RICO — “We Find It Extremely Difficult to Fathom Any Scenario in Which An Attorney Might Expose Himself to RICO Liability by Offering Conventional Advice to a Client or Performing Ordinary Legal Tasks” (Good Quote)

RSM Production Corp. v. Freshfields Bruckhaus Deringer US LLP, 2012 U.S. App. LEXIS 12784 (D.C. Cir. June 22, 2012):

RSM Production Corporation ("RSM") appeals the dismissal of its complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6), against the law firm Freshfields Bruckhaus Deringer U.S. LLP, and two of its partners, Jan Paulsson and Brian King (hereinafter "Freshfields"). RSM alleged that Freshfields, through its representation of the nation of Grenada in international arbitration, conspired to violate the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(d), in an effort to prevent RSM from obtaining an exclusive license for offshore oil and gas exploration and development in Grenada. See 18 U.S.C. § 1964(c). The district court ruled that RSM's lawsuit was barred under the doctrine of res judicata because of its prior lawsuit in the Southern District of New York regarding the same licensing effort. On appeal, RSM contends Freshfields was not in privity with the New York defendants and that RSM was not required to add Freshfields as a party to that litigation on pain of res judicata. Freshfields challenges those arguments and presents alternative grounds for affirmance, upon de novo review, which RSM maintains lack merit. We affirm on the alternative ground that RSM's complaint failed to state a claim of RICO conspiracy against Freshfields.

I.

***- In 1996, RSM, a Texas corporation whose chief executive officer is Jack Grynberg, entered into an exclusive agreement with the nation of Grenada that "was to have resulted in an oil and natural gas hydrocarbon exploration, development and production license being issued as a matter of routine performance by Grenada to RSM." Compl. ¶ 10. The agreement provided that the license application was to be filed within ninety days of the agreement's execution, subject, as relevant, to a force majeure clause. See Agreement Between the Gov't of Grenada & RSM Prod. Corp. ("Agreement"), arts. 3.1, 24, Ex. A to Compl.

- A few months after the Agreement was executed, Gregory Bowen, then Deputy Prime Minister and Minster of Energy of Grenada, Compl. ¶ 5, told Grynberg that "he expected significant bribe payments from RSM and Grynberg in order for RSM and Grynberg to do business in Grenada," ... and Grynberg refused to pay, and Bowen thereafter "obstructed, harassed and intimidated RSM and Grynberg in their efforts to explore, develop and produce Grenada's vast oil and natural gas resources."

- Also shortly after the Agreement was executed, RSM, with Grenada's consent, invoked the force majeure clause in view of ongoing boundary-water disputes between Grenada and some of its neighbors. Id. ¶ 18. Over the course of the next eight years, RSM made substantial expenditures to collect exploration data in reliance on the exclusive licensing Agreement. Id. ¶ 19. Also during this time, Lev Model formed Global Petroleum Group, a Grenadian company, in December 2003, to "acquire rights to explore, develop and produce the Grenadian offshore areas believed to contain . . . vast[ ]recoverable reserves of petroleum." Id. ¶¶ 14, 17. Model and his company acted as agents for others to bribe Grenadian officials in order to acquire these offshore rights. Id. ¶ 17. Then, in January 2004, RSM informed Grenada "that sufficient progress had been made [in resolving the boundary disputes] to allow it to proceed and that it was in the process of revoking the force majeure." Id. ¶ 20.

- On April 14, 2004, RSM submitted its license application to Grenada. Id. ¶ 21. Initially Grenada raised "frivolous concerns" about the lack of financial assurances. Id. ¶ 22. Earlier that year a Grenadian official, who reported to Bowen, had informed Global Petroleum's directors (including Model) "that Grenada was 'in a situation' with RSM" and "not in a position to enter any agreements concerning [its] offshore petroleum assets until the 'situation' with RSM was resolved." Id. ¶ 23. By letter of April 27, 2004, Bowen advised RSM that its license application was untimely, id., which RSM disputed, id. ¶¶ 24, 29. Bowen rejected RSM's efforts to settle the dispute amicably. Id. ¶¶ 25-27.

- On or about August 31, 2004, RSM invoked Article 26 of the Agreement by filing a request for arbitration with the International Centre for the Settlement of Investment Disputes ("the ICSID").... Grenada engaged Freshfields as its arbitration counsel. Id. ¶ 13. Global Petroleum and Model (and affiliated entities) paid the legal costs of Grenada's arbitration, which amounted to millions of dollars. Id. ¶¶ 44-46. In 2009, an ICSID panel ruled that RSM's license submission had been untimely, and RSM appealed. Id. ¶ 29.

Meanwhile, on October 31, 2006, RSM sued Global Petroleum, Model, Bowen, and others (... but not Freshfields) in the Southern District of New York, alleging tortious interference with contract and with prospective business advantages and civil conspiracy to commit tortious interference. *** The New York complaint was dismissed in 2009, pursuant to Federal Rule of Civil Procedure 12(b)(2) and (6), and the dismissal was affirmed on appeal.***

Prior to the affirmance, RSM filed the current complaint against Freshfields on March 17, 2010, alleging it was part of a conspiracy to bribe Grenadian officials and deny RSM its offshore licensing rights. Specifically, Freshfields "knowingly agreed to perform services of a kind which have facilitated the activities of those who are operating the Enterprise . . . in an illegal manner." ... The Enterprise consisted of Global Petroleum, Model, Bowen, and others who were associated "for the common purpose of enriching Bowen and other high-level Grenadian officials" by "obtaining rights to receive an exclusive [offshore] exploration license" in Grenada, and "defeat[ing] RSM's claim to the very same, exclusive exploration license." ... The conspiracy had a secondary aim of "conceal[ing] the scheme, since it was and is necessary to avoid detection in order to secure and later retain the license." ... Freshfields, in turn, "by knowingly participating in and benefi[t]ting from the legal fees arising out of the conspiracy, . . . participated in and benefitted from a racketeering enterprise." ... RSM sought damages in excess of $500 million, costs, attorney's fees, and threefold damages.***

II.

18 U.S.C. § 1962(d) provides that it is "unlawful for any person to conspire" to violate a substantive RICO provision.... To state a § 1962(d) conspiracy, the complaint must allege that (1) two or more people agreed to commit a subsection (c) offense, and (2) a defendant agreed to further that endeavor. See Salinas v. United States, 522 U.S. 52, 65 (1997). A defendant need not agree to be the one to commit the predicate acts. See id. at 65-66 (citing ALI MODEL PENAL CODE). Nor must a defendant "participate in the operation or management of [the] enterprise in order to be liable for conspiracy." United States v. Wilson, 605 F.3d 985, 1019 (D.C. Cir. 2010). "[I]t suffices that [the defendant] adopt the goal of furthering or facilitating the criminal endeavor." Salinas, 522 U.S. at 65; see also Brouwer v. Raffensperger, Hughes & Co., 199 F.3d 961, 967 (7th Cir. 2000). ***

RSM's allegations of Freshfields' alleged conspiratorial RICO conduct fall short of th[e Twiqbal] standard. The complaint alleges essentially six facts regarding Freshfields' knowledge. None individually or taken together supports a plausible inference that in agreeing to represent Grenada in international arbitration proceedings, Freshfields knew of the bribery-racketeering conspiracy and agreed to foster its goals.

The complaint alleges:

1. Upon agreeing in 2004 to represent Grenada in international arbitration, Freshfields was on notice that its client "had a reputation for corruption and bribery." ...Such knowledge has no bearing on the contractual defense presented by Freshfields on behalf of Grenada during the arbitration proceedings.

2. "On information and belief," another law firm had declined to represent Grenada after becoming "aware of [the] fact that either Grenada did not have funds adequate to pay [its] bills, or that the arbitration was being funded by a corrupt [e]nterprise," id. ¶ 30, and "Freshfields was [] aware . . . that [the other firm] had turned down the representation," id. ¶ 50. Another law firm's decision to decline representation, or a client's tainted reputation, is insufficient to show § 1962(d) liability; any other conclusion would preclude an attorney from representing a client alleged to have violated RICO without incurring personal RICO liability even absent evidence of knowledge of the bribery-racketeering conspiracy or of an agreement to further a § 1962(c) offense.

3. Freshfields was on notice that Model "was a convicted felon," ... and that Model and Global Petroleum ... were financing Grenada's legal defense at arbitration.... Such general allegations fall short of supporting a plausible inference that Freshfields was aware of an ongoing bribery-racketeering conspiracy between Grenada and Global Petroleum (and its affiliates) to defeat RSM's attempt to obtain an offshore license. To the contrary, such facts are consistent with a normal business practice in which an interested party -- such as Global Petroleum -- funds another entity's legal representation. The Model Rules of Professional Conduct indicate that third-party funding is neither unusual nor per se impermissible, see ABA Model Rules of Prof'L Conduct R. 1.8(f) (2011); D.C. Dist. Ct. Local Civ. R. 83.15(a) (2012), even if the third-party has a financial interest in the outcome of the litigation, see Model Rules of Prof'L Conduct R. 1.7. RSM cites no authority to the contrary.

4. Freshfields knew its "retainer was being paid through [the] corrupt relationship," ... and violated laws of the nations in which it is located by failing to report its arbitration-fee income as "corrupt money," id. ¶ 51. For example, in the United Kingdom, "as soon as a lawyer . . . discovers or suspects anything in the proceedings that may facilitate the acquisition, retention, use or control of 'criminal property,' the lawyer must immediately notify the National Criminal Intelligence Service of his belief." Id. The complaint, however, does not allege that the funds used to pay Freshfields for its legal services were ill-gotten gains subject to forfeiture or reporting. See U.S. Dep't of Justice, U.S. Attorneys' Manual § 9-120.103 (May 2010). Nor does the complaint identify any "criminal property" in Freshfields' control or possession. The court need not accept conclusions of law -- "corrupt money" -- as true for purposes of a motion to dismiss. See Warren v. Dist. of Columbia, 353 F.3d 36, 39 (D.C. Cir. 2004); see also Kirch v. Liberty Media Corp., 449 F.3d 388, 398 (2d Cir. 2006).

5. In 2007, "public reports" confirmed that Model and another Global Petroleum director had bribed Grenadian officials, of the bribery-racketeering conspiracy..... These allegations are insufficient to establish a plausible inference that Freshfields was aware of anything corrupt relevant to its provision of legal services other than accusations made by and on behalf of Global Petroleum's litigation adversary and general reports of public corruption in Grenada.

6. "[U]pon learning facts suggesting that the source of its income for legal services was also responsible for bribing Grenadian officials for the purpose of obtaining lucrative license rights in Grenada, [Freshfields] could not continue the representation, since the entire representation was and is adverse to its client, Grenada." Id. ¶ 52. Further, "representation in the face of a transparent conflict of interest is indicative of [Freshfields'] conscious decision to join the conspiracy, and . . . facilitate the goals of the [RICO] [e]nterprise . . . and conspiracy." Id. "[T]he court is 'not bound to accept as true a legal conclusion couched as a factual allegation.'" Mountain States Legal Found. v. Bush, 306 F.3d 1132, 1137 (D.C. Cir. 2002) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)); see also In re NYSE Specialists Sec. Litig., 503 F.3d 89, 95 (2d Cir. 2007).

Taken together, these allegations fail to establish the requisite link for § 1962(d) liability between Freshfields and the bribery-racketeering conspiracy. First, representing Grenada in arbitration by presenting its defense that RSM's license application was untimely under the parties' Agreement, qua defense, presents no adversity or conflict of interests as would either inform Freshfields of the bribery-racketeering conspiracy or plausibly show its agreement to present a legal defense was an agreement to further acts of racketeering.

Second, the payment of Freshfields' legal fees by sources seeking the valuable Grenadian offshore license is insufficient to show Freshfields was part of the bribery-racketeering conspiracy. Even when considered in light of the 2007 reports about Grenada and alleged legal malpractice by Freshfields, the source of the fees does not support a plausible inference that Freshfields "was aware of the essential nature and scope of the [RICO] enterprise," Baumer v. Pachl, 8 F.3d 1341, 1346 (9th Cir. 1993) (quoting United States v. Muskovsky, 863 F.2d 1319, 1324 (7th Cir. 1988)), much less that it "kn[ew] of and agreed to the overall objective of the RICO offense," United States v. Delgado, 401 F.3d 290, 296 (5th Cir. 2005). The chronology works against RSM. According to the complaint, Freshfields did not begin its representation of Grenada until well after Grenada had denied RSM's license application as untimely and RSM had filed for arbitration. Grenada, represented by Freshfields, defended the denial in the arbitration. Given the success of this defense and its seemingly innocuous, contractual nature, see Compl. ¶ 29; ICSID Arbitration Award at ¶¶ 342-95, it is implausible to infer that the 2007 reports would have alerted Freshfields to a bribery-racketeering conspiracy to deny RSM's license application three years earlier. A more plausible inference is that Freshfields would have suspected that the alleged bribes were made in an effort to secure future licensing rights, not to prompt Grenada's contractually-based denial of RSM's license application. That Freshfields continued to represent Grenada in arbitration after the 2007 publications does not alter the analysis. Because RSM failed to "nudge[] [its] claim[]" that Freshfields knew of the RICO conspiracy or any pattern of racketeering activity "across the line from conceivable to plausible," its "complaint must be dismissed," Twombly, 550 U.S. at 570. See also Iqbal, 129 S. Ct. at 1951; Baumer, 8 F.3d at 1346.

Third, the allegations fail to support a plausible inference that Freshfields agreed to join or acted to foster the bribery-racketeering conspiracy. The complaint does not allege that Freshfields itself committed any of the predicate acts. See Compl. ¶¶ 58, 62. Rather, the complaint alleges that Freshfields, "by knowingly participating in and benefit[t]ing from the legal fees arising out of the conspiracy, . . . participated in and benefitted from a racketeering enterprise," id. ¶ 62. In other words, to support the necessary inference that Freshfields agreed to further the conspiracy, RSM relies solely on the allegations regarding Freshfields' knowledge of the bribery-racketeering conspiracy and its legal representation of Grenada and payment therefor. Although alleged co-conspirators (i.e., Global Petroleum and Model) provided the funding for Grenada's arbitration defense, it is implausible to infer that therefore Freshfields' provision of legal services at arbitration was intended to further the criminal endeavor. To the contrary, Freshfields' representation of Grenada in the international arbitration proceedings is "more likely explained by," Iqbal, 129 S. Ct. at 1950, its normal business practice of providing legal services for and representing clients in arbitration.

In sum, the allegations of the complaint target Freshfields' services as attorneys, nothing more. As such, Freshfields' conduct in representing Grenada at arbitration is readily distinguishable from instances in which attorneys have been held liable under RICO § 1962(c) and (d) for performing, under the guise of providing legal services, illegal acts, such as devising a fraudulent scheme to manipulate the bankruptcy process, see Handeen v. Lemaire, 112 F.3d 1339, 1350-51 (8th Cir. 1997), or facilitating illegal investments, see United States v. Loften, 518 F. Supp. 839, 854 (S.D.N.Y. 1981).

Footnote 7. The circuit courts of appeals have declined to extend RICO liability under § 1962(c) to an attorney's provision of routine legal services. See Walter v. Drayson, 538 F.3d 1244, 1248-49 (9th Cir. 2008); Handeen, 112 F.3d at 1348-49 (8th Cir.); Azrielli v. Cohen Law Offices, 21 F.3d 512, 521 (2d Cir. 1994); Baumer, 8 F.3d at 1344 (9th Cir.); Nolte v. Pearson, 994 F.2d 1311, 1317 (8th Cir. 1993); cf. Reves, 507 U.S. at 182-83, 185-86. The Eighth Circuit observed in Handeen that although "[a]n attorney's license is not an invitation to engage in racketeering" and neither Reves nor the RICO statute exempts professionals as a class, "[i]t is a good thing, we are sure, that we find it extremely difficult to fathom any scenario in which an attorney might expose himself to RICO liability by offering conventional advice to a client or performing ordinary legal tasks (that is, by acting like an attorney)." Handeen, 112 F.3d at 1349.

Unlike in Salinas, 522 U.S. at 66, on which RSM relies, the complaint alleges no conduct by Freshfields beyond the provision of normal legal services in arbitration and so fails to support a reasonable inference that Freshfields "agree[d] to assist others in the commission of unlawful acts," Reply Br. at 24. As explained in Twombly, allegations that a defendant acted in ways consistent with a conspiratorial agreement, but also equally well explained by legitimate economic incentives, do "not suffice . . . to show illegality." 550 U.S. at 556-57; see also id. at 554. So too, unsupported conclusory allegations are "not entitled to be assumed true," Iqbal, 129 S. Ct. at 1951, and dismissal is proper when a conspiracy allegation "d[oes] not plausibly suggest an illicit accord because it [i]s not only compatible with, but indeed [i]s more likely explained by, lawful, unchoreographed freemarket behavior," id. at 1950; see also Am. Dental Ass'n v. Cigna Corp., 605 F.3d 1283, 1295 (11th Cir. 2010).

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