Congress enacted the Racketeering Influenced and Corrupt Organizations Act (RICO) in 1970 as Title IX of the Organized Crime Control Act.
U.S. v. Turkett, 452 U.S. 576, 578 (1981). It was intended to target organized crime’s infiltration into legitimate businesses through extortion and other criminal means. Id. at 586, 588. However, RICO contains both criminal and civil provisions. Id. The civil provisions provide for powerful remedies, including treble damages, plus costs of suit including reasonable attorneys’ fees, making it a very attractive vehicle for plaintiff’s lawyers and a dangerous threat to corporations, especially where a class claim is asserted. 18 U.S.C. § 1964(c). Indeed, RICO class actions against large corporate entities are becoming more common and threaten crippling damages. Further, civil RICO actions outnumber criminal RICO actions by a very wide margin.1 Accordingly, corporate counsel need to be savvy regarding RICO’s provisions, the applicable pleading requirements, common class certification issues, and how best to defend against a RICO action.RICO is exceedingly complex. Addressed below are some common pitfalls in RICO claims, potential bases to file motions to dismiss such claims, as well as important issues to keep in mind in contesting class certification in a RICO action.
RICO offenses are governed by 18 U.S.C. § 1962(a)-(c). Sections “1962(a) and 1962(b) are rarely used, and section 1962(c) is the most commonly invoked RICO provision.” Mark v. J.I. Racing, Inc., 1997 WL 403179, at *3 (E.D.N.Y. July 9, 1997). Section 1962(a) prevents “racketeers from using their ill-gotten gains to operate, or purchase a controlling interest in, legitimate businesses,” while section 1962(b) prohibits “the takeover of a legitimate business through racketeering, typically extortion or loansharking.” Id. Section 1962(c) is “intended to prevent the operation of a legitimate business or union through racketeering.” Id; see also Dysart v. BankTrust, 516 F. App’x 861, 863 (11th Cir. 2013).2
Under section 1962(c), a RICO plaintiff must show “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Jones v. Childers, 18 F.3d 899, 910 (11th Cir. 1994). Racketeering activity means the carrying out of a “predicate act” enumerated in the RICO statute. Id. A RICO plaintiff’s burden does not end there, however, as plaintiffs must also show an injury to their property or business and that the injury was “by reason of the substantive RICO violation,” i.e., causation. Dysart, 516 F. App’x at 863.
In crafting an initial response to a RICO complaint, it is important to remember that in civil RICO actions, some of the most common predicate acts of “racketeering activity” are mail and wire fraud. See, e.g., American Dental Ass’n v. Cigna Corp., 605 F.3d 1283 (11th Cir. 2010); see also, e.g., In re U.S. Foodservice Inc. Pricing Litigation, 729 F.3d 108 (2d Cir. 2013). This fact is critical because plaintiffs must satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b) with respect to the allegations of racketeering activity, rather than the notice pleading standard. See Tel-Phonic Services, Inc. v. TBS Intern., Inc., 975 F.2d 1134, 1139-39 (5th Cir. 1992) (“We find that most of the alleged wrongs are not pleaded with sufficient particularity to constitute the RICO predicate act of wire fraud or mail fraud. Rule 9(b) requires particularity in pleading the ‘circumstances constituting fraud.’ This particularity requirement applies to the pleading of fraud as a predicate act in a RICO claim as well.”); see also Trudel v. Stoltz, 67 F.3d 309 (9th Cir. 1995). A RICO pleading based on predicate acts of fraud must include the specifics of the fraud, including date, time, place, who made the alleged misrepresentations, and the content of the representations. Id. Accordingly, in contesting a RICO complaint, corporate counsel should carefully analyze the allegations to ensure they rise to the level of specificity 9(b) requires and raise any deficiencies promptly in a motion to dismiss.
With respect to the enterprise requirement, which is another area where corporate counsel should focus attention at the motion to dismiss stage, the plaintiff’s burden is to show that the person committing the predicate act of racketeering activity, or the RICO wrongdoer, is conducting “the affairs of the enterprise through a pattern of racketeering activity.” See Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994). RICO defines “enterprise” as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. § 1961(4).
Importantly, a majority of circuit courts of appeal have held that “the person [i.e., the RICO wrongdoer] and the enterprise referred to must be distinct,” and, therefore, “a corporate entity may not be both the RICO person and the RICO enterprise under section 1962(c).” See Riverwoods, 30 F.3d at 344; see also Wilcox v. First Interstate Bank of Oregon, N.A., 815 F.2d 522, 529 (9th Cir. 1987) (“In Rae v. Union Bank, 725 F.2d 478, 481 (9th Cir.1984), we rejected the argument that a corporate defendant could be both the RICO person and the RICO enterprise under 18 U.S.C. § 1962(c).”). Therefore, a plaintiff does not allege an actionable RICO claim by alleging that a defendant corporation is the party engaged in the pattern of racketeering activity, and that such defendant corporation is also the “enterprise” to which the conduct relates.
Corporate counsel should be aware, however, that if a corporation is the enterprise, an employee for the corporation may be the RICO wrongdoer. Conte, 703 F. Supp. 2d at 133-34 (“[A]n employee of a corporation is legally distinct from the corporation itself and therefore can function as a RICO person where the corporation is the alleged RICO enterprise.”). Moreover, a corporation could also associate itself “with others,” i.e., an association-in- fact, “to form an enterprise that is sufficiently distinct from itself.” Riverwoods, 30 F.3d at 344. Despite these apparent exceptions to the requirement that the corporate wrongdoer be distinct from the enterprise, a plaintiff still cannot allege that the enterprise consists merely of the “corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant . . . .” Id. Accordingly, in reviewing RICO allegations, corporate counsel should carefully analyze whether the plaintiff(s) have properly pled the enterprise requirement.
Corporate counsel should also scrutinize the allegations relating to the “pattern” requirement in any RICO complaint, because the “pattern” requirement is difficult to plead. Indeed, a pattern of racketeering activity requires a showing of at least two predicate acts of racketeering in a ten-year period. 28 U.S.C. § 1961(5). However, courts have interpreted this provision to require more than simply two isolated predicate acts. H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 237-38 (1989) (finding “the statement that a pattern requires at least two predicates implies that while two acts are necessary, they may not be sufficient”) (internal quotations omitted). In fact, the United States Supreme Court has found that “[s]ection 1961(5) concerns only the minimum number of predicates necessary to establish a pattern; and it assumes that there is something to a RICO pattern beyond simply the number of predicate acts involved.” Id. Courts have thus found in numerous circumstances that two acts, “without more” are not sufficient. See United States v. Indelicato, 865 F.2d 1370, 1382 (2d Cir. 1989). There must be more than “sporadic activity” and more than “two widely separated and isolated” offenses. H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 237-38 (1989) (internal quotations and citations omitted) (finding “[t]he term ‘pattern’ itself requires the showing of a relationship between the predicates…and of the threat of continuing activity”); see also SKS Constructors, Inc. v. Drinkwine, 458 F. Supp. 2d 68, 77 (E.D.N.Y. 2006). If there are any deficiencies in the allegations regarding the “pattern” of racketeering activity, corporate counsel should be sure to highlight them at the earliest possible time.
Allegations of causation are also often defective and, thus, the basis for a successful motion to dismiss. Importantly, to plead a RICO offense, plaintiffs need to allege plausible facts demonstrating a proximate relationship between the conduct and the harm. Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992). Even if a class of plaintiffs pleads and proves all of the other RICO elements, recovery under RICO is unavailable if there is a remote or “purely contingent” or indirect link between the acts of racketeering and the alleged damages. HEMI Group, LLC v. City of N.Y., 130 S. Ct. 983, 985 (2010); see also Vanderbilt, 735 F. Supp. 2d at 698-99.
Causation is also an important issue in the context of class certification. Much to the delight of the plaintiff’s bar, in 2008, in Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 649 (2008), the U.S. Supreme Court held that there is no requirement that a plaintiff show first-person reliance when the predicate act of a RICO claim is mail fraud. Prior to this decision, it was common for defendants to argue that each member of a putative class must show first person reliance and, accordingly, that the requirement under Rule 23(b)(3) that common questions of law and fact predominate over individualized issues for a damages class to be certified could not be satisfied. While at first blush the Bridge decision portended an avalanche of RICO class actions, the impact has been more modest than anticipated because the U.S. Supreme Court was clear that it was not eliminating the requirement of causation, which in many cases can raise a myriad of individualized issues. Id. at 658 (“In most cases, the plaintiff will not be able to establish even but-for causation if no one relied on the misrepresentation.”). Causation should thus be a focal point of corporate counsel at the class certification stage.
For example, in In re Countrywide Fin. Corp. Mortgage Mktg. & Sales Practices Litig., 277 F.R.D. 586, 605 (S.D. Cal. 2011), the Southern District of California denied a motion for class certification because, among other reasons, the borrower plaintiffs “failed to demonstrate that common issues predominate on the element of causation” in pleading their RICO cause of action based on defendant Countrywide’s alleged fraudulent scheme to push borrowers into subprime mortgages and loans so that the loans could then be sold on the secondary securities market. Id. at 598. The court explained that evidence put forth by plaintiffs showed that “at least some class members elected to proceed with the loans in question despite the risks” plaintiffs were concerned with in the litigation. Id. at 605. Accordingly, in finding that common issues did not predominate, the court found the plaintiffs had not demonstrated that “class members would not have taken on the loans in question but for the alleged misrepresentations and omissions attributed to” the defendant. Id.
Similarly, in Galas v. Lending Co., No. CV-12-01265- PHX-SMM, 2014 WL 4053406, at *15-16 (D. Ariz. Aug. 15, 2014), the court found that “individual inquiries” as to whether each insured class member relied on the defendant’s alleged fraudulent scheme were necessary in analyzing causation. The plaintiffs had argued, citing to Bridge, that “third-party reliance sufficiently establishes proximate causation without individual issues predominating.” Id. Plaintiffs argued that because a third party had relied on the defendant’s fraudulent statements that the class members’ loans were compliant with regulations, the defendant was able to sell such loans “on the secondary market” without any objection leading to increased interest rates on the loans. Id. The court disagreed, and found that under Bridge, third party reliance only satisfies the causation requirement if there is a “direct relation between the injury asserted and the injurious conduct alleged.” Id. The court found plaintiff could not make this “direct relation” showing, and accordingly that “individual inquiries regarding each class member’s reliance on the allegedly fraudulent scheme would be necessary.” Id; see also Martinelli v. Petland, Inc., 274 F.R.D. 658, 664-65 (D. Ariz. 2011) (denying class certification where plaintiffs could not prove the “direct relation” requirement of Bridge on a “class-wide” basis and noting that the “direct relation” requirement warrants “particular emphasis”).
Moreover, depending on the facts of the case and the type of misrepresentations, first-person reliance may still be required in order to show causation. In another post-Bridge RICO fraud action, the Eastern District of New York denied class certification despite the plaintiffs’ arguments that, under Bridge, reliance was no longer required. Calabrese v. CSC Holdings, Inc., No. 02-CV-5171(DLI)(JO), 2009 WL 425879, at *12 (E.D.N.Y. Feb. 19, 2009). The court explained that even post-Bridge, “a plaintiff asserting a civil RICO claim continues to have the obligation to demonstrate both but-for and proximate causation in order to show injury by reason of a RICO violation.” Id. The court found that because the alleged misrepresentations at issue in the case were made directly to each victim, “a putative plaintiff cannot establish that his injury was proximately caused by the RICO violation if he cannot allege and prove that he personally relied on the misrepresentations.” Id. Therefore, the issue of reliance as it relates to the causation requirement can still be fatal to a class certification motion in the appropriate case.
While the RICO statute is complex and intimidating because of the availability of treble damages, RICO offenses are not easy to plead, and corporate counsel can often successfully defeat RICO allegations early at the motion to dismiss stage or defeat class certification, and thereby minimize the potential exposure to the crippling treble damages authorized by the RICO statute.