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The Franchise Memorandum

Franchisees Fail to Establish Any Element of RICO Claim
Posted in RICO

In Jennings v. Bonus Building Care, Inc., Bus. Franchise Guide (CCH) 9115,284 (W.D. Mo. May, 7, 2014), a federal district court dismissed a lawsuit brought by four unit franchisees under the federal Racketeer Influenced and Corrupt Organizations Act ("RICO") because the franchisees could not meet any of the five elements required to sustain a RICO action. The franchisees alleged fraudulent and deceptive business practices against a total of 55 defendants associated with the Bonus Building Care franchise system, including corporate entities owned by the franchisor, multiple master franchisees, and various employees of the defendants. More specifically, the franchisees alleged that the defendants engaged in a scheme to defraud consumers by establishing a pyramid scheme, churning franchisees, charging erroneous or excessive fees, and disregarding their obligations under the unit franchise agreements.

The first RICO element required that the defendants be engaged in an "enterprise," consisting of an association of parties together for a common purpose over a sufficiently long period of time. Such an enterprise, however, must be distinct from the alleged pattern of racketeering, which in this case was the Bonus Building Care business itself. Because the franchisees argued that the entire Bonus Building Care system was created to perpetuate a fraudulent franchise scheme, they could not establish that the defendants were otherwise associated for any purpose sufficient to constitute an "enterprise" under the statute. Without the existence of an enterprise, it followed that the franchisees could not show the second RICO element that any of the 55 defendants operated or managed such an enterprise. The court also noted that the franchisees had failed to allege any action, much less participation, on behalf of at least 19 of the defendants. Although the franchisees did allege mail and wire fraud in their complaint, which could be sufficient to establish the third and fourth RICO element that each movant participated in predicate acts and a pattern of racketeering, the court noted that the fraud allegations did not satisfy the heightened pleading standards required for such allegations under the Rules of Civil Procedure. Similarly, the franchisees failed to establish the fifth element—that their injuries were proximately caused by the alleged predicate acts—because the complaint failed to identify any facts that moved it beyond a formulaic recitation of the elements.

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