Antitrust Law Daily Wrap Up, RICO—EDLa: Fraud on the PTO and Trademark Infringement Cannot Constitute Mail or Wire Fraud for RICO Act Purposes, (Dec 18, 2012)

By Tobias J. Gillett, J.D., LLM.

Manufacturers and retailers of shaved ice confections, machines to make the confections, and flavor concentrates could not assert RICO claims against another machine and concentrate manufacturer because fraud on the United States Patent and Trademark Office (USPTO) and trademark infringement did not constitute mail and wire fraud and because the defendant had not attempted to obtain property through its alleged acts of extortion, the federal district court in New Orleans has ruled (Southern Snow Manufacturing Co., Inc. v. SnoWizard Holdings, Inc., December 14, 2012, Brown, N.).

The defendant, SnoWizard Holdings, manufactures and sells shaved ice machines and flavor concentrates. According to the plaintiffs, SnoWizard had engaged in a pattern of fraudulent assertion of patent and trademark rights with regard to the products it sold.

The plaintiffs alleged that SnoWizard had applied for a patent on its machine in 1942, but that the patent was denied. However, SnoWizard allegedly continued to claim “patent pending,” and later “patented,” status for its machines until the present day. SnoWizard also obtained a patent on a ratchet linkage in 2004, allegedly without disclosing its public use and sale for more than one year before the application was filed.

In addition, the plaintiffs claimed that SnoWizard had repeatedly applied for federal and state trademark applications for marks used by the plaintiffs, and had sent cease and desist letters on the basis of those applications, even though SnoWizard knew that the plaintiffs had prior rights in the marks. SnoWizard also allegedly filed lawsuits over the trademarks, and contacted a telephone book publisher demanding it pull an advertisement for one of the plaintiffs that used one of the trademarks.

Furthermore, SnoWizard allegedly asserted its “fraudulent” intellectual property rights in internet discussion groups. The plaintiffs also claimed that SnoWizard had continued to place stickers indicating possession of a safety and design certification on its machines even though the machines had fallen out of compliance and the certification had lapsed.

The plaintiffs filed suit, alleging that SnoWizard’s conduct constituted fraudulent assertion of trademark rights, fraudulent assertion of patent rights, trademark infringement, extortion, and fraudulent assertion of the certification, and that these acts constituted the requisite predicate acts for RICO violations.

The court began its analysis by listing the elements of a RICO claim as “(1) a person who engages in (2) a pattern of racketeering activity, (3) connected to the acquisition, establishment, conduct, or control of an enterprise.” The court noted that “racketeering activity” under the RICO Act included extortion, mail fraud, and wire fraud, but that the predicate acts must be criminal. The court dispensed with an argument to the contrary by the plaintiffs, finding that the Supreme Court had not found that civil RICO claims can be based on predicate acts that are not criminal, but rather that a criminal conviction is not required to establish a pattern of racketeering activity.

The plaintiffs based their principal allegations of mail and wire fraud on SnoWizard’s alleged false statements to the USPTO and false representations to the public that SnoWizard owned a patent on its machine. However, the court concluded that “inequitable conduct before the PTO cannot qualify as an act of mail fraud or wire fraud for purposes of the predicate act requirement, because such conduct did not defraud the government of any property,” citing the Federal Circuit’s 2000 decision in Semiconductor Energy Laboratory Co., Lt. v. Samsung Electronics Co., Ltd. (204 F.3d 1368) as controlling authority on that point. The Supreme Court’s 2008 decision in Bridge v. Phoenix Bond & Indemnity Co. (553 U.S. 639), although permitting the plaintiffs to plead a RICO claim without demonstrating injury caused by reliance on the fraud, did not overrule the Federal Circuit on that point, as the plaintiffs still had to “plead a scheme to defraud upon which the predicate acts of mail or wire fraud may be based.”

Moreover, the court found that SnoWizard’s assertion of patent and trademark rights to the public also could not qualify as predicate acts, concluding that it would be “illogical” to hold that assertions of patent and trademark rights in the marketplace could constitute RICO predicate acts if fraud in obtaining those patent and trademarks could not. In addition, since precedent had established that trademark infringement does not contain the “deceptive element” necessary to establish a scheme to defraud, and since fraud on the USPTO cannot constitute that deceptive element, SnoWizard’s alleged acts of trademark infringement also could not serve as predicate acts of mail and wire fraud.

The plaintiffs also attempted to plead predicate acts of extortion, basing these allegations on the cease and desist letters SnoWizard sent, the lawsuits it filed, the internet postings asserting its trademark rights, and a refusal to provide products or services to one of the plaintiffs. The court observed that “none of these allegations suggest that Defendants obtained or attempted to obtain property from the Plaintiffs,” as required under both federal and Louisiana state extortion law, and therefore found that SnoWizard’s conduct could not serve as predicate acts of extortion for the RICO claims.

Furthermore, with regard to the claim of fraud based on the allegedly false display of the safety and design certification, the court found that the plaintiffs did not plead “evidence of intent to defraud” with sufficient particularity to satisfy Federal Rule of Civil Procedure 9(b). Therefore, since the plaintiffs had not established the necessary predicate acts for a RICO violation, the court dismissed the RICO claims.

The case numbers are 06-9170, 09-3394, 10-0791, 11-1499.

Mark Edw. Andrews (Andrews Arts & Sciences Law, LLC) for Southern Snow Manufacturing Co., Inc. Jack Edward Morris for SnoWizard Holdings, Inc.

Cases: RICO LouisianaNews