Legal Intelligencer: From Mobsters to Fraudsters: Clearing the Bar for Civil RICO Claims — Kang Haggerty News

Civil RICO is seen as “the litigation equivalent of a thermonuclear device,” and civil RICO claims are often employed in complex, high-stakes litigation.

In the July 5, 2024 Edition of The Legal Intelligencer, Edward T. Kang writes, “From Mobsters to Fraudsters: Clearing the Bar for Civil RICO Claims.“

When I hear practitioners talk about RICO, I often hear how no one understands it. I also hear some practitioners talk about how RICO is dead. It is not.

The Racketeer Influenced and Corrupt Organizations Act (RICO) was enacted by Congress and signed into law in 1970 as a tool to combat organized crime in the United States. In addition to imposing substantial criminal penalties for violations, the RICO statute authorizes a private right of civil action, enabling the victims of a person or business engaging in a “pattern of racketeering activity” to recover treble damages and attorney fees for injury to their business or property. Civil RICO is seen as “the litigation equivalent of a thermonuclear device,” Miranda v. Ponce Federal Bank, 948 F.2d 41 (1st Cir. 1991), and civil RICO claims are often employed in complex, high-stakes litigation.

The U.S. Supreme Court has consistently recognized the importance of the civil RICO claims. For example, the court has stated that the object of civil RICO is “not merely to compensate victims but to turn them into prosecutors, ‘private attorneys general,’ dedicated to eliminating racketeering activity.” See Rotella v. Wood, 528 U.S. 549 (2000). Data seems to suggest that it is useful and expedient for plaintiffs attorneys to effectively bring RICO claims like prosecutors. For example, plaintiffs brought an average of 759 civil RICO claims each year between 2001 and 2006. Of all RICO cases decided by federal appellate courts between 1999 and 2001, 78% were civil, and only 22% were criminal. As a result, judges and legal scholars have routinely complained that civil RICO’s overly expansive reach gives many ordinary civil cases an entrée to federal court.

To succeed on a civil RICO claim, a plaintiff must show that a defendant participated in the conduct of an enterprise that affects interstate commerce through a pattern of racketeering activity or collection of unlawful debt. See 18 U.S.C. Section 1962(c). In addition, the conduct must be the proximate cause of harm to the victim. See Sedima, S.P.R.L. v. Imrex, 473 U.S. 479 (1985). Of course, the RICO elements change drastically among different subsections (a), (b), and (c), where the “enterprise” could be either a “prize,” “victim,” or “instrument.” In other words, the single most litigated element of RICO—i.e., the “enterprise”—takes on different characteristics based on which subsubsection of the statute applies. As such, while these elements might appear simple at times, each has developed its own body of case law, with sub-elements, exceptions, and exceptions to the exceptions. Even if practitioners select the appropriate subsection, meeting the rest of the RICO elements is still challenging.

Many civil RICO claims are dismissed at the pleadings stage as the courts are hesitant to allow such claims to proceed. Only skilled and experienced attorneys can navigate the many requirements necessary to bring a successful civil RICO claim. Civil RICO claims are commonly dismissed either due to failure to plead fraud with particularity, or to the court finding that the claims are merely “garden-variety claims,” and thus do not support a finding of pattern of racketeering. This article discusses these two specific hurdles to civil RICO claims.

Failure to Plead With Particularity Under Rule 9(b)

Because typical civil RICO claims allege some type of fraud, one of the most common hurdles at the pleading stage is to plead the circumstances of the fraud with particularity under Federal Rules of Civil Rule 9(b). In general, while the plaintiff may generally plead the defendant’s state of mind or intent to deceive or defraud, appellate courts require a plaintiff to make particularized allegations regarding the facts of the fraud itself when pleading wire fraud or mail fraud as a predicate act. See Odom v. Microsoft, 486 F.3d 541 (9th Cir. 2007). Plaintiffs are required to identify specific examples of the fraud. For instance, in Burgess v. Religious Technology College, 600 Fed.Appx. 657 (11th Cir. 2015), the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of a civil RICO claim, finding that the plaintiffs failed to satisfy Rule 9(b) because they failed to identify the time period during which the defendants made the alleged fraudulent statements and the specific content of such statements.. The court noted that even under a relaxed standard with alleged prolonged multi-act schemes, a plaintiff must still allege at least some particular examples of fraudulent conduct to “lay a foundation for the rest of the allegations of fraud.” In addition, the plaintiffs must plead adequate factual allegations for courts to plausibly infer that the defendants specifically intended to defraud. For instance, in Eclectic Properties East v. Marcus Millichap, 751 F.3d 990 (9th Cir. 2014), the Ninth Circuit affirmed the dismissal of a civil RICO claim alleging the defendants’ intentional fraud in the inflation of property values on properties sold to the plaintiffs, finding that the plaintiffs’ fraud theory was not plausible when considered in light of the innocent, alternative explanation that the transactions were merely a group of business deals gone bad during a deep recession.

Failure to Plead a Pattern of Racketeering Activity

Courts also dismiss civil RICO claims of fraud when finding that the plaintiff only alleges a “garden-variety” fraud claim, not a pattern of racketeering activity. Some appellate courts have stated that when the RICO allegations concern only a single scheme with a discrete goal, the plaintiff fails to allege a pattern of racketeering even if the scheme took place over a longer period of time. For instance, in Home Orthopaedics v. Rodriguez, 781 F.3d 521 (1st Cir. 2015), the First Circuit dismissed a civil RICO claim, finding that despite the multiple instances of extortionate threats made over a period of years, the plaintiff failed to adequately allege a pattern of racketeering activity when the action evolved from a single business transaction that only harmed the plaintiff. In not finding a pattern of racketeering activity, the court stated that even if the defendants committed numerous crimes to try to collect a specific sum of money from the plaintiff, all of the unlawful acts had their origin in a single event or a single transaction. The court also found that the plaintiff failed to show that the defendants’ scheme to collect money would continue indefinitely, or that the defendants’ alleged racketeering acts were part of their regular business.

The Takeaways

Civil RICO claims often become the sole avenue for bringing large-scale fraud cases involving numerous victims to federal court. Trying to convert a “regular” fraud case into a RICO case is a mistake, however. Although RICO cases involve fraud, they also require other elements, including a pattern of fraud (not just one-time fraud) and the enterprise (not just one defendant). Practitioners need to understand each of the elements thoroughly. While it appears, there is an upward trend of expanding the scope and applicability of civil RICO cases, practitioners should be careful in making sure that their case meets the elements of a RICO before bringing one.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the July 5, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.