CS Technology, Inc. et al v. Horizon River Technologies, LLC
Filing
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ORDER granting Plaintiff's 102 Motion to Dismiss. Horizon's RICO counterclaim is DISMISSED with prejudice. Signed by District Judge Robert J. Conrad, Jr on 2/21/2020. (brl)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
3:18-cv-00273-RJC-DSC
CS TECHNOLOGY, INC. and
SITEHANDS, INC.,
Plaintiffs,
v.
HORIZON RIVER TECHNOLOGIES,
LLC,
Defendant.
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ORDER
THIS MATTER comes before the Court on Plaintiffs’ partial motion to dismiss
Defendant’s Second Amended and Supplemental Counterclaim, (Doc. No. 102), and
the Magistrate Judge’s Memorandum and Recommendation (“M&R”), (Doc. No. 132).
I.
BACKGROUND1
Plaintiffs CS Technology, Inc. (“CS Technology”) and Sitehands, Inc.
(“Sitehands”) provide IT infrastructure management and delivery services.
Defendant Horizon River Technologies, LLC (“Horizon” or “Defendant”) is a
technology services company whose clients have geographically dispersed offices or
franchises. (Doc. No. 92, ¶ 8.) One such client was Massage Envy Franchising, LLC
(“Massage Envy”). Massage Envy sought to update its technology infrastructure in
its clinics across the United States (the “Project”). (Doc. No. 92, ¶ 9.) On or about
This Order discusses only the allegations relevant to Defendant’s RICO claim that is the
subject of Plaintiffs’ motion.
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July 15, 2016, Horizon and Massage Envy entered into an agreement under which
Horizon was to plan and oversee the Project and perform certain on-site work. (Doc.
No. 92, ¶¶ 10, 20.) Around the same time that Horizon and Massage Envy entered
into their agreement, Horizon and CS Technology executed a Master Services
Agreement and Statement of Work (collectively, the “Agreement”) under which
Horizon subcontracted its on-site work for the Project to CS Technology. (Doc. No.
92, ¶ 21.) CS Technology assigned the Agreement to Sitehands in December 2016.
(Doc. No. 92, ¶ 5.)
The parties began work on the Project in August 2016. (Doc. No. 92, ¶ 39.)
Plaintiffs’ on-site work primarily consisted of procuring certain materials, sending
field technicians to install new internet cables and equipment, configuring the
devices, and providing on-site support. (Doc. No. 92, ¶¶ 25, 34.) Plaintiffs did not
employ their own field technicians. (Doc. No. 92, ¶ 48.) Instead, Plaintiffs used
independent contractors supplied by subcontractor companies to perform the on-site
work. (Doc. No. 92, ¶ 48.)
In or around March 2017, Horizon discovered billing errors and irregularities
that led it to conduct an in-depth review of Plaintiffs’ invoices. (Doc. No. 92, ¶ 69.)
While the Agreement prohibited Plaintiffs from billing Horizon for field technician
travel time and costs, Plaintiffs’ contracts with their subcontractors frequently
permitted the subcontractors to bill Plaintiffs for such travel charges. (Doc. No. 92,
¶ 55.) Horizon alleges that Plaintiffs fraudulently misclassified travel time and costs
as labor hours and billed Horizon for these travel charges without Horizon knowing.
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(Doc. No. 92, ¶ 109.)
Specifically, Horizon alleges that Plaintiffs directed their
subcontractors working on the Project to bill travel time and costs as labor hours.
(Doc. No. 92, ¶ 110.) In instances where the subcontractors did not bill travel time
and costs as labor hours, Plaintiffs converted the travel charges to labor hours prior
to sending the subcontractor invoices to Horizon for payment. (Doc. No. 92, ¶ 110.)
The disguised travel charges were then included on each monthly invoice that
Plaintiffs sent to Horizon. (Doc. No. 92, ¶ 111.)
Horizon alleges that CS Technology fraudulently overbilled JPMorgan Chase
& Co. (“JPMorgan”), another CS Technology client, in the same manner. (Doc. No.
92, ¶ 114.)
That is, CS Technology’s contract with JPMorgan prohibited CS
Technology from billing JPMorgan for travel time without JPMorgan’s approval.
(Doc. No. 92, ¶ 115.) Nevertheless, CS Technology misclassified travel time and costs
submitted by its subcontractors and independent contractor technicians as labor
hours before submitting the invoices to JPMorgan for payment. (Doc. No. 92, ¶ 115.)
On June 12, 2017, Sitehands stopped all work on the Project, claiming that
Horizon owed Plaintiffs more than $1 million for unpaid services. Plaintiffs then
initiated this action against Horizon on May 25, 2018.
Horizon first asserted
counterclaims against Plaintiffs on July 9, 2018. Plaintiffs filed their reply to the
counterclaims on August 13, 2018 and then moved for judgment on the pleadings as
to Horizon’s counterclaim for violation of the Racketeer Influenced and Corrupt
Organizations Act (“RICO”) on March 28, 2019.
Horizon moved to amend its
counterclaims to address the alleged deficiencies raised by Plaintiffs. The Court
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granted Horizon leave to amend and denied Plaintiffs’ motion for judgment on the
pleadings as moot, and Horizon filed its first amended counterclaims on June 4, 2019.
Plaintiffs moved to dismiss Horizon’s amended RICO counterclaim, and Horizon
again moved to amend its counterclaims. The Court allowed Horizon to amend and
denied Plaintiffs’ motion to dismiss as moot.
Horizon filed its Second Amended and Supplemental Counterclaim on August
13, 2019, asserting claims for (1) breach of contract, (2) fraud, (3) negligent
misrepresentation, (4) unfair or deceptive acts or practices in violation of N.C. Gen.
Stat. § 75-1.1, and (5) violation of RICO. On August 30, 2019, Plaintiffs filed the
instant motion to dismiss Horizon’s RICO counterclaim pursuant to Rule 12(b)(6). In
the M&R, the Magistrate Judge recommended that the Court deny the motion.
Plaintiffs timely filed objections to the M&R.
II.
STANDARD OF REVIEW
A district court may assign dispositive pretrial matters to a magistrate judge
for “proposed findings of fact and recommendations.” 28 U.S.C. § 636(b)(1)(B). The
Federal Magistrate Act provides that a district court “shall make a de novo
determination of those portions of the report or specific proposed findings or
recommendations to which objection is made.” Id. § 636(b)(1); Camby v. Davis, 718
F.2d 198, 199 (4th Cir. 1983).
The standard of review for a motion to dismiss under Rule 12(b)(6) for failure
to state a claim is well known. A motion to dismiss under Rule 12(b)(6) challenges
the legal sufficiency of a counterclaim. Fannie Mae v. Quicksilver LLC, 155 F. Supp.
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3d 535, 542 (M.D.N.C. 2015). A counterclaim attacked by a Rule 12(b)(6) motion to
dismiss will survive if it contains enough facts “to state a claim to relief that is
plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Facial
plausibility means allegations that allow the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S.
662, 663 (2009). “Threadbare recitals of the elements of a cause of action, supported
by mere conclusory statements, do not suffice.” Id. at 678.
At the same time, specific facts are not necessary; the counterclaim need only
“give the defendant fair notice of what the . . . claim is and the grounds upon which
it rests.” Twombly, 550 U.S. at 555. Additionally, when ruling on a motion to dismiss,
a court must accept as true all factual allegations contained in the counterclaim.
Erickson v. Pardus, 551 U.S. 89, 93–94 (2007). Nonetheless, a court is not bound to
accept as true legal conclusions couched as factual allegations. Papasan v. Allain,
478 U.S. 265, 286 (1986). “Courts cannot weigh the facts or assess the evidence at
this stage, but a [counterclaim] entirely devoid of any facts supporting a given claim
cannot proceed.” Potomac Conference Corp. of Seventh-Day Adventists v. Takoma
Acad. Alumni Ass’n, Inc., 2 F. Supp. 3d 758, 767–68 (D. Md. 2014). Furthermore, the
court “should view the [counterclaim] in a light most favorable to the [claimant].”
Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993).
III.
DISCUSSION
Plaintiffs object to the M&R’s conclusions that (1) Horizon sufficiently alleges
an open-ended pattern of racketeering activity, (2) Horizon sufficiently alleges a
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distinct enterprise, (3) Horizon’s allegations satisfy the heightened pleading
requirements of Rule 9(b), and (4) a contractual dispute of the type at issue here may
give rise to a RICO claim. After de novo review, the Court concludes that Horizon
fails to allege sufficient facts to plead a pattern of racketeering activity.2
RICO “does not cover all instances of wrongdoing. Rather, it is a unique cause
of action that is concerned with eradicating organized, long-term, habitual criminal
activity.” US Airline Pilots Ass’n v. AWAPPA, LLC, 615 F.3d 312, 317 (4th Cir. 2010).
Consistent with this goal, RICO provides “drastic” penalties, including treble
damages and attorney’s fees, that “are primarily designed to provide society with a
powerful response to the dangers of organized crime.” Id. To state a RICO claim
under 18 U.S.C. § 1962(c), a claimant must allege “(1) conduct (2) of an enterprise (3)
through a pattern (4) of racketeering activity.” Sedima v. Imrex Co., 473 U.S. 479,
496 (1985). Racketeering activity includes acts of wire fraud. 18 U.S.C. § 1961(1).
Where, as here, a RICO claim is based on predicate acts of wire fraud, the claimant
“must plead [the] circumstances of the fraudulent acts that form the alleged pattern
of racketeering activity with sufficient specificity pursuant to Fed. R. Civ. P. 9(b).”
Williams v. Equity Holding Corp., 245 F.R.D. 240, 243 (E.D. Va. 2007) (alteration in
original). The circumstances that must be alleged with particularity are “the time,
place, and contents of the false representations, as well as the identity of the person
making the misrepresentation and what he obtained thereby.”
Harrison v.
Because the Court concludes that Plaintiffs’ motion should be granted due to Horizon’s
failure to sufficiently allege the pattern element, the Court need not address Plaintiffs’ three
remaining objections.
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Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999).
A pattern requires at least two acts of racketeering activity, but two acts alone
do not necessarily establish a pattern. GE Inv. Private Placement Partners II v.
Parker, 247 F.3d 543, 549 (4th Cir. 2001). “To demonstrate a pattern of such activity,
the [claimant] must show continuity plus relationship, i.e., that the racketeering
predicates are related, and that they amount to or pose a threat of continued criminal
activity.”
US Airline Pilots Ass’n, 615 F.3d at 318 (quotation marks omitted).
“Predicate acts are related if they have the same or similar purposes, results,
participants, victims, or methods of commission, or otherwise are interrelated by
distinguishing characteristics and are not isolated events.”
Menasco, Inc. v.
Wasserman, 886 F.2d 681, 683 (4th Cir. 1989) (quotation marks omitted). Here,
Plaintiffs do not dispute that the allegations are sufficient to plead that the predicate
acts are related.
“‘Continuity’ is both a closed- and open-ended concept, referring either to a
closed period of repeated conduct, or to past conduct that by its nature projects into
the future with a threat of repetition.” H. J. Inc. v. Northwestern Bell Tel. Co., 492
U.S. 229, 241 (1989). “Closed-ended continuity may be established by a series of
related predicates extending over a substantial period of time.” GE Inv., 247 F.3d at
549 (quotation marks omitted). “To allege open-ended continuity, a [claimant] must
plead facts that demonstrate a threat of continuity, i.e., facts that give rise to a
reasonable expectation that the racketeering activity will extend[] indefinitely into
the future.” US Airline Pilots Ass’n, 615 F.3d at 318 (quotation marks omitted)
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(second alteration in original). The Fourth Circuit has explained that the pattern
element, often difficult to satisfy, “is more than incidental to the operation of the
RICO statute.” Menasco, 886 F.2d at 683. The continuity requirement of the pattern
element “demonstrates Congress’s desire to limit RICO’s application to ongoing
unlawful activities whose scope and persistence pose a special threat to social wellbeing.” US Airline Pilots Ass’n, 615 F.3d at 318 (quotation marks omitted). The
pattern requirement “thus acts to ensure that RICO’s extraordinary remedy does not
threaten the ordinary run of commercial transactions; that treble damage suits are
not brought against isolated offenders for their harassment and settlement value;
and that the multiple state and federal laws bearing on transactions such as this one
are not eclipsed or preempted.” Menasco, 886 F.2d at 683. In this regard, the Fourth
Circuit has also stated that it is “cautious about basing a RICO claim on predicate
acts of mail and wire fraud because it will be the unusual fraud that does not enlist
the mails and wires in its service at least twice.” GE Inv., 247 F.3d at 549.
Here, Horizon alleges that CS Technology engaged in an open-ended pattern
of racketeering activity (wire fraud) by misclassifying travel time and costs as labor
hours on its invoices in order to extract extracontractual profits from its clients. (Doc.
No. 92, ¶¶ 165, 175–76.)
Horizon’s counterclaim identifies eleven invoices from
August 2016 through June 2017 that allegedly misclassified travel charges as labor
hours. (Doc. No. 92, ¶ 112.) CS Technology’s fraudulent billing as to Horizon,
however, necessarily was to end upon completion of the Project and CS Technology’s
obligations under the Agreement. Because Horizon cannot demonstrate open-ended
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continuity when the racketeering activity has a “built-in ending point,” US Airline
Pilots Ass’n, 615 F.3d at 318, the Court must look to Horizon’s allegations of CS
Technology’s fraudulent billing of non-parties in order to determine whether Horizon
sufficiently alleges open-ended continuity, GE Inv., 247 F.3d at 548 (stating that a
claimant “may allege acts of related fraud against other victims to establish a pattern
of racketeering activity”).
Horizon alleges that CS Technology fraudulently billed JPMorgan in the same
manner—namely, CS Technology’s contract with JPMorgan prohibited it from billing
JPMorgan for travel time without JPMorgan’s approval, but CS Technology
nevertheless misclassified travel time and costs incurred by its subcontractors as
labor hours on its invoices to JPMorgan.
Horizon alleges that CS Technology
submitted the fraudulent invoices to JPMorgan every month at least from January
2016 through September 2016. (Doc. No. 92, ¶ 118.) Horizon further alleges that
JPMorgan was CS Technology’s client prior to January 2016 and continues to be a
client today. (Doc. No. 92, ¶ 119.) Based on this allegation, Horizon alleges upon
information and belief that CS Technology started sending fraudulent invoices to
JPMorgan shortly after CS Technology began work for JPMorgan in 2013 and
Plaintiffs continue to send fraudulent invoices to JPMorgan today. (Doc. No. 92,
¶ 120.)
Horizon also alleges upon information and belief that Bank of America
Corporation was a victim of CS Technology’s fraudulent billing. (Doc. No. 92, ¶¶ 123–
26.)
These allegations are insufficient to plead open-ended continuity. As an initial
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matter, Horizon’s general allegation—made upon information and belief—that CS
Technology’s fraudulent billing of JPMorgan began in 2013 and continues today lacks
the necessary particularity to satisfy Rule 9(b). Williams, 245 F.R.D. at 243 (“In order
to survive a motion to dismiss a RICO claim, a [claimant] must plead [the]
circumstances of the fraudulent acts that form the alleged pattern of racketeering
activity with sufficient specificity pursuant to Fed. R. Civ. P. 9(b).” (quotation marks
omitted) (second alteration in original)). The same is true for Horizon’s conclusory
allegations, made upon information and belief, that Bank of America Corporation was
a victim of CS Technology’s fraudulent billing.
Taking the sufficiently pleaded
allegations as true, CS Technology fraudulently misclassified travel charges as labor
hours on invoices to JPMorgan from January 2016 through September 2016. That
CS Technology fraudulently billed JPMorgan in the same manner over a nine-month
period, without more, does not give rise to a reasonable expectation that CS
Technology’s fraudulent billing will continue indefinitely into the future.
These
allegations are simply insufficient to plead the threat of continuity necessary to an
open-ended pattern.
The allegations are also insufficient to plead closed-ended continuity.
As
stated above, a “closed-ended pattern of racketeering activity involves a course of
related predicate acts during a substantial period of time which naturally comes to a
close.” Chambers v. King Buick GMC, LLC, 43 F. Supp. 3d 575, 599–600 (D. Md.
2014). “There is no specific time period that must be established; however, [t]ime
periods of less than two years have failed to provide the requisite period of time.”
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Dominican Republic v. AES Corp., 466 F. Supp. 2d 680, 690 (E.D. Va. 2006) (quotation
marks omitted) (alteration in original).
Here, Horizon’s allegations that CS
Technology fraudulently billed it and JPMorgan from January 2016 through June
2017—an eighteen-month period—is insufficient to plead closed-ended continuity.
As Horizon fails to sufficiently allege the pattern element, its RICO claim must
fail.
IV.
CONCLUSION
IT IS THEREFORE ORDERED that Plaintiffs’ motion to dismiss, (Doc. No.
102), is GRANTED and Horizon’s RICO counterclaim is DISMISSED with prejudice.
Signed: February 21, 2020
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