Nutrition Distribution LLC v. Custom Nutraceuticals LLC et al

Filing 30

ORDER - 1. Defendants' motion to dismiss Plaintiff's RICO claim (Doc. 21 ) is granted, with leave to amend. Plaintiff may file an amended complaint by July 27, 2016. Defendants' motion is otherwise denied. 2. Defendant's motion to dismiss (Doc. 13 ) is found to be moot. (See document for full details). Signed by Judge David G Campbell on 7/8/16. (LAD)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Nutrition Distribution LLC,
Plaintiff,

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ORDER

v.

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No. CV-16-00173-PHX-DGC

Custom Nutraceuticals LLC, et al.,

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Defendants.

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Defendants are nutritional supplement companies that manufacture and market

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Ostarine, a selective androgen receptor modulator (“SARM”) with effects similar to those

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of anabolic steroids. Doc. 20, ¶¶ 1, 19. Plaintiff, a competing nutritional supplement

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company, asserts that Defendants have violated the Lanham Act by engaging in false

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advertising of Ostarine. ¶¶ 25-36. Plaintiff also asserts that Defendants have violated the

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Racketeer Influenced and Corrupt Organizations Act (“RICO”) by engaging in a pattern

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of criminal activity in connection with their sale of Ostarine and similar products. ¶¶ 37-

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41. Defendants move to dismiss these claims, or in the alternative, to stay the action

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pending the Ninth Circuit’s resolution of a related case. Doc. 21. The motion has been

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fully briefed (Docs. 25, 26), and the Court concludes that oral argument will not aid in its

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decision.1 For the reasons that follow, the Court will dismiss the RICO claim with leave

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to amend, and otherwise deny the motion.

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Defendants’ request for oral argument is therefore denied. See Fed. R. Civ. P.
78(b); Partridge v. Reich, 141 F.3d 920, 926 (9th Cir. 1998).

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I.

Lanham Act.

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“The Lanham Act creates a cause of action for unfair competition through

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misleading advertising or labeling.” POM Wonderful LLC v. Coca-Cola Co., 134 S. Ct.

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2228, 2234 (2014); see 15 U.S.C. § 1125(a)(1)(B) (“Any person who . . . uses in

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commerce . . . any . . . false or misleading description of fact, or false or misleading

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representation of fact, which . . . misrepresents the nature, characteristics, qualities, or

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geographic origin of his or her or another person’s goods . . . shall be liable in a civil

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action”). This cause of action may be invoked by competitors – those entities that stand

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to suffer “‘an injury to a commercial interest in sales or business reputation’” as a

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proximate result of the defendant’s misrepresentations. Id. (quoting Lexmark Int’l, Inc. v.

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Static Control Components, Inc., 134 S. Ct. 1377, 1395 (2014)).

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Plaintiff alleges that Defendants have made false and misleading representations

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about Ostarine.

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products as “not for human consumption,” while simultaneously representing that

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Ostarine is a body-building drug and an “[e]asy to dose oral SARM.” Doc. 20 ¶¶ 1, 26.

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Second, Plaintiff alleges that Defendants have failed to disclose that the World Anti-

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Doping Agency and the U.S. Anti-Doping Agency have banned the use of SARMs –

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information that may be material to the competitive athletes targeted by Defendants’

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marketing. ¶ 31. Third, Plaintiff alleges that Defendants have represented that Ostarine

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has few side effects, when medical evidence suggests that it has potentially serious side

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effects. ¶¶ 27-30. Plaintiff alleges that Defendants’ statements have caused it a loss of

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good will and a diversion of business from its own products. ¶¶ 18, 24, 35.

First, Plaintiff alleges that Defendants have labeled their Ostarine

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Defendants do not dispute that Plaintiff has adequately pleaded the elements of a

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Lanham Act claim. Instead, they argue that the Court should abstain from deciding this

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claim because it raises issues that should be answered in the first instance by the Food

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and Drug Administration (“FDA”).

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In general, “[a] federal court’s obligation to hear and decide cases within its
jurisdiction is virtually unflagging.”

Lexmark, 134 S. Ct. at 1386.

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The primary

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jurisdiction doctrine constitutes a limited exception to this principle. This doctrine allows

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a federal court to abstain from deciding a case within its subject matter jurisdiction if it

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determines that the “initial decisionmaking responsibility should be performed by the

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relevant agency rather than the courts.” Syntek Semiconductor Co. v. Microchip Tech.

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Inc., 307 F.3d 775, 780 (9th Cir. 2002). Such abstention may be appropriate where a

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claim “implicates technical and policy questions that should be addressed in the first

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instance by the agency with regulatory authority over the regulatory industry.” Astiana v.

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Hain Celestial Grp., Inc., 783 F.3d 753, 760 (9th Cir. 2015) (citation omitted). Courts

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should consider “(1) the need to resolve an issue that (2) has been placed by Congress

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within the jurisdiction of an administrative body having regulatory authority (3) pursuant

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to a statute that subjects an industry or activity to a comprehensive regulatory authority

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that (4) requires expertise or uniformity in administration.” Id.

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The Court concludes that it should not dismiss this case under the primary

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jurisdiction doctrine. The Court need not consult the FDA to determine whether it is

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false and misleading to label a product as “not for human consumption” while touting the

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benefits of such consumption. This question is not one “that “requires resolution of an

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issue of first impression, or of a particularly complicated issue that Congress has

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committed to a regulatory agency.” Id. at 760 (quotation marks and citations omitted); cf.

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United States v. Storage Spaces Designated Nos. 8 & 49 Located at 277 E. Douglas,

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Visalia, Cal., 777 F.2d 1363, 1367 (9th Cir. 1985) (“Because the products are labeled as

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‘incense,’ when it appears that they are, in fact, intended for drug use, there is a

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reasonable basis for believing that the labeling is false and misleading.”).

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Nor does the Court require the FDA’s expertise to determine whether it is false

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and misleading to market a product to competitive athletes while neglecting to mention

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that it has been banned by the World Anti-Doping Agency and the U.S. Anti-Doping

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Agency. It is not clear that this question even implicates the FDA’s regulatory scheme;

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the Food, Drug, and Cosmetic Act (“FDCA”) “‘is not focused on the truth or falsity of

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advertising claims,’ but is instead directed to protecting’” public safety. Mut. Pharm. Co.

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v. Ivax Pharm., Inc., 459 F. Supp. 2d 925, 933 (C.D. Cal. 2006) (quoting Sandoz Pharm.

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Corp. v. Richardson-Vicks, Inc., 902 F.2d 222, 230 (3d Cir. 1990)). Thus, the FDCA

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does not prohibit all omissions that might be material to a consumer, but only those that

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are material “with respect to consequences which may result from the use of the article.”

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21 U.S.C. § 321(n). Even assuming the FDA could require Defendants to disclose that

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their product has been banned by major sports agencies, the issue is not one that

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implicates the agency’s technical and policy expertise. Indeed, Plaintiff may have a

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superior understanding of how consumers of body building products would react to this

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information. Cf. POM Wonderful, 134 S. Ct. at 2238 (competitor’s “awareness of unfair

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competition practices may be far more immediate and accurate than that of” the FDA).

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Finally, the Court will not abstain from deciding Plaintiff’s claim that Defendants

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made false and misleading statements about Ostarine’s side effects. The FDA certainly

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has primary jurisdiction to regulate statements about the side effects of drugs. See, e.g.,

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21 U.S.C. § 352(n) (prescription drugs are mislabeled if advertising materials do not

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contain a true statement of the drug’s “side effects, contraindications, and effectiveness”);

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21 C.F.R. § 201.66(c)(5)(vi)-(vii) (requiring statement of side effects for over-the-counter

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medications). But Defendants deny that Ostarine is a drug (Doc. 21 at 16) and apparently

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have not sought approval to market it as a drug. Having denied the FDA’s authority to

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regulate Ostarine as a drug, Defendants cannot invoke the same authority to avoid a suit

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under the Lanham Act.2

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Defendants argue that abstention is appropriate because the complaint raises a

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variety of issues that Congress has committed to the FDA, including whether Ostarine is

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a “drug” or “new drug,” as opposed to a “dietary supplement,” whether Defendants acted

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illegally in advertising and selling Ostarine, and whether Ostarine is “safe and effective.”

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Doc. 26 at 10. But Plaintiff’s theories do not require the Court to determine whether

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Defendants contend that Ostarine is a nutritional supplement, subject to
regulation under 21 U.S.C. § 343(s) and 21 C.F.R § 101.36. Doc. 21 at 14-15. Neither of
these authorities governs statements about a nutritional supplement’s side effects. Thus,
regulating these statements cannot be said to fall within the FDA’s primary jurisdiction.
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Ostarine is a drug or whether Defendants’ sale of Ostarine violated the FDCA. Even if

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Defendants are lawfully marketing Ostarine as a nutritional supplement, their statements

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about the product may still be false and misleading.

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Finally, Defendants argue that only the FDA can decide if Ostarine is safe. But

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while the FDA is charged with determining whether products like Ostarine are safe

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enough to be sold in interstate commerce (21 U.S.C. §§ 355(d), 350b(a)(2)), this case

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presents a different question: whether Ostarine is as safe as Defendants claimed. The

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Court can decide this question without expressing any opinion on the technical and policy

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questions committed to the FDA. Cf. ThermoLife Int’l, LLC v. Gaspari Nutrition Inc.,

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No. 14-15180, 2016 WL 1460171, at *1 (9th Cir. Apr. 14, 2016) (deciding whether a

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nutritional supplement distributor “falsely advertised its products as ‘safe’ . . . require[s]

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no interpretation of the FDCA”).

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As the Ninth Circuit has noted, “[n]ot every case that implicates the expertise of

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federal agencies warrants invocation of primary jurisdiction.” Astiana, 783 F.3d at 760.

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In addition, “courts must also consider whether invoking primary jurisdiction would

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needlessly delay the resolution of claims.” Id. (citation omitted). For reasons explained

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above, the Court concludes that this case is not one of the “limited set” requiring FDA

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expertise, and that the delay involved in seeking FDA guidance would not be justified in

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light of the allegations made. Id. (citation omitted).

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II.

RICO.

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RICO makes it unlawful for “any person employed by or associated with any

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enterprise engaged in . . . interstate or foreign commerce, to conduct or participate . . . in

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the conduct of such enterprise’s affairs through a pattern of racketeering activity.” 18

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U.S.C. § 1962(c). “Racketeering activity” includes any of several listed crimes “which is

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chargeable under State law and punishable by imprisonment for more than one year,” as

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well as any act chargeable under one of several enumerated federal statutes. § 1961(1).

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A “‘pattern of racketeering activity’ requires at least two acts of racketeering activity,”

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§ 1961(5), which must be “related” and “amount to or pose a threat of continued criminal

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activity.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989).

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To state a RICO civil claim, a plaintiff must allege “(1) the conduct (2) of an

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enterprise (3) through a pattern (4) of racketeering activity.” Eclectic Props. E., LLC v.

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Marcus & Millichap Co., 751 F.3d 990, 997 (9th Cir. 2014) (citation omitted). “In

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addition, the conduct must be (5) the proximate cause of harm to the victim.” Id.

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(citation omitted). Pleading a pattern of racketeering activity requires the plaintiff to

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allege that the defendant participated in at least two acts that were chargeable under the

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enumerated federal statutes. The plaintiff must adequately plead the elements of each

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predicate act, satisfying the pleading standard that would apply if the predicate act were a

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stand-alone claim. See Alan Neuman Prods., Inc. v. Albright, 862 F.2d 1388, 1392 (9th

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Cir. 1988) (complaint failed to state a RICO claim because it failed to adequately plead

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the elements of the predicate act; where predicate act is mail or wire fraud, complaint

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must plead the elements of this offense with the level of particularity required by Federal

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Rule of Civil Procedure 9(b)).

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Plaintiff alleges that Defendants have (1) engaged in “a comprehensive scheme to

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obtain money and property by false or fraudulent pretenses, representations and promises,

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including the illicit sale of SARMs and other pharmaceuticals”; (2) knowingly sold these

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drugs over the internet and had them delivered through commercial interstate carriers;

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(3) received income from this activity; and (4) conspired among themselves to engage in

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this activity. Doc. 20, ¶¶ 38-40. Plaintiff alleges that it has been injured in its business or

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property as the result. ¶ 41.

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Plaintiff has not adequately alleged a pattern of racketeering activity. Although

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Plaintiff asserts that Defendants have engaged in the illegal sale and distribution of

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pharmaceuticals, it fails to identify any particular instance in which Defendants engaged

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in such activity. Nor does Plaintiff explain which of the provisions listed in § 1961(1) it

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believes Defendant violated. It is not enough to allege that Defendants have violated

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some federal law, since not all violations of federal law are RICO predicates. See Smith

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v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996) (“Because appellants’ RICO counts do no

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more than allege copyright infringement . . . and copyright infringement is not a predicate

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act under RICO . . . appellants failed to state a claim.”). Because Plaintiff has failed to

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identify two or more instances in which Defendants violated a statute listed in § 1961(1),

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it has not adequately alleged a pattern of racketeering activity.3

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Defendants argue that Plaintiff’s attempt to plead damages is also deficient. The

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Court does not agree. Plaintiff alleges that (1) it sells natural nutritional supplements

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designed to boost testosterone, which compete directly with Defendants’ products, and

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(2) some of its business has been diverted to Defendants’ site. Doc. 20, ¶¶ 18, 41. These

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allegations are sufficient to state a plausible claim for financial injury resulting from

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Defendants’ conduct.

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Plaintiff requests leave to amend in the event any of its claims are dismissed.

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“Leave to amend should be granted if it appears at all possible that the plaintiff can

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correct the defect.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000). The Court

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concludes that Plaintiff may be able to allege a pattern of racketeering activity. The

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Court will therefore dismiss Plaintiff’s RICO claim with leave to amend.

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III.

Stay.

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As an alternative to dismissal, Defendants ask the Court to stay this case pending

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the Ninth Circuit’s resolution of Nutrition Distribution LLC v. Ironmag Labs, LLC, No.

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16-55632 (9th Cir., Apr. 29, 2016). In that case (brought by Plaintiff here), the district

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court dismissed Lanham Act and RICO claims against another marketer of Ostarine.

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Doc. 14-1 at 227-30. Plaintiff appealed.

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The Court will not stay this matter. Plaintiff’s theories in this case differ from

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those asserted in Ironmag. For example, there was no allegation that the defendant in

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Ironmag labeled its Ostarine product as “not for human consumption.” See id. at 146-68.

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Although it was alleged that the defendant in Ironmag failed to disclose that Ostarine had

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Plaintiff asks the Court to take judicial notice of several cases in which
individuals were prosecuted under federal law for marketing misbranded body building
drugs. See Doc. 25-2. This evidence cannot substitute for the pleadings of the complaint,
which must themselves state a RICO claim.
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been banned by major sports agencies (id. at 156, ¶ 43), the district court did not address

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this theory of Lanham Act liability (see id. at 227-30). Thus, the Ninth Circuit’s decision

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may not answer several important issues raised by this case, and the Court will not delay

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this case while waiting for what likely will be a years-long appeal process.

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IT IS ORDERED:

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1.

Defendants’ motion to dismiss Plaintiff’s RICO claim (Doc. 21) is granted,

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with leave to amend.

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July 27, 2016. Defendants’ motion is otherwise denied.

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2.

Plaintiff may file an amended complaint by

Defendant’s motion to dismiss (Doc. 13) is found to be moot.

Dated this 8th day of July, 2016.

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