Antitrust Law Daily Wrap Up, RICO—C.D. Cal.: Retailer’s RICO and state unfair trade practices claims to proceed against CELLFOOD manufacturer and distributor, (Nov 19, 2013)

By Linda O’Brien, J.D., LL.M.

A nutritional supplement retailer sufficiently stated RICO and state unfair trade practices claims against a manufacturer and a distributor of health products, alleging fraudulent conduct and misrepresentations regarding an ingredient of an oxygen and nutrient supplement, the federal district court in Los Angeles has decided (TRC & Associates v. Nuscience Corporation, November 18, 2013, Wright II, O.).

TRC & Associates, a retailer of nutritional supplements, purchased the oxygen-based nutrient supplement, CELLFOOD, from distributor, Lumina Health Products, Inc. (Lumina) from January 2007 to September 2013. Nuscience Corporation developed and manufactured CELLFOOD. TRC filed a complaint against Nuscience and Lumina alleging fraud, violations of the California Unfair Competition Law (UCL) and False Advertising Law (FAL), and violations under RICO, 18. U.S.C. §§1961 (4) and 1962. Specifically, TRC claimed that Nuscience and Lumina actively concealed a key ingredient in CELLFOOD that posed a severe health hazard and misrepresented compliance with federal regulations. Nuscience and Lumina moved to dismiss the complaint.

The defendants argued that TRC failed to plead a RICO enterprise and lacked allegations of a pattern of racketeering activity based in mail and wire fraud.

The court found that, under a plain reading of the statute, both defendants could qualify as RICO “persons,” as the complaint alleged that the defendants were each corporations and, thus, entities capable of holding an interest in property. Additionally, the complaint contained sufficient facts to prove an associated-in-fact enterprise. TRC alleged that both Nuscience and Lumina participated in misleading customers about CELLFOOD’s ingredients and efficacy through claims made in promotional materials and on their company websites. The business relationship between the defendants as manufacturer and distributor of the product suggested an ongoing organization where various associates functioned as a continuing unit.

The complaint also distinguished between “persons” and “enterprise” under RICO by alleging that the association of Nuscience and Lumina to sell CELLFOOD formed the enterprise and the association was distinct from their individual corporate existences. In concluding that TRC sufficiently plead a pattern of racketeering activity, the court determined that TRC alleged with particularity that the defendants formed a scheme to defraud, used the mail and U.S. wires in furtherance of the scheme, and had specific intent to deceive or defraud. The complaint provided strong support that communications between the three parties took place via mail and telephone, since all of the parties operated in different states.

The court also found that the plaintiff’s UCL and FAL claims did not seek extraterritorial application of California law. The court rejected Lumina’s argument that TRC’s state law claims were barred because the subject of the suit was a commercial transaction that took place between Lumina, a Florida corporation, and TRC, a Nevada corporation with a principal place of business in Ohio. The court noted that state statutory remedies could be invoked by out-of-state parties when the alleged wrongful conduct occurred in California. TRC alleged that the fraudulent conduct and material misrepresentations originated in California with Nuscience as manufacturer of CELLFOOD, traveled through Florida to Lumina, and ended with TRC in Ohio. Therefore, based on the business relationship between Nuscience and Lumina, the court could reasonably infer that Lumina had some role in the conduct that occurred in California.

The case is No. 2:13-cv-6903-ODW (CWx).

Attorneys: Stephen E. Abraham (Law Offices of Stephen Abraham) for TRC & Associates Inc. Michael J. Saltz (Jacobson Russell Saltz and Fingerman LLP) for Nuscience Corp. Jennifer Marino Thibodaux (Gibbons PC) for Lumina Health Products Inc.

Companies: TRC & Associates; Nuscience Corporation; Lumina Health Products, Inc.

Cases: Advertising RICO StateUnfairTradePractices CaliforniaNews