Liquor distributor loses appeal against illegal importers for civil R.I.C.O. damages on lost sales where bootleggers’ primary goal was not paying taxes.

The opinion in Empire Merchants, LLC v. Reliable Churchill et al. (embedded below), tells the story of one of NYC’s top liquor and wine distributors’ claims against some Maryland distributors and retailers seeking to recoup money Empire believed it lost because the Maryland distributors and retailers participated in a scheme with New York liquor retailers to sell liquor from Maryland into New York at a cheaper price. The difference in pricing that made this bootlegging attractive amounted to roughly $6.00/gal based on lower liquor tax charged in Maryland ($1.50/gal) vs. New York ($7.44/gal). Perhaps not much, but considering that Reliable sold more than 272,000 cases – at 31 gallons per 13.78 cases, that’s s savings of $3,671,407.84 on those sales alone.

Empire’s allegations were that the illegal activity gave rise to civil liability under the Racketeer Influenced and Corrupt Organizations Act (treble damages and attorneys fees as a reward).

The complaint alleged that the retailers in Maryland worked in concert with Maryland distributors who helped smuggle liquor products like Johnnie Walker, grey Goose, Seagram’s for which Empire was the exclusive NYC distributor, into Empire’s territory to retailers and restaurants in NYC allowing them to get that liquor at a lower price from the MD retailers – thereby causing Empire to lose sales. Empire also alleged its distributor competitor, Reliable Churchill knowingly allowed the retailers to purchase the liquor at a lower price benefiting from the smuggling – “[f]or the Cecil County [Maryland] retailers, [and]  Reliable…the bootlegging scheme opened a much larger market, as Cecil County has a population of 78,000 people, about 0.3% the population of metropolitan New York. Profits soared. One Cecil County retailer sold $300,000 of liquor to New York in a nine-day period. Reliable alone sold over 272,000 cases (5.8 million bottles) as part of this smuggling operation, resulting in gross revenues of more than $40 million.”

The District Court had dismissed the case finding that the alleged scheme was actually three separate schemes, none of which was actionable by Empire (the Appellate Court rejected this attempt to carve up the RICO enterprise into constituent schemes and found that the District Court was wrong rejecting this method of analysis – it was one scheme to defraud that had several outcomes). You can read the District Court opinion here. In another line of reasoning also rejected by the Appellate Court, the District Court found that mail fraud had been insufficiently alleged (but sending a letter or other correspondence like an invoice by mail takes care of that).

Importantly, the District Court had dismissed the case for a third reason – finding that there was a lack of proximate cause between Empire’s lost sales the criminal activity where the real object of the smuggling was to save nearly $6.00/gal on taxes rather than to steal sales from Empire. The Appellate Court held that this finding was not only supported by the overwhelming evidence presented regarding the scheme, it went a step further in analyzing Empire’s “lost sales” argument in a footnote explaining how other avenues for smuggling meant that while the direct harm was against that state of New York for its lost taxes, the lost sales were speculative, reasoning:

Thus, suppose that in 2009, a New York retailer calculated per-bottle profits from Empire Johnnie Walker, smuggled Johnnie Walker from Reliable, and smuggled Johnnie Walker from New Hampshire distributors at $1/bottle, $3/bottle, and $2/bottle, respectively:

A rational retailer would buy Reliable Johnnie Walker over the other two options. But if the defendants had not smuggled Maryland liquor to New York, the retailer would have purchased smuggled Johnnie Walker from New Hampshire, not Empire’s legal Johnnie Walker. In this scenario, Empire would have lost Johnnie Walker sales no matter what the defendants did, which means that the smuggling did not necessarily cause its injuries.

Given the lack of connection to lost sales, the Appellate Court found the claims didn’t meet the requirements of current Supreme Court precedent on the matter:

The causal connection in this case is thus far less certain than that in Bridge where, thanks to the “zero-sum nature of the auction,” the fraud “necessarily” deprived the plaintiffs of sales. See Hemi, 559 U.S. at 15, 130 S.Ct. 983 (plurality opinion) (emphasis added). Here, though Empire was New York State’s exclusive lawful distributor for many brands, the market was far from “zero-sum.” Sorting out Empire’s counterfactual sales in this scenario would thus prove “speculative in the extreme.” Canyon Cty. v. Syngenta Seeds, Inc., 519 F.3d 969, 983 (9th Cir. 2008). As the Court recognized in Anza, “[b]usinesses lose and gain customers for many reasons ….” 547 U.S. at 459, 126 S.Ct. 1991.

Perhaps the better cause of action here might have been some form of antitrust or other unfair competition claim given the Court’s own acknowledgement that the Supreme Court mandates this kind of critical analysis where causation is attenuated:

And the Supreme Court has suggested that there is an even greater need to apply this kind of skepticism “to claims brought by economic competitors” because such claims, “if left unchecked, could blur the line between RICO and the antitrust laws.” Anza, 547 U.S. at 460, 126 S.Ct. 1991.

Given that all the remaining claims were premised on the alleges RICO conspiracy, the Appellate Court’s finding that the relation between the smuggling and the lost sales was too thin resulted in the Court’s rejection of Empire’s other claims as well.The opinion is below and you can hear oral argument of the case here.