Antitrust Law Daily Wrap Up, RICO—NDCal: Alleged Scheme to Lure Reps from Multilevel Marketer Not Shown to Cause Injury, (Dec 5, 2012)

By E. Darius Sturmer, J.D.

An alleged broad scheme within the multilevel marketing industry to recruit a network of downstream sales consultants and companies (“reps”) away from an Independent Representative (“IR”), Titan Global, LLC, did not violate federal RICO law, though it could have run afoul of several state or common law torts, the federal district court in San Jose, California, has ruled (Titan Global, LLC v. Organo Gold Int’l, Inc. December 2, 2012, Koh, L.). The marketing enterprise within which the complaining IR operated was run by a third party, and was centered on the selling of telecommunications services like cable and internet.

The plaintiffs—Titan Global and its principals—failed to allege with particularity a pattern of interstate wire fraud, the court found. They had claimed that the wire fraud involved misrepresenting the income that downstream reps could earn under a rival company, Organo Gold, and they alleged losses of “not less than $25,000 per month” resulting from the “ravag[ing]” of their downstream reps by Organo Gold and its campaign of deception. In addition, the court stated, the acts of interstate wire fraud that Titan did allege were not the proximate cause of the company’s, or its principles’, injuries.

Addressing injury first, the court noted that the plaintiffs had alleged an actual injury sufficient for Article III standing. The reduction in commissions that the plaintiffs allegedly suffered after the alleged wire fraud scheme caused downstream reps to leave Titan Global or become less productive was “an actual compensable harm,” the court said. The plaintiffs were third-party beneficiaries of the enterprise’s IR agreement, and that agreement did entitle them to commissions based upon the sales of downstream reps. The court clarified that the alleged injuries were commercial, not merely emotional.

The downfall of the RICO claim, in the court’s view, was the plaintiff’s failure to adequately plead acts of interstate wire fraud that were the proximate cause of the plaintiffs’ injuries. They identified only three instances of allegedly fraudulent communications—a personal phone call about leaving the enterprise that evidence suggested was not fraudulent at all; a sales meeting in which a defendant did appear to have engaged in wire fraud in making fraudulent income representations to Titan’s fellow IRs and downstream reps; and a telephone call supposedly about income potentials but too lacking in details as to time and place to meet the particularity standard of Federal Rule of Civil Procedure 9(b). A single adequately alleged act of interstate wire fraud “did not constitute a pattern of racketeering activity as required under RICO,” the court stated.

Further, more predicate acts of alleged wire fraud would not have saved Titan Global’s claim, the court reasoned, because the plaintiffs’ alleged injury was too remote to allow recovery. Titan Global and its principals were in the best position to pursue the RICO claims, as they were the most direct victims who could be counted on to vindicate the law, the court acknowledged. Their alleged harm—the departure of downstream reps—occurred independently of any harm to those reps themselves, who might earn the same or higher income after switching while Titan Global still suffered harm. There also was little risk of double recovery.

However, whether it would be difficult to ascertain the amount of the plaintiffs’ damages attributable to the defendants’ wrongful conduct was dispositive in the case, the court concluded. Even if the plaintiffs had adequately alleged the three purported acts of interstate wire fraud, it would have been simply impossible to determine the amount of their damages attributable to that fraud.

Finally, the court noted, because the plaintiffs could yet potentially allege with particularity additional acts of interstate wire fraud that together would constitute a RICO violation and allege facts suggesting a direct connection between an injury to themselves and the predicate acts of alleged interstate wire fraud, they were entitled to leave to amend their claims.

The defendants’ motion to dismiss the RICO Act claims, as well as a claim for defamation, was therefore granted. However, the court refused to dismiss Titan Global’s business tort claims: unfair business practices under California law, tortious interference with contract, tortious interference with prospective business advantage, misappropriation of trade secrets, and civil conspiracy.

The case is No.: 12-CV-2104-LHK.

David Griffith Eisenstein (Law Offices of David G. Eistenstein, P.C.) for Titan Global, LLC. Brook Bernard Bond (Parsons Behle & Latimer) for Organo Gold Int’l, Inc.

Cases: RICO CaliforniaNews