Antitrust Law Daily Wrap Up, RICO—E.D.N.Y.: Allegations of stealing property and customers insufficient to state RICO claims, (Sep 19, 2013)

By Jody Coultas, J.D.

A biofuel and biofeed industry company failed to state Racketeer Influenced and Corrupt Organizations Act (RICO) claims against a competitor for allegedly stealing its property and customers, the federal district court in Central Islip, New York, has held (Naples v. Stefanelli, September 18, 2013, Seybert, J.). The company also failed to state a New York consumer protection law claim against the competitor.

Island Biofuel, LLC and JNS Industries, LLC (collectively, the Naples Corporation) collect and resell used vegetable and kitchen oil. Environmental Services, Inc. (ESI) also engaged in rendering to the biofuel industry on Long Island. If ESI was successful in convincing one of Island Biofuel’s customers to sign a contract with ESI, ESI would remove Island Biofuel’s containers and locks from the premises and replace them with ESI’s containers and locks. In its complaint, Island Biofuel estimated that ESI stole in excess of twenty thousand gallons of oil worth approximately $50,000 and containers valued at $15,000, and $100,000 in lost profits.

The owner of the Naples Corporation was pulled over by a Suffolk county police officer and Island Biofuel was charged with operating a commercial vehicle with a broken windshield wiper blade and an expired insurance health card. After the owner was sent home to fix the issue, New York State Department of Environmental Conservation (DEC) officers followed him to the Naples Corporation garage. Without cause or a warrant, the DEC officer inspected the garage and cited Island Biofuel for operating a waste facility without a permit. Later, the owner was rearrested for allegedly cutting a ten dollar lock with bolt cutters based on a statement by the owner of ESI.

After the arrest, the owner of Naples Corporation saw the officer that pulled him over for the broken wiper blade working at ESI’s facility dressed fully in clothing indicating that he was employed by and working for ESI. Naples Corporation complained multiple times to the County Police Department, but the complaints were never investigated. In response to the complaints, the arresting officer circulated a letter to County police officers stating that the County Police Department was to protect ESI and that, if anyone saw Naples Corporation collecting oil, they were to call the officer immediately. The letter also alleged that he had firsthand knowledge that they were cutting locks and stealing oil and would provide a sworn affidavit for petit larceny.

Naples Corporation brought RICO and New York consumer protection law claims against Suffolk County, the arresting officers, the State of New York, the DEC, ESI, and the ESI owners.

Claims against government entities. RICO claims could not be brought against the County entities, according to the court. A municipality cannot form the requisite criminal intent to establish a predicate act under RICO. The claims against the arresting officer in his official capacity as a government employ were also dismissed, as government employees cannot be held liable under RICO.

The state law claims against the County were dismissed for failure to include allegations that the Naples Corporation served a notice of claim, according to the court. A plaintiff must file a notice of claim prior to commencing an action against a municipality and within ninety days of the incident giving rise to the claim. Service of a notice is not, however, a condition precedent to the commencement of an action against a county’s employee unless the county is required to indemnify the individual defendant. The complaint lacked evidence of a notice. However, it was unclear whether the County was required to indemnify the arresting officer and, therefore, the claims against the officer were not dismissed.

Similarly, the claims against the State of New York and the DEC were all barred by the Eleventh Amendment, according to the court. The Eleventh Amendment bars suits against a state in federal court unless that state has consented to the litigation or Congress has permissibly enacted legislation specifically overriding the state’s immunity.

RICO claims. To state a RICO claim, a complaint must assert seven elements: “(1) that the defendant (2) through the commission of two or more acts (3) constituting a ‘pattern’ (4) of ‘racketeering activity’ (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an ‘enterprise’ (7) the activities of which affect interstate or foreign commerce.

The Naples Corporation sufficiently alleged a predicate act of racketeering activity, according to the court. ESI allegedly violated RICO by stealing Island Biofuel’s vegetable oil and vegetable oil containers and stealing customers through extortion and intimidation. Only those thefts of robbery and extortion as defined by New York Penal Law constitute racketeering activity under RICO. Because robbery is defined as forcible stealing, and the complaint lacked any allegations of the use or threat of use of physical force, the Naples Corporation failed to sufficiently plead a predicate act of robbery. There were, however, sufficient allegations of extortion by ESI. Extortion includes accusing an individual of a crime or causing criminal charges to be instituted against the individual. It was plausible that the Naples Corporation gave up certain customers to ESI due to the ESI accusing the owner of committing a crime and the alleged abuse of the arresting officer.

However, the Naples Corporation failed to adequately allege a pattern of racketeering activity, according to the court. The Naples Corporation alleged that ESI used the proceeds that they derived from stealing oil, containers, and customers to pay officers for their continued efforts to extort more customers from Island Biofuel. To establish a pattern of racketeering activity, the predicate acts of racketeering activity must amount to or pose a threat of continued criminal activity. The continuity requirement is satisfied either by showing a closed-ended pattern or open-ended pattern. Because the alleged extortion occurred only over a period of eight months, the Naples Corporation could not show that the predicate act extended over a substantial period of time as required to show a closed-ended pattern. Once ESI eliminated Island Biofuel as a competitor, the scheme essentially ended and the Naples Corporation could not show an open-ended pattern.

State law claim. ESI’s motion to dismiss the New York consumer protection law claims was granted, without prejudice, by the court. To state a claim under the New York law, the Naples Corporation was required to show that ESI’s conduct was consumer-oriented. Consumer-oriented conduct has a broad impact on consumers at large. The owner and the Naples Corporation were not engaged in the buying of goods, services, or property for personal use were not the type of consumer the New York law protects.

The case is No. 12-CV-4460(JS)(ARL).

Attorneys: Harry R. Thomasson, Jr. for James V. Naples. Arlene S. Zwilling, Suffolk County Attorney’s Office, for Philip Stefanelli.

Companies: Island Biofuel, LLC; JNS Industries, LLC; Environmental Services, Inc.

Cases: RICO StateUnfairTradePractices NewYorkNews