Published in March 2018 ABA Journal of Business Torts and Civil RICO. See Publication for complete article, including footnotes
The Supreme Court has emphasized the broad application and extraordinary purposes the Racketeer Influenced and Corrupt Organizations Act (“RICO”) has meant to serve. But, despite this broad mandate, many district courts view civil RICO as an “unusually potent weapon,” and thus the courts are particularly reluctant to allow civil RICO actions to proceed past the Rule 12(b)(6) pleading stage. In some ways this is understandable given that the predicate crimes for civil RICO are the same predicates for Department of Justice (“DOJ”) criminal RICO prosecutions, thereby raising the bar for civil RICO cases, despite the fact the standard of proof is considerably less (preponderance of the evidence).
Thus, district courts, as discussed herein, are pre-disposed to dismiss civil RICO cases under Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009). Despite this adversarial attitude, a plaintiff can win, but only upon a careful consideration and pleading of all of the elements of the offense, and by pleading sufficient plausibility.
However, sometimes even pleading all of the elements and pleading plausibility does not guarantee a court will deny the defendant’s motion to dismiss. This article will describe some of the most difficult issues and particular roadblocks in litigating a civil RICO case, which will hopefully provide a guide through the maze of civil RICO litigation.
A. Jurisdiction and Venue (RICO Injury)
A common ground for dismissing civil RICO cases is the lack of subject matter jurisdiction, i.e., the potential plaintiff must adequately plead he has been “injured in his property or business by reason of a violation of section 1962,” as described in 18 U.S.C. § 1964(c). The Supreme Court has been clear that the plaintiff’s injury must be “proximately and directly caused” by the RICO violation, which has been interpreted to be injury from the predicate acts themselves.
Next, courts have been clear that the injury must involve a “concrete monetary loss,” and thus expectancy losses or non-economic losses are not actionable. Also, when the RICO predicate crimes did not occur within the United States, the plaintiff must adequately allege he incurred ‘injury” within the jurisdiction of the United States to be able to bring an action. Lastly, courts are strict in not conferring jurisdiction to a plaintiff who relies “on conduct that would have been actionable as fraud in the purchase or sale of securities.”
B. Statute of Limitations
Another common impediment to civil RICO cases is the statute of limitations. The Supreme Court has found that civil RICO actions are subject to a four-year statute of limitations, which accrues to the plaintiff when he discovered or “should have discovered” the injury. If at any date after the injury has been discovered, and if a “new and independent injury” is incurred from the same violation, the right to sue accrues at the time the plaintiff discovered or should have discovered the latter injury. Importantly, “fraudulent concealment” by the defendant “equitably tolls” the running of the statute of limitations, only if the plaintiff is “reasonably diligent” in trying to discover their civil RICO claims.
C. Res Judicata and Collateral Estoppel
Prior state court actions resolved in favor of defendants may preclude a subsequent federal civil RICO action under “claim preclusion” (res judicata), or “issue preclusion” (collateral estoppel). This is a common defense.
D. Elements of a Section 1962(c) Violation
Although civil and criminal RICO provide for three substantive provisions, i.e., 18 U.S.C. § 1962(a), (b), and (c), there are separate injury requirements for alleging subsection (a) and (b) violations. As a result, most civil RICO cases are brought under section 1962(c). There are many complex issues which may trip up the civil practitioner, which are highlighted below.
1. Person (“Distinctness” From Enterprise)
A common ground of dismissal (when naming legal entities as Defendants) is when the plaintiff fails to allege distinctness between the RICO person and the enterprise which is that same legal entity corporation. Courts have ruled that a RICO enterprise may not consist “merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant.”
In Cruz v. FX DirectDealer, LLC., the court addressed “distinctness” when the enterprise consists of multiple corporate entities which are also defendants. There, the court discussed that corporations that are legally separate but “operate within a unified corporate structure” and “guided by a single corporate consciousness” cannot be both the “enterprise” and the “person” under § 1962(c).
This issue is complicated further when corporate defendants which comprise the enterprise are “functionally separate,” as when they perform different roles within the enterprise or use their separate legal incorporation to facilitate racketeering activity.
2. The Association-In-Fact “Enterprise”
When “enterprises” are legal entities, there are few questions as to its existence. But, when alleged as “association in fact” enterprises, issues exist. In United States v. Boyle, the Court ruled that an enterprise must have at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose. The Court cited to its previous ruling on association in fact enterprise, i.e., United States v. Turkette, which stated that an association-in-fact enterprise is “a group of persons associated together for a common purpose of engaging in a course of conduct.”
Despite this liberal view of association in fact enterprise, defendants commonly argue that the alleged enterprise is not “separate and apart” from the pattern of racketeering. These arguments are usually addressed by Boyle itself wherein the Court, citing to Turkette, stated that although the existence of an enterprise is a separate element that must be proved, the evidence used to prove the pattern of racketeering activity and the evidence establishing an enterprise “may in particular cases coalesce.” Thus, the proper allegation of the Boyle factors, i.e., common purpose, relationships, and longevity, factors which are not necessarily needed to show predicate acts of wire fraud or money laundering, should enable a court to find that the enterprise is “separate and apart” from the pattern of racketeering.
3. Failure to Meet the Particularity Provision of Federal Rule 9(b)
A common plaintiff shortcoming (because the typical civil RICO alleges fraud) is failure to plead the circumstances of the fraud with particularity under Federal Civil Rule 9(b). Circuit courts have followed the literal language of Rule 9(b) and stated that a plaintiff may plead generally the defendants’ state of mind or intent to deceive or defraud, but must make “particularized allegations [regarding] the factual circumstances of the fraud itself” when pleading mail or wire fraud as a predicate act.
Circuit courts generally require plaintiffs to identify specific examples of the fraud while pleading the overall nature of the fraud generally. Circuits have found sufficient allegations of fraud when specific instances of fraud are adequately alleged.
One significant hurdle, as noted above, when pleading the predicate mail/wire fraud acts, a plaintiff must allege acts which themselves caused injury to the plaintiff. The Court in Schmuck v. United States, a criminal case interpreting section 1341, held that mailings/wirings need not contain misrepresentations, but only need be incident to an essential part of the scheme to defraud. But this does not necessarily mean, in the civil RICO context, that predicate acts properly alleging mail or wire fraud are also the proximate and “but-for” cause of the injury. This analysis has to be made on a case-by-case basis.
4. Pattern of Racketeering/Continuity Failure to Plead a Pattern
Courts also dismiss civil RICO cases based on fraud predicates finding that a “pattern of racketeering activity” has not been adequately alleged. In H.J. Inc. v. Northwestern Bell Telephone Co., the court held that the complaint must allege “relatedness” and “continuity” necessary to properly plead a ‘pattern of racketeering.’” Relatedness is often not an issue, but “continuity” remains the bully which the civil RICO plaintiff must tame.
In H.J. Inc., the Court stated that “continuity” is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition. Emphasizing that Congress was concerned in RICO with long-term criminal conduct, the Court did discuss other examples when the plaintiff himself may not have been the victim of long-term conduct, but the long-term violative conduct of the defendants is emphasized. For example, H.J. Inc. describes that “threat of continuity” can be shown when “predicates are a regular way of conducting defendant’s ongoing legitimate business (in the sense that it is not a business that exists for criminal purposes), or of conducting or participating in an ongoing and legitimate RICO “enterprise.”
Thus, civil RICO plaintiffs, when faced with alleging short-term defendant conduct, can try to assert the Defendants’ long-term pattern of victimizing others as a means to create an inference that long-term conduct would have continued, absent the filing of the lawsuit, against the plaintiff. Justice Alito, when on the Third Circuit, specifically cited to H.J. Inc. for this principle of “inference.” But, generally, the practitioner must be aware of his particular circuit law, which may range from a liberal treatment of “continuity,” to views which are so strict that they fall outside the bounds of any reasonable interpretation of H.J. Inc., nor RICO’s legislative history.
5. Civil RICO Conspiracy Provision
Civil RICO plaintiff face difficulties in pleading RICO conspiracy violations, i.e., 18 U.S.C. § 1962(d) violations as many courts refuse to embrace the Supreme Court’s view of RICO conspiracy which was expressed in a criminal RICO case. In Salinas, the Court held that that to secure a conviction for RICO conspiracy, the government is not required to allege or prove the actual completion of a single racketeering act by the defendant or any other member of the conspiracy because completion of an overt act is not an element of the offense. Moreover, the Supreme Court in Salinas specifically held that there is no requirement that the defendant “himself committed or agreed to commit the two predicate acts requisite for a substantive offense under section 1962(c).”
Despite the clear pronouncements in Salinas, whose principles, like those in other Supreme Court cases interpreting criminal RICO convictions, see Boyle v. United States, supra, must also apply in civil RICO cases, courts routinely dismiss RICO conspiracy claims if they find that a substantive violation of RICO was not adequately pleaded.
Although in civil RICO, unlike criminal RICO, a plaintiff must have sustained injury by “an overt act” that is “an act of racketeering or otherwise wrongful under RICO.” This requirement of an overt act causing injury however, should not completely obviate Salinas.
Thus, civil plaintiffs are typically faced with a court ruling that “the failure to state a claim for a substantive RICO violation,” is fatal to plaintiffs’ RICO conspiracy claim under § 1962(d).” The best course for the civil RICO plaintiff is to (1) always allege a substantive RICO claim; and (2) properly allege the conspirator defendants agreed that at least one substantive civil RICO defendant violated section 1962(c).
There is a place for civil RICO litigation and cases can be successfully litigated. This roadmap of some of the most contentious civil RICO issues should assist practitioners to be the “private attorney’s generals” as envisioned by Congress and the Supreme Court.