United States District Court, S.D. New York
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For Elsevier Inc., Plaintiff: Jason Lee Jurkevich, Sills Cummis & Gross, New York, NY.
For Pierre Grossman, IBIS Corp., Publicacoes Tecnicas Internacionais, Defendants: Van Aaron Hughes, LEAD ATTORNEY, PRO HAC VICE, Dorsey & Whitney LLP (CO), Denver, CO.
OPINION AND ORDER
KATHERINE POLK FAILLA, United States District Judge.
From 2003 to 2011, Defendants Pierre Grossman (" Grossman" ), IBIS Corp. (" IBIS" ), Publicaç õ es Té cnicas Internacionais (" PTI" ), and various " John Doe" Defendants (collectively, " Defendants" ) purchased subscriptions from Plaintiff Elsevier, Inc. (" Plaintiff" or " Elsevier" ), a publisher of scientific, technical, and medical journals. Defendants allegedly purchased 50 of these subscriptions at low-priced, " individual" subscription rates, while promising that they would not resell the subscriptions to entities that would otherwise pay Elsevier's higher, " institutional" subscription rate. Despite this representation, Defendants allegedly did just that. On June 29, 2012, Elsevier initiated the instant action, bringing civil claims under the Racketeer Influenced and Corrupt Organizations Act (" RICO" ), see 18 U.S.C. § 1964(c), as well as claims under New York law, stemming from Defendants' alleged subscription fraud. Defendants have moved to dismiss the Amended Complaint for lack of personal jurisdiction and for failure to state a claim. For the reasons discussed in the remainder of this Opinion, Defendants' motion is granted in part and denied in part.
The Court assumes familiarity with the facts and procedural history set forth in its prior decision denying Plaintiff's motion for default judgment and granting Plaintiff leave to amend the Complaint, Elsevier, Inc. v. Grossman, No. 12 Civ. 5121 (KPF), 2013 WL 6331839 (S.D.N.Y. Dec. 5, 2013), as well as the Court's rulings therein. For convenience, the particular facts relevant to this motion are set forth below.
A. Factual Background
Plaintiff Elsevier is a Delaware corporation with a principal place of business in New York. (Am. Compl. ¶ 6). Elsevier publishes scholarly books and journals related to natural and social sciences. ( Id. at ¶ 10). Defendant Grossman is a citizen and resident of Brazil, and the Chief Executive Officer of PTI and IBIS. ( Id. at ¶ 13). He owns an apartment in Garden City, New York, which he visits once or twice a year and uses in connection with various business ventures. (Jurkevich Decl., Ex. B ¶ ¶ 4-5 (Affidavit of Pierre Grossman)). Defendant PTI is a corporation organized under the laws of Brazil, with a principal place of business in Brazil. (Am. Compl. ¶ 11). Defendant IBIS is a corporation organized under the laws of Brazil, with a principal place of business in Brazil, and an office -- Grossman's apartment -- in Garden City, New York. ( Id. at ¶ 12). Plaintiff also brought claims against John Doe Nos. 1-50, who are described, in part, as relatives and/or business associates of PTI, IBIS, or Grossman. ( Id. at ¶ 14).
1. Elsevier's Business Model
Elsevier publishes journals consisting primarily of peer-reviewed articles, which are written by scholars and often based upon original research. (Am. Compl. ¶ 15). Elsevier is the sole source for new copies of its journals. ( Id. at ¶ 18). Elsevier incurs substantial costs in copyediting, proofreading, typesetting, printing, binding, distributing, and marketing the journals, and in maintaining its editorial offices. ( Id. at ¶ 16).
Elsevier sells its journals through annual subscriptions -- either directly or through subscription agents. (Am. Compl. ¶ ¶ 17, 20). Subscription agents serve as intermediaries between individuals or institutions and Elsevier. ( Id.). Elsevier charges two different subscription rates: a full-price rate for institutions, and a discounted rate for individuals. ( Id.).
Elsevier does not permit individuals who purchase journals at the individual rate to then supply them to unidentified institutions for institutional use. (Am. Compl. ¶ 19). To that end, Elsevier provides its subscription agents with terms and conditions that require the agent to identify the end-user of each journal. ( Id. at ¶ 21). Specifically, Elsevier alleges that each direct customer and agent " represents and warrants" that it is purchasing the subscription from Elsevier
for its own account and use and not on behalf of any other person or entity. If Client is an agent, it represents and warrants that it is purchasing the Products
and Services from Elsevier for the account and use of no more than one identified institutional subscriber as principal or, if the agent is permitted to order personal subscriptions in a representative capacity, for the account and use of no more than one identified eligible individual subscriber for valid personal use.
( Id. at ¶ 22).
Elsevier relies upon the income from the institutional subscriptions to make its journals economically feasible. (Am. Compl. ¶ 17). As such, Elsevier suffers financial injury if it receives payment for institutional subscriptions at individual rates. ( Id. at ¶ 23). A significant decline in income from its journals could cause Elsevier to stop publishing one or more journals, or publish less information in those journals. ( Id.). Elsevier asserts that such consequences could adversely impact scholarship and scientific progress. ( Id.).
Elsevier maintains records of each individual and institutional customer in order to provide customer support, pay royalties, and enhance its products for certain markets. (Am. Compl. ¶ 18). According to Elsevier, the loss of customer information -- that is, the information about the ultimate end-users of its journals -- irreparably harms Elsevier. ( Id.).
2. Defendants' Alleged Subscription Fraud
Elsevier alleges that Defendants engaged in a fraud by conspiring to purchase individual subscriptions from Elsevier at discounted rates and then resell those subscriptions to institutions at the higher rate, thereby reaping substantial illegal profits while depriving Elsevier of revenue and customer information. (Am. Compl. ¶ 25). Specifically, Elsevier alleges that Grossman conspired with others, identified in the Complaint as John Doe Nos. 1-50, who are relatives and/or business associates of Defendants PTI, IBIS, or Grossman (the " Subscribing Defendants" ). ( Id. at ¶ ¶ 14, 26). The Subscribing Defendants, who are from various states, subscribed to certain journals published by Elsevier at individual rates between 2003 and 2011. ( Id. at ¶ 27). The Subscribing Defendants obtained the journals through the mail and interstate wires, and caused PTI and IBIS to resell them to institutions at substantially higher rates. ( Id.). Grossman also resold the individual-rate journals to institutions at the institutional rate. ( Id. at ¶ 28).
According to the Complaint, the Subscribing Defendants and Grossman placed orders for individual subscriptions using " false names and/or addresses." (Am. Compl. ¶ 29). Plaintiff further alleges " [u]pon information and belief" that each of the Defendants " misrepresented to Elsevier that each of the individual subscriptions was for the account and use of no more than one identified eligible individual subscriber for valid personal use." ( Id. at ¶ 32). The Subscribing Defendants and Grossman then sent journals to several common addresses, including addresses in Garden City, New York, and Sã o Paolo, Brazil. ( Id. at ¶ 30). Each of the Defendants shared in the profit from this scheme. ( Id. at ¶ 33).
Critical to the analysis that will follow, Plaintiff also attached as an exhibit to the Amended Complaint a chart listing information regarding 50 subscription orders placed by or on behalf of Defendants, which includes the name of the journals, the quantity of subscriptions ordered, the date of the subscriptions, the billing address, the individual customer names, and the mailing addresses provided for each subscription. (Am. Compl. ¶ 31 & Ex. A).
Most of the journal recipients appear to be individuals, with a few notable exceptions. The first of the 50 orders that were part of the alleged subscription fraud scheme was an order for the Journal of Health Economics placed on or about February 6, 2004. (Am. Compl., Ex. A). The order was billed to an address in Brazil associated with IBIS and PTI. ( Id.). The customer mailing address associated with this order, and with five other orders for this journal placed from 2004 to 2007, was " Inst Pesquisa Econ Aplicada, Biblioteca-M Emilia Velga." ( Id.). Whereas other customers on the list -- such as Defendant Grossman -- are classified as " Non Inst[itutional] Print Customers," this particular customer is identified as a " Brazilian Inst[itution] [of] Applied Econ[omic] Res[earch]." ( Id.). The other orders listed on the chart were billed to Grossman or to the Subscribing Defendants, and mailed to addresses in Brazil or to Grossman's Garden City address. ( Id.).
3. Plaintiff's Discovery of the Alleged Subscription Fraud
In order to detect subscription fraud, Plaintiff uses the services of a consultant who " analyzes vast amounts of individual rate subscription data to identify unusual patterns indicative of fraud." (Am. Compl. ¶ 34). According to Plaintiff, " [p]atterns indicative of fraud include, but are not limited to, unusually large numbers of individual subscriptions, many times in unrelated fields, ordered in the same person's name, or an unusually large number of subscriptions ordered from, or delivered to, the same address." ( Id. at ¶ 35). Plaintiff further asserts that " [b]ecause the patterns of fraud are based on numerous subscriptions made over time, even through the exercise of due diligence, the patterns may not be discovered until years after the subscriptions are placed." ( Id. at ¶ 36).
In November 2009, Elsevier's consultant became aware of suspicions by another publisher client regarding individual rate subscriptions ordered by Grossman, PTI, ...