RICO Enterprise Not Stated by Rimless Hub-and-Spoke Configuration Where Members of the Alleged Association-in-Fact Enterprise Have No Relationships with One Another

From Mega Concrete, Inc. v. Smith, 2011 U.S. Dist. LEXIS 30789 (E.D. Pa. Mar. 23, 2011):

Plaintiffs Mega Concrete, Inc., Mega Sitework, LLC, and Capponi Enterprises, Inc., filed suit against two former employees, Michael Smith and Kimberly Lawson, as well as six individual defendants and six corporate defendants, who they allege conspired and collaborated with the employees to steal payments, resources, manpower, and business opportunities that rightfully belonged to the plaintiffs. The amended complaint brings claims for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) and (d)***.

The plaintiffs collectively conduct business under the trade name "Mega Construction" ("Mega"). Mega is a Pennsylvania construction company that typically works as a subcontractor on commercial projects throughout the Delaware Valley Region.***

In August 2004, Mega hired Michael Smith as an estimator/project manager and in January 2006 he was promoted to Chief Operating Officer. ***

According to the complaint, in 2005, Smith began implementing a scheme to divert revenue and business opportunities from Mega. ***

To state a claim for a violation of § 1962(c), a plaintiff must allege that each defendant: (1) conducted or participated in the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. ***

1. Existence of An Enterprise

The plaintiffs assert that all of the defendants formed an association-in-fact enterprise, with Smith at the helm. Throughout the life of the enterprise, Smith is alleged to have recruited different defendants to participate in the enterprise's various schemes, always with Smith coordinating and directing the activities of the other defendants.***

An association-in-fact enterprise must have a "structure," meaning it must have (1) a common purpose, (2) relationships among those associated with the enterprise, and (3) longevity sufficient to permit these associates to pursue the enterprise's purpose. Boyle v. U.S., 129 S.Ct. 2237, 2244 (2009). At the pleading stage, a RICO claim must plead facts plausibly implying the existence of an enterprise with these three structural attributes. In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 369-70 (3d Cir. 2010). Cases involving RICO claims are often highly complex and lengthy, and carry the possibility of both attorney's fees and treble damages. 18 U.S.C. § 1964(c). It is for this reason that the United States Court of Appeals for the Third Circuit has emphasized the importance of carefully examining the allegations of the complaint at the pleading stage, lest the RICO statute become "an open gateway to the imposition of potentially massive costs on numerous defendants, regardless of whether there is even a hint of the collaboration necessary to trigger liability." In re Ins. Brokerage, 618 F.3d at 370.

The United States Supreme Court recently emphasized that the concept of an association-in-fact is an expansive one and refused to require any particular organizational arrangement. Boyle, 129 S.Ct. at 2244-45. The Supreme Court stated that members of the association-in-fact "need not have a hierarchical structure or a 'chain of command'; decisions may be made on an ad hoc basis and by any number of methods," and while the "group must function as a continuing unit and remain in existence long enough to pursue a course of conduct, nothing in RICO exempts an enterprise whose associates engage in spurts of activity punctuated by periods of quiescence." Id. at 2245.

After Boyle, the Third Circuit decided In re Insurance Brokerage, in which it upheld the dismissal of certain RICO claims for failure to adequately allege the existence of an "enterprise." The In re Insurance Brokerage complaint alleged the existence of several hub-and-spokes "broker-centered" enterprises, comprised of each defendant-broker at the center or "hub" of the enterprise, and individual insurer-partners as the "spokes." The plaintiffs were insurance purchasers who alleged that the defendants had entered into an unlawful scheme to allocate purchasers among particular groups of insurers who were insulated from competition and that, in return, the insurers paid the brokers hidden commissions. The district court found that because the plaintiffs had failed to plead any collaboration among the insurer-partners, the alleged enterprise lacked a "unifying rim" connecting the various spokes. Id. at 374. As a result, the district court held that the plaintiffs had not pled broker-centered enterprises encompassing both the broker-hub and all of the insurer-spokes. Id.

The Third Circuit agreed, finding that the plaintiffs' factual allegations did not plausibly imply anything more than parallel conduct by the insurers and that nothing supported the inference that these insurers had associated together for the "common purpose of engaging in a course of conduct." Id. The "relationship" prong of the Boyle analysis for association-in-fact enterprises could not be met where the factual allegations of the complaint failed to show how several of the alleged members of the enterprise were associated with one another. The allegations failed the basic requirement that "the components function as a unit, that they be "put together to form a whole." Id. (quoting Boyle, 129 S.Ct. at 2244) (quotations omitted).

As in In re Insurance Brokerage, the plaintiffs here allege the existence of a hub-and-spokes type organization, with Smith, Lawson and Paramount acting as the "hub," and the moving defendants as the "spokes." The complaint paints a picture of a single set of common defendants perpetrating various independent frauds, each with a different set of co-defendants who have no relationship to one another. The plaintiffs do not allege that any of the moving defendants associated with each other in any way, let alone for the common purpose of engaging in a course of conduct. There is nothing in either the amended complaint or the RICO Case Statement that ties together the various defendants into a single entity. In short, the plaintiffs have failed to plead facts plausibly implying the existence of relationships between and among the members of the alleged enterprise, or that the various members were joined in a common purpose, and therefore has not plead the existence of an enterprise for the purposes of a RICO claim.

In seeking to distinguish the Smith-centered enterprise from other rimless hub-and-spokes organizations, the plaintiffs point to the allegations regarding the "Marsh-centered" enterprise in In re Insurance Brokerage, which the Third Circuit found did plausibly imply the existence of an enterprise. The plaintiffs in In re Insurance Brokerage alleged that Marsh, a broker, prepared "broking plans" that governed the placement of insurance contracts. Each plan assigned the business to a specific insurer and included instructions as to which alternative insurer would provide a sham "competitive" quote. The Court found that the allegations in the complaint revealed "an expectation of reciprocity and cooperation among insurers," "relationships among the insurers," and that the various insurers in the enterprise had "joined together in pursuit of the aforementioned common purpose." Id. at 376.***

By contrast, the amended complaint here does not allege that the moving defendants knew about or cooperated with one another in the way that the insurers in the Marsh-centered enterprise did. The Court is not saying that each member of the association-in-fact must engage in direct communication with each and every other member. The complaint must, however, set forth facts that plausibly imply the existence of some relationship among the various members of the enterprise. Although the term "relationship" is broad, it cannot be satisfied where the members were acting entirely independently. See Gregory P. Joseph, Civil RICO: A Definitive Guide 93 (3d ed. 2010).

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