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WILLIAMS ELECTRONICS GAMES, INC. v. BARRY

March 5, 1999

WILLIAMS ELECTRONICS GAMES, INC., PLAINTIFF,
v.
GREGORY S. BARRY, LORNA BARRY, DONALD G. BARRY, KATHLEEN M. BARRY, JAMES M. GARRITY, ARROW ELECTRONICS, INC., A DELAWARE CORPORATION, LAWRENCE J. GNAT, RICHARD S. SLUPIK, MILGRAY ELECTRONICS, INC., A NEW YORK CORPORATION, MICROCOMP, INC., AN ILLINOIS CORPORATION, LINDA J. GNAT, ETAK, LTD., AN ARIZONA CORPORATION, AND AMERICAN PROGRESSIVE CIRCUITS, INC., AN ILLINOIS CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Gettleman, District Judge.

  MEMORANDUM OPINION AND ORDER

Plaintiff Williams Electronics Games, Inc. has brought an eight count second amended complaint ("complaint") against defendants Gregory S. Barry ("Barry"), Lorna Barry, Donald G. Barry, Kathleen M. Barry, James M. Garrity, Arrow Electronics, Inc. ("Arrow"), Lawrence J. Gnat ("Gnat"), Richard S. Slupik, Milgray Electronics, Inc. ("Milgray"), Microcomp, Inc., Linda J. Gnat, Etak, Ltd., and American Progressive Circuits, Inc. ("APC"). Counts I and II, brought against all defendants, allege violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Count III, against Arrow, Garrity, Milgray, Gnat and Slupik, allege Sherman Act violations, 15 U.S.C. § 1 et seq. Count IV, against all defendants, alleges state law claims for breach of fiduciary duty and inducement to breach fiduciary duty. Count V*fn1 against all defendants, alleges common law fraud and conspiracy, and Count VI alleges violations of the Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq. (Count VI), breach of contract and restitution against Barry (Count VII), and accounting and constructive trust (Count VIII). Defendants Arrow, Milgray and APC (the "corporate defendants") and defendant Garrity have moved to dismiss the RICO counts for failure to state a claim pursuant to Fed. R.Civ.P. 12(b)(6). In addition, APC has moved for summary judgment on Counts IV, V and VI. For the reasons set forth below, defendants' motions are granted in part and denied in part.

Motions to Dismiss

Standard

Pursuant to Fed.R.Civ.P. 12(b)(6), a motion to dismiss should not be granted unless it appears beyond doubt that plaintiff can prove no set of facts in support of its claim. Conley v. Gibson, 355 U.S. 41, 456, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). The court accepts as true all of the plaintiff's well-pleaded factual allegations, and gives plaintiff the benefit of every reasonable inference that may be drawn from those facts. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974).

Facts*fn2

For the period 1989 to 1997 plaintiff manufactured and sold coin operated pinball and video amusement games. It used electronic components manufactured or sold to it by defendants Arrow, Milgray and Microcomp. Defendant Barry was employed by plaintiff from August 1989 until January 1997 as either a Senior Buyer or Purchaser Manager. Barry was responsible for purchasing the electronic components to be used in amusement games.

Arrow is the world's largest distributor of electronic components and computer products to industrial and commercial customers such as plaintiff. Garrity was an Arrow salesman whose duties included selling electronic components to plaintiff. Plaintiff alleges that Garrity acted in furtherance of those duties as Arrow's agent and representative. According to the complaint, in the fourth quarter of 1990, beginning no later than January 1991, Garrity and Barry reached an agreement pursuant to which Barry would purchase on behalf of plaintiff products from Garrity at inflated prices. In return, Garrity provided Barry with monthly and annual year-end cash kickbacks.

During the period in question, Milgray also provided plaintiff with electronic component parts. Gnat was Milgray's branch manager for the northern district of Illinois. As such, Gnat's duties included supervising defendant Slupik, who was the Milgray salesman in charge of selling to plaintiff. Plaintiff alleges that Slupik, with the knowledge and encouragement of Gnat, also sold components to Barry at inflated prices and in return paid Barry monthly and year-end cash kickbacks.

Plaintiff further alleges that between 1992 and sometime in 1996 APC authorized Metro Teluse, Inc. and later Dyna Tech Sales, Inc. and their employees, particularly Harold Krause and Michael Iatomasi, to act as APC's agents to obtain and accept orders from plaintiff for purchase of electronic circuit boards. According to the complaint, APC sold electronic parts to plaintiff through orders that its agents, including Krause and Iatomasi, obtained under an arrangement in which they paid Barry consulting fees and/or commissions to obtain the orders.

Although the complaint is replete with factual detail as required by Fed.R.Civ.P. 9(b), reduced to its bare bones, the complaint alleges two fairly simplistic schemes. First, for most of the period in question Barry was plaintiff's primary buyer of electronic components. His duty was to purchase such components in the proper quantities at the lowest prices available. Starting sometime in early 1990 and continuing through March 1997, Barry devised a scheme in which he disregarded those duties by placing orders with defendants Arrow, Milgray, Microcomp, APC and others for components that were priced above those available from approved vendors, and for parts that Williams did not need. The result was increased commissions to the corporate defendants' salesmen (Gnat, Slupik and Garrity) who in turned paid Barry and / or his family members cash kickbacks. In addition, Barry concealed the excessive pricing by failing and refusing to bargain with defendants or other vendors to obtain price concessions and by instructing vendors to increase price quotations to create a false impression that market prices were higher than they actually were. Each summer from 1991 through 1995 Barry would meet with the salesmen, Garrity for Arrow and Slupik for Milgray, to review the level of purchases from the companies and determine the anticipated future purchases Barry could cause plaintiff to make, and to determine the amounts of payments to be made to Barry. Although the scheme worked slightly differently with APC than with the other corporate defendants, the basic concept, cash kickbacks for orders at inflated prices, was the same.

The second scheme alleged involved price fixing. During 1994 through 1996 plaintiff used thousands of erasable programmable read-only memory chips ("EPROMs") in its video games. Starting in the fourth quarter of 1994 through 1996 EPROMs were available from a variety of sources including franchised distributors as well as directly from one of the manufacturers of the EPROMs that Arrow and Milgray sold to plaintiff. Market prices for EPROMs generally declined during this period. From late 1990 and continuing until Barry left plaintiff in January 1997, Garrity knew that Slupik and Gnat were paying Barry for purchase orders for Microcomp and Milgray, and Slupik and Gnat knew that Garrity was paying Barry to obtain purchase orders for Arrow. Plaintiff alleges that Slupik, Gnat and Garrity agreed with each other that they would cause Barry to place with Milgray approximately one-half of the dollar value of plaintiff's purchase orders that Barry placed with Arrow, and that Arrow and Milgray would not compete with each other or with Microcomp for orders from plaintiff. Sometime in September 1994, Slupik, Gnat and Garrity agreed that instead of reducing Arrow's and Milgray's prices to plaintiff for EPROMs, they would "fix, raise, stabilize and maintain prices." Therefore, from August 1994 through June 1996, Arrow and Milgray charged plaintiff identical prices for EPROMS and changed those prices simultaneously in equal amounts.

Discussion

Counts I and II (RICO)

As noted, the corporate defendants (Arrow, Milgray and APC) and Garrity have moved to dismiss Counts I and II for failure to state a claim pursuant to Fed. R.Civ.P. 12(b)(6). The corporate defendants argue that the counts are defective because:

1. they rely on the doctrine of respondeat superior;

2. the alleged enterprise is an "association-in-fact" devoid of any structure separate and apart from the racketeering acts that defendants allegedly committed; and

3. the counts fail to allege a "pattern of racketeering activity" as defined by the Seventh Circuit.

Garrity's motion relies on points two and three above, lack of an enterprise and failure to allege a ...


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