Opinion
Civil No. 01-447-KI
December 17, 2001
Herbert G. Grey, Beaverton, Oregon, David B. Adler, Seattle, Washington, Attorneys for Plaintiffs.
Roderick A. Boutin, Bowerman Boutin, LLP, Oregon City, Oregon, S. Michael Rose, David K. Miller, Miller Wagner, Portland, Oregon, William H. Stockton, Brisbee Stockton, LLC, Hillsboro, Oregon, Attorneys for Defendants.
OPINION
Plaintiffs Reggie and Lisa Huff allege that defendants engaged in various schemes to steal the Huffs' business, plaintiff Acro-Tech, Inc., away from them. On September 6, 2001, I granted all defendants' motions to dismiss the first amended complaint but gave plaintiffs leave to file a second amended complaint. Defendants moved against the second amended complaint (corrected) ("Complaint"). Before the court are defendants Hallsworth and JDH Services, Inc.'s motion to dismiss (#72), defendants Robert Jackson, Luann Jackson, The Robert K. Jackson Family Trust and LB Land, Inc.'s motion to dismiss (#74), and defendant Boutin's motion to dismiss (#76). For the reasons below, I dismiss all RICO claims with prejudice and decline supplemental jurisdiction on the remaining state common law claims.
Plaintiffs discovered some small errors in the Second Amended Complaint and filed a corrected version. I will refer to the corrected version as the "Complaint."
OVERVIEW OF ALLEGED FACTS
Plaintiffs Reggie and Lisa Huff are the founders and majority shareholders of plaintiff Acro-Tech, Inc. Huff patented four inventions related to internal combustion engine performance and environmental compatibility. He assigned some of the patents to Acro-Tech. Plaintiffs allege that defendants, acting through an enterprise, tried to acquire Acro-Tech through unlawful means and for no compensation in order to gain control of its patents. Defendants' methods included three schemes: (1) attempt to acquire Acro-Tech and gain control of the patents; (2) use of positions as shareholders to demand that Acro-Tech buy them out at an inflated price or risk legal action; and (3) force Acro-Tech to defend frivolous lawsuits concerning its leased office space.
LEGAL STANDARDS
A motion to dismiss under Rule 12(b)(6) will only be granted if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his complaint which would entitle him to relief." Gilligan v. Jamco Development Corp., 108 F.3d 246, 248 (9th Cir. 1997). Normally, the review is limited to the complaint, and all allegations of material fact are taken as true and viewed in the light most favorable to the non-moving party. Id. The court, however, may consider whether conclusory allegations follow from the description of facts alleged. Holden v. Hagopian, 978 F.2d 1115, 1121 (9th Cir. 1992).
A court may deny leave to amend when any proposed amendment would be futile. Reddy v. Litton Industries, Inc., 912 F.2d 291, 296 (9th Cir. 1990), cert. denied, 502 U.S. 921 (1991).
DISCUSSION
I. Preliminary Matters
Before the court are motions to dismiss for failure to state a claim. Accordingly, the analysis will be based on the allegations as they stand in the current Complaint. Therefore, I deny plaintiffs' motion for Rule 56(f) discovery because I am not going to engage in any fact finding, as they contend. I also will not consider the additional evidence contained in the Declaration of Reggie Huff.
II. RICO
A. Section 1962(c) (Claim One)
The Racketeer Influence and Corrupt Organizations Act ("RICO") prohibits the following:
(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, 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 or collection of unlawful debt.18 U.S.C. § 1962(c).
A violation under § 1962(c) requires proof of: (1) conduct; (2) of an enterprise; (3) through a pattern; (4) of racketeering activity. Howard v. America Online, Inc., 208 F.3d 741, 746 (9th Cir.), cert. denied, 531 U.S. 828 (2000).
Defendants contend that plaintiffs do not adequately allege a separate enterprise. An enterprise under RICO includes groups with a formal legal structure and groups whose members merely associate in fact. Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1083 (9th Cir.), amended on other grounds, 234 F.3d 428 (9th Cir. 2000), cert. denied, 121 S.Ct. 843 (2001). A group cannot be an enterprise, however, unless it exists independently from the racketeering activity in which it engages. It must have some sort of structure for making decisions and mechanisms for controlling and directing the affairs of the group on an on-going basis rather than an ad hoc basis. A conspiracy is not a RICO enterprise. Id.
Plaintiffs allege the following facts concerning the structure of the enterprise. The enterprise is an association in fact comprised of Jackson, Jackson Trust, Hallsworth, LB Land, and JDH Services. Jackson, Luann Jackson, and Hallsworth controlled the enterprise through their positions as officers and directors of the corporations which are members of the enterprise. Decisions were collectively made by Jackson and Hallsworth and each worked in cooperation with the other as indicated by the exchange of stock between them and the sharing of confidential information learned by Hallsworth from his work as an accountant for Acro-Tech. Boutin controlled the enterprise as counsel of record in various court proceedings and as trustee on deeds of trust.
Plaintiffs do not sufficiently allege the structure of the enterprise or its mechanism for directing its affairs. The conclusory allegation, made on information and belief, that Jackson and Hallsworth collectively make decisions is based on the separate conduct each was engaged in, the allegation that the two men owned JDH Services together, and the transfer of stock between them. The allegations of misconduct vary greatly, allegedly ranging from extortion of board members to groundless FED actions to complaints filed with government agencies regulating securities. Considering this, the allegations are insufficient to plead control of the enterprise on an on-going rather than an ad hoc basis. Moreover, plaintiffs allege that Boutin, who is not an alleged member of the enterprise, controls its affairs. That would be a most unusual management structure. There is also no allegation that the enterprise utilized a structure separate and apart from the predicate acts to distribute the proceeds of the transactions. See Chang v. Chen, 80 F.3d 1293, 1300 (9th Cir. 1996).
Plaintiffs contend that the inclusion of two corporations in the enterprise satisfies the requirement that the enterprise is an entity separate and apart from the pattern of racketeering activity in which it engages, relying on Chang. Chang held that the involvement of a corporation which has an existence separate from its participation in the racketeering activity can satisfy the enterprise element's requirement of a separate structure. The court went on to find that although the corporation was named as a member of the enterprise, the complaint did not allege how the corporation was related to or participated in the alleged enterprise. Consequently, the court held that the complaint did not properly allege an enterprise. Id. at 1300-01.
I previously stated that the employment of JDH Services to perform accounting services, thus giving JDH Services access to Acro-Tech's confidential business and financial information, and LB Land's use of the lease as a basis for FED litigation was adequate to meet the test under Chang for a separate entity. On further reflection, I have changed my mind.
In Planned Parenthood v. American Coalition of Life Activists, 945 F. Supp. 1355 (D.Or. 1996), reh'g en banc granted, 268 F.3d 908 (9th Cir. 2001), the court held that the American Coalition of Life Activists ("ACLA"), a national organization, was the RICO enterprise. The other defendants and enterprise members were also members of ACLA, including a separate organization, Advocates for Life Ministries. The court dismissed the single defendant who did not belong to the ACLA. Thus, the organizational structure of the ACLA was one and the same as the organizational structure of the enterprise. Id. at 1384-85.
Likewise, in Webster v. Omnitrition International, Inc., 79 F.3d 776 (9th Cir.), cert. denied, 519 U.S. 96 (1996), the corporation which was allegedly running a pyramid sales scheme was found to be the RICO enterprise. Id. at 876-87. The other members of the enterprise were officers and other principals of the corporation, and its outside counsel. Finally, in Simon v. Value Behavioral Health, Inc., 208 F.3d 1073 (9th Cir.), amended on other grounds, 234 F.3d 428 (9th Cir. 2000), cert. denied, 121 S.Ct. 843 (2001), the court held that plaintiff alleged that defendants collaborated to defraud health plan beneficiaries but did not adequately allege a RICO enterprise. The numerous defendants, primarily insurance companies and their agents, insurance industry trade groups, employee benefit plans, employers, and governmental entities, included many corporations.
Based on a study of the facts in these cases, I conclude that plaintiffs have not adequately alleged how an enterprise consisting of two corporations, a trust, and two men who allegedly control the three entities, are structured and operate as an enterprise as opposed to an ad hoc conspiracy. Accordingly, the § 1962(c) RICO claim (claim one) is dismissed.
B. Section 1962(b) (Claim Two)
The second claim alleges violations of section (b) of RICO:
(b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.18 U.S.C. § 1962(b).
Defendants contend that plaintiffs fail to allege a pattern of racketeering activity and fail to allege that anything was acquired through the use of illegal activities. Plaintiffs allege that some of the defendants attempted to gain control of Acro-Tech through the nonmonetary means of pressuring board members to resign and filing complaints with state agencies regulating securities. "Control" under § 1962(b) does not require formal control such as holding a majority of stock or being named as an officer or director. Ikuno v. Yip, 912 F.2d 306, 310 (9th Cir. 1990). The control required, however, is obtaining a financial interest in the enterprise. See National Organization for Women, Inc., v. Scheidler, 510 U.S. 249, 259 (1994) (victim enterprise must be an entity that was acquired).
The only financial interest or control of Acro-Tech alleged by plaintiffs is that on July 16, 1996, Jackson Trust purchased $50,000 of Acro-Tech stock which was later transferred among various defendants. There is no allegation that this stock was obtained through racketeering activity. It appears to be a legitimate purchase which was allegedly later used as leverage by defendants. That allegation, however, does not state a claim under § 1962(b). Compare Gagan v. American Cablevision, Inc., 77 F.3d 951, 961 (7th Cir. 1996) (evidence of defendants acquiring interests in limited partnerships with stolen funds and funds converted from the limited partners themselves supports a § 1962(b) claim) with Discon, Inc. v. Nynex Corp., 93 F.3d 1055, 1062 (2nd Cir. 1996) (control of victim enterprise legally acquired during a divestiture fails to state a claim under § 1962(b)), cert. denied, 522 U.S. 809 (1997).
Consequently, plaintiffs' second claim under § 1962(b) is dismissed.
C. Section 1962(d) (Claim Three)
"To establish a violation of section 1962(d) [conspiracy], Plaintiffs must allege either an agreement that is a substantive violation of RICO or that the defendants agreed to commit, or participated in, a violation of two predicate offenses." A § 1962(d) conspiracy claim cannot survive if the substantive claim does not state an action upon which relief could ever be granted. Howard v. America Online, Inc., 208 F.3d 741, 751 (9th Cir.), cert. denied, 531 U.S. 828 (2000).
Because the substantive RICO violations are being dismissed, the conspiracy claim must also be dismissed.
III. Oregon RICO
Oregon RICO, ORS 166.715 — 166.735, is modeled after the federal statute. Federal cases interpreting the federal statute are persuasive in interpreting the intent of the Oregon legislature. State v. Blossom, 88 Or. App. 75, 78-79, 744 P.2d 281 (1987), rev. denied, 305 Or. 22 (1988).
In Claim Four, plaintiffs allege a violation of ORS 166.720(3), which parallels § 1962(c). Consequently, Claim Four is dismissed for insufficiently alleging an enterprise. In Claim Five, plaintiffs allege a violation of ORS 166.720(2), which parallels § 1962(b). Claim Five is dismissed for insufficiently alleging an interest acquired by racketeering activities.
Plaintiffs allege in Claim Six a violation of ORS 166.720(4), which parallels § 1962(d), a RICO conspiracy. Claim Six is dismissed for lack of a properly pleaded substantive Oregon RICO claim.
IV. Type of Dismissal for RICO Claims
Although the Complaint is entitled the Second Amended Complaint (Corrected), it is the fourth complaint plaintiffs filed in this action. I wrote a lengthy opinion dismissing the First Amended Complaint which explained in detail the deficiencies in the allegations and gave plaintiffs permission to replead. Consequently, all RICO and Oregon RICO claims dismissed in the Second Amended Complaint (Corrected) are dismissed with prejudice.
V. State Common Law Claims
Plaintiffs' remaining claims, for abuse of process, intentional interference with business and economic relations, and breach of contract, all arise under Oregon common law. All federal claims have been dismissed and there is no diversity jurisdiction. I decline to exercise supplemental jurisdiction over the three state law claims and dismiss them without prejudice. 28 U.S.C. § 1367(c)(3).
CONCLUSION
Defendants Hallsworth and JDH Services, Inc.'s motion to dismiss (#72), defendants Robert Jackson, Luann Jackson, The Robert K. Jackson Family Trust and LB Land, Inc.'s motion to dismiss (#74), and defendant Boutin's motion to dismiss (#76) are granted in part. The action is dismissed.