RICO — Corporate Defendant Is Not Distinct from Wholly-Owned Subsidiary Where Latter Is the Alleged Enterprise, Absent Allegations of Functional Separation between the Two

ISystems v. Spark Networks, Ltd., 2012 U.S. App. LEXIS 6197 (5th Cir. Mar. 21, 2012):

Spark Networks, the owner of the "jdate.com" web domain, won the rights to ISystems's "jdate.net" domain name in arbitration. ISystems then brought suit against Spark Networks ... for civil damages under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c). ***

Spark Networks, Incorporated ("Spark, Inc.") is the parent company of Spark Networks, Limited ("Spark Ltd.") (collectively "Spark defendants"). Spark Ltd. provides online personal services through various websites, including "jdate.com," which caters to the Jewish singles community. Spark Ltd.'s predecessor purchased the Internet domain name "jdate.com" on January 8, 1997, and on January 16, 2001, it registered the mark "JDate," namely for "providing a website for facilitating the introduction of individuals."

The plaintiff ISystems developed Julian date computation software, which it marketed through the Internet domain name "jdate.net." It purchased that domain name on May 21, 2001. ISystems allows an organization called the Jewish Dating Network to use a subdomain of its website, "www.jdate.net," to provide nonprofit matchmaking-related services and dating resources.

In 2003 Spark Ltd., through counsel, requested that ISystems transfer to it the domain name "jdate.net," on the ground that it was likely to cause confusion regarding Spark Ltd.'s registered "JDate" mark and "jdate.com" website. ISystems did not comply. On May 19, 2008, Spark Ltd. submitted a complaint to the National Arbitration Forum ("NAF") pursuant to the Uniform Domain Name Dispute Resolution Policy ("UDRP"). *** Pursuant to the arbitrator's order, the Internet Corporation for Assigned Names and Numbers ("ICANN") transferred the "jdate.net" domain name from ISystems to Spark Ltd.

On July 11, 2008, ISystems filed a complaint against the Spark defendants in federal district court. ISystems alleged that the Spark defendants' efforts resulting in the transfer of the "jdate.net" domain name violated ... RICO. ***

ISystems failed *** to allege facts that could establish that the Spark defendants violated RICO, because it did not allege a proper RICO "enterprise." ***

ISystems attempts to connect Spark Inc., the alleged RICO "person," to a distinct RICO "enterprise." ISystems argues that Spark Ltd. — which is Spark Inc.'s wholly owned subsidiary — is a RICO "enterprise" because under Cedric Kushner Promotions, a formal separation such as incorporation is a sufficient distinction between the RICO "enterprise" and the RICO "person." Cedric Kushner Promotions actually involved a scenario reversed from the one here. In that case, an employee (the RICO "person") illegally conducted the affairs of the corporation (the RICO "enterprise"). Here, the corporation is the alleged "person," and Cedric Kushner Promotions expressly declined to address such arrangements. In particular, the Court distinguished a scenario in which "a corporation was the 'person' and the corporation, together with all its employees and agents, were the 'enterprise,'" noting that "[i]t is less natural to speak of a corporation as 'employed by' or 'associated with' this latter oddly constructed entity." This Court has since held in Whelan v. Winchester Production Co. [319 F.3d 225, 229 (5th Cir. 2003)] that in making a distinction between a RICO "person" and a RICO "enterprise," "[i]t is not enough to establish that a defendant corporation through its agents committed the predicate acts in the conduct of its own business. That officers or employees of a corporation, in the course of their employment, associate to commit predicate acts does not establish an association-in-fact enterprise distinct from the corporation."

Here, ISystems pled that Spark Inc. controlled Spark Ltd. As in Whelan, ISystems fails to show that the alleged RICO "enterprise" exists, because it does not allege that Spark Ltd. did anything beyond carrying out the regular business of Spark Inc.

Footnote 26. See Lorenz v. CSX Corp., 1 F.3d 1406, 1412 (3d Cir. 1993) ("[I]t is . . . theoretically possible for a parent corporation to be the defendant and its subsidiary to be the enterprise under section 1962(c). However, the plaintiff must plead facts which, if assumed to be true, would clearly show that the parent corporation played a role in the racketeering activity which is distinct from the activities of its subsidiary. A RICO claim under section 1962(c) is not stated where the subsidiary merely acts on behalf of, or to the benefit of, its parent."); Brown v. Coleman Invs., Inc., 993 F. Supp. 416, 428 (M.D. La. 1998) ("In order to properly plead an enterprise, Brown must plead facts showing how the parent corporation . . . played a role in the racketeering activity that is distinct from the acts of the subsidiary . . . .").

In fact, it expressly conflates the two in describing their conduct. The First Amended Complaint states that "[a]ctions taken by Spark Limited complained of herein are . . . alleged to have been taken by Spark Inc., through its control of Spark LTD." And in many cases the First Amended Complaint fails to distinguish the entities at all, as it refers to them collectively as "Spark Networks," "Sparks," or "defendants." ISystems cannot avoid the distinctiveness requirement "'by alleging a RICO enterprise that consists merely of a corporation defendant associated with its own employees or agents carrying on the regular affairs of the defendants.'" Not every wholly owned and controlled subsidiary is an agent of its parent,

Footnote 28. See Nat'l Carbide Corp. v. Comm'r, 336 U.S. 422, 429 (1949) (holding, in an income-tax context, that a wholly owned subsidiary that is completely controlled by its parent is not necessarily the parent's agent), cited in Bramblett v. Comm'r, 960 F.2d 526, 532 (5th Cir. 1992).

but ISystems's failure to plead any functional separation between the two dooms its RICO claim. ISystems failed to allege a sufficiently distinct RICO "enterprise" and therefore an actionable RICO claim.

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