When to Bring a Racketeering ClaimAuthor(s): Stephen HornSource: Litigation, Vol. 9, No. 4 (Summer 1983), pp. 33-34, 54Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/29758816 .

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When to Bring a Racketeering Claim

by Stephen Horn It is easy to understand why many plaintiffs have cried fraud when their contractual expectations have not been fulfilled. The difference between a breach and a swindle lies not within the four corners of a contract but in the

mind of the defendant. In recent years, the gratuitous fraud claim has evolved into an accusation of racketeer? ing under the Racketeer Influenced and Corrupt Organiza? tions Act (RICO), 18 U.S.C. ??1961-1968 (West Supp. 1982). No doubt a racketeering claim does get the attention of

a defendant. It also provokes a visceral response in judges. My advice is not to plead a RICO count unless you have a RICO ease. The question is, when do you have a RICO case?

Though RICO was part of a Congressional effort to counteract the infiltration of organized crime into

legitimate business, most civil and criminal RICO cases have nothing to do with organized crime, as that phrase is commonly understood. The statute rests on two concepts: the notion of a "pat?

tern of racketeering activity" and the definition of an

"enterprise." A pattern of racketeering activity is two or more "acts of racketeering activity." An "act of rack?

eteering activity" is the commission of any one of a laun? dry list of crimes contained in Section 1961 of the Act.

Congress chose crimes popular with the syndicate, but included mail fraud, wire fraud, and commercial bribery as well. It is hard to imagine a felonious cabal in the business world that would not violate one of the act's broad prohibitions.

An "enterprise" includes any legal entity, as well as

totally illegitimate organizations. When a "pattern of

racketeering activity" becomes intertwined with an "enter?

prise" in any one of three ways, the statute is violated. The first way to violate the statute is to acquire an inter?

est in an enterprise with money earned through a pattern of racketeering activity, otherwise known as dirty money.

The author is a partner in the firm of Horn & Conroy in Washington, D. C., and chairman of the American Bar Association Committee on the

prosecution and defense of RICO cases.

For example, a mobster might use loan-sharking money to buy one-third of a truck company, or a construction company might fund a new joint venture with profits from a project obtained through bid-rigging.

The second way to violate the statute is to use a pattern of racketeering activity as a means to acquire an interest in an enterprise. For example, a mobster might use extor? tion to make trucking company owners sell one-third of a company, or a successful merger may be induced by mis? representation of financial position through a scheme involving mail and wire fraud.

The third way to violate the statute is to conduct or par? ticipate in the affairs of an enterprise through a pattern of racketeering activity. This last is the provision most often used.

Like the antitrust laws, RICO has both criminal and civil provisions. Any person injured in his business or

property as a result of a RICO violation can sue for triple damages, costs, and attorneys' fees.

Organized Crime

Virtually all RICO claims originate in breach of con?

tract, with the fraud claim included on the theory that more is better. Since the provisions of RICO encompass most fraud and bribery schemes hatched in the business world, traditional fraud claims have been elevated to RICO claims. No one seems to have taken this develop? ment too seriously. Certainly prosecuting authorities are not poring over the latest civil filings looking for cases to

investigate. But some courts have gone to extraordinary lengths to read standards into the law that justify dismissal of seemingly valid RICO counts.

For example, it is now practically obligatory to

challenge a RICO claim on the grounds that the plaintiff has not alleged that defendant is linked to organized crime. In theory, disposing of this defense should be a straight? forward proposition. The plain wording of the statute con? tains no requirement that the defendant be linked to

organized crime. Moreover, limiting the reach of RICO to people with some unspecified connection to "organized crime" (a term not mentioned once in the eight sections

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of the statute) would be nonsensical, not to mention patently unconstitutional.

How could such an allegation be proven by the average plaintiff? With all the effort that the federal government has devoted to the pursuit of organized crime, it has been able to produce only one witness to take the stand and testify to the existence of an organized criminal under? world. Rest assured that this gentleman is not available for the current crop of civil RICO cases.

To be sure, the legislative history of RICO is replete with references to the need to combat the infiltration of organized crime into legitimate business, which is certainly the purpose of the statute. Yet Congress specifically declined to limit the reach of the law to organized crime's members. See, e.g., 116 Cong. Rec. 18913-14 (1970) (Remarks of Senator McCiellan); 116 Cong. Rec. 35344 (1970) (Statement of Rep. Poff).

Virtually all federal courts that have considered limiting RICO to organized crime in criminal cases have rejected that construction. Most civil RICO decisions agree. See, e.g., O'Connor v. Brown, No. 81 C 1475 (N.D. 111. filed January 21, 1982); Spencer Companies v. Agency Rent A-Car, Inc., No. 81-2097-S(D. Mass filed Nov. 17, 1981); Hellenic Lines, Ltd. v. O'Hearn, 523 F. Supp. 244 (S.D.N.Y. 1981).

There are, however, a few decisions to the contrary. See, e.g., Waterman Steamship Corp. v. Avondale Shipyards, Inc., No 78-2118 (E.D. La. filed Dec. 2, 1981); City of Atlanta v. Ashland-Warren, Inc., No. C 81-106A (N.D. Ga. filed Aug. 20, 1981). The defendants in these aberrant cases were respected members of communities that were

outraged over their being labeled racketeers. The courts were apparently sympathetic enough to ignore the plain language of the law, rules of statutory construction, and the opinions of higher courts in favor of a myopic view of the legislative history.

The "competitive injury" requirement is another fatuous civil RICO hurdle. It was created by the court in

North Barrington Development, Inc. v. Fanslow, No. 80 C 2644 (N.D. 111. filed Oct. 9, 1980). The court determined that the RICO cause of action belongs solely to com? petitors of enterprises conducted through a pattern of

racketeering activity, so-called indirect victims. Those directly injured by the racketeering, "direct victims," do not have a claim.

The rationale for this holding is that there was a lot of talk among the congressmen who enacted RICO about the harm done to legitimate businesses that must compete with enterprises infiltrated by organized crime. The con? gressmen also said that RICO was patterned after the anti? trust laws. That convinced the North Barrington court to apply the doctrine of Brunswick Corp. v. Pueblo Bowl O-Mat, Inc., 429 U.S. 477(1977), an antitrust case under the Clayton Act.

In the Brunswick case, the court held that an antitrust plaintiff must allege and prove competitive injury, which is the type of damage the antitrust laws were designed to prevent. The error in applying the Brunswick requirement to RICO cases is fundamental. Unlike the antitrust laws, which are designed to foster competition, RICO is intend? ed to be a broad attack on criminal infiltration of

legitimate business. Congress even legislated a command to the courts to construe the provisions of RICO liberally "to effectuate its remedial purposes." Pub. L. No. 91-452, Title IX, ? 904(a), 84 Stat. 941, 947 (1970).

Moreover, two of the three kinds of activity proscribed by RICO have little or no impact on competition. Section 1962(a) forbids acquisition of an enterprise with money

derived from racketeering activity (dirty money). Section 1962(b) forbids acquisition of an enterprise by means of

racketeering activity itself. The North-Barrington?Brunswick approach would

deny a RICO cause of action to innocent shareholders of a business trying to prevent racketeers from buying in with dirty money. It would exclude a RICO claim by innocent businessmen who are trying to prevent a takeover of their companies through extortion or arson. One of organized crime's favorite commercial schemes, the bust-out, in which an enterprise is used to victimize creditors, would not be within RICO's ambit under the North Barrington rule.

An earlier version of the RICO legislation would have amended the Sherman Act. The ABA's Antitrust Section, however, recommended that the statute be independent of antitrust law so that private litigants "would [not] have to contend with a body of precedent?appropriate in a

purely antitrust context?setting strict requirements on

questions such as 'standing to sue.' "

Report No. 2 of the Section of Antitrust Law, Hearings on S. 30 and Related

Proposals Before Subcommittee No. 5 of the House Com? mittee on the Judiciary, 91st Cong., 2d Sess. 147 (1970).

Furthermore, the theory that RICO was intended to

punish only those who injure competitors is inconsistent with the result in virtually every criminal case brought under the statute. These eases have nothing to do with

injured competitors. Nowhere in the legislative history is there any authority for construing RICO differently in civil, as opposed to criminal, cases.

Yet another obstacle to a civil RICO claim was announced by the court in Kleiner v. First National Bank

of Atlanta, No. C81-1553 (N.D. Ga. filed Dec. 1, 1981) (companion eases). In the Kleiner case, the plaintiff bor? rower sued his lender, a bank. The RICO action was

(Please turn to page 54)

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when I suggested a sharing agreement.

"I have been practicing law for almost forty years, and I have been

doing a very good job in a traditional sense. What you are asking me to do is to think of defending lawsuits in a non-traditional way. Quite frankly, I am incapable of thinking in a non traditional way at this stage in my career."

Yet if defendants forget that the

plaintiff is the legitimate adversary and continue using traditional

defenses, they will go on making gifts of large awards to the plaintiffs in

multiple-party tort cases. I am not

suggesting a waiver of any defense; at most these approaches would involve a postponement of some defenses to reduce expenses and avoid infighting. Few suits would not benefit from such a sharing agreement.

Racketeering

Claim

(Continued from page 34) predicated on alleged acts of mail fraud.

The gravamen of the complaint was the apparent practice of banks to peg the prime rate artificially high. In other words, the best and most credit?

worthy customers don't really borrow at prime. They borrow at much lower rates. By the definition used in loan

agreements, the true prime rate is lower than the borrower is led to

believe, and thus he is paying too much interest on his loan at, for ex?

ample, prime plus two percent. The Kleiner court agreed that the

count looked, felt, and smelled like a civil RICO claim, but dismissed it

anyway because "RICO is basically a criminal act," for the practices alleged in the complaint. Order of Nov. 19, 1981, in No. C80-921, slip op. at 5.

Though it acknowledged that this fact was irrelevant to proper resolution of the plaintiffs non-criminal RICO

claim, the court pointed out that "the

practice plaintiff complains of has not

traditionally been treated as criminal in nature; i.e., its not a recognized form of criminal activity."

Given the "serious nature of criminal charges," the court con? cluded that the RICO claim should not be determined "in the first in? stance by a civil jury but rather should emanate from traditions first established in criminal law." Thus, the court solved its civil RICO dilem?

ma by tossing it to the prosecutors. But the court has certified the issue to the United States Court of Appeals for the Eleventh Circuit, which has now reversed the district court. A con?

trary result was reached in Willcutts v. Jefferson Trust and Savings, No. 81-1153 (C.D.III, filed Apr. 21, 1982).

Escalation The North Barrington and Kleiner

cases were actions of breach of con? tract with fraud elements. They caused an uproar only when RICO was applied. The opinions in the two cases suggest that the courts are

unhappy that a garden-variety business dispute has escalated into nuclear war through a literal inter?

pretation of a high-powered federal statute.

Sometimes the courts are quite blunt. For example, the Waterman

Steamship case, involved a suit by a

shipping company against a shipyard and a subcontractor that manufac? tured turbine couplings. The com?

pany charged the defendants with in?

tentionally selling ships with defective

propulsion units. The court acknowl?

edged that the statute's language was

"probably broad enough" to apply to the case, but held that it would be a

"travesty" to apply it to an "every? day" civil action, contrary to Con?

gress's clear intent. When do you have a RICO ease?

As the cases illustrate, this question cannot be answered by simply listing the elements of the action. It is one

thing to claim fraud. It is quite a dif? ferent story to attach to a fraud claim the loaded words, "Racketeer In? fluenced and Corrupt Organizations."

In a commercial setting, the courts seem to take fraud complaints with a

grain of salt. Racketeering sounds more serious. It sounds criminal. As one court said in refusing to allow a

plaintiff to amend an antitrust com?

plaint to include a RICO claim based on phony invoices mailed by the defendant:

[T]he most that can be said is that

54

the defendant's transactions, on this occasion, have been illegal. Defendant is not a member of a

society of criminals operating outside of the law.

Barr v. WVI/TAS, Inc., 66 F.R.D.

109, 113 (S.D.N.Y. 1975). Judicial hostility to civil RICO

actions may be a thinly disguised judgment on the merits of criminal fraud charges. If the defendant is a national bank or another respected entity and if the controversy sounds more commercial than criminal, the

plaintiff may have a battle. A litigator should understand that,

even if he succeeds in keeping a civil RICO claim in a case, he may have to contend with an unhappy and uncom? fortable judge who can hurt a good case in ways that cannot be cured on

appeal. Sometimes the risk may be worth taking. Civil RICO can and should be invoked where the defen? dant's behavior is truly culpable. But a lawyer should think twice before in?

voking civil RICO in a borderline case to cover all bases or to get the defen? dant's attention. He may also get the court's attention in ways he never

imagined.

Advance

Sheet

(Continued from page 50) files a pleading that is not "well

grounded in fact" or filed for any "improper purpose." These pro

posed sanctions may be imposed by the court "upon motion or upon its own initiative." Unless courts con

tinue to shy away from such sanc

tions, the new Rule 11 provides ample basis for protecting litigants against groundless strike suits whether or not the target of the strike is a corporate treasury.

Under the new rules, the pre answer discovery licensed by the Hart, Schaffner case may find a home in

litigation generally. To be sure, that

may mean just another basis for

conducting a wasteful pretrial skir mish. But if that is so, why is that more tolerable when a claim is made in the context of corporate litigation?

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