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Crab House of Douglaston, Inc. v. Newsday

March 3, 2006

CRAB HOUSE OF DOUGLASTON, INC. D/B/A DOUGLASTON MANOR; COLLEGE POINT RESTAURANT, CORP. D/B/A GALLAGHER'S II; RON BON PUB, INC. D/B/A GALLAGHER'S; ET WEEK PUBLICATION, INC.; GREENBERG & STEIN, LLP.; JOSEPH MAURO; PARALLEL PRODUCTIONS, INC.; PARK AVENUE AESTHETIC SURGERY, PC; SCOTT A. RUSSO; AND TAC CATERING INC., ON BEHALF OF THEMSELVES AND ALL SIMILARLY-SITUATED PERSONS AND ENTITIES PLAINTIFFS,
v.
NEWSDAY, INC.; HOY, LLC; UNITED MEDIA DISTRIBUTORS, LLC; DISTRIBUTION SYSTEMS OF AMERICA, INC.; HAROLD FOLEY; ROBERT GARCIA; ROBERT HAUFMAN; FRED HERB; ROBERT BRENNAN; LOUIS S. SITO; KEITH POTTHOFF; AND "JOHN DOES" "1" THROUGH, "25," DEFENDANTS.



The opinion of the court was delivered by: Hurley, District Judge

MEMORANDUM & ORDER

INTRODUCTION

The present lawsuit involves circulation misstatements made by two Long Island newspapers, Newsday and Hoy. In fact, Newsday reported the scheme in its own pages:

Newsday announced yesterday that an internal audit discovered its circulation had been inflated and said it is cutting previously reported figures for a six-month period last year by about 40,000 daily and 60,000 Sunday. . . . In addition, the Spanish- language newspaper Hoy, which Newsday launched and is now a subsidiary of Tribune, Newsday's parent organization, is cutting its figures for the September period by about 15,000 daily and 4,000 Sunday. . . . Newspaper circulation figures help determine rates that advertisers pay. Analysts expect Newsday and Hoy to give rebates or free space to some advertisers to compensate for the inflated figures. (2d Am. Compl. ("SAC") ¶ 75 (quoting N.Y. Newsday, June 17, 2004, at 1.).)

On behalf of those who purchased advertising based upon the bloated circulation figures, Plaintiffs Crab House of Douglaston, Inc., doing business as ("d/b/a") Douglaston Manor; College Point Restaurant, Corp. d/b/a Gallagher's II; Ron Bon Pub, Inc. d/b/a Gallagher's; ET Week Publication, Inc.; Greenberg & Stein, LLP; Joseph Mauro; Parallel Productions, Inc.; Park Avenue Aesthetic Surgery, PC; Scott A. Russo; and TAG Catering (collectively, "Plaintiffs") bring this putative class-action lawsuit against Corporate Defendants Newsday, Inc. ("Newsday"); Hoy, LLC ("Hoy"); United Media Distributors, LLC ("United"); Distribution Systems of America, Inc. ("DSA"), and Individual Defendants Harold Foley ("Foley"); Robert Garcia ("Garcia"); Thomas Langer ("Langer"); Robert Halfmann*fn1 ("Halfmann"); Fred Herb ("Herb"); Robert Brennan ("Brennan"); Louis S. Sito ("Sito"); Keith Pothoff*fn2 ("Pothoff"); and "John Does" "1" through "25" for violations of the Racketeer Influences and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. §§ 1962(c) and 1962(d); violations of § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a); unjust enrichment; and common law fraud.

This Court's jurisdiction over the putative class-action is premised exclusively upon the federal claims, i.e. the RICO and Lanham Act claims. (See SAC ¶ 9(a) (citing to 28 U.S.C. § 1331).) Defendants acknowledge that the facts of this case smack of common law fraud, but insist that "[t]his is not a federal RICO or 'unfair competition' case." (Id.) As a result, the Corporate Defendants and Individual Defendants Foley, Langer, Halfmann, Brennan, Sito, and Pothoff moved pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the SAC for failure to state a claim as to each of the alleged federal causes of action and ask the Court to decline supplementary jurisdiction over the common law claims. For the reasons set forth herein, the Court GRANTS Defendants' motions, but also GRANTS Plaintiffs leave to submit a Third Amended Complaint.

BACKGROUND

The following summary of facts is drawn from the SAC. The Court, as it must for the purposes of the present motion, accepts all of Plaintiffs' allegations as true, including the employment histories of the Individual Defendants.

I. The Parties

Plaintiffs represent a putative class of corporations and individuals who purchased advertising with Newsday and Hoy from 1995 to the present (hereinafter, the "class period"). Though there are only ten named plaintiffs, Plaintiffs hypothesize that there are tens of thousands of class members.

Corporate Defendant Newsday is a corporation organized under the laws of the State of New York, a wholly-owned subsidiary of the Tribune company, and "a publisher and distributor or co-publisher and co-distributor of 'Newsday' and 'Hoy' newspapers." (SAC ¶ 65.) Corporate Defendant Hoy is a limited liability company organized under the laws of the State of New York, also a wholly-owned subsidiary of the Tribune Company, and "a publisher and or co-publisher and co-distributor of 'Hoy' newspaper." (SAC ¶ 66.)

Corporate Defendant DSA, a corporation organized under the laws of New York and a wholly-owned subsidiary of the Tribune Company, has been the sole distributor of Newsday and Hoy from April 2, 1999, and has been delivering flyers to enumerated households from September 1990 to the present.

Corporate Defendant United is a limited liability company organized under the laws of the State of New York, the sole independent distributor of Newsday throughout the Greater New York metropolitan area from March 5, 1998 to April 2, 1999 and simultaneously the sole independent distributor of Hoy in the distribution area from November 15, 1998 to April 2, 1999. Unlike the other Corporate Defendants, United is not alleged to be a wholly-owned subsidiary of the Tribune Company. Rather, 51 percent of United stock was owned by DSA, 47.04 percent by Anthony Orlacchio ("Orlacchio"), President, and Michael Pouchie ("Pouchie"), Executive Vice President, and 1.96 percent by Defendant Langer.

The above corporations and limited liability companies are referred to as the "Corporate Defendants" as context demands.

Non-parties Volmar Distributors, Inc. ("Volmar") and American Media Distributors, Inc. ("American") combined with United, and DSA as the distributors of Newsday and Hoy (hereinafter, Volmar, American, United and DSA will be referenced, collectively, as the "Distributor"). Volmar was the sole independent Newsday distributor of Newsday in the distribution area from September 1981 until January 1997. American, a limited liability company organized on or about December 17, 1996 under the laws of the State of New York, was Volmar's successor in interest until its assets were acquired by United on or about March 5, 1998. Pouchie and Orlacchio were the principal stockholders of American, which was the sole independent distributor of Newsday in the distribution area from January 1997 to on or about March 5, 1998.

Individual Defendant Foley is a resident of Oneida County, New York, and is a computer programmer and an independent contractor for the Distributor. Foley allegedly created the computer programs that were used to conduct the distribution of Newsday and Hoy.

Defendant Garcia is a resident of Kings County, New York. During the class period, Garcia was an employee, agent, and sales manager for Newsday, overseeing the distribution of Newsday, and the circulation director for Hoy when it began publication in November 1998.

Defendant Langer is a resident of Westchester County, New York, and during the class period was an independent contractor, agent, and financial systems consultant for American; the chief financial officer of United; and an employee and agent of Newsday, Hoy, and DSA.

Defendant Halfmann is a resident of Suffolk County, New York, and during the class period was an employee, agent, and sales representative for Newsday, Hoy, and DSA.

Defendant Herb is a resident of Suffolk County, New York, and during the class period was an employee, agent, and sales representative for Newsday, Hoy, and DSA.

Defendant Brennan is a resident of Suffolk County, New York, and during the class period was an employee and agent for Newsday, Hoy, and DSA, and the Vice President of Circulation for Newsday. Brennan was either placed on administrative leave or terminated by Newsday on June 16, 2004, when the Tribune Company and Newsday publicly acknowledged that Newsday and Hoy had inflated their circulation volume. (See SAC ¶ 75 (excerpting the public release).)

Defendant Sito is a resident of Suffolk County, New York, and during the class period was an employee and agent of Newsday, Hoy, and DSA and is the president of Hoy, Executive Vice President of Newsday, and Vice President and National Director of Hispanic publications for the Tribune Company.

Defendant Pothoff is a resident of Suffolk County, New York, and during the class period was an employee of Newsday, Hoy, and DSA, and a former General Manager of United.

Defendants "John Does" "1" through "25" are officers, directors, employees, representatives, or agents of one or more of the Corporate Defendants who participated in the alleged enterprise and who, by reason of their positions, participated in, furthered, or exercised supervision and control over the alleged enterprise.

The above individuals are referred to as the "Individual Defendants" as context demands. Finally, non-party Audit Bureau of Circulation ("ABC") is a not-for-profit corporation authorized to do business in New York. ABC, an "independent auditing company and self-regulatory auditing organization engaged and responsible to advertisers, advertising agencies and the media they employ" (Id. ¶ 95), was the auditor of Newsday's and Hoy's circulation volumes.

II. The Alleged RICO Enterprises Plaintiffs allege that "each of the Defendants managed or operated and/or participated in the conduct of the affairs of three Enterprises to wit, the Circulation Enterprise and the Newsday and Hoy Enterprises through a pattern of racketeering activity consisting of mail fraud." (Id. ¶ 4; see also id. ¶ 181.)

A. The Newsday Enterprise

The SAC reads: "The first Enterprise, Company Defendant Newsday, corporation, is an Enterprise within 18 U.S.C. § 1961(4)." (Id. ¶ 181(1).)

B. The Hoy Enterprise

The SAC further reads: "The second Enterprise, Company Defendant Hoy, a limited liability company, is an Enterprise within the meaning of 18 U.S.C. § 1961(4)." (Id. ¶ 181(2).)

C. The Circulation Enterprise

The third and final alleged enterprise is the "Circulation Enterprise," an "association-in-fact" enterprise consisting of (1) Individual Defendants; (2) Defendants Newsday and Hoy; (3) the Distributor; and (4) ABC. (Id. ¶¶ 6, 181(3).)

The alleged purposes of the Circulation Enterprise were "lawful and unlawful." (Id. ¶ 182.) The "lawful purposes" were "the legitimate business of planning, developing, marketing, selling, distributing, and managing the circulation of Newsday and Hoy and the delivery of flyers, . . . and other services related to the publication of a newspaper and direct delivery of advertising flyers to households." (Id.) The "unlawful purposes" were generating increased revenues and profits by falsely inflating circulation volumes; "defrauding, cheating, and stealing money" from Plaintiffs; and concealing the existence and operations of the Circulation Enterprise. (Id. ¶ 183.)

III. The Alleged Scheme

Plaintiffs contend that through a scheme devised and orchestrated by the Individual Defendants and Corporate Defendants Newsday and Hoy, Plaintiffs were duped into purchasing advertising at an inflated price that was based upon falsified circulation figures. The system functioned in the following way. The Distributor delivered Newsday to retailers through delivery drivers, "who delivered the newspapers to retail outlets, such as grocery stores, stationery stores, supermarkets, chain stores and similar retail outlets." (SAC ΒΆ 101.) Unsold newspapers were picked up by the delivery drivers and then returned to the Distributor's distribution warehouse. The Distributor would bill the retail outlets at the end of each week for the previous week's purchases, less returns. The Distributor would then pay Newsday based upon the number of papers actually sold, and submit a weekly affidavit of sales and returns. These affidavits were submitted to the auditing company once every six months for certification of the circulation numbers. Defendants allegedly reported false circulation figures to ABC, ABC audited and certified those ...


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