Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Lack of enterprise, injury dooms GM racketeering claims, (Jul 18, 2016)

By Greg Hammond, J.D.

Consumers failed to sufficiently allege an enterprise or injury to support claims that a vehicle manufacturer, its outside counsel, and its claims administrator violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by concealing the existence of vehicle defects from regulators and the public and misrepresenting the safety of vehicles, the federal district court in New York City has determined. The allegations merely demonstrated that outside counsel and the claims administrator acted in concert with the manufacturer to carry out its ordinary affairs, which did not constitute a RICO enterprise. In addition, the consumers’ benefit-of-the-bargain defect theory could not be used to demonstrate RICO injury (In re General Motors LLC Ignition Switch Litigation, July 15, 2016, Furman, J.).

Thousands of individuals who owned or leased General Motors (GM) vehicles alleged that they or others were harmed by a drop in their cars’ value due to the revelations of General Motors LLC’s (GM LLC’s) cover-up of the ignition switch and other potentially fatal defects. GM LLC moved to dismiss the consumers’ claims brought under RICO and state consumer protection and deceptive trade practices laws.

RICO enterprise. GM first moved to dismiss the RICO claim for a failure to allege the existence of an "enterprise." The consumers alleged that GM LLC, its outside counsel King and Spalding LLP (K&S), and its claims administrator ESIS, Inc. formed an enterprise united by the "common purpose" of knowingly facilitating GM’s scheme to conceal the ignition switch defect and maintain a profitable business. However, the consumers failed to make any allegation that the defendants were sufficiently organized and devoted to the alleged illicit purposes that the resulting whole functioned as a continuing unit and that their common purpose was dictated by GM LLC, who controlled the corporate entities’ activities and manipulated them to the desired illicit ends.

The consumers also alleged that K&S worked with GM LLC to settle cases involving the ignition switch defect in order to prevent the defect from coming to light. All this demonstrated, however, was that K&S and ESIS acted in concert with GM LLC to carry out its business, and had no common purpose beyond helping GM LLC carry on its ordinary affairs. There was consequently no RICO enterprise, the court concluded.

RICO injury. The consumers also failed to allege injury to "business or property" within the meaning of RICO, the court determined. In particular, the consumers alleged a benefit-of-the-bargain defect theory—that plaintiffs who purchased defective cars were injured when they purchased a GM car that contained a latent defect, and had they known about the defect, they would have paid less for the car or not bought the car at all because a car with a safety defect was worth less than a car without a safety defect. This benefit-of-the-bargain defect theory, however, could not be used to demonstrate a RICO claim for harm to property under Second Circuit precedent, the court stated. The motion to dismiss the RICO claim was therefore granted.

State claims. Nevertheless, the benefit-of-the-bargain defect theory—that various consumers purchased cars that they would otherwise not have, had they known about the undisclosed defects, and that they suffered an economic loss from the difference in value between a defective car and a defect-free car—was sufficient to demonstrate they suffered a loss or injury under California’s Unfair Competition Law and Consumer Legal Remedies Act, the Florida Unfair and Deceptive Trade Practices Act, the Maryland Consumer Protection Act, the Oklahoma Consumer Protection Act, and the Virginia Consumer Protection Act. The motion to dismiss these claims was therefore denied.

The D.C. Consumer Protection Procedures Act claim, however, failed as a matter of law and was dismissed because the D.C. consumer’s vehicle was not purchased, leased, or received in the District of Columbia, he did not allege that he relied on any representation by GM LLC, and he did not allege that GM LLC made any misrepresentations or omitted material facts.

The case is No. 1:16-cv-05525-JMF.

Attorneys: Edward Charles Kruse (Kruse Law, LLC) for Megan Webb.

Companies: General Motors LLC

Cases: RICO ConsumerProtection StateUnfairTradePractices NewYorkNews