Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Fashion companies’ trademark-based RICO claims foundered on enterprise requirement, (Aug 10, 2016)

By Mark Engstrom, J.D.

Eight fashion companies that sold luxury goods under the brand names Gucci, Balenciaga, YSL, and Bottega Veneta could not pursue RICO claims against Alibaba Group Holdings and 20 other companies that allegedly sold or profited from the sale of counterfeit goods, the federal district court in New York City has ruled. Because the fashion companies failed to allege a valid association-in-fact enterprise, their RICO claims were dismissed (Gucci America, Inc. v. Alibaba Group Holding, Ltd., August 4, 2016, Castel, P.).

Lawsuit. Gucci America and seven additional fashion companies brought RICO, Lanham Act, and other claims against Alibaba Group and five Alibaba affiliates (collectively, "Alibaba"), Alipay.com, and 14 merchants that sold products through Alibaba.com, Taobao.com, and AliExpress.com (the "Alibaba Marketplaces").

Alibaba ecosystem. According to the plaintiffs, Alibaba developed an "ecosystem" around the Alibaba Marketplaces. That ecosystem included buyers, sellers, third-party service providers, strategic alliance partners, and investment companies. The Marketplaces formed the "nexus" of that ecosystem, the plaintiffs alleged, but all of the Marketplace participants benefited from the ecosystem’s continued success. Significantly, the Alibaba ecosystem had strong, self-reinforcing "network effects" that benefited its Marketplace participants, and Alibaba provided services that helped merchants advertise, deliver, and otherwise sell their products.

RICO claims. The plaintiffs alleged that Alibaba, Alipay, the Merchant Defendants, and multiple unidentified co-conspirators all formed a racketeering enterprise whose purpose was to "sell and profit from" the sale of counterfeit goods. The plaintiffs further alleged that Alibaba and Alipay provided services to the Merchant Defendants despite knowing that the Merchant Defendants sold counterfeit goods.

Enterprise. Alibaba and Alipay (collectively, the "Alibaba Defendants") argued that the plaintiffs failed to allege: (1) the existence of a RICO enterprise and (2) the "participation" of the Alibaba Defendants in a RICO enterprise.

The plaintiffs described the relationship between the Alibaba Defendants and each Merchant Defendant, the court noted. They also described how the Merchant Defendants manufactured and sold counterfeit goods in the Alibaba Marketplaces, and how the Alibaba Defendants knowingly aided the sale of counterfeit goods by providing a plethora of services to the Merchant Defendants.

The Alibaba Defendants argued that the plaintiffs’ allegations amounted to nothing more than a classic "hub-and-spokes" association, in which a central actor (the hub) formed bilateral and independent relationships with independent actors (the spokes). They also argued that this hub-and-spokes association could not constitute a RICO enterprise because the Merchant Defendants did not work together to achieve a "common purpose."

In Boyle v. United States, 556 U.S. 938 (2009), the U.S. Supreme Court found that a RICO enterprise did not require a particular hierarchical structure or chain of command. The enterprise could make decisions in many different ways, the High Court explained, and members of the enterprise could perform different roles during the enterprise’s existence. Nevertheless, every association-in-fact enterprise possessed "at least three" structural features: (1) a purpose; (2) relationships among those who associated with the enterprise; and (3) longevity that was sufficient to permit the associates to pursue the purpose of the enterprise.

After Boyle, courts disagreed about whether a hub-and-spokes association could satisfy the enterprise requirement, but the majority of courts in the Second Circuit found that the specific hub-and-spokes associations that were alleged in the cases before them did not constitute a RICO enterprise.

In this case, the court found that the plaintiffs failed to plausibly allege that the Merchant Defendants had engaged in anything other than independent conduct for their own economic interest. In fact, the plaintiffs did not even allege that the relationships between and among the Merchant Defendants were any different from the relationships that the Merchant Defendants had with millions of other merchants that operated within the Alibaba marketplace.

Although the plaintiffs alleged that each Merchant Defendant had engaged in fraudulent conduct with the purpose of profiting from the sale of counterfeit products, they did not allege that the Merchant Defendants had associated for the common purpose of engaging in a course of conduct. Nor did they plausibly allege that the competing Merchants had worked together to achieve those purposes.

Ultimately, the plaintiffs’ complaint did not indicate that the Merchant Defendants—who were located in different parts of the country—had agreed to act together. Plausibly read, the complaint merely alleged that each Merchant Defendant had independently engaged in a pattern of racketeering, without any coordination with other defendants.

The plaintiffs argued that the existence of a relationship between and among the Merchant Defendants could be inferred from their participation in the Alibaba ecosystem. The Merchant Defendants were aware of each other’s existence, the plaintiffs explained, because all of them operated within the Alibaba ecosystem.

The court rejected that argument. The Alibaba Marketplaces had "millions of merchants," the court explained, and the Merchant Defendants operated within different Marketplaces. Some operated on Alibaba.com, for example, and others operated on Taobao.com or AliExpress.com. In any event, a generalized awareness of the existence of a competitor did not establish the existence of an "interpersonal relationship," as described in Boyle.

Similarly, the fact that all of the Merchant Defendants obtained common benefits from the Alibaba ecosystem did not show that a relationship existed between and among the Merchant Defendants. Significantly, the Merchant Defendants did not act in ways that benefited each other, did not rely on each other to accomplish their activities, and did not otherwise function as a "continuing unit."

Finally, the plaintiffs argued that the Merchant Defendants benefited each other as the result of the "self-reinforcing network effects" that benefited all of the participants in the Alibaba Marketplaces. However, the benefits that the Merchant Defendants received from each other—by selling counterfeit goods—was "no greater or different than the benefit that merchants selling genuine goods receive[d] by operating in the Alibaba Marketplaces." According to the court, the plaintiffs’ allegations failed to show that the Merchant Defendants had engaged in anything more than parallel conduct.

The case is No. 15-cv-3784 (PKC).

Attorneys: Anne Maureen Coyle (Gibson, Dunn & Crutcher, LLP) for Gucci America Inc., Balenciaga S.A., and Balenciaga America, Inc. Jared R. Friedmann (Weil, Gotshal & Manges, LLP) for Alibaba Group Holding Ltd., Alibaba.com Hong Kong Ltd., and Alibaba.com Ltd.

Companies: Gucci America Inc.; Balenciaga S.A.; Balenciaga America, Inc.; Alibaba Group Holding Ltd.; Alibaba.com Hong Kong Ltd.; Alibaba.com Ltd.

Cases: RICO NewYorkNews