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Empire Merchants, LLC v. Reliable Churchill LLLP

United States Court of Appeals, Second Circuit

August 28, 2018

Empire Merchants, LLC, Plaintiff-Appellant,
Reliable Churchill LLLP, Sam Liquors Inc., Bin Luo, aka Chen, Bao Liquors Inc., Bao Xiong Zheng, aka Bao Xion Zheng, aka Bao Xing Zheng, Ting Wei, LTT Whiskey, Inc., Yi Feng Gao, Defendants-Appellees, Empire Merchants North, LLC, Plaintiff, Nileshkumar Jasbhai Patel, aka Nick Patel, Pratibha Patel, aka Panna Patel, Tech Pride of America, Inc., dba Happy 40 Liquors, dba Happy 40 Wines & Spirits, dba Happy 40 Discount Liquors, Anil Patel, Dilip C. Patel, Prakash Patel, J&R Company LLC, dba North East Liquors, Jatin B. Patel, aka Jattinkumar B. Patel, Vlamis Liquors LLC, dba Vlamis' Cut-Rate Liquors, Our Liquor, Inc., Alexander J. Lew, John Doe, Defendants Numbers 1-50, Tushar C. Patel, Ke Yao, Breakthru Beverage Group, LLC, Arlyn B. Miller, Charles Merinoff, Gregory L. Baird, Defendants.

          Argued: October 10, 2017

         Empire Merchants, LLC ("Empire"), the New York metropolitan area's exclusive distributor for many leading brands of liquor, sued defendants under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., alleging that they smuggled liquor into New York State, depriving Empire of sales it would have otherwise made. The district court granted defendants' Fed.R.Civ.P. 12(b)(6) motion to dismiss because, inter alia, the smuggling operation, as alleged, did not directly cause Empire to lose sales, and therefore Empire did not adequately allege proximate cause under RICO. We hold that Empire's Amended Complaint did not adequately allege proximate cause. Accordingly, the judgment of the district court is AFFIRMED.

          For Plaintiff-Appellant: Caitlin J. Halligan, Gibson, Dunn & Crutcher, LLP, New York, NY (Randy M. Mastro, Matthew J. Benjamin, Gibson, Dunn & Crutcher LLP, New York, NY, William E. Thomson, Gibson, Dunn & Crutcher LLP, Los Angeles, CA, on the brief)

          For Defendants-Appellees: Sean F. O'Shea (Helen M. Maher, on the brief), Boies, Schiller Flexner LLP, New York, NY, for Defendant-Appellee Reliable Churchill LLP Ronald D. Degen, O'Rourke & Degen, PLLC, New York, NY, for Defendant- Appellee LTT Whiskey Inc.

          Before: Pooler, Livingston, Circuit Judges, Crawford, District Judge. [1]

          Debra Ann Livingston, Circuit Judge.

         This is a case about proximate cause under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Plaintiff-Appellant Empire Merchants, LLC ("Empire"), a distributor of alcoholic beverages, is New York State's exclusive distributor for popular brands like Johnnie Walker, Grey Goose, and Seagram's Gin. Empire alleges that from at least 2008 to 2014, Defendant-Appellee Reliable Churchill LLLP ("Reliable") and (non-party) Republic National Distributing Company ("RNDC"), two of Maryland's largest liquor distributors, conspired with retail liquor stores in Cecil County, Maryland ("Cecil County retailers") and New York City ("New York retailers") to smuggle liquor from Maryland to New York, in violation of New York liquor law. Empire sued Reliable and several Cecil County and New York retailers under RICO, alleging that their bootlegging directly harmed Empire "because every case of alcohol smuggled into New York from Maryland was a lost sale by New York's authorized distributors-of which Empire was the largest." J.A. 172. The defendants moved to dismiss under Fed.R.Civ.P. 12(b)(6), arguing in part that the smuggling operation did not directly cause Empire to lose sales, and therefore that Empire had not adequately alleged proximate cause under RICO. The district court agreed and dismissed the case, and Empire appealed. Because Empire failed to allege proximate cause adequately, we AFFIRM the judgment of the district court.


         I. Factual Background[2]

         As relevant here, the American alcohol industry consists of three different groups of entities: (1) suppliers, who produce the alcohol in breweries, vineyards, and distilleries; (2) distributors, who purchase liquor from suppliers in bulk and sell it to retail liquor stores, restaurants, and bars; and (3) retailers, the liquor stores, restaurants, and bars that ultimately sell liquor to consumers. Many suppliers and distributors enter into contracts with one another, giving the distributors "the exclusive right to distribute that supplier's products in-state." J.A. 200. Both the federal government and New York State license suppliers and distributors, and many states and municipalities tax the sale of liquor. See, e.g., 27 U.S.C. § 203(c); N.Y. Alco. Bev. Cont. Law § 62.

         Empire is the largest liquor distributor in the New York metropolitan area and has exclusive distribution contracts for that area with some of the world's leading liquor suppliers, giving it exclusive rights to distribute popular brands like Johnnie Walker and Smirnoff. It alleges that from at least 2008 to 2014, Reliable and RNDC conspired with the Cecil County and New York retailers to smuggle liquor from Maryland to New York, thus violating state and federal law, interfering with Empire's exclusive New York distribution rights, and depriving Empire of millions of dollars in lost sales.[3]

         The scheme was simple. The New York retailers would make interstate phone calls and send interstate faxes and emails to Cecil County retailers requesting liquor, and the Cecil County retailers passed on the orders to Reliable and RNDC. Reliable and RNDC sold the requested products to the Cecil County retailers at discount. The New York retailers paid for the liquor in cash (sometimes up to $20, 000 at a time) and smuggled it in vans and trucks from Maryland to New York. The Cecil County retailers deposited the cash into bank accounts and wrote checks from those accounts to pay Reliable and RNDC.[4]

         Empire alleges that Reliable knew about the smuggling and that many of its employees encouraged and even helped coordinate the scheme. Some Reliable employees helped Cecil County retailers remove Maryland stickers from its liquor crates to help smugglers evade detection, at least one Reliable salesman lied to a Cecil County retailer who expressed concern that Reliable was encroaching on Empire's exclusive rights, and Reliable may have even been in direct contact with the smuggling New York retailers. Both Reliable and RNDC also track retailers' weekly sales and would have noticed the large purchasing discrepancies in rural Cecil County. And many Cecil County and New York retailers, according to the Amended Complaint, have admitted to smuggling.[5]

         At all relevant times during the alleged smuggling operation, Maryland's excise liquor tax was $1.50/gal, and the total excise tax in New York City (state and local tax included) was $7.44/gal. In both Maryland and New York, distributors are responsible for paying alcohol excise taxes. The operation "was predicated on" this $6/gal tax difference. Id. at 204. Smuggling allowed the New York retailers to buy liquor at a discount and then sell it at New York prices. For the Cecil County retailers, Reliable, and RNDC, the bootlegging scheme opened a much larger market, as Cecil County has a population of 78, 000 people, about 0.3% the population of metropolitan New York. Profits soared. One Cecil County retailer sold $300, 000 of liquor to New York in a nine-day period. Reliable alone sold over 272, 000 cases (5.8 million bottles) as part of this smuggling operation, "resulting in gross revenues of more than $40 million." Id. at 181.

         But the operation cost New York State, New York City, and, according to the Amended Complaint, Empire. "By willfully avoiding the payment of the much higher New York State and New York City excise tax on alcohol," the Amended Complaint alleges, the defendants deprived the State and City "of millions of dollars in tax revenue." Id. at 183-84. It also "caused Empire at least tens of millions of dollars in lost sales damages" because "every case of alcohol smuggled into New York from Maryland was a lost sale by New York's authorized distributors - of which Empire is the largest." Id. at 172, 189.

         Empire first learned of the smuggling operation in May 2016 when the United States Attorney's Office for the District of Maryland indicted RNDC and several co-conspirators for wire fraud and money laundering. Reliable is also alleged to have "been under investigation for the same smuggling activity and negotiating to resolve potential charges against the company" since at least 2013. Id. at 184.

         II. Procedural History

         Empire sued Reliable and the other defendants in the United States District Court for the Eastern District of New York (Ross, J.) on September 20, 2016, and filed an Amended Complaint on December 9, 2016. As relevant here, the Amended Complaint alleged:

• substantive violations of RICO, 18 U.S.C. § 1962(c), based on a pattern of mail and wire fraud, money laundering, and violations of the Travel Act, 18 U.S.C. § 1952;
• conspiracy under RICO, id. § 1962(d); and
• several claims under state law.

         Empire sought compensatory damages "for every . . . sale it lost as a result of the bootlegging scheme," treble damages and attorney's fees under RICO, punitive damages, and declaratory and injunctive relief. J.A. 189. But on March 16, 2017, the district court granted the Defendants' Rule 12(b)(6) motion to dismiss. See Empire Merchants, LLC v. Reliable Churchill LLLP, No. 16CV5226ARRLB, 2017 WL 5559030 (E.D.N.Y. Mar. 16, 2017).

         The bulk of the district court's analysis concerned Empire's allegations of wire fraud as a RICO predicate offense. Wire fraud, 18 U.S.C. § 1343, has three elements: (1) a scheme to defraud, (2) money or property that is the object of the scheme, and (3) use of the wires to further the scheme. Fountain v. United States, 357 F.3d 250, 255 (2d Cir. 2004). Focusing principally on the first element, the court held that Empire largely failed to allege a scheme to defraud, and to the extent that it had adequately pled such a scheme, it had not alleged that the wire fraud proximately caused its injuries. Empire argued that the smuggling operation itself constituted the requisite "scheme to defraud." The district court rejected this characterization, however, insisting that the smuggling operation was not a single scheme to defraud, but three schemes: (1) smuggling to avoid paying liquor taxes; (2) smuggling to violate New York's liquor licensing laws; and (3) smuggling to interfere with Empire's exclusive distribution contracts. It then concluded that Empire failed to allege proximate cause for the first and second schemes to defraud, and that the third was not a cognizable scheme at all.

         First, although "a smuggling scheme to defraud the government of excise taxes constitutes a 'scheme to defraud' under the wire fraud statute," the court reasoned, Empire had "disclaim[ed] any reliance on defendants' tax evasion in its RICO allegations." Id. at *8 (emphasis removed). Empire had also not pled that the alleged tax evasion directly caused Empire's injuries, which meant that Empire had failed to plead proximate cause under Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006). Second, to the extent that Empire alleged that the smuggling operation violated New York State's liquor licensing laws, those state law violations did not proximately cause Empire's injuries either because "Empire would have suffered the identical injury at the hands of a licensed wholesaler." Id. at *12. Finally, a smuggling scheme that interfered with Empire's exclusive distribution contracts, the district court concluded, was not a scheme to defraud because, though potentially actionable under New York tort law, "the act of selling" liquor in violation of another's contractual rights is "not itself deceitful." Id. at *10.

         The court then dismissed Empire's RICO claims predicated on mail fraud, 18 U.S.C. § 1341, money laundering, id. § 1956, and violations of the Travel Act, id. § 1952. Empire did not adequately allege mail fraud because the complaint did not mention any specific use of the mails to further the smuggling operation. The defendants' alleged money laundering - the Cecil County retailers' deposits and withdrawals of the New York retailers' cash payments - may have helped conceal the smuggling from government regulators but did not, on its own, proximately cause Empire's injuries. The Travel Act violations were "wholly derivative of the[] money laundering allegations" and therefore failed for the same reason. Id. at *16. Finally, the court dismissed the RICO conspiracy claim for lack of ...

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