Antitrust Law Daily Wrap Up, RICO—6th Cir.: Doctrine of claim preclusion did not apply based on wrongful concealment, (Sep 16, 2013)

By Jody Coultas, J.D.

Venture Global Engineering, LLC (VGE) sufficiently alleged that Satyam Computer Services, Ltd. wrongfully concealed material facts that precluded dismissal of its Racketeer Influenced and Corrupt Organizations Act (RICO) claim on the basis of claim preclusion, the U.S. Court of Appeals in Cincinnati has held. Dismissal was reversed and the matter was remanded for further proceedings (Venture Global Engineering, LLC v. Satyam Computer Services, Ltd., September 13, 2013, Griffin, R.).

Satyam approached Venture about forming a joint venture that would provide engineering services to the automotive industry. Although Satyam primarily provided IT services and had little experience in automotive engineering, it represented itself as an attractive business partner because of its strong brand and recognition as a leading global IT company with a broad base of automotive customers. The parties entered into a joint venture, but the relationship went south, and Satyam initiated an arbitration in which both parties alleged the other party breached the agreement.

An arbitrator found that the parties had agreed that a bankruptcy of any company affiliated with VGE would be an Event of Default under the Shareholders Agreement. Therefore, Satyam was entitled to purchase Venture’s shares in the joint venture for their book value. Satyam could also recoup royalties that Venture received from the joint venture after Satyam first gave notice of its right to buy the shares.

Five years after the arbitration, Venture alleged that Satyam violated RICO by inducing it to form the joint venture by misrepresenting Satyam’s financial stability and general suitability as a business partner. The district court held that the doctrine of claim preclusion barred Venture’s claims.

A prior judgment that would otherwise preclude further claims will not do so where a plaintiff’s failure to raise or reserve its cause of action in an earlier case between the parties was caused by the defendant’s wrongful concealment of facts giving rise to the claim.

Venture sufficiently pled that the Satyam wrongfully concealed material facts that gave rise to the RICO claim, according to the court. To state a claim for wrongful concealment, the plaintiff must show that the defendant wrongfully concealed material facts that prevented plaintiffs from asserting their claims in the first action. Satyam argued that the actions Venture alleged constituted concealment were part of the fraud itself and could not serve as a basis for concealment of the fraud. Although the allegations form the basis of the underlying fraud, they also demonstrated that the fraud was “self-concealing.” Where the claims sound in fraud, the wrongful concealment prong is satisfied by a showing that the fraud was self-concealing. Venture also sufficiently alleged that Satyam actively concealed material facts because those responsible for the fraud engaged the services of others to issue false audit reports for the company. Satyam’s concealment prevented Venture from asserting their claims in the arbitration, according to the court. Venture did not discover Satyam’s fraud until well after the arbitration.

The district court’s erred in concluding that Venture’s awareness of Satyam’s actions would have suggested to a reasonable person the possibility that Satyam had been engaging in the fraud, according to the court. In wrongful concealment claims, there is a third, assumed prong that requires the plaintiff to show that they exercised due diligence until discovering the facts that underlie their claim. The district court concluded that Venture’s suspicion during the arbitration that Satyam had breached its agreements and was harming the joint venture created a duty to investigate the possibility of the underlying fraud. Venture’s allegations established that the fraud was so well concealed that, other than those directly responsible, no one knew anything about the fraud until it was revealed from within. It was reasonable for Venture to not inquire into the alleged fraud before it was revealed.

The case is No. 12-2200.

Attorneys: John E. Anding (Drew, Cooper & Anding, P.C.) for Venture Global Engineering, LLC. Jordan B. Leader (Proskauer Rose LLP) for Satyam Computer Services, Ltd.

Companies: Venture Global Engineering, LLC; Satyam Computer Service, Ltd.

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