Antitrust Law Daily Wrap Up, RICO—M.D. Fla.: Claims against software provider for defective program may proceed, (Oct 31, 2014)

By Linda O’Brien, J.D., LL.M.

A metal distributor and its subsidiaries could proceed with RICO claims against a software provider and its related companies for allegedly forming a scheme to defraud the distributor by selling an integrated software program that the defendants knew would not work, the federal district court in Tampa, Florida has ruled (Lawrence Holdings, Inc. v. ASA International, Ltd., October 30, 2014, Covington, V.).

Lawrence Holdings, Inc. and its subsidiaries (LHI) specialize in metal distribution and processing. In 2006, LHI researched purchasing a software package that would integrate the databases of its subsidiaries so information could be utilized on a single platform. LHI contacted Verticent, Inc., a manufacturing software provider and one of several interrelated entities controlled Alfred Angelone, Christopher Crane, and Terrence McCarthy. Employees from ASA International, one of Verticent’s related companies, represented to LHI that Verticent’s ERP software had the capability of integrating the databases of LHI’s subsidiaries. LHI and Verticent entered into a software licensing agreement, and ASA employees attempted to install the Verticent ERP software.

Although the ERP software did not work, LHI continued to make payments to Verticent in reliance on ASA employees’ representations concerning the software’s capabilities until Verticent filed for bankruptcy in 2012. LHI filed suit against Verticent, ASA, and their owners, alleging violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). Specifically, LHI asserted that the defendants had a scheme to make money from the metal distribution industry through mail and wire fraud by selling an integrated software program to LHI, knowing that the program would never work, and then having Verticent file for bankruptcy. The defendants moved for dismissal.

Pattern of racketeering. The court found that the plaintiffs sufficiently alleged a pattern of racketeering activity. To proceed with claims under RICO, a plaintiff must show that the defendant conducted the activities of an enterprise through a pattern of racketeering. In rejecting the defendants’ contention that the action involved only a single transaction, the court noted that the plaintiffs alleged that the defendants engaged in an elaborate scheme spanning six years in order to defraud LHI and other companies by selling software that they knew did not work and continued to persuade the buyer that more time and money was necessary. Such activities satisfy the relationship and continuity elements necessary to show a pattern of racketeering, in the court’s view.

Proximate cause. There was sufficient nexus between LHI’s alleged injury and the defendants’ alleged RICO violations, according to the court. The plaintiffs alleged that the defendants made several misrepresentations to LHI after LHI entered into the software agreement, including claims that additional customization at an additional cost was required to have the ERP software meet LHI’s needs. Thus, at the current stage of the litigation, LHI has sufficiently alleged proximate cause.

Particularity. Additionally, the complaint satisfied the heightened level of particularity as required by the Federal Rule of Civil Procedure 9(b). The court noted that the complaint identified the specific individuals involved, the content and purpose of particular fraudulent statements, and, where possible, the dates of the statements. Furthermore, LHI identified many specific uses of mail and wire communications where the defendants maintained the charade of trying to implement a software package and intended to defraud LHI. The complaint described ASA’s general business practice of selling products that the defendants did not have, knowing the software did not work, and instructing employees to sell the software anyway. Those allegations provided a sufficient basis for the court to infer specific intent by the defendants.

Statute of limitations. Finally, the plaintiffs ‘claims were not barred by RICO’s four-year statute of limitations. The defendants’ argument that LHI’s RICO injuries arose from the purchase of the ERP software in 2006 and LHI should have known they were damaged when the software was not working in 2007 was rejected. The plaintiffs contended that they did not have actual notice or have reason to suspect that it would never receive functional ERP software until Verticent declared bankruptcy in 2012. The face of the complaint failed to show that LHI’s RICO claims were time-barred and such a determination was better suited until after discovery, the court concluded.

The case is No. 8:14-cv-1862.

Attorneys: Jordan M. Rand (Dilworth Paxson, LLP), and Michael C. Addison (Addison & Howard, PA) for Lawrence Holdings, Inc., Snappy Materials, LLC, Tico Titanium, Inc., Supra Alloys, Inc., and Alloy Metals, Inc. Katherine M. Harwood (Ford, Walker, Haggerty & Behar), and L. Louis Mrachek (Mrachek, Fitzgerald, Rose, Konopka, Thomas & Weiss, PA) for ASA International, Ltd., Khameleon Software, Inc., ASA Automotive Sytems, LLC, ASA Properties, Inc., and 10 Speen Street LLC.

Companies: Lawrence Holdings, Inc.; Snappy Materials, LLC; Tico Titanium, Inc.; Supra Alloys, Inc.; Alloy Metals, Inc.; ASA International, LTD.; ASA International, Ltd.; Khameleon Software, Inc.; ASA Automotive Sytems, LLC; ASA Properties, Inc.; 10 Speen Street LLC

Cases: RICO FloridaNews