Lussier v. Subaru of New England CV-99-109-B 01/13/00
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
George Lussier Enterprises, Inc., d/b/a Lussier Subaru, et a l .
v. Civil N o . C-99-109-B Opinion N o . 2000 DNH 013 Subaru of New England, Inc., et a l .
MEMORANDUM AND ORDER
Seven current and former New England Subaru dealers have
filed a class action complaint against their distributor, Subaru
of New England, Inc. (“SNE”) and its sole shareholder, Ernest
Boch. The dealers claim that Boch directs SNE to withhold
approximately 10% of the new Subaru vehicles destined for the New
England market and allocates these “discretionary” vehicles only
to dealers who agree to purchase Subaru vehicles with expensive
and unwanted accessories. They also allege that Boch and SNE
used the mails and interstate wires to lock the dealers into
dealership agreements through false promises that SNE would allocate vehicles equitably. As a result, they claim that SNE
-2- and Boch are liable for injunctive relief and damages under the
Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18
U.S.C. § 1961, et seq. SNE and Boch have moved to dismiss the
dealers’ RICO claims pursuant to Fed. R. Civ. P. 12(b)(6). 1
I.
SNE is the exclusive distributor of Subaru vehicles in New
England.2 In this capacity, it has entered into franchise
agreements with all of the region’s Subaru dealers. The
franchise agreements contain or incorporate by reference certain
standard provisions dictated by Subaru’s national distributor,
Subaru of America, Inc. One such provision states that “It is
understood and agreed that [SNE] will allocate all affected
1 The dealers also claim that SNE has breached its dealer contracts, violated federal antitrust laws and is liable under various state dealer protection statutes. I disposed of SNE’s motion to dismiss the antitrust claim in a prior order. Defendants have not challenged the sufficiency of the dealers’ state law claims. 2 I take the facts from the complaint and describe them in the light most favorable to the plaintiffs. See Miranda v . Ponce Fed. Bank, 948 F.2d 4 1 , 43 (1st Cir. 1991).
-3- Subaru products equitably, using appropriate factors such as the
-4- respective inventory levels and sales performance of [its]
dealers during a representative period of time immediately prior
to such allocation.” Dealership Agreement and Standard
Provisions, Defendants’ Joint Appendix, Tab A(1) at 9.3
SNE implemented a vehicle distribution plan on February 1 ,
1987, dubbed “Fair Share II.” Under this plan, SNE allocates 90%
of its vehicles to dealerships based upon a formula tied to the
number of vehicles each dealership sells during a given
allocation period. The plan specifies that SNE may withhold the
remaining “discretionary vehicles” and use them for “executive
vehicles and discretionary purposes such as market action
vehicles.”4 Fair Share II Distribution System, Defendants’ Joint
3 The dealers paraphrase certain provisions in SNE’s dealership agreement and other related documents. I quote from the documents, which were supplied by the defendants in support of their motion. See Beddall v . State S t . Bank and Trust Co., 137 F.3d 1 2 , 16-17 (1st Cir. 1998) (motion to dismiss is not converted into a motion for summary judgment when court considers document referred to in the complaint if the plaintiff’s cause of action depends on the document and the document’s authenticity is not in dispute). 4 The plan elsewhere defines “discretionary vehicles” as “[v]ehicles to be used as demonstrators by Subaru of New England;
-5- Appendix, Tab B ( 2 ) .
At some point not specified in the dealers’ amended
complaint, but after they incurred substantial costs to develop
their dealerships, SNE began to condition a dealer’s access to
discretionary vehicles on the dealer’s agreement to purchase
vehicles with unwanted accessories, such as leather seats,
keyless entry systems, CD players, and air filtration systems.
The dealers characterize this practice as an “option-packing
scheme.” Because SNE withholds a disproportionate number of
Subaru’s most popular models as discretionary vehicles, the
dealers have little choice but to accede to SNE’s demands. As a
result, they allegedly have been forced to purchase an average of
$480 in unwanted accessories on each vehicle SNE has allocated
and sold to the dealers.
The dealers claim that the “option-packing scheme”
constitutes extortion under the Hobbs Act. The also assert that
vehicles to be used for major auto shows; vehicles set aside to assist dealers who, at the sole discretion of Subaru of New England, need assistance and vehicles delivered to VIPs.” Defendants’ Joint Appendix, Tab B(3) (emphasis in original).
-6- Boch and SNE have committed mail and wire fraud by using the
mails and interstate wires to lock the dealers into agreements
through false promises that SNE would allocate vehicles
equitably.
II.
To survive a motion to dismiss for failure to state a claim,
a plaintiff’s complaint must “set forth ‘factual allegations,
either direct or inferential, regarding each material element
necessary to sustain recovery.’” Doyle v . Hasbro, Inc., 103 F.3d
186, 190 (1st Cir. 1996) (quoting Gooley v . Mobil Oil Corp., 851
F.2d 513, 515 (1st Cir. 1988)). When applying this standard, I
must accept the well-pleaded facts of the complaint as true and
draw all reasonable inferences in favor of the plaintiff. See
Miranda v . Ponce Fed. Bank, 948 F.2d 4 1 , 43 (1st Cir. 1991). I
may dismiss the complaint “only i f , when viewed in this manner,
the pleading shows no set of facts which could entitle the
plaintiff to relief.” Gooley, 851 F.2d at 514 (citing Conley v .
-7- Gibson, 355 U.S. 4 1 , 45-48 (1957)).
The threshold for stating a claim under the federal rules
“may be low, but it is real.” Id. While I must construe all
well-pleaded facts in the plaintiff’s favor, I need not credit
“bald assertions, unsupportable conclusions, periphrastic
circumlocutions, and the like.” Doyle, 103 F.3d at 190 (quoting
Aulson v . Blanchard, 83 F.3d 1 , 3 (1st Cir. 1996)) (internal
quotation marks omitted).
III.
The dealers identify three distinct RICO claims in their
amended complaint. In Count I they claim that SNE is liable
because it conducted or participated in the conduct of an
enterprise through a pattern of racketeering. See 18 U.S.C. §
1962(c) (1994). They charge in Count II that SNE is liable
because it invested the proceeds of racketeering activity in an
enterprise. See 18 U.S.C. § 1962(a) (1994). They assert in
Count III that Boch is liable pursuant to § 1962(c) because he
conducted or participated in the conduct of an enterprise through
-8- a pattern of racketeering. See 18 U.S.C. § 1962(c). I address
defendants’ challenge to each count in separate sections.
A. Count I : The Section 1962(c) Claim Against SNE
Section 1962(c) provides in relevant part that “[i]t shall
be unlawful for any person employed by or associated with any
enterprise engaged i n , or the activities of which affect,
interstate or foreign commerce, to conduct or participate,
directly or indirectly, in the conduct of such enterprise’s
affairs through a pattern of racketeering activity . . . .” 18
U.S.C. § 1962(c). To be liable under § 1962(c), a person must
(1) “conduct or participate . . . in the conduct” of (2) an
“enterprise” (3) through a “pattern” (4) of “racketeering
activity.” Id.; see Selima, S.P.R.L. v . Imrex Co., Inc., 473
U.S. 479, 496 (1985) (identifying elements of § 1962(c) claim).
The dealers claim in Count I that SNE is liable pursuant to
§ 1962(c) because it conducted or participated in the conduct of
either a network of Subaru dealers known as the New England
Subaru Dealer Network or Subaru of America through a pattern of
-9- extortion, mail and wire fraud. SNE challenges the sufficiency
of Count I . It argues that the dealers cannot state a claim that
SNE conducted or participated in the conduct of the New England
Subaru Dealer Network through a pattern of racketeering because
the Network does not qualify as an “enterprise.” It also asserts
that the dealers cannot claim that Subaru of America is the
“enterprise” because SNE did not “conduct or participate . . . in
the conduct” of Subaru of America’s affairs. I address each
argument in turn.
1. The New England Subaru Dealer Network as a RICO Enterprise
The dealers charge that the “New England Subaru Dealer
Network” is an association-in-fact enterprise comprised of
“[c]ertain corporations doing business in the New England states
which have held Subaru franchises, and individuals who are
officers and directors of said corporations.” First Am. Compl.
(Doc. #31) ¶ 53 at 1 7 .
An association-in-fact enterprise must be “an ongoing
organization” whose members “function as a continuing unit” and
-10- are “associated together for a common purpose of engaging in a
course of conduct.” United States v . Turkette, 452 U.S. 576, 583
(1981); see also Aetna Cas. Sur. C o . v . P & B Autobody, 43 F.3d
1546, 1557 (1st Cir. 1994). In addition, an association-in-fact
enterprise must have an existence “separate and apart from the
pattern of [racketeering] activity in which it engages.”
Turkette, 452 U.S. at 583; see also Aetna Cas., 43 F.3d at 1557.
A distinct structure is the hallmark of an association-in-
fact enterprise. For a plaintiff seeking to establish the
existence of such an enterprise, “it is not sufficient that
several organized, ongoing groups come together for one concerted
action.” Libertad v . Welch, 53 F.3d 428, 442 (1st Cir. 1995).
Rather, a plaintiff must show that the associated groups
“constitute a larger unit, over and above their separate
structures and operations.” Id. A plaintiff may accomplish this
goal by producing “evidence of systematic linkage, such as
overlapping leadership, structural or financial ties, or
continuing coordination.” Id. at 443.
-11- The conclusory nature of the dealers’ allegations regarding
the “New England Subaru Dealer Network” makes it impossible to
infer that the Network qualifies as an association-in-fact
enterprise.5 The complaint fails to provide any factual
allegations that would suggest that the Network is an ongoing
organization, that its members function as a continuing unit and
share a common purpose, that it has an existence separate from
the racketeering activities allegedly conducted by SNE, or that
it has a larger structure distinct from the individual franchises
that allegedly form its membership. Accordingly, I conclude that
the dealers have failed to state a cognizable claim that the
Network qualifies as a RICO enterprise.
5 The dealers’ allegation that the membership of the Network consists of both corporations and individuals does not, in itself, pose a problem. Although the statutory definition of an association-in-fact enterprise refers to “any union or group of individuals,” 18 U.S.C. § 1961(4) (1994) (emphasis added), the First Circuit has ruled that such an enterprise may be comprised of legal entities or a combination of individuals and legal entities. See United States v . London, 66 F.3d 1227, 1243 (1st Cir. 1995) (citing Libertad, 53 F.3d at 4 4 4 ) .
-12- 2. Subaru of America as a RICO Enterprise
Having determined that New England Subaru Dealer Network
cannot serve as the enterprise supporting Count I , I next
consider whether the dealers can satisfy this requirement by
naming Subaru of America as the enterprise. SNE does not dispute
the dealers’ claim that Subaru of America meets the statutory
definition of an enterprise. See 18 U.S.C. § 1961(4). Instead,
it argues that Subaru of America cannot serve as the enterprise
because the complaint fails to sufficiently allege that SNE
“conduct[ed] or participat[ed], directly or indirectly, in the
conduct of” Subaru of America. See 18 U.S.C. § 1962(c).
The proper place to begin an analysis of SNE’s argument is
the Supreme Court’s opinion in Reves v . Ernst & Young, 507 U.S.
170 (1993). In Reves, the defendant was an outside accounting
firm hired to audit the books of the farm cooperative that was
identified as the RICO enterprise. See id. at 173-75. The Court
interpreted the “conduct” element of § 1962(c) to mean that the
accounting firm was only liable if it had “participate[d] in the
-13- operation or management of the [RICO] enterprise itself.” Id. at
185. To satisfy this “operation or management” test, the Court
explained, a RICO defendant must take “some part in directing the
enterprise’s affairs,” but need not have “primary responsibility
for [those] affairs.” Id. at 179 (emphasis in original).
The Reves Court drew a distinction between “insider”
defendants, who were employed by or otherwise affiliated with the
enterprise, and “outsider” defendants, who occupied no formal
position within the enterprise. The Court determined that its
“operation or management” test applied to “outsiders;” therefore,
“outsiders” could be liable under § 1962(c). See id. at 185. 6
The Court indicated, however, that there were limits on the
exposure of such “outside” defendants to liability, noting that
6 The First Circuit has narrowed the application of Reves by holding that the “operation or management” test applies only to RICO defendants who are “outsiders.” See United States v . Owens, 167 F.3d 739, 754 (1st Cir.) (“Reves’s analysis does not apply where a party is determined to be inside a RICO enterprise.”), cert. denied, 120 S . C t . 224 (1999), and cases cited therein. Because SNE is an “outside” defendant relative to the Subaru of America enterprise, I apply the Reves analysis here.
-14- “§ 1962(c) cannot be interpreted to reach complete ‘outsiders’
because liability depends on showing that the defendants
conducted or participated in the conduct of the ‘enterprise’s
affairs,’ not just their own affairs.” Id. (emphasis in
original).
Applying Reves, the critical question under the “conduct”
element of § 1962(c) is whether the complaint sufficiently
alleges that SNE participates in the operation or management of
Subaru of America. The dealers argue that they have satisfied
this element by alleging that Subaru of America has (1)
“authorized SNE to distribute Subaru vehicles through dealerships
selected by SNE”; (2) named SNE its exclusive New England
distributor; and (3) required dealers to obey SNE’s reasonable
written directives. See First Am. Compl. (Doc. #31) ¶ 52 at 1 6 .
I disagree.
While the dealers allege that SNE acquired its power to
exploit the dealers as a result of its relationship with Subaru
of America, the amended complaint is devoid of any factual
-15- allegations that would support a claim that SNE conducted or
participated in the conduct of Subaru of America’s affairs.7 At
most, it alleges that SNE provides services for Subaru of America
in the New England area. Such allegations are not sufficient to
support a claim that SNE conducted or participated in the conduct
of Subaru of America. See, e.g., Goren v . New Vision Int’l,
Inc., 156 F.3d 721, 728 (7th Cir. 1998); Baumer v . Pachl, 8 F.3d
1341, 1344 (9th Cir. 1993); University of Maryland at Baltimore
v . Peat, Marwick, Main & Co., 996 F.2d 1534, 1539-40 (3d Cir.
1993); Nolte v . Pearson, 994 F.2d 1311, 1317 (8th Cir. 1993).
As neither the New England Subaru Dealer Network nor Subaru
of America can satisfy the enterprise element of the dealers’ §
1962(c) claim against SNE, I grant SNE’s motion to dismiss Count
B. Count I I : The Section 1962(a) Claim Against SNE
7 This case is unlike Aetna Casualty and Surety C o . v . P & B Autobody, 43 F.3d 1546, 1559-60 (1st Cir. 1994), where the defendant caused the alleged enterprise to make payments it otherwise would not have made in furtherance of the defendant’s racketeering activities.
-16- The dealers claim in Count II that SNE violated § 1962(a),
which prohibits the use or investment of income or proceeds
derived from racketeering activities in the acquisition,
establishment, or operation of an enterprise. See 18 U.S.C. §
1962(a). 8 The disputed issue that I need to consider under this
claim is whether the dealers have sufficiently alleged the
requisite “use or investment injury.”9
8 The statute provides in relevant part:
It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in the acquisition of any interest i n , or the establishment or operation o f , any enterprise which is engaged i n , or the activities of which affect, interstate or foreign commerce.
18 U.S.C. § 1962(a). 9 The rule that the same entity cannot serve simultaneously as both RICO defendant and RICO enterprise applies to a claim under § 1962(c), but not to a claim under § 1962(a). See Schofield v . First Commodity Corp. of Boston, 793 F.2d 2 8 , 3 1 , 32 (1st Cir. 1986). Therefore the dealers may, as they have, designate SNE as both defendant and enterprise in Count I I . See First Am. Compl. (Doc. #31) ¶¶ 110, 111 at 3 5 .
-17- To state a claim under § 1962(a), a RICO plaintiff must
allege a specific injury caused by the defendant’s use or
investment of racketeering proceeds. See Compagnie De
Reassurance D’Ile de France v . New England Reinsurance Corp., 57
F.3d 5 6 , 91 (1st Cir. 1995). This “use or investment injury”
must be distinct from the injury caused by the alleged predicate
acts of racketeering. In other words, a plaintiff cannot state a
claim under § 1962(a) by simply “repeat[ing] the crux of [his or
her] allegations in regard to the pattern of racketeering
activity.” Id. at 91-92 (quoting Lightning Lube, Inc. v . Witco
Corp., 4 F.3d 1153, 1188 (3d Cir. 1993)).
Other courts have held that the mere reinvestment of
racketeering proceeds in a corporate enterprise, with the result
that the enterprise continues to engage in the predicate acts of
racketeering that generated those proceeds, does not in itself
constitute a distinct “use or investment injury.” See, e.g.,
Fogie v . THORN Americas, Inc., 190 F.3d 889, 896 (8th Cir. 1999);
Lightning Lube, 4 F.3d at 1188-89; Update Traffic Sys., Inc. v .
-18- Gould, 857 F. Supp. 2 7 4 , 282-83 (E.D.N.Y. 1994); Gelb v . American
Tel. & Tel. Co., 813 F. Supp. 1022, 1024-25 (S.D.N.Y. 1993). If
such reinvestment were sufficient to satisfy the “use or
investment injury” requirement, then that requirement “would be
almost completely eviscerated when the alleged pattern of
racketeering is committed on behalf of a corporation.” Lightning
Lube, 4 F.3d at 1189 (quoting Brittingham v . Mobil Corp., 943
F.2d 297, 305 (3d Cir. 1991)). As the Third Circuit noted in
Lightning Lube:
Over the long term, corporations generally reinvest their profits regardless of the source. Consequently, almost every racketeering act by a corporation will have some connection to the proceeds of a previous act. Section 1962(c) is the proper avenue to redress injuries caused by the racketeering acts themselves. If plaintiffs’ reinvestment injury concept were accepted, almost every pattern of racketeering by a corporation would be actionable under § 1962(a) and § 1962(c) would become meaningless.
Id. (quoting Brittingham, 943 F.2d at 3 0 5 ) . I am persuaded by
this reasoning that the mere reinvestment of racketeering
proceeds in a corporate enterprise, with the result that the
enterprise survives and continues to commit predicate acts of
-19- racketeering, is insufficient to satisfy the requirement that a
plaintiff identify a distinct “use or investment” injury to state
a claim under § 1962(a).
The dealers specify three injuries purportedly caused by
SNE’s use or investment of racketeering proceeds. First, they
claim that SNE used the proceeds of the “option-packing scheme”
to pay commissions to sales employees known as “district
managers.” Because district managers’ commissions were tied to
the amount of accessories they sold to the dealers, the
commission system gave the district managers an incentive to
continue to pressure the dealers to purchase unwanted
accessories. See First Am. Compl. (Doc. #31) ¶¶ 28-29 at 9, ¶
118 at 3 7 . Second, the dealers allege that SNE invested
racketeering proceeds in a litigation “war chest” that allowed it
to outspend and outlast dealers who sought to challenge its
practices in court or otherwise. See id. ¶ 119 at 3 7 . Third,
the dealers claim that SNE invested racketeering proceeds “in
enforcing terminations against disfavored dealers, enforcing
-20- illegal exclusivity provisions in Dealer Agreements, auditing
warranty reimbursement claims from dealers, and in retaining
lawyers in connection with all of these actions.” Id. ¶ 120 at
37. According to the dealers, these actions helped SNE “to
weaken the dealer body and render it susceptible to SNE’s demands
to purchase unordered accessories.” Id. ¶ 120 at 3 8 . The
dealers claim that as a result of these three tactics, they
“suffered lost profits, loss of value of the dealerships, and
otherwise were injured in their property and business.” Id. ¶
121 at 3 8 .
The first and third of the dealers’ alleged injuries are
nothing more than allegations that SNE reinvested the proceeds of
the “option-packing scheme” in the enterprise itself, using the
funds to fuel a variety of mechanisms that facilitated the
continued operation of the scheme. This type of allegation
cannot satisfy the requirement that the dealers plead a separate
“use or investment injury,” because the real injury described is
the injury flowing from the underlying racketeering activity.
-21- This is the same injury for which the dealers seek redress in
their claim under § 1962(c), and it will not support a separate
claim under § 1962(a).
The dealers’ second allegation -- that money derived from
racketeering was invested in a “war chest” that allowed SNE to
overpower the dealers in any dispute -- similarly fails to set
forth a separate injury flowing from the use or investment of
racketeering proceeds. It is ultimately an argument that SNE
used the proceeds of the “option-packing scheme” to prevent the
dealers from successfully challenging the scheme, thereby
bolstering the scheme and guaranteeing its continued success.
The dealers rely on Crowe v . Smith, 848 F. Supp. 1258, 1265 (W.D.
La. 1994), in which the court found that the use or investment
injury requirement was satisfied by allegations that the
defendants used racketeering income to build a “litigation war
chest” that funded several fraudulent legal proceedings against
the plaintiff. See Pls.’ Objection to Boch’s Mot. to Dismiss
(Doc. #40) at 2 1 . I find Crowe unpersuasive, however, because I
-22- can discern no principled distinction between the creation of a
“war chest” and the other mechanisms by which SNE allegedly used
the proceeds of the “option-packing scheme” to perpetuate the
scheme. Therefore, I conclude that the dealers’ allegation that
SNE used the proceeds of the “option-packing scheme” to fund a
“war chest” does not state a distinct “use or investment injury.”
This allegation, like the other injuries alleged by the dealers
in Count I I , replicates the underlying injuries for which the
dealers seek relief in their § 1962(c) claim. Accordingly, I
grant SNE’s motion to dismiss the dealers’ claim under § 1962(a).
C. Count III: The Section 1962(c) Claim Against Boch
The dealers assert a § 1962(c) claim in Count I I I , this time
against Boch. The count identifies SNE as the RICO enterprise
and contends that Boch conducted or participated in the conduct
of SNE through a pattern of extortion under the Hobbs Act, mail
fraud, and wire fraud. Boch argues that this claim is deficient
because it fails to sufficiently plead the predicate acts of
racketeering activity.
-23- 1. Extortion under the Hobbs Act
The Hobbs Act imposes criminal penalties on any person who
“in any way or degree obstructs, delays, or affects commerce or
the movement of any article or commodity in commerce, by robbery
or extortion.” 18 U.S.C. § 1951(a) (1994). For all purposes
relevant to this action, the act defines extortion as “the
obtaining of property from another, with his consent, induced by
wrongful use of actual or threatened force, violence, or fear.”
Id. § 1951(b)(2). Fear of economic loss, generally called
“economic fear,” is included within the meaning of the statutory
term “fear.” See, e.g., United States v . Hathaway, 534 F.2d 386,
394 (1st Cir. 1976).
The dealers contend that Boch violated the Hobbs Act by
directing SNE to withhold discretionary vehicles from the dealers
unless they agreed to purchase vehicles with expensive and
unwanted accessories. See First Am. Compl. (Doc. #31) ¶¶ 126-128
at 3 9 . They assert that this practice constitutes extortion
because Boch is threatening to withhold discretionary vehicles,
-24- which the dealers need to profitably operate their businesses, as
a means to coerce them into paying above-market rates for
unwanted accessories.
Assuming without deciding that the dealers have pleaded
sufficient facts to support a conclusion that Boch obtained the
dealers’ property through the wrongful use of economic fear,10
10 This case presents a substantial question as to whether the dealers have alleged conduct by Boch that is actionable under the Hobbs Act. Not every business use of economic fear is inherently unlawful. See United States v . Sturm, 870 F.2d 769, 773 (1st Cir. 1989). “Indeed, the fear of economic loss is a driving force of our economy that plays an important role in many legitimate business transactions.” Brokerage Concepts, Inc. v . U.S. Healthcare, Inc., 140 F.3d 494, 523 (3d Cir. 1998) (distinguishing between legitimate “hard bargaining” and extortion). One court has distinguished between legitimate and illegitimate uses of economic fear by stating:
In a “hard bargaining” scenario the alleged victim has no pre-existing right to pursue his business interests free of the fear he is quelling by receiving value in return for transferring property to the defendant, but in an extortion scenario the alleged victim has a pre-existing entitlement to pursue his interests free of the fear he is quelling by receiving value in return for transferring property to the defendant.
Id. at 525 (quoting Viacom Int’l, Inc. v . Ichan, 747 F. Supp.
-25- their Hobbs Act claim nevertheless is defective because they fail
to allege that Boch acted with culpable intent. The Hobbs Act
punishes only the “wrongful” use of economic fear. See 18 U.S.C.
§ 1951(b)(2). Central to this requirement is proof that the
Hobbs Act defendant knew that he had no right to obtain the
property he sought to obtain from the alleged extortion victim.
See Sturm, 870 F.2d at 775. In the present case, the dealers do
not assert that Boch knew when he directed SNE to implement the
“option-packing scheme” that the dealers had a property interest
in the discretionary vehicles and that SNE had no right to
condition the allocation of these vehicles on a promise to
purchase expensive and unwanted automobile accessories. This
205, 213 (S.D.N.Y. 1990), aff’d on other grounds, 946 F.2d 998 (2d Cir. 1991)).
In this case, the amended complaint does not expressly allege that the dealers have a pre-existing entitlement to the discretionary vehicles. Without such an allegation, it is unclear how Boch’s alleged conduct could qualify as extortion. I need not resolve this question, however, because I conclude that the amended complaint fails to sufficiently provide that Boch acted with the type of criminal intent that is required for a Hobbs Act violation.
-26- omission is fatal to the dealers’ Hobbs claim.11
2. Mail and Wire Fraud
The dealers also allege that Boch caused SNE to use the
United States mails and interstate wires on numerous occasions to
send the dealers false representations about the distributor’s
method for allocating vehicles.12 While the dealers specify a
plethora of false representations, their allegations can be
summarized as follows: SNE promised in the dealership agreements
to treat the dealers “in a lawful and ethical manner,” and stated
that it intended to allocate vehicles “equitably,” according to
11 The dealers also allege that Boch violated the Hobbs Act by causing SNE to threaten to terminate dealership agreements unless the dealers agreed to certain concessions. These subsidiary Hobbs Act claims suffer from the same pleading defect as the dealers’ primary Hobbs Act claim. 12 By alleging numerous mailings and wire transmissions in violation of the mail and wire fraud statutes, the dealers have satisfied the requirement that a civil RICO plaintiff allege at least two acts of racketeering activity. Cf. Fleet Credit Corp. v . Sion, 893 F.2d 441, 444 (1st Cir. 1990) (stating that plaintiff who alleged 95 mailings in violation of mail fraud statute “alleged many more than just two predicate acts”). Thus, the dealers’ RICO claim against Boch is sufficient even though they cannot rely on the alleged Hobbs Act violations to support their claim.
-27- legitimate business factors, “such as the respective inventory
levels and sales performance” of individual dealers. First Am.
Compl. (Doc. #31) ¶ 89 at 2 7 ; see also id. ¶¶ 9 5 , 96 at 2 8 , 2 9 .
SNE assured the dealers that vehicles would not be pre-
accessorized and that all accessories were strictly optional.
See id. ¶¶ 9 8 , 100, 102 at 3 0 , 3 1 , 3 2 . SNE represented to the
dealers’ advisory board that discretionary vehicles were withheld
for “legitimate business purposes.” Id. ¶ 95 at 2 8 . SNE made
various other misrepresentations designed to further the “option-
packing scheme” by deceiving the dealers about the true nature of
the allocation system. See id. ¶¶ 9 7 , 9 9 , 1 0 1 , 103 at 2 9 , 30-32,
33.
According to the complaint, Boch caused SNE to make these
representations. See id. ¶¶ 126, 130 at 3 9 . He also allegedly
knew that all of the representations were false at the time that
he caused SNE to make them because he actually intended to use
the allocation system as a means to force the dealers to purchase
pre-installed accessories. See id. ¶ 91 at 2 7 , ¶ 95 at 2 8 , ¶ 96
-28- at 2 9 , ¶¶ 126, 130 at 3 9 . Therefore, the dealers claim, the
misrepresentations amount to a fraudulent scheme in violation of
the federal mail and wire fraud statutes.13 The dealers also
claim that the allocations themselves, which were allegedly
accomplished by means of mail or wire communications, constituted
mail or wire fraud. See id. ¶ 106 at 34-35.
A violation of the mail or wire fraud statutes requires: (1)
the defendant’s knowing and willing participation in a scheme or
artifice to defraud with the specific intent to defraud, and (2)
the use of the mails or interstate wire communications in
13 The mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343 (1994), both provide in relevant part:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, [makes use of the mails or of interstate wires] . . . for the purposes of executing such scheme or artifice” shall be guilty of an offense.
Because the relevant language in both the mail and wire fraud statutes is the same, I apply the same analysis to both sets of allegations. See United States v . Boots, 80 F.3d 580, 586 n.11 (1st Cir. 1996).
-29- furtherance of the scheme.14 See United States v . Ruiz, 105 F.3d
1492, 1501 (1st Cir. 1997) (mail fraud); United States v .
Czubinski, 106 F.3d 1069, 1073 (1st Cir. 1997) (wire fraud).
In moving to dismiss Count III, Boch contends that the
dealers have failed to adequately plead the requisite “scheme or
artifice to defraud” because: (1) the alleged misrepresentations
were incapable of deceiving and did not actually deceive the
dealers, (2) the complaint includes no facts from which
fraudulent intent could reasonably be inferred, and (3) many of
the alleged communications “were statements of opinion or
expectation that typically are not viewed as capable of
fraudulent meaning.” Mem. in Support of Boch’s Mot. to Dismiss
(Doc. #33) at 18-19. I reject Boch’s arguments.
Boch’s first contention -- that the alleged misrepresen- 14 A scheme to defraud under the mail or wire fraud statutes must involve deprivation of money, property, or the right to honest services. See 18 U.S.C. §§ 1341, 1343, 1346. The dealers plead a deprivation of money and/or property by alleging that SNE’s false representations deceived them into purchasing unwanted accessories and losing dealership profits. See First Am. Compl. (Doc. #31) ¶¶ 1 0 7 , 108 at 3 5 . Boch does not dispute that the dealers have sufficiently alleged a deprivation.
-30- tations regarding the allocation system neither could have nor
did deceive the dealers -- flies in the face of the allegations
as presented in the amended complaint. The dealers unambiguously
allege that they actually relied to their detriment on various
false representations made by SNE at Boch’s direction. See First
Am. Compl. (Doc. #31) ¶ 90 at 2 7 . This allegation, which I must
accept as true for present purposes, flatly contradicts Boch’s
contention that the alleged misrepresentations did not actually
deceive the dealers and were incapable of doing so.15
Second, the dealers have alleged sufficient facts to support
an inference of fraudulent intent. In the First Circuit, a civil
RICO plaintiff must plead predicate acts of mail and wire fraud
15 What is less clear is whether the dealers were required to plead actual (or reasonable) reliance. A conviction under the mail or wire fraud statutes does not require any showing that a person was actually deceived. See, e.g., United States v . Rosen, 130 F.3d 5 , 9 (1st Cir. 1997); Czubinski, 106 F.3d at 1075. Courts have disagreed, however, as to whether the standing requirements of the RICO statute add a reliance requirement where the alleged predicate acts include mail and/or wire fraud. Because the dealers alleged actual, detrimental reliance, I need not resolve this uncertain legal issue. See infra, note 1 7 .
-31- with particularity, in accordance with Fed. R. Civ. P. 9 ( b ) . See
Ahmed v . Rosenblatt, 118 F.3d 886, 889 (1st Cir. 1997) (citing
Feinstein v . Resolution Trust Corp., 942 F.2d 3 4 , 42 (1st Cir.
1991); New England Data Serv., Inc. v . Becher, 829 F.2d 286, 290
(1st Cir. 1987)), cert. denied, 118 S . C t . 1165 (1998). Rule 9
requires a plaintiff claiming fraud to specify the time, place
and content of allegedly false representations. See Doyle v .
Hasbro, Inc., 103 F.3d 186, 194 (1st Cir. 1996). However, as the
rule itself provides, fraudulent intent “may be averred
generally.” Fed. R. Civ. P. 9 ( b ) .
The dealers’ allegations of mail and wire fraud satisfy the
specificity requirements of Rule 9. The complaint is suffi-
ciently particular regarding the contents of the communications,
the date of their transmission, and who sent what to whom. See
First Am. Compl. (Doc. #31) ¶¶ 95-102 at 28-33. The complaint
also contains a general averment that Boch intentionally caused
SNE to misrepresent the nature of the allocation system with the
fraudulent intent to induce the dealers to enter franchise
-32- relationships and fall prey to the “option-packing scheme.” See
id. ¶ 91 at 2 7 , ¶¶ 125, 126, 130 at 3 7 .
Finally, Boch’s contention that the alleged misrepresenta-
tions were expressions of opinion or aspiration, and therefore
cannot form the basis for mail or wire fraud violations, rests on
an inaccurate characterization of the communications at issue.
Most of the alleged misrepresentations were statements by SNE
regarding its system for allocating vehicles. Some of these
statements allegedly were promises to make future allocations on
the basis of legitimate business criteria; others purport to
describe the actual reasons for past or present allocations.
Neither type of statement falls under the rubric of opinion.
Moreover, while an unfulfilled promise does not in itself
constitute fraud, a scheme to defraud may be effectuated “by
means of false or fraudulent . . . promises.” McEvoy Travel
Bureau, Inc. v . Heritage Travel, Inc., 904 F.2d 786, 791 (1st
Cir. 1990); see also McNally v . United States, 483 U.S. 350, 359
(1987) (noting that the mail fraud statute “reache[s] false
-33- promises and misrepresentations as to the future”), superseded on
other grounds by 18 U.S.C. § 1346 (1994). Speaking in the
context of common law fraud, the First Circuit recently explained
the distinction between a false promise that constitutes a
fraudulent misrepresentation and a broken promise that does not:
[T]he concept of misrepresentation includes a false representation as to one’s intention, such as a promise to act. “A representation of the maker’s own intention to do . . . a particular thing is fraudulent if he does not have that intention” at the time he makes the representation. . . . On the other hand, i f , at the time he makes a promise, the maker honestly intends to keep it but later changes his mind or fails or refuses to carry his expressed intention into effect, there has been no misrepresentation.
Palmacci v . Umpierrez, 121 F.3d 781, 786-87 (1st Cir. 1997)
(internal citations omitted). Read in the light most favorable
to the dealers, the complaint alleges that Boch caused SNE to
falsely represent that it intended to allocate vehicles in
accordance with legitimate business criteria, at a time when Boch
actually intended to use the allocations as a means to coerce the
dealers into purchasing accessories. Therefore, even SNE’s
representations as to the basis of future allocations support the
-34- dealers’ allegations of a scheme to defraud.
In sum, the dealers claim that Boch caused SNE to make
numerous false representations about the vehicle allocation
system with the specific intent to defraud the dealers by
inducing them first to become Subaru dealers and thereafter to
purchase unwanted accessories. These allegations are sufficient
to state a scheme to defraud under the mail and wire fraud
statutes. Accordingly, I conclude that the dealers have
sufficiently alleged predicate acts of mail and wire fraud in
support of their § 1962(c) claim against Boch.
3. Standing
The RICO statute imposes a standing requirement under which
a plaintiff seeking civil remedies for a violation of § 1962(c)
must establish that the defendant’s racketeering activities
caused injury to the plaintiff’s business or property.16 See 18
16 Section 1964(c) provides in relevant part that:
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold
-35- U.S.C. § 1964(c) (1994 & Supp. II 1996); Sedima, S.P.R.L. v .
Imrex Co., Inc., 473 U.S. 479, 495-97 (1995); Camelio v . American
Fed’n, 137 F.3d 666, 669-70 (1st Cir. 1998). More particularly,
a plaintiff’s standing to sue depends on a finding that at least
one of the defendant’s predicate acts of racketeering was the
proximate cause, as well as the but-for or factual cause, of the
plaintiff’s injury. See Holmes v . Securities Investor Protection
Corp., 503 U.S. 258, 268, 276 (1992); Camelio, 137 F.3d at 670.
At the pleading stage, however, general factual allegations that
the plaintiff suffered injury as a result of the defendant’s
conduct are sufficient to satisfy the standing requirement. See
National Org. for Women, Inc. v . Scheidler, 510 U.S. 249, 256
(1994).
The dealers claim that they relied on the fraudulent
misrepresentations that Boch caused SNE to make about the vehicle
allocation system when they decided to enter into dealership
the damages he sustains and the cost of the suit, including a reasonable attorney’s fee . . . .
18 U.S.C. § 1964(c).
-36- agreements.17 See First Am. Compl. (Doc. #31) ¶ 90 at 2 7 . They
allege that because they were deceived as to the nature of the
allocation system, they were compelled to purchase “option-
packed” vehicles that were harder to sell and less profitable.
See id. ¶ 107 at 3 5 . The net result, according to the dealers,
is that the fraudulent “option-packing scheme,” implemented and
advanced by Boch’s violations of the mail and wire fraud
statutes, caused the dealers to suffer lost profits and a
diminishment in the value of their dealerships. See id. ¶ 108 at
35.
Based on these allegations, I conclude that the dealers have
pleaded sufficient facts to establish the causal connection
required for standing. The complaint, read in the light most
17 Because the dealers have alleged actual and detrimental reliance on the alleged misrepresentations, see First Am. Compl. (Doc. #31) ¶90 at 2 7 , I need not consider whether a failure to do so would prevent them from asserting standing. See Sebago, Inc. v . Beazer East, Inc., 18 F. Supp.2d 7 0 , 81-82 (D. Mass. 1998) (citing and discussing cases disagreeing on whether actual and detrimental reliance on alleged misrepresentations is required for standing to sue for a violation of § 1962(c) based on predicate acts of mail/wire fraud).
-37- favorable to the dealers, alleges that the dealers’ property
and/or businesses were injured, and that Boch’s racketeering
activities were both the proximate and factual cause of those
injuries. Nothing more is required at this stage of the
litigation.
For the reasons stated above, I conclude that the dealers
have sufficiently alleged that Boch conducted or participated in
the conduct of SNE through a pattern of mail and/or wire fraud,
and that the mail and/or wire fraud caused injury to the dealers’
property and/or businesses. Accordingly, Boch’s motion to
dismiss Count III is denied.
IV.
For the reasons set forth herein, I grant defendants’ motion
to dismiss Counts I and II and the portion of Count III that
depends upon the pleading of Hobbs Act violations as predicate
-38- acts of racketeering. I deny the motion to dismiss insofar as it
applies to the remainder of Count III.
SO ORDERED.
Paul Barbadoro Chief Judge
January 1 3 , 2000
cc: Richard McNamara, Esq. Michael Harvell, Esq. Howard Cooper, Esq. William Kershaw, Esq. Robert Cordy, Esq.
-39-