The opinion of the court was delivered by: Hurley, District Judge:
Before the Court are five motions to dismiss plaintiffs' fourth amended complaint. (See docket nos. 141, 143, 149, 150, 151.) The Court previously granted defendants' motions to dismiss the second amended complaint ("SAC"),*fn1 dismissing all claims under the Lanham Act with prejudice, dismissing all claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., without prejudice and with leave to amend, and temporarily declining jurisdiction on plaintiffs' state law claims. Plaintiffs have since amended their complaint and defendants now move again to dismiss pursuant to Fed R. Civ. P. 12(b)(6). For the reasons that follow, defendants' motions are granted in part, and denied in part.
The allegations set forth in plaintiffs' fourth amended complaint ("FAC") are substantially similar to the prior pleadings in this case,*fn2 the underlying facts of which have been articulated in more detail in the Court's previous Memorandum & Order. See Crab House of Douglaston, Inc. v. Newsday, Inc. ("Crab House I"),418 F. Supp. 2d 193 (E.D.N.Y. 2006). Some familiarity with the underlying facts of this case is therefore assumed. In a nutshell, plaintiffs' claims arise from an alleged scheme by defendant news publications Newsday, Inc. ("Newsday"), Hoy, LLC ("Hoy"), and their distributors, as well as various employees to inflate the reported circulation numbers for their publications and "advertising flyers" by as much as 50 percent. (FAC ¶¶ 1-6, 25.) It is alleged that by padding these numbers, defendants fraudulently drove up the rates they could charge advertisers.
Central to the implementation of the purported scheme was the Audit Bureau of Circulation ("ABC"), an independent, non-profit entity responsible for auditing the reported circulation numbers of Newsday, Hoy, and a host of other news publications. ABC publishes biannual audited circulation reports upon which advertisers, including plaintiffs, rely in estimating both the effectiveness of their advertising in a particular publication and the market rate for placing such advertisements. The alleged fraud is said to have involved defendants submitting false circulation reports to ABC, taking various measures to create the appearance that those circulation reports were valid when later audited by ABC, and using the final audited reports published by ABC to substantiate the bogus circulation claims made to potential advertisers.
The named plaintiffs bring this action on behalf of themselves and a
class consisting of other businesses that placed advertisements in the
publications beginning in 1995 and continuing through the date
plaintiffs filed their FAC. (Id. ¶ 15.) They allege eight causes of
action, with the first five charging substantive RICO violations under
18 U.S.C. § 1962(c)*fn3 [Counts I and III] and
RICO conspiracy violations under 18 U.S.C. § 1962(d)*fn4
[Counts II, IV, and V], with the remaining three being causes
of action under state law, to wit, unjust enrichment, fraud, and New
York General Business Law § 349.
The "Company defendants," as they are referred to in the FAC, include the two publication companies Newsday and Hoy, and their distributor, Distribution Systems of America, Inc. ("DSA").*fn5 The FAC also brings claims against a number of named and unnamed individuals. The named individuals (the "Individual defendants")*fn6 include:
1) Louis Sito ("Sito"), President and Publisher of Hoy, Executive Vice President for Circulation for Newsday, and National Director Of Hispanic Publications for The Tribune Company, the parent company for the three Company Defendants;*fn7
2) Robert Brennan ("Brennan"), Vice President of Circulation for Newsday, and "overall director" for circulation and sales of Newsday, Hoy, and DSA;
3) Robert Garcia ("Garcia"), Circulation Director for Hoy; 4) Robert Halfmann ("Halfmann"),*fn8 "employee, agent, and sales representative" of the Company Defendants;
5) Fred Herb ("Herb"), also an "employee, agent, and sales representative" of the Company Defendants;
6) Keith Potthoff ("Potthoff"), an "employee and agent of Company Defendants," as well as General Manager of DSA.
7) Harold Foley ("Foley"), a computer programmer and independent contractor to the Company Defendants;
8) Thomas Langer ("Langer"), and independent contractor and financial systems consultant to the distribution companies that preceded DSA.
According to the FAC, defendants Sito, Brennan, and Garcia were all terminated from the Tribune Company in 2004, and pled guilty in 2006 for conspiracy to commit mail fraud in connection with the scheme alleged here. (FAC ¶¶ 107, 113, 115, 119, 120, 124.) The FAC defines "one or more" of the John/Jane Doe defendants as "a high-level officer, director, employee, representative and agent of one or more of the Company Defendants," and a "managing member of the Circulation Enterprise." (FAC ¶ 143.)
Rule 8(a) provides that a pleading shall contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The Supreme Court has recently clarified the pleading standard applicable in evaluating a motion to dismiss under Rule 12(b)(6). To survive a motion to dismiss [under 12(b)(6)], a plaintiff must allege "only enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).*fn9
While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).
Id. at 555-56 (citations and internal quotation marks omitted).
First, in assessing a party's complaint the Court should "begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Ashcroft v. Iqbal, 566 U.S. ---,129 S. Ct. 1937, 1950 (2009). "While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Id. Thus, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. at 1949 (citing Twombly, 550 U.S. at 555).
Second, "[w]hen there are well-pleaded factual allegations a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. "Determining whether a complaint states a plausible claim for relief [is] . . . a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950. The Court defined plausibility as follows:
A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of 'entitlement to relief.'"
Id. at 1949 (quoting and citing Twombly, 550 U.S. at 556-57).
RICO is a broadly worded statute that "has as its purpose the elimination of the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce." S. Rep. No. 91-617, at 76 (1969); see Statement of Findings and Purpose, Organized Crime Control Act of 1970, Pub. L. 91-452, 84 Stat. 922, 922-23 (1970); see also Attorney Gen. of Can. v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 107 (2d Cir. 2001). "RICO provides that '[a]ny person injured in his business or property by reason of' a RICO violation may bring a civil action to recover treble damages." Canada, 268 F.3d at 107 (quoting Metromedia Co. v. Fugazy, 983 F.2d 350, 368 (2d Cir.1992) (quoting 18 U.S.C. § 1964(c))).
To plead a violation of § 1962(c), the sole substantive RICO claim alleged in the FAC, plaintiffs must allege injuries arising from "(1) the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985); DeFalco v. Bernas, 244 F.3d 286, 306 (2d Cir. 2001); Cofacredit, S.A. v. Windsor Plumbing Supply Co. Inc., 187 F.3d 229, 242 (2d Cir. 1999); Azrielli v. Cohen Law Offices, 21 F.3d 512, 520 (2d Cir. 1994). The first two elements, as they pertain to the instant case, are examined in the section to follow; the latter two are discussed in section IV below.
III.CONDUCT OF THE RICOENTERPRISES
"Any principled analysis of a RICO claim [ ] must begin from an understanding of what enterprise is alleged." Spira v. Nick, 876 F. Supp. 553, 561 (S.D.N.Y. 1995). One violates RICO where "a defendant, through the commission of two or more acts constituting a pattern of racketeering activity, directly or indirectly participate[s] in an enterprise . . . ." DeFalco, 244 F.3d at 306; see Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994)("Under [§1962(c)], the RICO 'person' must conduct the affairs of the RICO 'enterprise' through a pattern of racketeering activity."). The term "'enterprise' includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." § 1961(4).
Plaintiffs here allege the existence of four racketeering enterprises within the meaning of § 1961(4). The first three are standalone corporate enterprises, namely: the "Newsday Enterprise," consisting of defendant Newsday; the "Hoy Enterprise," consisting of defendant Hoy; and the "ABC Enterprise," consisting of ABC. Plaintiffs also allege the existence of an "association-in-fact" enterprise, which they label as the "Circulation Enterprise." The Court begins its analysis with an examination of the ABC enterprise.
Defendants argue that plaintiffs' claims as to the ABC enterprise should be dismissed because they failed to allege that defendants actually "conduct[ed] or participat[ed], directly or indirectly, in the conduct of such enterprise's affairs." See 18 USC § 1962(c). The "conduct" element requires that "one [ ] participate in the operation or management of the enterprise itself." Reves v. Ernst & Young, 507 U.S. 170, 185 (1993).
Of course, the word "participate" makes clear that RICO liability is not limited to those with primary responsibility for the enterprise's affairs, just as the phrase 'directly or indirectly' makes clear that RICO liability is not limited to those with a formal position in the enterprise; but some part in directing the enterprise's affairs is required.
First Capital Asset Mgmt. Inc. v. Satinwood. Inc., 385 F.3d 159, 176 (2d Cir. 2004)(quoting Reves, 507 U.S. at 185); see also Redtail Leasing, Inc. v. Bellezza, No. 95 Civ. 5191, 2001 U.S. Dist. LEXIS 10814, at *11 (S.D.N.Y. July 31, 2001)("There is a 'substantial difference' between actual control over an enterprise and association with an enterprise in ways that do not involve control; only the former is sufficient under Reves.").
Although the Reves "operation or management" test sets forth a "low hurdle to clear at the pleading stage," City of New York v. Smokes-Spirits.com, Inc., 541 F.3d 425, 449 (2d Cir. 2008), overruled on other grounds by Hemi Group, LLC v. City of New York, --- U.S. ---, 130 S. Ct. 983, 994 (2010), plaintiffs have not cleared that hurdle vis-a-vis their allegations pertaining to the ABC Enterprise.
Plaintiffs claim that defendants primarily controlled the affairs of ABC by mailing fraudulent circulation numbers to ABC. ABC, in turn, relied on those false numbers and incorporated them into the audit circulation reports that it later published. Although the false circulation reports submitted to ABC likely affected the content of the final audit reports that ABC published, to suggest that this effect is tantamount to participating in or conducting the operation or management of the entity is a bridge too far. ABC stood at arm's length to defendants in its relationship as auditor, and defendants' submission of false information alone would not have changed the tenor of that relationship, or altered the internal processes by which ABC authenticates the information that it receives. In this context, without affecting such internal processes and affairs of ABC, defendants cannot be said to have met the "conduct" requirements set forth in Reves.
Other courts have come to similar conclusions in analogous scenarios. For example, in In re Smithkline Beecham Clinical Lab., 108 F. Supp. 2d 84 (D. Conn. 1999), it was alleged that the defendant, a medical laboratory company, conducted the affairs of the hospitals and doctors' offices to which the defendants sent fraudulent billing invoices. The court concluded that "although [the] alleged fraudulent billing practices may have victimized the physicians' offices, hospitals, and laboratories, that does not suffice to establish that [defendant] 'operated or managed' the affairs of each of these alleged enterprises." Id. at 100. Similarly, in Allstate Insurance Co. v. Seigel, 312 F. Supp. 2d 260, 275 (D. Conn. 2004), plaintiff insurance company brought RICO claims against a physician and his medical services company for submitting false invoices for medical services that were never actually performed. There, the Court noted that "any time a company is defrauded by the conduct of a defendant, one could say that the defendant 'controlled' the company's operations, since absent the fraud, the company would not have done what it did or acted in the manner in which it did. Such a free-wheeling interpretation of the operation and management test would appear to be inconsistent with Reves." Id.; see also Reves, 507 U.S. at 185 ("[RICO] 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.").
Plaintiffs allege that defendants conducted the affairs of the ABC Enterprise in two other ways. First, they allege that David Laventhal (not a defendant), the former president of Newsday, sat on the board of ABC during the 1990s and "participated in the formulation of the policies and practices of ABC," the details of which "await discovery." (FAC ¶ 174.) However, Laventhal's alleged participation on the board of ABC is not tantamount to participating in the operation or management of an enterprise as defined by the relevant case law.
As stated above, in order to participate in the operation or management of ABC in this case, the process by which ABC verifies submitted audit reports would have to have been affected. According to the FAC, ABC's board is composed of "persons employed as executives of nationally known advertisers, advertising agencies, business and farm publications, magazines, daily newspapers and weekly newspapers." (FAC ¶ 174.) Any attempt to enact policies or practices that would weaken or, in plaintiffs' words, "subvert" the organization's ability to audit claimed circulation numbers would be in direct conflict with the interests of other members of the board who represent advertisers. It is also arguably in conflict with the representatives of the other news publications who wish to preserve the integrity and level playing field of a fully functioning audit agency. Plaintiffs' allegation that Laventhal could have effected such unilaterally favorable policies vis-a-vis Newsday in the environment described above is simply not plausible. See Seigel, 312 F. Supp. 2d at 275-76 ("[A] defendant will not be found to participate in the management or operation of the enterprise simply because he enjoys substantial persuasive power to induce the alleged enterprise to take certain actions.")(citing Vickers Stock Research Corp. v. Quotron Sys., Inc., No. 96 Civ. 2269, 1997 U.S. Dist. LEXIS 10837 (S.D.N.Y. July 25, 1997)).
Second, plaintiffs allege that defendants affected the internal operations of ABC through its liaisons to ABC. Two individuals acted in this capacity: defendant Brennan, who served as a representative of the Newspaper Association of America to a committee at ABC and who also allegedly "participated in the formulation of the policies and practices of ABC," (FAC ¶ 174), and a non-defendant identified in the FAC as Ed Smith, who "entertained ABC auditors and became friendly with the auditors who compromised the thoroughness of ABC's auditing activities." (FAC ¶ 205.)
The allegations that Brennan conducted the affairs of ABC by influencing the policies and practices of ABC fail for precisely the same reasons that the allegations pertaining to non-defendant Laventhal failed. As to the allegations pertaining to Smith, according to the FAC, he would notify Newsday in advance of the actual date of an internal audit by ABC, and would allegedly know the specific delivery routes that would be inspected. This foreknowledge, plaintiffs claim, allowed defendants to prepare falsified circulation data for the particular route under investigation. Though this allegation identifies one of the many ways in which defendants perpetrated their fraud, it does not explain how Smith, or any other individual, actually participated in or conducted the affairs of ABC.
The FAC therefore fails to provide sufficient allegations that any defendant conducted or participated in the conduct of the ABC enterprise, and the allegations pertaining to that enterprise, as against all defendants, are therefore dismissed.
b.The Circulation Enterprise
Plaintiffs' only substantive RICO claims against the Company defendants are brought under Count III of the FAC, which alleges that they conducted the affairs of the ABC Enterprise (discussed above), as well as the affairs of the Circulation Enterprise. The Circulation Enterprise is pled as an association-in-fact enterprise consisting of the following members:
1) The Company defendants (Newsday, Hoy, DSA) (FAC ¶ 285(3));
3) The Individual defendants (id.);