Antitrust Law Daily Wrap Up, RICO—5th Cir.: Dismissal of Southern Snow’s claims against SnoWizard was warranted, (Aug 17, 2016)

By Peter Reap, J.D., LL.M.

Because the claims asserted by Southern Snow Manufacturing Company, Van’s Snoballs, Parasol Flavors, Snow Ingredients, and the related individuals (collectively, "Southern Snow") against SnoWizard were precluded by res judicata, and because the claims against Morris and Tolar failed to satisfy the requirements for conspiracy, obstruction of justice, or malicious prosecution, a federal district court’s dismissal of all the claims was affirmed, the U.S. Court of Appeals in New Orleans has decided. Moreover, given that Southern Snow advanced arguments that, although creative, were not ridiculous, the district court’s denials of sanctions were also affirmed (Snow Ingredients, Inc. v. SnoWizard, Inc., August 15, 2016, Elrod, J.).

The parties are sellers of flavored shaved ice confections. Litigation between the parties began when Southern Snow sued SnoWizard in 2006 and the litigation history was long and plentiful. In a number of different actions (the "Consolidated Cases"), the claims and counterclaims addressed the scope, validity, and ownership of patents and trademarks and the fairness of the companies’ business practices. In June 2012, some nine months before the trial and jury verdict in the Consolidated Cases, Southern Snow filed a complaint in the Eastern District of Louisiana reiterating many of the claims then under dispute in the Consolidated Cases and alleging that SnoWizard’s actions in docket Nos. 10-4275 and 11-0515 constituted additional illegal practices.

Shortly after the jury verdict in the Consolidated Cases, SnoWizard moved to dismiss the Second Amended Complaint for failure to state a claim. The judge granted the motion to dismiss. Southern Snow now appealed that dismissal. In addition, after Southern Snow filed the First Amended Complaint in this case, SnoWizard moved for Rule 11 sanctions, arguing that counsel for Southern Snow filed RICO claims "which manifestly are not warranted by existing law" solely to harass the defendants. The district court denied the motion. SnoWizard again moved for sanctions after Southern Snow filed the Second Amended complaint. The district court denied the motion. SnoWizard appealed both denials.

Res judicata. The question of claim preclusion for the claims against the defendants other than Morris and Tolar turned on whether the disputed counts satisfy the court’s transactional test, the appellate court noted. Under the transactional test to determine whether two suits involve the same cause of action, the court asks whether the facts in the two suits are "related in time, space, origin, or motivation, whether they form a convenient trial unit, in short, whether they are based on the same nucleus of operative facts.

After concluding that Southern Snow’s civil-RICO claims were barred by res judicata, the district court concluded in the alternative that Southern Snow did not satisfy the federal pleading standard for that claim. The appellate court agreed. Even assuming, arguendo, that the obstruction of justice RICO claims were not precluded by the judgment in the Consolidated Cases, they would fail because they do not state a claim on which relief can be granted.

Southern Snow did not allege any actual criminal activity as a predicate act, the court explained. At most, Southern Snow alleged that the defendants "perpetrated a series of obstructive acts in different civil actions in the District Court, in USPTO Trademark Trial and Appeal Board proceedings, and in USPTO opposition and cancellation proceedings." But the obstructive acts Southern Snow alleged are not criminal conduct. Therefore, they could not act as a predicate offense for a civil-RICO claim, the court held.

Southern Snow alleged that Morris and Tolar conspired with SnoWizard in all of the allegedly illegal activity that is precluded by the resolution of the Consolidated Cases. Because Morris and Tolar were not parties in the Consolidated Cases, they were not protected by res judicata. Nevertheless, Southern Snow’s conspiracy claims against Morris and Tolar failed because they did not satisfy the federal pleading standards.

As for its malicious prosecution claim, Because Southern Snow has no live claim in the present case alleging that SnoWizard committed malicious prosecution in the Consolidated Cases, the Federal Circuit ruling in Southern Snow’s favor in the Consolidated Cases was irrelevant, according to the court. Because Southern Snow’s only live malicious prosecution claim is tied to case No. 10-4275 and because Southern Snow did not obtain a favorable resolution on the merits in that case, its malicious prosecution claim failed.

Sanctions. SnoWizard filed twice for Rule 11 sanctions in the present suit. Both motions asserted that Southern Snow’s civil-RICO claims were not warranted by existing law or by any non-frivolous argument for extending existing law. SnoWizard also argued that the complaints were filed for an improper purpose: to harass SnoWizard. SnoWizard argued that Southern Snow’s inability to plead facts satisfying the pleading requirements for the various predicate criminal acts rendered Southern Snow’s civil-RICO claims legally irredeemable and sanctionable. The district court disagreed, noting that the cases SnoWizard cited to dismiss Southern Snow’s RICO claims were from sister circuits.

The district court was troubled by the potential seriousness of Southern Snow’s allegations. Although Southern Snow’s RICO claims ultimately failed, its claims were not so obviously foreclosed by precedent as to make them legally indefensible, the Fifth Circuit ruled. The filings did not indicate that Southern Snow neglected its duty of reasonable inquiry into the relevant law. Thus, the district court did not abuse its discretion when it declined to sanction an attorney who attempted to plead a predicate criminal offense, albeit unsuccessfully.

The case is No. 15-30393.

Attorneys: Mark E. Andrews (Andrews Arts & Sciences Law, LLC) for Snow Ingredients, Inc., Simeon, Inc. and Southern Snow Manufacturing Co., Inc. Jack Edward Morris (Jack E. Morris, Attorney at Law, LLC) for SnoWizard, Inc.

Companies: Snow Ingredients, Inc.; Simeon, Inc.; Southern Snow Manufacturing Co., Inc.; SnoWizard, Inc.

Cases: RICO LouisianaNews MississippiNews TexasNews