The most interesting RICO case in the country right now is In re Outlaw Laboratories LP Litigation (S.D. CA., case 18-840), in which the Outlaw Labs, the distributor of over-the-counter male sexual enhancement substances sold in small retail stores, and its lawyers used the threat of RICO litigation to stop what it considered unfair competition. But the tables have turned, and now they are being sued in a RICO class action.
Outlaw Labs had its lawyer send fairly standard “cease and desist” letters to these small retailers demanding they stop selling Outlaw’s competitors’ products, which allegedly contained controlled substances for which a prescription is required. But the letters went on to threaten a RICO lawsuit against the retailer if it did promptly comply. Many cease and desist letters threaten trademark infringement or Lanham Act litigation when there is a legitimate violation by a competitor. Few threaten RICO actions. The letters also offered to settle if the retailers paid damages (Outlaw’s estimated lost profits, but really an arbitrary number) and ceased selling the offending products. Some retailers accepted the offer and settled Outlaw’s potential RICO claims by paying money.
And this is where things became very interesting. Outlaw went on to sue dozens of these retailers that did not settle their claims. But it did not assert RICO claims in these suits, perhaps because it realized the claims were frivolous or close to it. That turned out to be a fatal error.
A lawyer for one of the retailers realized the failure to assert RICO claims may have meant there was none to begin with and that could itself be a RICO violation, trying to demand money through the threat of a RICO claim when there was no such claim (basically extortion).
The retailers took the extraordinary step of filing a RICO class action on behalf of those who had paid settlements to Outlaw, claiming the cease and desist letters threatening RICO suits violated the federal mail fraud statute, which is the most common type of RICO violation.
Outlaw argued quite correctly that the Noerr-Pennington doctrine protects pre-suit demand letters as a type of First Amendment expression. So an ordinary demand letter to a potential defendant would be protected speech and could not be actionable under the antitrust laws, or RICO, as extended by the Ninth Circuit in Direct TV v. Sosa.
But the district judge accepted the counterplaintiffs’ argument that these pre-suit letters were not entitled to Noerr-Pennington protection, at least arguably, and could proceed to trial under the “sham” exception. That applies when the pre-suit demand is legally and factually “baseless,” which is how the retailers view the pre-suit letters. The court agreed there likely was no colorable RICO claim against the retailers and has allowed the RICO counterclaim against Outlaw and its lawyers (which are also alleged to be a RICO enterprise) to proceed on this “sham” exception theory.
Outlaw’s summary judgment motion was denied, and the case is set for trial. And to add to Outlaw’s problems, its lawyer’s malpractice insurance provider has brought a declaratory judgment action asking the court to rule it has no obligation to pay for Outlaw’s lawyer’s defense because the claim was not promptly reported to the insurer, as required by the policy.
This brings to mind the courtroom scene in The Merchant of Venice, where the plaintiff can find the tables get turned very quickly against it. The lessons for any lawyer threatening a RICO claim are pretty obvious. Know what you are talking about or hire a lawyer who does. The consequences of loosely threatening a RICO claim can be dire.