RICO — Rimless Hub-and-Spoke Configuration Does Not State an Enterprise — 9(b) Applies Only to Predicate Acts Sounding in Fraud
Target Corp. v. LCH Pavement Consultants, LLC, 2013 U.S. Dist. LEXIS 80306 (D. Minn. June 7, 2013):
Target sued its paving consultant, LCH Pavement Consultants, LLC ("LCH"); three employees of LCH, Leslie Bailey ("Bailey"), Lois Wade ("Wade"), and Keith Heutzenroeder ("Heutzenroeder"); four paving companies, United Paving Company ("United"), American Pavement Solutions Inc. ("American"), Asphalt Maintenance Inc. ("Asphalt"), and Rose Paving Company ("Rose Paving"); and the presidents or CEOs of those four companies, Sabas Trujillo ("Trujillo"), Timothy Helstad ("Helstad"), James Stinson ("Stinson"), and Alan Rose ("Rose"). In its Second Amended Complaint, Target alleged five counts: a civil action for a violation of the Racketeer Influenced and Corrupt Organization Act ("RICO") against all Defendants (Count I); a breach of contract claim against LCH (Count II); a breach of contract claim against United, American, Asphalt, and Rose Paving (Count III); a claim of fraud against all Defendants (Count IV); and a claim for a violation of § 1 of the Sherman Act against all Defendants (Count V). Rose Paving and Rose moved for judgment on the pleadings, and the remaining three Defendant paving companies and their presidents moved to dismiss the RICO, Sherman Act, and fraud claims. Before the hearing, Rose Paving and Rose were dismissed pursuant to a stipulation, so the Court will deny Rose Paving and Rose's motion without addressing it.
Target has numerous stores across the country, and in 2009, Target hired LCH to act as its paving consultant for the majority of its stores. As Target's paving consultant, LCH had the responsibility to manage Target's parking lot repair and maintenance needs, which included identifying the quantity and type of work needed at the various stores, soliciting bids from paving contractors, and overseeing the paving and maintenance work as a construction manager.
In its Second Amended Complaint, Target alleges that LCH and the Defendant paving contractors and their presidents or CEOs — United and Trujillo, American and Helstad, Asphalt and Stinson, and Rose Paving and Rose (hereinafter collectively referred to as "the Defendant paving contractors") — entered into a two-part scheme to defraud Target. The first part of the scheme involved bid rigging. Target alleges that paving projects were allocated among the Defendant paving contractors on a territorial basis, and to ensure that a Defendant paving contractor received projects in its allotted territory, other paving contractors were not invited to submit or discouraged from submitting bids, some paving contractors submitted high bids that were uncompetitive, and other bids were falsely inflated. Target also alleges that no bids were sent directly to Target; rather, LCH intercepted the bids and created a spreadsheet for Target reporting the results of the bidding process, and that spreadsheet was materially false. Target claims that the bid-rigging scheme ended in June 2011, when Target moved to archetype pricing. The second part of the scheme involved nonperformance of work, and this portion of the scheme occurred during the bid-rigging portion and extended past June 2011. For this portion of the scheme, Target alleges that the Defendant paving contractors performed less work than they had contracted to do but billed Target as if they had completed all the work. Target also asserts that the Defendant paving contractors falsified documents to make it appear that LCH was present on the project sites and acted as a construction manager when in fact LCH was not present. Target claims that it discovered Defendants' scheme and terminated its relationship with Defendants in May 2012.
Footnote 1. Some Defendants incorrectly assert that all RICO elements must be pleaded with particularity under Federal Rule of Civil Procedure 9(b). But the heightened pleading standard under Rule 9(b) only applies to the racketeering activity element when the alleged racketeering activity is fraud. See Crest, 660 F.3d at 353, 358 (noting that plaintiff failed to meet the heightened pleading standards of Rule 9(b) in alleging mail and wire fraud); Abels v. Farmers Commodities Corp., 259 F.3d 910, 919 (8th Cir. 2001) (reasoning that the heightened pleading standard under Rule 9(b) applies to RICO cases "because the [racketeering] allegations are allegations of fraud, not because particularized allegations are needed in order to determine whether a pattern exists. If the racketeering activity alleged were bribery, for example, Rule 9(b) would not apply").
Because the enterprise pleading deficiencies are dispositive of the present motion, the Court turns directly to that element.
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). In the Second Amended Complaint, Target alleges an association-in-fact enterprise comprising all Defendants. As explained below, Target fails to sufficiently allege an all-Defendant enterprise, but not for the reason most urged by the Defendant paving contractors. In their papers, the Defendant paving contractors argue that Target describes their actions only in terms of them engaging in predicate acts of racketeering activity-submitting bids and invoices and performing work-and that if those predicate acts are removed, the enterprise structure evaporates. They urge that a RICO association-in-fact enterprise must have a structure that is independent of the predicate acts.
But the Supreme Court made plain in 2009 that for an association-in-fact enterprise, no additional structural elements are required beyond the enterprise being "a continuing unit that functions with a common purpose." Boyle v. United States, 556 U.S. 938, 948 (2009). The sole common purpose might be commission of the predicate acts: "a group that does nothing but engage in extortion through old-fashioned, unsophisticated, and brutal means may fall squarely within the statute's reach." Id.
In Boyle, the Supreme Court addressed what structural features are necessary for an association-in-fact enterprise: "a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purpose." 556 U.S. at 945; see also Crest, 660 F.3d at 354 (quoting Boyle). Although the Eighth Circuit has not addressed the issue, the Third Circuit and several district courts have reasoned that a rimless hub-and-spokes organization does not qualify as an association-in-fact enterprise. See In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 374 (3d Cir. 2010) (noting that allegations of a rimless hub-and-spokes organization "do not plausibly imply anything more than parallel conduct by the [spokes], [and] they cannot support the inference that the [spokes] 'associated together for a common purpose of engaging in a course of conduct'"); McDonough v. First Am. Title Ins. Co., No. 10-CV-106, 2011 WL 285685, at *5-7 (D.N.H. Jan. 28, 2011) (discussing cases where rimless "hub-and-spoke structures have been held not to qualify as RICO 'enterprises'"); Conte v. Newsday, Inc., 703 F. Supp. 2d 126, 135 (E.D.N.Y. 2010) ("These 'hub and spokes' allegations are insufficient to support a conclusion that the various defendants were associated with one another for a common purpose."); see Negrete v. Allianz Life Ins. Co. of N. Am., Nos. CV 05-6838, 05-8908, 2011 WL 4852314, at *6 (C.D. Cal. Oct. 13, 2011) (holding that allegations that an entity acted as an intermediary for communications among the spokes supplied the "'unifying rim' of relationships" between the spokes); see also Gregory P. Joseph, Civil RICO: A Definitive Guide 106 (3d ed. 2010) ("[T]he rimless hub-and-spoke configuration would not satisfy the 'relationships' prong of Boyle's structure structure."). This is because without a "rim," there are no allegations of concerted actions among the spokes, only allegations of parallel conduct. In re Ins. Brokerage, 618 F.2d at 374. And an association-in-fact enterprise requires more than parallel conduct; it requires relationships among those associated with the enterprise, and it requires those associated with the enterprise to "function as a unit, that they be 'put together to form a whole.'" Id. (quoting Boyle, 556 U.S. at 945).
Footnote 3 Pre-Boyle cases also reasoned that a rimless hub-and-spokes organization did not constitute a RICO enterprise. See Cedar Swamp Holdings, Inc. v. Zaman, 487 F. Supp. 2d 444, 451 (S.D.N.Y. 2007) ("[A]n allegation that the perpetrator of a series of independent fraudulent transactions used a different accomplice to aid each transaction is insufficient to justify a conclusion that the perpetrator and the accomplices together constituted an ongoing organization or functioned as a continuing unit."); In re Pharm. Indus. Average Wholesale Price Litig., 263 F. Supp. 2d 172, 183 (D. Mass. 2003) ("Most courts have found that complaints alleging hub-and-spoke enterprises fail to satisfy the RICO enterprise requirement.").
In the Second Amended Complaint, Target alleges an association-in-fact enterprise comprised of all Defendants. As alleged, that association-in-fact enterprise is a hub-and-spokes organization, where the hub is LCH and the spokes are the Defendant paving contractors. Target has alleged sufficient facts to show relationships between the individual Defendant paving contractors and LCH. But the complaint alleges no rim: the Second Amended Complaint contains no nonconclusory factual allegations to support a reasonable inference of relationships among the Defendant paving contractors. For the bid-rigging portion of the scheme, Target alleges Defendants ensured that the Defendant paving contractors were given a project in their allocated territory by not asking local paving contractors to bid, submitting high bids, and altering bids. But these allegations do not show relationships among the Defendant paving contractors because LCH was the entity that is alleged to have solicited bids, intercepted bids, and provided materially false summary spreadsheets of the bids to Target. Because LCH was the entity that solicited bids and created the summary spreadsheet, two factual allegations to which Target points fail to show relationships among the Defendant paving contractors: the allegation (1) that, with respect to two stores, United was allocated work even though Rose Paving was the low bidder and the bid summary spreadsheet was falsified to make Rose Paving's bid appear higher, and (2) that with respect to three stores, only Asphalt, American, and Rose Paving bid. Moreover, the complaint's allegation that the Defendant paving contractors could trust LCH to allocate work to them at inflated prices and its allegation that in June 2011 "some or all of the Defendants" met in advance of the Target sourcing event (Second Am. Compl. ¶ 13) do not provide the Court with sufficient factual matter to infer relationships among the Defendant paving contractors.
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