Antitrust Law Daily Wrap Up, RICO—E.D. Wis.: Former employer fails to plead continuity to support racketeering claims, (Jul 1, 2016)

By Mark Engstrom, J.D.

Centec LLC could not pursue Racketeer Influenced and Corrupt Organizations Act (RICO) claims against a former employee who allegedly stole its business by convincing its suppliers to terminate their contracts with Centec and to conduct their business with his own competing firm, the federal district court in Milwaukee has ruled. Because Centec failed to plead sufficiently continuous acts of racketeering, the RICO claims were dismissed with prejudice (Centec, LLC v. Plutshack, June 30, 2016, Adelman, L.).

Centec sued Plutshack, his brother Lee, and Aegir Specialty Valves for violations of RICO. Centec alleged that Mark Plutshack, a minority owner and former general manager of Centec, secretly convinced two of Centec’s business partners—Kieselmann GmbH and Keofitt A/S—to terminate their contracts with Centec and do business with his company, Aegir Specialty Valves. According to Centec, the predicate acts of racketeering—wire fraud—involved Plutshack’s use of the wires to secretly steal Kieselmann and Keofitt from Centec.

Wire fraud. Centec essentially argued that Plutshack owed Centec a fiduciary duty and a duty of loyalty, but he breached those duties when he secretly convinced Kieselmann and Keofitt to terminate their relationships with Centec and do business with Aegir. Plutshack’s conduct was fraudulent, Centec alleged, because Plutshack held a position of trust within the company and that position carried the implicit representation that Plutshack would not undermine the company’s business relationships for his own personal gain.

In short, Plutshack had arguably misled Centec by pretending to be Centec’s loyal agent when he was simultaneously stealing the company’s parts suppliers. Because Plutshack used the wires to solicit Kieselmann and Keofitt, his alleged conduct arguably amounted to wire fraud.

Continuity. The court assumed that the alleged conduct constituted related acts of wire fraud, but concluded that a pattern of racketeering was insufficiently pleaded. More specifically, the requisite continuity was not alleged. First, the alleged acts of wire fraud had occurred over a single year, which was an insufficient period of time to establish closed-ended continuity. Second, the allegations were insufficient to establish open-ended continuity.

The court noted that, in cases that relied on open-ended continuity, liability depended on the threat of future acts of racketeering. To establish that threat, a RICO plaintiff had to identify "past conduct that by its nature project[ed] into the future with a threat of repetition."

The court concluded that Centec did not allege any misconduct creating a threat that Plutshack would engage in future acts of racketeering. According to Centec’s complaint, Plutshack left Centec, started a competing company, and brought Centec’s key suppliers with him. Plutshack did not inform Centec of his plans. Instead, he secretly used his position at Centec to convince Kieselmann and Keofitt to leave Centec and do business with him.

Plutshack’s secret use of his Centec position for that purpose was deceitful, the court explained, and because Plutshack had allegedly used the wires to further that deceit, he may have committed wire fraud. That fraud, however, was no longer a threat because Centec had discovered Plutshack’s competing company and knew that Plutshack was no longer acting on its behalf. Although Plutshack was still a minority shareholder of Centec, he was no longer in charge of the company’s business.

Because Plutshack no longer occupied a position of trust at Centec, the threat that Plutshack would continue to exploit that trust to steal Centec’s business relationships was no longer present. Moreover, Centec failed to plead any facts suggesting that Plutshack might try to defraud other companies or commit other criminal acts while operating Aegir Specialty Valves or any other entity. Consequently, no "threat of repetition" was present.

Centec argued that it could show open-ended continuity because Plutshack was still a minority member of Centec and thus owed statutory duties to the company. Centec appeared to imply that Plutshack would continue to breach those duties as long as he operated a competing company. However, Plutshack was no longer competing "in secret" and thus was no longer engaged in a scheme to defraud Centec. Ultimately, Plutshack’s open competition with Centec was not deceptive, and for that reason, Centec could not establish a pattern of wire fraud.

For those reasons, Centec failed to allege a RICO claim against Plutshack. Because Centec’s complaint did not allege factual content that allowed a reasonable inference that the remaining defendants had conspired to violate RICO, the court dismissed the RICO claims against those defendants, as well.

The case is No. 15-C-1401.

Attorneys: Daniel Kelly (Rogahn Kelly LLC) for Centec LLC. Andrew J. Kramer (Hansen Reynolds Dickinson Crueger LLC) for Mark Plutshack.

Companies: Centec LLC

Cases: RICO WisconsinNews