New Jersey District Court Rejects RICO Claim in BMW “Clean Diesel” Case Under “Indirect Purchaser” Rule

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On February 2, 2021, Judge Kevin McNulty of the U.S. District Court for the District of New Jersey declined to reconsider his dismissal of a RICO claim in a putative class action against BMW and automotive part supplier Robert Bosch. The court held that RICO’s indirect purchaser rule barred the claim because the plaintiffs purchased their vehicles from dealers and other third parties, not the defendants.

  • According to the plaintiffs, BMW colluded with co-defendant Robert Bosch to market certain BMW vehicles as “clean diesel,” even though the defendants knew that the vehicles discharged emissions at impermissible levels. Plaintiffs alleged that the defendants accomplished this unlawful scheme through a “defeat device”—a software technology that alters the vehicle’s emissions control system when tested by regulators in a test environment. Plaintiffs alleged various state consumer protection claims and a violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act.
  • The court dismissed the first complaint without prejudice for lack of Article III standing after concluding that plaintiffs’ allegations—which relied on testing of a single vehicle that showed discrepancies between laboratory and on-road emissions results—failed to support the inference that all class members’ vehicles contained a defeat device. Although plaintiffs were able to cure this Article III defect after filing an amended complaint, the court still found that they could not show statutory standing under RICO.
  • Citing the Supreme Court’s seminal Illinois Brick decision, the court observed that an “absolute bar to RICO standing is the so-called ‘indirect purchaser rule,’” which is drawn from antitrust law and prohibits a plaintiff who is two or more steps removed from the alleged RICO violator from bringing a RICO claim.
  • The plaintiffs asked the court to reconsider its RICO standing decision. They acknowledged that the indirect purchaser rule applied to RICO claims—and that they did not purchase their vehicles directly from the defendants—but argued that the court should recognize certain exceptions. In particular, the plaintiffs argued that the indirect purchaser rule did not apply to their case because (1) there were no dueling claims to a common fund, and (2) they were direct victims of the fraud.
  • The court disagreed, citing the Supreme Court's recent decision in Apple Inc. v. Pepper, 139 S. Ct. 1514 (2019), which established that the indirect purchaser rule is a bright-line rule, regardless of whether the rationales underlying Illinois Brick apply in a given case.
  • The “indirect purchaser rule” may prove to be a powerful—and underutilized—defense to RICO claims in class actions in which plaintiffs typically purchase products through third parties.
    • Indeed, as Judge McNulty noted in his earlier motion-to-dismiss order, the rule as applied to automotive class actions is potentially sweeping in scope: “Practically speaking, of course, applying the indirect purchaser rule to car buyers forecloses all consumer RICO claims against car manufacturers, because state laws generally prohibit manufacturers’ direct sales of automobiles. A RICO remedy would thus seem to be confined to car dealers, and there are no dealers (at least qua dealers) among the plaintiff class. So far as our research has disclosed, there is no automobile exception to the indirect purchaser rule.”
  • As the First Circuit has commented, “because the mere assertion of a RICO claim . . . has an almost inevitable stigmatizing effect on those named as defendants,” courts “should strive to flush out frivolous RICO allegations at an early stage of the litigation.” While it remains to be seen whether the “indirect purchaser” defense to RICO claims will gain traction with other courts, Judge McNulty’s opinions on this subject may provide automotive class action defendants, pharmaceutical companies, and other indirect sellers of consumer products with a novel argument to “flush out” these dangerous claims.
  • The case is Hu v. BMW of North America, LLC, No. 18-4363, and you can read the opinion here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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