Antitrust Law Daily Wrap Up, RICO—W.D. Mo.: RICO claims against cleaning business franchisor and others dismissed for failure to state a claim, (May 9, 2014)

By Edward L. Puzzo, J.D.

A complaint by cleaning business franchisees alleging RICO violations by their franchisor, "master franchisees" and their employees failed to state a claim upon which relief could be granted, and must be dismissed, the federal district court in Kansas City, Missouri has ruled (Jennings v. Bonus Building Care, Inc., May 7, 2014, Kays, G.).

Bonus Building Care is a nationwide cleaning franchise business. Plaintiffs Rosetta Jennings, and three other individuals who purchased and operated Bonus cleaning franchises, filed claims against 55 parties, alleging Racketeer Influenced and Corrupt Organizations Act (RICO) violations. The defendants included franchisors, intermediary "master franchisees" and various individuals employed by both. Defendants moved to dismiss, alleging either (1) a lack of personal jurisdiction, or (2) the failure to state a claim upon which relief can be granted, or both.

Personal jurisdiction. The court found that it had personal jurisdiction over defendants. The federal statute under which the claims were brought, RICO, authorized the exercise of personal jurisdiction in any district in which the defendants was found or transacted its affairs. The court found that at least one of the defendants operated its business within the Western District of Missouri, meeting this requirement.

To further address any due process concerns, the court noted that 29 defendants had process served on them, 11 others were individuals domiciled within the United States, and three corporate defendants had their principal places of business within the United States. Thus all were subject to the court's jurisdiction, the court ruled. The court therefore denied the motions to dismiss on jurisdictional grounds.

Claim upon which relief can be granted. Establishment of a Section 1962(c) RICO violation, the court explained, requires (1) the existence of an enterprise; (2) conduct by the defendants in association with the enterprise; (3) the defendants’ participation in at least two predicate acts of racketeering; and (4) conduct that constitutes a pattern of racketeering activity.

Here plaintiffs alleged that the Bonus system existed to defraud consumers by way of a pyramid scheme, "churning" franchisees, charging excessive fees and disregarding its obligations under franchise agreements. These allegations provided a purpose, but on the whole, the court continued, the complaint failed to establish that a RICO enterprise existed with regard to any of the defendants. Thus the first element of a Section 1962(c) RICO violation was not met.

Similarly, the second element was not met, continued the court, because as to 19 of the defendants, the complaint failed to allege any action, much less participation in the operation or management of an enterprise, and as to the rest of the defendants, since the court found that no RICO enterprise existed, every other defendant necessarily could not have operated or managed that enterprise.

As to the third element, plaintiffs alleged mail fraud and wire fraud as predicate acts for the RICO claim. But under Fed. R. Civ. P. 9(b), allegations of fraud require heightened "who, what, when, where and how" particularity, the court noted. The complaint alleged that material information was omitted from the franchise disclosure documents, but it failed to allege who originated these communications, from where, and how specifically these communications reached plaintiffs. The complaint also alleged that press releases concerning the business were fraudulent, but did not specify which statements were misleading, how they were issued, nor who received them. Generic allegations of the use of the mails to "fraudulently misrepresent the true nature" of the business are insufficiently specific under Rule 9(b). Thus the third element was insufficiently pleaded, the court ruled.

The complaint also failed to meet the requirements for fourth element, regarding a pattern of racketeering activity, since it failed to establish that any defendant committed one, much less a pattern, of predicate acts. The complaint alleged that plaintiffs suffered injuries to their business and property, but failed to explain which defendant caused which injuries, thus failing to plead proximate cause.

Due to the complaint's failure to properly plead a Section 1962(c) violation, the court dismissed the complaint for failure to state a claim upon which relief could be granted. The failure of plaintiff's claims under Section 1962(c) of RICO, of necessity also precluded a conspiracy claim under Section 1962(d), the court ruled.

The case is Civil Action No. 4:13-CV-663-W-DGK.

Attorneys: Jonathan E. Fortman (Fortman Law Firm) for Rosetta Jennings. Brad Jackson (Law Offices of Brad Jackson) for Bonus Building Care, Inc.

Companies: Bonus Building Care, Inc.

Cases: RICO FranchisingDistribution MissouriNews