United States District Court,

M.D. Tennessee,

Nashville Division.

Gary CARRIGAN, Plaintiff,

v.

ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Defendant.

 

No. 3:10–cv–1089.

May 10, 2012.

 

MEMORANDUM

ALETA A. TRAUGER, District Judge.

Pending before the court is the defendant’s Motion for Summary Judgment (Docket No. 37), to which the plaintiff has responded (Docket No. 46), and the defendant has filed a reply (Docket No. 50). For the reasons discussed herein, the defendant’s motion will be granted in part and denied in part.

 

FACTUAL BACKGROUND

The plaintiff, Gary Carrigan was formerly employed by the defendant, Arthur J. Gallagher Risk Management Services, Inc. (“AJGRMS”), a subsidiary of Arthur J. Gallagher & Co. (“Gallagher”), a worldwide insurance brokerage company that participates in a variety of insurance related business. Prior to his employment with AJGRMS, the plaintiff was employed by Gale Smith and Company (“Gale Smith”), an insurance brokerage company located in Brentwood, Tennessee. On July 1, 2008, Gallagher acquired Gale Smith, and the plaintiff subsequently became an AJGRMS employee working out of the same location in Brentwood. While employed at Gale Smith and AJGRMS, the plaintiff sold an insurance product he helped develop known as the “Drivers Advantage Program”

 

Unless otherwise noted, the facts are drawn from the defendant’s statement of undisputed facts (Docket No. 39), the plaintiff’s responses thereto (Docket No. 47), the plaintiff’s statement of additional material facts (Docket No. 48), the defendant’s responses thereto (Docket No. 51), and related exhibits. The court draws all reasonable inferences in favor of the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Brown v. United States, 583 F .3d 916, 919 (6th Cir.2009).

 

The Drivers Advantage Program is a limited medical benefit plan, which is a form of health insurance providing basic medical coverage . These plans are often used in industries containing part-time or seasonal employees. They are also used in industries with personnel who do not otherwise qualify for comprehensive benefits. An example of such personnel are owner operators in the trucking industry. In some instances, limited medical benefit plans may also provide basic gap coverage between the time an employee commences employment and the point at which that employee is eligible to receive more comprehensive medical benefits. The Drivers Advantage Program was specifically developed for the trucking industry.

 

Such plans do not offer catastrophic coverage.

 

At his deposition, the plaintiff testified that the Drivers Advantage Program could also be adapted to suit potential clients in other industries. (Docket No. 41, Ex. A at 4.)

 

Upon selling the Drivers Advantage Program to a trucking client, the plaintiff’s earnings are based on his commissions. Specifically, he receives a commission on the premiums paid by that client. To date, the plaintiff has earned commissions that have ranged from 7% to 22%.

 

When he was employed by AJGRMS, the plaintiff spent the majority of his time marketing the Drivers Advantage Program from Tennessee. While he is personally licensed to sell insurance in Tennessee, Kentucky, and Florida, the plaintiff maintains that his business activities encompass a broader geographic scope. (See Docket No. 41, Ex. A, at 6–7; Docket No. 49 ¶ 2.) In particular, the plaintiff has testified that he is able to market the Drivers Advantage Program to a larger geographic market through partnerships he maintains with brokers licensed to sell insurance in states where he lacks a license. (Docket No. 41, Ex. A at 7.) AJGRMS does not dispute the plaintiff’s testimony. In fact, it has admitted that an insurance product could be sold by someone who is not licensed in a particular state through the use of local brokers possessing such a license. (Docket No. 51 ¶¶ 75–76.)

 

Sometime after AJGRMS’ acquisition of Gale Smith, the plaintiff had numerous discussions with Frank Caruso, an Area President in AJGRMS’ Brentwood office, concerning whether the plaintiff would sign a covenant not to compete. Both individuals also discussed the manner in which the plaintiff would earn his commissions in connection with the Drivers Advantage Program following the acquisition. Specifically, Caruso informed the plaintiff that a portion of his commissions would have to be split with the broker benefits services division at Gallagher. The plaintiff did not find this potential arrangement to be appealing. Caruso also expressed his belief that limited medical benefit programs did not possess a lucrative future. Indeed, Caruso had little interest in the Drivers Advantage Program, believed that it was not a desirable product to sell, and felt that its appeal would continue to diminish if health care reform legislation were enacted.

 

Following these discussions, AJGRMS and the plaintiff negotiated the plaintiff’s departure from the company and his purchase of the eleven client accounts associated with his Drivers Advantage Program book of business (“the Drivers Advantage accounts”) that he would take with him upon his exit. The plaintiff was represented by counsel during these negotiations, which led to an agreement (“the Sale Agreement”) whereby the plaintiff agreed to purchase the aforementioned accounts. While the majority of these clients were based in Tennessee, three clients were based in the following states: Alabama, Indiana, and Kentucky.

 

The eleven client accounts are listed in Exhibit A to the Sale Agreement. (Docket No. 41, Ex. B.) Those accounts are with the following clients: Business Transportation Services, Dixie Ohio Express, Inc., DMC Transportation Services, Inc., Evergreen Transportation, Inc., First Express, Inc., Independent Truckers Group, Morristown Driver’s Service, Inc., Nationwide Express, Paschall Truck Lines, Inc., Sharp Transportation, Inc., and Teton Transportation, Inc. (Id.)

 

Both parties had appeared to agree that seven of the eleven clients were based in Tennessee and that the remaining four were located in the following states: Mississippi, Indiana, Kentucky, and Texas. (Docket No. 47 ¶ 23.) However, in his declaration, the plaintiff clarified that Evergreen Transportation, Inc., the purported Mississippi-based entity, was actually based in Alabama. (Docket No. 49 ¶ 2.) The defendant does not dispute this assertion. A search performed on the website of the Alabama Secretary of State confirms that Evergreen Transportation, Inc. is an Alabama corporation. See http://arc-sos.state.al.us/cgi/corpname.mbr/input (last visited May 4, 2012). As for Independent Truckers Group, the purported Texas-based entity, the court’s research shows that, according to the company’s website, it is actually based in Memphis, Tennessee. See http://independenttruckersgroup.com (last visited May 4, 2012). A Business Information Search performed on the website of the Tennessee Secretary of State confirms that the entity is a Tennessee corporation. See http:// tnbear.tn.gov/Ecommerce/FilingSearch.aspx (last visited May 4, 2012).

 

The Sale Agreement, which was effective March 18, 2009, contained the following non-compete clause:

 

[AJGRMS] and its affiliates agree that they will not, directly or indirectly, solicit, accept any offer to provide or otherwise compete directly or indirectly with Buyer in the sale of a product known as the Driver[s] Advantage [P]rogram or similar product to any purchaser or potential purchaser of such product, nor shall [AJGRMS] solicit, accept any offer to provide or otherwise induce the termination or non-renewal of the Drivers Advantage [P]rogram listed on the attached Exhibit A. The restrictions contained in this Section shall terminate three (3) years after the Effective Date.

 

(Docket No. 41, Ex. C.) This clause was proposed and drafted by the plaintiff’s counsel. As its plain terms reflect, the non-compete clause contains a limitless geographic scope. However, the eleven Drivers Advantage accounts the plaintiff purchased were with clients based in Tennessee, Alabama, Indiana, and Kentucky. In addition, the plaintiff has adduced evidence showing that, at the time he contracted with AJGRMS, he had already marketed the Drivers Advantage Program to companies based in North Carolina, Mississippi, and Texas. (See Docket No. 49 ¶¶ 7, 10; Docket No. 49, Exs. B, D.) One of these companies was Trimac Transportation (“Trimac”), an entity based in Houston, Texas. (Docket No. 49 ¶ 10; Docket No. 49, Ex. D.)

 

This information is contained in the plaintiff’s declaration (Docket No. 49) and the exhibits attached thereto. After the plaintiff’s counsel filed that declaration, the Clerk noted, in a separate docket entry, that the plaintiff’s counsel failed to include the required description of the attached exhibits. The Clerk thus directed him to resubmit the exhibits with such a description. To date, the plaintiff’s counsel has failed to correct this error. The Order accompanying this Memorandum will direct the plaintiff to resubmit the exhibits attached to his declaration with the required description.

 

The Sale Agreement also set forth a schedule in which the total purchase price of $147,623 was to be paid in three installments. The first payment consisting of fifty percent of the $147,623 purchase price was due at the signing of the Sale Agreement. The remainder of the purchase price was to be paid in two equal installments on March 18, 2010 and March 18, 2011. The amount of these two payments was to be determined on March 18, 2010 by referring to the final price of the eleven Drivers Advantage accounts purchased by the plaintiff. On or near that date, both parties agreed that the final two payments would each be in the amount of $47,611.69.

 

In particular, the Sale Agreement specifies that the “[f]inal price will be calculated as actual revenue generated by the Exhibit A Accounts x 1.25% minus $73,812.” (Docket No. 41, Ex. C.) The $73,812 figure constituted the amount of the first payment made by the plaintiff at the signing of the agreement.

 

Shortly after signing the Sale Agreement, the plaintiff departed AJGRMS and started his own business. Almost one year after his departure, the plaintiff attended a truck show in Louisville, Kentucky, where he met Kevin Hite, an individual who worked for a company based in Texas called Homeland Healthcare. During the ensuing conversation, the plaintiff described to Hite his new business venture involving a driver fatigue management system for trucking companies related to sleep apnea. In the course of this conversation, Hite informed the plaintiff that his company did limited medical benefit business with Bob Clement, an employee of Gallagher Benefit Services (“GBS”) in Kansas City, Missouri. GBS is an affiliate of AJGRMS.

 

The plaintiff specifically testified at his deposition that Hite had informed him that his company worked with GBS in selling a limited medical benefit product to an entity based in Virginia called Bridge Terminal Transport (“BTT”). (Docket No. 41, Ex. A, at 22.)

 

Following this conversation, the plaintiff sent an email to Caruso in March 2010 in which he, among other things, asked whether AJGRMS had breached the non-compete clause in the Sale Agreement. In response, Caruso stated that AJGRMS had not violated the clause.0 After receiving Caruso’s response, the plaintiff timely mailed his second payment of the purchase price to AJGRMS on or before the contractual deadline of March 18, 2010.

 

In his email, the plaintiff also provided Caruso with information concerning how the eleven Drivers Advantage accounts had performed. (Docket No. 47 ¶ 44.) This information was used to calculate the amount of the second and third payments of the total purchase price of the accounts. (Id.)

 

0. The plaintiff does not believe that Caruso knew that the alleged breach occurred. (Docket No. 47 ¶ 48.) He also does not believe that personnel in the GBS office in Kansas City knew of the Sale Agreement’s existence. (Id.)

 

The plaintiff subsequently filed this lawsuit on October 15, 2010. Between the time he received Caruso’s response to his March 2010 email and his filing of the present action, the plaintiff did not inform anyone at AJGRMS about his conversation with Hite at the truck show in Louisville. After filing this action, the plaintiff did not make the third payment of the purchase price to AJGRMS, which was due on March 18, 2011.

 

According to the plaintiff, he has not made this final payment of $47,611.69 because he believes that AJGRMS has violated the non-compete clause in the Sale Agreement. In support of this assertion, the plaintiff relies on the following facts, which AJGRMS has not disputed for the purposes of the pending motion: (1) since AJGRMS entered into the Sale Agreement with the plaintiff, its affiliate, GBS, has continued to advertise and offer limited medical benefit plans on its website; (2) following the plaintiff’s departure, AJGRMS, from its Kansas City, Missouri office, has continued to renew an existing limited medical benefit plan to Trimac and write a limited medical benefit plan for a Virginia-based entity called Bridge Terminal Transport (“BTT”); and (3) GBS sold a limited medical benefit product to Trimac from its Kansas City, Missouri office that was effective sometime in October 2010.

 

The plaintiff filed this action in the Circuit Court for Williamson County, alleging that AJGRMS and its affiliates sell competing limited medical benefit insurance products in violation of the Sale Agreement’s non-compete clause and intended to do so all along. (Docket No. 1., Ex. 1 at 6–8.) He has asserted claims for breach of contract, fraudulent misrepresentation, and violation of the Tennessee Consumer Protection Act (“TCPA”). (Id. at 7–9.) AJGRMS removed this case on November 17, 2010. (Docket No. 1.) On December 8, 2010, it filed its Answer. (Docket No. 8.) After the court entered a Memorandum and Order denying its Motion for Judgment on the Pleadings on February 10, 2011 (Docket No. 15), AJGRMS successfully obtained leave to amend its Answer to assert additional defenses and counterclaims. (Docket No. 28.) The counterclaims allege that the plaintiff: (1) breached the Sale Agreement by failing to make the third payment toward the purchase price of the eleven Drivers Advantage accounts; and (2) committed an abuse of process in filing the present lawsuit, as his real motivation for commencing this action was to prompt AJGRMS to release him from his contractual obligations. (Docket No. 29 ¶¶ 28, 34–35.) To date, the plaintiff has failed to file a responsive pleading to these counterclaims. AJGRMS filed the present motion on January 17, 2012. (Docket No. 37.)

 

ANALYSIS

I. Standard of Review

Rule 56 requires the court to grant a motion for summary judgment if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). If a moving defendant shows that there is no genuine issue of material fact as to at least one essential element of the plaintiff’s claim, the burden shifts to the plaintiff to provide evidence beyond the pleadings, “set[ting] forth specific facts showing that there is a genuine issue for trial .” Moldowan v. City of Warren, 578 F.3d 351, 374 (6th Cir.2009); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986). “In evaluating the evidence, the court must draw all inferences in the light most favorable to the non-moving party.”   Moldowan, 578 F.3d at 374 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

 

At this stage, “ ‘the judge’s function is not … to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial.’ “ Id. (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986)). But “[t]he mere existence of a scintilla of evidence in support of the [non-moving party’s] position will be insufficient,” and the party’s proof must be more than “merely colorable.” Anderson, 477 U.S. at 249, 252. An issue of fact is “genuine” only if a reasonable jury could find for the non-moving party. Moldowan, 578 F.3d at 374 (citing Anderson, 477 U.S. at 252).

 

II. The Defendant’s Motion

 

A. Abandoned Claims

 

AJGRMS contends that it is entitled to summary judgment on all of the claims asserted in the plaintiff’s Complaint. However, in his opposition brief, the plaintiff only defended his breach of contract claim. He otherwise failed to respond to any of the arguments raised in AJGRMS’ motion concerning his fraudulent misrepresentation and TCPA claims.

 

In his opposition brief, the plaintiff implicitly abandons these two claims, as evidenced by his silence to the specific arguments levied by AJGRMS in its opening brief as to each of these causes of action. Moreover, at his deposition, the plaintiff essentially conceded his fraudulent misrepresentation claim. That claim was premised on Caruso’s purported knowledge at the time the Sale Agreement was signed that AJGRMS was competing with the plaintiff and intended to continue to do so. (Docket No. 1, Ex. 1 at 7–8.) The plaintiff thus alleged that AJGRMS, through Caruso, made “material false and misleading statements and omitted material facts … including[,] but not limited to [,] the fact that the Defendant and its affiliates were not abandoning limited benefit plans and that they intended to continue offering such plans in direct competition with the Plaintiff.” (Id. at 8.)

 

However, the plaintiff’s deposition testimony tells a different story. Indeed, at his deposition, the plaintiff participated in the following exchange concerning Caruso’s state of mind at the time the Sale Agreement was signed:

 

Q. And it sounds like during your conversations earlier today about Frank and his character and what you’ve come to learn about him.

 

You don’t think he’s made some type of official decision to violate that agreement, do you?

 

A. Absolutely not.

 

Q. When he signed that contract back in 2009, it sounds like you think he had every intention of abiding by it, isn’t that right?

 

A. Absolutely.1

 

1. Earlier in his deposition, the plaintiff testified that he was sure that Caruso did not know that the defendant was allegedly violating the Sale Agreement when he responded to the plaintiff’s March 2010 e-mail. (Docket No. 41, Ex. A at 21.) Specifically, after recalling the conversation with Hite at the truck show in Louisville, the plaintiff testified as follows:

 

So[,] I left the truck show, and I sent Frank an e-mail, I think, and asked him … Frank, is this contract valid on paragraph 6?

 

And Frank assured me that he—that they had not violated when the guy told me he was doing business out there. I’m sure Frank didn’t know. I know Frank didn’t know because his character is better. So[,] he didn’t know, but it’s done.

 

(Id.)

 

(Docket No. 41, Ex. A at 29.) The plaintiff also conceded at his deposition that he lacked any evidence showing that anyone else at Gallagher intentionally violated the non-compete clause contained in the Sale Agreement. (Id.)

 

Accordingly, for the reasons expressed herein, the court finds that the plaintiff has abandoned his fraudulent misrepresentation and TCPA claims by virtue of his own failure to defend them in his response brief. Summary judgment will therefore be granted to AJGRMS as to these two claims.

 

B. The Plaintiff’s Breach of Contract Claim

It is well-settled that, in Tennessee, a viable claim for breach of contract has three essential elements: (1) the existence of an enforceable contract; (2) nonperformance amounting to a breach of that contract and (3) damages caused by the breach of contract. Ingram v. Cendant Mobility Fin. Corp., 215 S.W.3d 367, 374 (Tenn.Ct.App.2006). AJGRMS argues that summary judgment is warranted here because the plaintiff has failed to establish any of these three elements with respect to the non-compete clause contained in the Sale Agreement.

 

1) Enforceability

It is undisputed that the non-compete clause at issue here was entered into ancillary to the sale of a business, specifically, the book of business associated with the Drivers Advantage Program. (See Docket No. 41, Exs. B, C; Docket No. 47 ¶¶ 22, 25–26.) Generally, “a covenant which is incidental to the sale and transfer of a trade or business, and which purports to bind the seller not to engage in the same business in competition with the purchaser, is lawful and enforceable, provided such covenants are reasonable and go no further than affording a fair protection to the buyer.” Greene Cnty. Tire and Supply, Inc. v. Spurlin, 338 S.W.2d 597, 599–600 (Tenn.1960) (internal quotation marks and citations omitted). The “reasonableness of the restraint necessary to secure the buyer fair protection in receiving the benefits for which he made the purchase is to be determined by reference to the nature of the business, the manner in which it has been conducted and its territorial extent.” Id. at 600 (internal quotation marks omitted).

 

As AJGRMS points out in its opening brief, the non-compete clause contained in the parties’ Sale Agreement lacks any defined geographic scope. Citing J.T. Shannon Lumber Co. v. Barrett, No. 2:07–cv–2847–JPM–cgc, 2010 WL 3069818, at(W.D.Tenn. Aug. 4, 2010), it asserts that this flaw makes the clause unreasonable and unenforceable. (Docket No. 38, at 9.) This contention is without merit. Indeed, the court previously considered and rejected a similar argument when it denied AJGRMS’ Motion for Judgment on the Pleadings. In its Memorandum and Order, the court noted that, “in the most recent Tennessee case to deal with a non-compete agreement ancillary to a business sale, the Tennessee Court of Appeals imposed a reasonable geographic limitation consistent with the circumstances of the case, where the parties had not made one explicit.” (See Docket No. 15, at 7) (citing Butts v. Birdwell, 503 S.W.2d 930, 937 (Tenn.Ct.App.1973)).

 

In addition, the Barrett case does not support voiding the non-compete clause under the present circumstances. Relying on Tennessee authority, the federal court in Barrett declined to void the non-compete clause at issue, because there was “no evidence that [the] Plaintiff acted with bad faith by inserting” it into the employment agreement. Barrett, 2010 WL 3069818 at *9. Here, AJGRMS does not contend that the plaintiff inserted the non-compete clause into the Sale Agreement in bad faith. In any event, the record evidence does not support such a finding, as AJGRMS, a subsidiary of a worldwide insurance brokerage company (Gallagher), accepted the non-compete clause drafted by the plaintiff’s counsel (along with its limitless geographic scope) in the course of negotiating the Sale Agreement. The court in Barrett, again relying on well-settled Tennessee authority, also expressly recognized that, where a non-compete clause is overly broad, a court may also impose a reasonable limitation. See Barrett, 2010 WL 3069818 at(stating that, when a non-compete clause is overly broad, the court may determine that the clause is enforceable to the extent that it is subject to reasonable territorial and temporal limitations). There, the court concluded that the geographic scope of the non-compete clause was overly broad (purporting to cover the entire globe), but nevertheless found that limiting the scope to include the Asian market was reasonable under the circumstances. Id.

 

The court thus turns its attention to the task of fashioning a geographic limitation to the non-compete clause that is reasonable under the circumstances. In determining a reasonable geographic scope, the court will consider “the nature of the business, the manner in which it has been conducted and its territorial extent.” Spurlin, 338 S.W.2d at 600. The book of business acquired by the plaintiff here involved an insurance product that he helped develop called the Drivers Advantage Program. This product is a limited medical benefit plan offering basic levels of medical coverage. In conducting his business affairs while employed for Gale Smith and AJGRMS, the plaintiff spent the majority of his time in Tennessee marketing the Drivers Advantage Program. However, the record evidence shows that his efforts were directed at a wider geographic market. Indeed, the plaintiff is licensed to sell insurance in Tennessee, Kentucky, and Florida. In addition, the plaintiff testified that he is able to market the Drivers Advantage Program in other states where he is not licensed to sell insurance through partnerships he has with local brokers who possess such licenses. AJGRMS does not dispute this testimony and, in fact, has admitted for the purposes of this motion, that an insurance product could be sold by someone who is not licensed in a particular state through the use of local brokers. As for the territorial extent of his business activities, the record shows that the plaintiff agreed to purchase from AJGRMS eleven Drivers Advantage accounts with clients based in Tennessee, Alabama, Indiana, and Kentucky. Moreover, the plaintiff has adduced evidence demonstrating that, at the time he contracted with AJGRMS, he had already marketed the Drivers Advantage Program to companies based in North Carolina, Mississippi, and Texas. AJGRMS has not disputed this evidence.

 

Given these circumstances, the court believes that the non-compete clause should be modified to include a geographic scope that covers: (1) the states in which the plaintiff was licensed to sell insurance at the time he contracted with AJGRMS to purchase the eleven Drivers Advantage accounts; (2) the states in which the clients for those accounts were based; and (3) any other states in which the plaintiff had already marketed the Drivers Advantage Program at the time he signed the Sale Agreement with AJGRMS. Such a modification offers a fair protection to the plaintiff-buyer “in receiving the benefits for which he made the purchase.” See Spurlin, 338 S.W.2d at 599–600. Accordingly, the court concludes that the territorial scope of the non-compete clause can be reasonably limited to the following states: Tennessee, Kentucky, Florida, Alabama, Indiana, North Carolina, Mississippi, and Texas.

 

AJGRMS opposes such an expanded scope and argues that the plaintiff is judicially estopped from contending that the non-compete clause is enforceable anywhere other than the three states in which he is licensed: Tennessee, Kentucky, and Florida. Judicial estoppel is a doctrine that “generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (internal quotation marks omitted). It is an “equitable doctrine meant to preserve the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship, achieving success on one position, then arguing the opposite to suit an exigency of the moment.” Eubanks v. CBSK Fin. Group, Inc., 385 F.3d 894, 897 (6th Cir.2004) (internal quotation marks omitted). However, judicial estoppel “should be applied with caution to avoid impinging on the truth-seeking function of the court, because the doctrine precludes a contradictory position without examining the truth of either statement.” Id. (internal quotation marks omitted).

 

In support of its judicial estoppel argument, AJGRMS asserts that the plaintiff successfully defeated its Motion for Judgment on the Pleadings and, more specifically, its argument that the non-compete clause’s limitless geographic scope made it unenforceable, on the strength of the following argument:

 

Plaintiff does not suggest that this Court or any court should enforce the agreement on a nationwide or worldwide basis. Rather, Carrigan maintains licenses in three states, which he did at the time of his employment with Gallagher and the Court should only enforce the agreement in the markets where Carrigan’s product is sold or offered by him.

 

(Docket No. 13, at 1–2.) AJGRMS submits that the plaintiff thus argued at that stage of the proceedings that the non-compete clause should only be enforced in the three states in which he is licensed to sell insurance: Tennessee, Kentucky, and Florida. Accordingly, it argues that the plaintiff is estopped from seeking an expansion of the clause’s geographic scope beyond those three states.

 

In his opposition brief, the plaintiff contends that his prior representation sought enforcement of the non-compete clause not only in the states where he was licensed, but also in those states where his products were offered or sold. In any event, he argues that AJGRMS’ contention must fail because the court did not rely on his representation in rejecting its argument that the non-compete clause was unenforceable due to its limitless geographic scope. The court agrees. Indeed, even assuming, as AJGRMS submits, that the plaintiff proposed that the non-compete clause should only be enforced in the three states in which he maintains a license, the fact remains that the court never relied on this proposed modification when it previously rejected the defendant’s argument concerning the clause’s unenforceability. The court merely acknowledged that the plaintiff had “posited a possible judicial modification that might be made,” but nevertheless concluded that it was not appropriate to modify the non-compete clause at that stage of the proceedings because the factual record was not sufficiently developed. (Docket No. 15, at 8.) Thus, the plaintiff plainly did not prevail on his argument concerning a possible judicial modification to the non-compete clause. See Maine, 532 U.S. at 749. Accordingly, AJGRMS’ contention concerning judicial estoppel must fail.

 

2) Breach

AJGRMS also argues that, even if the non-compete clause is enforceable, summary judgment is nonetheless appropriate as to the plaintiff’s breach of contract claim because the plaintiff has not shown that AJGRMS engaged in any competitive activity in the states in which he is licensed to sell insurance. This assertion is tied to AJGRMS’ position that the geographic scope of the non-compete clause should be limited to Tennessee, Kentucky, and Florida. However, the court has rejected that position and has instead imposed a geographic scope to the non-compete clause that it believes is reasonable under the circumstances of this case. The court will accordingly apply this modified geographic scope in analyzing whether, as the defendant submits, the plaintiff has not shown any evidence of a breach of the non-compete clause.

 

The non-compete clause contained in the Sale Agreement provides, in pertinent part, that:

 

[AJGRMS] and its affiliates agree that they will not, directly or indirectly, solicit, accept any offer to provide or otherwise compete directly or indirectly with Buyer in the sale of a product known as the Driver[s] Advantage [P]rogram or similar product to any purchaser or potential purchaser of such product … The restrictions contained in this Section shall terminate three (3) years after the Effective Date.

 

(Docket No. 41, Ex. C.) The effective date of the Sale Agreement was March 18, 2009. Thus, the court must determine whether the plaintiff has adduced any evidence showing that AJGRMS or its affiliates solicited, accepted any offer to provide, or otherwise competed with him in selling the Drivers Advantage Program or a similar product to any purchaser or potential purchaser in any of the following states within the applicable three-year period ending March 18, 2012: Tennessee, Kentucky, Florida, Alabama, Indiana, North Carolina, Mississippi, and Texas.

 

The court finds that the plaintiff has successfully adduced such evidence here. For the purposes of this motion, it is undisputed that, since AJGRMS entered into the Sale Agreement with the plaintiff on March 18, 2009, its affiliate, GBS, has continued to advertise and offer limited medical benefit plans on its website. The Drivers Advantage Program is a type of limited medical benefit plan. Indeed, AJGRMS has not argued that the Drivers Advantage Program is dissimilar from the limited medical benefit plans that either it or GBS offers. Moreover, GBS’ online advertising of limited medical benefit plans effectively solicits business from purchasers and potential purchasers worldwide, which necessarily includes those based in Tennessee, Kentucky, Florida, Alabama, Indiana, North Carolina, Mississippi, and Texas. This activity thus constitutes a violation of the non-compete clause.

 

It is also undisputed that, following the plaintiff’s departure in March 2009, AJGRMS, from its Kansas City, Missouri office, continued to renew an already existing limited medical benefit plan to Trimac, the Texas-company to whom the plaintiff had previously marketed the Drivers Advantage Program. By engaging in this activity, AJGRMS competed with the plaintiff in selling a product similar to the Drivers Advantage Program to an already existing purchaser in Texas. The non-compete clause plainly prohibited such competitive activity.2 AJGRMS also admits, for the purposes of this motion, that GBS sold a limited medical benefit product to Trimac from its Kansas City, Missouri office that was effective sometime in October 2010. This affiliate’s competing sale to the same purchaser similarly violated the non-compete clause contained in the parties’ Sale Agreement.3

 

2. In its response to the plaintiff’s statement of additional facts, AJGRMS asserts that the non-compete clause did not prohibit it from renewing a pre-existing business relationship with Trimac, because it is undisputed that the parties never discussed during their contract negotiations what would happen to any limited medical benefit accounts that AJGRMS or its affiliates were already servicing. (Docket No. 51 ¶ 68.) This argument is without merit. While the parties may never have discussed what would happen to such accounts during their negotiations, the plain terms of the non-compete clause address this topic. Indeed, the non-compete clause unambiguously prohibits AJGRMS and its affiliates from competing “directly or indirectly with [the plaintiff] in the sale of a product known as the Driver[s] Advantage [P]rogram or similar product to any purchaser or potential purchaser of such product.” (Docket No. 41, Ex. C) (emphasis added). Thus, the clause plainly distinguishes “potential purchasers” of the Drivers Advantage Program or similar products from existing “purchasers” of such products, and prohibits AJGRMS and its affiliates from making competing sales to either group. See Cocke Cnty. Bd. of Highway Comm’rs v. Newport Utils. Bd., 690 S.W.2d 231, 237 (Tenn.1985) (“It is the court’s duty to enforce contracts according to their plain terms.”)

 

3. The plaintiff also contends that AJGRMS breached the non-compete clause contained in the parties’ Sale Agreement by writing a limited medical benefit plan to BTT, an entity based in Virginia. While it is undisputed that AJGRMS engaged in such business activities, it is nevertheless immaterial, because the reasonable geographic scope of the non-compete clause does not cover competing sales made by AJGRMS in Virginia.

 

In sum, the undisputed evidence shows that AJGRMS breached the non-compete clause contained in the Sale Agreement it signed with the plaintiff.

 

3) Damages

While AJGRMS does not address the issue of damages in its legal briefs, it does address the subject in its response to the plaintiff’s statement of additional facts. Specifically, it asserts that the plaintiff has not been damaged by any competing sales to Trimac in Texas because he is not licensed to sell insurance there. (Docket No. 51 ¶ 66.) Again, this assertion is tied to AJGRMS’ unsuccessful attempt to limit the geographic scope of the non-compete clause to Tennessee, Kentucky, and Florida. However, the court has already concluded that the reasonable geographic scope of the non-compete clause covers the competing sales made in Texas. While the parties dispute the specific amounts involved, it is undisputed that AJGRMS and its affiliate, GBS, earned revenues from their sales of limited medical benefit plans to Trimac. Moreover, AJGRMS appears to concede that, to the extent the non-compete clause covers competing sales made to Trimac in Texas, the plaintiff has shown that he suffered some amount of damages.4 (Docket No. 51 ¶ 66.)

 

4. Aside from seeking contractual damages in his Complaint, the plaintiff also seeks a refund of the entire purchase price of the eleven Drivers Advantage accounts with interest. (Docket No. 1, Ex. 1 at 7.) Leaving aside the fact that the plaintiff did not pay the entire purchase price for those eleven accounts, the court notes that this claim for relief appears to sound in restitution. Restitution is a remedy that “ ‘restores the injured party to the position he occupied prior to the contract being made. In some cases, it contemplates the return of the specific property and in others, a judgment for the equivalent in money for the performance rendered by the Plaintiff and received by the Defendant.’ “ GuestHouse Int’l, LLC v. Shoney’s N. Am. Corp., 330 S.W.3d 166, 207 (Tenn.Ct.App.2010) (internal quotation marks omitted). Restitution damages are recoverable for breach of contract “when rescission of the contract is sought and awarded.” Id. However, since the plaintiff does not seek rescission of the contract in his Complaint, such damages are unavailable here.

 

Accordingly, because the plaintiff has adduced evidence demonstrating the existence of an enforceable agreement, nonperformance amounting to a breach, and resulting damages, AJGRMS’ motion for summary judgment as to the plaintiff’s breach of contract claim will be denied.

 

C. AJGRMS’ Counterclaim

Finally, AJGRMS asserts that it is entitled to summary judgment on its counterclaim against the plaintiff for breach of the Sale Agreement. In support of its motion, it argues that it is undisputed that the plaintiff failed to timely make the last payment of $47,611.69 toward the purchase price of the eleven Drivers Advantage Program accounts, which was due on March 18, 2011. The plaintiff has asserted in his responses to AJGRMS’ first requests for admission and statement of undisputed facts that he was not obligated to make the final payment because of AJGRMS’ earlier breach of the non-compete clause. (Docket No. 41, Ex. D ¶ 10; Docket No. 47 ¶ 54.) In response, AJGRMS notes that, because the plaintiff has not filed a responsive pleading to its First Amended Answer and Counterclaims, he is in default and has waived any affirmative defenses to its breach of contract counterclaim.

 

In his opposition brief, the plaintiff’s counsel neither explains his failure to file a responsive pleading to the First Amended Answer and Counterclaims nor seeks leave of court to file a response and assert any affirmative defenses. Instead, he devotes a single paragraph in a footnote to his argument, in which he appears to contend that his filing of a Complaint asserting that AJGRMS breached the contract cures his subsequent failure to serve an answer to the counterclaims and assert any corresponding affirmative defenses therein. The plaintiff’s contention is without merit. Federal Rule of Civil Procedure 12(a)(1)(B) expressly provides that “[a] party must serve an answer to a counterclaim … within 21 days after being served with the pleading that states the counterclaim or crossclaim.” Fed.R.Civ.P. 12(a)(1) (B) (emphasis added). A complaint is plainly not an answer. Having failed to serve an answer, the plaintiff has effectively defaulted.5 Accordingly, AJGRMS is entitled to summary judgment on its breach of contract counterclaim.

 

5. The court notes that AJGRMS has not moved for entry of default or for a default judgment pursuant to Federal Rule of Civil Procedure 55.

 

While this is admittedly a harsh result, the court is constrained to reach it under the present circumstances.

 

CONCLUSION

Based on the foregoing, the defendant’s Motion for Summary Judgment (Docket No. 37) will be GRANTED in part and DENIED in part.

 

An appropriate order will enter.

United States District Court,

N.D. California.

MITSUI O.S.K. LINES, LTD., Plaintiff,

v.

SEAMASTER LOGISTICS, INC.; Toll Global Forwarding (Americas) Inc.; American Global Logistics LLC; Kesco Container Line, Inc.; Kesco Shipping, Inc.; and Does 1 through 20, Defendants.

 

No. 11–2861 SC.

May 10, 2012.

 

ORDER DENYING MOTIONS TO PARTIALLY DISMISS SECOND AMENDED COMPLAINT

SAMUEL CONTI, District Judge.

I. INTRODUCTION

Now before the Court are two motions to partially dismiss the Second Amended Complaint, ECF No. 72 (“SAC”), of Plaintiff Mitsui O.S.K. Lines, Ltd. (“MOL”), a Japanese corporation. Specifically, the motions seek dismissal of the SAC’s fourth and fifth claims, arising under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(c) and 1962(d). The first motion to dismiss was brought by Defendants Seamaster Logistics, Inc. (“Seamaster”) and Toll Global Forwarding (Americas) Inc., formerly named Summit Logistics International, Inc. (“Summit”), and the second was brought by Defendant American Global Logistics LLC (“AGL”) (collectively, “Moving Defendants”).

 

Both motions are fully briefed. ECF Nos. 77 (“SM/SL MTD”), 78–1 (“AGL MTD”), 80 (“MOL Opp’n”), 82 (“SM/SL Reply”), 84 (“AGL Reply”). Pursuant to Civil Local Rule 7–1(b), both motions are suitable for decision without oral argument. For the reasons set forth below, the Court DENIES both motions.

 

II. BACKGROUND

The Court assumes familiarity with Magistrate Judge James’s October 19, 2011 Order dismissing MOL’s original Complaint. ECF No. 38. Therefore, the Court will only briefly summarize the case, supplementing Judge James’s account with allegations contained in the SAC. The Court recounts additional, specific allegations as part of the discussion sections below, and takes all of the SAC’s well-pleaded allegations as true. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

 

MOL is a Vessel Operating Common Carrier (“VOCC”)—that is, an ocean shipper—operating between foreign and U.S. ports, including the Port of Oakland. Moving Defendants are, in industry parlance, “NVOCCs,” that is, Non–Vessel Operating Common Carriers. Like MOL, they are shippers, but unlike MOL, they do not operate seafaring vessels. NVOCCs such as the Moving Defendants essentially are trucking companies that engage only in inland or “door” carriage, while VOCCs like MOL may engage in ocean shipping. See SAC ¶ 16.

 

Sometimes, in addition to providing ocean carriage, MOL is hired to arrange inland carriage. See id. On those jobs, called “through” or “door-to-door” carriage, MOL pays NVOCCs to arrange for the inland leg (or legs) of the trip on MOL’s behalf. Id. MOL alleges that Defendants engaged in a scheme to charge MOL for unnecessary or nonexistent inland carriage. In essence, MOL alleges that Defendants routinely represented to MOL that they had performed inland carriage to or from a port serviced by MOL, but in actuality third parties would make the inland shipments. As a result, MOL allegedly was induced into paying for inland carriage that it never received. See id. ¶¶ 24–31. MOL alleges that some of this conduct occurred in inland China and some in the United States. See MOL Opp’n at 7–8 (identifying allegations of SAC which purportedly pertain to U.S. conduct).

 

The SAC’s fourth and fifth claims assert that, by using postal mail, faxes, and the Internet to communicate with and bill MOL in connection with these shipments, Defendants engaged in wire and mail fraud—predicate acts that can support civil RICO liability under 18 U.S.C. §§ 1962(c) and (d), respectively. See SAC ¶¶ 78–91. Moving Defendants’ position, in brief, is that MOL cannot state viable RICO claims against them because the case primarily concerns conduct that took place in inland China and effected MOL in Japan, and that, under Morrison v. National Australia Bank Ltd., –––U.S. ––––, 130 S.Ct. 2869 (2010), RICO has no extraterritorial application.

 

Section 1962(c) provides: “It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.” Section 1962(d) makes it unlawful to conspire to do so. Section 1961(1) enumerates prohibited racketeering activities (or “predicate acts”), which include mail and wire fraud.

 

III. LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b) (6) “tests the legal sufficiency of a claim.” Navarro v. Block, 250 F.3d 729, 732 (9th Cir.2001). “Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.1988). “When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Iqbal, 556 U .S. at 679. However, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). The allegations made in a complaint must be both “sufficiently detailed to give fair notice to the opposing party of the nature of the claim so that the party may effectively defend against it” and “sufficiently plausible” such that “it is not unfair to require the opposing party to be subjected to the expense of discovery.” Starr v. Baca, 633 F.3d 1191, 1204 (9th Cir.2011).

 

IV. DISCUSSION

 

A. Morrison and Its Progeny

 

Moving Defendants have not challenged the sufficiency of MOL’s factual allegations. See SM/SL Reply at 7–8 (acknowledging that MOL’s claims are sufficiently pled). Instead, Moving Defendants rest their challenge to MOL’s RICO claims on Morrison, a securities action, and the handful of cases that have applied its reasoning in the RICO context. Because the post-Morrison RICO cases have yet to settle on a single approach, the Court will briefly survey the field. It concludes that European Community v. RJR Nabisco, Inc., No. 02–CV–5771 (NGG)(VVP), 2011 WL 843957 (E.D .N.Y. Mar. 8, 2011), supplies the governing rule in this case.

 

1. Territoriality in the Securities Context

In Morrison, the Supreme Court considered whether § 10(b) of the Securities and Exchange Act of 1934 has extraterritorial application. 130 S.Ct. at 2876–77. The Morrison plaintiffs, all Australian nationals, had purchased stock in an Australian bank on an Australian stock exchange. Their complaint alleged that officers of the bank’s U.S. subsidiary had, in the United States, made fraudulent statements that caused some of the subsidiary’s assets to appear more valuable than they really were. Id. at 2876. On these facts, the Court addressed the question of whether the Australian plaintiffs had a viable cause of action under § 10(b), given the long-standing presumption against extraterritorial application of domestic laws. Id. at 2877–78.

 

The court held that they did not. Rejecting tests that various circuit courts had developed for ascertaining the extraterritorial application of statutes, id. at 2878–81, the court articulated the presumption against extraterritoriality in robust terms: “When a statute gives no clear indication of an extraterritorial application, it has none.” Id. at 2878. The court then turned to the language of the Exchange Act, observing that “the objects of the statute’s solicitude” were “transactions in securities listed on domestic exchanges, and domestic transactions in other securities ….“ Id. at 2884. “It is those transactions that the statute seeks to regulate …; it is parties or prospective parties to those transactions that the statute seeks to protect ….“ Id. (citations omitted). On that basis, the court concluded that Congress did not intend for the Exchange Act to possess extraterritorial reach.

 

The Morrison court also rejected the argument that the case called only for domestic application of § 10(b). The court acknowledged that plaintiffs had alleged some U.S. conduct, but this did not make their proposed application of § 10(b) domestic rather than extraterritorial: “[I]t is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.” Id. (emphasis in original).

 

2. Cases Addressing Territoriality in the RICO Context

Since Morrison made it clear that the presumption against extraterritoriality is a canon of construction applicable to any statute, id. at 2878–79, a half-dozen courts have applied its reasoning in the RICO context. These courts have uniformly held that RICO is silent as to its extraterritorial application and that, under Morrison, it therefore has none. See, e.g., In re Toyota, 785 F.Supp.2d at 913; Norex, 631 F.3d at 32. Further, these courts have broadly agreed that, while the “object” of the Exchange Act’s “solicitude” considered in Morrison was domestic securities transactions, in the RICO context “it is the ‘enterprise’ that is the object of the statute’s solicitude, and the ‘focus’ of the statute.” European Cmty., 2011 WL 843957, at *5. Specifically, “the focus of RICO is on the enterprise as the recipient of, or cover for, a pattern of criminal activity.” Cedeño, 733 F.Supp.2d at 474. RICO “seeks to regulate ‘enterprises’ by protecting them from being victimized by or conducted through racketeering activity.”   European Cmty., 2011 WL 843957, at *5.

 

Cedeño v. Intech Group, Inc., 733 F.Supp.2d 471, 474 (S.D.N.Y.2010); Norex Petroleum Ltd. v. Access Industries, Inc., 631 F.3d 29, 32 (2d Cir.2010); European Cmty., 2011 WL 843957; United States v. Philip Morris USA, Inc., 783 F.Supp.2d 23, 28–29 (D.D.C.2011); In re Toyota Motor Corp., 785 F.Supp.2d 883, 913 (C.D.Cal.2011); CGC Holding Co., LLC v. Hutchens, 2011 WL 5320988, at *14, 824 F.Supp.2d 1193 (D.Colo.2011).

 

See also Philip Morris, 783 F.Supp.2d at 28–29 (citing Cedeño, 733 F.Supp.2d at 473) (RICO “is focused on how a pattern of racketeering activity affects an enterprise”); In re Toyota, 785 F.Supp.2d at 914 (same); but see CGC Holding Co., 2011 WL 5320988, at (“The focus of [RICO] is the racketeering activity, i.e., to render unlawful a pattern of domestic racketeering activity perpetrated by an enterprise.”).

 

Beyond these points, however, the cases’ reasoning diverges. Cf. In re Toyota, 785 F.Supp.2d at 914–15 (surveying cases and observing that “[i]t is unclear how Morrison’ s logic, which evaluates the ‘focus’ of the relevant statute, precisely translates to RICO”). This divergence has been obscured to a certain degree by factual differences between the cases, specifically, their varying mixtures of foreign and domestic elements. Some cases have been relatively clear-cut: Post-Morrison courts have had no difficulty concluding that far-flung foreign schemes conducted by foreign actors and implicating only incidental U.S. conduct are fundamentally extraterritorial and thus beyond the reach of RICO. But in other cases, the balance of foreign and domestic elements has not been so one-sided. In those cases, district courts—starting from the premise that RICO has no extraterritorial application—have had to decide whether applying RICO to the facts before them would result in an impermissible extraterritorial application or a permissible domestic one. in Morrison’ s memorable terms, these courts much or what kind of domestic conduct sends its kennel. Morrison does not say, and the approaches.

 

See Cedeño, 733 F.Supp.2d 471 (Venezuelan actors allegedly conspired to imprison Venezuelan national in Venezuela); Norex, 631 F.3d 29 (conspiracy by Russian nationals to seize control over Russian oil industry through widespread bribery and institutional corruption in Russia); European Cmty., 2011 WL 843957 (South American and Russian cartels allegedly operated labyrinthine international money laundering and smuggling scheme involving illicit distribution abroad of U.S.-made cigarettes).

 

See Philip Morris, 783 F.Supp.2d 23 (where English cigarette manufacturer allegedly conspired to deceive American public about health effects of smoking, district court dismissed RICO claims, despite enterprise’s “tremendous impacts” on United States, because English defendant’s domestic conduct was “isolated” and not by itself actionable under RICO); In re Toyota, 785 F.Supp.2d at 914–15 (dismissing RICO claims as insufficiently pled but observing that well-pled allegations of “enterprise operating in the United States, consisting largely of domestic ‘persons,’ engaging in a pattern of racketeering activity in the United States, and damaging Plaintiffs abroad, … might well state a claim consistent with Morrison’s holding”); CGC Holding Co., 2011 WL 5320988, at (where Canadian nationals allegedly engaged in an enterprise “to extract money from [U.S. plaintiffs] through a phony loan scheme,” plaintiffs stated cognizable RICO claim because “the racketeering activity of the enterprise … was directed at and largely occurred within the United States”).

 

The challenge of applying Morrison in RICO cases stems from the difficulty of ascertaining where a RICO enterprise is located. This difficulty was not present in the securities context from which Morrison arose. When the Morrison court determined that only “transactions in securities listed on domestic exchanges, and domestic transactions in other securities” were properly subject to the Exchange Act, 130 S.Ct. at 2884, it could rely on courts to identify the place where an alleged transaction occurred: Though securities transactions may occur in volume, each one occurs in a readily ascertained place at a readily ascertained time.

 

RICO enterprises are different. They are not discrete events; they are groups of people. As such, they do not “occur” in a place in the way that transactions do. They have an entirely different and, especially in the case of association-in-fact enterprises, more amorphous structure:

 

RICO defines the term “enterprise” to include “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). The latter type of enterprise—the kind that is not a legal entity—is commonly called an “association-in-fact” or “associated-in-fact” enterprise. E.g., Cedeño, 733 F.Supp.2d at 472; In re Toyota, 785 F.Supp.2d at 900.

 

[A]n association-in-fact enterprise is simply a continuing unit that functions with a common purpose. Such a group need not have a hierarchical structure or a “chain of command”; decisions may be made on an ad hoc basis and by any number of methods-by majority vote, consensus, a show of strength, etc. Members of the group need not have fixed roles; different members may perform different roles at different times. The group need not have a name, regular meetings, dues, established rules and regulations, disciplinary procedures, or induction or initiation ceremonies.

Boyle v. United States, 556 U.S. 938, 948 (2009). An associationin-fact enterprise need only have “a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.” Id. at 946.

 

Because the very notion of an association-in-fact enterprise is “expansive,” id. at 944, some alleged enterprises may be difficult to pin to a location. Nevertheless, because RICO applies only to domestic enterprises, courts will be called upon to determine whether a particular RICO enterprise, whatever its structure, is extraterritorial or domestic, which implies a rough determination of the location of the enterprise. The enterprise’s location need not be targeted with pinpoint accuracy: The relevant question is simply whether the enterprise is extraterritorial or not .

 

The location of the associated racketeering activity is a different question, and not dispositive of the issue of the enterprise’s territoriality. “The ‘enterprise’ is not the ‘pattern of racketeering activity’; it is an entity separate and apart from the pattern of activity in which it engages.” United States v. Turkette, 452 U.S. 576, 583 (1981). “RICO is not a recidivist statute designed to punish someone for committing a pattern of multiple criminal acts. Rather, it prohibits the use of such a pattern to impact an enterprise ….“ Cedeño, 733 F.Supp.2d at 473. Accordingly, the question before this Court is not where the predicate acts alleged by MOL took place, but rather the territoriality of the alleged enterprise itself. See id. at 474; European Cmty., 2011 WL 843957, at *5. The propriety of focusing the territoriality inquiry on the enterprise rather than the racketeering is confirmed by the fact that RICO defines the term “enterprise” to include legal entities. 18 U.S.C. § 1961(4). In such cases, the territoriality of the RICO enterprise clearly would not depend on the location where predicate acts occurred but on the location of the legal entity, that is, of the enterprise itself. The Court sees no reason why the analysis should differ for association-in-fact enterprises.

 

3. The Nerve Center Test

The only case to squarely propose a principled way to determine the territoriality of a RICO enterprise is European Community. The European Community court recognized that “[b]ecause the ‘focus’ of RICO is the ‘enterprise,’ a RICO ‘enterprise’ must be a ‘domestic enterprise.’ “ 2011 WL 843957, at(citing Morrison, 130 S.Ct. at 2884). The court acknowledged the lack of precedent “suggesting how a court may determine the geographic location of a RICO enterprise.” Id. It then analogized the inquiry to “determin[ing] the geographic location of a corporation.” Id. The court turned for guidance to Hertz Corp. v. Friend, ––– U.S. ––––, 130 S.Ct. 1181 (2010). In that case, the Supreme Court set forth a “nerve center” test for ascertaining the state citizenship of a corporation for purposes of diversity jurisdiction. Hertz, 130 S.Ct. at 1192–94. The European Community court, applying Hertz principles, suggested that courts should focus on the RICO enterprise’s “brains” as opposed to its “brawn,” that is, on “the decisions effectuating the relationships and common interest of its members, and how those decisions are made,” as compared to the location where the consequences of those decisions transpire. 2011 WL 843957, at *6. The court appeared to recognize that the inquiry will sometimes yield artificially simplified results, “i.e., [a] single place of business for a corporation, though there may be many,” but stated that “the test is still instructive ….“ Id.

 

This Court agrees. The nerve center test provides a familiar, consistent, and administrable method for determining the territoriality of RICO enterprises in cases such as the one at bar, which blend domestic and foreign elements. It permits district courts deciding RICO cases like this one to analogize to the larger body of cases that use the nerve center test to identify a corporation’s state court citizenship for diversity purposes. Further, the nerve center test has the virtue of recognizing that a RICO enterprise is analytically distinct from the pattern of predicate acts associated with it—a distinction that the earlier cases have sometimes blurred. E.g., CGC Holding Co., 2011 WL 5320988, at (determining that RICO enterprise was domestic because the “racketeering activity of the enterprise … was directed at and largely occurred within the United States”). In short, the test aligns the focus of the court’s inquiry with the focus of RICO: “the enterprise as the recipient of, or cover for, a pattern of criminal activity.” Cedeño, 733 F.Supp.2d at 474. To the extent that previous post-Morrison RICO cases—none of which are binding precedent on this Court—have focused on the nationality of a RICO enterprise’s constituent members, the location of racketeering activity, the location of “effects,” or the location or quantity of ambiguously defined “conduct,” this Court parts ways with them.

 

B. Application of Nerve Center Test

The nerve center test ascertains the territoriality of an association-in-fact RICO enterprise by examining the alleged “decisions effectuating the relationships and common interest of [the enterprise’s] members, and how those decisions are made.” European Cmty., 2011 WL 843957, at *6. This requires the Court first to examine the structure of the enterprise alleged by MOL.

 

1. Structure of the Alleged RICO Enterprise

“To state a claim under § 1962(c), a plaintiff must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Odom v. Microsoft Corp., 486 F.3d 541, 547 (9th Cir.2007) (internal quotation marks omitted). Presently, this Court is concerned only with the second element, that of the enterprise. Moving Defendants have not challenged the sufficiency of MOL’s allegations of the “enterprise” element. Nevertheless, because MOL’s pleading could be clearer in connecting its allegations to its claims, the Court recounts the allegations that comprise the enterprise element. The Court does so solely to illuminate the structure of the alleged enterprise, with an eye toward applying the nerve center test.

 

MOL also asserts a claim under subsection (d) of § 1962. Subsection (d) simply makes it unlawful to conspire to violate the preceding three subsections. Since Moving Defendants’ § 1962(d) liability depends on MOL making out a viable claim under § 1962(c), and Moving Defendants have raised no specific challenge to the conspiracy element of MOL’s § 1962(d) claim, the Court focuses on § 1962(c) exclusively.

 

“[A]n association-in-fact enterprise is simply a continuing unit that functions with a common purpose.” Boyle, 556 U.S. at 948. To plead the “enterprise” element of a RICO claim, plaintiffs must adequately allege that: (1) defendants have associated for a common purpose for engaging in a course of conduct, (2) in an ongoing organization, either formal or informal, and (3) the various associates function as a continuing unit. See Odom, 486 F.3d at 552–53.

 

Odom was decided before Boyle, but the Court sees no distinction between the cases’ respective definitions of a RICO enterprise. Both cases simply applied the holding of Turkette to reject argument that RICO required a plaintiff to show that an enterprise has a separate or “ascertainable” structure, i.e., one going beyond what is necessary to carry out its racketeering activities. Compare Odom, 486 F.2d at 553 with Boyle, 556 U .S. at 948. The Court therefore continues to recognize Odom as binding authority.

 

The enterprise alleged by MOL satisfies these minimal structural requirements—which, as the Ninth Circuit has observed, are “not very demanding.” Id. at 548. MOL alleges the following: Seamaster is a California corporation, Summit is a U.S. corporation with its principal place of business in New Jersey, and AGL is a “corporation and/or limited liability company” organized under Georgia law, with its principal place of business in that state. SAC ¶¶ 4–5, 10. Both Summit and Seamaster are part of a group of companies whose corporate parent is the Toll Group (“Toll”), a business entity of form unknown. Id. ¶ 6 & n.1.0 During a period covering 2006–2007, Summit and Seamaster were spun off from a corporate forebearer, the Hecny Group (“Hecny”), with whom Summit and Seamaster now directly compete. Id. ¶ 7. Jerry Huang, aka Huang Chun Jen (“Huang”), was a “key executive and member of the Board of Directors” of Hecny, id., and now is Summit’s Managing Director for the Asia Pacific Region, id. ¶ 8.

 

0. As explained supra in the Introduction, Summit is Toll’s former name and Toll appears in this action as Toll Global Forwarding (Americas) Inc.

 

Hecny was the “longtime strategic partner” of a company called Global Link Logistics, Inc. (“Global Link”), whose founder and CEO was Chad Rosenberg (“Rosenberg”). Id. ¶ 12. Rosenberg left Global Link and bought Moving Defendant AGL; Rosenberg now serves as AGL’s CEO. Id. ¶¶ 11–12, 14; Ex. I.

 

MOL alleges that the relationship between AGL on the one hand and Summit and Seamaster on the other is a “strategic partnership” mirroring that of Hecny and Global Link. Id. ¶ 15. Furthermore, MOL avers that Summit/Seamaster and AGL comprise an association-infact. Id. “Through Seamaster, AGL ships goods with MOL on behalf of customers in the United States who are the ultimate recipient of the goods.” Id. The purpose of the relationship is “to facilitate the import transportation of cargo (largely furniture and other consumer goods) from Asia to the United States.” Id. MOL alleges that Summit, Seamaster, and AGL “actively conducted and participated in the affairs of the enterprise” by “arranging for and otherwise participating in thousands of shipments of cargo from Asia to the United States.” Id. ¶ 80. MOL alleges that the partnership and related shipping activities began at least in 2007 and continued until at least 2011. Id. ¶ 79.

 

Taken together, these allegations describe an association-in-fact enterprise, that is, “a continuing unit that functions with a common purpose” without being, itself, a legal entity. Boyle, 556 U.S. at 948; 18 U.S.C. § 1961(4). MOL alleges a common purpose, namely, the import transportation of cargo from Asia to the United States. MOL further alleges an ongoing organization. An ongoing organization is nothing more than “a vehicle for the commission of two or more predicate crimes” which need not have any particular formal organization. See Odom, 486 F.3d at 552. MOL alleges that Seamaster/Summit and AGL form a strategic partnership which engages in the allegedly wrongful shipping practices described in the SAC, practices which are furthered by the alleged mail and wire frauds. While MOL does not allege that the partners are bound by any formal agreement or structure, they are not required to do so. See id. Further, the presence of Huang and Rosenberg in both the previous Hecny/Global Link partnership and the current alleged partnership between Seamaster, Summit, and AGL supports a reasonable inference that these corporations serve, at least to a significant degree, to effectuate the purposes of an informal alliance of businesspeople. Lastly, MOL’s allegations describe an enterprise that satisfies the continuity requirement. This requirement “focuses on whether the associates’ behavior was ‘ongoing’ rather than isolated activity.” Odom, 486 F.3d at 553 (quoting United States v. Patrick, 248 F.3d 11, 19 (1st Cir.2001)). MOL’s allegation that the partnership, as well as the shipping activities at the center of this case, were ongoing at least from 2007 to 2011 easily satisfies this standard.

 

2. Territoriality of the Alleged RICO Enterprise

Having described the alleged RICO enterprise, the Court now applies the nerve center test to determine whether RICO applies to it. This test examines the “decisions effectuating the relationships and common interest of [the enterprise’s] members, and how those decisions are made.” European Cmty., 2011 WL 843957, at *6. Focusing on the brains rather than the brawns of the enterprise, id., the Court concludes that the enterprise alleged here is a domestic one.

 

The Court first observes that all three Moving Defendants are U.S. corporations. Their domestic legal status is not by itself dispositive. See supra p. 12 (rejecting notion that “nationality of a RICO enterprise’s constituent members” determines territoriality). Their domestic status tends to show, however, that the decision making necessary to effectuate the alleged association-in-fact enterprise’s common purpose occurred substantially within the territory of the United States.

 

Additionally, MOL alleges that Seamaster, Summit, and AGL “arranged” shipments in the United States. The location where the shipping actually took place is merely evidence of where the enterprise exercised its “brawn.” It is the activity of arranging the allegedly illicit shipments that indicates where the enterprise exercised its “brains.” MOL alleges that these shipments were arranged in substantial part within the United States, which, in combination with the U.S. status of the alleged enterprise’s member corporations, supports a reasonable inference in MOL’s favor, i.e., that the enterprise’s nerve center was domestic.

 

Even if the Court were to read the allegations of the complaint in a light less favorable to MOL—and in the procedural posture of this case, the Court must do the opposite—MOL has alleged, at minimum, an enterprise with one foot in China and one in the United States. This is more than the merely incidental domestic activity which, Morrison warned, would do nothing to shake the watchdog from its post. See Morrison, 130 S.Ct. at 2884. On the contrary, MOL alleges a cross-national enterprise that uses U.S. corporations as cover for a pattern of racketeering activities. These allegations are enough to assert the existence of a domestic enterprise to whose activities RICO applies. See Cedeño, 733 F.Supp.2d at 474.

 

Moving Defendants’ arguments to the contrary are unavailing. Apparently following the “conduct” approach that some earlier cases took, but which this Court has declined to follow, see supra Section IV.A.3, AGL characterizes this case as being “primarily” or “at its core” about conduct in inland China. AGL MTD at 2, AGL Reply at 4. AGL argues, in essence, that because the bulk of the allegations in the SAC relate to conduct in China, the alleged RICO enterprise must be extraterritorial. As MOL points out, AGL essentially ignores MOL’s allegations of U.S. conduct. But even if AGL had accurately characterized MOL’s allegations, the location of “conduct” is simply not the test. The location of the enterprise is. AGL’s position would supplant the relatively principled nerve center test with one that invites courts to adopt a “know-it-whenthey-see-it” approach to territoriality, with predictably unpredictable results. This Court declines to adopt that approach.

 

For their part, Seamaster and Summit urge the Court to dismiss MOL’s RICO claims because MOL alleges “an international, not domestic, RICO enterprise.” SM/SL Reply at 4. This argument misapprehends the holding of Morrison. That case teaches that “some domestic activity” will not save an otherwise extraterritorial RICO claim—not that any international activity will doom an otherwise domestic claim. See Morrison, 130 S.Ct. at 2884 (emphasis in original). Essentially, Seamaster and Summit argue that even though MOL alleges an enterprise with domestic ties substantial enough to make it at least “international,” such an enterprise is not truly domestic because the extraterritorial elements somehow matter more. Adopting this position would require the Court to engage in the sort of conduct-weighing analysis that it has already declined to undertake. When a RICO plaintiff alleges a combination of domestic and foreign elements (e.g., conduct, effects, actors), a court needs some way to determine whether the domestic elements outweigh the foreign for purposes of the territoriality inquiry. This implies a determination about which elements are relatively important. Such a determination could be made on an ad hoc basis after examining the (often prolix and complex) allegations of the RICO complaint. But this Court believes that the analysis calls instead for a consistent method that cuts through extraneous matter to the heart of the issue. The nerve center test meets this need. In the RICO context, as well as in the corporate citizenship context from which it is derived, the nerve center test takes a sprawling network of decision makers and actors and reduces it, for legal purposes, to a single, simplified location. This simplification is a feature, not a bug. Seamaster and Summit’s position would unhelpfully muddy the analysis: Whereas the relevant categories under Morrison are “extraterritorial” and “not,” Seamaster and Summit would add a third category—“both.” In such situations, courts would be stuck making ad hoc determinations about territoriality without a reliable guide.

 

The Court also rejects Seamaster and Summit’s argument that MOL’s RICO claims are impermissibly extraterritorial because MOL, as a Japanese company, feels the effects of the alleged scheme in Asia. SM/SL Reply at 4. Morrison repudiated the “effects” tests adopted by various circuits and replaced it with one that focuses, in the securities context, on the location of the alleged transaction, and, in the RICO context, on the location of RICO’s object of solicitude, the enterprise as a cover for or victim of racketeering activity.   Cedeño, 733 F.Supp.2d at 474. Morrison’ s holding bars courts from refusing to apply RICO simply because the scheme’s effects are felt abroad; it does not suggest that courts may deny relief for that reason. It is true that “MOL unambiguously seeks application of RICO to remedy harmful effects felt outside the United States.” SM/SL Reply at 4. Such application is entirely permissible under Morrison, because the enterprise causing those foreign effects is a domestic one.

 

V. CONCLUSION

Moving Defendants have not challenged MOL’s RICO claims on any grounds other than the presumption against extraterritoriality. Having concluded for the foregoing reasons that this challenge does not succeed, the Court accordingly DENIES the partial motions to dismiss brought, respectively, by Defendants Seamaster Logistics, Inc., and Toll Global Forwarding (Americas) Inc., formerly named Summit Logistics International, Inc., and by American Global Logistics LLC. Plaintiff Mitsui O.S.K. Lines, Ltd.’s RICO claims remain undisturbed, as do the other, unchallenged claims of the Second Amended Complaint.

 

IT IS SO ORDERED.