RICO Enterprise after Boyle

Gregory P. Joseph*

On June 8, 2009, the Supreme Court resolved a split in the Circuits holding, in Boyle v. United States, 129 S. Ct. 2237 (2009), that an associated-in-fact enterprise under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) must have a “structure.” This article explores some of the civil RICO implications of Boyle.

Background. 18 U.S.C. § 1961(4) provides that the term “‘enterprise’ includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” In United States v. Turkette, 452 U.S. 576, 583 (1981), the Supreme Court ruled that an enterprise “is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit.” Turkette stressed the distinction between the “enterprise” and “pattern” requirements: “The ‘enterprise’ is not the ‘pattern of racketeering activity’, it is an entity separate and apart from the pattern of activity in which it engages.” Id. Prior to Boyle, the Circuits conflicted as to whether, or to what extent, an associated in fact enterprise must, under Turkette, have an “ascertainable structure” separate and apart from the pattern of racketeering. See Odom v. Microsoft Corp., 486 F.3d 541 (9th Cir. 2007) (collecting cases).

Boyle. Boyle involved a group of bank robbers who, over several years, stole night deposit boxes and attempted vault heists. The core group was constant. Others like Boyle came and went. Boyle’s basic argument was that the group lacked any ascertainable structure and therefore did not constitute a RICO enterprise.

The Supreme Court ruled that an associated-in-fact enterprise requires a “structure,” but not much of one. The Court cited a dictionary definition of “structure” as “the sense relevant here” — “‘[t]he way in which parts are arranged or put together to form a whole’ and ‘[t]he interrelation or arrangement of parts in a complex entity.’” 129 S.Ct. at 2244. That is an ostensive definition which any group satisfies.

Boyle holds that “an association-in-fact enterprise must have at least three structural features: [1] a purpose, [2] relationships among those associated with the enterprise, and [3] longevity sufficient to permit these associates to pursue the enterprise’s purpose.” Id. Every group of criminals that commits a crime together seems likely to satisfy these requirements. Boyle rejected the argument that the structure must bear a resemblance to “business-like entities” (as the two dissenters would have required). Id. at 2243.

The Court ruled that the enterprise must extend “beyond that inherent in the pattern of racketeering activity” only in the very limited sense that it is a separate element that must be proved. Enterprise may be inferred from the same evidence establishing the pattern, id. at 2244-45, and, under Boyle’s analysis, perhaps must be. Boyle rejects the notion that an enterprise need be “ascertainable” except in the sense that the jury must find its existence beyond a reasonable doubt (presumably, in a civil action by a preponderance of the evidence), and Boyle declares that it may be misleading to instruct the jury that it must find the structure to be “ascertainable.” Id. at 2245. The Court holds that no hierarchical or other structural attributes are required of an associated-in-fact enterprise — it “is simply a continuing unit that functions with a common purpose.” Id. at 2245. The fact that the bank-robbery enterprise fluctuated in and out of hibernation was of no significance to the Court. Id.

Twombly, Iqbal and Enterprise. Most civil RICO claims are dismissed under Rule 12(b)(6) or 56. See Gross v. Waywell, 2009 U.S. Dist. LEXIS 52599 (S.D.N.Y. June 16, 2009) (statistically analyzing reported decisions). Since Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955 (2007) — and now Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) — courts have required specificity in pleading the enterprise element of civil RICO. See, e.g., Brunig v. Clark, 560 F.3d 292 (5th Cir. 2009).

Boyle changes what must be alleged factually to state an associated-in-fact enterprise. The plaintiff must factually allege: (1) a common purpose, (2) relationships among the constituents comprising the enterprise, and (3) that the enterprise was of sufficient longevity to permit the constituents to pursue the common purpose. Prongs (2) and (3) bear a strong resemblance to the relatedness and continuity aspects of the “pattern” requirement.

Because injury is a prerequisite to standing for a civil RICO claim, prong (3) will likely be satisfied in any case that survives a standing challenge because the alleged purpose presumably will have been accomplished for the plaintiff to have suffered loss. As a result, the minimum durational requirement of the “pattern” requirement — which may be two years for closed-end continuity (see, e.g., Fresh Meadow Food Servs., LLC v. RB 175 Corp., 282 F.App’x 94 (2d Cir. 2008)) — is likely to be much more important than the longevity requirement of the “enterprise” requirement.

Similarly, “relationships” is so neutral a term that Boyle’s prong (2) is likely to be satisfied by any alleged group. It would be difficult to satisfy this prong if the actors were acting independently, in competition with one another, or if their relationship was affirmatively hostile, but that is merely another way of saying that such a group did not share a common purpose (prong (1)). The “relationships” prong parallels the “relatedness” component of the “pattern” requirement, with the distinction that “relationships” applies to members of the alleged associated-in-fact enterprise, while “relatedness” pertains to predicate acts. It can be expected that “relationships” requirement, like the “relatedness” requirement, will prove “not a cumbersome one for a RICO plaintiff.” Feinstein v. Resolution Trust Corp., 942 F.2d 34, 44 (1st Cir. 1991).

Commonality of purpose (prong (1)) is likely to become a major battleground after Boyle. The typical associated-in-fact enterprise in civil RICO cases is a collection of entities and individuals. If the constituents are competitors, if they are acting independently or at cross purposes — or if the allegation of common purpose is purely conclusory — this prong will not be satisfied. Note that Twombly rejected a conclusory allegation of conspiracy contained in a very detailed complaint. Similarly, Iqbal rejected “a ‘formulaic recitation of the elements’ of a constitutional discrimination claim.” Factually pleading a common purpose is critical after Boyle.

Distinctiveness Requirement. Section 1962(c) contains a distinctiveness requirement — the enterprise must be separate and distinct from the defendant. To satisfy this requirement, it is common to see complaints under § 1962(c) alleging that an enterprise consists of an entity, perhaps a subsidiary and certain of their officers or employees — because the entity alone is the deep pocket and cannot be both enterprise and defendant. By definition, the constituents of such an “enterprise” are likely to have a common purpose because their purpose is that of the entity.

To avoid permitting the distinctiveness requirement to be dodged through artful pleading, many courts have disallowed such pleading tactics unless the complaint factually alleges “something more” to satisfy the distinctiveness requirement. See, e.g., Levyas v. Bank of Am., 601 F.Supp.2d 1201 (S.D. Cal. 2009) (parent plus subsidiary; collecting cases). If “[r]easonable jurors could not find the existence of an association-in-fact enterprise separate and apart from the activities of” the parent entity, no § 1962(c) claim is stated. See Cardinal Health Solutions, Inc. v. Valley Baptist Med. Ctr., 2009 U.S. Dist. LEXIS 3909 (S.D. Tex. Jan. 21, 2009) (corporation plus subsidiaries plus officers and employees; summary judgment). The distinctiveness requirement is of perhaps even more importance in light of the diminished litigability of enterprise after Boyle.

Conflation of §§ 1962(c) and (d). Boyle argued that, absent a meaningful structure requirement, there would effectively be “a merger of the crimes proscribed by” §§ 1962(c) and (d). 129 S.Ct. at 2246. The Boyle Court did not address this other than to note that, “while in practice the elements of a violation of §§ 1962(c) and (d) are similar, this overlap would persist even if petitioner's conception of an association-in-fact enterprise were accepted.” Id.

It is difficult to see how a group of persons who commit a violation of § 1962(c) will not have conspired to do so in light of the “common purpose” component of Boyle’s definition of “enterprise” and the Court’s dispensing with any “structure” requirement with teeth. On the other hand, it is possible to envision a violation of § 1962(d) in the absence of violation of § 1962(c) because a plaintiff could suffer RICO loss from an overt act that is a predicate act before all of the requirements of § 1962(c) have been satisfied.

Entity vs. Associated-in-Fact Enterprises. Boyle accentuates the difference in meaning of “enterprise” when the term is used to refer to an entity as opposed to an association in fact. Under § 1962(a) and (b), the “enterprise” is the victim of, respectively, either (a) an investment from the proceeds of a pattern of racketeering activity or (b) the acquisition of control through such a pattern. Only entities satisfy this use of “enterprise.” See NOW v. Scheidler, 510 U.S. 249, 259 (1994) (“The ‘enterprise’ referred to in subsections (a) and (b) ... [must] be an entity that was acquired through illegal activity or the money generated from illegal activity.”).

Under § 1962(c), either an entity or an association in fact may form the enterprise. Either way, however, the “operation or management” test of Reves v. Ernst & Young, 507 U.S. 170 (1993), must be satisfied. Boyle rejected the dissent’s argument that application of the Reves test indicated that associated-in-fact enterprises must be “business-like entities.” Id. at 2243 n.3. Application of the “operation to management” test to associated-in-fact enterprises after Boyle will require a hard look at the precedent under Reves.

Pattern Trumps Enterprise. In attempting to differentiate “enterprise” and “pattern,” the Court in a footnote observed:

It is easy to envision situations in which proof that individuals engaged in a pattern of racketeering activity would not establish the existence of an enterprise. For example, suppose that several individuals, independently and without coordination, engaged in a pattern of crimes listed as RICO predicates-for example, bribery or extortion. Proof of these patterns would not be enough to show that the individuals were members of an enterprise.

129 S.Ct. at 2245 n.4 (emphasis added). Focusing on the second sentence, it is difficult to see how “several individuals” could “independently and without coordination” engage in a single “pattern of crimes” — if they are all acting independently and without coordination, their crimes would not satisfy the “relatedness” test of the pattern requirement. Thus, the last sentence refers back to “these patterns” in the plural. Contrary to the first sentence, therefore, it is not “easy to envision situations in which proof that individuals engaged in a pattern of racketeering activity would not establish the existence of an enterprise.” By definition, they almost always would. The phrase “in a pattern” in the first sentence probably should read “in patterns.”

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* Mr. Joseph, of Gregory P. Joseph Law Offices LLC in New York, is a Fellow of the American College of Trial Lawyers and former Chair of the Section of Litigation of the American Bar Association. He can be reached at gjoseph@josephnyc.com. © 2009 Gregory P. Joseph

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