Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Auction house not injured by competitor’s allegedly fraudulent conduct, (Mar 11, 2014)

By Jody Coultas, J.D.

4 K&D Corporation could not state Racketeer Influenced and Corrupt Organizations Act (RICO) or New York Deceptive Acts and Practices Law claims against competitor Concierge Auctions, LLC or its employees for allegedly fraudulent conduct related to luxury home auction services, the federal district court in New York City has held (4 K&D Corporation v. Concierge Auctions, LLC, March 10, 2014, Koeltl, J.). Home owners that were allegedly injured by Concierge’s conduct stated RICO claims against Concierge’s president and chief operating officer, but could not maintain Deceptive Acts and Practices Law claims.

4 K&D alleged that Concierge made false promises and various misrepresentations about its own auction results, sales statistics, and track records, and that Concierge engaged in other fraudulent conduct such as using shill bidders, allowing bids from unregistered bidders, and adding a reserve at the last minute in order to obtain customers for its luxury homes auction business.

RICO. In order to state a claim under Section 1962(c) of RICO, a plaintiff must allege conduct of an enterprise though a pattern of racketeering activity. The statute applies only to persons who are employed by or associated with an enterprise.

The Section 1962(c) claims were properly brought against managers of Concierge, according to the court. Concierge argued that the claim should be dismissed because 4 K&D failed to allege that the RICO “enterprise” was different from the “persons” alleged to have violated 1962(c). The claim alleged that Concierge was the RICO “enterprise,” while the RICO “persons” were the president, chief operating officer, former chief operating officer, and part owner of Concierge who “operated or otherwise managed Concierge through a pattern of racketeering activity.” The Section 1962(c) claims were brought against these RICO persons only and not against Concierge. Therefore, 4 K&D did not seek to hold Concierge liable as a RICO “person” but only alleged that Concierge was the “enterprise.”

4 K&D sufficiently alleged wire fraud as RICO predicate acts and a pattern of racketeering activity by Concierge’s president and chief operating officer, according to the court. To state a claim, 4 K&D had to allege two or more related “predicate acts” that constitute a “pattern” of racketeering activity. The defendants argued that 4 K&D failed provide the exact time and location of the statements or the identity of the speaker. Statements that appeared in the marketing or pitching materials disseminated in the name of Concierge, could properly be attributed to the business. 4 K&D provided sufficient allegations regarding the persons responsible for the statements. The claims plausibly alleged that the president and chief operating officer, through wire communications, made multiple false representations with the intention to obtain money from multiple property sellers in a deceptive manner. However, the allegations against the former chief operating officer and part owner of Concierge were insufficient.

However, the court held that 4 K&D did not suffer a sufficient injury to support the RICO claims and granted the defendants’ motion to dismiss. 4 K&D argued that it was injured because the allegedly fraudulent acts gave Concierge an unfair advantage in the competition for auction business. However, 4 K&D could only be indirectly injured as the result of a direct injury to property sellers who were allegedly defrauded. 4 K&D was not the only auction company that could have been indirectly injured by Concierge’s conduct. There could be numerous reasons that a home seller chose Concierge over 4 K&D and other companies that had nothing to do with the alleged RICO violations. Furthermore, standing for 4 K&D was not necessary to vindicate any sellers’ claims for the alleged fraudulent conduct.

Home owners that contracted with Concierge to auction their property stated RICO claims, according to the court. The home owners were direct victims of the alleged fraud and alleged direct injuries caused by the alleged Section 1962(c) violations. Also, the alleged damages were specifically the loss of a $100,000 break-up fee and the increased difficulty in selling their house. Concierge’s arguments that the home owners failed to allege injury “by reason of a pattern of racketeering activity,” and the necessary continuity in the predicate acts directed at the home owners were without merit.

The court also granted the defendants’ motion to dismiss 4 K&D’s and the home owners’ RICO Sections 1962(a), (b), and (d) claims.

New York deceptive practices law. To state a claim under the Deceptive Acts and Practices Law, 4 K&D was required to show that the allegedly deceptive transaction occurred in New York. With respect to the home owners’ claims, the fact that Concierge’s contract with the home owners contained a choice-of-law and a forum-selection clause requiring any dispute be resolved under New York law did not indicate where the transaction occurred. Because the home owners were selling a property in Illinois, the transaction at issue did not occur in New York. The home owners’ and 4 K&D’s claims also fail because Concierge’s conduct was not alleged to be “consumer-oriented,” which is a required element of the Deceptive Acts and Practices Law claims. Each auction contract was entered into after individualized negotiations, which were wholly unlike the unsophisticated, day-to-day consumer transactions in the sales of consumer products and services.

The case is No. 13 Civ. 2527 (JGK).

Attorneys: Joel Steven Schneck (Goldberg & Rimberg, PLLC) for 4 K & D Corp. d/b/a Grand Estates Auction Co. Robert S. Wolf (Moses & Singer LLP) for Concierge Auctions, LLC.

Companies: 4 K&D Corporation; Concierge Auctions, LLC

Cases: RICO StateUnfairTradePractices NewYorkNews