RICO — Cover-Up Conspiracy Insufficiently Related to Original Conspiracy to Be Part of Same Pattern, Cannot Establish Open-Ended Continuity — Attorney Fees in Bringing RICO Claim ≠ RICO Injury — Factually Pleading Conspiracy (8(a), Not 9(b))

The Knit With v. Knitting Fever, Inc., 2015 U.S. App. LEXIS 15575 (3d Cir. Sept. 2, 2015):

The Knit With ("TKW") appeals several orders the district court entered in TKW's suit alleging various claims under state and federal law. For the reasons that follow, we will affirm the district court.

I.

Because we write only for the parties who are familiar with the very involved procedural history of this matter, we need not discuss it in detail here.1 Following numerous decisions and orders of the district court, the only claims remaining are counterclaims that Knitting Fever, Inc., ("KFI") brought for defamation and tortious interference with existing and prospective contracts. Thereafter, the parties filed cross motions for summary judgment. Although KFI sought summary judgment on its defamation claim only, the district court also addressed KFI's tortious interference claim. In a Memorandum and Opinion, dated August 8, 2012, the district court denied both parties' motions. The Knit With v. Knitting Fever, Inc., 2012 WL 3235108 (E.D. Pa. Aug. 8, 2012).

1   The facts of this case have been recited in several of the district court's opinions. See The Knit With v. Knitting Fever, Inc., 2008 WL 5381349, at *1-6 (E.D. Pa. Dec. 18, 2008); The Knit With v. Eisaku Noro, 2008 WL 5273582, at *1-3 (E.D. Pa. Dec. 19, 2008); The Knit With v. Knitting Fever, Inc., 2011 WL 891871 at, *1-2 (E.D. Pa. Mar. 10, 2011).

As of August 8, 2012, KFI's counterclaims against [*3]  TKW were outstanding. Nonetheless, on August 9, 2012, TKW filed a Notice of Appeal seeking review of all of the district court's orders dismissing its claims against the various defendants or granting summary judgment to the defendants on its various claims. Clearly, as of August 9, 2012, the orders appealed from did not dismiss all claims as to all parties and were not certified under Rule 54(b). However, on November 29, 2012, the district court entered an order accepting the parties' stipulated dismissal with prejudice of KFI's counterclaims against TKW pursuant to Rule 41(a)(1)(A)(ii).2 Thus, this court does have jurisdiction over TKW's appeal.

2   We cannot help but notice that after the parties executed the stipulated withdrawal of KFI's counterclaims, KFI's counsel wrote to the district court informing it of the stipulated withdrawal and further informing the district court that it was requesting leave to file a motion pursuant to 28 U.S.C. § 1927, seeking to impose excessive costs, expenses and attorneys' fees against TKW. In response, the district court wrote the following in a letter to KFI's counsel: "Continuing the litigation of this case by filing yet another motion is a subject to which, I hope, you would give serious consideration [*4]  before incurring even more fees in what many times can become a rather lengthy proceeding itself."

The court's apparent frustration with counsel is understandable.

II. DISCUSSION

TKW makes a number of arguments in support of its appeal. Each is discussed separately below.

***

B. The district court erred in holding that TKW did not have RICO standing. [Note:  These headings represent the appellant’s contentions, not the Court’s conclusion]

It is well-settled that the plaintiff cannot prevail under section 1962(c) absent injury in his business or property that is caused by the conduct constituting the RICO violation. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985).

The Supreme Court has declared that Congress's limitation of recovery to business or property injury "retains restrictive significance. It would for example exclude personal injuries suffered.'" Genty v. Resolution Trust Corp., 937 F.2d 899, 918 (3d Cir. 1991) (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979)). Moreover, injury to "valuable intangible property" is normally not the type of property injury that is capable of incurring a concrete financial loss. Anderson v. Ayling, 396 F.3d 265, 271 (3d Cir. 2005). Therefore, to prove standing under 18 U.S.C. § 1964(c), a plaintiff must proffer "proof of a concrete financial loss and not mere injury to a valuable intangible property interest." Maio v. Aetna, Inc., 221 F.3d 472, 483 (3d Cir. 2000) (citation omitted).

Moreover, "[t]here must be a direct relationship between the injury asserted and the injurious conduct alleged," and only where proximate cause exists does a plaintiff have standing to raise a RICO claim. Holmes v. SPIC, 503 U.S. 258, 269 (1992). Thus, a RICO plaintiff who complains of "harm flowing directly from the misfortunes visited upon a third person by the [*12]  defendant's acts" may not recover under §1964(c). Id. at 268-69.

TKW claimed five types of RICO injury as a result of the alleged conspiracy to distribute allegedly mislabeled yarns: (1) attorneys' fees; (2) the cost of investigating the allegations of mislabeling and recalling the yarns TKW believed to be mislabeled; (3) the cost of replacement goods; (4) harm to goodwill and reputation; and (5) the cost of and lost profits from the yarns at issue." 2012 WL 2938992, at *4. The district court comprehensively and exhaustively explained why TKW's enumerated damages either "do not constitute concrete financial loss to business or property or were not proximately caused by the Defendants' predicate acts in furtherance of the scheme."6 Id. at *5-14. We agree with the district court's reasoning and analysis and we will affirm the court's holding as to standing substantially for the reasons stated in the district court's opinion.7

6   The defendants conceded the fraudulent scheme solely for the purpose of addressing whether TKW would have standing under RICO to seek redress for such a scheme. 2012 WL 2938992, at *5 n.3.

7   The district court expressly noted the absence of any argument from TKW on the subject of RICO injury. Id. at * 5 n.3. Given TKW's failure to make any substantive arguments [*13]  in support of its claimed injuries, we are hard-pressed to understand how TKW can now complain that the district court erred in holding that it did not have RICO standing. Nonetheless, as we stated above, the district court fully and exhaustively explained why TKW did not have RICO standing.

Ironically, the largest injury claimed by TKW are attorneys' fees in the amount of over $2 million billed by James Casale, TKW's principal and its lawyer. The district court did not address the fact that TKW is effectively a pro se plaintiff, but it rejected the idea that attorneys' fees were injury sufficient to confer RICO standing. It wrote: "[T]he Court finds that such damages in and of themselves are insufficient to confer RICO standing. Otherwise, [TKW], in the absence of any other injury caused by Defendants' purported conspiracy, could obtain standing simply by initiating a lawsuit. Accordingly, these fees fail to provide the requisite concrete financial loss resulting from the alleged RICO violations from which this Court can find statutory standing." Id. at *5. We agree. In fact TKW's attempt to morph pro se attorney's fees into a RICO injury is as novel as it is frivolous.

C. The district court erred [*14]  in dismissing the RICO conspiracy claims.

TKW contends that the district court erred in dismissing, its conspiracy claims pursuant to 18 U.S.C. § 1962(d) against Debbie Bliss, Diane Elalouf, Jeffery Denecke, Designer Yarns and Filatura pursuant to Fed.R.Civ.P 12(b)(6) and (c).8

8   TKW refers to these defendants as the "Supply Chain Conspirators."

18 U.S.C. § 1962(d) makes it unlawful for any person to conspire to violate subsections (a), (b), or (c) of RICO. Because there is no requirement of some overt or specific act, the RICO conspiracy provision is even more comprehensive than the general conspiracy offense. Salinas v. United States, 522 U.S. 52, 63 (1997). Thus, "a defendant may be held liable for conspiracy to violate section 1962(c) if he knowingly agrees to facilitate a scheme which includes the operation or management of a RICO enterprise." Smith v. Berg, 247 F.3d 532, 538 (3d Cir. 2001). Nonetheless, "[u]nderlying a § 1962(d) claim is the requirement that plaintiff must show that defendants agreed to the commission of a 'pattern of racketeering.'" Banks v. Wolk, 918 F.2d 418, 421 (3d Cir. 1990). Those who innocently provide services will not incur § 1962(d) liability; rather, "liability will arise only from services which were purposefully and knowingly directed at facilitating a criminal pattern of racketeering activity." Smith, 247 F.3d at 538 n.11.

Thus, pleading a § 1962(d) conspiracy requires a plaintiff to "set forth allegations that address the period of the conspiracy, the [*15]  object of the conspiracy, and the certain actions of the alleged conspirators taken to achieve that purpose." Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1166 (3d Cir. 1989), abrogated on other grounds by Beck v. Prupis, 529 U.S. 494 (2000). The supporting factual allegations "must be sufficient to describe the general composition of the conspiracy, some or all of its broad objectives, and the defendant's general role in that conspiracy." Rose v. Bartle, 871 F.2d 331, 366 (3d Cir. 1989) (citation and quotation marks omitted). It is not enough for a complaint to simply make "conclusory allegations of concerted action but [be] devoid of facts actually reflecting joint action."9 Abbot v. Latshaw, 164 F.3d 141, 148 (3d Cir. (1998). Moreover, "mere inferences from the complaint are inadequate to establish the necessary factual basis." Rose, 871 F.2d at 336. "Plaintiff must allege facts to show that each Defendant objectively manifested an agreement to participate, directly or indirectly, in the affairs of a RICO enterprise through the commission of two or more predicate acts." Smith v. Jones, Gregg, Creehan & Gerace, LLP, 2008 WL 5129916, at *7 (W.D. Pa. Dec 5, 2008). "Bare allegations of conspiracy described in general terms may be dismissed." Id. As we explain below, the allegations here fail to satisfy this standard as to any of the defendants.

9   This analysis need not rise to the level of particularity required by Fed.R.Civ.P. 9(b) for allegations of fraud; rather it is governed by the more liberal pleading [*16]  standards of Rule 8. Rose, 871 F.2d at 366.

(i). Debbie Bliss.

The district court dismissed TKW's complaint against Bliss in its entirety. The Knit With v. Knitting Fever, Inc., 2010 WL 4909929, at 1 (E.D. Pa. Dec. 1, 2010). In this portion of its appeal, TKW contends that the district court erred in so doing.10

10   Under Rule 12(b)(6), a defendant bears the burden of demonstrating that the plaintiff has not stated a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6); see also Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005). This court conducts a de novo review of a Rule 12(b)(6) dismissal of a compliant. See Phillips v. County of Allegheny, 515 F.3d 224, 230 (3d Cir. 2008). The Federal Rules of Civil Procedure require that a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). To avoid dismissal, a complaint must set forth facts that raise a plausible inference that the defendant inflicted a legally cognizable harm upon the plaintiff. See Ashcroft v. Iqbal, 556 U.S.662, (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007). Conclusory allegations of liability do not suffice. See Iqbal, 556 U.S. at 679.

A court confronted with a Rule 12(b)(6) motion must accept the truth of all factual allegations in the complaint and must draw all reasonable inferences in favor of the nonmovant. Gross v. German Found. Indus. Initiative, 549 F.3d 605, 610 (3d Cir. 2008). Legal conclusions receive no such deference, and the court is "not bound to accept as true a legal conclusion couched as a factual allegation." Twombly, 550 U.S. at 555. Although a plaintiff may use legal conclusions to provide the structure for the [*17]  complaint, the pleading's factual content must independently "permit the court to infer more than the mere possibility of misconduct." Iqbal, 556 U.S. at 679.

TKW's complaint alleges the existence of a conspiracy between KFI, Sion Elalouf, and Designer Yarns, as follows:

   Upon information and belief -- to effect "damage control" and to continue "pulling the wool over" the trade concerning the cashmere content [of the yarns at issue] -- Mr. Elalouf and Designer Yarns agreed, after May 26, 2006 and certainly before June 20, to claim that the [yarns at issue], since 2001, always contained the requisite quantity of cashmere (or, conversely, to cover-up the absence of any cashmere content in the Debbie Bliss Cashmerino since 2001).

Compl. ¶ 60 (emphasis in original). Debbie Bliss's alleged participation in this conspiracy is described in only three paragraphs of, and one exhibit to, the Complaint. See Compl. ¶¶11, 72, 129; Compl. Ex. 16.

Paragraph 11 describes Bliss's background and how she came to design yarns and ultimately license her brand of yarns to defendant Designer Yarns. The paragraph ends with the conclusory allegation that "[a]t all times relevant to this Complaint, and certainly since September 2006, Mrs. [*18]  Bliss has participated in and facilitated the racketeering scheme which has injured Plaintiffs' business." However, that is simply a legal conclusion which is entitled to no deference.

Paragraphs 72 and 129, together with Exhibit 16, assert that Bliss evidenced her participation in the conspiracy by authoring an open letter to the yarn retailing community in 2006 addressing the rumors of mislabeling and expressing her "complete confidence in the honesty of all the parties from the mills that acquire and spin the fibers, to the distributors and agents who have all work so hard to make the brand so successful." However, TKW's sixty-page complaint fails to include any specific allegation that Bliss intended to facilitate a conspiracy or operate a RICO enterprise. Accordingly, the district court "declined to make the untenable leap that Defendant Bliss's authoring of a letter -- defending a line of yarns to which her name was attached . . . demonstrates . . . her agreeing to participate in a pattern of racketeering activity . . .." 2010 WL 49099289, at *7. Accordingly, the district court did not err in granting Bliss' Rule 12(b)(6) motion and dismissing the complaint against her in its entirety.11

11   By Order, dated April 14, 2011, [*19]  the district court denied TKW's motion to vacate Bliss's dismissal. TKW contends in its appeal that it presented newly discovered evidence to the district court that Bliss was "quoted as participating in specifying the [cashmere content in the yarns at issue] since inception of the branded product." According to TKW, this newly discovered evidence is precisely the evidentiary fact required to subject Bliss to RICO conspiracy liability.

TKW's characterization of Bliss's statement is inaccurate. The statement doesn't mention the [yarns at issue at all]. Instead, the statement was made during an interview when Bliss, speaking generically and not with reference to any particular yarn, described her approach to creating designs as follows: "I might suggest to them, oh I would like uh perhaps a bit more wool in it, perhaps a bit more silk in it." Bliss was not discussing the content of the yarns at issue here. Indeed, they contain no silk. Thus, this particular argument is meritless.

(ii). Designer Yarns and Filatura.12

12   Throughout its brief, KFI refers to Filatura as "VVG."

The district court found, and TKW does not disagree, that TKW's complaint alleges two distinct schemes to defraud: (1) a [*20]  conspiracy between the KFI defendants and Designer yarns to distribute the mislabeled yarns at issue and (2) a conspiracy between the KFI defendants and the remaining defendants to cover-up the initial fraudulent plans. 2011 WL 891871, at *8. This is significant because the cover-up conspiracy is not alleged to have occurred until 2006, Compl. ¶¶ 60, 61. However, TKW admits that its last purchase of the yarns at issue occurred, at the latest, in the fall of 2005. Compl. ¶ 41. Thus, because the second conspiracy began after TKW bought the yarns at issue, it could not have caused TKW's alleged injury, viz., the purchase of mislabeled yarns. Accordingly, the district court did not err in dismissing the RICO conspiracy claim against Filatura. Indeed, we note that TKW expressly admits that its business and commercial interests were harmed, not as result of the cover-up, but rather "[a]s a consequence of the false labeling of [the yarns at issue here]." Compl. ¶ 82.

Apparently realizing the effect of having pled two separate conspiracies, as opposed to one continuous one, TKW now tries to avoid the results of its own allegations. TKW first contends that the district court's reliance on Pyramid Securities, Ltd. v. IB Resolution, 924 F.2d 1114 (D.C. Cir. 1991), is misplaced because Pyramid [*21]  was a summary judgment case involving an evidentiary standard. However, the district court did not hold that TKW failed to prove necessary facts; it held that TKW failed to allege them. 2011 WL 891871, at *11.

Second, TKW contends that the district court erred in concluding that the second conspiracy is "unrelated" to the first. TKW is correct that a scheme to cover-up a conspiracy has some connection to the original conspiracy. However, TKW cites to no authority for the proposition that this connection alone sufficient to make two conspiracies part of the same pattern of racketeering. In fact, we have held that "allegations of concealment on the part of the RICO defendant do not constitute a basis for establishing an open-ended scheme or threat of repetition to satisfy the continuity requirement." Davis v. Grusemeyer, 996 F.2d 617, 623 (3d Cir. 1993) (citation and internal quotation marks omitted).

Third, and finally, TKW contends that the alleged cover-up conspiracy was also a conspiracy to allow the continued sale of mislabeled yarn. However, in support of this contention, TKW cites to "facts" that it did not allege in its complaint. See TKW's Br. at 41-42. When assessing a motion to dismiss or motion for judgment on the pleadings, however, a court may only [*22]  consider the "allegations contained in the compliant, exhibits attached to the compliant, and matters of public record." Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993).

With regard to Designer Yarns, TKW contends that the factual allegations at ¶¶ 5, 11 and 36 "give the grounds" for Designer Yarns "mislabeling conspiracy liability." TKW's Br. at 44. Paragraph 5 alleges only that Designer Yarns has a license to use the Debbie Bliss trademark and a distributor relationship agreement with KFI. Paragraph 11 provides only background information regarding Bliss and alleges that she licensed her name to Designer Yarns. TKW provides no legal authority for claiming that merely holding a trademark license and entering into a distribution agreement permits the inference of an agreement to conspire.

Paragraph 36 does allege that "certainly before June 9, 2011 and on a date more specifically known only to Defendants, Mr. Elalouf and Designer Yarns entered into an agreement to substitute the 0% cashmere version for the Cashmerino spun of 12% cashmere." However, aside from this legal conclusion, the compliant identifies no factual bases upon which a court could make the reasonable inference that Elalouf and Designer Yarns affirmatively and knowingly [*23]  entered into some sort of plan or scheme to commit the requisite predicate offenses.

TKW asserts that "Designer need not agree to or participate in Elalouf's corrupt acts." TKW's Br. at 44. According to TKW, "controlling authority requires only Designer be aware of the enterprises' activities." Id. at 44-45 (citing Smith v. Berg, 247 F.3d 532 (3d Cir. 2001). However, nothing in the cited authority abrogates the well-established principle that liability under § 1962(d) is available only for services "which were purposely and knowingly directed at facilitating a criminal pattern of racketeering activity." Smith, 247 at 537 n.11. While an alleged conspirator need not agree or participate in each of the predicate acts, it must conspire "to violate RICO - that is, to conduct or participate in the activities of a corrupt enterprise." Zavala v. Wal-Mart Stores, Inc., 691 F.3d 527, 539 (3d Cir. 2012) (citing Salinas v. United States, 552 U.S. 52, 62 (1997). We agree with KFI that TKW's allegations that Designer Yarns held a trademark license, entered into distribution agreements to sell products using that trademark, and a boilerplate allegation of an agreement to conspire do not permit the inference that Designer Yarns agreed to conduct or participate in the activities of a racketeering enterprise.

Finally, we reject TKW's contention that Designer Yarns was part [*24]  of the cover-up conspiracy. TKW asserts that "[n]o controlling precedent requires Designer to know who orchestrated the cover-up." TKW's Br. at 46. TKW's factual allegations consist only of a conclusory allegation of Designer Yarns' participation in a cover-up (Compl. ¶ 60) and allegations regarding: obtaining yarn samples for testing (Compl. ¶¶ 62-63); and transmitting the results to its sub-licensee and distributor (Compl. ¶ 65). As correctly noted by the district court, "such allegations fail to imply Designer Yarns's knowledge that his analysis was part of any alleged cover-up orchestrated by Elalouf - especially since the testing showed cashmere in the yarns. . . ." 2011 WL 891871, at *10.

(iii). Diane Elalouf and Jeffrey Denecke.

TKW submits that its complaint contains two factual allegations against Elalouf that are sufficient to state a claim under § 1962(d) for her participation in the original, mislabeling conspiracy, viz., Compl. ¶¶ 8 and 35. TKW contends that Paragraph 8 alleges that she was an officer and shareholder of KFI and it contends that Paragraph 35 alleges that she was the "sole KFI employee with access to suppliers' invoices specifying product fiber content at variance from the products' labeled [*25]  compositions." In TKW's view, these two allegations sufficiently suggest that Diane Elalouf knew of, agreed to, and facilitated the mislabeling conspiracy.

In support of its submission, TKW cites to two cases. However, neither is helpful. In United States v. Ali, 2005 WL 2989728 (E.D. Pa. Aug. 19, 2005), the government pled that the defendant personally committed predicate acts and participated in the association-in-fact enterprise. Id. at *2. Here, TKW pled nothing in this regard with respect to Diane Elalouf. Granewich v. Harding, 985 P.2d 788, 792 (Or. 1999) is no stronger. It does not involve a RICO conspiracy and it does not support the assertion that merely benefitting from the alleged RICO enterprises' activity is sufficient to state a claim under § 1962(d).

TKW's argues that it did allege that Diane Elalouf was the "sole KFI employee with access to suppliers' invoices specifying product fiber content at variance from the products' labeled compositions." However, TKW mischaracterizes its own complaint. Paragraph 35 simply does not allege that the supplier invoices to which she allegedly had sole access "specif[ied] product fiber content at variance from the products' labeled composition." Rather, Paragraph 35 alleges only that Diane Elalouf had sole access to the manufacturers' stated content of the yarns at issue [*26]  and "could prevent" KFI employees from "learning the invoiced purchase values," the "true source of products" and "learning, as disclosed by the manufacturer, the actual fiber content of goods imported and resold by KFI." Compl. ¶ 35. Nowhere does the compliant allege that these invoices would reveal a variance with the labeled content. As the district court observed: "Noticeably missing from the allegations is any indication that Diane Elalouf had any actual knowledge of the alleged corrupt enterprise's activities." 2011 WL 1161716, at *7.

Finally, we note that, with respect to Diane Elalouf and Jeffrey Denecke, TKW does not contest the district court's conclusion that TKW did not suffer any injuries by reason of the alleged cover-up conspiracy.13

13   TKW does argue that Denecke's dismissal must be vacated because the original conspiracy and the cover-up conspiracy are related. However, as discussed above, the two conspiracies are not one continuous conspiracy.

Accordingly, for all of the above reasons, we hold that the district court did not err in dismissing the RICO conspiracy charges against Diane Elalouf and Jeffrey Denecke.

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