The Chinese e-commerce giant Alibaba Group Holding Ltd. (“Alibaba”) is making headlines once again with its recent victory in New York federal court. Notorious for allegedly enabling the sale of counterfeit products on its e-commerce venues, Alibaba owns and operates the popular shopping sites Alibaba.com, Taobao.com, and AliExpress.com. On Friday, August 4, 2016, the U.S. District Court for the Southern District of New York granted the Alibaba Defendants’ motion to dismiss two claims asserted against them under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1961 et seq. (“RICO”), by plaintiffs Gucci America, Inc., Balenciaga, S.A. and Balenciaga America, Inc., Bottega Veneta International S.A. and Bottega Veneta Inc., Yves Saint Laurent America, Inc. and Luxury Goods International, and Kering, S.A.
The Alibaba Defendants consist of seven corporate entities that had roles on online platforms through which Chinese merchants could connect with consumers worldwide. In the lawsuit, Plaintiffs allege that fourteen separate companies sold counterfeit products bearing Plaintiffs’ marks in the Alibaba marketplaces. Plaintiffs further alleged that the Alibaba Defendants provided services to the Merchant Defendants even though the Alibaba Defendants knew or should have known that that the Merchant defendants were selling counterfeit goods.
Plaintiffs’ first RICO claim was a substantive RICO claim brought pursuant to Section 1962(c), which makes it “unlawful for any person employed by or associated with any enterprise engaged in…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…”. In their motion to dismiss, the Alibaba Defendants argued that the Plaintiffs failed to adequately allege the existence of a RICO enterprise and that the Alibaba Defendants “participated” in that enterprise within the meaning of RICO. Specifically, the Alibaba Defendants argued that the Plaintiffs’ allegations amount to a classic “hub-and-spokes” association, in which one central actor known as the “hub” forms bilateral and independent relationships with several independent actors that are the “spokes.” The Alibaba Defendants argued that a “hub-and-spokes” association cannot constitute a RICO enterprise, because while the Alibaba Defendants may associate with the Merchant Defendants, they did not work together to achieve a common purpose.
The court agreed with the Alibaba Defendants and determined that the Plaintiffs failed to plausibly allege that the Merchant Defendants engaged in anything but independent conduct for their own economic interests. In so ruling, the court noted that there was no indication that the Merchant Defendants, located in different parts of the country, came to an agreement to act together or that they even knew each other. The Plaintiffs argued that the Merchant Defendants were aware of each other’s existence by virtue of operating on the Alibaba online platform. The court rejected this argument, because the Alibaba marketplaces consist of millions of merchants, some Merchant Defendants operated on Alibaba.com and others operated on Taobao.com or AliExpress.com, and a generalized awareness of a competitor does not establish the existence of an interpersonal relationship. The court noted that the receipt of common benefits from the Alibaba marketplace does not infer that the Merchant Defendants acted in a coordinated matter by receiving common benefits.
Plaintiffs’ second RICO claim, which was brought pursuant to Section 1962(d), was a conspiracy charge premised on the substantive RICO violation. The court determined that Plaintiffs’ failure to state a claim for their substantive RICO violation warrants dismissal of the RICO conspiracy claim when Plaintiffs failed to plausibly allege that the Merchant Defendants were aware of each other’s existence.
Because Plaintiffs had prior opportunities to file an amended pleading, the court ruled that it would not consider the sufficiency of unpled alternative enterprises. However, Plaintiffs’ claims under the Lanham Act, 15 U.S.C. §1051 et seq. and under New York state law are still pending.