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.
BACKGROUND
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 ...