Appellants Could Not Allege Injury From Illegal Drug Dealing As Court Finds Congress did not intend the term “business or property” in RICO to include Illegal Activity

Schulman v. Kaplan, __ 4^th __, 2023 WL 225625 (9^th Cir., Jan. 18, 2023)

Although the court stated it had appellate jurisdiction over this case pursuant to 28 U.S.C. § 1291, i.e., Article III standing, appellants lacked statutory standing under RICO..

Appellants sued Appellees in federal district court, asserting dozens of claims, two of which arise under RICO. The district court granted Appellees’ motion to dismiss with prejudice, holding that Appellants lacked standing to bring their RICO claims.

After finding that hat Appellants had Article III standing, the court considered whether

Appellants have statutory standing to bring their RICO claims. See Canyon Cnty. v. Syngenta Seeds, Inc., 519 F.3d 969, 974 n.7 (9th Cir. 2008).  The court has recognized that to establish statutory standing pursuant to RICO, a plaintiff “must show: (1) that his alleged harm qualifies as injury to his business or property; and (2) that his harm was by reason of the RICO violation, which requires the plaintiff to establish proximate causation.” 

Here, Appellants allege that Appellees devised a racketeering scheme to defraud them, committed acts of mail and wire fraud, and injured them in “their business and property, because their moneys, profits, and property” from their cannabis enterprise “have been wrongly diverted to and converted by Defendants.”  It is therefore clear from the face of the complaint that Appellants’ claimed injury arises pursuant to RICO Section 1964(c). Accordingly, for Appellants to establish RICO standing, the statute’s use of the term “business or property” must encompass businesses and property engaged in the cultivation, sale, and marketing of cannabis—an enterprise that is legal under California law, but illegal under federal law.

The text of RICO does not define either “business” or “property.” For this reason, courts usually look to state law to determine whether a particular interest amounts to property. Diaz v. Gates, 420 F.3d 897, 900 (9th Cir. 2005) (en banc) (“Without a harm to a specific business or property interest—a categorical inquiry typically determined by reference to state law—there is no injury to business or property within the meaning of RICO.”) (emphasis added). California law, unlike federal law, recognizes licensed cannabis businesses as well as a property interest in cannabis. 

The court observed that numerous courts have held that state law does not control where RICO’s statutory purpose or congressional intent in enacting the statute conflicts with the relevant state law thus presenting the following question: do either the statutory purpose of RICO or the congressional intent animating its passage conflict with the California laws recognizing a business and property interest in cannabis? We conclude that they do.

Because RICO’s definition racketeering activity necessarily encompasses dealing in cannabis, it would be inconsistent to allow a business that is actively engaged in cultivation of and commerce in cannabis to recover damages under RICO for injury to that business. The court found that since RICO and the CSA were enacted almost contemporaneously, it is clear that Congress did not intend the term “business or property” in RICO to include cannabis businesses or property. Congress enacted RICO as part of a comprehensive legislative package aimed at combating the influence of organized crime on interstate commerce. S. Rep. No. 91-617, at 76 (1969). Considering the laws in tandem, it is evident that Congress would have considered a cannabis business to be a form of organized crime and that Congress would not have intended RICO to provide damages for injury to interests in which it explicitly disclaimed the existence of any property rights.

Although some states, such as California, have changed their legal regimes pertaining to the use, cultivation, distribution, and sale of cannabis since the enactment of RICO and the CSA, these activities are still clearly illegal under federal law. Congress could not have intended to allow a drug dealer to recover RICO damages from someone who, by mail and wire fraud, stole a shipment of the drug.  Otherwise, RICO would serve to protect the same variety of conduct it was intended to combat.

For these reasons, the court held that Appellants lacked a statutory right to bring a claim under RICO and the district court’s order dismissing Appellants’ RICO claims is upheld.