De Jesus v. Sears, Roebuck & Co., Inc.

• Decision Date: 25 June 1996
• Docket Number: D,No. 713,713
• Court: U.S. Court of Appeals — Second Circuit
• Parties: 1996-1 Trade Cases P 71,452, RICO Bus.Disp.Guide 9077 Edwin De JESUS, individually and on behalf of all others similarly situated, Carolyn Penzo, Les Totans, William Cooke, Cary Welsh, Leonard Toland, Randy J. Lane, Deborah Lynne Debordes, Nixon McCune and Ronald G. Redding, Plaintiffs-Appellants, v. SEARS, ROEBUCK & CO., INC., Defendant-Appellee. ocket 95-7424.

Page 65

87 F.3d 65

1996-1 Trade Cases P 71,452, RICO Bus.Disp.Guide 9077

Edwin De JESUS, individually and on behalf of all others similarly situated, Carolyn Penzo, Les Totans, William Cooke, Cary Welsh, Leonard Toland, Randy J. Lane, Deborah Lynne Debordes, Nixon McCune and Ronald G. Redding Plaintiffs-Appellants, v. SEARS, ROEBUCK & CO., INC., Defendant-Appellee.

No. 713, Docket 95-7424.

United States Court of Appeals Second Circuit.

Argued Dec. 20, 1995.

Decided June 25, 1996.

Patrick M. Wall, New York City, for Plaintiffs-Appellants.

Theodore N. Mirvis, New York City (Paul K. Rowe, Meir Feder, Wachtell, Lipton, Rosen & Katz, New York City, of counsel), for Defendant-Appellee.

Before: KEARSE, MAHONEY, and PARKER, Circuit Judges.

MAHONEY, Circuit Judge:

Plaintiffs-appellants Edwin De Jesus, Carolyn Penzo, Les Totans, William Cooke, Cary Welsh, Leonard Toland, Randy J. Lane, Deborah Lynne Debordes, Nixon McCune, and Ronald G. Redding ("Plaintiffs") appeal from a judgment entered March 28, 1995 in the United States District Court for the Southern District of New York, Michael B. Mukasey, Judge, that: (1) dismissed the federal claims stated in their third amended complaint (the "Complaint") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure; (2) declined to exercise supplemental jurisdiction over their pendent state law claims; and (3) denied leave to amend the Complaint. The Complaint alleged that defendant-appellee Sears, Roebuck & Co., Inc. ("Sears") violated § 1 of the Sherman Act, as amended, 15 U.S.C. § 1, ¹ § 3 of the Clayton Act, 15 U.S.C. § 14, ² and a provision of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(a)-(c). ³ The complaint also alleged pendent state law claims.⁴

On appeal, Plaintiffs contend that the Complaint was improperly dismissed. We disagree and affirm the judgment of the district court.

Background

This suit arises out of a Neighborhood Office Agent ("NOA") program instituted by Allstate Insurance Company ("Allstate") in late 1984 or early 1985 through which Allstate offered its agents the opportunity to establish local neighborhood Allstate offices. According to Sears, this program enabled participating agents to choose their own office sites, select their own staff, decide upon the level of office expenses, and maintain operational control over their own offices. Allstate would reimburse each NOA for office expenses up to a total equalling a percentage of premiums earned by the agent, with the formula weighted to new business production. Through this NOA program, Allstate hoped to increase business and profits, while providing its agents with entrepreneurial opportunities and greater flexibility and control over their own offices. See generally Deus v. Allstate Ins. Co., 15 F.3d 506, 511-12 (5th Cir.) (describing NOA program), cert. denied, --- U.S. ----, 115 S.Ct. 573, 130 L.Ed.2d 490 (1994).

Plaintiffs are residents of various states who worked as NOAs for Allstate, a subsidiary of The Allstate Corporation. They sue both individually and as representatives of the class of NOAs allegedly injured by Sears. Sears is a New York corporation and has its principal place of business in Illinois. It conducts business in all fifty states, and at all relevant times was the parent corporation of The Allstate Corporation. ⁵

Plaintiffs allege that Sears maintained Allstate as a "criminal enterprise" that "coerce[d] and/or fraudulently induce[d] its current agents and ... fraudulently induce[d] others who wished to become agents ... to accept the status of [NOAs]." This was allegedly accomplished, inter alia, by (1) knowingly making false statements that Allstate would reimburse NOAs for virtually all out-of-pocket expenses associated with operating an office, and assuring potential NOAs that they would earn substantially more income as NOAs; (2) threatening Allstate agents with termination if they chose not to enter the NOA program; and (3) falsely assuring prospective NOAs that Allstate's marketing resources would be made available to assist them in numerous ways, including selecting sites, negotiating leases, choosing equipment, staffing offices, and processing claims. plaintiffs-appellants claim that Sears' purpose for designing this fraudulent scheme was three-fold:

(a) to cause the NOAs to shoulder the lion's share of expenses, thus removing from Allstate the cost of field operations; (b) to ensure the failure of these NOAs after they had had time to develop a substantial book of business, so that Allstate could claim the benefit of the NOA's efforts by obtaining the "book of business" developed by the NOA at his or her own expense and risk; and (c) to put the NOAs in such a state of financial insecurity as to coerce them into changing their status from that of NOA to that of Neighborhood Exclusive Agent ("NEA"), thus causing the NOA to abandon his or her pension and welfare benefits --- benefits to which a[n] NEA was not entitled.

In their RICO Case Statement, Plaintiffs assert that Sears achieved these objectives through the aid of Allstate's upper level management officials and local sales managers. However, no specific Sears officials or employees are alleged to have personally participated in the scheme. Instead, Plaintiffs describe Sears' relationship to the alleged RICO enterprise, Allstate, as follows:

Sears operated and managed the enterprise through corporate control. As the 100%, then 80%, and controlling shareholder of Allstate, Sears has historically and is currently empowered to appoint Allstate's management, including its Board of Directors and its senior officers. In this fashion, Sears determines the business objectives and goals of Allstate, and designates those persons who manage and operate Allstate in accordance with those objectives and goals.

In sum, Plaintiffs claim that Sears achieved its fraudulent objectives because "through its control over [The Allstate Corporation, Sears was] able to control Allstate."

Plaintiffs also assert two antitrust claims pursuant to 15 U.S.C. §§ 1 and 14. Their complaint alleges that Sears, "through Allstate," engaged in unlawful "tying" arrangements by: (1) requiring NOAs who wanted to advertise individually in the Yellow Pages to arrange for such advertising exclusively through Woodward Direct--an agency allegedly owned or controlled by Sears; and (2) requiring each NOA to lease a Sears computer at excessive cost (compared to the cost at which other equally effective computers were available) in order to access the Allstate database.

Sears moved to dismiss the Complaint, contending that Plaintiffs had failed to state a federal claim, and that the district court should not exercise supplemental jurisdiction over their pendent state law claims. In an opinion and order dated March 20, 1995, the district court granted Sears' motion. The court concluded that Plaintiffs' RICO claims failed to allege fraud with the degree of particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, and especially that "both the complaint and RICO Case Statement fail to allege fraud with particularity against Sears, the named defendant in this case." The court also determined that no unlawful "tying" arrangement was alleged as to the required use either of Woodward Direct to advertise in the Yellow Pages, or of a Sears computer to access the Allstate database. In view of the dismissal of Plaintiffs' federal claims, the district court declined to exercise supplemental jurisdiction over their state law claims. The court also denied Plaintiffs leave to amend their complaint in view of their prior opportunities to do so.

This appeal followed.

Discussion

We review a Rule 12(b)(6) dismissal de novo. Branham v. Meachum, 77 F.3d 626, 628 (2d Cir.1996); Dorking Genetics v. United States, 76 F.3d 1261, 1269 (2d Cir.1996). ⁶ On appeal, Plaintiffs argue that: (1) the Complaint alleged valid RICO claims; (2) the Complaint adequately alleged unlawful "tying" arrangements under the Sherman and Clayton Acts; and (3) in any event, the district court should have granted Plaintiffs an opportunity to replead their RICO claims with sufficient particularity. We address these contentions in turn.

A. The RICO Claims.

"A motion to dismiss is designed to test the legal sufficiency of the complaint, and thus does not require the Court to examine the evidence at issue." Carey v. Mt. Desert Island Hosp., 910 F.Supp. 7, 9 (D.Me.1995) (citing Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985)). Accordingly, we must accept as true all well-pleaded factual allegations in the Complaint and view them in the light most favorable to Plaintiffs. Papasan v. Allain, 478 U.S. 265, 283, 106 S.Ct. 2932, 2942, 92 L.Ed.2d 209 (1986). The complaint is deemed to include any document annexed to it as an exhibit. See Fed.R.Civ.P. 10(c). Even viewing all of Plaintiffs' RICO allegations in this favorable light, however, we find no basis upon which to conclude that Sears is a proper defendant for Plaintiffs' RICO claims.

The Complaint and RICO Case Statement name Sears as a defendant solely because of its corporate relationship to Allstate. As noted above, Plaintiffs claim that "Sears operated and managed the [RICO] enterprise through corporate control[,]" and that "[i]n this fashion, Sears determine[d] the business objectives and goals of Allstate, and designate[d] those persons who manage[d] and operate[d] Allstate in accordance with [the fraudulent RICO] objectives and goals." There is no allegation that Sears employees acted independently to further this alleged RICO scheme.

"In some instances, the corporate relationship between a parent and its subsidiary [is] sufficiently close ... to justify piercing the corporate veil and holding one corporation legally accountable for the actions of the other. As a general matter, however, a corporate relationship alone is not sufficient to bind a [parent corporation...