By Deborah Quick
A third U.S. District Court has rejected a motion to dismiss Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. § 1962, RICO) allegations in a “clean-diesel” case, holding that allegations a car manufacturer and parts supplier committed mail fraud when they worked together to deceive the U.S. Environmental Protection Agency with respect to federal Clean Air Act (CAA) compliance were not an attempt to repackage a Clean Air Act violation as a RICO-predicate act. Further, the court rejected the argument that private-plaintiffs were barred from alleging fraud on the EPA as a RICO-predicate act; rather, the alleged deception of consumers was the illegal act alleged, although that deception may have involved also deceiving EPA. [Albers v. Mercedes-Benz USA, LLC, et al., ___F.Supp.3d___, Case No. 16-881 (D. N.J. Mar. 25, 2020).]
Background
The putative class representatives allege that, from 2007 through the beginning of 2016, German car manufacturer Mercedes sold diesel cars (Subject Vehicles) in the United States that they advertised as:
“. . .‘the world’s cleanest and most advanced diesel’ with ‘ultra-low emissions, high fuel economy and responsive performance,’ representing that they emit ‘up to 30 percent lower greenhouse-gas emissions than gasoline.’”
However, per the class allegations, Mercedes and its parts-supplier Bosch:
” . .installed an electronic control unit in the Subject Vehicles known as electronic diesel control unit or ‘EDC] 17[, which] allegedly functioned as a defeat device, i.e., turned off or limited emissions reductions during real-world driving conditions as compared to lab testing.”
The purpose of the defeat device was to persuade regulators and consumers that the Subject Vehicles met emissions standards, including those limiting allowable emissions of NOx (nitrous oxide), a pollutant regulated under the Clean Air Act (42 U.S.C. § 7401 et seq.) The defeat devices accomplished this sleight of hand by detecting when the Subject Vehicles’ emissions were being measured under laboratory conditions, when emissions limitations functions would be enabled. Conversely, when the defeat devices sensed that the Subject Vehicles were being driven under normal conditions, emissions controls were disabled and performance—as well as emissions—were thereby enhanced.
The putative class representatives alleged that they paid a premium for their “green diesel” cars. Their complaint stated claims under various state consumer protection laws as wells as violation of the federal RICO, pursuant to which they seek civil penalties:
“The RICO enterprise is alleged to be one by which the Mercedes and Bosch defendants coordinated their operations through the design, manufacturing, distributing, testing, and sale of the Subject Vehicles.”
The elements of a RICO violation are: 1) conduct 2) of an enterprise 3) through a pattern 4) of racketeering activity. See, Boyle v. U.S., 556 U.S. 938, 944 (2009). “Enterprise” is defined “exceedingly broadly” to include both corporate entities and informal associations. Ibid. With respect to the pattern of racketeering activity, the statute “requires at least two acts of racketeering activity within a ten-year period,” which may include federal mail fraud under 18 U.S.C. § 1341 or federal wire fraud under 18 U.S.C. § 1343. … In addition:
“. . .the plaintiff only has standing if, and can only recover to the extent that, he has been injured in his business or property by the conduct constituting the violation. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985).”
Bosch sought to dismiss the RICO claim, arguing, inter alia, that:
“. . .[p]laintiffs should not be allowed to convert their [CAA] claim into a RICO claim,” and that they “may not base their RICO claim on a ‘fraud on the regulator theory. 18 U.S.C. § 1962(c).”
The U.S. District Court’s Ruling
Defendants argued that plaintiffs’ allegations of racketeering involved violations of federal emissions standards, and therefore their RICO claim is “simply a disguise for a private CAA claim.” Plaintiffs countered that the CAA’s savings clause—“Nothing in this section shall restrict any right which any person (or class of persons) may have under any statute or common law to seek enforcement of any emission standard or limitation or to seek any other relief ….,” 42 U.S.C. § 7604(e)—preserves their claim. The U.S. District Court adopted a third analytical lens: that plaintiffs’ RICO claim:
“. . .is not premised on a violation of the CAA; rather, it alleges a pattern of deceptive marketing practices that amount to mail and wire fraud. These claims, while surely related to the concerns of the CAA, do not adopt the CAA as a predicate or rest on a violation of the CAA.”
This result echoes that of other District Courts that have considered similar attacks on RICO claims arising from similar facts. Counts v. Gen. Motors, LLC, No. 16-CV-12541, 2018 WL 5264194, at *12 (E.D. Mich. Oct. 23, 2018), and In re Duramax Diesel Litig., 298 F. Supp. 3d 1037, 1088 (E.D. Mich. 2018).
Separately, Bosch attached the RICO claims against itself—a parts supplier—to the extent that those claims relied on allegations that Bosch assisted Mercedes with false applications to EPA as RICO-predicate acts, relying on Cleveland v. U.S., 531 U.S. 12 (2000). In Cleveland, the defendant was accused of having submitted “false statements in an application for a state gambling license” as the basis of a mail fraud claim, the RICO-predicate act.
“The Supreme Court held that the mail fraud statute aims at the deprivation of a victim’s property. It requires ‘the object of the fraud to be “property” in the victim’s hands [but …] a Louisiana video poker license in the State’s hands is not “property.’ Id. at 26-27.”
Here, however, the gravamen of plaintiffs’ complaint is not that that Bosch and Mercedes acted together to deceive EPA, but rather Mercedes and Bosch “made material misrepresentations that induced [plaintiffs] to purchase vehicles” they would not otherwise have purchased, or to have paid higher prices than they otherwise would have paid.
“In short, the alleged scheme to defraud buyers included misrepresentations to the EPA, but EPA is not alleged to be the mail or wire fraud victim.”
Plaintiffs’ RICO claims thus survived the motion to dismiss.
Conclusion and Implications
Class-action plaintiffs’ RICO claims against various auto manufacturers have survived motions to dismiss in various jurisdictions, but it remains to be seen whether plaintiffs can succeed in proving notoriously difficult to prosecute RICO claims.
