Antitrust Law Daily Wrap Up, RICO—N.D. Ala.: Equipment insurance sold in lieu of warranty did not give rise to RICO claim, (Jul 15, 2016)

By Edward L. Puzzo, J.D.

The purchaser of an HVAC unit, who was sold an equipment insurance policy by the retailer instead of the extended manufacturer's warranty she thought she was purchasing, could not sustain a RICO claim against the retailer and insurance company because she failed to show that an association-in-fact RICO enterprise existed between the two, or that the use of the alleged racketeering income caused her harm, the federal district court in Birmingham, Alabama, has ruled (Frederick v. Service Experts Heating & Air Conditioning, LLC, July 14, 2016, Proctor, R.).

In 2007, Brandi Frederick purchased a new Trane HVAC unit from Service Experts Heating & Air Conditioning. She believed she had also purchased an extended warranty on the HVAC unit at the time of purchase. In 2011, after the unit began to exhibit performance problems and she sought repair under the warranty, she learned that she did not have the manufacturer's extended warranty but instead had purchased from Service Experts an insurance policy from Equiguard, Inc.

Consequently, Frederick brought claims alleging that Service Experts, Equiguard and others had fraudulently induced her to purchase an Equiguard policy, which she thought was a Trane extended warranty, in violation of Sections 1962(a), 1962(c), and 1962(d) of the Racketeer Influenced and Corrupt Organizations (RICO) Act. Defendants sought to dismiss.

Plausible predicate acts. The court explained that a RICO claim requires a plaintiff to establish the essential basics of a RICO enterprise as well as a "pattern of racketeering activity." Since the plaintiff alleged that the defendants used the mail and telephone to send monthly invoices for the HVAC unit and alleged warranty, i.e. mail and wire fraud, the pattern of activity requirement, the additional Federal Rule of Civil Procedure 9(b) requirement of particularity for fraud claims, and plausibility requirement were all met, the court found.

RICO Section 1962(a). To sustain a claim under RICO Section 1962(a), the use or investment of racketeering income, not the racketeering predicate acts themselves, must proximately cause harm to the RICO victim. Frederick did not plead facts showing how the use or investment of income derived from the purported mail and wire fraud caused her harm, the court stated. Thus, she failed to plead a plausible claim under this section, the court ruled.

RICO Section 1962(c). To state a claim for relief under Section 1962(c), a plaintiff must satisfy four elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. For the enterprise element, an association-in-fact enterprise can exist in the absence of a formally structured group. But associations-in-fact are not enterprises unless they furnish a vehicle for the commission of two or more predicate crimes, the court stated.

Frederick posited an association-in-fact consisting of Service Experts and Equiguard. However, Frederick failed to allege how Equiguard agreed to employ procedures as part of a long-term criminal enterprise predicated on acts of mail and wire fraud. Service Experts sold Equiguard policies, but there were simply no plausible facts alleged that indicate Equiguard had any knowledge of, much less purposeful involvement in, Service Experts’ purported fraud, nor that it had any part in directing the affairs of the alleged enterprise. Thus, these allegations did not successfully plead an association-in-fact RICO enterprise.

The plaintiff’s only well-pleaded facts in this regard suggested that Service Experts alone was both the RICO person and the RICO enterprise. But, as a matter of law, Service Experts cannot be both. Accordingly, the court ruled, Frederick did not plead a claim under Section 1962(c), and that cause of action must be dismissed with prejudice.

RICO Section 1962(d). A claim under Section 1962(d) cannot be supported without successfully pleaded claims under Sections 1962(a) or 1962(c). Nevertheless, even if Frederick had successfully so pleaded, the court noted, she failed to aver plausible facts demonstrating an illicit agreement to defraud her was made between Service Experts and the other RICO defendants. This claim too must be dismissed, the court ruled.

Leave to amend. Finally, the court found that good cause was lacking to allow Frederick leave to file a second amended complaint. She should have been aware of the factual shortcomings of her amended complaint in November 2015 when the court dismissed GE, originally named as a defendant, for many of the same reasons, the court noted, yet she did not file a motion to amend to cure the factual deficiencies. The court also noted that, despite extensive discovery, Frederick had not offered any new facts learned through discovery that would warrant a finding of good cause to amend. Therefore, the court ruled against Fredrick's alternative request for leave to amend.

The case is Civil Action No. 2:14-cv-01647-RDP.

Attorneys: Jeffrey E. Holmes(Gilpin Givhan PC) for Brandi Frederick. Grace L. Kipp(Spotswood Sansom & Sansbury LLC) for Service Experts Heating & Air Conditioning LLC

Companies: Service Experts Heating & Air Conditioning, LLC; Equiguard, Inc.

Cases: RICO AlabamaNews