Seventh Circuit is Wrong: Closed-Ended” Continuity in a RICO Action Does Not Require Pleading An Implicit Threat of Future Harm; Court Ruling is in Direct Contravention of Supreme Court Precedent

Menzies v. Seyfarth Shaw LLP, __ F.3d __, 2019 WL 5884481 (7th Cir. 2019)


The Seventh Circuit affirmed the dismissal of a civil RICO suit finding inadequate allegation of “continuity” sufficient to find a pattern of racketeering. At issue was whether Menzies adequately pleaded the continuity dimension of the continuity-plus-relationship test. The court stated that doing so requires “(1) demonstrating a closed-ended series of conduct that existed for such an extended period of time that a threat of future harm is implicit, or (2) an open-ended series of conduct that, while short-lived, shows clear signs of threatening to continue into the future.” *5, citing case.

The court discussed closed-ended continuity further and stated that to ascertain the presence of a so-called “closed-ended” series of misconduct—asks whether there were enough predicate acts over a finite time to support a conclusion that the criminal behavior would continue. The focus, therefore, is on “the number and variety of predicate acts and the length of time over which they were committed, the number of victims, the presence of separate schemes and the occurrence of distinct injuries.”

The Court’s view at best breeds confusion and is arguably incorrect and in direct contravention of the Supreme Court’s holding in H.J. Inc. v. Northwestern Bell, 492 U.S. 229, 242 (1989) wherein the court stated as follows with regard to closed-ended continuity:

A party alleging a RICO violation may demonstrate continuity over a closed period, by proving a series of related predicates extending over a substantial period of time.
In discussing “closed-ended continuity” the Court did not express that these “serious of related predicates” require acts which themselves carry the threat of continuing into the future. In fact, various circuits have found closed-ended continuity satisfied without finding that the predicates carry the implicit threat of harm into the future when the scheme has been completed and there was a series of related predicates which had occurred over a substantial period of time.

In fact, if Menzies was the rule, closed-ended continuity would be a nullity as any long-running scheme by a defendant that has been completed would fail the closed-ended test because the completed fraudulent acts did not carry with them “a threat of future harm.” This is particularly true for completed mail and wire fraud schemes which do not carry an implicit threat of continued activity. The goal of Menzies is to drive “mail and wire fraud” schemes out of civil RICO, which is also in direct contravention of Supreme Court law which liberally construes RICO. Sedima.

Unlike mail and wire fraud schemes, most violent crimes (extortion; murder etc.) carry with them the implicit threat of continuing into the future to satisfy both the closed-ended and open-ended test. But again, the mail and wire fraud scheme would not be sufficiently alleged to meet either the closed ended or open-ended test when the goal of the scheme has been completed, or terminable by a certain date, even if there was a series of related predicates over a substantial period of time. Thus, under Menzies such fraud schemes, unless continuing to the present day, would not carry with it an implicit threat of future harm and fail to satisfy both closed-ended and open-ended continuity, and not constitute a pattern.

Accordingly, under Menzies, long running fraud schemes which have been completed would fail the closed-ended, and open-ended test, and fail to be actionable as a pattern. This is not the intent of the drafters of the statute or the Supreme Court.

David J. Stander is an Attorney who focuses on civil RICO litigation.

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