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RICO — Role of Operation-and-Management Test in Assessing Distinctiveness between Enterprise and Defendant — Mere Business Relationship between Entities ≠ Operation or Management

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From Crichton v. Golden Rule Ins. Col, 2009 U.S. App. LEXIS 17376 (7th Cir. Aug. 5, 2009):

Florida resident John Crichton began purchasing group health insurance from Golden Rule in 1995 under a master policy offered only to members of the Federation of American Consumers and Travelers ("the Federation"), a nonprofit organization that provided its members with (among other services) discounts on insurance through group-buying power. Crichton renewed his insurance every year through 2004. ***

The gist of all three claims [including RICO] was that Golden Rule had induced him to purchase insurance by an artificially low introductory premium and that Golden Rule failed to inform him that the cost of his renewal premiums would escalate dramatically because of Golden Rule's practice of closing blocks of insurance to new enrollees. ***

We have held that "[a] RICO complaint must identify the enterprise." Richmond v. Nationwide Cassel L.P., 52 F.3d 640, 645 (7th Cir. 1995). Crichton identifies the enterprise as the Federation. Alternatively, Crichton alleges that Golden Rule and the Federation, together, as two persons associated in fact, see 18 U.S.C. § 1961(4), made up the RICO enterprise. An association-in-fact enterprise theory requires that the association-in-fact "enterprise" and the person sought to be held liable be sufficiently distinct. See Haroco, Inc. v. Am. Nat'l Bank & Trust Co. of Chi., 747 F.2d 384, 401-02 (7th Cir. 1984); see also Richmond, 52 F.3d at 647. This is because RICO "liability depends on showing that the defendants conducted or participated in the conduct of the 'enterprise's affairs,' not just their own affairs." Reves v. Ernst & Young, 507 U.S. 170, 185, 113 S. Ct. 1163, 122 L. Ed. 2d 525 (1993).

As to the first of these theories, the parties debate on appeal whether Crichton's allegations are sufficient to state a claim that Golden Rule "conduct[ed] or participat[ed] . . . in the conduct of [the Federation's] affairs." If not, there is no need to address the remaining elements of a RICO claim under § 1962(c). ***

.Crichton alleges that Golden Rule conducted and participated in the Federation (the alleged RICO enterprise) by helping the Federation draft new bylaws, assisting it in setting the dues that Golden Rule would subsequently collect from certificate-holders on its behalf, and controlling the marketing information disseminated by the Federation about Golden Rule's health-insurance products. These allegations are insufficient to state a RICO claim. The statute does not penalize tangential involvement in an enterprise; a plaintiff must plead and prove that a defendant took some part in directing or conducting the alleged "enterprise" such that it "participate[d] in the operation or management of the enterprise itself." Reves, 507 U.S. at 185; see also Goren, 156 F.3d at 727. Allegations that a defendant had a business relationship with the putative RICO enterprise or that a defendant performed services for that enterprise do not suffice. Slaney v. Int'l Amateur Athletic Fed'n, 244 F.3d 580, 597 (7th Cir. 2001); Goren, 156 F.3d at 727.

Here, Crichton has done little more than plead facts suggesting the existence of the marketing relationship between the Federation and Golden Rule. Assisting in the setting and collection of membership dues on the Federation's behalf and controlling the content of its own insurance promotional materials are activities consistent with the existence of a business partnership, not the prototypical RICO violation in which the defendant seizes control of an enterprise to accomplish an illegal purpose by using the enterprise's resources, contacts, and appearance of legitimacy. Fitzgerald v. Chrysler Corp., 116 F.3d 225, 227 (7th Cir. 1997). Likewise, that Golden Rule is alleged to have assisted the Federation in redrafting its bylaws suggests only that Golden Rule performed a service for the Federation. These allegations, taken individually or together, are insufficient to state a claim that Golden Rule controlled the operation or management of the Federation.

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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