BJ Skin & Nail Care v. INTERN. COSMETIC EXCHANGE

• Decision Date: 07 August 1986
• Docket Number: Civ. No. B-85-612(EBB).
• Court: U.S. District Court — District of Connecticut
• Parties: B.J. SKIN & NAIL CARE, INC. v. INTERNATIONAL COSMETIC EXCHANGE, INC.

641 F. Supp. 563

B.J. SKIN & NAIL CARE, INC. v. INTERNATIONAL COSMETIC EXCHANGE, INC.

Civ. No. B-85-612(EBB).

United States District Court, D. Connecticut.

August 7, 1986.

Allan B. Winston, Lakeville, Conn., for plaintiff.

Jamie K. Gerard, Nevas, Nevas & Rubin, Westport, Conn., for defendant.

RULING ON MOTION TO DISMISS

ELLEN B. BURNS, District Judge.

This case arises out of an October, 1984, sales agency agreement between the plaintiff ("B.J.") and the defendant ("I.C.E."). Under the agreement, I.C.E. was to market cosmetics manufactured by B.J. I.C.E. agreed to use its sales force to market B.J.'s products, receive payments from retail stores, and turn over these payments to B.J. In return for selling plaintiff's product and performing bookkeeping functions, I.C.E. was to receive commissions from the sales it generated.

At some point in October, 1985, B.J. began to believe that I.C.E. was failing to turn over sums received from retail outlets and commenced this suit. The first two counts are common law claims of conversion and fraud. The third count, and the subject of this motion, is a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq. This count alleges that the individual defendants, while associated with an "enterprise" (I.C.E.), conducted that enterprise's affairs through a "pattern of racketeering activity."¹ See 18 U.S.C. §§ 1962(c), 1964(c).² The alleged racketeering activities appear to be acts of mail and wire fraud, one such act occurring in June, 1985, and the remaining acts all occurring in a three-week period in October, 1985.³ See Amended Complaint, ¶ 24. The complaint alleges that these "predicate acts" establish a "pattern of racketeering activity" as defined by 18 U.S.C. § 1961(5) (a "pattern of racketeering activity" requires at least two acts of racketeering activity.) The defendants have moved to dismiss the third count for failure to plead that they were involved in a pattern of racketeering activity. Because the complaint fails to establish that these defendants were involved in more than one criminal episode, the motion to dismiss is granted.⁴

I.

In support of its RICO claim the plaintiff relies heavily upon the Supreme Court's ruling in Sedima, S.P.R.L. v. Imrex Company, Inc., ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985). Plaintiff claims that Sedima grants a broad license to plead civil RICO violations whenever a party can point to the commission of two predicate acts. Unfortunately for plaintiff, although Sedima gave a broader reading to the civil RICO provisions than had the Second Circuit, it also chastised the lower courts for allowing RICO to evolve into "something quite different form the original conception of its enactors" by failing "to develop a meaningful concept of `pattern.'" ___ U.S. at ___, 105 S.Ct. at 3287. Many courts have heeded this admonition by focusing on the requirements of "continuity plus relationship" of the predicate acts to determine if they establish a "pattern." Id. at ___, 105 S.Ct. at 3285 n. 14 (quoting S.Rep. No. 91-617, p. 158 (1969)).

In Superior Oil Co. v. Fulmer, 785 F.2d 252 (8th Cir.1986), the plaintiff had prevailed at trial on a RICO count, alleging and proving that, by committing several acts of mail and wire fraud as part of a scheme to steal gas from plaintiff's interstate pipeline, the defendants had engaged in a pattern of racketeering activity. The court, quoting extensively from Judge Newman's decision in United States v. Moeller, 402 F.Supp. 49, 57-58 (D.Conn. 1975), noted that the "common sense interpretation of the word pattern implies acts occurring in different criminal episodes, episodes that are at least somewhat separated in time and place yet still sufficiently related by purpose to demonstrate a continuity of activity." 785 F.2d at 255, n. 3. (emphasis in original).⁵ The Eighth Circuit found support for Judge Newman's common sense approach in Sedima's pointed footnote 14. The Supreme Court went out of its way to note that although two predicate acts were necessary to establish a pattern of racketeering activity, this did not mean that two such acts were sufficient. Rather, the purpose of RICO was not to target "sporadic" criminal activity or the "isolated offender" but to prevent the infiltration of legitimate businesses by continuing criminal activity. ___ U.S. at ___, n. 14, 105 S.Ct. at 3285 n. 14.

When viewed in this context it is apparent that RICO's reference to a "pattern" of racketeering activity was directed towards individuals who demonstrate a propensity to engage in continuous or on-going criminal activity rather than isolated acts. While Congress chose to make clear that a "pattern of racketeering activity" required the commission of at least two predicate acts, nothing in the statute demonstrates an intent to depart from the ordinary meaning of the word "pattern" by permitting courts to find that two illegal acts committed as part of a single fraudulent scheme are sufficient to impose liability under RICO.

The burgeoning use of RICO in ordinary business fraud litigation demonstrates the absurdity of an expansive concept of "pattern." Nearly all business dealings involve frequent use of telephones and mail. It becomes exceedingly easy for a party who feels injured in a business transaction to point to several telephone calls or letters exchanged as part of the transaction. Such an injured party may believe that his injury resulted from misrepresentations made during these communications. Of course, whether fraud actually occurred is a matter for the trier of fact to determine. But it is difficult to imagine that Congress intended the word "pattern" to be given such an all-encompassing definition that these typical business transactions would be "federalized" by RICO. See Fleet Management Systems v. Archer-Daniels-Midland Co., 627 F.Supp. 550, 555 (C.D. Cal.1986) ("litigators, lured by the prospect of treble damage awards, are now turning to federal courts in garden-variety fraud claims that would in the past have proceeded in state court.") A more sensible view is that Congress used the word "pattern" in its everyday sense to reach those who engage in numerous or continuous fraudulent schemes under the guise of legitimate business.

Most courts which have addressed this question post-Sedima have adopted this common-sense approach. Some have required plaintiffs to plead that the defendants have engaged in more than one related criminal episode. Superior Oil Co. v. Fulmer, 785 F.2d 252 (8th Cir.1986); Clodfelter v. Thuston, 637 F.Supp. 1034 (E.D. Mo.1986); Agristor Leasing v. A.O. Smith Corp., Inc., 634 F.Supp. 1208 (D.Kan.1986); Frankart Distributors, Inc. v. RMR Advertising, 632 F.Supp. 1198, (S.D.N.Y. 1986); Soper v. Simons Int'l, 632 F.Supp. 244 (S.D.N.Y.1986); Medallion T.V. Enterprises, Inc. v. Selec TV, Inc., 627 F.Supp. 1290 (C.D.Cal.1986): Allington v. Carpenter, 619 F.Supp. 474 (C.D.Cal.1985); Northern Trust Bank v. Inryco, 615 F.Supp. 828 (N.D.Ill.1985). Other courts have not gone to the extent of requiring a plaintiff to plead the defendant's involvement in multiple criminal episodes but have still required that the complaint allege an open-ended scheme over an extended period of time so as to demonstrate that the alleged criminal activity is "continuous" rather than isolated. See e.g. Temporaries, Inc. v. Maryland National Bank, 638 F.Supp. 118 (D.Md.1986) (communications leading to two fund transfers and a conditional stock transfer agreement over a two-month period insufficient to show "pattern"); Sheftelman v. Jones, 636 F.Supp. 263 (N.D.Ga. 1986) (mailings of a false statement to thousands of investors doesn't establish a "pattern"); Graham v. Slaughter, 624 F.Supp. 222 (N.D.Ill.1985) (Twenty acts of embezzlement over two and one-half year period sufficient to show a pattern). Cf. Alexander Grant & Co. v. Tiffany Industries, Inc., 770 F.2d 717 (8th Cir.1985) (allegations of thirty acts of mail and wire fraud sufficient to show continuous nature of scheme). Despite this trend and the Supreme Court's admonition against an expansive definition of "pattern", a few courts have persisted in allowing civil RICO complaints supported by allegations of two or more instances of mail or wire fraud in furtherance of a single fraudulent scheme. See R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350 (5th Cir.1985) (not discussing implications of Sedima's footnote 14); Trak Microcomputer Corp. v. Wearne Bros., 628 F.Supp. 1089 (N.D.Ill. 1985) (disagreeing with Northern Trust Bank v. Inryco, supra); Conan Properties v. Mattel, Inc., 619 F.Supp. 1167 (S.D. N.Y.1985) (not discussing footnote 14).

This court finds those decisions requiring plaintiffs to allege multiple criminal episodes to assert a civil RICO claim most persuasive. Such a requirement comports with the common sense meaning of the word "pattern," see Moeller, 402 F.Supp. at 57, while fulfilling the Congressional intent of targeting those who infiltrate legitimate business operations through continuing criminal activity.⁶ "Where there is only one purpose, one result, one set of participants, one victim, and one method of commission, there is no continuity and therefore no pattern of racketeering activity." Torwest v. Dick, 628 F.Supp. 163, 166 (D.Colo.1986).

II.

Under the multiple criminal episode approach of Superior Oil v. Fulmer, 785 F.2d 252, the complaint fails to allege a civil RICO claim. Essentially, the defendants are accused of engaging in a criminal scheme to defraud the plaintiff by entering into a marketing agreement and converting funds that should have been delivered to the plaintiff. Although this single criminal scheme may have involved a number of separate criminal acts, there are no allegations in the complaint that indicate that this scheme was anything but an isolated or sporadic episode. This scheme, if proven, does not amount to the type of long-term,...