Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Retailer's claim against FedEx and subsidiaries failed to meet distinctness requirement, (Jan 28, 2016)

By Edward L. Puzzo, J.D.

A RICO case brought by a retailer against Fed Ex and two of its subsidiaries must be dismissed because the three defendant corporations, while separately incorporated, did not use the structure of their relationship to facilitate unlawful activity, and therefore the distinctness requirement of RICO was not met, the federal district court in New York City has ruled (U1IT4less, Inc. v. FedEx Corporation, January 27, 2016, Forrest, K.).

Plaintiff U1IT4less, doing business as NY Biker Gear, is an Internet retailer of motorcycle-related clothing and accessories. Plaintiff alleged that when FedEx shipped its products to customers, it improperly calculated the weights, and thus the charges, for certain packages and further incorrectly charged plaintiff custom charges for packages shipped to Canada that should have charged to recipients. Plaintiff brought claims against three related FedEx companies—FedEx Corporation, FedEx Corporate Services, and FedEx Ground Package System—alleging that its actions violated the Racketeer Influenced and Corrupt Organizations (RICO) Act. Defendants moved to dismiss.

Under Section 1962(c) of the RICO Act, the plaintiff must allege, among other requirements, an adequately distinct enterprise and a pattern of racketeering activity. The court discussed other Second Circuit decisions addressing the issue of "distinctness."

The court in Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339 (2d Cir. 1994) stated that the distinctness requirement may not be circumvented by alleging a RICO enterprise that consists of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant. Even where the defendant corporations were legally separate from each other, distinctness could be lacking if the defendant corporations acted within the scope of a single corporate structure, guided by a single corporate consciousness, Discon, Inc. v. NYNEX Corp., 93 F.3d 1055 (1996).

On the other hand, the court in City of New York v. Smokes-Spirits.com, Inc., 541 F.3d 425 (2d Cir. 2008), rev’d on other grounds, 559 U.S. 1 (2010), citing the distinctness standards articulated in U.S. Supreme Court case of Cedric Kushner Promotions, Ltd. v. King, 219 F.3d 115 (2d Cir. 2000), rev’d, 533 U.S. 158 (2001), only required that the RICO person and the alleged enterprise be legally, if not necessarily actually, distinct.

Given the foregoing differing requirement distinctness requirements, the Seventh Circuit's definition in Bucklew v. Hawkins, Ash, Baptie & Co., 329 F.3d 923 (7th Cir. 2003) was useful, the court stated. The Seventh Circuit stated that separate incorporation did not constitute sufficient distinctness to trigger RICO liability unless the enterprise’s decision to operate through subsidiaries rather than divisions somehow facilitated its unlawful activity.

Under that refinement of the distinctness requirement, the court found, the defendant corporations' relationship here did not meet the RICO distinctness requirement. There are many reasons a company may choose to make use of separate incorporation of its subsidiaries, and Section 1962(c) does not stand for the proposition that every company that commits fraud after doing so violates the RICO Act, the court stated. FedEx Corporation, the parent company, interacted with its subsidiaries, and they interacted with each other, exactly as they would have had the subsidiaries been divisions of a single FedEx Corporation, and their separate legal status was not used to facilitate unlawful activity. Therefore, the distinctness requirement of RICO was not met, and defendants' motion to dismiss must be granted, the court ruled.

The case is Civil Action No. 1:11-cv-01713-KBF.

Attorneys: Ilze Caroline Thielmann (Whatley Kallas, LLP) for U1IT4less, Inc. Aaron T. Cassat for FedEx Corporation and FedEx Corporate Services, Inc. Jeremy O. Harwood (Blank Rome LLP) for FedEx Ground Package System, Inc.

Companies: U1IT4less, Inc.; FedEx Corporation; FedEx Corporate Services, Inc.; FedEx Ground Package System, Inc.

Cases: RICO NewYorkNews