Antitrust Law Daily Wrap Up, RICO—SDNY: Upstream Cigarette Seller Not Liable for Alleged RICO Violations Related to Selling Cigarettes Bought Online, (May 20, 2013)

By Jody Coultas, J.D.

The City of New York could not state Racketeer Influenced and Corrupt Organizations Act (RICO) claims against upstream cigarette seller Charles Wells because there was no evidence of an enterprise that engaged in RICO violations, according to the federal district court in New York City (City of New York v. Chavez, May 13, 2013, Forrest, K.).

The City sued online cigarette sellers, those sellers' cigarette suppliers, and several dozen of those sellers' buyers and downstream sellers for violations of the Contraband Cigarette Trafficking Act (CCTA) and RICO.

A civil RICO claim required the City to show that Wells, through the commission of two or more acts constituting a "pattern" of "racketeering activity," directly or indirectly participated in an "enterprise," the activities of which affected interstate or foreign commerce and caused injury to plaintiff. To establish a conspiracy to violate RICO, the City needed to prove a conspiracy to commit acts that, if successful, would constitute a substantive civil RICO violation; the defendant agreed to join in, and knowingly participated in, the conspiracy; and the defendant acted in furtherance of the conspiracy.

Wells argued that there was no conspiracy to violate RICO because the underlying acts did not constitute a substantive RICO violation. Specifically, Wells argued that there was no “enterprise.” A number of courts have found that no "association-in-fact" enterprise exists when the evidence proved separate and parallel vertical, bilateral relationships between one central actor and several independent actors one level removed from the central actor in the scheme. Such an organization is known as a "hub and spokes" association. Wells argued therefore that the relationships at issue did not require any ongoing organization, coordination of any kind, dependence, or common purpose.

An enterprise in a hub and spokes association case must have "ongoing organization"; the enterprise must "function as a continuing unit"; it must "have a common purpose of engaging in a course of conduct"; its members must be in certain ways "dependent" on one another; its members must be in certain ways "joined together as a group"; its members must act in certain ways "to benefit" one another; its members must contribute to the association's goals and purposes in some "necessary and symbiotic" manner; and its members' activities must in some manner "rely" on other members' activities. If each act of fraud was equally effective without the perpetration of any other act of fraud, then no enterprise existed. If each act of fraud was not effective without the other acts of fraud, then a RICO enterprise existed.

The City was unable to show that the relationships at issue were more than a hub and spokes association, according to the court. Wells was knowingly involved in, and knowingly facilitated, illegal activity in violation of the CCTA and state tax laws. However, there was no evidence that any of the illegal acts required the existence of any other defendant's illegal act in order to be effective in bringing profits to Wells. There was no evidence of collaboration or cooperation between the parties. Testimony suggested that Wells was not necessary for the perpetuation of the overarching scheme. The City needed to prove more than the fact that individuals were all engaged in the same type of illicit conduct during the same period. However, the evidence only established a hub and spokes association that did not support the RICO claims.

The case is No. 11 Civ. 2691 (KBF).

Attorneys: Eric Proshansky for New York City Department, City of New York. Jeffrey Kent (Wicker Reed Wicker PLLC) for Israel Chavez.

Cases: RICO NewYorkNews