Commercial Litigation and Arbitration

RICO Developments 2009

Gregory P. Joseph*

The Supreme Court’s decision in Bridge v. Phoenix Bond & Indemnity Co., 128 S. Ct. 2131 (2008), was the most significant development under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) over the past year. This article summarizes Bridge and other significant recent cases. Note: On January 14, 2009, the Supreme Court heard oral argument in, but has not yesterday decided, Boyle v. United States, in which the issue is the “structure” requirement for association-in-fact enterprises.

Criminal vs. Civil Elements. In Bridge, the Supreme Court rejected the argument that a RICO plaintiff alleging mail fraud must plead and prove that it personally relied on the defendant’s fraudulent statement or omission. The Court deemed it irrelevant that reliance is an element of common law fraud because “Congress chose to make mail fraud, not common-law fraud, the predicate act for a RICO violation.” The Bridge Court stressed that “a person can be injured ‘by reason of’ a pattern of mail fraud even if he has not relied on any misrepresentations.” The Court noted that proof of reliance by the plaintiff “may in some cases be sufficient to establish proximate cause but there is no sound reason to conclude that such proof is always necessary.” It added, however, that causation must still be shown: “[N]one of this is to say that a RICO plaintiff who alleges injury ‘by reason of’ a pattern of mail fraud can prevail without showing that someone relied on the defendant's misrepresentations.”

The factual scenario in Bridge was unusual because both the plaintiff and the defendant were bidders at an auction, so the defendant’s successful fraud on the agency conducting the auction arguably had to harm the plaintiff — it was a zero-sum game. Similar scenarios — in which the defendant’s fraud on a third party arguably had to harm the plaintiff — have been sustained since Bridge. See, e.g., Ritter v. Klisivitch, 2008 U.S. Dist. LEXIS 58818 (E.D.N.Y. July 30, 2008) (acts of mail and wire fraud aimed at third parties but designed to prevent plaintiff from collecting judgments states claim under Bridge). Bridge does not dispense with reliance requirement where reliance is affirmatively alleged. Dungan v. Academy at Ivy Ridge, 2008 U.S. Dist. LEXIS 56757 (N.D.N.Y. July 21, 2008).

Bridge may have broader implications. In Grange Mut. Cas. Co. v. Mack, F. App'x 832 (6th Cir. 2008), the Sixth Circuit remanded a dismissal of a § 1962(d) claim against a latecomer to a RICO conspiracy (i.e., one who joined the conspiracy after the plaintiffs had been harmed). It reasoned that, “[g]iven that plaintiffs are no longer required to allege reliance following Bridge,” if they can “allege that they were injured by reason of a conspiracy to violate § 1962(c)'s substantive provision,” then “the district court will need to further consider whether [the defendant] can be held civilly liable for injuries caused by the conspiracy but occurring prior to [his] joinder in the conspiracy.”

Intracorporate Conspiracy. RICO was patterned after the Clayton Act, but not all antitrust doctrines carry over. There is a Circuit split as to whether a corporation and its subsidiaries may conspire to commit a violation of § 1962(d). The split is summarized in District 1199P Health & Welfare Plan v. Janssen, LP, 2008 U.S. Dist. LEXIS 10352 (D.N.J. Dec. 23, 2008), which followed the antitrust approach and concluded that, other than in exceptional circumstances, “a parent corporation cannot conspire with its wholly owned subsidiary to violate § 1962(d) of RICO because the two entities always have a ‘unity of purpose or a common design.’” For a contrasting view, see United States v. Gwinn, 2008 U.S. Dist. LEXIS 26361 (S.D. W.Va. Mar. 31, 2008).

Hub-and-Spoke Conspiracies. In addition to finding that the “Google Network” was too diffuse a concept to comprise a RICO enterprise, the Court in Vulcan Golf, LLC v. Google Inc., 2008 U.S. Dist. LEXIS 60608 (N.D. Ill. July 31, 2008), followed several cases holding that, whatever validity a hub-and-spoke configuration may have as a form of conspiracy, it does not amount to a RICO enterprise.

In Pari Delicto. The Fifth Circuit ruled in Rogers v. McDorman, 521 F.3d 381 (5th Cir. 2008) that pari delicto is a viable defense to a RICO claim, even though it is not a defense to securities and antitrust claims. Following the Eleventh Circuit’s decision in Official Comm. of Unsecured Creditors v. Edwards, 437 F.3d 1145 (11th Cir.), cert. denied, 127 S. Ct. 45 (2006), the Rogers Court held that civil RICO recovery is precluded when the plaintiff is an active participant in the misconduct, despite the absence of any reference to the defense in the statute.

Fraud on the Market. The Second Circuit held in McLaughlin v. Am. Tobacco Co., 522 F.3d 215 (2d Cir. 2008) that, unlike the securities laws, RICO does not import a fraud-on-the-market presumption. Rather, when “mail or wire fraud is the predicate act for a civil RICO claim, the transaction or ‘but for’ causation element requires the plaintiff to demonstrate that he relied on the defendant's misrepresentation.”

Twombly Converts 8(a) to 9(b). Fed.R.Civ.P. 9(b) requires specificity in pleading fraud claims, including fraud-based RICO claims. Even before the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), courts often required specificity in pleading other aspects of civil RICO claims. In the wake of Twombly, which construes Rule 8(a) to require “plausibility” in pleading, specificity is perhaps even more strictly required in pleading non-fraud elements of RICO claims. See, e.g., Dalton v. City of Las Vegas, 282 F. App’x 652 (10th Cir. 2008) (enterprise and pattern); CSX Transp., Inc. v. Meserole Street Recycling, Inc., 2008 U.S. Dist. LEXIS 61376 (E.D. Mich. Aug. 12, 2008) (pattern); Izenberg v. ETS Servs., 2008 U.S. Dist. LEXIS 102428 (C.D. Cal. Dec. 8, 2008) (pattern); Pineda v. Saxon Mortg. Servs., 2008 U.S. Dist. LEXIS 102439 (C.D. Cal. Dec. 10, 2008) (predicate acts). Rule 8(a) has become Rule 9(b).

RICO as Alternative Private Right of Action. There is substantial case law concerning whether RICO — usually through mail fraud predicates — may be used to create a private right of action for statutory violations that do not otherwise provide a private remedy. The plaintiffs in In re: Epogen & Aranesp Off-Label Mktg. & Sales Prac. Litig., 2008 U.S. Dist. LEXIS 105233 (C.D. Cal. Dec. 17, 2008) alleged that the defendants promoted a drug for off-label use through mail and wire fraud and thus in violation of RICO. The Court rejected the claim, finding that the suit was largely an attempt to bring a private cause of action for violations of the[Food, Drug and Cosmetics Act. It reasoned that “the FDCA provides no private right of action for violations thereof, and what the FDCA does not create directly, RICO cannot create indirectly.”

Operation and Management. A series of recent decisions addressed the operation-and-management test of Reves v. Ernst & Young, 507 U.S. 170 (1993). The trend was to find that the challenged conduct did not comprise operation and management. See Allstate Ins. Co. v. Rozenberg, 2008 U.S. Dist. LEXIS 104735 (E.D.N.Y. Dec 29, 2008) (outsiders who defrauded an enterprise by submitting fraudulent bills without the assistance of insiders did not operate or manage it); Dahlgren v. First National Bank of Holdrege, 2008 U.S. App. LEXIS 14732 (8th Cir. July 11, 2008) (“A bank's financial assistance and professional services may assist a customer engaging in racketeering activities, but that alone does not satisfy the stringent ‘operation and management’ test of Reves…. ‘Bankers do not become racketeers by acting like bankers’”); Walter v. Drayson, 538 F.3d 1244 (9th Cir. 2008) (rendering customary legal services does not constitute operation and management); Nastro v. D’Onofrio, 2008 U.S. Dist. LEXIS 26323 (D. Conn. March 31, 2008) (same).

Governmental Employees. It is well settled that governmental entities cannot be sued under RICO because they lack the necessary mens rea to commit the predicate crimes on which RICO liability depends. Joseph, Civil RICO: A Definitive Guide § 11 (2d ed. 2000). Several cases have extended this to governmental employees acting in their official capacity. The Ninth Circuit reasoned in Pesnell v. Arsenaut, 531 F.3d 993 (9th Cir. 2008), that a Federal Tort Claims Act action against a federal government employee could not include a RICO claim because the employee’s actions would by definition have to have been taken outside the course and scope of his or her employment. See also Hoekstra v City of Arnold,LaFlamboy v. Landek, 587 F. Supp. 2d 914 (N.D. Ill. 2008) (same; to the extent the officials allegedly acted in their personal capacity, however, claim sustained).

Election of Remedies. Is RICO injury stated where the plaintiff has alternative sources of recovery that are not exhausted? Generally not, but different facts produce different results. Compare Liquidation Comm'n of Banco Intercontinental, S.A. v. Renta, 530 F.3d 1339 (11th Cir. 2008) (“whether a plaintiff must pursue other remedies before a RICO claim depends on whether those other contingencies are sufficiently likely to mitigate the plaintiff's loss that damages in the RICO case cannot be ascertained, or may not have occurred at all. RICO need not necessarily be the claim of last resort, but neither can a plaintiff seek to treble damages that he did not actually incur”) with Harbinger Capital Partners v. Wachovia Capital Markets, 2008 U.S. Dist. LEXIS 67462 (S.D.N.Y. Aug. 26, 2008) (“creditor claiming that its ability to collect its debt has been impaired or frustrated by a RICO violation lacks standing to sue under RICO for the amount of the debt as long as the extent of the loss remains uncertain, as for example where collection efforts continue”).

No Unjust Enrichment. Injury to business or property is required by § 1964(c). That may be measured in many ways, but the test is always the injury to the plaintiff resulting from the RICO violation. “Unjust enrichment is not available under civil RICO. See 18 U.S.C. § 1964(c) (‘damages he sustains’).” In re Zyprexa Prods. Liab. Litig., 2008 U.S. Dist. LEXIS 71037 (E.D.N.Y. Sept. 5, 2008).

Nationwide Jurisdiction. There is a Circuit split as to which subdivision of § 1965 confers nationwide jurisdiction in civil RICO cases. Most courts interpret § 1965(b) as conferring nationwide jurisdiction over nonresident defendants if the plaintiff can establish personal jurisdiction over at least one defendant under § 1965(a). The Court in Allstate Ins. Co. v. Plambeck, 2009 U.S. Dist. LEXIS 10302 (N.D. Tex. Jan. 30, 2009) had personal jurisdiction over one resident defendant. Applying the majority rule, it held jurisdiction was proper as to all other defendants provided that, in the words of § 1965(b), "the ends of justice [so] require[d]." The Allstate Court held that: “In a RICO action, the ‘ends of justice’ require nationwide service of process to further the Congressional intent of allowing ‘plaintiffs to bring all members of a nationwide [ ] conspiracy before a court in a single trial.’”

* Mr. Joseph, of Gregory P. Joseph Law Offices LLC in New York, is a former Chair of the Section of Litigation of the American Bar Association. He can be reached at © 2009 Gregory P. Joseph

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