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List Interactive, Ltd. v. Knights of Columbus

United States District Court, D. Colorado

March 20, 2018

LIST INTERACTIVE, LTD. d/b/a Uknight Interactive, and LEONARD LABRIOLA Plaintiffs,
KNIGHTS OF COLUMBUS, and DAVID J. KAUTTER, in his official capacity as Acting Commissioner of the Internal Revenue Service, Defendants.
KNIGHTS OF COLUMBUS Counterclaim Plaintiff,



         This matter is before the Court on five pending motions. For the reasons discussed in this order, the Court (1) denies plaintiffs' motion for a temporary restraining order, preliminary injunction, and sanctions; (2) denies the Knights of Columbus' motion for a protective order; (3) grants the Knights of Columbus' partial motion to dismiss; (4) grants in part and denies in part plaintiffs' and other counterclaim defendants' motion to dismiss the Knights of Columbus' counterclaims; and (5) denies the Knights of Columbus' motion to dismiss for lack of standing, or alternatively, for partial summary judgment.


         I provided a detailed overview of the facts in an order dated July 28, 2017.[1] The facts remain the same subject to a few developments since that order was issued. Plaintiff List Interactive, Ltd., frequently referred to by its d/b/a UKnight Interactive or just UKnight, is a small company that designs web systems. Plaintiff Leonard Labriola is the manager of UKnight. I will refer to the plaintiffs collectively as “UKnight.” UKnight alleges that in September 2011 defendant Knights of Columbus promised to announce to the broader Knights of Columbus fraternity of lodges and agents (“the Order”) an agreement whereby UKnight would be the designated vendor for the Order's life insurance business. The promised announcement never occurred, and litigation followed.

         UKnight's core claims, as I see them, are that the Knights of Columbus breached an oral contract when it reneged on its agreement to make UKnight its designated vendor, and that the Knights of Columbus stole trade secrets from UKnight before doing so. UKnight has also asserted two other creative claims that are the subject of one of the pending motions. For its part, the Knights of Columbus has struck back with an assortment of counterclaims, which this order also addresses. I will explain each of the pending motions as I get to them.


         To survive a 12(b)(6) motion to dismiss, the complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A plausible claim is a claim that “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While the Court must accept the well-pled allegations of the complaint as true and construe them in the light most favorable to the plaintiff, Robbins v. Wilkie, 300 F.3d 1208, 1210 (10th Cir. 2002), conclusory allegations are not entitled to be presumed true, Iqbal, 556 U.S. at 681. However, so long as the plaintiff offers sufficient factual allegations such that the right to relief is raised above the speculative level, he has met the threshold pleading standard. See, e.g., Twombly, 550 U.S. at 556; Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008).


         As mentioned above, there are five pending motions. I will address each motion in turn.

         A. UKnight's Emergency Motion for a Temporary Restraining Order, Preliminary Injunction, and Sanctions for Witness Intimidation. [ECF No. 76].

         Plaintiff UKnight filed a motion for a temporary restraining order to enjoin the Knights of Columbus from engaging in behavior during discovery that UKnight described as “witness intimidation.” ECF No. 76 at 1. The Court heard argument regarding this discovery issue on September 25, 2017, and I issued an Order that same day addressing and effectively granting the requested injunctive relief. See ECF No. 79. Now five months have passed and no further discovery issues of the sort have arisen. Thus, the Court sees no live issue remaining in this motion, and tellingly UKnight did not argue that this motion is still ripe at the hearing before this Court on February 6, 2018 when asked. Therefore, ECF No. 76 is DENIED.

         B. Knights of Columbus' Motion for Protective Order. [ECF No. 77].

         This motion focused immediately on the plaintiffs' September 22, 2017 email to local councils, which the Court addressed in its order of September 25, 2017, and to that extent it is moot. To the extent the motion seeks protection against any discovery concerning membership information, it is DENIED for reasons discussed infra in connection with defendants' motion to dismiss for lack of standing, etc. ECF No. 107.

         C. Knights of Columbus' Partial Motion to Dismiss. [ECF No. 100].

         The Knights of Columbus filed a motion to dismiss the First and Second Claims in UKnight's Second Amended Complaint. ECF No. 100. UKnight's First Claim alleges that the Knights of Columbus violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and that it continues to violate RICO through an alleged insurance fraud enterprise. ECF No. 98 at 28. UKnight's Second Claim seeks a court order requiring David J. Kautter, the Acting Commissioner of the Internal Revenue Service, to invalidate the Knights of Columbus' tax-exempt status due to the alleged insurance fraud activity. Id. at 46. For the following reasons, I GRANT the Knights of Columbus' motion to dismiss both claims.

         1. UKnight's RICO Claim.

         RICO vests a private citizen with substantive rights to avoid injuries to his business or property caused by a pattern of racketeering activity. 18 U.S.C. § 1964(c). It outlaws four types of racketeering activities which, as relevant here, include “conducting the affairs of an enterprise through a pattern of racketeering” or conspiring to do so. Id. at §§ 1962(c-d). In the Tenth Circuit, a plaintiff asserting a RICO claim must plausibly allege that “a person (1) conducted the affairs (2) of a distinct enterprise (3) through a pattern (4) of racketeering activity.” Safe Streets All. v. Hickenlooper, 859 F.3d 865, 882 (10th Cir. 2017) (internal quotation marks and citations omitted).

         UKnight alleges that the Knights of Columbus, the insurance ratings agency AM Best, and a software company called IDI make up the “Insurance Fraud Enterprise.”[2] ECF No. 98 at 29. With the Knights of Columbus at the helm, the alleged objective of this enterprise is to perpetuate the Knights of Columbus' insurance fraud scheme by allowing the Knights of Columbus to (1) inflate its reported membership numbers without detection, and (2) use these inflated membership numbers to bolster the Knights of Columbus' insurance business reputation to make more money. Id. According to UKnight, this played out in the following ways. First, the Knights of Columbus provided AM Best with false membership numbers and demographic data so that AM Best would, in turn (and unknowingly), generate fraudulent insurance ratings for the Knights of Columbus' insurance products. This bolstered the Knights of Columbus' insurance business reputation and allowed it to attract business under false pretenses, including business relationships like the one between UKnight and the Knights of Columbus. Id. at 30-31.

         After this scheme was up and running, the Knights of Columbus then used its relationship with IDI, a software company, to ensure its fraudulent scheme went undetected. Id. at 31. This allegation requires some additional background. According to UKnight, from 2011 until approximately 2013 the Knights of Columbus were gung-ho about working with UKnight to develop a new web platform for the Order's insurance business. ECF No. 54 at 6. All was well until sometime in 2013, when the Knights of Columbus “realized that broad deployment of the UKnight system would necessarily reveal their fraudulent inflation of membership numbers.” ECF No. 98 at 40. Wishing to have its cake (the functionality of the UKnight web platform) and eat it too (not have information regarding its fraudulent inflation of membership numbers fall into the wrong hands), the Knights of Columbus allegedly hatched a plan whereby it dispatched the software company IDI to surreptitiously acquire knowledge about UKnight's web platform so that the Knights of Columbus could replicate the UKnight system in-house. Id. Based upon these alleged events and the involvement of IDI and AM Best in them, UKnight alleges that the Knights of Columbus therefore “conduct[ed] the affairs of an enterprise through a pattern of racketeering” in violation of RICO. 18 U.S.C. § 1962(c-d). Because UKnight's failure to sufficiently plead the third and fourth elements of its RICO claim (a “pattern of racketeering activity”) is dispositive, I assume without deciding that UKnight has satisfied the first two elements of the RICO cause of action.

         A “pattern of racketeering activity” requires at least two predicate acts of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 n.14 (1985). “The implication is that while two acts are necessary, they may not be sufficient.” Id. Thus, in order for UKnight to successfully plead a “pattern, ” it must demonstrate not only the existence of two or more predicate acts perpetrated by the enterprise, but also that the alleged predicate acts are related and pose at least a threat of continued criminal activity. H.J. Inc. v. NW. Bell Tel. Co., 492 U.S. 229, 238-39 (1989). In the Tenth Circuit, courts interpret this holding from H.J. to require a showing of (1) “relationship” and (2) “continuity.” Boone v. Carlsbad Bancorporation, Inc., 972 F.2d 1545, 1555 (10th Cir. 1992).

         UKnight alleges the existence of seven predicate acts underlying this racketeering scheme: extortion (on the part of the Knights of Columbus), theft of trade secrets (on the part of both the Knights of Columbus and IDI), interstate transport of stolen goods (Knights of Columbus), wire fraud (Knights of Columbus and AM Best), receipt of stolen funds obtained by fraud (Knights of Columbus), financial institution fraud (Knights of Columbus), and witness tampering (Knights of Columbus). ECF No. 98 at 33-44.

         a. “Relationship

         Under Boone, UKnight must first show how these predicate acts are related. The relationship test “is not a cumbersome one for a RICO plaintiff.” Boone, 972 F.2d at 1555 (internal citation removed). A showing that predicate acts “‘have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events'” is all that is needed. Id. (quoting H.J., 492 U.S. at 240). Here, UKnight has pled that the Insurance Fraud Enterprise had a shared purpose “to artificially inflate the membership ranks and artificially skew the demographic structure of the Knights of Columbus risk-pool, and to wrongfully bring under the control of Defendant the tools developed by UKnight to prevent this system from revealing their fraud and to enhance their ability to effectively continue this fraud.” ECF No. 98 at 44. UKnight further argues that the predicates have the same participants and victims and that they all serve to “protect the financial position of and enrich[] the [Knights of Columbus].” Id. at 45.

         I find that even in viewing the record in the light most favorable to UKnight, the alleged relationship between the acts is attenuated, and the predicate acts seem to be “isolated events” rather than calculated parts of a racketeering scheme. See Boone, 972 F.2d at 1555. The participants, victims, and methods of commission used by IDI to allegedly steal UKnight's trade secrets are quite different than those allegedly used by the Knights of Columbus to mislead AM Best. Thus, I am unconvinced that UKnight has met its burden on the relationship prong of establishing a “pattern.”

         b. “Continuity

         However, even if UKnight met its burden to show a relationship between the predicate acts, it has failed to sufficiently allege “continuity” of the alleged racketeering activities. As the Supreme Court has explained,

Continuity is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition. It is, in either case, centrally a temporal concept-and particularly so in the RICO context, where what must be continuous, RICO's predicate acts or offenses, and the relationship these predicates must bear one to another, are distinct requirements.

H.J., 492 U.S. at 241-42. The Supreme Court has determined “that when Congress said predicates must demonstrate ‘continuity' before they may form a RICO pattern, it expressed an intent that RICO reach activities that amount to or threaten long-term criminal activity.” Bixler v. Foster, 596 F.3d 751, 761 (10th Cir. 2010) (citing H.J., 492 U.S. at 243 n.4). As such, UKnight must show that the alleged Insurance Fraud Enterprise's activities “amount to or threaten long-term criminal activity.” Id.; see also Gotfredson v. Larsen LP, 432 F.Supp.2d 1163, 1174-76 (D. Colo. 2006) (to satisfy the continuity element in RICO, one must sufficiently allege “a clear threat of future criminal conduct.”). UKnight has failed to do so.

         UKnight argues that the scheme has existed for at least five years-since the time that UKnight's trade secrets were allegedly stolen-and presents a “clear threat of future criminal conduct” because the Knights of Columbus “shows no intention of stopping this practice of fraudulently inflating its insurable membership numbers” and “is actively seeking a new vendor to implement an internal system using UKnight's stolen trade secrets.” ECF No. 98 at 45. However, UKnight's hodgepodge framing of who and what this enterprise is comprised of makes it exceedingly unlikely that the enterprise poses a real threat of future harm. While there remains the possibility that the Knights of Columbus will continue to fudge its membership numbers, it is implausible to assert that this enterprise poses a threat of future criminal conduct as required under RICO. The alleged criminal actions of this enterprise involving more than just the Knights of Columbus are isolated-lying to a national insurance ratings agency, stealing the trade secrets of a web program developer-and any risk of their reoccurrence or ability to cause future harm is purely hypothetical. Like the schemes in Gotfredson, SIL-FLO, Inc. v. SFHC, Inc., 917 F.2d 1507, 1516 (10th Cir. 1990), and other cases where courts have dismissed RICO claims based on continuity, the Insurance Fraud Enterprise's alleged actions amount to a narrowly-focused scheme conducted in the past with no risk of future criminal conduct. See Giese v. Giese, No. 16-CV-01032-RBJ, 2017 WL 1407037, at *4 (D. Colo. Apr. 17, 2017). This kind of “narrowly-focused, albeit allegedly illicit behavior is not the kind of extensive, continuing racketeering activity that RICO was meant to cover.” Id.

         Thus, the objectives of RICO would not be served by recognizing a RICO claim in this instance. SIL-FLO, Inc., 917 F.2d at 1516. Accordingly, the Court finds that UKnight's First Claim in the amended complaint is DISMISSED with prejudice.

         2. UKnight's Claim for Injunctive Relief to Remove the ...

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