule 12(b)(6), [*10]
the court accepts as true all well-pleaded factual allegations and draws all reasonable
inferences in the plaintiff's favor. See Dangler v. New York City Off Track Betting
Corp., 193 F.3d 130, 138 (2d Cir. 1999). In Bell Atlantic Corp. v. Twombly, the Supreme
Court retired the standard set forth half a century ago in Conley v. Gibson, that a
complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle him to relief," in favor of
the requirement that plaintiff plead enough facts to "state a claim to relief that is plausible
on its face." Bell Atlantic, 550 U.S. 544, 561, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)
(quoting Conley, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)). Under Bell
Atlantic, in order to be facially plausible, a complaint cannot make merely "a formulaic
recitation of the elements of a cause of action," but must allege facts that "raise a right of
relief above the speculative level on the assumption that all allegations in the complaint
are true (even if doubtful in fact)." Id. at 555 (citations omitted). The Second Circuit has
interpreted the foregoing language to "requir[e] a flexible 'plausibility standard,' which
obliges [*11] a pleader to amplify a claim with some factual allegations in those contexts
where such amplification is needed to render the claim plausible," rather than to mandate
a "universal standard of heightened fact pleading." Iqbal v. Hasty, 490 F.3d 143, 157-58
(2d Cir. 2007).

When material outside the complaint is "presented to and not excluded by the court, the
motion must be treated as one for summary judgment . . . and all parties must be given a
reasonable opportunity to present all the material that is pertinent to the motion." Fed. R.
Civ. P. 12(d). For the purposes of this rule, however, the complaint is deemed to include
writings and documents attached to the complaint, referenced in the complaint, or integral
to the complaint. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir.
2002); Fed. R. Civ. P. 10(c). A document is "integral" to the complaint where "the
complaint relies heavily upon its terms and effects." Chambers, 282 F.3d at 153 (citations

92
omitted). "A plaintiff's reliance on the terms and effect of a document in drafting the
complaint is a necessary prerequisite to the court's consideration of the document on a
dismissal motion; mere notice or possession is [*12] not enough." Id. (emphasis in
original).

I. Application

A. Civil RICO Claims

1. Substantive RICO Claim Under § 1964(c)

The Palter Defendants argue that Plaintiffs' civil RICO claim should be dismissed under
Rule 12(b)(6) for failure to state a claim and under Rule 9(b) for failure to plead fraud
with sufficient particularity. In civil RICO suits, a plaintiff must first satisfy the elements
of § 1962, the criminal RICO statute. City of New York v. Smokes-Spirits.com, Inc., 541
F.3d 425, 439 (2d Cir. 2008). The criminal RICO statute makes it "unlawful for any
person employed by or associated with any enterprise engaged in . . . interstate . . .
commerce, to conduct or participate, directly or indirectly, in the conduct of such
enterprise's affairs through a pattern of . . . collection of unlawful debt." 18 U.S.C. §
1962(c). A plaintiff bringing a RICO claim must, therefore, establish four elements: "(1)
conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Smokes-
Spirits.com, 541 F.3d at 439 (quoting Sedima, S. P. R. L. v. Imrex Co.., 473 U.S. 479,
496, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985)). 3 If a plaintiff clears this first hurdle, he
or she can bring a civil RICO claim under § 1964(c) for damages [*13] incurred by
violation of the criminal RICO statute. See id. (citing 18 U.S.C. § 1964(c)).

FOOTNOTES

3 Some courts have broken-down the cause of action to seven elements: "(1) that the
defendant (2) through the commission of two or more acts (3) constituting a 'pattern' (4)
of 'racketeering activity' (5) directly or indirectly invests in, maintain an interest in, or
participates in (6) an 'enterprise' (7) the activities of which affect interstate . . .
commerce." See Persaud v. Bode, 04-CV-4475 (ARR), 2006 U.S. Dist. LEXIS 97452,
2006 WL 1419397, at *4 (E.D.N.Y. Feb. 8, 2006) (citing Moss v. Morgan Stanley, Inc.,
719 F.2d 5, 17 (2d Cir. 1983)). However the elements are broken down, the substantive
crime remains the same and is governed by § 1962.

Under § 1964(c), "a plaintiff must show: (1) a substantive RICO violation under § 1962;
(2) injury to the plaintiff's business or property, and (3) that such injury was by reason of
the substantive RICO violation." Id. (internal quotation marks and citations omitted). A
plaintiff must also establish both factual and proximate causation. Id. at 440 (citing
Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268, 112 S. Ct. 1311, 117 L. Ed. 2d
532 (1992)). "[P]roximate cause . . . requires that 'there be some direct relation [*14]

93
between the injury asserted and injurious conduct alleged.'" State Farm Mut. Auto. Ins.
Co. v. CPT Med. Servs., P.C., No. 04-CV-5045 (ILG), 2008 U.S. Dist. LEXIS 71156,
2008 WL 4146190, at *13 (E.D.N.Y. Sept. 5, 2008) (quoting Holmes, 503 U.S. at 268).
"[W]here mail fraud is the predicate act for a civil RICO claim . . . the proximate cause
element . . . requires the plaintiff to show 'reasonable reliance.'" State Farm Mut. Auto.
Ins. Co. v. Eastern Med., P.C., No. 05-CV-3804 (ENV) (RML), 2008 U.S. Dist. LEXIS
59891, 2008 WL 3200256, at *5 (E.D.N.Y. Aug. 5, 2008) (quoting Bank of China, N.Y.
Branch v. NBM LLC, 359 F.3d 171, 176 (2d Cir. 2004)); 4Frankel v. Cole, No. 06-CV-
439 (CBA), 2006 U.S. Dist. LEXIS 96775, 2007 WL 5091074, at *20 (E.D.N.Y. Apr. 20,
2007).

FOOTNOTES

4 The parties in Bank of China were granted certiorari to the Supreme Court on the issue
of whether reasonable reliance is the proper standard for proximate causation in a civil
RICO claim, 545 U.S. 1138, 1138, 125 S. Ct. 2956, 162 L. Ed. 2d 886 (2005), but they
subsequently dismissed their petition, 546 U.S. 1026, 1026, 126 S. Ct. 675, 163 L. Ed. 2d
545 (2005) (dismissing petition for certiorari under Supreme Court Rule 46.1). Therefore,
proof of reasonable reliance is still required in civil RICO claims. See, e.g., Gragg v.
NYS Dept. of Envtl. Conservation, No. 97-CV-1506 (RSP), 2000 U.S. Dist. LEXIS
19607, 2000 WL 246272, at *6 (N.D.N.Y. Mar. 3, 2000).

Here, [*15] the Palter Defendants argue that Plaintiffs have not sufficiently pled
reasonable reliance with respect to the mail fraud RICO claim--i.e., that Plaintiffs could
not have reasonably relied on the letters of medical necessity. They argue that Plaintiffs
have made mere conclusory allegations of reliance. Plaintiffs, however, contend that the
Palter Defendants fraudulently submitted thousands of claims which caused Plaintiffs to
pay over one million dollars in unnecessary reimbursements which could not be detected
as fraudulent until after a pattern of filed suspicious claims was apparent. According to
Plaintiffs, they could not detect Defendants' fraud because the submissions were facially
valid insurance claims authorized by physicians and submitted by a licensed medical
services corporation upon which they reasonably relied.

The court agrees with Plaintiffs. On a motion to dismiss, the court cannot say definitively
that an insurance company that receives thousands of insurance claims could not
reasonably rely on facially valid claims submitted by a licensed professional corporation
and accompanied by reports from licensed physicians. See CPT Med. Servs., 2008 U.S.
Dist. LEXIS 71156, 2008 WL 4146190, at *13 (holding [*16] that an insurance
company's allegations that it paid for "fraudulent claims" for medically unnecessary CPT
Tests by "relying on mispresentations contain[ed]" in those claims satisfies the pleading
requirement of reasonable reliance).

94
The Palter Defendants also argue that Plaintiffs' did not reasonably rely on the Palter
Defendants' claims because New York's No-Fault laws provide Plaintiffs a thirty-day
window to challenge suspicious claims. New York's No-Fault laws requires insurers to
pay claims within "30 calendar days . . . after . . . receiv[ing] proof of claim" to encourage
quick payments of claims. See 11 N.Y.C.R.R. §§ 65-3.2, 65-3.8(a)(1). The policy of
encouraging quick payments would be harmed if an insurer were unable to recover
payments made on fraudulent claims merely because they could not detect the fraud
within the statutory thirty-day window. See Walton v. Lumbermens Mut. Cas. Co., 88
N.Y.2d 211, 214, 666 N.E.2d 1046, 644 N.Y.S.2d 133 (1996) (holding that the legislative
purpose of New York's No-Fault Laws is "to establish a quick, sure and efficient system
for obtaining compensation for economic loss suffered as a result of such accidents")
(citations omitted). Therefore, if Plaintiffs, as alleged, reasonably [*17] relied on the
Palter Defendants' submissions, such reliance would potentially excuse Plaintiffs' failure
to utilize the procedures for challenging claims within the thirty-day window. Cf. CPT
Med. Servs., 2008 U.S. Dist. LEXIS 71156, 2008 WL 4146190, at *7 (holding that an
insurance company "is not precluded from bringing an action alleging fraud and unjust
enrichment merely because it did not discover the defendants' alleged fraud within the
thirty day claim period"). Thus, Plaintiffs have sufficiently pled reasonable reliance.

2. Rule 9(b) Applied to § 1964(c) Claim

The Palter Defendants also argue that Plaintiffs failed to plead these elements with
sufficient particularity as required by Rule 9(b). Under Rule 9(b), "[i]n alleging fraud or
mistake, a party must state with particularity the circumstances constituting fraud or
mistake." Fed. R. Civ. P. 9(b). A RICO claim predicated on mail fraud requires a plaintiff
to particularize five elements: (1) the false or misleading claims; (2) why plaintiff
believes these claims were fraudulent; (3) when and where the statements were made; (4)
those responsible for the statements; and (5) how the mailings fit within defendant's
fraudulent scheme. See Moore v. PaineWebber, Inc., 189 F.3d 165, 173 (2d Cir. 1999)
[*18] (internal quotation marks and citations omitted); Caytas v. Maruszak, No. 06-CV-
985 (LTS), 2007 U.S. Dist. LEXIS 62302, 2007 WL 2456956, at *3 (S.D.N.Y. Aug. 22,
2007). When there are multiple defendants, Rule 9(b) requires that a plaintiff allege facts
specifying each defendant's contribution to the fraud. See DiVittorio v. Equidyne
Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). Thus, "the plaintiff must
identify which defendant caused each allegedly fraudulent statement to be spoken,
written, wired, or mailed, and to whom the communication was made; when the
communication was made; and how it advanced the fraudulent scheme." Persaud v. Bode,
No. 04-CV-4475 (ARR), 2006 U.S. Dist. LEXIS 97452, 2006 WL 1419397, at *2
(E.D.N.Y. Feb. 8, 2006) (citing McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir.
1992)). The purpose of Rule 9(b) is not to create a heavy burden for plaintiffs, but rather,
to allow defendants to identify their alleged role and acts in the fraud to appropriately
respond to the complaint. See Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990) ("The
primary purpose of Rule 9(b) is to afford defendant fair notice of the plaintiff's claim and
the factual ground upon which it is based.").

95
Here, the Palter Defendants [*19] argue that Plaintiffs "simply ignore th[e] requirement"
of "specify[ing] each defendant's alleged participation in the fraud." (Def. Rep. Mem. at
1-3.) They contend that Plaintiffs merely have grouped the Palter Defendants with other
Management Defendants and, thus, fail to particularize the specific role and acts of the
Palter Defendants. Plaintiffs respond that they sufficiently pled the particular roles played
by the various defendants.

Defendants' claims are without merit. Plaintiffs have alleged that the Palter Defendants,
in concert with Dr. Halima, the Prescribing Physicians, and other Management
Defendants submitted several thousand fraudulent claims by mail for medically
unnecessary tests and services over the course of several years to take advantage of New
York's No-Fault Laws. Plaintiffs also allege that the Palter Defendants, who are not
physicians, used Dr. Halima as a cover to operate the professional corporation. According
to Plaintiffs, the Palter Defendants and other Management Defendants were the true
managers and owners of the professional corporations that ordered, performed, wrote
reports for, and billed Plaintiffs for diagnostic tests that were known by the Palter [*20]
Defendants to be medically unnecessary. In addition, Plaintiffs have presented a sample
of 916 allegedly fraudulent claims submitted by the Palter Defendants to Plaintiffs. These
allegations sufficiently set forth the role of the Palter Defendants and the acts of fraud
they are alleged to have committed. See CPT Med. Servs., 2008 U.S. Dist. LEXIS 71156,
2008 WL 4146190, at *11 (holding allegations nearly identical to those at issue here were
"sufficient to explain how [the non-medical professional defendants] participated in the
operation or management of the enterprises"). Moreover, the conduct Plaintiffs allege the
Palter Defendants to have committed is exactly the sort of conduct sought to be
discouraged by the requirement that only physicians own and operate medical
professional corporations. See Mallela, 4 N.Y.3d at 320 n.2. Thus, requiring Plaintiffs to
plead with more particularity would not further any of the policy goals of Rule 9(b). The
court thus finds that the Plaintiffs have pled a civil RICO claim predicated on mail fraud
with sufficient particularity as required by Rule 9(b).

3. Conspiracy RICO Claim Under § 1964(d)

The Palter Defendants also argue that Plaintiffs' conspiracy RICO claim under § 1964(d)
[*21] must fail along with its substantive RICO claim. See, e.g., Purgess v. Sharrock, 806
F. Supp. 1102, 1110, n. 9 (S.D.N.Y. 1992) ("Dismissal of plaintiff's substantive RICO
claim . . . mandates dismissal of the conspiracy to commit RICO claim . . . as well.").
However, since the court finds that Plaintiffs properly pled a civil RICO claim under §
1964(c), the Palter Defendants' argument that Plaintiffs' RICO conspiracy claim must fail
as well is denied as moot.

4. Statute of Limitations

The Palter Defendants argue that Plaintiffs' RICO claims are barred, in part, by the
applicable statute of limitations. Civil RICO claims are subject to a four-year statute of
limitations that "begins to run when the plaintiff discovers or should have discovered the
RICO injury." In re Merrill Lynch Ltd. P'ships Litig., 154 F.3d 56, 58 (2d Cir. 1998)

96
(citations omitted). Here, Plaintiffs filed their complaint on March 23, 2006. Thus, if
Plaintiffs knew or should have known of the alleged fraud before March 23, 2002, their
claims with respect to any bills submitted prior to that date would be barred. As discussed
above, the court finds plausible Plaintiffs' argument that they could not discover the
Defendants' [*22] fraudulent scheme until a pattern of fraudulent claims developed.
Further, at this point in the dispute, the Court cannot say when Plaintiffs knew or should
have known of the alleged fraud. See CPT Med. Servs., 2008 U.S. Dist. LEXIS 71156,
2008 WL 4146190, at *7.

B. New York Fraud Claim

The Palter Defendants argue that Plaintiffs' fraud claim under New York law is flawed
for four reasons: (1) it is barred by case law; (2) it fails to allege reasonable reliance and
proximate cause; (3) it is not claimed with particularity as required by Rule 9(b); and (4)
it is time-barred. "The [four] elements of fraud under New York law are: (1) a
misrepresentation or a material omission of material fact which was false and known by
defendant to be false, (2) made for the purpose of inducing the plaintiff to rely on it, and
(3) justifiably relied upon by the plaintiff, (4) who then suffered an injury as a result of
such reliance." Smokes-Spirits.com, 541 F.3d at 454 (citing Lama Holding Co. v. Smith
Barney Inc., 88 N.Y.2d 413, 421, 668 N.E.2d 1370, 646 N.Y.S.2d 76 (1996)).

The Palter Defendants contend that New York case law bars Plaintiffs' fraud claim based
on the recent holding by New York's Civil Court in Tahir v. Progressive Cas. Ins. Co..,
12 Misc. 3d 657, 814 N.Y.S.2d 507 (N.Y. Civ. Ct. 2006). [*23] The court disagrees and
finds this decision by a lower state court distinguishable from the case at bar. In Tahir,
the plaintiff medical services provider sued an insurance company because the insurance
company denied payments under New York's No-Fault Laws for CPT and nerve
conduction threshold tests. Id. at 509. The insurance company alleged that the tests were
medically unnecessary and, thus, fraudulent, because they were not compensable under
Medicare. Id. Medicare's decision not to cover the tests was the insurer's only reason both
for rejecting the claims and for alleging fraud. Id. The court in Tahir, however, held that
Medicare's standard by itself was an inadequate basis for rejecting claims and alleging
fraud. Id. at 513.

In the instant matter, Plaintiffs have not relied solely on Medicare's standard. For
example, Plaintiffs point to two physicians who allegedly prescribed CPT tests but in
affidavits deny ever prescribing or referring patients for these tests. In addition, Plaintiffs
allege that the Palter Defendants, unlike the plaintiffs in Tahir, are nonphysicians illegally
operating a medical profession corporation to take advantage of New York's No-Fault
Laws. See id. at 511 n.3 [*24] (holding that if the plaintiffs were "independent
contractors . . . [they] would not be a provider within the meaning of the insurance
regulation" and thus would be ineligible for payments) (internal quotation marks and
citations omitted); see also Walton, 88 N.Y.2d at 214 (discussing the policy
considerations for preclusion of nonphysicians). Therefore, the court finds that New York
law does not bar Plaintiffs' fraud claim.

97
In addition, the Palter Defendants contend that Plaintiffs have not pled reasonable
reliance and proximate causation as required for fraud claims under New York law.
However, as discussed above with respect to their civil RICO claims, Plaintiffs have
sufficiently pled reasonable reliance. See CPT Med. Servs., 2008 U.S. Dist. LEXIS
71156, 2008 WL 4146190, at *16 (holding that a civil RICO claim with allegations
nearly identical to those here met the requirements for pleading a common law fraud
claim). The court, therefore, finds that Plaintiffs have also sufficiently pled reasonable
reliance and proximate causation for their fraud claim under New York law.

The Palter Defendants finally argue that Plaintiffs' fraud claim is essentially a breach of
contract claim and, as such, must be litigated [*25] under contract law. Under New York
law, "[i]t is well settled that no cause of action to recover damages for fraud arises when
the only fraud charged relates to a breach of contract." Edwil Indust., Inc. v. Stroba Instrs.
Corp., 131 A.D.2d 425, 516 N.Y.S.2d 233, 233 (Sup. Ct. N.Y. Co. 1987). However, "the
same conduct constituting the breach of a contract obligation may also constitute the
breach of a duty arising out of a relationship created by the contract but independent of
the contract itself." La Barte v. Seneca Res. Corp., 285 A.D.2d 974, 977, 728 N.Y.S.2d
618 (4th Dep't 2001) (holding that a claim for a breach of fiduciary duty may be "separate
and distinct from . . . [a] contractual relationship" between the parties). A fraud claim is
distinct from a contract claim when there are: (1) distinct legal duties, (2) fraud
"collateral or extraneous to the contract" or (3) "special damages" caused by the fraud
and not "[]recoverable as contract damages." Textiles Network Ltd. v. DMC Enters.,
LLC, No. 07-CV-393 (DLC), 2007 U.S. Dist. LEXIS 64247, 2007 WL 2460767, at *3
(S.D.N.Y. Aug. 31, 2007); Metro Life Ins. Co. v. Noble Lowndes Int'l, 84 N.Y.2d 430,
435, 643 N.E.2d 504, 618 N.Y.S.2d 882 (1994) (holding that one of the differences
between contract and tort claims is the availability [*26] of enhanced damages in the
latter for intentional conduct).

Here, Plaintiffs maintain that there was no contract between them and the Palter
Defendants and, notably, that their fraud claims are distinct claims, independent of any
potential contract dispute. The court agrees. Even if the court were to find that Plaintiffs
have valid claims for breach of contract, it would not change the fact that Plaintiffs have
pled distinct fraud claims that go well beyond contract claims. See Standardbred Owners
Ass'n v. Roosevelt Raceway Assocs., L.P., 985 F.2d 102, 105 (2d Cir. 1993) (holding that
"the existence of . . . contractual 'rights' does not forclose the plaintiffs' RICO fraud
claims"); U.S. Fire Ins. Co. v. United Limo. Serv., Inc., 328 F. Supp. 2d 450, 454
(S.D.N.Y. 2004) ("The type of activity that gives rise to RICO claims also frequently
gives rise to lesser state law claims, such as fraud or unjust enrichment."). The fraudulent
conduct allegedly committed by the Palter Defendants--the operation of a medical
professional corporation by nonphysicians to charge insurers for medically unnecessary
diagnostic tests--is extraneous to any contract between Plaintiffs and the Palter
Defendants [*27] because it does not concern disputes over a contractual obligation
between the parties. Instead, Plaintiffs' claims sound "in tort, not in contract." See
Standardbred, 985 F.2d at 105. Thus, Plaintiffs' fraud claims survive.

C. New York Unjust Enrichment Claim

98
The Palter Defendants assert that, much like Plaintiffs' fraud claim, Plaintiffs' unjust
enrichment claim is governed by a contract and, thus, is limited to a breach of contract
claim. "The basic elements of an unjust enrichment claim in New York require proof that
(1) defendant was enriched, (2) at plaintiff's expense, and (3) equity and good conscience
militate against permitting defendant to retain what plaintiff is seeking to recover." Berry
v. Deutsche Bank Trust Co. Ams., No. 07-CV-7634 (WHP), 2008 U.S. Dist. LEXIS
91561 , 2008 WL 4694968, at *6 (S.D.N.Y. Oct. 21, 2008) (quoting Briarpatch Ltd., L.P.
v. Phoenix Pictures, Inc., 373 F.3d 296, 306 (2d Cir. 2004)). Unjust enrichment claims,
however, are inapplicable when "a valid and enforceable written contract govern[s] . . .
the same subject matter. See Shah v. Micro Connections Inc., 286 A.D.2d 433, 433-34,
729 N.Y.S.2d 497 (2d Dep't 2001).

Here, as discussed above, Plaintiffs sufficiently pled a common law fraud claim. [*28]
Accordingly, whether or not Plaintiffs have a valid breach of contract claim is
immaterial. See CPT Med. Servs., 2008 U.S. Dist. LEXIS 71156, 2008 WL 4146190, at
*16 (permitting under circumstances similar to those alleged here both fraud and unjust
enrichment claims to proceed simultaneously with a civil RICO claim); see also United
Limo. Serv., Inc., 328 F. Supp. 2d at 454 ("The type of activity that gives rise to RICO
claims also frequently gives rise to lesser state law claims, such as fraud or unjust
enrichment."). Moreover, even if Plaintiffs are unable to prove their civil RICO claims,
the court cannot, at this stage in the litigation, hold that there are no set of facts that
would entitle Plaintiffs to restitution under an unjust enrichment theory. See Mfrs.
Hanover Trust Co. v. Chem. Bank, 160 A.D.2d 113, 117, 559 N.Y.S.2d 704 (1st Dep't
1990) (holding that "equity and good conscience" might require that a party be entitled to
recover payments from "one who is not entitled to it . . . even if the mistake is due to
negligence of the payor"). Therefore, the Court denies the Palter Defendants' motion to
dismiss Plaintiffs' unjust enrichment claim is denied.

CONCLUSION

For all the reasons stated above, the Palter Defendants' [*29] motion to dismiss is denied
in its entirety.

SO ORDERED

DATED: Brooklyn, New York

March 19, 2009

/s/

Dora L. Irizarry

United States District Judge

99
2009 U.S. Dist. LEXIS 37105, *; Fed. Sec. L. Rep. (CCH) P95,218

CARL AMARI, Plaintiff, v. MICHAEL SPILLAN, et al., Defendants.

Case No. 2:08-cv-829

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO,


EASTERN DIVISION

2009 U.S. Dist. LEXIS 37105; Fed. Sec. L. Rep. (CCH) P95,218

April 14, 2009, Filed

SUBSEQUENT HISTORY: Motion denied by Amari v. Spillan, 2009 U.S. Dist. LEXIS
88430 (S.D. Ohio, Sept. 4, 2009)

PRIOR HISTORY: Amari v. Spillan, 2009 U.S. Dist. LEXIS 16254 (S.D. Ohio, Feb. 12,
2009)

CORE TERMS: stock, securities fraud, actionable, predicate acts, mail, predicate offense,
sale of securities, wire fraud, pleaded, Exchange Act, particularity, securities law,
fraudulently induced, national securities, racketeering activity, indirectly, transferred,
Reform Act, RICO Amendment's, state law claim, fraudulent scheme, factual allegations,
failure to state a claim, person injured, interstate commerce, fraud claim, instrumentality,
perpetrated, registered, eliminated

COUNSEL: [*1] For Carl Amari, Plaintiff: Amelia A Bower, LEAD ATTORNEY,
Plunkett & Cooney PC - 1, Columbus, OH; Merle Leslie Royce, II, Chicago, IL.

For Lisa Buccellato, ML Financial Services, Inc., Defendants: Patrick M Quinn, LEAD
ATTORNEY, The Brunner Firm Co., LPA, Columbus, OH; Rick Louis Brunner, The
Brunner Firm Co LPA -2, Columbus, OH.

JUDGES: GREGORY L. FROST, UNITED STATES DISTRICT JUDGE. Magistrate


Judge Terence P. Kemp.

OPINION BY: GREGORY L. FROST

OPINION

OPINION AND ORDER

This matter is before the Court on the Motion of Defendants, Lisa Buccellato and ML
Financial Services, Inc., To Dismiss Plaintiff's Amended Complaint Pursuant to Fed. R.

100
Civ. P. 12(b)(6) ("Buccellato Defendants' Motion to Dismiss") (Doc. # 38), Plaintiff Carl
Amari's memorandum in opposition to the Buccellato Defendants' Motion to Dismiss
(Doc. # 45), and the Buccellato Defendants' reply memorandum (Doc. # 48). For the
reasons that follow, the Court DENIES the Buccellato Defendants' Motion to Dismiss.

I. Background

Plaintiff Carl Amari filed this action on September 2, 2008 against Michael S. Spillan,
Melissa K. Spillan ("Spillan Defendants"), the Buccellato Defendants, Rocco Pistilli and
Strategic Alliance Group ("Pistilli Defendants"), and HedgeLender [*2] LLC. Amari
filed the Amended Complaint on September 22, 2008. (Doc. # 10.)

In the Amended Complaint, Amari alleges that all Defendants engaged in a fraudulently
induced loan scheme in which stock owned by Amari was transferred to an entity
controlled by the Spillan Defendants as security for a loan from one of the Spillan's
businesses, Triangle Equities Group, Inc. Amari contends that he was induced to enter
into the loan by false representations that the stock would not be sold and that within one
year the stock would be returned to him upon payment of a set price. Amari further
alleges that the stock was sold on the public markets and when he repaid the loan, the
stock was unavailable for return to him.

Amari alleges that the Buccellato Defendants induced him to enter into the transactions
with the Spillan Defendants. Amari was interested in obtaining a business loan in July
2005. Amended Complaint PP 22-24. Lisa Buccellato proposed a "First Loan"
transaction "wherein Plaintiff would transfer 700,000 shares of Plaintiff's common stock
[in]. . . Genius Products, Inc. ("Genius") for a loan in the amount of $ 750,750." Id. at P
24. Buccellato represented that the Spillan Defendants "would [*3] hold the stock so that
Plaintiff could reacquire the First Loan shares upon repayment of the Loan, plus a
premium for the use of funds calculated on a 'month-per-share' basis." Id. at P 25. In
September 2005, Amari transferred the Genius stock to the Spillan Defendants, with the
knowledge of the Buccellato Defendants, for proceeds of $ 690,000 under a purported
"Stock Sale and Buyback Agreement." Id. at PP 26-30. The Buccellato Defendants
received a 6% commission on the transaction. Id. at P 31.

Amari further alleges that the Buccellato Defendants proposed a "Second Loan"
transaction with the Spillan Defendants entities in December 2005, whereby Amari
received a loan of $ 576,800 against the pledge of 400,000 share of Genius stock. Id. at
PP 32-35. The Buccellato Defendants received a 6% commission on this loan. Id. at P 36.

Amari avers that once the stock was transferred, the Spillan Defendants, with the
Buccellato Defendants' knowledge, sold it for their own benefit. Id. at P 38.
Consequently, when Amari paid the Spillans the $ 798,000 to reacquire the First Loan
shares, the stock was unavailable for return to him. Id. at PP 39-66. Likewise, Amari's
demand for the Second Loan shares [*4] has gone unsatisfied. Id. at P 68. Amari has lost
the benefit of his 1,100,000 shares of Genius stock, which at the time of the promised re-
delivery, had an aggregate value of $ 3,520,000. Id. at PP 69, 70.

101
The Amended Complaint details the alleged conspiracy in which the Buccellato
Defendants and the Spillan Defendants engaged. Id. at PP 82-88. It further explains that
the Buccellato Defendants were part of an associational enterprise with the Spillan
Defendants "with the common purpose of inducing borrowers, including Plaintiff, to
enter into the purported stock loan transactions." Id. at P 94. Finally, the Amended
Complaint sets forth the numerous other actions that have arisen from the same alleged
fraudulent loan scheme, including: Joshua Fink v. Michael S. Spillan, CSG Fin., Inc.,
Schreiber Bosse and Co., Inc., and Trident Fin. Serv. aka Trident Group, No. 03-CVH-11
12677 (Franklin Cty. Common Pleas Ct. May 18, 2003); Nations Mobile v. Triangle
Equities Group and One Equity Ltd, No. BC324092 (Ca. Superior Court for the Cty. of
Los Angeles November 5, 2004); Charles Mottley v. Melissa K. Spillan dba Dafcan Fin.,
Inc., Triangle Equities Inc. dba Dafcan Fin., Inc. and Dafcan Fin., Inc., No. 2:07-cv-384
(S.D. Ohio May 7, 2007) [*5] (J. Frost); Javeed Matin v. Dafcan Fin., One Equity Corp.,
Melissa Spillan, Michael Spillan, Rocco Pistilli and Strategic Alliance Group, Inc., No.
2:07-cv-452 (S.D. Ohio May 15, 2007) (J. Frost); Nexus Holdings, Inc. v. Dafcan Fin.,
Inc., One Equity Corp., Melissa Spillan, Michael Spillan, ML Financial Serv., Inc., Lisa
Buccellato, Rocco Pistilli and Strategic Alliance Group, Inc., No. 2:07-cv-029 (S.D. Ohio
October 9, 2007) (J. Smith); Robert Schwartz v. One Equity Corp., Dafcan Fin., Inc.,
Triangle Equities, Inc., Triangle Equities Group, Melissa K. Spillan, Michael S. Spillan,
HedgeLender LLC, Roel Hoekstra, ML Fin. Services, Inc., Lisa Buccellato, Rocco Pistilli
and Strategic Alliance Group, Inc., No. 2:07-cv-1141 (S.D. Ohio November 5, 2007) (J.
Marbley); and Sec. & Exch. Comm'r v. One Equity Corp., Triangle Equities Group, Inc.,
Victory Mgt. Group, Inc., Dafcan Fin., Inc., Michael S. Spillan, No. 08-cv-667 (S.D.
Ohio July 10, 2008) (J. Sargus).

On February 26, 2009 the Pistilli Defendants were voluntarily dismissed from this action.
(Docs. # 51, 52.)

II. Standard

Fed. R. Civ. P. 12(b)(6) provides for dismissal of actions that fail to [*6] state a claim
upon which relief can be granted. Under this standard, a court must construe the
complaint in favor of the plaintiff, accept the factual allegations contained in the
complaint as true, and determine whether Plaintiff's factual allegations present plausible
claims. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L.
Ed. 2d 929 (2007). 1 The claims must "plausible" and not merely "conceivable." Id.

FOOTNOTES

1 The Court notes that Amari argues under a now defunct standard, i.e., a complaint
should not be dismissed for failure to state a claim unless it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which would entitle him to
relief. However, as the Sixth Circuit has explained:

102
In [Twombly], the Court disavowed the oft-quoted Rule 12(b)(6) standard of Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957) (recognizing "the
accepted rule that a complaint should not be dismissed for failure to state a claim unless it
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim
which would entitle him to relief"), characterizing that rule as one "best forgotten as an
incomplete, negative gloss on an accepted pleading standard." Twombly, 127 S. Ct. at
1969.
Ass'n of Cleveland Fire Fighters, 502 F.3d 545, 548 (6th Cir. 2007).

III. [*7] Analysis

Amari alleges causes of action under the Racketeer Influenced and Corrupt Organization
Act ("RICO"), 18 U.S.C. § 1962, Section 10(b) of the Securities Exchange Act of 1934
("Securities and Exchange Act"), 15 U.S.C. § 78j(b), 2 and Securities and Exchange
Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, 3 and the common law of Ohio. The
Buccellato Defendants move to dismiss all of the claims against them.

FOOTNOTES

2 Section 10(b) provides:


It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of any national
securities exchange --

(b) To use or employ, in connection with the purchase or sale of any security registered
on a national securities exchange or any security not so registered, any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest or for the
protection of investors.

3 SEC Rule 10b-5 provides:


It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility [*8] of any
national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of the circumstances under
which they were made, not misleading, or

103
(c) To engage in any act, practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the purchase or sale of any
security.

A. RICO and Securities Fraud

In pertinent part, RICO provides that it "shall be unlawful for any person employed by or
associated with any enterprise engaged in, or the activities of which affect, interstate or
foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such
enterprise's affairs through a pattern of racketeering activity . . . ." 18 U.S.C. § 1962(c).
"Racketeering activity" is defined as, inter alia, any act which is indictable as a violation
of the mail and wire fraud statutes. 18 U.S.C. § 1961(1). RICO also prohibits conspiring
to violate any of its substantive provisions, 18 U.S.C. § 1962(d), and provides a civil
remedy for "any person injured in his business [*9] or property by reason of a violation
of" the statute. 18 U.S.C. § 1964(c).

The Buccellato Defendants argue that the predicate acts identified in the Amended
Complaint are insufficient to allege "racketeering activity" in light of the Private
Securities Litigation Reform Act ("PSLRA"), 18 U.S.C. § 1964(c). Section 107 of the
PSLRA amends RICO to state that "any person injured in his business or property by
reason of a violation of [RICO] may sue . . . except that no person may rely upon any
conduct that would have been actionable as fraud in the purchase or sale of securities to
establish a violation of [RICO]." The Buccellato Defendants argue that the PSLRA
eliminated "any conduct actionable as fraud in the purchase or sale of securities" as a
predicate act for a private cause of action under RICO and that is exactly what Amari is
alleging. In other words, the purchase and unapproved sale of Amari's stock does not
constitute "racketeering activity" under RICO in light of the PSLRA. Amari and the
Buccellato Defendants direct this Court's attention to Bald Eagle Area Sch. Dist. v.
Keystone Fin., Inc., 189 F.3d 321 (3rd Cir. 1999), for its on point analysis. The Bald
Eagle [*10] Court explained:
Prior to 1995, a private plaintiff could assert a civil RICO claim for securities law
violations sounding in "garden variety" fraud. See Sedima S.P.R.L. v. Imrex Co., Inc.,
473 U.S. 479, 504-505, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985) (Marshall, J.,
dissenting). Inasmuch as "fraud in the sale of securities" was a predicate offense in both
criminal and civil RICO actions, Id. at 504, plaintiffs regularly elevated fraud to RICO
violations because RICO offered the potential bonanza of recovering treble damages.
However, in 1995, Congress enacted the Private Securities Litigation Reform Act
("PSLRA"), Pub.L. No. 104-67, 109 Stat. 737 (1995). The PSLRA amended RICO by
narrowing the kind of conduct that could qualify as a predicate act. Section 107 of the
PSLRA (known as the "RICO Amendment") amended 18 U.S.C. § 1964(c), to provide in
relevant part as follows:
Any person injured in his business or property by reason of a violation of section 1962 of
this chapter may sue therefor in any appropriate United States District Court and shall

104
recover threefold the damages he sustains and the cost of the suit, including a reasonable
attorney's fee, except that no person may rely upon any conduct that would have been
[*11] actionable as fraud in the purchase or sale of securities to establish a violation of
section 1962.

18 U.S.C. § 1964(c)(emphasis added).

The Conference Committee Report accompanying § 107 states that the amendment was
intended not simply "to eliminate securities fraud as a predicate offense in a civil RICO
action," but also to prevent a plaintiff from "pleading other specified offenses, such as
mail or wire fraud, as predicate acts under civil RICO if such offenses are based on
conduct that would have been actionable as securities fraud." H. R. Conf. Rep. No. 104-
369, at 47 (1995).
Bald Eagle, 189 F.3d at 327.

The Bald Eagle plaintiff pleaded mail fraud, wire fraud, and bank fraud as predicate
offenses under RICO. The Third Circuit, in affirming the trial court's dismissal of the
RICO claim, concluded that "a plaintiff cannot avoid the RICO Amendment's bar by
pleading mail fraud, wire fraud, and bank fraud as predicate offenses in a civil RICO
action if the conduct giving rise to those predicate offenses amounts to securities fraud."
Id. at 330.

In the instant action, the Buccellato Defendants argue that Amari, like the plaintiff in
Bald Eagle, cannot avoid the PSLRA's bar by pleading mail [*12] and wire fraud as
predicate acts in his civil RICO claim. The Buccellato Defendants go even further and
argue that "the statutory bar applies irrespective of whether or not the plaintiff could
successfully allege or prevail on a claim for securities fraud." (Doc. # 38 at 5 citing
Howard v. America Online, Inc., 208 F.3d 741, 749 (9th Cir. 2000)).

In opposition, Amari argues that, although the PSLRA eliminated securities fraud, or any
claim that is actionable as securities fraud, as a predicate act in a civil RICO action, the
"Buccellato Defendants mischaracterize the nature of the transactions sued upon by
Plaintiff . . . [t]he Amended Complaint makes clear in its opening paragraph that the
action arises from a 'fraudulently induced loan scheme' " not securities fraud. (Doc. # 45
at 2 citing Amended Complaint P 1.) Further, Amari argues that the PSLRA applies only
to "actionable" securities fraud claims.

The Court concludes that Amari is correct that only actionable securities fraud claims
constitute predicate acts subject to the PSLRA's bar, i.e., claims that can be brought under
the fraud provisions of the Securities and Exchange Act. The statutory language
specifically states such: [*13] "[N]o person may rely upon any conduct that would have
been actionable as fraud in the purchase or sale of securities to establish a violation of
section [18 U.S.C. §] 1962." 18 U.S.C. § 1964(c). Further, it was not simply the fact that
the Bald Eagle plaintiff pleaded mail and wire fraud as predicate acts that supports the
Third Circuit's decision. Instead, the predicate acts pleaded could not support a civil

105
RICO claim because they were capable of "support[ing] convictions" under federal
securities laws, i.e., they were actionable securities fraud. Bald Eagle, 189 F.3d at 330.
[T]he proper focus of the analysis is on whether the conduct plead as predicate offenses is
"actionable" as securities fraud -- not on whether the conduct is "intrinsically connected
to, and dependent upon" conduct actionable as securities fraud.
Id. Indeed, at the same time the Bald Eagle RICO action was before the Third Circuit
courts, the same conduct was the bases of a parallel securities fraud action under the
Securities and Exchange Act. Id. at 330.

Thus, the Court finds it necessary to first determine whether Amari's allegations
constitute actionable securities fraud. In this regard, the Court agrees with [*14] Amari
that any determination as to whether he has an actionable claim under the securities laws
is premature. (Doc. # 45 at 14.) As the discovery unfolds, the parties will be in a better
position to ascertain whether the alleged fraudulently induced loan scheme constitutes
actionable securities fraud. At this early stage of these proceedings, the Court concludes
that Plaintiff has sufficiently pleaded plausible claims under RICO and under the
Securities and Exchange Act. See Twombly, 550 U.S. at 555.

B. State Law Claims

The Buccellato Defendants argue that Amari's state law claim for conversion fails
because he has failed to allege that the Buccellato Defendants converted or damaged his
property rights, Amari's unjust enrichment clam fails because its allegation that the
Buccellato Defendants merely benefitted from a fraudulent scheme perpetrated by others,
and that Amari's fraud claim fails because it was not pleaded with particularity as
required by Rule 9 of the Federal Rules of Civil Procedure. See Fed. R. Civ. P. 9(b) (a
plaintiff must "state with particularity the circumstances constituting fraud or mistake").
This Court disagrees.

Amari alleges that the Buccellato Defendants themselves [*15] mislead Amari as to the
nature of the transaction and the return of his stock. That is, that the Buccellato
Defendants themselves perpetrated fraud. Further, Amari's injury flows from this
engagement in the fraudulent scheme, even if these defendants did not sell the stock
themselves. Thus, both the conversion claim and the unjust enrichment claim are
plausible and, therefore, survive the Buccellato Defendants' Motion to Dismiss.

With regard to pleading with particularity, the same allegations Amari made in his
Amended Complaint have been considered by Judge Marbley in Schwartz v. One Equity
Corp., on the Buccellato and Pistilli Defendants' motion to dismiss in that case, whereby
the judge held:
Schwartz explicitly alleges [in the Amended Complaint] that the [Defendants]
misrepresented what would happen to his shares of [stock]. . . . This allegation soundly
meets the particularity requirements of Rule 9(b).
(Case No. 07-cv-1141; Doc. # 88 at 7.) This Court finds Judge Marbley's conclusion
correct and adopts the same analysis here. Consequently, Plaintiff's fraud claims also
survive the Buccellato Defendants' Motion to Dismiss.

106
IV. Conclusion

For the reasons set forth above, the Court DENIES [*16] the Buccellato Defendants'
Motion to Dismiss. (Doc. # 38.)

IT IS SO ORDERED.

/s/ Gregory L. Frost

GREGORY L. FROST

UNITED STATES DISTRICT JUDGE

2008 U.S. Dist. LEXIS 60608, *

VULCAN GOLF, LLC, JOHN B. SANFILIPPO & SON, INC., BLITZ REALTY
GROUP, INC., and VINCENT E. "BO" JACKSON, Individually and on Behalf of All
Others Similarly Situated, Plaintiffs, v. GOOGLE INC., OVERSEE.NET, SEDO LLC,
DOTSTER, INC., a/k/a REVENUE DIRECT.COM., INTERNET REIT, INC., d/b/a
IREIT, INC., and JOHN DOES I-X, Defendants.

07 C 3371

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF


ILLINOIS, EASTERN DIVISION

2008 U.S. Dist. LEXIS 60608

July 31, 2008, Decided


July 31, 2008, Filed

SUBSEQUENT HISTORY: Class certification denied by Vulcan Golf, LLC v. Google


Inc., 2008 U.S. Dist. LEXIS 102819 (N.D. Ill., Dec. 18, 2008)

PRIOR HISTORY: Vulcan Golf, LLC v. Google Inc., 552 F. Supp. 2d 752, 2008 U.S.
Dist. LEXIS 22155 (N.D. Ill., 2008)

CORE TERMS: unjust enrichment, domain, citations omitted, network, tortious


interference, parking, economic advantage, conspiracy count, trademark, license, entity,
racketeering activity, hub-and-spoke, conspiracy, consensual, supplier, ongoing, civil
conspiracy, claims of fraud, hierarchical, manufacturer, advertising, dilution, consumer,
providers, joined, pled, interfered, internet, fraud claims

107
COUNSEL: [*1] For Vulcan Golf, LLC, Individually and on behalf of all others
similarly situated, John B. Sanfilippo & Son, Inc., Blitz Realty Group, Inc., Vincent E
Jackson, a/k/a "Bo;" Individually and on Behalf of All Others Similarly Situated,
Plaintiffs: Robert M. Foote, LEAD ATTORNEY, Mark Anthony Bulgarelli, Stephen
William Fung, Foote, Meyers, Mielke & Flowers, LLC, Geneva, IL; Bryan L Clobes,
Cafferty Faucher, LLP, Philadelphia, PA; Craig S. Mielke, Foote, Meyers, Mielke,
Flowers & Solano, Geneva, IL; Dana Marie Pesha, William J. Harte, William J. Harte,
Ltd., Chicago, IL; Dominic J. Rizzi, Nyran Rose Pearson, Cafferty Faucher LLP,
Chicago, IL; Kathleen Currie Chavez, Chavez Law Firm P.C., Geneva, IL; Matthew J.
Herman, Kinnally, Krentz, Loran, Hodge & Herman, P.C., Aurora, IL.

For Google Inc., Defendant: Aaron Daniel Van Oort, Faegre & Benson LLP,
Minneapolis, MN; Daniel Purcell, Joseph Gratz, Michael Page, Ragesh K. Tangri, Keker
& Van Nest LLP, San Francisco, CA; Henry M. Baskerville, Jonathan M. Cyrluk, Joseph
J. Duffy, Mariah E Moran, Stelter & Duffy, Ltd., Chicago, IL.

For Oversee.Net, Defendant: Ronald Y Rothstein, LEAD ATTORNEY, Thomas Joseph


Wiegand, Winston & Strawn LLP, Chicago, [*2] IL; Marlon Emile Lutfiyya, Winston &
Strawn, Chicago, IL; Steven D. Atlee, Winston & Strawn LLP, Los Angeles, CA.

For Sedo LLC, Defendant: Jeffrey Singer, LEAD ATTORNEY, Anastasios T. Foukas,
Segal, McCambridge, Singer & Mahoney, Ltd., Chicago, IL; Misty Rose Martin, Segal,
McCambridge, Singer & Mahoney, Chicago, IL.

For Dotster, Inc., also known as Revenuedirect.com, Defendant: Alison C Conlon, LEAD
ATTORNEY, Michael R. Dockterman, LEAD ATTORNEY, Wildman, Harrold, Allen &
Dixon, LLP, Chicago, IL; Joanna J. Cline, Robert L. Hickok, Vincent V. Carissimi,
Pepper Hamilton LLP, Philadelphia, PA.

For Internet Reit, Inc., doing business as, Ireit, Inc., Defendant: Alexis Elizabeth Payne,
Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, Chicago, IL; Bradley Louis
Cohn, Brett A. August, Pattishall, McAuliffe, Newbury, Hillard & Geraldson, Chicago,
IL; Kenneth P. Held, Steven R. Borgman, Vinson & Elkins LLP, Houston, TX; Scott
Ryan Wiehle, Vinson & Elkins, Dallas, TX.

JUDGES: Hon. Blanche M. Manning, United States District Judge.

OPINION BY: Blanche M. Manning

OPINION

MEMORANDUM AND ORDER

I. Background

108
The court assumes familiarity with the facts of this case based on its prior order of
March, 20, 2008, but briefly sets [*3] out some basic relevant facts. Plaintiffs Vulcan
Golf, LLC, John B. Sanfilippo & Son, Inc. ("JBSS"), Blitz Realty Group, Inc., and
Vincent E. "Bo" Jackson, have filed a complaint styled as a class action lawsuit against
the following defendants: Google, Inc., Oversee.net, Sedo LLC, Dotster, Inc. a/k/a
revenuedirect.com, Internet Reit, Inc., d/b/a Ireit, Inc., and John Does I-X.

The plaintiffs allege that Google and the other defendants have engaged in a wide-
ranging scheme whereby they receive "billions of dollars in ill-gotten advertising and
marketing revenue" by knowingly and intentionally registering, licensing and monetizing
purportedly deceptive domain names at the expense of the plaintiff-mark owners. The
court granted in part the defendants' motion to dismiss the First Amended Complaint with
leave to replead the dismissed counts, specifically: (1) the RICO counts; (2) trademark
infringement as to plaintiff Bo Jackson; (3) dilution of trademark as to plaintiff Blitz; (4)
the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFDBPA") count;
(5) the declaratory judgment count; (6) the intentional interference with current economic
advantage count; (7) the unjust enrichment [*4] count, and (8) the civil conspiracy count.

Currently before the court is the defendants' consolidated motion to dismiss the Third
Amended Complaint ("TAC"), which realleges all of the claims stated in the First
Amended Complaint but does not seek a declaratory judgment or relief under the
ICFDBPA. The defendants have filed a consolidated motion to dismiss the RICO counts,
the claim for tortious interference with prospective economic advantage, the unjust
enrichment count and the conspiracy count. 1

FOOTNOTES

1 The defendants also seek to dismiss the trademark infringement count as to Bo Jackson
and the dilution count as to Blitz Realty. However, in a footnote in their response to the
motion to dismiss, the plaintiffs acknowledge that the repleading of these counts was
inadvertent. Accordingly, the court grants the defendants' motion to dismiss the
trademark infringement count as to Bo Jackson and the dilution count as to Blitz Realty.

For the reasons stated below, the motion to dismiss is granted in part and denied in part.

I. Standard on Motion to Dismiss

On a motion to dismiss under Fed. R. Civ. P. 12(b)(6), the court accepts the allegations in
the complaint as true, viewing all facts, as well as [*5] any inferences reasonably drawn
therefrom, in the light most favorable to the plaintiff. See Marshall-Mosby v. Corporate
Receivables, Inc., 205 F.3d 323, 326 (7th Cir. 2000). "While a complaint attacked by a
Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's
obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels

109
and conclusions, and a formulaic recitation of the elements of a cause of action will not
do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L. Ed.
2d 929 (2007)(citations omitted).

The Seventh Circuit has interpreted Bell Atlantic as follows:


Rule 12(b)(6) permits a motion to dismiss a complaint for failure to state a claim upon
which relief can be granted. To state such a claim, the complaint need only contain a
"short and plain statement of the claim showing that the pleader is entitled to relief."
Fed.R.Civ.P. 8(a)(2). The Supreme Court has interpreted that language to impose two
easy-to-clear hurdles. First, the complaint must describe the claim in sufficient detail to
give the defendant "fair notice of what the … claim is and the grounds upon which it
rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, --, 127 S.Ct. 1955, 1964, 167
L.Ed.2d 929 (2007) [*6] (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2
L.Ed.2d 80 (1957)) (alteration in Bell Atlantic). Second, its allegations must plausibly
suggest that the plaintiff has a right to relief, raising that possibility above a "speculative
level"; if they do not, the plaintiff pleads itself out of court. Bell Atlantic, 127 S.Ct. at
1965, 1973 n. 14.
E.E.O.C. v. Concentra Health Services, Inc., 496 F.3d 773, 776 (7th Cir. 2007). See also
Killingsworth v. HSBC Bank Nevada, N.A., 507 F.3d 614, 618-19 (7th Cir. 2007)
(observing that Supreme Court in Bell Atlantic "retooled federal pleading standards" such
that a complaint must now contain "enough facts to state a claim for relief that is
plausible on its face.").

III. Analysis

A. RICO counts

The first three counts of the TAC seek relief under the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), 18 U.S.C. § 1961, et. seq. Count I pleads a claim under 18
U.S.C. 1962(a), Count II is a claim under 18 U.S.C. § 1962(c), and Count III alleges a
claim under 18 U.S.C. § 1962(d). The court addresses the motion to dismiss each of these
counts in turn.

1. § 1962(c)

Under the federal RICO [*7] statute, it is "unlawful for any person employed by or
associated with any enterprise engaged in, or the activities of which affect, interstate or
foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such
enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c). Under
section 1962(c), a plaintiff must allege a defendant's (1) conduct (2) of an enterprise (3)
through a pattern (4) of racketeering activity. Lachmund v. ADM Investor Servs., Inc.,
191 F.3d 777 (7th Cir. 1999).

An "enterprise" is "any individual, partnership, corporation, association, or other legal


entity, and any union or group of individuals associated in fact although not a legal
entity." 18 U.S.C. § 1961(4). "While a RICO enterprise can be formal or informal, some

110
type of organizational structure is required." Stachon v. United Consumers Club, Inc.,
229 F.3d 673 (7th Cir. 2000). Indeed, the "hallmark of an enterprise is 'structure.'" United
States v. Korando, 29 F.3d 1114, 1117 (7th Cir. 1994)(citation omitted). Specifically, a
RICO enterprise must have "an ongoing 'structure' of persons associated through time,
joined in purpose, and organized in a manner [*8] amenable to hierarchical or
consensual decision making." Jennings v. Emry, 910 F.2d 1434, 1440 (7th Cir. 1990)
(citations omitted). Further, there must be "an organization with a structure and goals
separate from the predicate acts themselves." United States v. Masters, 924 F.2d 1362,
1367 (7th Cir. 1991). "Thus, in order to adequately plead a claim under § 1962(c), the
complaint must identify an 'association in fact' that is meaningfully different in the RICO
context from the units that go to make it up." Williams v. Ford Motor Company, 11 F.
Supp. 2d 983, 986 (N.D. Ill. 1998)(citation omitted).

The TAC alleges that the RICO enterprise is the Google Network, which it defines as: (1)
Defendant Google; (2) the Parking Company Defendants; (3) Google Search Network
(America Online, CompuServe, Netscape, AT& T WorldNet, EarthLink, Sympatico, and
others); (4) Google Content site partners (New York Post Online Edition, Mac Publishing
(includes Macworld.com, JavaWorld, LinuxWorld), HowStuffWorks, and others); (5)
Google Adsense Network (Parking Company Defendants, Domain Aggregators, Domain
Registrants, and other third party website owners, blog sites, domain registrants, licensees
and aggregators [*9] that enter into agreements with Defendant Google for the
monetization of domains under their license/control/ownership). See TAC at P 214. It
further alleges that each defendant is a "person" within the meaning of the RICO statute.
Id. at P 212.

The court agrees with the defendants that the TAC fails to repair the fatal deficiences of
the First Amended Complaint regarding the allegations of structure and enterprise. As an
initial matter, the plaintiffs' rote recitation of the legal requirements of a RICO claim fail
to satisfy pleading requirements post-Bell Atlantic. For instance, the TAC alleges:
215. The RICO Enterprise is an ongoing structure of persons associated with [sic] time,
joined in purpose, and organized in a manner amenable to hierarchical or consensual
decisionmaking and whose activities affect, [sic] interstate and foreign commerce. As set
forth herein, the RICO Enterprise has a defined structure, framework, and organization
conducive to making decision [sic]. Written rules, procedures, contracts, licenses, and
other agreements operate to establish a defined mechanism to control the affairs of the
RICO Enterprise on an ongoing basis.
However, this paragraph is nothing more [*10] than a regurgitation of the appropriate
legal requirements for a plaintiff to sufficiently plead enterprise and structure.

The plaintiffs argue that they have pled the requisite hierarchical structure by pleading
that Google controls the Enterprise by providing essential access to the revenue
generating AdWords advertisers, organizing and promulgating rules for the operation of
the Enterprise, and controlling and monitoring participation in the Enterprise. For
instance, under the heading "Structure and Roles of Participants in the RICO Enterprise,"
TAC at page 50, the TAC alleges that:

111
226. Each participant/member of the RICO Enterprise is crucial to its functions and
operation, as generally summarized below:
a. Defendant Google: Provides access to the revenue generating Adwords Advertisers and
organizes, controls, monitors participation in and otherwise operates the RICO
Enterprise;

b. Google Network: Participate in the RICO Enterprise for the purpose of generating
revenue from services provided in connection with AdWords Advertisements
placed/displayed on domains/sites/video/ search results under their license, control,
and/or ownership.
But these allegations stand for the conclusory [*11] and unenlightening proposition that
the Google Network, defined as the RICO Enterprise, participates in the RICO
Enterprise. Moreover, while the TAC alleges what the RICO Enterprise members
purportedly do, see TAC P 240, a plaintiff cannot establish structure by describing what
the enterprise does. Brown v. County of Cook, 549 F. Supp. 2d 1026, 1031 (N.D. Ill.
2008)("Seeking to define an enterprise by what it does fails to establish a structure . . . .")
(citation omitted).

As in its previous order dismissing the RICO claim, the court finds Stachon instructive.
In Stachon, the plaintiffs alleged that the defendants, United Consumer Club, Inc.
("UCC"), a consumer purchasing club, and its executives, had violated RICO. The district
court concluded that the plaintiffs had failed to allege an enterprise, stating as follows:
[T]hat UCC, over its 21-year existence, contracted with numerous manufacturers,
suppliers, and members fails to establish an "ongoing structure." Plaintiffs offer nothing
to demonstrate that the changing, unnamed manufacturers, suppliers, and members
function with UCC as a continuing unit or as an ongoing structure.
Stachon v. United Consumers Club, Inc., 98 C 7020, 1999 U.S. Dist. LEXIS 16484, 1999
WL 971284, at *3 (N.D. Ill. Oct. 21, 1999), [*12] aff'd, 229 F.3d 673 (7th Cir. 2000). In
finding no structure, the district court in Stachon went on to note that:
Further, Plaintiffs offer nothing to show that the alleged "enterprise" is more than UCC
simply contracting with members and suppliers. . . . Plaintiffs provide, and the court
finds, no case law to support that a purchasing club's (or any corporation's) ordinary
business dealings with past and present manufacturers, suppliers, or members constitute a
structure. . . .

Each Individual Defendant, manufacturer, supplier, and member enters into agreements
for their own benefit. But nothing within these ordinary business relationships mirrors a
hierarchical organization, nor do these relationships foster consensual decision making in
pursuit of the enterprise's alleged purpose. . . . In fact, Plaintiffs offer nothing to show
that these entities ever made consensual decisions as a unit to promote its alleged
purpose. . . .
1999 U.S. Dist. LEXIS 16484, [WL] at **3-4 (citations omitted)(emphasis added).

The plaintiffs' revised version of its complaint does not cure the problem identified by the
Stachon court. Here, the TAC alleges at great length how Google manages its
relationships with its advertisers through [*13] contracts, licenses, policies and

112
procedures. See, e.g., TAC P 248 ("Through rules, regulations, licenses, contracts and
other terms and conditions, [sic] imposed by Defendant Google, participation in and
operation of the RICO Enterprise is governed by a defined structure and written terms.");
P 251 ("Defendant Google and the Parking Company Defendants use the structure of the
Enterprise, the written agreements, licenses, sublicenses, and other related rules/terms to
control all aspects of the affairs of the RICO Enterprise and to carry out the Decepetive
Domain Scheme alleged herein."); P 230 (chart that sets out the location on the internet
of the contractually-based terms and conditions of participation in Google's advertising
program). The TAC also alleges that Google allows certain individuals and entities,
including the parking company defendants, to subcontract with third parties for
"derivative participation." TAC P 250.

But the plaintiffs' reliance on the intricacies of Google's complex contractual structure
cannot take the place of alleging how Google, the parking company defendants and the
other purported enterprise members "function as a continuing unit." Indeed, as noted
[*14] by another court in this district, "the mere fact that the financial [here, contractual]
relationships themselves were 'structured' does not infuse the alleged 'enterprise' with any
structure." Blue Cross and Blue Shield of Alabama v. Caremark, Inc., No. 98 C 1285,
1999 U.S. Dist. LEXIS 16230, 1999 WL 966434, at *8 (N.D. Ill. Sept. 30, 1999).

There are simply no allegations in the TAC that indicate that the members of the alleged
Google Network engaged in consensual decisionmaking or were joined in purpose to
further the goals of the enterprise. Indeed, there is nothing to suggest that the various
members of the alleged Google Network had any specific knowledge of the others'
existence. Id. ("Indeed, there is no indication that the individual Caremark Referral
Sources were even aware of each others' existence."). As noted by another district court:
Here, as defendants point out, there are no allegations (and it is difficult to see how there
could be) that the thousands of doctors who benefitted from discounted purchases or free
samples of Lupron(r) were associated together in any meaningful sense, or were even
aware of one another's existence as participants in a scheme to defraud. Without the
elements of organization [*15] and control, whether informal or formal, and the
existence of an association, whether legal or factual, any group of persons sharing a
common occupation, e.g., urologists and lawyers, and a similar motive, e.g., greed, could
be held to constitute a RICO enterprise.
In re Lupron Marketing and Sales Practices Litigation, 295 F. Supp. 2d 148, 173-74 (D.
Mass. 2003)(internal citations omitted). 2 Similarly, in the instant case, while the various
members of the alleged enterprise may likely assume that they are not the only entities
who have contracted with Google to receive advertising services, none of the allegations
suggest that the hundreds of thousands (if not millions) of members of the alleged RICO
enterprise (i.e., the Google Network 3) are specifically aware of the other members such
that they are organized in any structured manner or joined in purpose.

FOOTNOTES

113
2 As also discussed by the In re Lupron court, the hub-and-spoke scheme alleged by the
plaintiffs is generally not accepted as a RICO enterprise:
Here, there is no allegation of a general agreement between TAP and the collective
providers, rather individual agreements between TAP and the respective providers are
alleged. This type [*16] of "hub-and-spoke" configuration of a conspiracy is largely
disfavored. . . . Most courts have found that complaints alleging hub-and-spoke
enterprises fail to satisfy the RICO enterprise requirement. See VanDenBroeck v.
CommonPoint Mortg. Co., 210 F.3d 696, 700 (6th Cir. 2000) (rejecting a RICO
enterprise involving defendant bank and a series of sub-lenders with whom the bank
associated, because there were no allegations of a mechanism by which this group
"conducted its affairs or made decisions"); New York Auto. Ins. Plan v. All Purpose
Agency & Brokerage, Inc., 97-CV-3164, RICO Bus. Disp. Guide 9611, 1998 WL 695869
at *6 (S.D.N.Y. Oct. 6, 1998) (rejecting a hub-and-spoke enterprise in which auto-insurer
conspired with individual clients to provide them lower insurance rates, without any
evident association between the clients; stating "Such a series of discontinuous
independent frauds is not an 'enterprise.' Each is a single two-party conspiracy."); First
Nationwide Bank v. Gelt Funding, Corp., 820 F. Supp. 89, 98 (S.D.N.Y. 1993) (holding
that hub-and-spoke scheme is not an enterprise); Blue Cross and Blue Shield of Ala. v.
Caremark, Inc., 98-CV-1285, RICO Bus. Disp. Guide 9828, 1999 WL 966434 at *8
(N.D. Ill. 1999) [*17] (rejecting enterprise theory in RICO insurance-fraud claim
involving health providers because "[p]laintiffs fail to allege how this large and
geographically diverse group of almost 3,000 independent physicians and entities acted in
concert with one another …. there is no indication that the individual [providers] were
even aware of each other's existence."); Blue Cross of Cal. v. SmithKline Beecham
Clinical Labs., Inc., 62 F. Supp. 2d 544, 551-53 (D. Conn. 1998) (rejecting proposed
enterprise consisting of insurer and, among others, thousands of doctors, where there was
no evidence doctors were even aware of alleged kickback scheme).
In re Lupron Marketing and Sales Practices Litigation, 295 F. Supp. 2d at 173-74.

3 The TAC alleges that the RICO Enterprise (i.e., Google Network) is the "largest
internet advertising network in the world." TAC P 217.

The defendants' motion to dismiss the § 1962(c) is granted. Because the court concludes
that the count is dismissed with prejudice, it need not address the other bases for
dismissal.

2. § 1962(a)

The plaintiffs also allege for the first time in the TAC a RICO claim under § 1962(a),
which states that:
It shall [*18] be unlawful for any person who has received any income derived, directly
or indirectly, from a pattern of racketeering activity or through collection of an unlawful
debt in which such person has participated as a principal within the meaning of section 2,
title 18, United States Code, to use or invest, directly or indirectly, any part of such

114
income, or the proceeds of such income, in acquisition of any interest in, or the
establishment or operation of, any enterprise which is engaged in, or the activities of
which affect, interstate or foreign commerce.

"Though there are significant substantive differences among the cited RICO provisions,
the existence of an 'enterprise' and a 'pattern of racketeering' are elements that are
fundamental to each of the RICO subsections." Starfish Inv. Corp. v. Hansen, 370 F.
Supp. 2d 759, 769 (N.D. Ill. 2005)(citing 18 U.S.C. § 1962; Liquid Air Corp. v. Rogers,
834 F.2d 1297, 1303-04 (7th Cir. 1987); Dudley Enters., Inc. v. Palmer Corp., 822 F.
Supp. 496, 501 (N.D. Ill. 1993)). Because the court has already concluded that the
plaintiffs have failed to plead an enterprise, the defendants' motion to dismiss the §
1962(a) claim, Count I, is granted.

3. § 1962(d)

To [*19] state a claim under § 1962(d), the plaintiff must allege "(1) that each defendant
agreed to maintain an interest in or control of an enterprise or to participate in the affairs
of an enterprise through a pattern of racketeering activity and (2) that each defendant
further agreed that someone would commit at least two predicate acts to accomplish those
goals." Goren v. New Vision Intern., Inc., 156 F.3d 721, 732 (7th Cir. 1998). However,
because the plaintiffs have failed to establish a violation of § 1962(c) for failure to allege
an enterprise, their § 1962(d) claim based on the same facts must also fail. See Stachon v.
United Consumers Club, Inc., 229 F.3d 673, 677 (7th Cir. 2000) (relying on Midwest
Grinding Co. v. Spitz, 976 F.2d 1016, 1026 (7th Cir. 1992)). Therefore, Count III is
dismissed.

B. Unjust Enrichment and Civil Conspiracy

The defendants contend that the unjust enrichment and civil conspiracy counts should be
dismissed because the allegations do not comply with Fed. Rule Civ. P. 9(b), which
requires that fraud claims be alleged with specificity.

"Under Illinois law, a civil conspiracy is defined as: '(1) a combination of two or more
persons, (2) for the purpose of accomplishing [*20] by some concerted action either an
unlawful purpose or a lawful purpose by unlawful means, (3) in the furtherance of which
one of the conspirators committed an overt tortious or unlawful act.'" Foodcomm Int'l. v.
Barry, 463 F. Supp. 2d 818, 830 (N.D. Ill. 2006)(citation omitted). "A plaintiff may
recover under the theory of unjust enrichment if the defendant unjustly retained a benefit
to plaintiff's detriment, and defendant's retention of the benefit violates the fundamental
principles of justice, equity and good conscience." Fortech, L.L.C. v. R.W. Dunteman
Co., Inc., 366 Ill. App. 3d 804, 852 N.E.2d 451, 304 Ill. Dec. 201 (Ill. App. Ct. 2006)
(citations and internal quotation marks omitted).

Neither of these claims includes fraud as an element of the claim. However, the Seventh
Circuit has stated that "Rule 9(b) applies to 'averments of fraud,' not claims of fraud, so

115
whether the rule applies will depend on the plaintiffs' factual allegations." Borsellino v.
Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007)(citations omitted).
Accordingly, "a claim that 'sounds in fraud' - in other words, one that is premised upon a
course of fraudulent conduct - can implicate Rule 9(b)'s heightened pleading
requirements." Id. [*21] (citations omitted).

In Borsellino, the Seventh Circuit analyzed specific allegations of the complaint to


determine whether the claims for tortious interference with economic advantage, tortious
interference with fiduciary relationship and civil conspiracy were subject to Rule 9(b)
pleading standards. In concluding that these three claims did "sound in fraud," (as
apparently conceded by the plaintiffs in that case), the Seventh Circuit noted that:
The first paragraph of the complaint begins: "This action arises out of a pattern of fraud
and racketeering activity," and the complaint goes on to accuse Goldman Sachs of being
"a conspirator with Putnam in defrauding Plaintiff into abandoning his interest in CTA,
and thus his rights to one-third of Archipelago." This fraud, it is charged, was a tortious
interference with the plaintiffs' economic advantage and CTA's fiduciary relationship;
Goldman Sachs allegedly conspired with Putnam and the Townsends to commit the
fraud. Furthermore, the appellants' opening brief is riddled with references to fraud,
showing that this theory pervades their entire case, but especially these three claims.
Id. (internal citations omitted).

The defendants generally [*22] argue that the allegations which the plaintiffs incorporate
by reference into their unjust enrichment and civil conspiracy claims are insufficient to
satisfy Rule 9(b). However, the defendants have completely failed to address the
threshold question of whether or not the unjust enrichment and civil conspiracy counts
necessarily sound in fraud and simply assert it is so. The plaintiffs' statements in response
are equally unhelpful. They first argue that the claims do not require fraud as an element
and contend that the TAC "is replete with allegations of wrongful conduct that would
establish the unjust nature of allowing Defendants to retain the benefits from the
Deceptive Domain Scheme." Response at 31 (pointing to allegations of using, licensing,
and monetizing domains in purported violation of trademark laws, domain redirection
and concealment, tasting and kiting of domain names and use of distinctive and valuable
marks causing dilution). They then conclude, with no analysis, that this alleged wrongful
concerted action is also sufficient to meet Rule 9(b)'s requirements as to the civil
conspiracy count. The plaintiffs then, in a puzzling statement, argue that even if the court
construes [*23] the unjust enrichment claim to be based on fraud, plaintiffs have
satisfied this burden as well-again, with no analysis.

The parties make superficial arguments with little to no specific analysis of the actual
allegations of the complaint and presumably expect the court to do the actual work for
them. Moreover, the court is left to sift through the unfocused arguments by the plaintiffs
who have failed to clearly identify the basis of their claims. 4

FOOTNOTES

116
4 They first defend the unjust enrichment civil conspiracy claim by contending that
because the court construed their ICFDBPA claim, which was pled in their First
Amended Complaint and which is not repled in the TAC, as disavowing a claim of fraud,
then heightened pleading does not apply to the unjust enrichment and civil conspiracy
counts as currently pled in the TAC. This argument is misguided on two levels. First, an
amended complaint supersedes any previously filed complaints. The TAC stands on its
own. To the extent that the court made any determination on a count that is not pled in
the version of the complaint currently before it, it is irrelevant. Second, and more
troubling, is the court's impression that the plaintiffs are avoiding [*24] (either
intentionally or unintentionally) having to state exactly what they are pleading. The
plaintiffs are masters of their complaint. It is their job to tell the defendants and the court
what their claim is based on, not the other way around. The court should not be in a
position to have to construe the allegations in one way or another. Indeed, despite this
being their fourth attempt to properly plead their claims, the plaintiffs do not seem to
know whether they are pleading fraudulent conduct or not. See Plaintiffs' Response to the
Motion to Dismiss at 31 ("To the extent this Court construes the unjust enrichment claim
to be based on fraud. . . ."). The plaintiffs' inability to succinctly and intelligently discuss
and defend their unjust enrichment and civil conspiracy claims only fuels a concern that
the plaintiffs have employed a "kitchen sink" approach in the drafting of their complaint.

In any event, both parties cite to Association Benefit Servs., Inc. v. Caremark RX, Inc.,
493 F.3d 841, 855 (7th Cir. 2007), in support of their positions. In that case, the plaintiff
alleged that the defendant had committed fraud and was unjustly enriched when it entered
into a contract with [*25] a third party. The plaintiff had introduced the defendant to the
third party and had, according to the plaintiff, expected to receive certain commissions on
the transactions between the defendant and the third party. The district court granted
summary judgment to the defendant on the unjust enrichment claim holding that "because
the claim of fraud failed, [the plaintiff] had not demonstrated the necessary element of
wrongdoing [as to the unjust enrichment claim]." Association Ben. Servs., 493 F.3d at
854.

The Seventh Circuit, in affirming the district court, acknowledged that fraud is not a
required element of an unjust enrichment claim. Id. at 855. However, the Seventh Circuit
concluded that because the wrongdoing upon which the unjust enrichment claim was
predicated was fraud, and the district court had properly rejected the fraud claim, then the
unjust enrichment claim also failed. Id. (referring favorably to another Seventh Circuit
case which held that "where the plaintiff's claim of unjust enrichment is predicated on the
same allegations of fraudulent conduct that support an independent claim of fraud,
resolution of the fraud claim against the plaintiff is dispositive of the unjust [*26]
enrichment claim as well.")(emphasis added).

Here, however, the plaintiffs do not plead a separate fraud claim. Instead, the wrongdoing
and unlawful conduct alleged by the plaintiffs includes trademark violations and

117
violations of the ACPA, which are not based on fraud. Thus, the defendants' motion to
dismiss these claims for failing to comply with Rule 9(b) is denied.

C. Tortious Interference with Prospective Economic Advantage

To establish a claim for tortious interference with prospective economic advantage, the
plaintiffs must show: (1) their reasonable expectation of entering into a valid business
relationship; (2) defendants' knowledge of that expectancy; (3) purposeful interference by
the defendants preventing that expectancy from being fulfilled; and (4) damages resulting
from such interference. Burrell v. City of Mattoon, 378 F.3d 642, 652 (7th Cir. 2004).
According to the defendants, this claim should be dismissed because, with respect to
certain plaintiffs and certain defendants, the TAC fails to plead the second element of
knowledge.

Specifically, the defendants assert that the TAC does not allege that the parking company
defendants knew of the existence of any domains other [*27] than their own. Thus, the
defendants argument goes, the plaintiffs cannot logically assert that all of the parking
company defendants knew of all of the domains at issue and thus, only certain defendants
can be responsible for tortiously interfering with certain domains. In particular, the
defendants contend that while the plaintiffs allege that: (1) Dotster, Oversee and Sedo
interfered with a business expectancy existing between internet users/consumers and
plaintiff Vulcan Golf; (2) Dotster, IREIT and Oversee interfered with JBSS; (3) Sedo
interfered with Bo Jackson; and (4) Oversee interfered with Blitz, the claims as to
plaintiff Vulcan Golf versus IREIT; JBSS versus Sedo; Bo Jackson versus Dotster,
Oversee, and IREIT; and Blitz versus Dotster, IREIT, and Sedo must be dismissed due to
a lack of knowledge.

While framing their argument as one based on knowledge, the defendants are essentially
making an argument based on standing. For the same reasons as stated in its order of
March 18, 2008, the court will not address issues of standing until the issue of class
certification is resolved. The defendants' motion to dismiss the tortious interference claim
is denied.

IV. Conclusion

For [*28] the reasons stated above, the motion to dismiss [165-1] is granted in part and
denied in part. Specifically, the motion to dismiss the RICO counts is granted while the
motion to dismiss the civil conspiracy, unjust enrichment, and tortious interference
counts is denied. Given that the plaintiffs have now had three opportunities to properly
plead their RICO claims 5, the motion to dismiss those counts is with prejudice. The
plaintiffs shall file within 21 days of the date of entry of this order their motion for class
certification. The defendants shall file a consolidated response within 21 days thereafter
and the plaintiffs shall file their reply, if any, within 14 days thereafter.

FOOTNOTES

118
5 The three opportunities were in the initial complaint, the First Amended Complaint and
the Third Amended Complaint. The court notes that the plaintiffs filed their First
Amended Complaint after the briefing on the defendants' motions to dismiss had been
completed. While no order had been entered on the initial motions to dismiss, the
plaintiffs had the benefit of the defendants' arguments on the RICO claim when they filed
their First Amended Complaint. The plaintiffs then had the benefit of the court's analysis
[*29] of the RICO claims in the March 20, 2008, order on the defendants' motion to
dismiss the First Amended Complaint when they filed their TAC, which is at issue here.
After dismissing certain counts of the First Amended Complaint and being given
permission to replead, the plaintiffs initially filed a Second Amended Complaint.
However, the SAC contained a cause of action (a declaratory judgment request) that had
been dismissed and which the plaintiffs did not amend; thus, the court ordered the
plaintiffs to file a TAC eliminating that count before the instant briefing on the motion to
dismiss.

Date: July 31, 2008

/s/ Blanche M. Manning

Blanche M. Manning

United States District Judge

2009 U.S. Dist. LEXIS 63317, *

BETA HEALTH ALLIANCE MD PA d/b/a MEDCENTRA, et al., Plaintiffs, vs.


KELLEY WITHERSPOON LLP, et al., Defendants.

Civil Action No. 3:09-CV-0399-BF

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF


TEXAS, DALLAS DIVISION

2009 U.S. Dist. LEXIS 63317

July 22, 2009, Decided


July 22, 2009, Filed

119
SUBSEQUENT HISTORY: Dismissed by Beta Health Alliance MD PA v. Kelley
Witherspoon LLP, 2009 U.S. Dist. LEXIS 63345 (N.D. Tex., July 22, 2009)

CORE TERMS: racketeering, racketeering activity, subject matter jurisdiction,


association-in-fact, patients, medical services, legal entity, mail fraud, fraudulent scheme,
wire fraud, asserting, lawsuit, reasons stated, medical bills, citations omitted, beneficial
interest, settlement, continuity, succeeded, deprived, engaging, defraud, ongoing,
predicate acts, medical care, statutory definition, civil actions, undisputed facts, suffered
injury, misrepresentations

COUNSEL: [*1] For Beta Health Alliance MD PA, doing business as Medcentra,
Associated Medical Providers, Allied Group MD PA, Plaintiffs: Valerie S Hulse, LEAD
ATTORNEY, The Hulse Law Firm, Dallas, TX.

For Kelley Witherspoon LLP, Kevin Lamar Kelley, Nuru Lateef Witherspoon,
Defendants, Counter Claimants: Kevin Kelley, LEAD ATTORNEY, Kelley |
Witherspoon, Dallas, TX.

For Beta Health Alliance MD PA, Associated Medical Providers, Allied Group MD PA,
Counter Defendants: Valerie S Hulse, LEAD ATTORNEY, The Hulse Law Firm, Dallas,
TX.

JUDGES: PAUL D. STICKNEY, UNITED STATES MAGISTRATE JUDGE.

OPINION BY: PAUL D. STICKNEY

OPINION

MEMORANDUM OPINION AND ORDER

The parties consented to proceed before the United States Magistrate Judge, and the
District Court entered an Order Reassigning Case on May 27, 2009. (Doc. 14.)
Defendants' motion to dismiss for lack of subject matter jurisdiction is now before this
Court in accordance with 28 U.S.C. § 636(c). For the reasons stated herein, Defendants'
motion to dismiss is DENIED.

Background

This lawsuit arises from a continued arrangement between Plaintiffs Beta Health Alliance
MD PA, doing business as, Medcentra, Associated Medical Providers, and Allied Group
MD PA (collectively "Plaintiffs"), and Defendants [*2] Kelley Witherspoon LLP
("Firm"), Kevin Lamar Kelley ("Kelley"), and Nuru Lateef Witherspoon ("Witherspoon")
(collectively "Defendants"). 1 Defendants, a law firm and its attorneys, represented
clients who had been injured as a result of accidents, such as car and premises accidents.
(Compl. at 2.) From 2003 through 2008, on over 34 occasions, Defendants referred their
injured clients to Plaintiffs, medical services providers, for medical treatment of injuries

120
sustained during these accidents. (Compl. at 2.) At the time of these referrals, Defendants
made verbal and written promises to Plaintiffs that the medical bills of these persons
would be promptly paid when the underlying legal injury cases were settled. (Compl. at
2.) One such assurance was a "Letter of Protection," a document composed and signed by
the Defendants which stated that Defendants would pay the medical bills for any
reasonable and necessary care administered by Plaintiffs to Defendants' clients. (Compl.,
Ex. B.)

FOOTNOTES

1 For the purposes of this motion, the facts alleged in Plaintiffs' complaint are taken as
true.

In reliance on Defendants' verbal and written assurances, Plaintiffs provided medical


treatment to Defendants' [*3] clients and abstained from collection efforts against these
clients. (Compl. at 2.) They also kept the appropriate medical records and provided
copies of these records to Defendants by depositing them into the United States Mail.
(Compl. at 2.) As time passed, however, Defendants never made any payments to
Plaintiffs. (Compl. at 2.) When questioned about the missing payments, Defendants
reassured Plaintiffs that the money would be forthcoming as soon as the pending cases
were resolved. (Compl. at 2.)

According to Plaintiffs, Defendants falsely told them that the underlying cases were still
pending when, in fact, Defendants had resolved the cases, collected the settlement funds,
and distributed the proceeds. (RICO Case Statement at 6-8.) Plaintiffs allege that
Defendants had no intention of paying them upon settlement and had no intention of
honoring the Letter of Protection. (Compl. at 3.) Plaintiffs also assert that Defendants
intended to deceive and defraud Plaintiffs to obtain medical records for their cases and
resultant attorneys' fees for themselves. (Compl. at 3.) Plaintiffs claim that Defendants'
fraudulent scheme lasted for over four years and deprived them of a substantial [*4] sum
of money. (Compl. at 3.)

On March 3, 2009, Plaintiffs filed this lawsuit against Defendants, asserting that
Defendants violated both the Racketeer Influenced and Corrupt Organizations Act
("RICO") and Texas state law. (Doc. 1.) Plaintiffs allege that Defendants violated RICO
by engaging in mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), health care
fraud (18 U.S.C. § 1347), interstate transportation offenses (18 U.S.C. § 2314), and by
attempting and conspiring to commit the aforementioned offenses (18 U.S.C. § 1349).
(Compl. at 1.) On March 25, 2009, Defendants filed an answer, a motion to dismiss for
lack of subject matter jurisdiction, and a counterclaim for defamation. (Doc. 5.)

Standard of Review

121
Defendants move for dismissal pursuant to FED. R. CIV. P. 12(b)(1), claiming the Court
lacks subject matter jurisdiction. "A case is properly dismissed for lack of subject matter
jurisdiction when the court lacks the statutory or constitutional power to adjudicate the
case." Home Builders Ass'n of Miss., Inc. v. City of Madison, 143 F.3d 1006, 1010 (5th
Cir. 1998) (quoting Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1187 (2d
Cir. 1996)). Federal district courts [*5] have subject matter jurisdiction over federal
questions arising under the Constitution, laws or treatises of the United States, 28 U.S.C.
§ 1331 (2006), and civil actions where the amount in controversy exceeds $ 75,000 and
there is diversity of citizenship, 28 U.S.C. § 1332 (2006).

In ruling on a motion to dismiss pursuant to FED. R. CIV. P. 12(b)(1), the court may
consider: "(1) the complaint alone; (2) the complaint supplemented by undisputed facts in
the record; or (3) the complaint supplemented by undisputed facts plus the court's
resolution of disputed facts." Clark v. Tarrant County, 798 F.2d 736, 741 (5th Cir. 1986)
(citing Williamson v. Tucker, 645 F.2d 404, 413 (5th Cir. 1981)). The plaintiff constantly
bears the burden of proof that jurisdiction exists. Rodriguez v. Tex. Comm'n on the Arts,
992 F. Supp. 876, 879 (N.D. Tex. 1998) (citing Menchaca v. Chrysler Credit Corp., 613
F.2d 507, 511 (5th Cir. 1980)). Where the defendant's challenge to the court's jurisdiction
is also a challenge to the existence of a federal cause of action, the Court must deal with
the challenge as an attack on the merits of the claim. Williamson v. Tucker, 645 F.2d
404, 415 (5th Cir. 1981). Therefore [*6] "a motion under 12(b)(1) should be granted
only if it appears certain that the plaintiff cannot prove any set of facts in support of his
claim that would entitle him to relief." Home Builders Ass'n of Miss., Inc., 143 F.3d at
1010 (citing Benton v. United States, 960 F.2d 19, 21 (5th Cir. 1992)). In ruling on
Plaintiffs' motion, the Court will consider both the complaint and RICO Case Statement.

Analysis

Plaintiffs seek to recover damages for violations of the RICO statute, 18 U.S.C. § 1961
(2006), et seq. Section 1964 of RICO expressly provides that federal district courts have
jurisdiction over civil claims brought under the act. See 18 U.S.C. § 1964(c). 2
Accordingly, this Court must determine whether Plaintiffs' stated claim does, in fact, fall
under this statute. For the reasons stated herein, this Court finds that Plaintiffs' claim falls
under 18 U.S.C. § 1962(a), (c), and (d).

FOOTNOTES

2 Section 1964(c) of RICO states: "Any person injured in his business or property by
reason of a violation of section 1962 of this chapter may sue therefor in any appropriate
United States district court . . . ."

Plaintiffs allege Defendants violated 18 U.S.C. § 1962(a), (c), and (d). According to the
Fifth [*7] Circuit, these subsections, in their simplest terms, state that:

122
(a) a person who has received income from a pattern of racketeering activity cannot
invest that income in an enterprise;

(c) a person who is employed by or associated with an enterprise cannot conduct the
affairs of the enterprise through a pattern of racketeering activity; and

(d) a person cannot conspire to violate subsections (a), (b), or (c).


Crowe v. Henry, 43 F.3d 198, 203 (5th Cir. 1995).

A civil RICO claim thus requires: "(1) a person who engages in (2) a pattern of
racketeering activity (3) connected to the acquisition, establishment, conduct, or control
of an enterprise." Delta Truck & Tractor, Inc. v. J.I. Case Co., 855 F.2d 241, 242 (5th Cir.
1988) (emphasis in original). Moreover, to have standing under RICO, the plaintiff must
demonstrate that the defendant's violation of RICO caused injury to business or property.
Hughes v. Tobacco Inst., Inc., 278 F.3d 417, 422 (5th Cir. 2001) (citations omitted). In
looking both at the Plaintiffs' complaint and the court-ordered RICO Case Statement, the
Court concludes that Plaintiffs sufficiently assert a RICO person, a pattern of
racketeering, and a RICO enterprise, and [*8] claim an actual injury to their business.
Therefore, Plaintiffs have sufficiently alleged a claim under 18 U.S.C. § 1962(a), (c), and
(d).

RICO Persons

Under RICO, a "person" includes "any individual or entity capable of holding a legal or
beneficial interest in property." 18 U.S.C. § 1961 (3). Generally, the RICO person in a
civil action is the defendant. Landry v. Air Line Pilots Ass'n Int'l AFL-CIO, 901 F.2d
404, 425 (5th Cir. 1990) (citing Delta Truck & Tractor, Inc. v. J.I. Case Co., 855 F.2d
241, 242 (5th Cir. 1988)). Moreover, the "person" must be one that either poses or has
posed a continuous threat of engaging in acts of racketeering. Delta Truck & Tractor, Inc.
855 F.2d at 242. "In most cases, pleading the existence of a 'pattern of racketeering
activity' will supply this element of continuity to the RICO person." Id.

Plaintiffs have succeeded in naming a sufficient RICO person. Plaintiffs have alleged
three RICO persons in their complaint: the Firm, Kelley, and Witherspoon. (Compl. at 1.)
Kelley and Witherspoon are individuals capable of holding a legal or beneficial interest
in property, and the Firm is an entity capable of holding a legal or beneficial interest in
property. [*9] Thus, all three defendants meet the statutory definition. 18 U.S.C. §
1961(3). Moreover, for the reasons stated below, Defendants, pose a continuous threat of
engaging in acts of racketeering.

Pattern of Racketeering Activity

To allege a pattern of racketeering activity, as required by 18 U.S.C. § 1962, Plaintiffs


must allege at least two acts of racketeering. See 18 U.S.C. § 1961(5). Section 1961(1)
(B) defines racketeering activity as "any act which is indictable" under several specified
sections of Title 18 of the United States Code. Thus, Plaintiffs must show both predicate

123
acts and a pattern of such acts. In re Burzynski, 989 F.2d 733, 742 (5th Cir. 1993) (citing
Delta Truck & Tractor, Inc., 855 F.2d at 242-43. Additionally, "[t]he critical features of a
pattern of racketeering activity are continuity and relationship." Delta Truck & Tractor,
Inc., 855 F.2d at 243 (citing Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n. 14, 105
S. Ct. 3275, 87 L. Ed. 2d 346 (1985)). A relationship exists if "criminal conduct forms a
pattern" which "embraces criminal acts that have the same or similar purposes, results,
participants, victims or methods of commission or otherwise are interrelated by
distinguishing characteristics [*10] and are not isolated events." Strain v. Kaufman
County Dist. Attorney's Office, 23 F. Supp. 2d 685, 695 (N.D. Tex. 1998) (quoting
Landry, 901 F.2d at 432).

Plaintiffs have succeeded in asserting a pattern of racketeering. Plaintiffs have alleged


that Defendants engaged in mail fraud and wire fraud, which are both predicate acts of
racketeering under 18 U.S.C. § 1962. (Compl. at 5.) They contend that Defendants
engaged in mail fraud by using the United States Postal Service to send and deliver
various documents and materials used in furtherance of Defendants' scheme to defraud
and deceive Plaintiffs. (RICO Case Statement at 3-4.) They assert that Defendants
engaged in wire fraud by using wire communications such as interstate telephone calls
and internet communications to further their overall scheme and to collect the proceeds of
the individual case settlements. (RICO Case Statement at 4.) Moreover, Plaintiffs have
asserted that there was a pattern of activity. Specifically, Plaintiffs claim that from 2003
to 2008, Defendants referred at least 34 patients to Plaintiffs, promising to pay Plaintiffs
for all medical services rendered. (Compl. at 2.) Plaintiffs allege that although
Defendants [*11] reassured Plaintiffs that the bills would be paid, Defendants had no
intention of making any payments. (Compl. at 2-3.) Plaintiffs claim that they only
continued to accept referrals over the five-year period because they believed the
reassurances and misrepresentations made by the Defendants. (RICO Case Statement at
8.) Therefore, according to Plaintiffs, Defendants' actions were not isolated events:
Defendants carried out their fraudulent scheme in at least 34 instances, and while the
individual patients varied, the nature of the scheme and the way it was implemented
remained the same. (RICO Case Statement at 8.) They claim that there was a common
plan (to defraud Plaintiffs out of money and services), the same participants (Kelley,
Witherspoon, and the Firm), the same victim (Plaintiffs), and the same method of
commission. (RICO Case Statement at 8.) By asserting that Defendants engaged in mail
fraud and wire fraud in at least 34 instances in order to carry out a fraudulent scheme,
Plaintiffs sufficiently allege a pattern of racketeering activity.

Enterprise

A RICO enterprise "includes any individual, partnership, corporation, association or other


legal entity, and any union or group [*12] of individuals associated in fact although not a
legal entity." 18 U.S.C. § 1961(4). Therefore, a RICO enterprise can be either a legal
entity or an association-in-fact. See Manax v. McNamara, 842 F.2d 808, 811 (5th Cir.
1988). "An association-in-fact enterprise (1) must have an existence separate and apart
from the pattern of racketeering, (2) must be an ongoing organization and (3) its members

124
must function as a continuing unit as shown by a hierarchical or consensual decision
making structure." Delta Truck & Tractor, Inc., 855 F.2d at 243-44 (citations omitted).

Plaintiffs have succeeded in asserting two RICO enterprises. The first alleged RICO
enterprise is the Firm. (Compl. at 4.) Because the Firm is a Texas limited partnership, it is
a legal entity and it satisfies the statutory definition of an enterprise. 18 U.S.C. § 1961(4).
The second alleged RICO enterprise is an association-in-fact, consisting of Kelley,
Witherspoon, the Firm, clients of the Firm, and insurance carriers. (Compl. at 4.)
Plaintiffs assert that the association-in-fact is an ongoing organization, existing since
2003 through the present, to handle the administration and resolution of personal injury
claims. (Compl. [*13] at 4.) According to Plaintiffs, this existence is separate and apart
from the pattern of racketeering. (Compl. at 4.) Plaintiffs also allege that the association-
in-fact operates on a hierarchal basis under the direction of Kelley and Witherspoon.
(RICO Case Statement 9.) Lastly, Plaintiffs assert that because some of the members of
the association-in-fact enterprise voluntarily agreed to join the enterprise and play an
active role in its affairs, there is a consensual decision-making structure. (RICO Case
Statement at 9.) Because Plaintiffs claim that there is an ongoing organization with a
continuity of structure and a shared purpose, Plaintiffs have properly alleged an
association-in-fact.

Injury

A plaintiff may sue for damages under RICO only if he has suffered injury to his business
or property by the conduct constituting the violation. 18 U.S.C. § 1964(c). Therefore, a
plaintiff must suffer an economic injury which is concrete and particular and not
speculative. Price v. Pinnacle Brands, Inc., Civil Action No. 3:96-CV-2150-T, 1997 U.S.
Dist. LEXIS 11698, 1997 WL 820964, at *2 (N.D. Tex. Apr. 2, 1997) (citations omitted).
Plaintiffs sufficiently allege that the fraudulent scheme caused concrete injuries. Plaintiffs
[*14] claim that had Defendants not made continued promises, reassurances, and
misrepresentations, they would not have continued providing medical care to Defendants'
clients. (RICO Case Statement at 8.) Moreover, Plaintiffs claim that but for the fraudulent
scheme and wrongful acts of the Defendants, Plaintiffs would not have been injured
financially. (RICO Case Statement at 14.) Plaintiffs allege they have been injured
because they provided medical services for which Plaintiffs did not pay. (RICO Case
Statement at 13.) In fact, Plaintiffs have submitted a list of patients who received medical
care and whose medical bills remain outstanding and unpaid. (Compl., Ex. A. at 3-10.)
Also, Plaintiffs allege they have been deprived of the ability to provide medical services
to patients who would have paid for these services, but obtained the services through
Defendants. (RICO Case Statement at 13.) Lastly, Plaintiffs assert they have been
deprived of the ability to provide services to other patients as their limited resources have
been diverted by the fraudulent activities of the Defendants. (RICO Case Statement at
13.) According to Plaintiffs, these losses exceed $ 145,619, exclusive of interest [*15]
and costs of the lawsuit. (RICO Case Statement at 13.)

Conclusion

125
Plaintiffs have adequately pled facts to support that Defendants are RICO persons who
have engaged in a pattern of racketeering that is connected to the acquisition,
establishment, conduct, or control of an enterprise. They have also adequately pled facts
to support that their business has suffered injury. Therefore, Plaintiffs' allegations are
sufficient to show that Plaintiffs' claim falls under 18 U.S.C. § 1962. Because Plaintiffs'
claim falls under the RICO statute, this Court has subject matter jurisdiction over the
lawsuit. As a result, Defendants' motion to dismiss for lack of subject matter jurisdiction
is DENIED.

SO ORDERED, July 22, 2009.

/s/ Paul D. Stickney

PAUL D. STICKNEY

UNITED STATES MAGISTRATE JUDGE

614 F. Supp. 2d 1037, *; 2009 U.S. Dist. LEXIS 36133, **

In re: ACTIMMUNE MARKETING LITIGATION; This Document Relates to: All


Actions

Master File No. C 08-02376-MHP

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF


CALIFORNIA

614 F. Supp. 2d 1037; 2009 U.S. Dist. LEXIS 36133

April 28, 2009, Decided


April 28, 2009, Filed

SUBSEQUENT HISTORY: Claim dismissed by In re Actimmune Mktg. Litig., 2009


U.S. Dist. LEXIS 103408 (N.D. Cal., Nov. 6, 2009)

CASE SUMMARY:PROCEDURAL POSTURE: Defendants, the manufacturer of a


pharmaceutical drug, the drug's marketer, and the marketer's CEO, filed a motion to
dismiss complaints filed by plaintiffs, consumers and third-party payors (TPPs) of the
drug, alleging violation of the Racketeer Influenced and Corrupt Organizations Act
(RICO), 18 U.S.C.S. § 1962, violation of Cal. Bus. & Prof. Code § 17200 et seq.,
violation of other state consumer protection statutes, and unjust enrichment.

126
OVERVIEW: Plaintiffs alleged fraud and deception in the marketing and sale of the
drug, a bio-engineered form of interferon gamma, for scientifically unproven purposes,
primarily in the treatment of idiopathic pulmonary fibrosis (IPF). Plaintiffs contended
that they needlessly paid for prescriptions for the drug for the treatment of IPF.
Defendants argued that plaintiffs did not have standing under either U.S. Const. art. III or
RICO's civil enforcement provision, 18 U.S.C.S. § 1964(c), because they did not allege a
direct and causal link between defendants' alleged fraudulent marketing scheme and any
damages claimed by plaintiffs. The court agreed that plaintiffs did not adequately plead
the requirements of a RICO claim because they did not plead an ascertainable loss that
was in direct relation to the alleged fraudulent conduct. The court refused to make the
unsupported inference that plaintiffs purchased the drug as a result of defendants'
fraudulent conduct. As to the state law claims, the court rejected plaintiffs' attempt to use
a fraud-on-the-market theory to circumvent the reliance element. Further, the claims did
not meet the specificity requirement of Fed. R. Civ. P. 9(b).

OUTCOME: The court granted defendants' motion to dismiss all claims, but it dismissed
the claims without prejudice and granted plaintiffs leave to amend.

CORE TERMS: marketing, fraudulent, patient, misrepresentation, off-label, prescription,


misleading, treating, interferon, scientific, causation, license, doctor, unjust enrichment,
clinical trials, disease, proximate cause, licensed, class action, consumer protection, leave
to amend, consumer, promoted, campaign, survival, state law claims, fraudulent conduct,
causes of action, pulmonologists, purportedly

LexisNexis(R) Headnotes
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Motions to
Dismiss
HN1 A motion to dismiss under Fed. R. Civ. P. 12(b)(1) tests the subject matter
jurisdiction of the court.

Constitutional Law > The Judiciary > Case or Controversy > Standing > Elements
Evidence > Procedural Considerations > Burdens of Proof > Allocation
HN2 Under Article III of the Constitution, federal judicial power extends only to "Cases"
and "Controversies." U.S. Const. art. III, § 2, cl. 1. Article III standing is thus a threshold
requirement for federal court jurisdiction. At a constitutional minimum, standing requires
the party invoking federal jurisdiction to show that it has suffered some actual or
threatened injury as a result of the putatively illegal conduct of the defendant, and that the
injury can be traced to the challenged action and is likely to be redressed by a favorable
decision. To satisfy the injury in fact requirement, the alleged harm must be an invasion
of a legally protected interest which is (a) concrete and particularized and (b) actual or
imminent, not conjectural or hypothetical. The party invoking federal jurisdiction bears
the burden of establishing these elements.

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to
State Claims
Civil Procedure > Summary Judgment > General Overview

127
Evidence > Judicial Notice > Adjudicative Facts > Public Records
HN3 Pursuant to Fed. R. Civ. P. 12(b)(6), a complaint may be dismissed against a
defendant for failure to state a claim upon which relief can be granted against that
defendant. A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of a claim.
Because Rule 12(b)(6) focuses on the sufficiency of a claim--and not the claim's
substantive merits--a court may typically look only at the face of the complaint to decide
a motion to dismiss. Although the court is generally confined to consideration of the
allegations in the pleadings, when the complaint is accompanied by attached documents,
such documents are deemed part of the complaint and may be considered in evaluating
the merits of a Rule 12(b)(6) motion. In addition, pursuant to Fed. R. Evid. 201, a court
may take judicial notice of matters of public record without converting a motion to
dismiss under Rule 12(b)(6) into a motion for summary judgment.

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to
State Claims
Civil Procedure > Pleading & Practice > Pleadings > Amended Pleadings > Leave of
Court
HN4 A motion to dismiss should be granted under Fed. R. Civ. P. 12(b)(6) if plaintiff
fails to plead enough facts to state a claim to relief that is plausible on its face. Dismissal
may be based on the lack of a cognizable legal theory or the absence of sufficient facts
alleged under a cognizable legal theory. Allegations of material fact are taken as true and
construed in the light most favorable to the nonmoving party. However, mere conclusions
couched in factual allegations are not sufficient to state a cause of action. The court need
not accept as true allegations that are conclusory, legal conclusions, unwarranted
deductions of fact or unreasonable inferences. Courts may dismiss a case without leave to
amend if the plaintiff is unable to cure the defect by amendment.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > Fraud
Civil Procedure > Pleading & Practice > Pleadings > Heightened Pleading Requirements
> Fraud Claims
HN5 A plaintiff alleging fraud must satisfy a heightened pleading standard that requires
circumstances constituting fraud be pled with particularity. Fed. R. Civ. P. 9(b). In a case
under the Racketeer Influenced and Corrupt Organizations Act, a plaintiffs must state the
time, place and specific conduct of the false representations as well as the identifies of the
parties to the misrepresentation. In addition, plaintiffs seeking to satisfy Rule 9(b) must
set forth an explanation as to why the statement or omission complained of was false and
misleading. The pleading must be specific enough to give defendants notice of the
particular misconduct so that they can defend against the charge and not just deny that
they have done anything wrong. Finally, a plaintiff seeking to state a claim for fraud must
also plead knowledge of falsity, or scienter. The requirement for pleading scienter is less
rigorous than that which applies to allegations regarding the circumstances that constitute
fraud because malice, intent, knowledge, and other condition of mind of a person may be
averred generally. Fed. R. Civ. P. 9(b). Nonetheless, nothing in the Federal Rules of Civil
Procedure relieves a plaintiff of the obligation to set forth facts from which an inference
of scienter could be drawn.

128
Civil Procedure > Pleading & Practice > Pleadings > Heightened Pleading Requirements
> Fraud Claims
HN6 The heightened pleading standard of Fed. R. Civ. P. 9(b) applies to allegations of
fraud and allegations that sound in fraud, including false misrepresentations.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
Constitutional Law > The Judiciary > Case or Controversy > Standing > Elements
Constitutional Law > The Judiciary > Case or Controversy > Standing > Particular
Parties
HN7 U.S. Const. art. III standing requirements include a causal connection between the
injury and the conduct complained of that is fairly traceable to the challenged action of
the defendant and not the result of the independent action of some third party not before
the court. If a plaintiff lacks Constitutional standing, Congress may not confer standing
on that plaintiff by statute. In addition to Article III standing, a private civil action for
fraud under the Racketeer Influenced and Corrupt Organizations Act (RICO) only grants
standing to any person injured in his business or property by reason of a violation of its
substantive provisions. 18 U.S.C.S. § 1964(c). A violation of RICO occurs under 18
U.S.C.S. § 1962(c) when a person associated with any enterprise participates in the
conduct of such enterprise's affairs through a pattern of racketeering activity.
"Racketeering activity" is defined as including any act indictable under certain
enumerated federal criminal statutes, including those which make mail fraud and wire
fraud criminal offenses. 18 U.S.C.S. § 1962(d) makes it unlawful to conspire to violate §
1962(c).

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > Fraud
Constitutional Law > The Judiciary > Case or Controversy > Standing > Elements
Constitutional Law > The Judiciary > Case or Controversy > Standing > Particular
Parties
HN8 In order to bring a claim under the Racketeer Influenced and Corrupt Organizations
Act (RICO) based on fraud, the United States Supreme Court has ruled that a plaintiff
must demonstrate that the injury to his business or property was caused by reason of a
violation of RICO. The plaintiff only has standing if, and can only recover to the extent
that, he has been injured in his business or property by the conduct constituting the
violation. A defendant who violates RICO is not liable to those who have not been
injured, nor to those the defendant might have injured by other conduct. The Supreme
Court affirmed the importance of the causation requirement for standing under RICO, in
the context of securities fraud, in holding that a class action claim under RICO requires
that a defendant's violation was not only a "but for" cause of injury, but was the
proximate cause as well. According to the Supreme Court, proximate cause demands
some direct relation between the injury asserted and the injurious conduct alleged. When
a court evaluates a RICO claim for proximate causation, the central question it must ask
is whether the alleged violation led directly to the plaintiff's injuries.

129
Antitrust & Trade Law > Consumer Protection > Deceptive Labeling & Packaging >
Federal Food, Drug & Cosmetic Act
Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > Fraud
Governments > Agriculture & Food > Federal Food, Drug & Cosmetic Act
HN9 A false and misleading statement under the federal Food, Drug, and Cosmetic Act,
21 U.S.C.S. § 301 et seq., that is, one that occurs when the drug label does not match the
promoted assertion about the drug, and a false and misleading statement about the drug
itself that can give rise to a claim under the Racketeer Influenced and Corrupt
Organizations Act (RICO) are not the same. Moreover, off-label marketing of an
approved drug is itself not inherently fraudulent. A RICO violation is not focused on the
drug's label, but rather whether the promoted assertion was knowingly false as to a
material matter about the drug, that is, if it constituted actionable fraud. The term
"defraud" in predicate act statutes to RICO, for example, mail fraud statutes, has been
given its established common law meaning.

Civil Procedure > Pleading & Practice > Pleadings > Complaints > Requirements
HN10 A pleading must contain something more than a statement of facts that merely
creates a suspicion of a legally cognizable right of action.

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to
State Claims
HN11 On a motion to dismiss, courts are not bound to accept as true a legal conclusion
couched as a factual allegation.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > Fraud
HN12 A lack of first-party reliance does not mean that a plaintiff under the Racketeer
Influenced and Corrupt Organizations Act (RICO) alleging injury by reason of a pattern
of mail fraud can prevail without showing that someone relied on the defendant's
misrepresentation. In most cases, the plaintiff will not be able to establish even but-for
causation if no one relied on the misrepresentation. The United States Supreme Court has
explained that while a person can be injured "by reason of" a pattern of fraud, even if he
has not relied on any misrepresentations, the injury must still have occurred as a result of
the fraud to state a cause of action under RICO.

Civil Procedure > Pleading & Practice > Pleadings > Amended Pleadings > Leave of
Court
HN13 In the normal course, district courts should freely grant leave to amend when a
viable case may be presented. Fed R. Civ. P. 15(a). Leave to amend should be granted
unless the district court determines that the pleading could not possibly be cured by the
allegation of other facts.

Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to
State Claims

130
HN14 While a complaint attacked by a Fed. R. Civ. P. 12(b)(6) motion to dismiss does
not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his
entitlement to relief requires more than labels and conclusions, and a formulaic recitation
of the elements of a cause of action will not do.

Antitrust & Trade Law > Private Actions > Racketeer Influenced & Corrupt
Organizations > Claims > General Overview
Evidence > Procedural Considerations > Burdens of Proof > General Overview
Torts > Negligence > Causation > Proximate Cause > General Overview
HN15 Plaintiffs under the Racketeer Influenced and Corrupt Organizations Act are held
to a more stringent showing of proximate cause than would be required at common law.

Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > General
Overview
HN16 There is a clear distinction in the law between puffery and fraud. A statement that
is quantifiable and makes a claim as to the specific or absolute characteristics of a
product may be an actionable statement of fact while a general, subjective claim about a
product is non-actionable puffery.

Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > State
Regulation
Evidence > Inferences & Presumptions > Inferences
HN17 Knowledge alone of someone else's fraud cannot sustain state-based consumer
protection or fraud claims against the nonparticipant. However, the United States Court
of Appeals for the Ninth Circuit has held that when a complaint specifically alleges that a
party knew about the fraud, participated in gathering profits from the fraud, and actually
profited from the fraud, its specific intent can be inferred.

COUNSEL: [**1] For Deborah Jane Jarrett, Nancy Isenhower, Jeffrey H. Frankel,
Plaintiffs: Reed R. Kathrein, LEAD ATTORNEY, Hagens Berman Sobol Shapiro LLP,
Berkeley, CA; David S. Nalven, Thomas M. Sobol, Hagens Berman Sobol Shapiro LLP,
Cambridge, MA; Douglass A. Kreis, Aylstock, Witkin & Sasser, PLC, Pensacola, FL;
Lance A Harke, Harke & Clasby, LLP, Miami, FL; Steve W. Berman, Hagens Berman
Sobol Shapiro LLP, Seattle, WA.

For Zurich American Insurance Company, Plaintiff: Kim Elaine Miller, LEAD
ATTORNEY, Kahn Gauthier Swick LLC, New York, NY.

For Government Employees Health Association, Inc, Plaintiff: Thomas M. Sobol, Hagens
Berman Sobol Shapiro LLP, Cambridge, MA.

For InterMune Inc, Defendant: Simon J. Frankel, LEAD ATTORNEY, Covington &
Burling LLP, San Francisco, CA; Erin C Smith, Covington & Burling, San Francisco,
CA; Ethan M. Posner, PRO HAC VICE, Covington & Burling LLP, Washington, DC.

131
For W. Scott Harkonen, Defendant: William M. Goodman, LEAD ATTORNEY,
Kasowitz, Benson, Torres & Friedman LLP, San Francisco, CA.

For Genentech Inc, Defendant: Conor Patrick Moore, Coblentz, Patch, Duffy & Bass
LLP, San Francisco, CA; George W. Hicks, Jr., PRO HAC VICE, Washington, DC;
Gerson Avery Zweifach, Jessamyn [**2] Sheli Berniker, Richard S. Scott, Williams &
Connolly LLP, Washington, DC; Jeffrey G. Knowles, Coblentz, Patch, Duffy & Bass,
San Francisco, CA.

JUDGES: MARILYN HALL PATEL, United States District Court Judge.

OPINION BY: MARILYN HALL PATEL

OPINION

[*1039] MEMORANDUM & ORDER

Re: Defendants' Motion to Dismiss

In this proposed nationwide class action, plaintiffs contend that defendants InterMune,
[*1040] Inc. ("InterMune"), W. Scott Harkonen ("Harkonen"), and Genentech, Inc.
("Genentech") engaged in a fraudulent and deceptive scheme to market and sell the drug
Actimmune(R) (interferon gamma-1b). Plaintiffs allege numerous causes of action
pursuant to the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18
U.S.C., sections 1962(c)-(d); the California Business and Professions Code, sections
17200 et seq.; the California Civil Code, sections 1770 et seq; various state consumer
protection acts; and unjust enrichment. Now before the court are three separate motions,
by Genentech, InterMune, and Harkonen, to dismiss the actions pursuant to Federal Rules
of Civil Procedure 12(b)(1) and 12(b)(6). Having considered the parties' arguments and
submissions and for the reasons stated below, the court enters this memorandum and
order.

BACKGROUND

I. [**3] Procedural Issues

According to Plaintiffs' complaints, the allegations of which must be accepted as true for
the purposes of a motion to dismiss, see Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct.
99, 2 L. Ed. 2d 80 (1957), this case is about fraudulent marketing and sales practices
surrounding the pharmaceutical drug known as Actimmune(R), a bio-engineered form of
interferon gamma. There are two complaints governing the four related civil actions
listed above. There are also three related criminal cases: United States v. InterMune, 06-
cr-00707 and United States v. Harkonen, 08-cr-00164, and Harkonen v. Arch Specialty
Ins. Co., 08-cr-5458, none of which is the subject of the instant motions.

132
The parties to the civil actions have agreed that the two pending complaints (the First
Amended Class Action Complaint, brought jointly with leave of court by plaintiffs in the
first three related actions, 08-2376, 08-2916 and 08-3797, and the Class Action
Complaint, brought by plaintiffs in the recently related action 08-4531) are substantially
similar. The primary substantive difference is that Genentech is named as a defendant
only in the latter case for the unjust enrichment claim. The parties agreed that to avoid
duplicative [**4] briefing and to streamline the cases, it would be preferable to adopt the
arguments presented in defendants' motions to dismiss the first three cases and apply
those arguments to all four cases.

Accordingly, the court GRANTS this request and applies defendants' moving papers,
along with the oppositions and reply briefs, to all four cases, i.e., to the joint complaint
governing the first three cases as well as the second complaint governing the fourth case.
The court will rely primarily on the joint complaint for the factual allegations, but will
distinguish between the two complaints where needed.

II. The Parties and the Factual Background

Plaintiffs bring this suit on behalf of themselves and others similarly situated as
consumers and third-party payors ("TPPs") of Actimmune(R), alleging fraud and
deception in the marketing and sale of the drug for scientifically unproven purposes,
primarily in the treatment of idiopathic pulmonary fibrosis ("IPF"). See First Amended
Class Action Complaint ("Compl.") P 2. Plaintiffs Deborah Jane Jarrett, Nancy
Eisenhower, Jeffrey H. Frankel, and Linda K. Rybkoski, residing in Georgia, Indiana,
Pennsylvania, and Ohio, respectively, represent current or [**5] former users of
Actimmune(R) who administered the drug by self-injection and incurred payment
obligations from their own funds. Id. PP 8-11.

[*1041] Plaintiff Zurich American Insurance Company ("Zurich"), a New York


corporation with its headquarters located in Illinois, is a TPP that provides health and
pharmacy benefits to its insureds across the United States. During the Class Period,
Zurich paid for prescriptions of Actimmune(R) to treat IPF. Id. P 12. Plaintiff
Government Employees Health Association, Inc. ("GEHA"), a not-for-profit organization
incorporated in Missouri, is another TPP that serves as a large national health insurance
plan for federal employees and retirees, as well as their families, across the United States
and around the world. See Class Action Complaint ("GEHA Compl."), P 7. During the
Class Period, GEHA paid for more than $ 4 million of Actimmune(R) prescriptions for
its insureds suffering from IPF. Id.

Genentech is a Delaware corporation with its primary place of business in San Francisco,
California. Compl. P 15. Genentech is a publicly traded biotechnology company that uses
human genetic information to discover, develop, manufacture, and commercialize bio-
therapeutics. [**6] Id. P 20. During the 1980s, Genentech developed a bio-engineered
form of interferon gamma-1b, a naturally occurring protein in the human body that
stimulates the immune system. Id. P 21. In 1990, Genentech obtained approval from the
Food and Drug Administration ("FDA") to market and sell interferon gamma-1b under

133
the brand-name Actimmune(R) for the treatment of Chronic Granulomatous Disease
("CGD"). 1 CGD is a rare, inherited autoimmune disease that affects about 400 people
annually in the U.S. Id. PP 22-23. In 2000, Genentech obtained FDA approval to broaden
Actimmune(R)'s indication to include delaying disease progression in patients with
severe, malignant osteopetrosis, which is another rare congenital disorder that affects
about 400 people annually in the U.S. Id. P 25.

FOOTNOTES

1 When the FDA approves a drug for a particular use or "indication," that indication will
be included on the drug's label or package insert and the drug may be marketed for that
indication. See 21 U.S.C. § 355(b)-(d). Physicians, however, may lawfully prescribe a
drug for "off-label" indications to achieve therapeutic goals other than those for which the
drug was approved. See In re Amgen Inc. Secs. Litig., 544 F.Supp.2d 1009, 1021 n.2
(C.D. Cal. 2008). [**7] It is unlawful to market, advertise or otherwise promote the off-
label use of the drug. See Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301-99.

In May 1998, Genentech exclusively licensed the U.S. marketing and development rights
to interferon gamma, including Actimmune(R), to Connetics Corporation ("Connetics").
Id. P 29; see also Def. Br., Exh. A ("License Agreement for Interferon Gamma"). 2
Connetics is a Delaware corporation with its principal place of business in Palo Alto,
California, that was founded by Genentech executives. Compl. PP 16, 29. Genentech
granted Connetics an exclusive license "to use, sell, offer for sale and import (but not to
make or have made) Licensed Products in the Field of Use" within the United States.
Compl. P 30; Def. Br., Exh. A § 2.1(a) at 8-9. "Licensed Products" referred to any
pharmaceutical formulations containing interferon gamma. Def. Br., Exh. A § 1.22 at 6.
"Field of Use" was defined as "the administration to humans of Licensed Product for the
treatment or prevention" of various diseases and conditions, including, [*1042] in
pertinent part, CGD, severe, malignant osteopetrosis, and pulmonary fibrosis. Id. §§
1.12(c)-(e) at 3.

FOOTNOTES

2 In ruling on a motion [**8] to dismiss, a district court generally "may not consider any
material beyond the pleadings." Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir.1994).
However, a court ruling on a motion to dismiss may consider the full texts of documents
which the complaint quotes only in part. Cooper v. Pickett, 137 F.3d 616, 623 (9th Cir.
1997).

134
The license agreement also required Connetics to pursue research and development in an
effort to gain additional FDA approval of new indications for interferon gamma. Compl.
P 30; Def. Br., Exh. A § 3.1 (a) at 19. Specifically, Genentech required Connetics to "use
its Best Efforts to develop, seek FDA clearance for marketing of, commercialize and sell
Licensed Products in the Territory in all Areas of the Field of Use" and provided
deadlines called "commercialization milestones" for so doing. Id. (emphasis added). The
license included annual reporting requirements by Connetics to Genentech regarding
these activities. Id. § 3.3 ("Review of Clinical Development Plan and Marketing
Programs") at 24. These requirements stated in part that:
On or about each August 1 during the term of this Agreement, Connetics shall supply
Genentech with a report on Connetics' development [**9] and marketing programs for
Licensed Products in the Field of Use in the Territory. The report shall include the
following: (i) a description of Connetics' progress in such programs during the twelve
(12) months prior to the date of each such report, (ii) a description of Connetics' planned
development and marketing programs for the twelve (12) months after the date of each
such report, (iii) a copy of the most recent version of the Clinical Development
Milestones . . . Genentech shall have the right to comment on the Clinical Development
Milestones and the development and marketing programs, and at Genentech's discretion,
the Parties shall meet to discuss and agree upon changes to the Clinical Development
Milestones.
Id. at 24-25; Compl. P 31 (emphasis added in Complaint).

The license further stated that "Connetics shall conduct clinical trials . . . and shall make,
use, sell and distribute Licensed Products in accordance with all applicable laws and
regulations." Id. § 3.7(a) at 25-26. 3 The license explicitly contemplated a sub-license by
Connetics to its newly created and wholly-owned subsidiary InterMune to carry out the
development and commercialization requirements. Id. § 3.1(a) [**10] at 19; Compl. P
33.

FOOTNOTES

3 Whether this recitation that Connetics shall "make, use, sell" Licensed Products is
consistent with the earlier provision granting Connetics the license to "use, sell. . . (but
not make or have made)" has not been placed at issue by the instant motions before the
court.

InterMune is a pharmaceutical product marketing company, incorporated in Delaware


with its principal place of business in Brisbane, California. Compl. P 13. InterMune
generally distributes its products through specialty pharmacies, which then resell to
hospitals, general pharmacies and physicians. Id. P 34. In August 1998, Connetics sub-
licensed some of its Actimmune(R) rights to InterMune, and InterMune assumed many of
Connetics' obligations to Genentech. In April 1999, Connetics sub-licensed more
Actimmune(R) rights to InterMune; and in June 2000, Connetics assigned all of its

135
Actimmune(R) rights to InterMune, whereupon InterMune assumed all of Connetics'
obligations, including the development and commercialization obligations as well as the
annual reporting obligation to Genentech. Id. PP 36. 38. InterMune was also required to
pay Genentech royalties on Actimmune(R) sales and to make various milestone [**11]
payments. Id. PP 37-38. While Genentech initially supplied Actimmune(R) to InterMune,
InterMune employed a different supplier by May 2001. Id. PP 39, 41. Genentech
continues to receive royalties [*1043] from InterMune on Actimmune(R) sales. Id.

Harkonen is a resident of California who served as InterMune's Chief Executive Officer


("CEO") and on its Board of Directors, from February 1998 through at least June 2003,
and was the senior vice president of Connetics during the time when Connetics held the
Actimmune(R) license. Id. PP 14, 29, 35. Plaintiffs' bring this action against InterMune,
as marketer and seller of Actimmune(R), Harkonen, as former CEO of InterMune, and
Genentech, as the original manufacturer and licensor of Actimmune(R), alleging they
were co-conspirators in a fraudulent marketing and sales scheme. Id. P 2.

III. The Fraudulent Scheme

Plaintiffs allege that from the time InterMune acquired the full and exclusive license to
Actimmune(R), defendants knew that the drug would not be profitable from sales for
CGD and severe, malignant osteopetrosis alone. Compl. P 42. They contend that while
InterMune and Genentech knew that the market for Actimmune(R) only consisted of
about 800 CGD [**12] and severe, malignant osteopetrosis patients, the sales of
Actimmune(R) soared. Id. P 40. Genentech's sales of Actimmune(R) to InterMune
increased 37% from 1999 to 2000, and then more than doubled between 2000 ($ 3.7
million) and 2001 ($ 7.4 million). Id. P 40. Actimmune(R) sales rose from less than one
million dollars in 1999 to $ 105.8 million in 2002 and $ 141.4 million in 2003 and stayed
at above $ 90 million through 2006. Id. PP 48-49, 92. Plaintiffs attribute this increase in
sales to the deceitful marketing of Actimmune(R) for an unproven indication. Id.

Plaintiffs admit that throughout 1999 Actimmune(R) was being promoted by InterMune
only for approved indications. Id. P 48. InterMune admitted that substantially all
Actimmune(R) sales from 2000 to the present are attributable to prescriptions for the
treatment of IPF. Id. P 50. Plaintiffs contend that after 1999, InterMune and Harkonen
embarked on a campaign to market and promote Actimmune(R) to treat IPF and that they
"falsely claimed benefits associated with Actimmune(R) for IPF," "suppressed evidence
that Actimmune(R) was ineffective in treating IPF," and "caused physicians to prescribe
Actimmune(R) to treat IPF." Id. P 47. [**13] Under the terms of the license agreement,
Genentech was able to monitor and review the marketing programs of Actimmune(R) for
unproven and unapproved uses and Genentech therefore allegedly knew or should have
known that the increase in sales from 2000 onward was the result of marketing for an
unproven, off-label indication. Id. PP 40, 71, 76.

Plaintiffs contend that InterMune and Harkonen intentionally misrepresented, and


instructed InterMune's sales force to misrepresent to pulmonologists, the medical benefits
of Actimmune(R) for IPF to increase profits. Id. PP 51-54, 72-80. Plaintiffs cite

136
InterMune's 2000 filings with the Security and Exchange Commission ("SEC"), stating
that "[t]he results of a clinical trial published in October 1999 in the New England
Journal of Medicine showed statistically significant evidence that interferon gamma-1b
can halt and reverse the progression of idiopathic pulmonary fibrosis." Id. P 54. Plaintiffs
allege this statement was false because the study included just eighteen participants, eight
of whom received interferon gamma-1b and the patients suffered from a less advanced
stage of pulmonary disease that was not clearly identified as IPF. Id. P 53.

In [**14] October 2000, InterMune sponsored a Phase III clinical trial of Actimmune(R)
to determine whether treating IPF patients with Actimmune(R) was effective in
decreasing [*1044] disease progression and death. Id. P 55. In August 2002, data from
the clinical trial failed to show statistical significance in the rates of progression-free
survival. Id. P 56. InterMune and Harkonen discussed the results of the trial with the
FDA and the FDA allegedly advised defendants that Actimmune(R) was unlikely to be
approved for the treatment of IPF without further clinical testing. Id. In 2003, InterMune
began enrolling patients in a Phase II clinical trial ("the INSPIRE study") to test
Actimmune(R) in IPF patients with mild to moderate lung function, and in 2005
InterMune enrolled a second wave of patients. Id. P 99.

From 2002 to at least January 2003, InterMune and Harkonen engaged in a sales and
marketing campaign that included disseminating a number of press releases, sending
sales representatives to visit physicians, sending letters to patients taking Actimmune(R),
setting up booths at medical conferences, setting up a registry known as the
Actimmune(R) Safe and Appropriate Use Program ("the ASAP registry") [**15] for
doctors to join and obtain information, creating a nonprofit patient advocacy group called
the Coalition for Pulmonary Fibrosis, and sponsoring meetings and medical programs for
pulmonologists, all of which allegedly served to tout the positive results in treating IPF
with Actimmune(R). Id. PP 73-75, 81-87.

Plaintiffs allege that distributed materials promoting Actimmune(R) for IPF before the
Phase III trial had been completed served to advance false information in the absence of
scientific proof. Plaintiffs allege that once the clinical trial results were obtained,
InterMune and Harkonen allegedly misrepresented the data as "demonstrating survival
benefits" and "reducing mortality by 70% in patients with mild to moderate disease." Id.
PP 64-67. InterMune and Harkonen allegedly encouraged patients to begin taking the
drug early in the treatment of their disease even though the data did not support a claim
of improved survival rates. Id. P 70. Plaintiffs cite a statement from an independent "Data
Monitoring Committee" that analyzed the clinical trial data and allegedly stated the trial
had "failed to establish benefit on the primary endpoint" and that InterMune's statements
constituted [**16] a "serious misrepresentation of results obtained from exploratory data
subgroup analysis." Id. P 67. Plaintiffs allege the actions taken by InterMune and
Harkonen served to increase sales and profits by causing patients and TPPs to pay for
useless prescriptions for the longest possible period of time. Id. P 71.

More generally, plaintiffs contend that InterMune's sales force that visited physicians was
instructed and encouraged to misrepresent the state of scientific evidence relating to

137
Actimmune(R) in treating IPF. Id. P 72-76. Plaintiffs contend that the sales
representatives used other InterMune drugs, such as the anti-fungal drug Amphotec
which can be used to treat pulmonary aspergillosis, to gain access to pulmonologists to
discuss and promote Actimmune(R) for the treatment of IPF. Id. PP 77-80. Plaintiffs
further allege that the sales representatives used the ASAP registry to initiate contact with
pulmonologists and share positive data on the treatment of IPF with Actimmune(R), but
not share any negative trends in survival or progression data with the physicians. Id. P
81-84. Plaintiffs allege the meetings, programs and patient advocacy groups sponsored by
InterMune all served [**17] "as a front for InterMune that was set up to sell
Actimmune(R), not to support IPF research." Id. P 85-89. Plaintiffs maintain these sales
and marketing efforts persisted in the face of overwhelming negative information about
the benefit of treating IPF [*1045] with Actimmune(R) and that InterMune and
Harkonen concealed negative facts and "continued to allow the medical and patient
communities to rely on their misrepresentations to sell more Actimmune(R)." Id. PP 90-
94.

In 2004, an article in the New England Journal of Medicine presented the results from
InterMune's Phase III clinical trial on Actimmune(R). The article stated that "no
significant differences were noted in the primary outcome measure of progression-free
survival (defined as either disease progression or death)" but "[n]evertheless, we
observed a trend toward enhanced survival in all randomized patients who were treated
with interferon gamma-1b, as compared with those receiving placebo . . . ." Id. PP 95-96.
The authors, all of whom allegedly received consulting fees from InterMune, concluded
that further research was needed to determine whether Actimmune(R) increased survival
of IPF patients. Id. Plaintiffs assert that InterMune [**18] used this sentence to justify
continuing their marketing campaign.

In 2005, an article in CHEST, by many of the same authors, analyzed the appropriateness
of the endpoints used in the Phase III clinical trial on Actimmune(R). The article stated
that "the suggestion of benefit of [Actimmune(R)] on both disease progression and
mortality . . . while not reaching statistical significance in all, is promising and requires
further exploration in larger and longer clinical trials . . . ." Id. P 98. Plaintiffs cite another
article published the following year, in the Proceedings of the American Thoracic
Society, which concluded that "current evidence does not justify the routine use of
Actimmune(R) in the management of IPF." Id. P 100.

In 2007, the FDA announced the early termination of the INSPIRE study conducted by
InterMune. Id. P 101. The FDA's alert stated "the study was stopped because an interim
analysis showed that patients with IPF who received Actimmune(R) did not show
benefit." Id.

According to the complaint, defendants' misleading and false representations to doctors,


patients and the general public demonstrate that InterMune and Harkonen willfully
embarked on an extensive "campaign [**19] of deception" and fraud to promote
Actimmune(R) for the treatment of IPF. Id. PP 43, 63, 104. Plaintiffs generally conclude
that InterMune's campaign caused physicians to prescribe Actimmune(R), and caused

138
consumers and TPPs to pay for Actimmune(R), despite an absence of scientific proof to
support its effectiveness. Plaintiffs also generally conclude that Genentech knew or
should have known of this campaign because it received updates on InterMune's
marketing programs as well as large royalties from Actimmune(R) sales.

IV. Related Criminal Prosecution

A. Criminal Prosecution of InterMune

In October 2006, after a two-year investigation, the Department of Justice ("DOJ")


charged InterMune with misbranding under 21 U.S.C. § 452(f)(1) for promoting
Actimmune(R) for the treatment of IPF with the intent to defraud and mislead. See
Compl., Exh. A (Criminal Information), at 3. The DOJ stated in a press release that
InterMune's wrongful actions caused the submission of false and fraudulent claims for
Actimmune(R) not eligible for reimbursement and also caused governmental payors to
pay for Actimmune(R) prescriptions they would not have paid for but for InterMune's
deception. See Compl., Exh. [**20] B (DOJ Press Release).

InterMune agreed to pay a combined $ 42.5 million, including interest, over five years to
settle the criminal charges that it [*1046] illegally marketed Actimmune(R) for an off-
label use. Of this sum, $ 30.2 million will be paid to the United States as restitution for
losses suffered by governmental payors such as Medicare, Medicaid, the Veteran's
Administration, the Department of Defense, and the Federal Employees Health Benefits
Program. See Compl., Exh. E (Civil Settlement Agreement). InterMune will also pay $
6.7 million in restitution to the state Medicaid programs that paid a portion of the cost of
prescriptions for Actimmune(R) for IPF. InterMune also entered into a deferred
prosecution agreement, in which it agreed it would not disagree to a material extent with
the facts outlined in Attachment A to the Agreement. See Compl., Exh. F (Deferred
Prosecution Agreement). InterMune also entered into a corporate integrity agreement, in
which it agreed to reform its corporate practices and submit to monitoring and strict
reporting requirements to the government for five years. See Compl., Exh. G (Corporate
Integrity Agreement).

B. Criminal Prosecution of Harkonen

In March [**21] 2008, Harkonen was indicted for disseminating and causing to be
disseminated information regarding Actimmune(R) for the treatment of IPF with the
intent to defraud and mislead, thereby causing Actimmune(R) to be misbranded. See
Compl., Exh. C (Indictment) at 10. The DOJ stated in a press release that Harkonen
promoted Actimmune(R) as a safe and effective treatment for IPF in order to sell more
Actimmune(R) and to generate revenues and profits for InterMune. See Compl., Exh. D
(2008 Press Release).

IV. The Purported Class

Plaintiffs bring these actions on behalf of themselves and the Class comprised of:

139
All individuals and entities in the United States and its territories who, for purposes other
than resale, purchased, reimbursed, and/or paid for ACTIMMUNE for the treatment of
IPF during the period from May 5, 1998 through the present. For purposes of the Class
definition, individuals and entities purchased ACTIMMUNE if they paid for some or all
of the purchase price.
Compl. P 113.

Plaintiffs allege that "[i]n reliance on Defendants' representations, tens of thousands of


prescriptions were written by pulmonologists for the treatment of IPF and tens of
thousands of consumers and/or [TPPs] [**22] paid for Actimmune(R) prescriptions
needlessly." Id. P 105. Plaintiffs allege six causes of action, for RICO violations under 18
U.S.C., sections 1962(c) and (d), violations of the California Unfair Competition Law
under the California Business and Professions Code, sections 17200 et seq.; violations of
other state consumer protection statutes, and unjust enrichment.

Defendants filed separate motions to dismiss both complaints; all of which are related
and have now been adopted as being presently before the court. Genentech moves to
dismiss all counts against it, namely, Counts II-IV (count I is not advanced against
Genentech) in the Complaint and Count VI (the only count advanced against Genentech)
in the GEHA Complaint, for failure to state a claim. Intermune moves to dismiss all
counts, arguing that plaintiffs have not alleged a claim for RICO violations or violations
of unfair competition law or the equitable doctrine of unjust enrichment, nor have
plaintiffs satisfied the injury in fact requirement for Article III standing. Harkonen moves
as to Counts I-V (Count VI is not advanced against Harkonen) by joining and
incorporating the Genentech and InterMune motions.

[*1047] LEGAL STANDARD

I. [**23] Rule 12(b)(1), Standing

HN1A motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) tests the subject
matter jurisdiction of the court. See, e.g., Savage v. Glendale Union High Sch., 343 F.3d
1036, 1039-40 (9th Cir.2003). HN2Under Article III of the Constitution, federal judicial
power extends only to "Cases" and "Controversies." U.S. Const., art. III, § 2, cl. 1. Article
III standing is thus a threshold requirement for federal court jurisdiction. Lujan v.
Defenders of Wildlife, 504 U.S. 555, 559-60, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992).
At a constitutional minimum, standing requires the party invoking federal jurisdiction to
show that it has "suffered some actual or threatened injury as a result of the putatively
illegal conduct of the defendant, and that the injury can be traced to the challenged action
and is likely to be redressed by a favorable decision." Valley Forge Christian Coll. v.
Ams. United for Separation of Church and State, Inc., 454 U.S. 464, 472, 102 S. Ct. 752,
70 L. Ed. 2d 700 (1982) (citations and internal quotations omitted). To satisfy the injury
in fact requirement, the alleged harm must be "an invasion of a legally protected interest
which is (a) concrete and particularized and (b) actual or imminent, not conjectural or
[**24] hypothetical." Lujan, 504 U.S. at 560 (citations and internal quotations omitted).

140
The party invoking federal jurisdiction bears the burden of establishing these elements.
Id. at 561.

II. Rule 12(b)(6), Failure to State a Claim

HN3Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed


against a defendant for failure to state a claim upon which relief can be granted against
that defendant. A motion to dismiss under Rule 12(b)(6) "tests the legal sufficiency of a
claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Because Rule 12(b)(6)
focuses on the "sufficiency" of a claim--and not the claim's substantive merits--"a court
may [typically] look only at the face of the complaint to decide a motion to dismiss." Van
Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002). Although the
court is generally confined to consideration of the allegations in the pleadings, when the
complaint is accompanied by attached documents, such documents are deemed part of the
complaint and may be considered in evaluating the merits of a Rule 12(b)(6) motion.
Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987). In addition, pursuant
to Federal Rule of Evidence 201, [**25] "a court may take judicial notice of 'matters of
public record'" without converting a motion to dismiss under Rule 12(b)(6) into a motion
for summary judgment. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001)
(quoting Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986)).

HN4A motion to dismiss should be granted if plaintiff fails to plead "enough facts to state
a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544,
127 S. Ct. 1955, 1974, 167 L. Ed. 2d 929 (2007). Dismissal may be based on the lack of a
cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal
theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). Allegations
of material fact are taken as true and construed in the light most favorable to the
nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996).
However, mere conclusions couched in factual allegations are not sufficient to state a
cause of action. Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L. Ed. 2d 209
(1986). The court [*1048] need not accept as true allegations that are conclusory, legal
conclusions, unwarranted deductions of fact or unreasonable inferences. See Sprewell v.
Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); [**26] Clegg v. Cult
Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994). Courts may dismiss a case
without leave to amend if the plaintiff is unable to cure the defect by amendment. Lopez
v. Smith, 203 F.3d 1122, 1129 (9th Cir. 2000).

III Fraud-Based Claims

HN5A plaintiff alleging fraud must satisfy a heightened pleading standard that requires
circumstances constituting fraud be pled with particularity. Fed. R. Civ. P. 9(b). In a
RICO case, a plaintiffs must "state the time, place and specific conduct of the false
representations as well as the identifies of the parties to the misrepresentation." Schreiber
Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). In addition,
plaintiffs seeking to satisfy Rule 9(b) must "set forth an explanation as to why the

141
statement or omission complained of was false and misleading." In re GlenFed, Inc. Sec.
Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc); see Fecht v. Price Co., 70 F.3d
1078, 1082 (9th Cir. 1995). The pleading must be "specific enough to give defendants
notice of the particular misconduct . . . so that they can defend against the charge and not
just deny that they have done anything wrong." Vess v. Ciba-Geigy Corp. USA, 317 F.3d
1097, 1106 (9th Cir. 2003) [**27] (internal quotation omitted).

Finally, a plaintiff seeking to state a claim for fraud must also plead knowledge of falsity,
or scienter. See GlenFed, 42 F.3d at 1546. The requirement for pleading scienter is less
rigorous than that which applies to allegations regarding the "circumstances that
constitute fraud" because "malice, intent, knowledge, and other condition of mind of a
person may be averred generally." Fed. R. Civ. P. 9(b). Nonetheless, nothing in the
Federal Rules of Civil Procedure relieves a plaintiff of the obligation to "set forth facts
from which an inference of scienter could be drawn." Cooper v. Pickett, 137 F.3d 616,
628 (9th Cir. 1997) (quoting GlenFed, 42 F.3d at 1546).

HN6This heightened pleading standards applies to allegations of fraud and allegations


that sound in fraud, including false misrepresentations. Vess, 317 F.3d at 1106-07; see
also Meridian Project Sys., Inc. v. Hardin Constr. Co., LLC, 404 F. Supp. 2d 1214, 1219
(E.D. Cal. 2005) ("It is well settled in the Ninth Circuit that misrepresentation claims are
a species of fraud, which must meet Rule 9(b)'s particularity requirement."); Neilson v.
Union Bank of Cal., N.A., 290 F. Supp. 2d 1101, 1141 (C.D. Cal. 2003) [**28] (same).

DISCUSSION

Defendants argue that plaintiffs improperly seek to piggyback this private class action on
InterMune's settlement agreement with the federal government for the off-label
promotion of Actimmune(R) for IPF. Defendants state that the government's case cannot
create civil liability because the government prosecuted criminal violations of the federal
Food, Drug, and Cosmetic Act ("FDCA"), 21 U.S.C. § 301 et seq., which provides no
private right of action for consumers or TPPs. Plaintiffs proceed primarily on a theory of
liability under RICO, premised on predicate acts of mail and wire fraud, claiming that
plaintiffs paid for prescriptions of Actimmune(R) as a result of defendants' knowingly
false representations that Actimmune(R) effectively treated IPF. Plaintiffs also bring
claims based on various consumer protection statutes and unjust enrichment. The court
first addresses the RICO claims.

[*1049] I. RICO Claims

Defendants argue that plaintiffs' complaints are fatally flawed because they cannot
properly allege a direct and causal link between defendants' alleged fraudulent marketing
scheme concerning Actimmune(R)'s effectiveness for treating IPF and any damages
claimed by plaintiffs. [**29] Specifically, defendants argue that plaintiffs have not pled
that the individual plaintiffs suffer from IPF, nor that any of the plaintiff's doctors
prescribed Actimmune(R) to treat IPF, nor that any of plaintiff's doctors was even
exposed to the allegedly fraudulent representations, nor that any such fraudulent

142
representations caused any of plaintiff's doctors to prescribe Actimmune(R). Defendants
conclude that plaintiffs' alleged injuries are merely conjectural because the allegedly
fraudulent marketing scheme has not directly caused plaintiff actual harm. Without this
causal link, plaintiffs do not have standing under either Article III of the U.S.
Constitution or RICO's civil enforcement provision, 18 U.S.C. § 1964(c). Defendants
contend these civil actions should be dismissed in their entirety for failure to state a claim
based on this ground--that the plaintiffs lack standing because they had not suffered an
injury cognizable under RICO. 4

FOOTNOTES

4 The court gives no credence to plaintiffs' argument that defendants have improperly
raised their standing arguments in the context of a Rule 12(b)(1) motion to dismiss for
lack of subject matter jurisdiction and not under Rule 12(b)(6) for [**30] failure to plead
RICO causation. The court finds that defendants properly moved to dismiss the complaint
for failure to state a claim for violation of RICO due to defects in standing, namely, for
failure to allege causation. The Table of Contents and first page of InterMune's Motion to
Dismiss make this clear. See, Motion to Dismiss filed by InterMune, Docket No. 71.

HN7Article III standing requirements include "a causal connection between the injury
and the conduct complained of" that is "fairly . . . trace[eable] to the challenged action of
the defendant, and not . . . th[e] result [of] the independent action of some third party not
before the court." Lujan v. Defenders of Wildlife, 504 U.S. 555, 559-60, 112 S. Ct. 2130,
119 L. Ed. 2d 351 (1992). If a plaintiff lacks Constitutional standing, Congress may not
confer standing on that plaintiff by statute Id. at 576-77. In addition to Article III
standing, a private civil action for fraud under RICO only grants standing to "[a]ny
person injured in his business or property by reason of a violation of" its substantive
provisions. 18 U.S.C. § 1964(c). A violation of RICO occurs under subsection (c) when a
person "associated with any enterprise . . . participate[s] . . . in the [**31] conduct of
such enterprise's affairs through a pattern of racketeering activity . . . ." Id. "Racketeering
activity" is defined as including any act indictable under certain enumerated federal
criminal statutes, including those which make mail fraud and wire fraud criminal
offenses. Miller v. Yokohama Tire Corp., 358 F.3d 616, 620 (9th Cir. 2004) (citations
omitted). Insofar as concerns this case, subsection (d) makes it unlawful to conspire to
violate subsection (c).

HN8In order to bring a RICO claim based on fraud, therefore, the Supreme Court has
ruled a plaintiff must demonstrate that the injury to his "business or property" was caused
"by reason of a violation" of RICO. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S.
479, 496, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985) ("the plaintiff only has standing if,
and can only recover to the extent that, he has been injured in his business or property by
the conduct constituting the violation"); Haroco, Inc. v. Am. Nat'l Bank & Trust Co. of
Chicago, 747 F.2d 384, 398 (7th Cir. 1984), aff'd, 473 U.S. 606, 105 S. Ct. 3291, 87 L.

143
Ed. 2d 437 [*1050] (1985) (noting that a defendant who violates RICO is not liable to
those who have not been injured, nor to those defendant might have injured by other
conduct).

The Supreme [**32] Court affirmed the importance of the causation requirement for
standing under RICO, in the context of securities fraud, in holding that a class action
claim under RICO requires that a defendant's violation was not only a "but for" cause of
injury, but was the proximate cause as well. Holmes v. Sec. Investor Prot. Corp., 503
U.S. 258, 267, 112 S. Ct. 1311, 117 L. Ed. 2d 532 (1992). According to the Court,
proximate cause demands "some direct relation between the injury asserted and the
injurious conduct alleged." Id. at 268; Bridge v. Phoenix Bond & Indem. Co., 128 S.Ct.
2131, 2139, 170 L. Ed. 2d 1012 (2008) (requiring the plaintiff to establish proximate
cause in order to show injury "by reason of" a RICO violation); Anza v. Ideal Steel
Supply Corp., 547 U.S. 451, 461, 126 S. Ct. 1991, 164 L. Ed. 2d 720 (2006) ("When a
court evaluates a RICO claim for proximate causation, the central question it must ask is
whether the alleged violation led directly to the plaintiff's injuries.")

Defendants argue that plaintiffs lack standing to bring their RICO claims as no individual
plaintiff has shown the requisite "direct relation" between defendants' purportedly
fraudulent misrepresentations about the effectiveness of Actimmune(R) to treat IPF and
plaintiffs' alleged injuries. Plaintiffs [**33] counter by arguing that proximate cause
elements raise factual questions that are not to be resolved in a motion to dismiss. Apart
from that, plaintiffs contend that the defendants' unlawful action was their
misrepresentation of Actimmune(R)'s efficacy in treating IPF, and that this fraud directly
caused economic loss to the individual plaintiffs as purchasers and to the TPPs as co-
payors or reimbursers. Plaintiffs allege they would not have made payments for a drug
that was not effective for the treatment of IPF and damages would not have been incurred
had defendants' advertisements not been deceptive and fraudulent. Nowhere do plaintiffs
allege in detail who was misled by the advertisements or promotions--words the plaintiffs
use interchangeably--or who the intended target audience was for these diverse
"marketing activities."

The court recognizes that the causal chain of injury plaintiffs allege in this case is similar
to that of many other civil RICO claims in which a plaintiff contends it incurred harm as
a result of defendants' false or misleading representations. 5 The causal chain for the
instant plaintiffs' harm is, of course, more attenuated than that alleged in cases where
[**34] a single defendant made false representations about its own product. It is for this
reason, presumably, that plaintiff has brought in the RICO statute to allege a conspiracy
and a pattern of racketeering activity among the parties. As such, plaintiffs contend that
defendants Genentech (the original manufacturer and licensor of Actimmune(R)),
InterMune (the marketer and seller of Actimmune(R)) and Harkonen (the former CEO of
InterMune) conspired to violate RICO by participating in a pattern of racketeering
activity (predicated on mail and wire fraud) in furtherance of the unlawful marketing and
sale of Actimmune(R). The court examines these allegations with careful scrutiny.

144
FOOTNOTES

5 The purported harm here is that plaintiffs sustained a monetary loss only, as no harmful
side effects of the drug were alleged.

[*1051] There are a substantial number of allegations in plaintiffs' complaints that do


not depend on mere off-label uses of Actimmune(R). A number of them specifically
allege statements made and their falsity. However, many of plaintiffs' allegations conflate
a false and misleading statement under the FDCA, i.e., one that occurs when the drug
label does not match the promoted assertion about the [**35] drug, and a false and
misleading statement about the drug itself that can give rise to a claim under RICO.
HN9The two types of statements are not the same. 6 A RICO violation is not focused on
the drug's label, but rather whether the promoted assertion was knowingly false as to a
material matter about the drug, i.e., if it constituted actionable fraud. See Neder v. United
States, 527 U.S. 1, 21-25, 119 S. Ct. 1827, 144 L. Ed. 2d 35 (1999) (giving the term
"defraud" in predicate act statutes to RICO, e.g., mail fraud statutes, its established
common law meaning). Plaintiffs need to pare down the allegations accordingly and
focus on those sorts of representations in this action. Plaintiffs' blunderbuss approach to
pleading is ineffective here. The major problem with plaintiffs' complaints is that they do
not allege that any of the individual plaintiffs suffered from IPF and that they took
Actimmune(R) for that reason. In fact, the complaint fails to specify for what reason the
individual plaintiffs took the drug and for what indication it was prescribed, or indeed if it
was even prescribed at all or if plaintiffs obtained the drug by other means.

FOOTNOTES

6 Moreover, off-label marketing of an approved drug is itself not inherently [**36]


fraudulent. See, e.g., In re Epogen & Aranesp Off-Label Marketing & Sales Practices
Litigation, 590 F. Supp. 2d 1282, 2008 WL 5335062 (C.D. Cal. 2008); citing U.S. v.
Caronia, 576 F.Supp.2d 385, 397 (E.D.N.Y. 2008) ("Promotion of off-label uses is not
inherently misleading simply because the use is off-label"); Washington Legal Found. v.
Friedman, 13 F.Supp.2d 51, 67-68 (D.D.C. 1998) (observing that claims made about the
effectiveness of prescription drugs are not inherently misleading merely because they
were neither made by scientists or academics nor evaluated by the FDA), vacated in part,
340 U.S. App. D.C. 108, 202 F.3d 331 (D.C. Cir. 2000); United States v. Caputo, 288 F.
Supp. 2d 912, 921 (N. D. Ill. 2003) (noting that the sophistication of the audience to
whom off-label uses are promoted should be taken into account when evaluating the
legitimacy of such promotion).

Plaintiffs spend pages recapitulating defendants' efforts to engage in sales and marketing
programs to increase the sales of Actimmune(R). The allegations relating to the causal

145
chain of injury as a result of these marketing efforts, however, is scanty. Purchasers of
Actimmune(R) do not suffer an injury cognizable under RICO simply because they paid
for the [**37] drug. To show causation, plaintiffs allege that InterMune and Harkonen
misrepresented the benefits of Actimmune(R) in the treatment of IPF and "caused
physicians to prescribe Actimmune(R) to treat IPF," and "caused patients and TPPs to
pay for Actimmune(R)." Plaintiffs allege that "[i]n reliance on Defendants'
representations, tens of thousands of prescriptions were written by pulmonologists for the
treatment of IPF and tens of thousands of consumers and/or [TPPs] paid for
Actimmune(R) prescriptions needlessly." This is not enough. Plaintiffs' mere recitations
of the causation element of the RICO claim do not provide sufficient grounds for
entitlement to relief. See Twombly, 127 S.Ct. at 1965 (HN10"[T]he pleading must
contain something more . . . than . . . a statement of facts that merely creates a suspicion
[of] a legally cognizable right of action"). The court is not convinced that these
speculative allegations about doctor "reliance" and legal conclusions about a "direct and
proximate" causation of injuries state a claim for relief, even under the lenient pleading
[*1052] Hstandard of the Federal Rules of Civil Procedure. Fed. R. Civ. P. 8(a); see
Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L. Ed. 2d 209 (1986) [**38]
(holding that HN11on a motion to dismiss, courts "are not bound to accept as true a legal
conclusion couched as a factual allegation") (emphasis added).

Plaintiffs need to allege what specific information the individual plaintiffs or their
physicians had about the drug, the extent to which they relied upon that information, and
that the information relied upon was false, misleading or otherwise fraudulent. Plaintiffs
also need to allege when the drug was prescribed, purchased and administered, and
whether these actions would not have been taken if not for the
concealment/misrepresentations of facts made regarding the efficacy or lack thereof
about Actimmune(R) for treating IPF. 7 The court understands that in some respects it
may be difficult for plaintiffs to determine what specific predicate acts occurred and
when, and thus pinning down reliance with specificity may also be difficult at this stage.
But plaintiffs nonetheless need to provide further specificity with respect to the
misrepresentations made by defendants.

FOOTNOTES

7 The court recognizes this may not be an easy task. See, e.g., Ironworkers Local Union
No. 68 v. AstraZeneca Pharms.L.P., 585 F.Supp.2d 1339, 1344 (M.D. Fla. 2008)
(dismissing [**39] civil RICO claims for lack of causation, noting that "establishing that
Plaintiffs' injuries were caused by Defendants' misconduct would require an inquiry into
the specifics of each doctor-patient relationship implicated by the lawsuit . . . each
physician who prescribed [the drug at issue] to an individual consumer . . . would have to
be questioned as to whether his or her independent medical judgment was influenced by
Defendants' misrepresentations, and to what extent.") However, as noted by the
Ironworkers court, the Supreme Court has held that detrimental reliance by a plaintiff is
not required to sustain a RICO claim predicated on mail fraud. See Bridge, 128 S.Ct. at
2141-44 (ruling that plaintiffs can recover for injuries resulting from defendant's

146
fraudulent misrepresentations to "someone" and first-party reliance is neither a required
element of a civil RICO claim nor a prerequisite to establishing proximate cause.)

Even setting aside the issue of whether the doctors relied on the allegedly fraudulent
marketing materials, plaintiffs' claims are still lacking in basis. The court is well aware
that plaintiffs can recover under RICO law in a variety of circumstances where their
[**40] injuries result directly from the defendant's fraudulent misrepresentations to a
third party. See Bridge, 128 S.Ct. at 2141. But here, no individual plaintiff has even
alleged that their injuries resulted from defendants' purported fraud. Plaintiffs have not
put forth any specific allegations that anyone--the doctors, the plaintiffs themselves, or
any other third party--relied on defendants' purportedly fraudulent misrepresentations to
cause the injury. Id. at 2144 (HN12a lack of first-party reliance does not mean that a
RICO plaintiff alleging injury by reason of a pattern of mail fraud can prevail "without
showing that someone relied on the defendant's misrepresentation . . . In most cases, the
plaintiff will not be able to establish even but-for causation if no one relied on the
misrepresentation."). The Supreme Court explained that while a person can be injured
"by reason of" a pattern of fraud, even if he has not relied on any misrepresentations, the
injury must still have occurred as a result of the fraud to state a cause of action under
RICO. Id. at 2139. Applying this reasoning to the instant case, therefore, no plaintiff has
alleged an injury that is sufficiently related to the [**41] alleged fraudulent conduct to
satisfy RICO. Again, this deficiency is a result of plaintiffs lack of specificity with
respect to defendants' alleged misrepresentations.

[*1053] Having considered the parties' arguments, the court finds that plaintiffs have
failed to plead the requirements of its RICO claims. The private remedy provisions of
RICO require a plaintiff to have suffered an ascertainable loss that is in direct relation to
the alleged fraudulent conduct. Plaintiffs have failed to plead such a loss. In the absence
of pleadings that sufficiently establish the relation between the injury asserted and the
injurious conduct alleged for at least one of the plaintiffs, there can be no cognizable
claim under RICO. The court will not make the unsupported inference that the individual
plaintiffs purchased the drug as a result of defendants' fraudulent conduct. The chasm
between plaintiffs' allegations and the legal causes of action under which they seek relief
is simply too wide. Plaintiffs cannot sustain their civil RICO claims based on these
allegations.

However, the court is well aware that HN13"in the [**42] normal course district courts
should freely grant leave to amend when a viable case may be presented." Lipton v.
Pathogenesis Corp., 284 F.3d 1027, 1038 (9th Cir.2002), citing Fed R. Civ. P. 15(a);
Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (leave to amend should be granted
unless the district court "determines that the pleading could not possibly be cured by the
allegation of other facts"). As such, the court will dismiss the RICO claims without
prejudice and permit plaintiffs to file an amended complaint. It would be improper to
determine at this stage that plaintiffs cannot cure the aforementioned flaws in their
pleading.

147
II. Consumer Protection Claims and Unjust Enrichment

Defendants move to dismiss the instant actions for two main reasons: the first goes to the
underlying basis of the RICO claims, and the other to the sufficiency of its supporting
allegations in pleading fraudulent conduct. With the RICO claims dismissed, the court
now considers the second reason in the context of the state law claims and the equitable
claim of unjust enrichment.

For the reasons described above, plaintiffs have failed to allege that it was defendants'
allegedly fraudulent misrepresentations [**43] about Actimmune(R), rather than the
scientific literature or any other factor, that led directly to the plaintiffs injuries.
HN14"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need
detailed factual allegations. . . a plaintiff's obligation to provide the "grounds" of his
"entitle [ment] to relief" requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do." Twombly, 127 S.Ct. at 1964
-1965 (citations omitted). Plaintiffs' RICO claims have been dismissed because of a
failure to do more than formulaically recite an injury that is proximately related to the
injurious conduct alleged.

However, the proximate cause requirements of RICO are more stringent than those of the
laws of most states. See Desiano v. Warner-Lambert Co., 326 F.3d 339, 348 (2d Cir.
2003) (noting that HN15RICO plaintiffs are held to a more stringent showing of
proximate cause than would be required at common law), see also Holmes, 503 U.S. at
268-269 (defining the narrow directness requirements under RICO). The legal standard of
proximate cause that is relevant to the consumer protection fraud claims before the court,
therefore, is not the [**44] law of RICO; it is, rather, the laws of the individual states in
which plaintiffs reside. Notably, defendants allege that plaintiffs lack standing to assert
claims on behalf of the purported Class under the laws of states in which no named
plaintiff resides. On that issue, the court agrees with plaintiffs that the class-certification
[*1054] issue is logically antecedent to Article III standing, where the standing concerns
"would not exist but for the class-action certification." Achem Products, Inc. v. Windsor,
521 U.S. 591, 612, 117 S. Ct. 2231, 138 L. Ed. 2d 689 (1997). The court focuses its
instant inquiry on the standing concerns that presently exist for the individual plaintiffs.

Defendants contend that plaintiffs have not alleged causation or reliance to state a claim
under the remaining states' statutes. Defendants argue that plaintiffs rely on vague
inferences from behavior that could be interpreted as fraudulent but could equally be
interpreted as engaging in competitive business strategy. Defendants contend that the
issue of individual prescribing decisions of doctors with access to scientific literature is
entirely unaddressed by plaintiffs. Instead, defendants argue that plaintiffs plead a fraud-
on-the-market theory, [**45] which must fail because the presumption of reliance does
not work in non-efficient markets like prescription drug "markets" (if individual patients
purchasing drugs prescribed by individual doctors for personalized conditions can even
constitute a "market") and it further fails to distinguish between competitive business
practices and fraudulent marketing efforts.

148
First, the court looks askance at any attempt on the part of plaintiffs' to use a fraud-on-
the-market theory to circumvent the reliance element of the state law claims. The court
will not let plaintiffs escape their burden to plead and prove the element of reliance by
using a market-based fraud theory to handwave the requirement that there be a
connection between the misdeed complained of and the loss suffered under state law. As
is the case with the RICO claims, even under the more relaxed standard for proximate
cause under state law, a fraud-on-the-market theory cannot plead the necessary element
of causation because the relationship between defendants' alleged misrepresentations and
the purported loss suffered by the patients is so attenuated, at least on the facts alleged,
that it would effectively be nonexistent.

Second, [**46] as discussed supra, the mere objective of a company or companies to


maximize profits is not in and of itself evidence of fraud. It does not necessarily follow
that off-label promotion plus resulting profits equals fraudulent conduct. See supra note
6; see also, In re Orthopedic Bone Screw Prods. Liab. Litig., 159 F.3d 817, 830-31 (3d
Cir. 1998) (Cowen, J., dissenting) (noting that off-label promotion is desirable in cases
where patients could benefit from having their doctors know about when and how to use
a product for an off-label use), rev'd, Buckman Co. v. Plaintiffs' Legal Comm., 531 U.S.
341, 121 S. Ct. 1012, 148 L. Ed. 2d 854 (2001). Moreover, courts have routinely refused
to find promotional marketing of off-label uses fraudulent when they are directed at
sophisticated audiences, like physicians. See, e.g., Caronia, 576 F. Supp. 2d at 397-398
(refusing to find defendant's speech inherently misleading when it was directed at
physicians, "who are familiar with the FDA-approval process and able to independently
evaluate the validity of their claims"). Plaintiffs fail to allege that specific representations
were made to the individual plaintiffs' physicians, let alone that such representations were
misleading.

Plaintiffs [**47] make tendentious leaps in concluding that defendants marketing efforts
are false and misleading simply because defendants presented their drug product in the
best light possible. For example, plaintiffs allege that many of the distributed materials
promoted Actimmune(R) for IPF before the Phase III trial had been completed and that
they therefore inherently served to advance "false information [*1055] in the absence of
scientific proof." The court disagrees with this contention. HN16There is a clear
distinction in the law between puffery and fraud. See, e.g., Newcal Industries, Inc. v. Ikon
Office Solution, 513 F.3d 1038, 1053 (9th Cir. 2008) (describing a statement that is
quantifiable and makes a claim as to the "specific or absolute characteristics of a
product," may be an actionable statement of fact while a general, subjective claim about a
product is non-actionable puffery); Pizza Hut, Inc. v. Papa John's Intern., Inc., 227 F.3d
489, 497 (5th Cir. 2000) (holding that statements of fact must be literally false in order
for the court to assume they misled consumers). Here, plaintiffs summary assertions that
defendants fraudulently misrepresented the scientific literature on Actimmune(R) are
[**48] unhelpful in stating any legal claim. They lack the specificity necessary to sustain
plaintiffs' private civil fraud claims under consumer protection state statutes.

149
By way of example, plaintiffs contend that, beginning after 1999, InterMune and
Harkonen embarked on a campaign to promote Actimmune(R) to treat IPF and that they
"falsely claimed benefits associated with Actimmune(R) for IPF," "suppressed evidence
that Actimmune(R) was ineffective in treating IPF." The scientific articles relied on in
plaintiffs' complaints belie such assertions of misrepresentation and fraud. Those articles
suggest at least facially that there are reasons to continue using Actimmune(R) to treat
IPF.

Plaintiffs' allegations underlying the state law fraud claims focus on the generalized
nature of defendants' purportedly deceptive actions, e.g., that defendants promoted the
false belief that Actimmune(R) was effective in treating IPF and that they concealed
adverse study results and selectively disclosed positive studies. Genentech argues the
scientific literature is mischaracterized in the complaints and that, instead, the literature
embodies the rising and falling optimism within the research community [**49]
regarding the use of Actimmune(R) in treating IPF. Genentech further argues that the
trend line parallels Actimmune(R) sales from 1999-2007 and there is no reason or
plausible basis to infer that defendants engaged in attempts to defraud patients. Plaintiffs
argue it is improper to evaluate the substance of the scientific articles on a motion to
dismiss. The merits of the scientific studies are not the issue, however. The issue is
whether the studies themselves could have provided another basis for physician reliance,
apart from the allegedly misleading representations by defendants to physicians.
Plaintiffs fail to address this possibility and therefore fail to sufficiently allege that the
purportedly fraudulent practices of defendants fostered a belief that Actimmune(R) was
effective in treating IPF and therefore caused physicians to prescribe Actimmune(R),
resulting in plaintiffs' harm.

The court has already found plaintiffs generalized assertions of fraudulent motive,
without more, inadequate to meet the heightened pleading requirements of RICO. See
Mazur v. eBay Inc., 2008 U.S. Dist. LEXIS 57105, 2008 WL 2951351, *7 (N.D. Cal.
2008) (Patel, J), citing Twombly, 127 S.Ct. at 1974. Because the pleading does not
[**50] state with particularized facts that, taken as a whole, raise a strong inference of
fraud, they also fail to meet the specificity required by Rule 9(b). As with the RICO
claims, here too the court acknowledges that "[d]ismissal without leave to amend is
proper only if it is clear . . . that the [claims] could not be saved by any amendment."
Swartz v. KPMG LLP, 476 F.3d 756, 756, 760 (9th Cir. 2007), citing Fed R. Civ. P.
15(a). Thus, plaintiffs are permitted leave to amend the complaint to allege specific
misrepresentations, subject to the requirements of Rule 9(b). The same applies for
plaintiffs' efforts to seek restitution from defendants under an unjust enrichment theory.

[*1056] The court grants leave to amend the state law claims and unjust enrichment
claims against all defendants, despite the fact that the court rejects plaintiffs' allegations
that the License Agreement between Genentech and Connetics/InterMune on its face
reflects an agreement to defraud anyone. The clause upon which plaintiffs rely to allege
that Genentech knew or should have known of the allegedly fraudulent marketing
practices is no more than a standard due diligence clause. It does not impose
requirements on the licensor [**51] to provide feedback or otherwise participate to any

150
extent in the purportedly fraudulent conduct. HN17Knowledge alone of someone else's
fraud cannot sustain state-based consumer protection or fraud claims against the
nonparticipant. However, the Ninth Circuit has held that when a complaint specifically
alleges that a party knew about the fraud, participated in gathering profits from the fraud,
and actually profited from the fraud, its specific intent can be inferred. See, e.g., Newcal
Industries, Inc. v. Ikon Office Solution, 513 F.3d 1038, 1056 (9th Cir. 2008) (reversing a
dismissal that Newcal failed to allege its fraud allegations with sufficient particularity and
holding that specific intent can be inferred when a party knew about the fraud and
actively profited from the fraud).

Therefore, the court will not dismiss all claims against Genentech with prejudice.
Plaintiffs are allowed to amend the complaint to allege further facts as to the forms of
misrepresentation and deception in which Genentech purportedly engaged, such as to
meet the Newcal standard. The court advises plaintiffs to focus on state law claims in this
state and the other states where the named plaintiffs reside.

CONCLUSION

The [**52] court GRANTS the parties' joint motion to adopt defendants' motions to
dismiss, opposition and reply briefs from related cases. The moving papers for civil cases
08-2376, 08-2916 and 08-3797 are deemed filed in civil action 08-4531. This order
applies in all four cases.

The court GRANTS defendants' motions to dismiss the complaints in their entirety. All
claims--the RICO claims, the state law claims and the unjust enrichment claims--are
dismissed without prejudice and with leave to amend as described above. Amended
complaints, if any, shall be filed within thirty (30) days of the date of this order. Answers
or other responses should be filed within thirty (30) days of the filing of the amended
complaints.

IT IS SO ORDERED.

Dated: April 28, 2009

/s/ Marilyn Hall Patel

MARILYN HALL PATEL

United States District Court Judge

Northern District of California

2008 U.S. Dist. LEXIS 90466, *

151
C. ALLEN FOSTER, ET AL., Plaintiffs, v. WINTERGREEN REAL ESTATE
COMPANY, ET AL., Defendants.

CIVIL No. 3:08cv00031

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF


VIRGINIA, CHARLOTTESVILLE DIVISION

2008 U.S. Dist. LEXIS 90466

November 6, 2008, Decided


November 6, 2008, Filed

SUBSEQUENT HISTORY: Reconsideration denied by, Motion denied by Foster v.


Wintergreen Real Estate Co., 2008 U.S. Dist. LEXIS 102858 (W.D. Va., Dec. 19, 2008)
Affirmed by Foster v. Wintergreen Real Estate Co., 2010 U.S. App. LEXIS 2050 (4th
Cir. Va., Jan. 29, 2010)

CORE TERMS: mail, pattern of racketeering activity, wire fraud, predicate acts,
racketeering, Lanham Act, entity, resort, continuity, racketeering activity, real estate,
standing to sue, conspiracy, wire, mail fraud, specificity, quotation, predicate, commerce,
mailing, harmed, broker, state law, fraud claim, false statements, advertising, misleading,
competitor's, consumer, defraud

COUNSEL: [*1] For C. Allen Foster, Susan C. Foster, William F. Jones, Plaintiffs:
Edward Bennett Lowry, Robert Woods Jackson, LEAD ATTORNEYS, MICHIE
HAMLETT LOWRY RASMUSSEN & TWEEL PC, CHARLOTTESVILLE, VA; Lloyd
Lee Byrd, SANDS ANDERSON MARKS & MILLER, RICHMOND, VA.

For Wintergreen Real Estate Company, Richard C. Carroll, Peter V. Farley, Timothy C.
Hess, Kyle T. Lynn, Defendants: Douglas P. Rucker, Jr., Lloyd Lee Byrd, LEAD
ATTORNEYS, SANDS ANDERSON MARKS & MILLER, RICHMOND, VA.

JUDGES: NORMAN K. MOON, UNITED STATES DISTRICT JUDGE.

OPINION BY: NORMAN K. MOON

OPINION

MEMORANDUM OPINION

This matter is before the Court on the Defendants' Motion to Dismiss [docket no. 13]. In
June 2008, the Plaintiffs, three individuals, filed a seventeen-count complaint against the
Defendants, Wintergreen Real Estate Company and four individuals. Counts one through
three of the complaint allege civil Racketeer Influenced and Corrupt Organizations Act

152
("RICO") violations, and count eleven alleges a violation of the Federal Lanham Act. The
remaining counts allege a variety of fraud, contract, tort, false advertising and conspiracy
claims under state common and statutory law. Defendants moved to dismiss all counts of
the complaint for failure to state [*2] a claim. For the reasons that follow, the Court will
grant the Defendants' motion to dismiss the complaint.

I. BACKGROUND

The suit arises out of the relationship between the Plaintiffs, who are three real estate
investors (A. Foster, S. Foster, and Jones), and the Defendants, who are a real estate
company (Wintergreen) and its officers, real estate agents and brokers (the individual
defendants: Carroll, Hess, Lynn, and Farley). Plaintiffs were real estate investors, and
used Defendants as their real estate agents and brokers for real estate in the Wintergreen
Resort area beginning in about June 2003 and continuing for a period of approximately
three years. Through the Defendants, Plaintiffs bought and sold numerous pieces of
property in the Wintergreen Resort area over those three years. Plaintiffs claim that they
incurred extra costs and lost profits as a result of the Defendants' various acts of false
advertising, fraud, and breach of contract.

Plaintiffs allege that the Defendants made several statements in order to induce Plaintiffs
to use their services, some of which were true and some of which were false. The true
statements were: (1) that Defendants were members of the Multiple [*3] Listing Service
("MLS"); (2) that Wintergreen was the only real estate company with an office in the
Resort, had "inside knowledge" about the real estate market within the Resort, and was
therefore the dominant real estate company in the resort; and (3) that Defendant Carroll
was the top salesperson at Wintergreen. The false statements included: (1) that
Wintergreen created color brochures for all of the properties it sells, and gives the
brochures to potential buyers and other real estate brokers; (2) that Wintergreen lists all
of its for-sale properties with the MLS; and (3) that Wintergreen features all of its for-
sale properties on its real estate television channel. (Compl. P 18.) The Plaintiffs aver that
the statement that Defendants were members of the MLS, while true, was intended to
lead the Plaintiffs to believe that Defendants complied with the rules, requirements, and
customs of membership in the MLS, which included listing all properties for sale.
(Compl. P 21.) The Plaintiffs claim that in reliance on these false and misleading
statements, which were made on at least two different occasions, they decided to use
Wintergreen, and Mr. Carroll specifically, as their real [*4] estate broker for their
purchases and sales in the Resort.

The Plaintiffs also describe a number of Defendants' practices which were intended to
lead Plaintiffs to believe that Defendants were vigorously marketing Plaintiffs' properties,
when in fact, they were not. For each property that the Plaintiffs listed for sale with the
Defendants, the Defendants sent Plaintiffs letters stating that the property had been
submitted to MLS for listing, and that the other Wintergreen agents had been made aware
of the listing. The letters also stated that the property would he advertised on
Wintergreen's television channel, and that Wintergreen would produce color brochures
about the property, as it did for all properties it had for sale. (Compl. PP 47-50.)

153
The Plaintiffs claim that for 13 of the 29 properties they sold through Defendants,
Defendants never listed the properties on MLS. For others, they only listed the properties
with MLS after they had already found a buyer. For the properties they did list on MLS,
they failed to include a picture, so that outside buyers would be less likely to show
interest. Plaintiffs allege that all of this was done in order to increase the commissions
earned [*5] by the Defendants, at the expense of the amount of profit made by the
Plaintiffs. (Compl. PP 63-67.) Further, the Plaintiffs allege that the Defendants never
made color brochures for any of the properties, never advertised the properties on their
television channel, never distributed any other marketing materials to other brokers or
firms, and never otherwise properly marketed Plaintiffs' properties. (Compl. PP 68-73.)
In addition, the Defendants on several occasions violated the terms of the listing
agreements by simultaneously representing both buyer and seller (called "dual
representation") without Plaintiffs' authorization. (Compl. P 88.) On other occasions,
Plaintiffs allege that Defendants used "straw men" to circumvent the contractual
prohibition on unauthorized dual representation. (Compl. P 89-91.) The Plaintiffs allege
that the Defendants purposefully failed to market Plaintiffs' properties so that they could
find a buyer among their existing client pool, and receive a commission from both the
seller and the purchaser.

The Plaintiffs allege that the Defendants applied similar practices with respect to
hundreds of other properties bought and sold by persons other than the Plaintiffs [*6]
over this three-year period. Plaintiffs base these allegations on information obtained
through the public records on the number of sales of property in the Wintergreen Resort
area, compared with the number of properties listed through the MLS. The Plaintiffs also
rely on interviews with "a number of the sellers," who confirm that they never authorized
the Defendants not to list their properties with MLS, and that they expected those
properties to be listed with MLS. (Compl. PP 79-83.)

The Plaintiffs also allege that the Defendants made false statements and concealed
material facts in order to induce Plaintiffs into making specific real estate transactions, to
Plaintiffs' detriment. For example, the Plaintiffs bought two lots in the Stoney Creek area
of the Wintergreen Resort, because the Defendants knowingly concealed the fact that a
noisy stump grinder was located nearby. (Compl. PP 110-115.) As a result, the property
values of the lots were significantly lower than the Defendants had led the Plaintiffs to
believe. In addition, Plaintiffs purchased two other lots in reliance on Defendants'
statements that a nearby property was the "last piece of developable multifamily land left
at [*7] Wintergreen Resort." (Compl. P 101.) Plaintiffs allege that the Defendants knew
this statement was false, because Defendant Farley was simultaneously involved in a deal
to develop a separate adjacent parcel for multi-family use. (Compl. P 102.) The Plaintiffs
believe that the Defendants concealed this deal because they knew that it would lower the
value of the properties sold to the Plaintiffs. (Compl. P 105.) Finally, the Plaintiffs
purchased a property at Mountain Inn through the Defendants. However, the Defendants
had concealed the fact that they had lost their real estate office in the Mountain Inn.
(Compl. P 116.) As a result, the Plaintiffs believed that Defendants would not be able to
effectively market their properties. The Plaintiffs allege that they would not have

154
purchased any of these properties if they had been fully informed of all of the material
facts.

II. STANDARD OF REVIEW

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of a complaint and
does not resolve contests concerning the facts, the merits of claims, or the applicability of
defenses. See Randall v. United States, 30 F.3d 518, 522 (4th Cir. 1994). Such motions
"should be granted only in very [*8] limited circumstances," Rogers v. Jefferson-Pilot
Life Ins. Co., 883 F.2d 324, 325 (4th Cir. 1989), and a complaint will survive as long as it
sets out facts sufficient for the court to infer that each element of a cause of action is
present. See Wolman v. Tose, 467 F.2d 29, 33 (4th Cir. 1972). In considering a Rule
12(b)(6) motion, a complaint is to be construed in the light most favorable to the plaintiff
and the court is to assume its factual allegations to be true. See Hishon v. King &
Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 81 L. Ed. 2d 59 (1984); Martin Marietta v.
Int'l Tel. Satellite, 991 F.2d 94, 97 (4th Cir. 1992). "A motion to dismiss for failure to
state a claim should not be granted unless it appears to a certainty that the plaintiff would
be entitled to no relief under any state of facts which could be proved in support of the
claim." McNair v. Lend Lease Trucks, Inc., 95 F.3d 325, 328 (4th Cir. 1996) (en banc).

Although "a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need
detailed factual allegations, a plaintiff's obligation to provide the grounds of his
entitlement to relief requires more than labels and conclusions, and a formulaic recitation
of the elements of a cause of action [*9] will not do." Bell Atl. Corp. v. Twombly, 550
U.S. 544, 127 S. Ct. 1955, 1964-65, 167 L. Ed. 2d 929 (2007) (alteration in original
omitted) (citations omitted) (internal quotation marks omitted). Instead, "factual
allegations must be enough to raise a right to relief above the speculative level on the
assumption that all the allegations in the complaint are true (even if doubtful in fact)." Id.
at 1965 (citations omitted). Rule 12(b)(6) does "not require heightened fact pleading of
specifics, but only enough facts to state a claim to relief that is plausible on its face";
plaintiffs must "nudge[] their claims across the line from conceivable to plausible" or
"their complaint must be dismissed." Id. at 1974. As the Fourth Circuit has held, a
plaintiff "must sufficiently allege facts to allow the Court to infer that all elements of
each of his causes of action exist." Jordan v. Alternative Res. Corp., 458 F.3d 332, 344-
45 (4th Cir. 2006).

III. DISCUSSION

A. RICO claims

Counts one through three of the complaint set out the Plaintiffs' RICO claims: 1)
participating in or conducting a RICO enterprise; 2) investment of proceeds of
racketeering activity; and 3) conspiracy to violate RICO.

1. Participating in a RICO enterprise

155
RICO [*10] makes it unlawful "for any person employed by or associated with any
enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to
conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs
through a pattern of racketeering activity or collection of unlawful debt." 18 U.S.C. §
1962 (c).

In order to state a claim under this subsection, the Plaintiffs must establish the following
elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering
activity. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S. Ct. 3275, 87 L.
Ed. 2d 346 (1985). The Plaintiffs bring a claim under this provision against the individual
defendants only, and allege that Wintergreen is the RICO enterprise. They allege that the
pattern of racketeering activity consists of a number of instances of mail and wire fraud,
in which the defendants communicated false statements to the Plaintiffs in order to
perpetrate a fraud.

The Plaintiffs must also show that they were proximately harmed by the RICO violation.
18 U.S.C. § 1964 (c); see also Holmes v. Securities Investor Protection Corp., 503 U.S.
258, 268, 112 S. Ct. 1311, 117 L. Ed. 2d 532 (1992) (holding that proximate cause is an
element of civil [*11] RICO claims). "To meet this burden with respect to mail fraud and
wire fraud, a plaintiff must plausibly allege both that he detrimentally relied in some way
on the fraudulent mailing or wire … and that the mailing or wire was a proximate cause
of the alleged injury to his business or property." American Chiropractic Association v.
Trigon Healthcare, Inc., 367 F.3d 212, 233 (4th Cir. 2004). 1 In this case, the Plaintiffs
have alleged reliance on the fraud and that the fraud was a proximate cause of the harm
they suffered.

FOOTNOTES

1 But see Bridge v. Phoenix Bond & Indem. Co., 128 S. Ct. 2131, 2139, 170 L. Ed. 2d
1012 (2008) ("The gravamen of the offense [of mail fraud] is the scheme to defraud, and
any mailing that is incident to an essential part of the scheme satisfies the mailing
element, even if the mailing itself contains no false information." (internal quotations and
citations omitted) (internal modifications omitted)). Further, the Supreme Court held that
no showing of actual reliance on the false statements is required to establish predicate
acts of mail or wire fraud. Id.

a. Enterprise

An enterprise is defined to include "any individual, partnership, corporation, association,


or other legal entity, and [*12] any union or group of individuals associated in fact
although not a legal entity." 18 U.S.C. § 1961 (4). Under 18 U.S.C. § 1962 (c), the person
committing the racketeering acts must be separate from the "enterprise" that person
participates in or conducts. United States v. Computer Sciences Corporation, 689 F.2d

156
1181, 1190 (4th Cir. 1982), overruled in part by Busby v. Crown Supply, Inc., 896 F.2d
833 (4th Cir. 1990). 2

FOOTNOTES

2 Busby overruled the part of Computer Sciences that dealt with this issue as it applies to
18 U.S.C. § 1962 (a), the investment provision, discussed infra.

In this case, the Defendants argue that because the individuals are employees of
Wintergreen, which is alleged to be the RICO enterprise, there is no difference,
distinction or separation between them, as required by the statute. They rely heavily on
Computer Sciences in support of this proposition. 3 In Computer Sciences, criminal
RICO charges were brought against a corporation and six individuals, who were
employees of the corporation. See United States v. Computer Sciences Corp., 511
F.Supp. 1125 (E.D.Va.1981). The Fourth Circuit dismissed the charges against the
corporation, holding that the corporation could [*13] not be both a defendant and the
RICO enterprise required by 18 U.S.C. § 1962 (c). Computer Sciences, 689 F.2d at 1190.
However, the court did not dismiss the charges as to the individual defendants.

FOOTNOTES

3 Defendants also rely on several other cases, none of which are applicable to the facts
presented here. For example, Defendants cite to Entre Computer Centers, Inc. v. FMG of
Kansas City, Inc.., 819 F.2d 1279 (4th Cir. 1987) in support of their argument that
employees of a corporation cannot be separate from the corporation for purposes of
RICO. However, that case involved a franchise corporation and its franchisees. Further,
the case does not specify which provision of RICO it was dealing with, a detail which
becomes important in light of the Busby case. Overall, the court's holding is too vague to
determine exactly how it might apply to this case. Finally, this case is flagged as having
been overruled by Busby, which the Defendants failed to mention.

Defendants also cite to Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30
F.3d 339 (2d Cir. 1994). In that case, the plaintiffs sought to hold a corporate entity liable
under RICO, and alleged that the RICO enterprise consisted of [*14] the corporate entity
itself, in association with its employees and agents. Id. at 344. The court held that, "where
employees of a corporation associate together to commit a pattern of predicate acts in the
course of their employment and on behalf of the corporation, the employees in
association with the corporation do not form an enterprise distinct from the corporation."
Id. However, the main distinction between Riverwoods and this case is that in
Riverwoods, the corporate entity was the defendant, and in this case, only the individual
defendants are named in this count of the complaint. Therefore, the holding in

157
Riverwoods deals with a case in which the plaintiffs were trying to construe the same
group of actors as both the person and the enterprise. That is not the case here.

The Defendants misunderstand the Fourth Circuit's holding in Computer Sciences. The
court did not hold that employees of a corporation are never separate entities from that
corporation; rather, it held that the corporation itself could not be both a RICO enterprise
and a participant in the conduct of that RICO enterprise. Id. This is further clarified
because the court did not dismiss the charges against the [*15] individual defendants,
accused of participating in the conduct of the RICO enterprise, their employer. Id. at
1191.

The same facts as in Computer Sciences are at issue in this case: the individual
defendants were employees and officers of Wintergreen, which is alleged to be the RICO
enterprise. The employment relationship does not eliminate the distinction required by
the statute. Rather, some relationship between the individuals and the enterprise is
required by the plain language of the statute. See Busby, 896 F.2d at 841 ("[18 U.S.C. §
1962](c) . . . requires a relationship between the "person' and the 'enterprise' (i.e.,
employer-employee). . ." (emphasis in original)). Therefore, the Plaintiffs have
sufficiently alleged a RICO enterprise that is separate and distinct from the persons
committing the racketeering activity.

b. Racketeering activity

Racketeering activity is defined to cover a broad range of illegal activities commonly


engaged in by members of organized crime. It includes mail fraud and wire fraud, as
prohibited by 18 U.S.C. §§ 1341 and 1343, respectively. 18 U.S.C. § 1961 (1).

In this case, Plaintiffs allege various acts of mail and wire fraud by the Defendants. (See
[*16] Compl. PP 16-21, 47-48. 79-83, 100-106.) The essential elements of the offense of
mail fraud are: "(1) a scheme to defraud, and (2) the mailing of a letter, etc., for the
purpose of executing the scheme." Pereira v. United States, 347 U.S. 1, 8, 74 S. Ct. 358,
98 L. Ed. 435, (1954); Linden v. United States, 254 F.2d 560, 567 (4th Cir.1958). The
elements for wire fraud are identical, except for the obvious distinction that use of
electronic or telephonic means of communication, rather than the mail, is required. John
C. Holland Enterprises, Inc. v. J.P. Mascaro & Sons, Inc., 653 F.Supp. 1242, 1249
(E.D.Va. 1987).

The Plaintiffs allege that the information provided to them by Defendants over the phone,
fax, or email, or by U.S. mail, was false, included material misrepresentations or
concealed material facts, was intended to deceive the Plaintiffs, and did in fact deceive
the Plaintiffs. The Plaintiffs allege that the Defendants' statements, made on various
occasions, about their membership in the MLS, their marketing practices, and their
position and status in the Wintergreen Resort real estate market were false or misleading.
The Plaintiffs also allege that, because they did not live the Wintergreen area, the mails

158
[*17] and wires were necessarily used on numerous occasions, in furtherance of
Defendants' attempts to defraud them. The Plaintiffs allege with specificity as to date,
manner, and content, at least one occasion when these statements were made by
Defendant Carroll over the phone (Compl. PP16-21), and at least two occasions when
they were made in writing sent through the mail (Compl. PP 47-48). Taking the
allegations in the complaint as true, it does appear that the Plaintiffs have sufficiently
alleged acts of mail and/or wire fraud by the Defendants.

The Defendants argue that Plaintiffs cannot state a RICO claim because they have not
alleged the fraud with the particularity required by Federal Rule of Civil Procedure 9(b).
Rule 9(b) requires allegations of fraud to be pled with particularity as to the time, place
and contents of the false representations, the identity of the person making those
representations, and what was obtained by the fraud. Harrison v. Savannah Westinghouse
River Co., 176 F.3d 776, 784 (4th Cir. 1999) (quoting 5 Charles Alan Wright and Arthur
R. Miller, Federal Practice and Procedure: Civil § 1297, at 590 (2d ed. 1990)). The
plaintiff may allege the true facts and defendant's [*18] mental state generally. Id. A
fraud claim will survive a motion to dismiss under Rule 9(b) if "the court is satisfied (1)
that the defendant has been made aware of the particular circumstances for which she will
have to prepare a defense at trial, and (2) that plaintiff has substantial prediscovery
evidence of those facts." Id.

The Plaintiffs in this case have satisfied their burden of pleading fraud with particularity
under Rule 9(b) as to Defendant Carroll. As noted above, they do plead at least one
specific instance of wire fraud and two specific instances of mail fraud, complete with the
time, place and contents of the false representations, as well as the identity of the person
who made them. In addition, they allege many other such instances with somewhat less
particularity, although they do provide lists of dates of phone calls and other
communications.

However, the Plaintiffs do not allege with specificity that any of these communications
were with anyone other than Defendant Carroll. 4 Instead, as to the remaining individual
defendants, the Plaintiffs simply allege that "the Individual Defendants" made the same
representations as those attributed specifically to Defendant Carroll [*19] on any one or
more of several dates listed. (Compl. PP 25, 101, 111, 119.) These allegations are
insufficient under Rule 9(b) to state a claim against the individual Defendants other than
Mr. Carroll. See Cooke & Moses, LLC v. QSS-Engineered Systems Group, LLC, 2007
U.S. Dist. LEXIS 63650, 2007 WL 2463288, *7 n.4 (N.D.W.Va. 2007) ("This Court has
previously reasoned that, when plaintiffs make fraud-based claims against multiple
defendants, 'the plaintiff must plead with specificity against each defendant …' and
allegations made against 'undifferentiated "defendants" violate this rule.'" (quoting Tri-
County Elec. Co., Inc. v. Dean, 1994 U.S. Dist. LEXIS 21659, 1994 WL 653489, *4
(N.D.W.Va.1994)); see also Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986) (failure to
connect alleged misrepresentation to particular defendant does not meet the requirements
of Rule 9(b)).

159
FOOTNOTES

4 The two letters that Plaintiffs attach to the Complaint, which contain alleged false
statements, were both signed by Defendant Carroll.

c. Pattern of racketeering activity

The most critical element of a RICO violation is to show a "pattern of racketeering


activity." A "pattern of racketeering activity" means "at least two acts of racketeering
activity, one of which occurred after [*20] the effective date of this chapter and the last
of which occurred within ten years (excluding any period of imprisonment) after the
commission of a prior act of racketeering activity." 18 U.S.C. § 1961 (5).

Courts look to the pattern element in order to identify the types of claims that Congress
intended RICO to cover. See H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229,
236, 109 S. Ct. 2893, 106 L. Ed. 2d 195 (1989) ("[W]e suggested that RICO's expansive
uses 'appear to be primarily the result of the breadth of the predicate offenses, in
particular the inclusion of wire, mail, and securities fraud, and the failure of Congress and
the courts to develop a meaningful concept of "pattern."'") (quoting Sedima, 473 U.S. at
500).

The Fourth Circuit has stated that RICO liability should be imposed only when there are
"ongoing unlawful activities whose scope and persistence pose a special threat to social
well-being." Menasco, Inc. v. Wasserman, 886 F.2d 681. 684 (4th Cir. 1989). The Fourth
Circuit has on several occasions cautioned against finding a RICO violation in a "garden
variety fraud," especially when the alleged pattern of racketeering relies solely on
predicate acts of mail or wire fraud. E.g., Al-Abood v. El-Shamari, 217 F.3d 225, 238
(4th Cir.2000) [*21] ("However, we are cautious about basing a RICO claim on
predicate acts of mail and wire fraud because it will be the unusual fraud that does not
enlist the mails and wires in its service at least twice. This caution is designed to preserve
a distinction between ordinary or garden-variety fraud claims better prosecuted under
state law and cases involving a more serious scope of activity." (internal quotations and
citation omitted)); Flip Mortgage Corp. v. McElhone, 841 F.2d 531, 538 (4th Cir. 1988)
("[T]his circuit will not lightly permit ordinary business contract or fraud disputes to be
transformed into federal RICO claims [because] … the heightened civil and criminal
penalties of RICO are reserved for schemes whose scope and persistence set them above
the routine." (internal quotation omitted)). 5

FOOTNOTES

5 A majority of the other circuits have taken the same approach as the Fourth Circuit with
respect to finding patterns of racketeering from predicate acts of mail and wire fraud. See,
e.g., Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 21 (1st Cir.2000) ("We

160
note that courts, including our own, have suggested that RICO claims premised on mail
or wire fraud must be particularly [*22] scrutinized because of the relative ease with
which a plaintiff may mold a RICO pattern from allegations that, upon closer scrutiny, do
not support it."); Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1024-25 (7th Cir.1992)
("Indeed, mail and wire fraud allegations are unique among predicate acts because
multiplicity of such acts may be no indication of the requisite continuity of the underlying
fraudulent activity. Consequently, we do not look favorably on many instances of mail
and wire fraud to form a pattern." (internal quotations and citation omitted)); Terry A.
Lambert Plumbing, Inc. v. Western Sec. Bank, 934 F.2d 976, 981 (8th Cir. 1991)
("Bankers do not become racketeers by acting like bankers. We agree with the statement
by the Fourth Circuit that 'If the pattern requirement has any force whatsoever, it is to
prevent this type of ordinary commercial fraud from being transformed into a federal
RICO claim. If we were to recognize a RICO claim based on the narrow fraud alleged
here, the pattern requirement would be rendered meaningless.'" (quoting Menasco, 886
F.2d at 685); Barrett v. Tallon, 30 F.3d 1296 (10th Cir. 1994) (affirming district court's
dismissal of RICO claims because [*23] "the plaintiffs attempted to dress a garden-
variety state fraud and/or conversion case in RICO clothing.") (internal quotations
omitted)); Robert Suris General Contractor Corp. v. New Metropolitan Federal Sav. &
Loan Ass'n, 873 F.2d 1401, 1404 (11th Cir. 1989) (affirming district court's grant of
summary judgment, where the district court held that, "Plaintiff has taken a simple breach
of contract or garden-variety fraud claim and attempted to boot-strap it into a 'federal
case' by couching the allegations in [RICO] statutory language. This is not the purpose
for which RICO was enacted."); Western Associates Ltd. Partnership v. Market Square
Associates, 344 U.S. App. D.C. 257, 235 F.3d 629, 637 (D.C. Cir. 2001) ("Although a
RICO claim may be based only on predicate acts consisting exclusively of mail and wire
fraud, scrutiny of such claims is necessary, and not inconsistent with the breadth of
RICO. The pattern requirement thus helps to prevent ordinary business disputes from
becoming viable RICO claims, with defendants subject to treble damages, simply
because the parties used the United States mails or a fax machine to transmit contested
financial documents.").

In this case, the parties have focused largely [*24] on the issue of whether Plaintiffs have
sufficiently pled a pattern of racketeering activity. The Plaintiffs contend that the
Defendants operated a wide-spread and extensive scheme to defraud many investors, not
just themselves, and that this type of activity is properly addressed as a civil RICO claim.
Defendants, on the other hand, argue that the Plaintiffs are trying to "dress up" into a
federal RICO claim a "garden-variety" fraud claim that really belongs in state court.

H.J. Inc., supra, sets out the standard to determine whether a pattern of racketeering
activity exists. In H.J. Inc., the Supreme Court rejected the proposition that a pattern may
consist of only two predicate acts of racketeering, but also rejected the proposition that a
pattern could only be found where the perpetrator of the predicate acts was actually
involved in organized crime. 492 U.S. at 236-37. Instead, the Court concluded that "to
prove a pattern of racketeering activity a plaintiff or prosecutor must show that the

161
racketeering predicates are related, and that they amount to or pose a threat of continued
criminal activity." Id. at 239 (emphasis in original).

The Court explained that the relationship prong [*25] is satisfied by showing "criminal
acts that have the same or similar purposes, results, participants, victims, or methods of
commission, or otherwise are interrelated by distinguishing characteristics and are not
isolated events." Id. at 240 (adopting the definition from 18 U.S.C. § 3575 (e)).

The Court explained the continuity prong as follows:


"Continuity" is both a closed- and open-ended concept, referring either to a closed period
of repeated conduct, or to past conduct that by its nature projects into the future with a
threat of repetition. . . . A party alleging a RICO violation may demonstrate continuity
over a closed period by proving a series of related predicates extending over a substantial
period of time. Predicate acts extending over a few weeks or months and threatening no
future criminal conduct do not satisfy this requirement: Congress was concerned in RICO
with long-term criminal conduct. Often a RICO action will be brought before continuity
can be established in this way. In such cases, liability depends on whether the threat of
continuity is demonstrated.
Id. at 241-242. The Court emphasized that the continuity prong is a fact-specific
determination, id. at 242, but [*26] that continuity can be found -where it is shown that
the predicates are a regular way of conducting defendant's ongoing legitimate business,"
id. at 243.

The Fourth Circuit has stated that there are no "mechanical rules" to determine whether a
pattern of racketeering has been shown, but that it is "a matter of criminal dimension and
degree to be decided on a case-by-case basis." Parcoil Corp. v. NOWSCO Well Service,
Ltd., 887 F.2d 502, 504 (4th Cir. 1989). Courts should consider several factors in making
this determination, including "the number and variety of predicate acts and the length of
time over which they were committed, the number of putative victims, the presence of
separate schemes, and the potential for multiple distinct injuries." Brandenburg v. Seidel,
859 F.2d 1179, 1185 (4th Cir.1988), overruled on other grounds by Quackenbush v.
Allstate Ins. Co., 517 U.S. 706, 116 S. Ct. 1712, 135 L. Ed. 2d 1 (1996). Such factors
should be considered along with "all the facts and circumstances of the particular case-
with special attention to the context in which the predicate acts occurred." Id. The Fourth
Circuit has "rejected RICO pattern claims when plaintiffs have failed to show with
specificity the existence of [*27] a distinct threat of continuing racketeering activity."
Professionals, Inc. v. Berry, 1992 U.S. App. LEXIS 6219, 1992 WL 64796, *3 (4th Cir.
1992).

This is a very close case with regard to whether Plaintiffs have adequately shown a
pattern of racketeering activity. Both parties point to a number of cases in support of their
respective positions. However, whether a pattern of racketeering has been shown is a
highly fact-dependent determination. Because none of the cases discussed by the parties
present exactly the same facts as the instant case, they are of only limited value in
resolving this issue. Here, the scheme alleged by the Plaintiffs lasted at least three years.
The predicate acts are all related to each other and to the scheme to defraud. The

162
Plaintiffs allege that the Defendants' normal course of doing business involved making
the same false representations that Defendants' made to Plaintiffs. These factors come
close to meeting the "relationship plus continuity" test required to find a pattern.

However, the pattern alleged by the Plaintiffs is based solely on predicate acts of wire
and mail fraud. Such cases require closer scrutiny before concluding that Plaintiffs have
shown a pattern of racketeering [*28] activity. When considering the alleged scheme at
issue in this case, it does not appear to be the type of social evil meant to be addressed by
RICO. See Al-Abood, supra. While Plaintiffs allege that the scheme was directed at other
victims besides themselves, those allegations are too speculative to support a finding of a
pattern of racketeering activity. The Plaintiffs cannot allege with specificity that
Defendants victimized anyone besides themselves. The Plaintiffs provide no names,
dates, or places with regard to any other victims. See Orteck Intern. Inc. v. TransPacific
Tire & Wheel, Inc., 2006 U.S. Dist. LEXIS 67702, 2006 WL 2572474, *18 (D.Md. 2006)
(holding that no pattern was established despite plaintiffs' allegations that defendants
operated similar fraudulent schemes against other victims, because "Plaintiffs do not
plead the fraud claims involving these other companies with adequate specificity"). The
Plaintiffs indicate in their complaint that they must rely on further discovery to identify
other victims of Defendants' scheme. (Compl. P 84.) This is insufficient to broaden the
scope of the scheme beyond the Plaintiffs. See Menasco, 886 F.2d at 684 (holding that no
pattern of racketeering existed [*29] and that allegations that defendants defrauded
"various individuals" other than plaintiffs were too vague to show threat of continuing
racketeering activity); Friedler v. Cole, 2005 U.S. Dist. LEXIS 2994 , 2005 WL 465089,
* 10 (D.Md. 2005) (holding no pattern of racketeering existed because defendants'
scheme was directed only at the two plaintiffs, and that allegation that there may be other
victims, who may be revealed through the discovery process, were too vague to establish
a pattern).

It is also notable that while Plaintiffs allege lost profits, they do not allege that they
actually took losses on these real estate deals. Rather, it appears that the Plaintiffs' main
complaint is that while they did make profits on their sales of property, they did not make
as much profit as they think they should have. And although Plaintiffs purchased several
properties they otherwise would not have, had they known all the material facts, they do
not allege that the properties were entirely worthless. While this scenario may still be
actionable as fraud, it does not appear to rise to the level of a RICO violation, which
would subject the Defendants to the possibility of treble damages. The Fourth Circuit has
failed to find [*30] a RICO pattern in cases involving much greater losses to the
plaintiffs. See, e.g., GE Investment, supra. Therefore, having considered the factors at
issue and the facts of the case as alleged by the Plaintiffs, I conclude that the Plaintiffs
have failed to allege a pattern of racketeering activity, and that this case does not fall
"sufficiently outside the heartland of fraud cases to warrant RICO treatment." Al-Abood,
217 F.3d at 238.

2. Investment of Proceeds of Racketeering Activity

163
The RICO statute also prohibits anyone who derives income from a pattern of
racketeering activity to use or invest that income in the acquisition, establishment or
operation of any enterprise that is engaged in or affects interstate commerce. 18 U.S.C. §
1962 (a). 6 In order to prove a violation under this subsection, the Plaintiffs must show
that Defendants: (1) derived income from a pattern of racketeering activity; (2) used or
invested the income, directly or indirectly, in the establishment and operation, (3) of an
enterprise, (4) which was engaged in or affected interstate commerce. See United States
v. Vogt, 910 F.2d 1184, 1194 (4th Cir. 1990). The Plaintiffs must also show that they
were harmed [*31] by the alleged violation of this subsection. 18 U.S.C. § 1964 (c).

FOOTNOTES

6 18 U.S.C. § 1962(a) provides that: "It shall be unlawful for any person who has
received any income derived, directly or indirectly, from a pattern of racketeering activity
or through collection of an unlawful debt in which such person has participated as a
principal within the meaning of section 2, title 18, United States Code, to use or invest,
directly or indirectly, any part of such income, or the proceeds of such income, in
acquisition of any interest in, or the establishment or operation of, any enterprise which is
engaged in, or the activities of which affect, interstate or foreign commerce."

Plaintiffs bring a claim under this sub-section against all the individual defendants and
Wintergreen. In contrast to a claim under § 1962 (c), the RICO enterprise may also be a
defendant in a claim under § 1962 (a). Busby, 896 F.2d at 841. However, because the
Plaintiffs have not established a pattern of racketeering activity, as discussed supra, they
cannot state a claim under this subsection. Therefore, this count will be dismissed.

3. Conspiracy to violate RICO

18 U.S.C. § 1962 (d) provides that, "It shall be unlawful for [*32] any person to conspire
to violate any of the provisions of subsection (a), (b), or (c) of this section." Thus, the
elements of a claim under this subsection are: (1) knowledge of the general nature of the
conspiracy; (2) agreement by the defendant: (a) to personally commit a violation of
sections 1962(a)-(c); (b) to aid or abet a violation; or (c) that another co-conspirator
commit a violation; and (3) injury caused by an act in furtherance of the conspiracy. In re
American Honda Motor Co., Inc. Dealerships Relations Litigation, 941 F.Supp. 528, 560
(D.Md. 1996) (citing United States v. Pryba, 900 F.2d 748, 760 (4th Cir.), cert. denied,
498 U.S. 924, 111 S. Ct. 305, 112 L. Ed. 2d 258 (1990). General principles of conspiracy
apply, and proof of an overt act is not required. Salinas v. United States, 522 U.S. 52, 62,
118 S. Ct. 469, 139 L. Ed. 2d 352 et seq. (1997).

Because the Plaintiffs have not stated a claim under one of the other substantive
provisions of RICO, then the conspiracy claim necessarily fails. GE Investment Private
Placement Partners II v. Parker, 247 F.3d 543, 551 n.2 (4th Cir. 2001) (citing Efron v.

164
Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 21 (1st Cir. 2000), cert. denied, 532
U.S. 905, 121 S. Ct. 1228, 149 L. Ed. 2d 138 (2001)). Therefore, this count of the
complaint [*33] will be dismissed.

B. Lanham Act Claims

The purpose of the federal Lanham Act is to prohibit unfair competition and false,
deceptive or misleading use of registered marks in commerce. 15 U.S.C. § 1127. The
Lanham Act creates a civil remedy for certain unfair trade practices in the following
provision:
Any person who, on or in connection with any goods or services, or any container for
goods, uses in commerce any word, term, name, symbol, or device, or any combination
thereof, or any false designation of origin, false or misleading description of fact, or false
or misleading representation of fact, which--
(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation,
connection, or association of such person with another person, or as to the origin,
sponsorship, or approval of his or her goods, services, or commercial activities by another
person, or

(B) in commercial advertising or promotion, misrepresents the nature, characteristics,


qualities, or geographic origin of his or her or another person's goods, services, or
commercial activities,

shall be liable in a civil action by any person who believes that he or she is or is likely to
be damaged by such act.
15 U.S.C. § 1125(a)(1).

The [*34] Plaintiffs claim that they were damaged, in the form of lost profits, by the
false advertising of the Defendants, as described in the summary of facts above. The
Defendants moved to dismiss this claim on the basis that the Plaintiffs lack standing to
sue under the Lanham Act, because they are consumers. Plaintiffs contend that they do,
in fact, have standing under the Act, because their commercial interests were harmed by
the Defendants' activities.

The Fourth Circuit has squarely held that consumers do not have standing to sue under
the Lanham Act. Made in the USA Foundation v. Phillips Foods, Inc., 365 F.3d 278, 281
(4th Cir. 2004). Defendants contend that Plaintiffs were consumers of the Defendants'
product (their real estate services), and as such, cannot have standing to sue under the
Lanham Act. It does not appear that the Fourth Circuit has directly addressed the question
of who does have standing under the Lanham Act. Other circuits agree, however, that
commercial entities have standing to sue direct competitors. See, e.g., Procter & Gamble
Co. v. Amway Corp., 242 F.3d 539, 561-562 (5th Cir.2001); Conte Bros. Automotive,
Inc. v. Quaker State-Slick 50, Inc., 165 F.3d 221, 229 (3d Cir.1998); [*35] Stanfield v.
Osborne Indus., 52 F.3d 867, 873 (10th Cir.1995).

165
Some circuits have held that commercial entities whose commercial interests are harmed
by a violation of the Act have standing to sue, even when not direct competitors. E.g.,
Camel Hair and Cashmere Institute of America, Inc. v. Associated Dry Goods Corp., 799
F.2d 6, 12 (1st Cir.1986) (holding that a trade group had standing to sue a coat
manufacturer, because the trade group had "a strong interest in preserving cashmere's
reputation as a high quality fibre"); Berni v. Int'l Gourmet Restaurants of America, Inc.,
838 F.2d 642, 648 (2d Cir.1988) ("Although a [Lanham Act] plaintiff need not be a direct
competitor … standing to bring a … claim requires the potential for commercial or
competitive injury.").

In Made in the USA, the Fourth Circuit explained that Camel Hair stands for the
proposition that "a Lanham Act plaintiff must be suing to protect a commercial interest."
365 F.3d at 280. The Fourth Circuit has elsewhere noted that the Lanham Act provides "a
private remedy [for a] commercial plaintiff who meets the burden of proving that its
commercial interests have been harmed by a competitor's false advertising." Mylan
Laboratories, Inc. v. Matkari, 7 F.3d 1130, 1139 (4th Cir.1993) [*36] (quoting Sandoz
Pharmaceuticals Corp. v. Richardson-Vicks, Inc., 902 F.2d 222, 230 (3d Cir.1990))
(emphasis added). It is therefore unclear whether the Fourth Circuit would extend a
Lanham Act remedy to a non-consumer, non-competitor Plaintiff whose commercial
interests have been harmed by another entity's unfair trade practices.

It is clear that in this case, the Plaintiffs and Defendants were not direct competitors. and
it is difficult to imagine how the Plaintiffs might have had any relationship with the
Defendants other than as a consumer. The Plaintiffs argue that they entered into a
-business relationship" with Defendants, but do not specify the nature of that relationship.
There is no indication that Plaintiffs and Defendants were partners or otherwise
associated to form a commercial entity. It appears only that the Plaintiffs engaged
Defendants as their real estate brokers, and as such were consumers of Defendants'
services. While Defendants' alleged conduct may have caused a conflict of interest, in
that they represented both Plaintiffs and prospective purchasers in several transactions,
there does not appear to have been any competition between them. Therefore, the
Plaintiffs [*37] do not have standing to sue under the Lanham Act, and this count of the
complaint will be dismissed.

C. State Law Claims

The remainder of the Plaintiffs' claims arise under state law. The Defendants have urged
the court, should it dismiss the Plaintiffs' claims under federal law, not to exercise
supplemental jurisdiction over the remaining state law claims. In deciding whether to
exercise supplemental jurisdiction, "a federal court should consider and weigh in each
case, and at every stage of the litigation, the values of judicial economy, convenience,
fairness, and comity." Carnegie-Mellon University v. Cohill, 484 U.S. 343, 350, 108 S.
Ct. 614, 98 L. Ed. 2d 720 (1988). Having considered those factors, I decline to exercise
supplemental jurisdiction over Plaintiffs' state law claims, and those claims will be
dismissed without prejudice. 28 U.S.C. § 1367(c)(3).

166
IV. CONCLUSION

For the reasons stated herein, the Court will grant the instant Motion (docket no. 13). An
appropriate Order will follow.

The Clerk of the Court is hereby directed to send a certified copy of this Memorandum
Opinion and the accompanying Order to all counsel of record

ENTERED: This 6th Day of November, 2008

/s/ Norman K. Moon

NORMAN K. MOON

UNITED STATES [*38] DISTRICT JUDGE

167