Antitrust Law Daily Wrap Up, RICO—SDNY: Allegedly Fraudulent Sale of Luxury Watches Not Sufficiently “Related and Continuous” to Constitute RICO Pattern of Racketeering Activity, (Apr 15, 2013)

By Tobias J. Gillett, J.D., LL.M.

Purchasers of luxury watches failed to state RICO claims against the retailer of the watches and related individuals over the allegedly fraudulent sale of the watches as new when the watches were used and had been repaired, because the purchasers failed to allege a sufficiently "related and continuous" pattern of racketeering activity, the federal district court in New York City has ruled (Kalimantano v. Motion in Time, Inc., April 12, 2013, Engelmayer, P.).

Motion in Time, Inc. (MIT) sells jewelry and watches. According to the complaint, in 2010 a customer from Kazakhstan ordered a new watch from MIT, but later discovered it was used and had been repaired. MIT refused to take it back. The customer later assigned his claim to the German company Kalimantano GmbH.

In 2009, one of Kalimantano’s principals, Tofik Davidoff, began receiving e-mails from MIT promoting discounts on their luxury watches. In January 2012, Davidoff purchased a watch from MIT on behalf of three Kalimantano trading partners in Kazakhstan. Davidoff sought to purchase two other watches from MIT, but became suspicious during the transaction and canceled one wire transfer, although two others had already cleared.

The trading partners later informed Davidoff that the watch that was purchased was used and had been repaired. They returned the watch to a Kalimantano manager, made him liable for the money they paid for the watch, and assigned him their claims. MIT refused to refund the money paid for the watch or the two wire transfers that had not been canceled in time. MIT representatives allegedly also made telephone calls to Davidoff threatening to harm him and his family and to contract for his murder. They also created a website accusing Davidoff of stealing the watch.

Kalimantano, Davidoff, and two other Kalimantano employees filed suit against MIT and four MIT-related individuals, alleging violations of the RICO Act, among other claims. The defendants filed a motion to dismiss.

The court explained that a plaintiff must demonstrate "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity" to state a RICO claim under 18 U.S.C. § 1962(c).

Predicate acts. The pattern of racketeering must consist of "at least two acts of racketeering activity" within a ten-year period. Here, the plaintiffs adequately pled the presence of mail or wire fraud associated with the watch transactions. Therefore, whether or not the plaintiffs’ additional allegations of "witness tampering, extortion, and money laundering" were sufficiently pled, the claims satisfied the "conduct" element of a RICO claim.

Enterprise. To satisfy the "enterprise" element, a plaintiff must allege "two distinct entities: "(1) a ‘person’ and (2) an ‘enterprise’ that is not simply the same ‘person’ referred to by a different name." Here, the plaintiffs alleged that the individual defendants had committed the acts of fraud through the vehicle of MIT. Since MIT as the enterprise was alleged to be separate from the individual defendants, and the only the individual defendants were "alleged to have used the MIT shop as the hub for their racketeering activities," the plaintiffs had adequately pled the "enterprise" element."

Pattern of racketeering activity—open-ended continuity. To adequately plead a "pattern of racketeering activity," a plaintiff must plead predicate acts that are "related and continuous," with the "continuity" fitting either a closed- or open-ended pattern. Open-ended continuity requires "evidence from which it may be inferred that the predicate acts were the regular way of operating [the enterprise], or that the nature of the predicate acts themselves implies a threat of continued criminal activity." Since the plaintiffs had conceded that MIT was a "legitimate business," they had to demonstrate that the "predicate acts were the regular way in which they operated their legitimate business or that the nature of these acts themselves implies a threat of continued criminal activity."

The court concluded that the plaintiffs allegations of "three, or perhaps, four instances in which MIT sold as new luxury watches that were not so" were insufficient to state a RICO claim. Six additional complaints about MIT’s business practices gleaned from an online review website did not alter this conclusion, because only two alleged similar sales of used watches as new, and even if those reviews were counted the plaintiffs would only have alleged six instances of fraud in MIT’s eight years of operation.

Moreover, the allegations did not demonstrate a "threat of continuing criminal activity over time." The court observed that similar allegations of alleged illegal conduct in otherwise legitimate sales of property "have generally not been held to imply a threat of continuing criminal activity." The allegations presented merely "isolated or sporadic" fraudulent conduct, not "long-term criminal conduct."

Although finding it a "more difficult" question, the court also rejected the argument that the defendants’ alleged "witness tampering and extortion" implied "a threat of continuing criminal activity." The court noted that "an official proceeding does not have to be pending" for the federal statute proscribing witness intimidation to apply, but that it "contemplates at least an investigation another kind of legal process that would plausibly arise and cause a witness to be summoned." Here, the plaintiffs did not show that the defendants had made any threats "in contemplation of an actual future court proceeding."

Even if the statute would apply, however, it would not constitute the requisite "continued threat of racketeering activity," in the court’s view. The "logical conclusion" of the allegations was that the defendants would have ceased their threats had Davidoff given in to them, and thus the "extortionate conduct" would not have continued indefinitely. Moreover, the plaintiffs had not alleged any threats made between October 4, 2012, and January 11, 2013, when the plaintiffs filed a motion to supplement, and were made from New York City, 3,800 miles from the plaintiffs in Germany. Therefore, they did not constitute "a realistic threat of continuing criminal activity, according to the court."

Pattern of racketeering activity—closed-ended continuity. The court also found that the plaintiffs had not alleged open-ended continuity. The court observed that open-ended continuity generally requires a period of racketeering activity lasting at least two years, although that duration on its own was insufficient "to support a finding of a closed-ended pattern."

Here, the plaintiffs alleged that the RICO conspiracy began with the sending of the e-mails from MIT in 2009, and extended through the last threatening telephone call on October 4, 2012. Although those allegations were nominally "consistent with a period of just short of four years," the allegations regarding the e-mails were "too blurry and inexact to qualify as RICO predicates." The court noted that fraud allegations had to be pled with particularity pursuant to Federal Rule of Civil Procedure 9(b), and the allegations did not quote the e-mails, specify their dates, or describe their content beyond stating that they contained promotional messages regarding "unusual discounts" on luxury watches. The plaintiffs also failed to allege that the defendants had a fraudulent intent at the time they sent the e-mails. Taking away the e-mail allegations, the plaintiffs pled no more than a two-year conspiracy.

Even if the allegations satisfied the two-year minimum requirement, the court observed that allegations of fraud involving "a limited number of participants or victims, a discrete scheme with a narrow purpose or a single property—as opposed to complex, multi-faceted schemes—are generally insufficient to demonstrate closed-ended continuity." Here, the allegations of "several instances in which watches were sold on false or misleading pretenses" did not "come close to describing a fraudulent scheme of sufficient breadth or reach to meet the pattern requirement," nor did the additional claims of threats and money laundering. Since the plaintiffs’ allegations did not satisfy either open- or closed-ended continuity, the court dismissed the RICO claims.

The court also dismissed the plaintiffs’ claims for conversion, fraudulent conveyance, fraud, misrepresentation, civil conspiracy, defamation, tortious interference with business relations, and injunctive relief, but declined to dismiss claims for breach of contract, money had and received, and unjust enrichment.

The case is No. 12 Civ. 6969 (PAE).

Attorneys: George Lambert (Law Offices of Leonard Suchanek) for Kalimantano GmbH. Jonathan H. Rosenthal (Malman, Malman & Rosenthal) for Motion in Time, Inc.

Companies: Kalimantano GmbH; Motion in Time, Inc.

Cases: RICO NewYorkNews