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The Franchise Memorandum

Claims Against Major Distributor Survive Motion to Dismiss
Posted in RICO

In re U.S. Foodservice Inc. Pricing Litigation, 2009 WL 5064468 (D. Conn. Dec. 15, 2009), the court denied U.S. Foodservice’s (“USF’s”) motion to dismiss a RICO claim filed by plaintiffs Frankie’s Franchise System and others. The plaintiffs alleged that USF had created a number of shell companies to procure products, which were then sold to USF at inflated prices. In turn, USF allegedly would pass the inflated prices to plaintiffs, thus receiving a higher profit margin than it would have otherwise received under the parties’ contracts.

USF contended that plaintiffs’ claim failed because they were either not properly pled or did not state a claim, or because certain of the plaintiffs lacked standing. The court denied USF’s motion, finding that plaintiffs had properly pled the existence of a RICO enterprise under the statute.  The court also found that plaintiffs had properly alleged wire and mail fraud against USF, by alleging that USF had sent its fraudulent invoices through the mail, and money laundering. Finally, the court rejected USF’s claim that two of the plaintiffs lacked standing because they were not parties to cost-plus contracts with USF. The court found that plaintiffs had alleged that cost-plus purchases had been made, which was sufficient to survive the motion to dismiss.

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