Fifth Circuit Affirms Previous Rulings that “Whistle Blowers” Do Not Have Standing to Bring Civil RICO Lawsuits

Arroyo v. Oprona, Inc., 2018 WL 2026996 (5th Cir. 2018)

The court affirmed a district court’s grant of a Rule 12(b)(6) motion to dismiss a civil RICO claim de novo, finding that the plaintiff did not establish standing to bring a civil RICO claim” under the RICO statute.

The court found that Arroyo has no standing under the RICO statute to assert her civil RICO claims because the injury Arroyo allegedly suffered stems from her loss of employment after she refused to participate in the scheme headed by Yoxall to defraud the IRS and reported Yoxall’s conduct to Rosen Swiss. “

The court cited to earlier precedent that “whistle blowers do not have standing to sue under RICO for the injury caused by the loss of their job.” “[B]eing discharged for either reporting a RICO violation or refusing to participate in a RICO violation does not flow from the predicate acts” and fails to establish standing to sue under the RICO statute. In other words, Arroyo’s injury resulted from Oprona’s decision to terminate her employment and not from the alleged predicate acts. Thus, Arroyo, as an employee allegedly discharged for reporting and refusing to participate in an activity that violated RICO, lacks standing to sue under the RICO statute.

Ed Note: This holding is consistent with thrust of civil RICO law that injury proximately and directly caused by predicate acts is required for standing. An employer’s act of termination of employment itself is not itself predicate activity.


Second Circuit Affirms Dismissal of Civil RICO Complaint Finding Insufficient Pleading of a “Material Misrepresentation”

Williams v. Affinion Group, LLC, ___ F.3d ___, 2018 WL 2090267 (2d Cir. 2018)

The Complaint alleged that consumers were “duped into believing” that membership programs were being offered by an e-merchant, rather than a company known as Trilegiant, and each time an e-merchant shared a customer’s billing information with Trilegiant, both the e-merchant and Trilegiant “committed an act of wire fraud.” The complaint alleges thousands of acts of mail and wire fraud in furtherance of the RICO enterprise and RICO conspiracy, including Trilegiant’s billing (by transmitting fraudulent charges on credit card bills), use of telephones (in refund mitigation to preserve fraudulent gains), and use of the internet (to initiate the scheme through post-transaction marketing and datapass).

Despite these claims, the Court did not find the allegation of a sufficient scheme to defraud, wherein a plaintiff must provide proof of a material misrepresentation. Neder v. United States, 527 U.S. 1, 25 (1999). The plaintiffs argued that the district court erred by requiring them to allege specific misrepresentations in the use of the mail or wires to satisfy Rule 9(b). While recognizing that mail or wire communications themselves need not contain a false statement. Schmuck v. United States, 489 U.S. 705, 715, 109 S.Ct. 1443, 103 L.Ed.2d 734 (1989), a plaintiff still needs to allege a material misrepresentation as part of the defendants’ scheme to fraud to state a violation of section 1341 or 1343.

The Court agreed with the district court that the complaint here lacked the particularized allegation of an underlying “scheme to defraud” animated by a material misrepresentation, and neither the complaint’s specific discussion of Trilegiant’s allegedly deceptive tactics, nor its conclusory references to Trilegiant’s fraudulent scheme, set forth a material misrepresentation with the requisite particularity. The complaint therefore failed to plead a scheme to defraud. Without an underlying scheme to defraud, the plaintiffs have not alleged a pattern of racketeering.

Ed Note: It is unclear whether the “material misrepresentation” is required to be a mailing or interstate wiring or whether it can be argued that so long as there is particularity of mailings/wirings in furtherance of the scheme, an oral misrepresentation is sufficient. It appears safe to find the material misrepresentation in a predicate act.

Civil RICO Conspiracy

The court also found the conspiracy claim failed as plaintiff failed to allege “the existence of an agreement to violate RICO’s substantive provisions.” Because the alleged conspiracy involved an agreement to commit the same substantive RICO violations the court deemed insufficiently pled, and the plaintiffs have not alleged any further acts that, if carried out, would have satisfied RICO’s requirement of a pattern of racketeering. Citing to Salinas v. United States, 522 U.S. 52, 118 S.Ct. 469, 139 L.Ed.2d 352 (1997).

Ed Note: The court looks at one prong of Salinas, but ignores the preceding sentence that all that is necessary if that the Defendant adopt the scheme. The Court’s view appears to be the prominent view in analyzing civil RICO conspiracy allegations.

Court Denies Motion to Dismiss Civil RICO Complaint Finding Sufficient Distinctness

Murphy v. Gospel of Asia Inc., 2018 WL 2422755 (W.D. Ark., May 29, 2018)

The Court dismissed the motion on the pleadings under Rule 12(c)(2) finding that a legal entity defendants GFA and an affiliate was distinct from an enterprise consisting of GFA, and other legal entities, such as Believers Church, Gospel for Asia-India, Last Hour Ministries, and Love India Ministries, and others, all of which are alleged to be affiliates or associates of the named Defendants.

The court first addressed general rules of distinctness: First, “the person named as the defendant cannot also be the entity identified as the enterprise.” Atlas Pile Driving Co. v. DiCon Fin. Co., 886 F.2d 986, 995 (8th Cir. 1989). Second, “[plaintiffs] cannot circumvent the distinctness requirement by ‘alleging a RICO enterprise that consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant.’ ” (known as the Riverwoods test).

But, here, these rules did not apply as the Court concluded first, that the allegations in the Complaint make clear that GFA was simply one member of a RICO enterprise consisting of all of the named Defendants. This is more than sufficient to allege a plausible association-in-fact enterprise. *2, citing Atlas Pile Driving, supra., 886 F.2d at 995. Second, the Complaint did not allege a RICO enterprise that consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant.*3

Moreover, because there remained unresolved factual disputes about whether the named Defendants are distinct from the “RICO enterprise,” judgment on the pleadings was improper.

Editor Notes: There are various givens regarding distinctness (ALWAYS DISTINCT):

(1) Individual defendants are each always distinct from an association in fact solely consisting of themselves as members. See Boyle, Brittingham; Gospel for Asia

(2) Individuals are always distinct from legal entity enterprises. Kushner.

(3) Individual legal entity defendants are always distinct from an association in fact of individuals and unrelated entities or entities not commonly controlled by Defendants. Atlas Pile Driving

Eleventh Circuit Analyses RJR Nabisco to Hold That the Presumption Against Extraterritoriality was Rebutted for Certain Applications of the Federal RICO Statute

Comparelli v. Republica Bolivariana De Venzuela, ___ F.3d ___, 2018 WL 2749717 (11th Cir. 2018)

The court reversed and remanded a lower court decision which dismissed a complaint for lack of subject-matter jurisdiction. Foreigners had brought action against República Bolivariana de Venezuela and nationalized Venezuelan company under expropriation exception of Foreign Sovereign Immunities Act (FSIA), alleging unlawful taking of their property in violation of international law.

In ruling for the Plaintiffs/Foreigners, the court analyzed the extraterritorial application of the civil RICO statute, analyzing “whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially.” Id., citing to RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S.Ct. 2090, 2101, 195 L.Ed.2d 476 (2016). In analyzing the FSIA “expropriation exception,” the court discussed that this case mirrors the situation described in RJR Nabisco, which held that the presumption against extraterritoriality was rebutted for certain applications of the federal RICO statute. There, the Supreme Court noted “that RICO defines racketeering activity to include a number of predicates that plainly apply to at least some foreign conduct.” RJR Nabisco, 136 S.Ct. at 2101. For example, the prohibition against hostage taking includes conduct that occurred outside the United States, provided that “the offender or the person seized or detained is a national of the United States,” “the offender is found in the United States,” or “the governmental organization sought to be compelled is the Government of the United States.” See 18 U.S.C. § 1203(b)(1); RJR Nabisco, 136 S.Ct. at 2101–02.

The court continued to state that in other words, like the FSIA expropriation exception, the RICO statute as applied to exterritorial hostage takings ensured a specific nexus to the United States. That nexus requirement was enough to rebut the presumption against extraterritoriality in RJR Nabisco, and we hold that the nexus requirement of § 1605(a)(3) similarly rebuts that presumption here.

The court concluded that on remand, the district court should permit the Comparellis to file an amended complaint and, after Venezuela and Pequiven have responded, address whether the domestic takings rule applies and whether jurisdiction exists under the FSIA’s expropriation exception.


Circuit Court Rules that the District Court Properly Abstained Until Appellate Review of Earlier Actions Were Determined Before Ruling that Res Judicata Barred a Civil RICO Action

Beck v. Clausen, __ F.3d __, 2018 WL 1572689 (7th Cir. 2018)

Plaintiffs (an LLC and its shareholders) (collectively “the Baeks”), brought this action against Northside Community Bank (“NCB”) and several of its employees, alleging civil RICO violations which focus on the allegedly fraudulent and abusive acts committed by NCB in the course of a lending relationship with the plaintiffs. This RICO action is the last in a series of legal actions between the parties.

In response to the RICO complaint, NCB initially moved to dismiss, or in the alternative, to stay the proceeding under Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). After the state court struck or dismissed all of the plaintiffs’ claims and granted summary judgment to NCB on its claims, NCB amended its motion to assert an alternative ground for dismissal: res judicata. The Plaintiffs argued that res judicata could not apply to their RICO claim because they never had filed a similar RICO claim in state court. Although they had attempted to amend their complaint to include such a claim, that motion had been denied. According to the Baeks, “a claim that was never filed could not be dismissed.”

The district court granted NCB’s amended motion. Applying Illinois’ law of res judicata, it determined that there had been a final judgment both in the previous actions, there was identity of the parties (or their privies) in the prior actions and the federal RICO action; and those causes of action were the same as the federal RICO claim because they all involved “a single group of operative facts.”

Plaintiff had also argued that that the Circuit Court’s adjudication was not final until an appeal had been resolved on earlier actions. Although this argument did not “rely on new law or new facts,” the district court noted that it did “raise an important argument not yet passed upon.” The district court therefore considered the argument on the merits, and waited until the state appellate court issued an order affirming the judgments rendered in the state court with respect to two other actions before ruling the current RICO suit was barred.

This Circuit Court ruled that the district court correctly determined that res judicata precluded the plaintiffs’ present action, and therefore the district court granted the defendants’ motion to dismiss the complaint with prejudice. The Court also found that the abstention by the district court under the Colorado River doctrine, which allows courts to conserve judicial resources by abstaining from accepting jurisdiction when there is a parallel proceeding elsewhere, was proper finding that it was sensible to stay proceedings until an earlier-filed state case has reached a conclusion, and then (but only then) to dismiss the suit outright on grounds of claim preclusion.

Ed Note: The rules governing Colorado River abstention and res judicata are complex, but commonly broadly interpreted to bar civil federal actions in federal court.

Seventh Circuit Follows Second Circuit in Ruling that Injury to Intangible Property Rights for Purposes of a Civil RICO Action Occurs at Principal Place of Business of Plaintiff

Armada (Singapore) PTE Limited v. Amcol International, 885 F.3d 1090 (7th Cir. 2018)

The Seventh Circuit affirmed the lower court’s ruling dismissing a civil RICO plaintiff, granting judgment on the pleadings, after the Supreme Court ruling in RJR Nabisco, Inc. v. European Community, ___U.S.___, 136 S.Ct. 2090, 195 L.Ed.2d 476 (2016). Addressing RICO’s extraterritorial effect, the Supreme Court held that “[a] private RICO plaintiff … must allege and prove a domestic injury to its business or property.” Id. at 2106.
Here, Armada, a foreign corporation, alleges Amcol used its influence as largest shareholder of Ashapura, a foreign corporation, to engage in a number of schemes aimed at draining Ashapura of assets to thwart Armada’s collection efforts. The plaintiff brought a civil RICO action against Amcol, Ashapura and five John Does. Armada claimed that it suffered an injury to its property, namely its judgment and other claims against Ashapura. Armanda claims that Amcol, by means of racketeering activity, injured that property by divesting Ashapura of assets, thereby making the judgment and other claims against Ashapura uncollectable.
In discussing what the Supreme Court meant by “domestic injury,” the Court referred to the location where an injury was suffered. It also made a point of noting the domestic-injury requirement does not categorically bar foreigners from recovering under the statute’s provisions. The district courts have issued a wide range of opinions, but the Second Circuit became the first court of appeals to address the “domestic injury” issue.

In Bascuñán v. Elsaca, 874 F.3d 806 (2d Cir. 2017), the plaintiff, a resident of Chile, alleged that his cousin had stolen millions of dollars from him through various schemes. The Second Circuit rejected a one-dimensional approach, noting that RICO’s requirement that injury must be to business or property means all RICO claims are by nature based on “economic” injury. Id. at 1094. The Second Circuit adopted an approach that addressed each individual injury alleged, considered the four injuries pleaded by the plaintiff, and concluded that such minimal, defendant-initiated contacts with the United States were not sufficient to make the resulting injuries to the plaintiff “domestic.” On the other hand, the court held that the alleged theft of the bearer shares and the theft of the money in a New York bank account were “domestic injuries” as there was harm to tangible property that was located in the United States.

The court in Bascunan held that “where the injury is to tangible property, we conclude that, absent some extraordinary circumstance, the injury is domestic if the plaintiff’s property was located in the United States when it was stolen or harmed, even if the plaintiff himself resides abroad.”

The court here in Armada rejected Armada’s argument that its judgment and claims are tangible properties located in the United States. Amcol argued that there is no tangible property in this case, only “a bundle of litigation rights,” and that the connections to the United States are too tenuous to make Armada’s alleged injuries domestic.

The court followed Bascunan in discussing that injuries to a plaintiff’s intangible property is “suffered” at its residence, which for a corporation like Armada is its principal place of business. Here, Armada’s principal place of business is in Singapore, so any harm to Armada’s intangible bundle of litigation rights was suffered in Singapore. Thus, the injury is not domestic, and Armada failed to plead a plausible claim under civil RICO.

Ed. Note:    Intangible property rights can constitute sufficient injury to “business or property” if the plaintiff suffers concrete monetary loss. It is interesting that tangible property is treated differently from intangible property for purposes of “domestic injury.”


“Civil RICO Litigation 2018, A Plaintiff’s Guide Through the Maze”

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.