Antitrust Law Daily Wrap Up, RICO—SDNY: City of New York’s RICO Claims Proceed Against Tobacco Sellers over Failure to Pay Taxes, (May 22, 2013)

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

The City of New York has stated RICO claims against a tobacco retailer, its owners, and a delivery company over their alleged failure to prepay taxes on the tobacco products they sold to city residents, in violation of the federal Contraband Cigarette Trafficking Act (CCTA), the federal district court in New York City has ruled (City of New York v. Gordon, May 21, 2013, Furman, J.).

Robert Gordon, a member of the Seneca Nation of Indians, owns All Of Our Butts, a company selling tobacco products over the phone and internet, with his wife, Marcia Gordon. According to the city’s complaint, All Of Our Butts sold untaxed cigarettes to customers in the city, in violation of New York State and city laws requiring sellers to prepay taxes on the tobacco products they sell. The cigarettes were allegedly delivered through Regional Integrated Logistics, Inc. d/b/a Regional Parcel Services (RPS).

The City of New York filed suit against the Gordons and RPS, asserting that they violated the federal Prevent All Cigarette Trafficking Act (PACT Act), the CCTA , the New York Cigarette Marketing Standards Act (CMSA), and the federal RICO Act. The defendants filed a motion to dismiss.

The court explained that, to state a claim under the RICO Act, a RICO plaintiff must establish (1) that the defendant violated the RICO statute, (2) that the plaintiff suffered “an injury to business or property,” and (3) “that the injury was caused by the violation of” the RICO Act.

RICO enterprise. To allege a violation of the RICO statute, a plaintiff must allege both a RICO “person” and a RICO “enterprise” “that is not simply the same ‘person’ referred to by a different name.” The court found the city met this standard by identifying the RICO enterprise as “All Of Our Butts,” and alleging that Robert Gordon, Marcia Gordon, several John Doe defendants, and RPS had “been employed by or associated with” the enterprise. The court found it “clear from the complaint” that the RICO enterprise “All Of Our Butts” was distinct from the RICO person “Robert Gordon d/b/a All Of Our Butts.”

Moreover, even if it had been alleged “that the ‘d/b/a’ itself was the relevant enterprise, such an allegation would still be sufficient,” according to the court. The court observed that “[a] sole proprietorship may constitute a RICO enterprise distinct from the individual defendant who owns it, so long as the proprietorship is not ‘strictly a one-man show,’” and the city had alleged that All Of Our Butts employed multiple people.

Predicate acts. The court also found that the city had sufficiently alleged a pattern of racketeering activity by alleging that the defendants had “engaged in acts that were indictable under the CCTA.” The court had previously found that Marcia Gordon and RPS could be sued under the CCTA, and therefore rejected their use of the same arguments to claim that they were not indictable under it.

The court also rejected Robert Gordon’s argument that the city could not state a RICO claim against him because it had not asserted a CCTA claim against him and because it could not “accuse him of violating the CCTA” since he was an “Indian in Indian Country.” The court observed that a civil RICO claim did not require “that a plaintiff bring a substantive claim for commission of the relevant predicate acts.” In addition, Robert Gordon’s “immunity from a civil suit under the Act [did] not render him immune from indictment and criminal prosecution under the Act,” and hence he was “indictable” under the CCTA for purposes of the RICO Act.

Pattern of racketeering activity. The court explained that to allege a pattern of racketeering activity a plaintiff must plead “at least two acts of racketeering activity” occurring within a ten-year period. The court found that the city satisfied this requirement by alleging that the Gordons had “since May 2002, sold, distributed, and caused to be delivered thousands of cartons of unstamped cigarettes to persons” in the City; that since June 2009 RPS had “received, transported and distributed the unstamped cigarettes” to customers in the City; and that All Of Our Butts sold contraband cigarettes, delivered by RPS, to city investigators on two occasions in 2012. The City also alleged both predicate acts that extended over a period of more than two years, and “a threat of continuing criminal activity beyond the period during which the predicate acts were performed.”

Injury to business or property. The court quickly disposed of the “injury to business or property” element, citing case precedent for the proposition that “lost taxes can constitute injury to business or property for purposes of RICO.”

Causation. Finally, the court rejected the defendants’ argument, based on the Supreme Court’s 2010 decision in Hemi Group, LLC v. City of New York, 559 U.S. 1, that the City’s lost tax revenue was not proximately caused by the alleged RICO violations. In Hemi Group, the City claimed that an out-of-state cigarette dealer’s failure to file reports required by federal law made it easier for City consumers to avoid paying taxes, but the Supreme Court found the causal link between the dealer’s failure to file reports with the state and the taxpayer’s failure to pay taxes “was too weak to support a RICO claim.”

Here, however, the defendants were in-state cigarette dealers “required to charge, collect, and remit taxes directly to the City,” and therefore their “selling, shipping, and transporting of the cigarettes was a direct cause of the tax evasion that injured the City,” according to the court.

The court also granted a preliminary injunction to the city against the defendants’ operation, finding that the city was likely to succeed on its claims under the PACT Act, CMSA, and CCTA.

The case is No. 12 Civ. 4838 (JMF).

Attorneys: Aaron Michael Bloom, New York City Law Department, for City of New York. Marybeth Priore (Colucci & Gallaher, P.C.) for Regional Integrated Logistics, Inc.

Companies: All Of Our Butts; Regional Integrated Logistics, Inc.

Cases: RICO NewYorkNews