Caudill Seed and Warehouse Company, Inc. v. Jarrow Formulas, Inc.

Filing 19

MEMORANDUM OPINION and ORDER by Judge John G. Heyburn, II on 8/9/2013; The Court denied Jarrows motion to strike. The Court now addresses Jarrows motion to dismiss. For the reasons that follow, the Court will sustain the motion in part and deny it in part. IT IS HEREBY ORDERED that Defendant Jarrow Formula Inc.s Motion to Dismiss is DENIED as to Count I, Count II claims for conversion and theft by deception pursuant to KRS §514.040 and KRS § 446.070, and Count V. IT IS FURTHER O RDERED that Defendant Jarrow Formula Inc.s Motion to Dismiss is SUSTAINED as to Count II for wire fraud under 18 U.S.C. § 1341 and § 1343 and theft by deception directly under KRS § 514.040, Count IV, and Count VI. re 7 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM MOTION to Strike filed by Jarrow Formulas, Inc. cc:counsel (JSS)

Caudill Seed and Warehouse Company, Inc. v. Jarrow Formulas, Inc.

Doc. 19

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:13-CV-82-H

CAUDILL SEED AND WAREHOUSE COMPANY INC.,

PLAINTIFF

V.
JARROW FORMULAS, INC.,

DEFENDANT

MEMORANDUM OPINION AND ORDER
Plaintiff, Caudill Seed and Warehouse Company, Inc. (“Caudill Seed”) filed suit against
Defendant Jarrow Formulas, Inc. (“Jarrow”) over alleged wrongdoing in connection with
Jarrow’s interactions with and hiring of Caudill Seed’s former Director of Research, Kean
Ashurst. Jarrow moved to dismiss and to strike the amended complaint. The Court denied
Jarrow’s motion to strike. The Court now addresses Jarrow’s motion to dismiss. For the reasons
that follow, the Court will sustain the motion in part and deny it in part.
I.
The facts of the case are mostly undisputed at this point. Caudill Seed produces and
supplies organically-produced agricultural products for consumers, including turf seeds,
sprouting seeds, beans and related equipment to dealers and distributors in the commercial
sprouting industry. It specializes in isolating and developing compounds from broccoli seeds
and sprouts. Jarrow is a former customer of Caudill Seed, which manufactures, formulates,
markets, sells and distributes dietary supplements. Caudill Seed maintains that Jarrow is a
competitor, while Jarrow claims the two operate in distinct industries.
Caudill Seed hired Ashurst in July of 2002. Ashurst occupied a number of positions
within the company, ultimately serving as the Director of Research. In this position, Ashurst was

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privy to Caudill Seed’s proprietary and confidential information. Of particular importance was
his access to a research notebook containing recorded results of research, formulas, and
processes Ashurst and others performed, and a hard drive that largely stored the same material.
He maintained exclusive control over the notebook, hard drive, and other documents and
information. Ashurst knew that this research and information was critical for an upcoming
industry conference and for securing two new major accounts.
Ashurst submitted his resignation to Caudill Seed on May 2, 2011. On the same day,
Jarrow placed Ashurst on its payroll.1 However, Caudill Seed claims that the relationship
between Jarrow and Ashurst began months earlier.

Caudill Seed alleges that in email

correspondence between Ashurst and Jarrow in the period before his resignation, Jarrow
knowingly requested and accepted confidential and proprietary information belonging to Caudill
Seed from Ashurst. Caudill further alleges that Jarrow conspired with, encouraged, and directed
Ashurst in wrongfully converting and sharing this information with Jarrow and its affiliates.
According to Caudill Seed, after Ashurst resigned, he informed a Caudill Seed officer
that he possessed confidential and proprietary information. Now officially working for Jarrow,
Ashurst proposed to assist Caudill Seed in restructuring some of the research and data removed
from the company in exchange for Caudill Seed signing a waiver of all claims and a general
release absolving him and Jarrow of any wrongdoing. When the officer asked to see the release
and have a lawyer examine it, Ashurst refused and left the meeting.
Caudill Seed filed suit against Ashurst in Jefferson Circuit Court on May 17, 2011.2
Jarrow is not a party to that action, which is presently pending. In December of 2011, Judge
Shultz Gibson entered an Agreed Protective Order directing that any document labeled
1

Jarrow considers Ashurst a consultant, operating as an independent contractor for the company.
That case is styled Caudill Seed & Warehouse Company, Inc. v. Kean Ashurst, 11-CI-3438 (Jefferson Circuit
Court, Div. 12, May 17, 2011).
2

2

confidential or highly confidential shall not be disclosed or used in any way other than in
connection with that action (“Protective Order”). Accordingly, the parties have not submitted to
the Court the emails that serve as the principal evidence against Jarrow.
After Caudill Seed filed suit in state court, it filed suit in this Court against Jarrow, as
Ashurst’s employer, alleging the following six counts: Tortious Interference (Count I); Wire
Fraud-Theft by Deception-Conversion (Count II); Unjust Enrichment (Count III); Extortion –
Hobbs’ Act Violation (Count IV); Fraud, Outrageous Conduct – Punitive Damages (Count V);
and the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. §§ 1861-68 (“RICO”)
(Count VI). Jarrow now moves to dismiss each Count, except for Count III. The Court will
separately address Jarrow’s arguments as to each count.
II.
Jarrow moves to dismiss five of six of Caudill Seed’s counts under Federal Rule of Civil
Procedure 12(b)(6). “To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)) (internal citation
omitted). When reviewing Jarrow’s motion, the Court will construe the complaint in a light most
favorable Caudill Seed, accepting all factual allegations, but not legal conclusions, as true.
Logsdon v. Hains, 492 F.3d 334, 340 (6th Cir. 2007).
A.
Jarrow’s motion asks the court to dismiss many of these counts on the basis that Caudill
Seed insufficiently pleaded its claims in its complaint. Under Federal Rule of Civil Procedure 8,

3

a complaint must contain “a short and plain statement of the claim showing that the pleader is
entitled to relief.” FED. R. CIV. P. 8(a)(2). This standard does not require “detailed factual
allegations,” but a pleading is insufficient if it only tenders “naked assertion[s] . . . without some
further factual enhancement.” Twombly, 550 U.S. at 555-57 (2007).
The pleading standard for claims based on fraud is heightened under Federal Rule of
Civil Procedure 9. Id. at 569 n.14 (explaining that certain claims are understood to pose “a high
risk of abusive litigation,” necessitating a heightened pleading standard for those subjects). The
party asserting fraud “must state with particularity the circumstances constituting fraud or
mistake.” FED. R. CIV. P. 9(b). The Sixth Circuit counsels that this rule requires a plaintiff to:
“(1) specify the statements that the plaintiff contends were fraudulent; (2) identify the speaker;
(3) state where and when the statements were made; and (4) explain why the statements were
fraudulent.” Ind. State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v.
Omnicare, Inc., 583 F.3d 935, 942-43 (6th Cir. 2009) (quoting Gupta v. Terra Nitrogen Corp.,
10 F. Supp. 2d 879, 883 (N.D. Ohio 1998)). Essentially, then, “Rule 9(b) requires that the
plaintiff specify the ‘who, what, when, where, and how’ of the alleged fraud.” Sanderson v.
HCA-The Healthcare Co., 447 F.3d 873, 877 (6th Cir. 2006) (quoting United States ex rel.
Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997)).
Plaintiff does not make entirely clear in its complaint which claims it bases on fraud 3, and
therefore which claims should be held to the Rule 9(b) heightened pleading standard. As to both

3

Fraud is generally defined as “the knowing misrepresentation of a material fact, or concealment of the same when
there is a duty to disclose, done to induce another to act to his or her detriment.” Satyam Computer Servs., Ltd. v.
Venture Global Eng’g, LLC, 323 F. App’x 421, 429 (6th Cir. 2009)(defining fraud for the purposes of Federal Rule
of Civil Procedure 60). “Moreover, under Kentucky law, fraud consists of six elements: 1) material representation
2) which is false 3) known to be false or made recklessly 4) made with inducement to be acted upon 5) acted in
reliance thereon and 6) causing injury.” Torres v. Am. Emp’rs Ins. Co., 151 F. App’x 402, 412 (6th Cir. 2005).
While both of these definitions do not directly define fraud for the purposes of determining whether Rule 9(b)
applies to the particular claims alleged here, they are informative as guideposts in determining the applicability of
Rule 9 to this case.

4

federal and state claims4, where the claim is not directly for fraud, the Court must determine
whether fraud is the basis of the claim in order to establish which pleading standard applies.
Here, Caudill Seed’s tortious interference claims do not implicate fraud. See Ky. CVS
Pharmacy, LLC v. McKinney, 2013 WL 1628154, *2 (E.D. Ky. Apr. 15, 2013) (holding that
“[f]raud is a possible, but not a required, element of tortious interference”).

Similarly, Caudill

Seed’s extortion claim in Count IV does not arise out of fraudulent statements or omissions.
Accord K.B.A. Constr. LLC v. Home Acres Bldg. Supply, 2005 WL 2243098, *2 (W.D. Mich.
Sept. 14, 2005) (analyzing mail and wire fraud claims under Rule 9(b), while apparently
analyzing extortion under a different standard). On the other hand, the Court must clearly apply
Rule 9 to any claims for wire fraud and theft by deception in Count II, as these claims at their
core suppose Jarrow’s fraud. Additionally, Plaintiff contends that Count II alleges common law
conversion. Courts have held that common law conversion claims must be plead under Rule 9’s
heightened standards, and this Court agrees where Caudill Seed uses the federal wire fraud
statute and state theft by deception statute as the basis for its conversion claims. See Union
Underwear Co., Inc. v. Wilson, 2005 WL 3307098, *3 (W.D. Ky. Dec. 1, 2005) (holding that
“the Plaintiff fails to meet the requirements of F.R.C.P. 9(b) in their claim of common law fraud
and conversion”).
The final two counts of Caudill Seed’s complaint involve pleading requirements that
derive from other claims. First, Caudill Seed’s punitive damages claim in Count V is not a
distinct cause for action itself; rather, it is derivative of the underlying infirmities cited by
Caudill Seed as the basis of its entitlement to punitive damages. Dalton v. Animus Corp., 913 F.
Supp. 2d 370, 378 (W.D. Ky. 2012). Caudill Seed claims that Jarrow should be liable for
4

“Whether a state-law claim sounds in fraud, and so triggers Rule 9(b)’s heightened standard, is a matter of
substantive state law, on which we must defer to the state courts.” Republic Bank & Trust Co. v. Bear Stearns &
Co., Inc., 683 F.3d 239, 247 (6th Cir. 2012).

5

punitive damages due to Jarrow’s fraud, misrepresentation, deceit and concealment of material
facts. Accordingly, the punitive damages claims based on fraud must be particularly pled in the
complaint. Caudill Seed also makes a specific demand for punitive damages. Because some
claims survive this motion to dismiss, punitive damages may still be available based on those
remaining claims, which are adjudged under a Rule 8 pleading standard if not based on fraud.
Second, Plaintiff brings a claim for violation of RICO.

The Sixth Circuit clearly

mandates that a plaintiff must plead a RICO claim with particularly if the predicate acts upon
which the RICO claim is based themselves are based on fraud. Vild v. Visconsi, 956 F.2d 560,
567 (6th Cir. 1992); Blount Fin. Servs., Inc. v. Walter E. Heller & Co., 819 F.2d 151, 152 (6th
Cir. 1987). Therefore, Plaintiff’s RICO claims based on mail and wire fraud, theft, and any other
variety of conversion, must be pled with particularity. See Union Underwear Co., 2005 WL
3307098, at *3 (reviewing a RICO claim based on mail and wire fraud under Rule 9(b) pleading
standards). However, Plaintiff’s RICO claims based on conspiracy and extortion need not. See
Blue Leather, LLC v. Markowicz, 2008 WL 2958826, *1 (W.D. Ky. July 21, 2008) (reviewing
the claim for civil conspiracy under Rule 8(a), and other claims for fraud under Rule 9(b));
Heinrich v. Waiting Angels Adoption Servs., Inc., 668 F.3d 393, 404-07 (analyzing predicate acts
of mail theft and wire fraud under Rule 9(b), while apparently analyzing the predicate act of
extortion under Rule 8).
B.
Important to this motion to dismiss based on the insufficiency of the complaint is the
parallel Jefferson Circuit Court case against Ashurst concerning the same principal subject
matter sub judice. The Protective Order issued in the Jefferson Circuit Court prevents the
disclosure of certain emails, the contents of which provide much of the support for Caudill

6

Seed’s claims here. In a number of instances in Jarrow’s motion, Jarrow argues that Caudill
Seed failed to plead claims with required specificity, while simultaneously condemning Caudill
Seed for providing too much specificity with regards to the documents guarded by the Protective
Order. The Court will not require Caudill Seed to violate the Protective Order in order to meet
pleading standards where the Court can reasonably infer from the information provided the
content of those documents, especially given the Court’s obligation to view facts in a light most
favorable to the plaintiff. Still, Caudill Seed must satisfy the minimum requirements of Rules 8
and 9 in order to overcome this motion to dismiss.
III.
In Count I, Caudill Seed first claims that Jarrow tortiously interfered with its contractual
relations with Ashurst and its business relations with prospective clients. Jarrow argues that
Caudill Seed failed to allege in its complaint the necessary elements to support either theory in
Count I, thereby rendering the claims insufficient as a matter of law.
Under Kentucky law, to recover for tortious interference with contractual relations, a
plaintiff must show “(1) the existence of a contract; (2) [the defendant’s] knowledge of the
contract; (3) that [the defendant] intended to cause a breach of that contract; (4) that [the
defendant’s] actions did indeed cause a breach; (5) that damages resulted to [the plaintiff]; and
(6) that [the defendant] had no privilege or justification to excuse its conduct.” Snow Pallet, Inc.
v. Monticello Banking Co, 367 S.W.3d 1, 5-6 (Ky. Ct. App. 2012). Jarrow argues that Caudill
Seed fails to plead the third element—that Jarrow intentionally interfered with Caudill Seed’s
contractual relations with Ashurst. The Court disagrees. Caudill Seed entered into non-compete
and confidentiality agreements with Ashurst. Viewed in a light most favorable to Caudill Seed,
the Court concludes that the fact section in the amended complaint sufficiently asserts Jarrow’s

7

intent to interfere with these contracts. See, e.g., ECF No. 6, ¶¶ 3, 13. Count I incorporates the
fact section by reference. Id. at ¶ 21. Accordingly, Jarrow’s argument fails.
To establish a claim for tortious interference with prospective business relations under
Kentucky law, a plaintiff must prove: “(1) the existence of a valid business relationship or
expectancy; (2) that [the defendant] was aware of this relationship or expectancy; (3) that [the
defendant] intentionally interfered; (4) that the motive behind the interference was improper; (5)
causation; and (6) special damages.” Snow Pallet, Inc., 367 S.W.3d at 6. Jarrow claims that
Caudill Seed failed to allege the existence of a valid business expectancy. Jarrow cites DiFolco
v. MSNBC Cable L.L.C., 622 F.3d 104, 115 (2d Cir. 2010) and Static Control Components, Inc.
v. Lexmark International, Inc., 2006 WL 980732, *1 (E.D. Ky. Mar. 7, 2006) in support. In
DiFolco, the Second Circuit found that the plaintiff’s allegations that the defendant interfered
with its “professional relationships and opportunities for employment” and “business
relationships in the news and entertainment industry” were too vague to show a valid prospective
business relationship, proving fatal to the claim. 622 F.3d at 115. Similarly, in Static Control
Components, the plaintiff generally referred to its customers as its business relations, which the
Court also found too vague. 2006 WL 980732, *1. Importantly, however, the Court did not
dismiss the claim; rather, it limited the tortious interference claim to contracts with specified
customers that the plaintiff could identify within thirty days. Id. at *2.
The case sub judice is somewhat different. Often throughout the complaint, Caudill Seed
refers to two potential accounts Caudill Seed hoped to secure, with which Jarrow and Ashurst
allegedly interfered.

These statements are more concrete than mere general references to

customer bases or professional and business relationships. However, Caudill Seed’s Count I is
certainly not the model of clarity.

Caudill Seed did not identify the accounts or provide

8

information as to the likelihood of securing their business. Nevertheless, this evidence can easily
be procured through discovery or if not, the claim will be dismissed at the summary judgment or
trial stage of the proceeding. Accordingly, the Court, exercising its discretion, finds that Count I
remains as to both theories of recovery.
IV.
Jarrow claims that Count II of Caudill Seed’s complaint improperly combines multiple
claims into one count in violation of Federal Rule of Civil Procedure 8(a)(2). To support this
argument, Jarrow cites Lampkin-Asam v. Volusia County School Board, 261 F. App’x 274, 277
(11th Cir. 2008), which found the entire complaint “confusing, incoherent, and clogged with
seemingly irrelevant factual allegations.” The Eleventh Circuit Court reasoned that after two
attempts to correct the insufficient complaint, the plaintiff failed to “adequately link a cause of
action to its factual predicates” in that it failed to offer a short and plain statement of the
plaintiff’s claim. Id. (quoting Wagner v. First Horizon Pharm. Corp., 464 F.3d 1272, 1275 (11th
Cir. 2006)). While Count II alleges more than one theory of recovery, it is by no means
incomprehensible to the point where Jarrow was unable to understand and answer the claims.
Estate of Smith ex rel. Richardson v. United States, 509 F. App’x 436, 439 (6th Cir. 2012) (“For
a complaint to survive a motion to dismiss, the non-conclusory ‘factual content’ and the
reasonable inferences from that content, must be ‘plausibly suggestive’ of a claim entitling a
plaintiff to relief.” (quoting Iqbal, 556 U.S. at 681)). In fact, Jarrow quite aptly explained and
refuted each of the claims contained within Count II in its motion and reply. Accordingly, the
Court finds that Count II did not violate Rule 8 to such a degree as to warrant its dismissal.
Giving a very liberal construction of Count II, Caudill Seed asserted four distinct claims
in the count: theft by wire fraud in violation of 18 U.S.C. §§ 1341 and 1343, theft by deception

9

in violation of K.R.S. § 514.040, violation of a state statute under KRS § 446.040, and common
law conversion. Jarrow argues that each of these claims must fail as a matter of law.5
A.
Addressing the federal theft by wire fraud and state theft by deception claims, the Court
must determine whether these statutes provide an implied private cause of action, because neither
statute does so explicitly. “In determining whether to infer a private cause of action from a
federal statute, our focal point is Congress’ intent in enacting the statute.”

Thompson v.

Thompson, 484 U.S. 174, 179 (1988). The federal statutes at issue here are purely penal. It
cannot be inferred that Congress intended to create a private right of action thereunder.
Morganroth & Morganroth v. DeLorean, 123 F.3d 374, 386 (6th Cir. 1997) (“Violations of [18
U.S.C. § 1341 and 1343] of the federal criminal code, however, do not give rise to private rights
of action.”). The Court must dismiss these claims.
B.
According to Jarrow, Kentucky’s theft by deception statute is also penal, and a private
plaintiff may not hold a defendant liable directly under that statute in Kentucky.

Accord

Youngblood v. City of Paducah, 2012 WL 529871, *6 (W.D. Ky. Feb. 17, 2012). Caudill Seed
does not refute this argument. The Court agrees. Accordingly, Caudill Seed’s claim against
Jarrow under KRS § 514.040 must be dismissed.
However, Caudill Seed argues that it brings its state law theft by deception claim under
KRS § 446.070, which “creates a private right of action in a person damaged by another person’s
violation of any statute that is penal in nature and provides no civil remedy.” Hargis v. Baize,
168 S.W.3d 36, 40 (Ky. 2005).
5

Caudill Seed does not seem to defend its claims brought directly under 18 U.S.C. §§ 1341 and 1343 and KRS §
514.040. However, Caudill Seed was not clear about this position in its briefings, so the Court must address the
sufficiency of each of these claims.

10

KRS 446.070 provides recovery for individuals injured by violations of “any
statute” so long as they are members of the class of persons meant for
protection by the statute. Kentucky courts have consistently held that the
“any statute” language is limited to state statutes only and does not extend to
federal statutes of which congress has not expressly intended to create a
private right of action.
Yeager v. Dickerson, 391 S.W.3d 388, 393 (Ky. Ct. App. 2013). Although Caudill Seed never
mentioned KRS § 446.070 in its pleadings, the Court will not dismiss this claim for this reason.
KRS § 446.070 is a negligence per se statute that provides a private right of action for some
Kentucky criminal statutes, such that the evidence needed to convict a defendant under the
criminal statute necessarily overlaps, and in some cases, largely envelops the evidence needed to
prove the claim pursuant to KRS § 446.070. Thus, Caudill Seed provided enough information to
state its claim under KRS § 446.070 in its pleadings for liability under KRS § 514.040, and
Jarrow is not prejudiced by allowing the claim to proceed under KRS § 446.070 to any material
degree.
Jarrow further argues that Caudill Seed failed to plead its theft by deception claim with
particularity, as is required under Rule 9.

However, the Court finds that Caudill Seed’s

complaint satisfies this rule to the best extent possible, considering that the evidence supporting
this claim is largely protected under the Protective Order.
Rule 9 requires the plaintiff to plead the who, what, when, where, and how of the fraud.
KRS § 514.040 enumerates a number of ways by which a person can commit theft by deception,
a few of which may apply to the present situation based on the facts alleged in the complaint.
The alleged perpetrators of the fraud are evident from the pleadings. As to the time of the
deception, it is clear from the complaint that the alleged deception took place between March
2011 and June 2011, as evidenced in the email dates. The emails allegedly evidence the
deception, although the contents of those emails remain undisclosed according to the Protective
11

Order. The location of the deception can be reasonably inferred from the information provided
in the complaint, especially in light of the fact that much of the alleged deception took place over
the internet and at Caudill Seed’s place of business. Accordingly, Caudill Seed’s claim for theft
by deception brought under KRS § 446.070 survives the motion to dismiss.
C.
Finally, Caudill Seed brings a conversion claim in Count II. Kentucky law is unsettled as
to the necessary elements of a conversion claim. Without expressly so holding, the Kentucky
Supreme Court quoted 90 C.J.S. Trover and Conversion § 4 (2004) for the proposition that
[t]he elements necessary to prove a conversion claim established in case law are
(1) the plaintiff had legal title to the converted property; (2) the plaintiff had
possession of the property or the right to possess it at the time of the conversion;
(3) the defendant exercised dominion over the property in a manner which
denied the plaintiff's rights to use and enjoy the property and which was to the
defendant's own use and beneficial enjoyment; (4) the defendant intended to
interfere with the plaintiff's possession; (5) the plaintiff made some demand for
the property's return which the defendant refused; (6) the defendant's act was
the legal cause of the plaintiff's loss of the property; and (7) the plaintiff
suffered damage by the loss of the property.
Ky. Ass’n of Cntys. All Lines Fund Trust v. McClendon, 157 S.W.3d 626, 632 n.12 (Ky. 2005).
However, a recent Kentucky Court of Appeals decision quoting an opinion from this Court
issued later in 2005, states, “In Kentucky, ‘The elements of a conversion claim are (1) ownership
rights in a certain property, (2) the wrongful act of taking or disposing of property, and (3)
causing damages.” Atmost Energy Corp. v. Honeycutt, 2013 WL 285397, *11 (Ky. Ct. App. Jan.
25, 2013) (quoting Davis v. Siemens Med. Solutions USA, Inc., 399 F. Supp. 2d 785, 801 (W.D.
Ky. 2005) (citing Anderson v. Pine S. Capital, LLC, 177 F. Supp. 2d 591, 603 (W.D. Ky. 2001);
Goss v. Bisset, 411 S.W.2d 50, 53 (Ky. 1967))). Under the more generalized elements described
in the Atmost Energy Corp. line of cases, Caudill Seed’s complaint is sufficient. Under the
McClendon recitation of elements, Jarrow contends that Caudill Seed failed to allege that it
12

demanded return of the stolen items. Jarrow may be correct that Caudill Seed failed to plead this
McClendon element, but Caudill Seed may not have been required to do so under Kentucky law
following the McClendon progeny.
Judge David Bunning, District Judge for the Eastern District of Kentucky, dealt with a
similar problem in Kendrick v. Standard Fire Ins. Co., 2007 WL 1035018 (E.D. Ky. Mar. 31,
2007). In Judge Bunning’s logical and reasoned analysis, he denied the motion to dismiss
plaintiff’s conversion claim despite the failure to plead that the plaintiff demanded return of the
alleged converted property, because there is no indication that McClendon “was intended to nor
does it address all considerations when pursing a conversion claim.” Id. at 13. Analyzing
Kendrick, this Court held that even though the more stringent conversion requirements in
McClendon may be applicable to many cases, “a plaintiff in a conversion action need not plead a
demand for return where the plaintiff claims that the taking was wrongful from the outset, rather
than an initially lawful taking that later become unlawful.” WCP/Fern Exposition Servs., LLC v.
Hall, 2011 WL 1157699, *10 (W.D. Ky. Mar. 28, 2011) (emphasis added). Neither party briefed
this issue. Because Caudill Seed may not have been required to plead this element, the Court
refuses to dismiss the claim for its failure to do so.
V.
In Count III, Caudill Seed alleges extortion claims under federal law, in violation of 18
U.S.C. § 1951, and state law, in violation of KRS § 514.080. Caudill Seed concedes that the
federal statute prohibiting extortion does not provide a private right of action. See Hopson v.
Shakes, 2013 WL 1703862, *2 (W.D. Ky. Apr. 19, 2013) (“The Hobbs Act[, 18 U.S.C. § 1951]
is a criminal statute, and federal courts have consistently found that the Hobbs Act does not
support a private cause of action.” (internal citation omitted)). Accordingly, this claim must be

13

dismissed. Similar to the state law theft by deception claim, no private right of action exists
directly under KRS § 514.080, a criminal statute. However, Caudill Seem may bring the claim
under KRS § 446.070.
Jarrow argues that even under the Kentucky negligence per se statute, Caudill Seed failed
to plead an extortion claim, because under Kentucky law, extortion does not extend to threats of
economic harm. KRS § 514.080 defines theft by extortion as
intentionally obtaining property of another by threatening to:
(a) Inflict bodily injury on anyone or commit any other criminal offense; or
(b) Accuse anyone of a criminal offense; or
(c) Expose any secret tending to subject any person to hatred, contempt, or
ridicule, or to impair his credit or business repute; or
(d) Use wrongfully his position as a public officer or servant or employee by
performing some act within or related to his official duties, either expressed or
implied, or by refusing or omitting to perform an official duty, either expressed
or implied, in a manner affecting some person adversely; or
(e) Bring about or continue a strike, boycott, or other collective unofficial
action, if the property is not demanded or received for the benefit of the group
in whose interest the actor purports to act; or
(f) Testify or provide information or withhold testimony or information with
respect to another's legal claim or defense.
KY. REV. STAT. ANN. § 514.080(1). Caudill Seed contends that Jarrow, acting through Ashurst,
threatened “economic injury” by “continuing to withhold from Caudill Seed its proprietary and
confidential information if Caudill Seed refused to sign the requested waiver.” The facts in
Caudill Seed’s complaint do not allege a threat that falls within the enumerated threats prohibited
under Kentucky extortion law. For this reason, Caudill Seed fails to state a claim upon which
relief can be granted, and the Court dismisses the entirety of Count IV.
VI.
Jarrow initially argued that Caudill Seed’s Count V, titled “Fraud, Outrageous Conduct –
Punitive Damages” should be dismissed pursuant to Rule 12(b), because Caudill Seed failed to
plead the fraud claim with particularity as required in Rule 9. However, Caudill Seed contends
14

that Count V only presents a punitive damages claim, the basis of which is fraud and other
outrageous conduct. As stated above, punitive damages claims are not separate causes of action,
but are means of obtaining damages derivative of particularly offensive unlawful conduct proved
through underlying causes of action. Consistent with the rest of this opinion, then, Caudill
Seed’s claims for punitive damages fail where the underlying claims fail, and the punitive
damages claims survive on the basis of those claims that remain.6
VII.
Caudill Seed brings Count VI under RICO, which prohibits certain entities from
engaging in proscribed criminal conduct under 18 U.S.C. § 1962(c). “To state a RICO claim, a
plaintiff must plead the following elements: ‘(1) conduct (2) of an enterprise (3) through a
pattern (4) of racketeering activity.’” Ouwinga v. Benistar 419 Plan Servs., Inc., 694 F.3d 783,
791 (6th Cir. 2012) (quoting Moon v. Harrison Piping Supply, 465 F.3d 719, 723 (6th Cir.
2006)). Jarrow makes convincing arguments that Caudill Seed failed to allege the occurrence of
valid racketeering activities and the existence of a legally cognizable pattern of that activity.
However, the Court finds that Caudill Seed’s claim must be dismissed for failure to plead an
enterprise, as defined under RICO law.
Under RICO, an enterprise “includes any individual, partnership, corporation,
association, or other legal entity, and any union or group of individuals associated in fact
although not a legal entity.” 18 U.S.C. § 1961(4). To establish an enterprise, a plaintiff must
prove
(1) an ongoing organization with some sort of framework or superstructure for
making and carrying out decisions; (2) that the members of the enterprise
functioned as a continuing unit with established duties; and (3) that the

6

To the extent that Caudill Seed sought to present a fraud claim in this count, Caudill Seed indeed failed to plead
any of the required particulars. Accordingly, that claim, if intended, is dismissed.

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enterprise was separate and distinct from the pattern of racketeering activity in
which it engaged.
Ouwinga, 694 F.3d at 793. “If RICO imposed liability on a corporation for the ordinary conduct
of its agents and employees, every claim of corporate fraud would automatically become a
violation of RICO.” In re ClassicStar Mare Lease Litig., 2013 WL 3746220, *14 (6th Cir. July
18, 2013).
Relevant to this case, “[u]nder the ‘non-identity’ or ‘distinctness’ requirement, a
corporation may not be liable under section 1962(c) for participating in the affairs of an
enterprise that consists only of its own subdivisions, agents, or members.” Begala v. PNC Bank,
Ohio, Nat. Ass’n, 214 F.3d 776, 781 (6th Cir. 2000). This is because “a corporation cannot be
both the ‘enterprise’ and the ‘person’ conducting or participating in the affairs of that enterprise.”
Davis v. Mut. Life Ins. Co. of N.Y., 6 F.3d 367, 377 (6th Cir. 1993). This Court has previously
explained that “[a]n employee and her employer corporation cannot together comprise a RICO
enterprise.” Vest v. Perkins, 2005 WL 1026207, *1 (W.D. Ky. Apr. 26, 2005). As the Vest
opinion makes clear, during all times when Jarrow employed Ashurst, 7 the two did not constitute
an enterprise.8 The same principle applies to the period when Caudill Seed still employed
Ashurst, because Caudill Seed concedes that Ashurst was Jarrow’s agent.
Caudill Seed often characterizes Ashurst as Jarrow’s agent in its complaint: in the fact
section, ECF No. 6, ¶¶ 17, 20; with respect to the theft and wire fraud claims, two of the three
predicate acts upon which Caudill Seed based its RICO claims, id. at ¶ 26; and in the RICO
count itself, id. at ¶ 41. To hold Jarrow liable, Caudill Seed contends that Ashurst acted on
7

Jarrow contends that Ashurst serves as its consultant, and Jarrow only employs Ashurst as an independent
contractor. Where Ashurst acts on behalf of Jarrow within the scope of his employment with Jarrow, the Court finds
no substantive reason why the principle that an employee and his employer corporation cannot together comprise a
RICO enterprise should not apply.
8
Thus, the alleged predicate act of extortion, which took place on May 4, 2011, two days after Jarrow placed
Ashurst on its payroll, cannot lie.

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behalf of Jarrow to obtain confidential and proprietary information, not simply in concert with
Jarrow. See Brown v. Cassens Transp. Co., 675 F.3d 946, 968 (6th Cir. 2012) (holding that, due
to the plaintiff’s characterizations in his complaint, “Crawford and Cassens can comprise an
enterprise on their own because Crawford ‘act[ed] as an agent for, or in concert with, Cassens”).
As Jarrow’s agent, acting upon Jarrow’s instructions and within the scope of his agency
relationship with Jarrow, Ashurst was not sufficiently distinct from Jarrow so as to establish an
enterprise for RICO purposes. Accordingly, Caudill Seed’s RICO claims must fail.
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Defendant Jarrow Formula Inc.’s Motion to Dismiss is
DENIED as to Count I, Count II claims for conversion and theft by deception pursuant to KRS §
514.040 and KRS § 446.070, and Count V.
IT IS FURTHER ORDERED that Defendant Jarrow Formula Inc.’s Motion to Dismiss is
SUSTAINED as to Count II for wire fraud under 18 U.S.C. § 1341 and § 1343 and theft by
deception directly under KRS § 514.040, Count IV, and Count VI.

August 8, 2013

cc: Counsel of Record

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