Commercial Litigation and Arbitration

RICO Developments 2007

RICO Developments 2007

Gregory P. Joseph*

Pleading a civil claim under the Racketeer Influenced and Corrupt Organizations Act (‛RICO“), 18 U.S.C. §1964(c) has always been challenging. Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), has only exacerbated the difficulties. Courts generally imposed strict pleading requirements in RICO cases even before Twombly. In the 5Ѕ months since, 75 decisions have cited Twombly, too — not to the benefit of the respective plaintiffs. This article highlights a number of significant RICO decisions of 2007, most of which rely to a greater or lesser extent on Twombly.

Causation. The Supreme Court has enforced strict causation standards in RICO cases since Holmes v. Secs. Investor Protection Corp., 503 U.S. 258 (1992). Last year, it reinforced that bulwark with Anza v. Ideal Steel Supply Corp., 126 S. Ct. 1991 (2006). As a result, only the most directly injured are deemed to have sustained causal damages affording them standing to sue under RICO. Globe Wholesale Tobacco Distribs. v. Worldwide Wholesale Trading, Inc., 2007 U.S. Dist. LEXIS (S.D.N.Y. Sept. 28, 2007), is illustrative.

The plaintiff in Globe was a wholesale tobacco dealer sued a competitor under RICO for selling contraband cigarettes with phony tax stamps. The plaintiff argued that, since it was obeying the law and selling only more expensive, fully-taxed cigarettes, the defendant was causing it competitive injury sufficient to sustain a RICO claim. United States District Judge Lewis A. Kaplan agreed that the plaintiff stated predicate acts. But the factual scenario was too close to that before the Supreme Court in Anza. In dismissing the RICO claim, Judge Kaplan concluded that: ‛Plaintiff's alleged harm was caused by a set of actions (offering lower prices) distinct from the alleged RICO violation (transporting counterfeit tax stamps and distributing contraband cigarettes).“ Consequently, plaintiff could not state causation because it was not directly harmed by the predicate act violations.

Damages & Standing. Injury to ‛business or property“ is a prerequisite for standing to sue under §1964(c). Personal injuries are not injuries to ‛business or property.“ What about the loss of income attendant to a personal injury? Or damage to reputation, which can certainly affect business interests? Neither is enough to confer RICO standing, under two recent decisions. In re Vioxx Prods. Liab. Litig., 2007 U.S. Dist. LEXIS 78510 (E.D. La. Oct. 23, 2007) (‛[T]he phrase 'injured in his business or property' excludes personal injuries, including the pecuniary losses therefrom.“); Snitzer v. City of Chicago, 2007 U.S. Dist. LEXIS 60416 (N.D. Ill. Aug. 15, 2007) (injuries to reputation are not injuries to business or property within RICO).

Is a chose in action a ‛property“ interest within §1964(c)? The plaintiffs in Magnum v. Archdiocese of Philadelphia, 2007 U.S. App. LEXIS 25812 (3d Cir. Nov. 6, 2007), were sexual abuse victims of Catholic clergymen. The plaintiffs recognized that their personal and emotional injuries did not constitute injury to ‛business or property.“ Instead, they alleged that the defendant Archdiocese had ‛concealed the truth about sexual predators in its midst for so long that by the time Appellants learned of the Archdiocese's culpability, it was too late to pursue state law tort remedies.“

The Third Circuit recognized that the loss of a cause of action could constitute RICO injury. It ruled, however, that it is essential to look at the nature of the underlying, lost claim, and that only a RICO violation ‛that causes one to relinquish a cause of action arising out of his business is an injury to ‘business or property’“ within §1964(c). In contrast, the plaintiffs’ ‛allegation of a lost opportunity to bring state law personal injury claims against the Archdiocese is not cognizable as an injury to ‘business or property’ in a civil RICO action.“

The plaintiff in Ello v. Singh, 2007 U.S. Dist. LEXIS 78138 (S.D.N.Y. Oct. 19, 2007), asserted only business and property injury, but it still was not enough. The plaintiff was a former union official and pension fund trustee who alleged that he was harmed because (i) as a trustee, he was personally exposed to liability for the defendants’ RICO violations, and (ii) his property interest in the pension fund had been diminished proportionately to the extent that the defendants’ misconduct harmed the fund. United States District Judge Kenneth M. Karas concluded, first, that the plaintiff’s potential future liability was too remote to be actionable: ‛A civil RICO action can only be brought when a plaintiff's ‘actual loss becomes clear and definite.’“ Second, he concluded that, as a fund participant, the plaintiff suffered only indirect injury, which is not actionable.

Pattern. The Supreme Court has described the pattern requirement as "the heart of any RICO complaint." Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 154 (1987). The Court has developed a ‛continuity plus relationship“ test to gauge whether predicate violations state a pattern. H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 240 (1989). Relatedness is almost never a problem. The issue ordinarily is continuity, and that is primarily a temporal concept.

Closed-Ended Continuity. For closed-ended continuity (past criminal conduct extending over a period of time), the first question is duration: Did the predicate acts continue sufficiently long to form a ‛pattern?“ Different Circuits have different tests. None is more stringent than the Second Circuit, which has indicated that a minimum of two years is necessary to state a pattern. First Capital Asset Mgmt. v. Satinwood, Inc., 385 F.3d 159, 181 (2d Cir. 2004). No Circuit accepts a period of a year or less. To satisfy these temporal tests, plaintiffs look for ways to extend the duration of the alleged misconduct.

The plaintiff in Jennings v. Auto Meter Prods., 495 F.3d 466 (7th Cir. 2007), urged the court to ‛take a broader look at the defendants' conduct“ by looking at asserted mail frauds, after the initial violations, that were intended to cover them up. The Seventh Circuit held that these cover-up allegations, even if true, did nothing to expand the pattern: ‛[A]ctions, even if themselves illegal, taken in an effort to cover up a criminal scheme do nothing to extend the duration of the underlying ... scheme.“

Open-Ended Continuity. The alternative to closed-ended continuity is open-ended (past criminal conduct coupled with a threat of future criminal conduct). To satisfy open-ended continuity, the plaintiff must allege a threat of continuing criminal activity stretching beyond the period during which the predicate acts were committed. H.J., Inc., 492 U.S. at 242-43.

The plaintiff and corporate defendant in Meissner Chevrolet Geo-Oldsmobile, Inc. v. Rothrock Chevrolet, Inc., 2007 U.S. Dist. LEXIS 78744 (E. D. Pa. 2007), were car dealerships. Some of the plaintiff’s employees went to work for the defendant. The alleged predicate acts extended over a few months only, so the plaintiff asserted open-ended continuity. United States District Judge Thomas N. O’Neill, Jr., held that no open-ended continuity was established because the ‛plaintiff is the sole alleged victim and defendants are the only perpetrators.“

Statute of Limitations. The four-year statute of limitations for RICO accrues when the plaintiff knows ‛that he has been hurt and who as inflicted the injury.“ Rotella v. Wood, 528 U.S. 549 (2000). Under the separate accrual rule, a new civil RICO claim accrues each time a plaintiff discovers (or should have discovered) a new and independent injury.

The plaintiffs in Eno Farms Coop. Ass'n v. Corp. for Indep. Living, 2007 U.S. Dist. LEXIS 82242 (D. Conn. 2007), claimed that they were defrauded in to purchasing what they thought were fee interests in affordable housing when in fact the defendants owned the units and could sell them free of any restrictions after 15 years. The allegedly fraudulent sales of housing units occurred more than four years before suit was commenced. The plaintiffs claimed new and independent injuries in the form of monthly payments made to the defendants who allegedly were continuing to cover up the original fraud with false communications. United States District Judge Alan H. Nevas concluded that, because collection of monthly payments over the years was part and parcel of the original alleged fraud, they did not constitute ‛new and independent injuries“ and did not trigger the separate accrual rule.

Governmental Entities. Governmental entitles have something of a unique status in RICO jurisprudence. They can be RICO plaintiffs because they are ‛persons“ within §1961(3) — that is, each is an ‛entity capable of holding a legal or beneficial interest in property.“ They cannot, however, be defendants because they lack the necessary mens rea. See Pethtel v. Wash. County Sheriff’s Office, 2007 U.S. Dist. LEXIS 60105 (S.D. Ohio Aug. 16, 2007).

Can a governmental entity be a RICO enterprise? The Seventh Circuit was not enamored of the idea, but it did so conclude in affirming the conviction of former Illinois Governor George Ryan in U.S. v. Wamer, 2007 U.S. App. LEXIS 19829 (7th Cir. Aug. 21, 2007), at the same time stressing that: ‛This of course does not mean that the state itself has violated any federal law; it may instead be a victim of the overall scheme, as are many RICO enterprises.“


*Mr. Joseph is a fellow of the American College of Trial Lawyers and a past Chair of the Litigation Section of the American Bar Association. He can be reached at ©2007 Gregory P. Joseph

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