Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Technology firm failed to identify predicate act to support federal RICO claims against patent troll, (May 20, 2014)

By Cheryl Beise, J.D.

Technology company FindTheBest.com, Inc. (“FTB”) failed to allege sufficient facts to state Racketeer Influenced Corrupt Organizations (RICO) Act claims against Boston-based patent assertion firm Lumen View Technology LLC (“Lumen”) and others who allegedly formed a series of “shell” entities and engaged in abusive litigation for the purpose of extorting “licensing fees” or settlements from accused infringers, the federal district court in New York City had held (FindTheBest.com, Inc. v. Lumen View Technology LLC, May, 2014, Cote, D.). FTB’s suit was dismissed because it failed to identify predicate acts to support its federal RICO claim, and the court declined to exercise supplemental jurisdiction over FTB’s remaining state law claims.

On September 16, 2013, FTB filed suit against Lumen View Technology LLC, Dalton Sentry, LLC, DecisionSorter, LLC, Hillcrest Group, Inc., Eileen C. Shapiro, and Steven J. Mintz (collectively “the defendants”), asserting federal RICO Act violations, and claims arising under California state law for extortion, abuse of process, malicious prosecution, and violations of California’s Unfair Competition Law.

FTB accused the defendants of operating non-practicing shell entities for the purpose of filing serial frivolous patent infringement lawsuits in bad faith against legitimate businesses without probable cause and without conducting proper due diligence and investigation into whether their targets were infringing the asserted patent claims.

Shapiro and Mintz formed Lumen in February 2012. One week after its formation, Lumen became the exclusive licensee of U.S. Patent 8,069,073 (the ’073 patent), issued on November 29, 2011 to Shapiro and Mintz, for a “System and Method For Facilitating Bilateral And Multilateral Decision-Making.” The patent claimed a process whereby two or more people entered and ranked their preferences, and then a computer used an algorithm to arrive at an optimal meeting point based on both parties’ input.

Lumen filed at least 20 lawsuits asserting infringement of the ’073 patent, including one against FTB. FTB operated a website that matched users with goods or services using user-defined criteria. On November 22, 2013, the federal district court in New York City issued an opinion and order dismissing Lumen’s infringement suit against FTB. The court held that the’073 patent was invalid under 35 U.S.C. §101 because it claimed an unpatentable abstract idea: computer-assisted matchmaking.

The defendant moved to dismiss FTB’s first amended complaint in its entirety. The defendants argued that their right to bring patent infringement litigation was protected by the Noerr-Pennington doctrine and FTB failed to adequately plead a RICO claim. Because the court agreed that FTB failed to plead a RICO violation, it did not reach the defendants’ Noerr-Pennington argument.

RICO Act

FTB alleged that the defendants violated 18 U.S.C. §§ 1962(c) and 1962(d). To state a viable RICO claim pursuant to 18 U.S.C. § 1962(c), a plaintiff must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. To state a claim for conspiracy to violate RICO under 18 U.S.C. 1962(d), a plaintiff must allege a conspiracy to commit a substantive RICO violation pursuant to 18 U.S.C. § 1962(a), (b), or (c).

The RICO Act defines “Racketeering” to include a variety of activities, including four specifically alleged by FTB: (1) extortion under the Hobbs Act, 18 U.S.C. § 1951, (2) mail fraud under 18 U.S.C. § 1341, (3) wire fraud under 18 U.S.C. § 1343, and (4) criminal felony extortion under state law.

Hobbs Act extortion. The Hobbs Act defines extortion as “the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.” 18 U.S.C. § 1951. FTB alleged that the defendants filed frivolous lawsuits with the wrongful intent and effect of causing fear of economic loss.

All Circuit Courts that have addressed the issue have agreed that the instigation of meritless litigation cannot constitute extortion under the Hobbs Act. While the Second Circuit had not yet faced the question, district courts in the Second Circuit have held that the filing of meritless litigation, or even malicious prosecution, is not a predicate RICO act.

FTB’s Hobbs Act claim was not saved by its contention that Lumen’s attorney threatened FTB’s CEO with criminal charges for calling Shapiro a “patent troll,” the court added. FTB did not explain how a threat to pursue criminal charges for using the term “patent troll” constituted an integral part of the defendants’ alleged pattern of racketeering activity.

Mail fraud and wire fraud. FTB also could not predicate its RICO claims on the defendants’ alleged acts of mail fraud and wire fraud. To constitute a RICO predicate act, a pleading of wire fraud or mail fraud must plausibly allege reliance on the misrepresentations at issue, the court noted.

FTB did not plead that it took any actions in reliance on any of the defendants’ purportedly false statements. To the contrary, FTB disputed from the outset that it was infringing the ’073 patent and successfully litigated to invalidate it, the court observed.

The Supreme Court has held that a third party’s reliance on a defendant’s fraudulent representation can suffice to establish the requisite causation between that representation and a first party’s injury. But FTB failed to establish that anyone’s reliance on Lumen’s alleged misrepresentations caused injury to FTB.

In addition, courts have consistently refused to recognize as wire or mail fraud litigation activities, even those arising to the level of malicious prosecution, as RICO Act violations simply because the mail or wires were used.

Travel Act. The Travel Act makes it a crime to travel between states with the intent to commit specified crimes listed in the statute, or to use the mail to commit those crimes. 18 U.S.C. § 1952(a). The defendants’ alleged crimes committed in violation of the Travel Act mirrored the extortion, mail fraud, and wire fraud claims already addressed. Because FTB failed to state a claim for a violation of those predicate acts, FTB’s Travel Act claim failed as well.

California criminal law. California penal law defines extortion as “the obtaining of property from another, with his consent, or the obtaining of an official act of a public officer, induced by a wrongful use of force or fear, or under color of official right.” Cal. Penal Code § 518.

FTB plausibly alleged that the defendants’ patent infringement lawsuit against FTB was “objectively baseless,” or otherwise constituted extortion under California law, according to the court. However, a RICO action requires a “pattern” of racketeering activity and FTB did not plausible plead that California law applied to any of the other allegedly extortionate lawsuits filed by the defendants.

The court also noted that public policy counseled against basing a RICO claim on an abusive litigation. Recognizing abusive litigation as a form of extortion would subject almost any unsuccessful lawsuit to a colorable extortion, the court said.

Because FTB failed to allege a predicate RICO act, other than a single claim for extortion under California law, its RICO claims necessary failed.

Supplemental jurisdiction. FTB also pleaded four state law tort claims, but the court declined to exercise supplemental jurisdiction over them. It is well settled that where the federal claims are eliminated in the early stages of litigation, courts should generally decline to exercise pendent jurisdiction over remaining state law claims. The litigation was at an early stage; discovery had not yet commenced, and principles of judicial economy did not counsel in favor of the exercise of jurisdiction. FTB was a California company and there was no reason why convenience favored resolution of its state law claims in New York federal court.

The case is No. 13 Civ. 6521 (DLC).

Attorneys: Joseph Leventhal (Leventhal Law, LLP) for FindTheBest.com, Inc. Mark P. Goodman and Carl Riehl (Debevoise & Plimpton, LLP) for Decisionsorter, LLC, The Hillcrest Group, Inc., Eileen C. Shapiro, and Steven J. Mintz. Richard C. Weinblatt (Stamoulis & Weinblatt, LLC) for Lumen View Technology, LLC and Stamatios Stamoulis.

Companies: FindTheBest.com, Inc.; Lumen View Technology, LLC; Decisionsorter, LLC; The Hillcrest Group, Inc.

Cases: RICO NewYorkNews