Indirect Injury from Patent-Holder’s Fraud on Patent Office, Rendering Contract to Sell Defectively Patented Product Less Valuable, ≠ RICO Injury; Fraud on Patent Office ≠ Predicate Act

From Jersey Asparagus Farms, Inc. v. Rutgers Univ., 2011 U.S. Dist. LEXIS 58053 (D.N.J. May 31, 2011):

This matter arises out of a now-terminated, exclusive license agreement through which Plaintiff Jersey Asparagus Farms, Inc. ("JAFI") was authorized by Defendant Rutgers University ("Rutgers") to sell the latter's patented varieties of asparagus.***

While JAFI served as Rutgers' exclusive distributor for over twenty years, their relationship soured once JAFI allegedly discovered that some of the patents underlying the parties' license agreement had expired or were otherwise invalid. Generally, Plaintiff brings antitrust monopolization, RICO, and DJA claims against Rutgers for its actions in allegedly fraudulently obtaining the patents and entering into the exclusive license agreement premised on those patents, as well as for seeking return of plants provided to JAFI and the payment of royalties under the license agreement. *** Plaintiff's Second Amended Complaint alleges that the exclusive license agreement authorized Plaintiff to cross-breed Rutgers patented asparagus parent plants, harvest all-male hybrid seed from those plants, and sell that seed to farmers with a license restriction prohibiting both Plaintiff and the purchasing farmers from asexually reproducing new hybrid plants by dividing the crowns of the plants grown from the purchased seed. ***

In JAFI's view, but for the fraudulently-obtained patents, Rutgers could not have legally retained control over the market beyond the first generation of planted hybrid seed.***

6. RICO Allegations Plaintiff, generally, alleges that Rutgers, the former-employee inventors of Rutgers' patents, and owners of farms that grew Rutgers' plants on Rutgers' behalf, comprised a "patent enterprise." See id. at ¶¶ 130-153. JAFI alleges that the enterprise obtained the patents though the mails and/or wire, and that the predicate RICO acts are the same patent-application misrepresentations alleged in connection with Plaintiff's antitrust claim. Id. at ¶¶ 154-165. With respect to the injuries suffered, Plaintiff alleges that it paid royalties "that it would not have had to pay but for the patents," that the amount of royalties was too high, and that Rutgers' assertions that JAFI may no longer sell the plants has "created doubt as to the right of JAFI to sell asexually reproduced plants or seed from such plants." Id. at ¶ 187.***

As an initial matter, Plaintiff conceded at oral argument that this claim, as plead in the SAC, is defective because, as held by the Federal Circuit, "inequitable conduct before the PTO cannot qualify as an act of mail fraud or wire fraud for purposes of the predicate act requirement." University of West Virginia Board of Trustees v. VanVoorhies, 278 F.3d 1288, 1303 (Fed. Cir. 2002) (quoting Semiconductor Energy Laboratory Co. v. Samsung Electronics Co., 204 F.3d 1368, 1380 (Fed. Cir. 2000)). Accordingly, the SAC fails to properly allege that Defendant utilized the mails in connection with the alleged scheme to defraud the patent office. After conceding this deficiency, which candor the Court appreciates, Plaintiff requested leave to amend to cure this deficiency. For the reasons explained herein, Plaintiff's request is denied because Plaintiff's inability to plead RICO standing would render amendment of its RICO claim futile.

Footnote. 23. The Court is aware of the alternative use of mails allegations made in connection with the state RICO claim. See e.g., SAC, ¶ 181 (stating that exclusive license agreements were "negotiated and consummated in writings that were transmitted either by mail or electronically."). However, as explained infra, the state RICO claim fails for lack of standing.

Defendant correctly argues that Plaintiff has not alleged (and can not sufficiently allege) RICO standing because Plaintiff does not assert the type of financial loss redressable by RICO. "Apart from the Article III constitutional and prudential standing requirements . . ., plaintiffs seeking recovery under RICO must satisfy additional standing criterion set forth in section 1964(c) of the statute." Maio v. Aetna, Inc., 221 F.3d 472, 482 (3d Cir. 2000). According to 18 U.S.C. § 1964(c), a RICO plaintiff must show: "(1) that the plaintiff suffered an injury to business or property; and (2) that the plaintiff's injury was proximately caused by the defendant's violation of 18 U.S.C. § 1962." Id. at 483.

Defendant argues, first, that the Plaintiff fails to allege standing because its injuries are to an intangible property interest, and such injuries are insufficient to allege an injury-in-fact. Defendant cites to Maio in support of its argument. Maio held that the reduction in value of an intangible property interest created by contract, without more, does not constitute RICO injury. 221 F.3d at 490. See also Anderson v. Ayling, 396 F.3d 265, 271 (3d Cir. 2005). To show RICO harm when contractual rights are at stake, a plaintiff must allege that the defendant failed to perform under the parties' agreement such as by providing an inferior product or service. Id.

While JAFI alleges that Rutgers misrepresented that it had valid patents to support the large fees and royalties it charged, JAFI does not allege that Rutgers provided inferior parent plants or support services in connection with the exclusive licensing arrangement. As stated by the Third Circuit, "[c]ase law does indicate that a plaintiff who is fraudulently induced to enter into a transaction does not suffer injury within the meaning of § 1964(c) until the defendant fails to perform — that is, until it becomes clear that the plaintiff will not get the benefit of the bargain." Id. (citation omitted). Here, JAFI received the benefit of its bargain though, allegedly, at an inflated price. This is not the sort of harm RICO redresses. Accordingly, Defendant's motion to dismiss is granted with respect to Plaintiff's federal RICO claim.

Footnote 24. [Indirect Injury Unredressable under RICO.] Moreover, to the extent Plaintiff's injury allegations are interpreted to be consistent with those alleged in McCullough [v. Zimmer, Inc., 382 Fed.Appx. 225, 228 n.2 (3d Cir. 2010)], discussed supra in connection with my antitrust standing analysis, that case confirms that dismissal of Plaintiff's RICO claim is appropriate. The court reasoned:

The McCulloughs' lack of standing to bring an antitrust action likewise prevents them from pursuing their RICO claims. The Supreme Court has extended much of the Associated General analysis for antitrust standing to RICO cases. A plaintiff lacks standing to sue under RICO where, as here, he suffers injury that is only indirectly related to a defendant's alleged misconduct. Accordingly, even if the McCulloughs had properly alleged the essential elements of a RICO claim, they would lack standing to sue under RICO for the same reasons they lack standing to sue under the [antitrust laws].

382 Fed.Appx. at 231 n.7 (internal citations omitted).

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