30, 32, 34, 35.) For example, the 1988 Annual Report stated that, in response to an FDA investigation, Lyphomed had reverified the documentation of its research to insure the correctness of the procedure.
We cannot hold that the Complaint fails to put Kapoor on notice of the outlines of the alleged predicate acts and of his role in them, at least as concerns mail fraud. It pleads that specified mailings contained false or misleading statements made by Kapoor about Lyphomed. However, the Complaint is not nearly so forthright about any alleged wire fraud. Though the Complaint alleges that phone calls and telecopier transmissions of various documents were used by Kapoor to perpetuate the alleged fraud, (Compl. P 75), no further detail is provided. Such general allegations, lacking in any factual foundation, fall far short of the requirements of Rule 9(b).
Thus, we find that the RICO Counts adequately plead acts of mail fraud as predicate acts, and to the extent Counts IV-VI rely on mail fraud, they are adequately specific. However, with respect to wire fraud, no underlying detail is given; only general accusations are made. This is clearly inadequate, and the references in the RICO counts to violations of the wire fraud statute as predicate acts are stricken. (Compl. PP 75, 75(b).)
B. Count IV: 18 U.S.C. § 1962(c)
-- Pattern of Racketeering Activity
Kapoor further argues that because the predicate acts of mail and wire fraud are fatally deficient, this Court cannot determine if the RICO Counts adequately plead a pattern of racketeering activity. Fujisawa responds that specified of acts mail fraud, insider trading and misrepresentation over a six-year period of time are plead with adequately specificity. (Compl. PP 30, 32, 39, 75, 29, 55.) Kapoor's argument is simply a rehash of his specificity arguments, which we have largely rejected, and they do not persuade us here either. The alleged predicate acts, with the exception of wire fraud, are plead with adequate specificity. Thus, we are able to adequately address this issue.
Precisely what constitutes a "pattern of racketeering activity" is somewhat ill-defined: it has been compared to Justice Potter Stewart's now famous obscenity test -- "I know it when I see it"-- set forth in Jacobellis v. Ohio, 378 U.S. 184, 197, 12 L. Ed. 2d 793, 84 S. Ct. 1676 (1964). Morgan v. Bank of Waukegan, 804 F.2d 970, 977 (7th Cir. 1986) (citing Papai v. Cremosnik, 635 F. Supp. 1402, 1410 (N.D. Ill. 1986). The Supreme Court has recently held that courts should take a flexible approach to the pattern requirement: In RICO, Congress "envisioned a concept of sufficient breadth that it might encompass multiple predicates within a single scheme that were related and that amounted to, or threatened the likelihood of, continued criminal activity." H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 237, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989) (overturning rule in Eighth Circuit that any number of predicate acts concerning multiple victims over six years cannot constitute a RICO pattern if they relate to a single scheme). This confirmed earlier Seventh Circuit holdings that "the mere fact that the predicate acts relate to the same overall scheme or involve the same victim does not mean that the acts automatically fail to satisfy the pattern requirement." Morgan, 804 F.2d at 975-76; Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1304 (7th Cir. 1987), cert. denied, 492 U.S. 917, 106 L. Ed. 2d 588, 109 S. Ct. 3241 (1989).
In order to establish a pattern, the plaintiff must plead two elements: "It is this factor of continuity plus relationship which combines to produce a pattern." H.J., Inc., 492 U.S. at 239 (citation omitted) (emphasis added); Schiffels v. Kemper Fin. Serv., 978 F.2d 344, 353 (7th Cir. 1992); Sutherland v. O'Malley, 882 F.2d 1196, 1203 (7th Cir. 1989) (recognizing H.J., Inc. as an affirmation of Seventh Circuit RICO jurisprudence). Thus, in order to establish a pattern, the plaintiff must plead that the racketeering predicates are related and that they amount to or pose a threat of continued criminal conduct. H.J., Inc., 492 U.S. at 239.
The relatedness prong of the pattern test is the more clearly defined of the two, and appears to have been met by Fujisawa. The relationship test is satisfied when the alleged predicate acts "are said to be related by a common purpose." H.J., Inc., 492 U.S. at 250. Certainly, the predicate acts plead in the present case all relate to concealing the ANDA fraud and/or inducing Fujisawa to purchase Lyphomed stock.
The continuity prong of the analysis is the more troublesome of the two. The Seventh Circuit has set out a test for assessing whether conduct alleged in the Complaint constitutes a continuing pattern of racketeering activity. See Sutherland, 882 F.2d at 1204; Jones v. Lampe, 845 F.2d 755, 756-57 & n.4 (7th Cir. 1988). Whether sufficient continuity exists is a fact-specific question encompassing many relevant factors including: (1) the number and variety of predicate acts and the length of time over which they were committed; (2) the number of victims; (3) the presence of several schemes; and (4) the occurrence of distinct injuries. Id. at 757; Triad Assoc., Inc. v. Chicago Housing Auth., 892 F.2d 583, 594 (7th Cir. 1989), cert. denied, 498 U.S. 845, 112 L. Ed. 2d 97, 111 S. Ct. 129 (1990).
Though none of these factors standing alone is dispositive, it is well-established in this circuit that "multiple acts of mail fraud in furtherance of a single episode of fraud involving one victim and relating to one basic transaction cannot constitute the necessary pattern." Jones, id. (quoting Tellis v. U.S. Fidelity & Guarantee Co., 826 F.2d 477, 478 (7th Cir. 1986); accord Talbot v. Robert Matthew Distrib. Co., 961 F.2d 654, 663 (7th Cir. 1992) (multiple acts of mail fraud extending over several years were in furtherance of single scheme and resulted in non-distinct injuries)
However, in congruence with the Supreme Court's ruling in H.J., Inc., there is a narrow exception to this rule. In certain circumstances, a single scheme to injure a single victim may constitute a pattern of racketeering activity. Where the particular predicate acts represent distinct, repeated injuries inflicted on the plaintiff, relatedness and continuity may be present. See H.J., Inc., 492 U.S. at 242 ("A party may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time."); Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1304-05 (7th Cir. 1987) (each act of fraud was a separate economic deprivation to plaintiff); Appley v. West, 832 F.2d 1021 (7th Cir. 1987) (each act of fraud was a separate deprivation); Illinois Dep't of Revenue v. Phillips, 771 F.2d 312 (7th Cir. 1985) (nine mailings of fraudulent tax returns was a pattern because each resulted in a separate underpayment). But see SK Hand Tool Corp. v. Dresser Indus. Inc., 852 F.2d 936, 943 (7th Cir. 1988), cert. denied, 492 U.S. 918 109 S. Ct. 3243, 106 L. Ed. 2d 509 (1989) (Liquid Air not applicable where each predicate act did not cause separate harm).
In Liquid Air, the defendant, who leased compressed air containers from the plaintiff, sent 19 false shipping orders to plaintiff indicating they had returned the cylinders when they had not. The Seventh Circuit held that each shipping order, plead as a predicate act, inflicted separate injury upon the plaintiff: "Each time an invoice was prepared, it deprived [the plaintiff] of its entitlement to rent or replacement value. Therefore, each act resulted in a distinct injury to [the plaintiff] and a concomitant benefit to [the defendant]." Liquid Air, 834 F.2d at 1304-05.
The test for the Liquid Air exception appears to be whether the plaintiff has suffered "repeated infliction of economic injury" over time. Jones, 845 F.2d at 759; Liquid Air at 1305. In the present case, it is clear that the predicate acts of mail fraud inflicted repeated and distinct economic injuries upon Fujisawa. Though the acts that constitute the gravamen of the Complaint all relate to a single scheme,
fraudulent acts to inflate the price of Lyphomed and to induce Fujisawa to purchase it, and involved only a single victim, Fujisawa, they resulted in repeated economic injury to the plaintiff. In reliance upon Kapoor's specific misrepresentations, Fujisawa purchased large blocks of Lyphomed stock in several separate transactions, each of which inflicted a distinct economic injury to the plaintiff. (Compl. PP 28, 30, 31, 39-43.) See Morgan, 804 F.2d 970, 976 (several acts of mail fraud over several years were distinct transactions though they could be viewed as part of a single scheme).
Where, as here, multiple predicate act relating to a single scheme inflict repeated economic injury on an alleged victim over the course of several years, both relatedness and continuity are clearly present. We hold that Fujisawa has adequately plead a pattern of racketeering activity, and we decline to dismiss Count IV.
C. Counts V and VI: 18 U.S.C. § 1962(a) and 18 U.S.C. § 1962(b)
In Counts V and VI, Fujisawa alleges that Kapoor, through use of the proceeds of racketeering activity, has acquired control of several other businesses. (Compl. PP 79-84.) Kapoor moves to dismiss both of these counts.
Kapoor argues that Count V must be dismissed because Fujisawa fails to plead injury from the use or investment of funds derived from racketeering activity as proscribed under section 1962(a).
The majority of circuit courts to address the issue has agreed, holding that allegations of injury from racketeering activity alone are insufficient to state a cause of action, and that injury from the use of racket-derived income is required under section 1962(a). See, Ouaknine v. MacFarlane, 897 F.2d 75, 82-83 (2nd Cir. 1990) (collecting cases); Rose v. Bartle, 871 F.2d 331, 357-358 (3d Cir. 1989); Grider v. Texas Oil & Gas Corp., 868 F.2d 1147, 1149 (10th Cir.), cert. denied, 493 U.S. 820, 107 L. Ed. 2d 43, 110 S. Ct. 76 (1989); see also, Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir. 1990) (noting conflicting authorities without deciding issue), cert. denied, 112 S. Ct. 332 (1991). But See Busby v. Crown Supply, Inc., 896 F.2d 833, 840 (4th Cir. 1990) (rejecting the "income use" rule). The Seventh Circuit has yet to address the issue, and there is a split among the courts of this district. Compare Weinstein v. Carrane, No. 90 C 1190, 1992 U.S. Dist. LEXIS 8916, 1992 WL151551, at *2 (N.D. Ill. June 22, 1992) (Leinenweber, J.) (refusing argument based on Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985), reversing earlier decision, and conforming to majority rule that allegations of predicate act injury are insufficient); Lappin v. Mesirow Inv. Serv., Inc., No. 91 C 4374, 1992 U.S. Dist. LEXIS 6451, 1992 WL 106776, at *1 (N.D. Ill. May 11, 1992) (Zagel, J.) (adopting Magistrate Judge's Report and Recommendation applying "income use" rule); R.E. Davis Chem. Corp. v Nalco Chem. Corp., 757 F. Supp. 1499, 1524-25 (N.D. Ill. 1990) (Rovner, J.) (declining to abandon "income use" requirement); Midwest Grinding Co., Inc. v. Spitz, 716 F. Supp. 1087, 1090-91 (N.D. Ill. 1989) (Rovner, J.) (to state a claim under section 1962(a), plaintiff must allege injury from use of income), aff'd on other grounds, 976 F.2d 1016 (7th Cir. 1992); Palumbo v. I.M. Simon & Co., 701 F. Supp. 1407, 1409-1410 (N.D. Ill. 1988) (Bua, J.); P.M.F. Serv., Inc. v. Grady, 681 F. Supp. 549, 555 (N.D. Ill. 1988) (Shadur, J.); Heritage Ins. Co. v. First Nat'l Bank of Cicero, 629 F. Supp. 1412, 1417 (N.D. Ill. 1986) (Getzendanner, J.), with, In re Conticommodity Serv., Inc. Sec. Lit., 733 F. Supp. 1555, 1556 (N.D. Ill. 1990) (Hart, J.) (rejecting "income use" requirement); Mid-State Fertilizer Co. v. Exchange Nat'l Bank of Chicago, 693 F. Supp. 666, 671 (N.D. Ill. 1988) (Hart, J.) (rejecting "income use" requirement), judgment aff'd, 877 F.2d 1333 (7th Cir. 1989); Continental Grain Co. v. Pullman Standard, Inc., 690 F. Supp. 628, 632-33 (N.D. Ill. 1988) (Leinenweber, J.) (rejecting "income use" rule, but this position was later abandoned by Judge Leinenweber in Lappin); Haroco, Inc. v. American Nat'l Bank and Trust Co., 647 F. Supp. 1026, 1032-33 (N.D. Ill. 1986) (Decker, J.).
The weight of authority and the plain language of the RICO statute support Kapoor on this issue: Section 1964(c) authorizes a private cause of action for "any person injured . . . by reason of a violation of section 1962." 18 U.S.C. § 1964(c). Section 1962(a) prohibits the investment of racketeering income to establish or operate an enterprise, not mere participation in acts of racketeering. 18 U.S.C. § 1962(a). In the past, we have twice joined the majority in holding that allegations of injury from predicate acts alone are insufficient to state a cause of action under section 1962(a). See Illinois ex rel. Hartigan v. Flisk, 702 F. Supp. 189, 192-93 (N.D. Ill. 1988) (Plunkett, J.);
Flood v. Waste Management, Inc., 1988 U.S. Dist. LEXIS 629 (N.D. Ill. 1988) (Plunkett, J.). Today we do so for the third time, and hold that in order to state a claim under section 1962(a), the plaintiff must allege injury from the use or investment of income derived from racketeering activity. Kapoor's motion to dismiss Count V is granted.
The same can be said of a claim under section 1962(b).
In order to state a claim for relief for violation of 1962(b), the plaintiff must allege that he was injured by reason of the defendant's acquisition or control of an interstate enterprise, not merely by the predicate acts of racketeering activity. Midwest Grinding, 716 F. Supp. at 1091 (citations omitted). Fujisawa has not done so, and Count VI is dismissed.
III. The State Law Claims
Kapoor's state law arguments all rest upon the assumption that the federal claims in the Complaint would be dismissed. Because we have left the vast majority of the complaint intact, including claims of fraud, we retain jurisdiction over the state law claims and decline to dismiss them.
Therefore, Kapoor's Motion to Dismiss is granted in part and denied in part. Kapoor's Motion to Dismiss Counts I, II and VII-X is denied in its entirety. References in Count III concerning misrepresentations in various Form 10-Qs are stricken without prejudice, the remainder of the Count to stand. References in Count IV to wire fraud are stricken without prejudice, the remainder to stand. Kapoor's Motion to Dismiss Counts V and VI is granted and those counts are dismissed without prejudice.
PAUL E. PLUNKETT
UNITED STATES DISTRICT JUDGE
DATED: February 9, 1993