Available Arguments: Defending RICO Claims after Boyle v. United States

For the Defense

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In today's litigation environment, businesses are increas­ingly faced with lawsuits alleging violations of the Fed­eral Racketeer Influenced and Corrupt Organization Act (RICO), often based on seemingly routine and legitimate commercial dealings. See 18 U.S.C. §§1961- 1968 (2010). The purpose of RICO was to "seek the eradication of organized crime in the United States" and to "curb the infil­tration of legitimate business organiza­tions by racketeers." Pub. L. No. 91-452, 84 Stat. 922 (1970); Atlas Pile Driving Co. v. DiCon Fin. Co., 886 F.2d 986, 990 (8th Cir. 1989). Obviously, routine commercial deal­ ings between two businesses fall outside of RICO's intended scope. That said, the lan­guage of the act is expansive, and Congress has mandated that RICO must be "liberally construed to effectuate its remedial pur­ pose." Pub. L. No. 91-452, §904(a), 84 Stat. 947 (1970). Defense lawyers in commercial disputes, therefore, must attempt to distinguish the routine business affairs of their clients from the type of conduct that RICO was actually intended to prohibit. As dis­ cussed below, this has become a more dif­ficult task in light of the Supreme Court's recent decision in Boyle v. United States.

Under section 1962(c) of RICO, it is un­ lawful for "any person employed by or as­ sociated with any enterprise ... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. 1962(c) (2010). The elements of a claim un­ der this statute are "(1) conduct (2) of an enterprise (3) through a pattern, (4) of rack­eteering activity." Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985). Under the act, "racketeering activity" is defined to include a wide variety of criminal offenses enumerated as "predicate acts" in section 1961. These predicate acts range from mur­ der to mail fraud. 18 U.S.C. §1961(1). The inclusion of mail fraud as one of RICO's predicate acts means that nearly all claims of commercial fraud will also involve "racketeering activity," as all businesses use the mail system to further their business.

RICO is primarily a criminal statute designed to combat the activities of Mafia-like organizations whose widespread criminal activity could not be fully punished under traditional criminal laws. In this context, courts clearly need to construe RICO broadly to "achieve results consis­ tent with Congress's goal of protecting legitimate businesses from infiltration by organized crime." Schmidt v. Fleet Bank, 16 F. Supp. 2d 340, 345 (S.D.N.Y. 1998) (inter­nal quotations omitted). In addition to criminal liability, however, RICO also per­mits plaintiffs to pursue civil actions that allow them to recover both treble damages and attorneys' fees. 18 U.S.C. §1964 (2006). Due to the threat of these large  penal­ ties, RICO's expansive breadth is troubling because it increases defendants'  litiga­tion risks in routine commercial disputes. Moreover, because of its criminal pur­ pose, the "mere assertion of a [civil] RICO claim... has an almost inevitable stigmatiz­ ing effect on those named as defendants." Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 655 (S.D.N.Y. 1996), a.ff' d, 113 F.3d 1229 (2d Cir. 1997): As a result, "[c]ivil RICO is an unusually potent weapon- the litigation equivalent of a thermonuclear device." Id. With this in mind, defense law­yers in commercial cases must attack the merits of these claims as early as possible, often during the motion to dismiss stage.

In the past, courts have been receptive to motions to dismiss civil RICO claims if the claims were based solely on allegations of fraud in routine business transactions. As the Fourth Circuit noted, courts "should not lightly permit ordinary business con­ tract or fraud disputes to be transformed into federal RICO claims." Flip Mortgage Corp. v. McElhone, 841 F.2d 531, 538 (4th Cir. 1988). In June 2009, however, the Su­preme Court issued a sweeping opinion in the criminal case of Boyle v. United States, seemingly expanding the types of civil dis­putes that fall within RICO's scope. See 129 Ct. 2237 (2009). Since that time, district courts have been more reluctant to dismiss civil RICO claims, even those arising from ordinary commercial relationships.

Nonetheless, commercial lawyers should not abandon the argument that RICO does not cover routine business transactions. Instead, commercial lawyers should simply restructure the argument to fit the Boyle framework and to refocus on the other elements of a civil RICO claim. Because RICO's breadth can have unintended con­ sequences in civil suits, courts should still "strive to flush out frivolous RICO allega­tions at an early stage of the litigation" and "lookout for the putative RICO case that is really nothing more than an ordinary fraud case clothed in the Emperor's trendy garb." Schmidt v. Fleet Bank, 16 F. Supp. 2d 340, 346 (S.D.N.Y. 1998). The purpose of this article is to highlight arguments available for the dismissal of civil RICO claims that were not foreclosed by the Supreme Court's holding in Boyle.

The complete article, "Defending RICO Claims After Boyle v. United States," originally appeared in For the Defense in February 2011.