There are normal business disputes where one side or the other fails to live up to its contractual obligation and a law suit ensures to determine the precise meaning of the contract, the responsibilities of the parties and the amount of damages, if any, to be paid. There is another category of business disputes where the loss to one party is caused by the criminal conduct of the other, and, upon further investigation, it is determined that the business partner is actually a criminal enterprise. Is a simple breach on contract action adequate in these circumstances?
Many years ago, while working in a rural county in Pennsylvania, I was confronted with a situation involving a timber company and its owners. These individuals would enter into contracts with landowners to log cherry trees and other valuable hardwoods. Many of these contracts would be valued in the millions or tens of millions of dollars. In the mountains of Northern Pennsylvania, tracts of land may encompass thousands of acres, and boundaries are sometimes ill-defined. Many of the property owners are absentee landowners. Taking advantage of these facts, this timber company and its owners would “stay” onto adjoining land removing tens of thousands of dollars worth of timber from adjoining landowners in nearly every contract. If their theft was discovered, they would retain counsel, and defend themselves in any civil action brought against them. In these cases, they would argue the ambiguity of the border, claim innocence, and, ultimately, settle any case for a fraction of the value of the trees they had taken.
It was a profitable business model for years. Pennsylvania does have a little used criminal statute that punishes Deceptive or Fraudulent Business Practices, and the defendants in this case were prosecuted and convicted under that statute. The owner of the company received a significant prison sentence. But what would have happened if the Commonwealth in that case had decided not to prosecute, which is frequently the case? Is there anything that the victims of his offenses could have done to recover their losses? The answer is: it depends.
Fraud in the business context is nothing new, but civil actions for fraud can be challenging. Fraud, broadly speaking, is a false statement designed to mislead a victim and which, in fact, does mislead the victim causing the victim damages. There are defenses to fraud that routinely arise in civil fraud litigation like lack of materiality or “puffery” in the sale of a product or services. Even where a fraud is clear, many jurisdictions impose an “economic loss” rules that limits, in most cases, the amount of damages a plaintiff can recover to fraud to the amount of damages the plaintiff would have been entitled to for breach of contract.
In an effort to avoid these state law limitations and obtain federal jurisdiction, some plaintiffs resort to the Racketeer Influenced and Corrupt Organizations Act (RICO). RICO provides for federal jurisdiction, treble damages and attorney’s fees when the defendant engages in “pattern of racketeering activity”. These requirements seem deceptively simple. The pattern of “racketeering activity” must include two separate instances of activity drawn from a list of specified offenses. Fraud is one of those activities, so three instances of fraud would constitute a RICO violation, right? The answer is mostly no.
As the recent case of Rajaranthnam v. Motley Rice LLC, filed in the U.S. District Court for the Eastern District of New York, points out civil RICO cases face significant obstacles. In that case, Motley Rice, a highly respected national law firm, had filed suit against Rajaranthnam on behalf of a number of plaintiffs for violating anti-terrorism law. The crux of the lawsuit alleged that Rajaranthnam financed and supported the “Tamil Tigers” in terrorist attacks directed at innocent civilians. Ultimately, that case was dismissed. Following the dismissal, Rajaranthnam, a billionaire hedge fund manager sued Motely Rice for RICO.
The suit alleged that Motley Rice, together with a confidential FBI informant and members of the government’s Joint Terrorism Task Force (“JTTF”), operated a RICO enterprise that improperly acquired and disseminated false information about his alleged support for the Sri Lankan terrorist group. The goal of this conspiracy, according to Rajaranthnam was to coerce him into a lucrative settlement with Motley Rice’s clients.
The case was dismissed early in the litigation. The Court began by explaining that it was the court’s duty to scrutinize civil RICO claims early in the “. . . litigation to separate the rare complaint that actually states a claim for civil RICO from that more obviously alleging common law fraud.” The plaintiff had alleged diverse acts that, on their face, would appear to satisfy that RICO’s pleading requirements. These included allegations that Motley Rice had engaged in fraudulent and illegal conduct related to 1970s asbestos litigation, September 11 terrorist attacks litigation, the use of a consulting firm to exploit government contacts and obtain government information, and the use of illegal tactics to cause the arrest of an Afghan drug lord.
As the court noted, however, RICO has “relatedness” and “continuity” requirements that are designed to separate the true RICO enterprise from the run-of-the-mill common law fraud. Although a formalized “structure” is not required in a criminal RICO case, civil cases have more stringent pleading requirements. The “relatedness” requirement of the civil case requires that there be both “vertical relatedness” and “horizontal relatedness”. Vertical relatedness means that the acts must relate to the RICO “enterprise”. Horizontal relatedness means that the acts must be related to each other. Therefore, disparate acts of fraud lack horizontal relatedness, and the acts are not connected to an organization’s hierarchy, there is not vertical relatedness.
In dismissing the action, the court found that Rajaranthnam had failed to adequately plead a RICO “pattern” of “racketeering activity”. The predicate acts pled did not rise to the level of mail fraud or wire fraud, witness tampering, bribery or any other enumerated violation under RICO. The court also noted that statements made to the media, even if defamatory, do not constitute a violation of any criminal statute. Finally, the court noted that a single violation (which the court did not find or specify) could not be fragmented into multiple violations in order to satisfy RICO’s requirements.
Does this mean that civil RICO cases should never be brought? Not at all. When confronted with a clear pattern of criminal activity, an aggrieved party should resort to RICO for recompense. As the Supreme Court explained, civil RICO serves as a law enforcement tool to protect the general public and the common good from the felonious conduct of criminal organizations by the creation of “private attorneys general”. RICO is therefore not the place for plaintiff’s attorneys to “be creative” in the manufacture of “crimes” to establish federal jurisdiction and to obtain treble damages and attorneys fees. Where a criminal enterprise is harming a company’s business through illegal activity (fraud or money laundering for example), RICO may be appropriate.
In the case at the beginning of this blog post describes a circumstance where there is a criminal enterprise based upon the felony level theft of timber, predicate acts under RICO. There were also far more than the required two acts. Vertical relatedness and horizontal relatedness were present, and there was certainly continuity. If a complaint against the timber company would have been filed, there is a strong likelihood that it would have been successful. The case illustrates one other important aspect of the RICO—the activities of the timber company were criminal. It would not have been necessary to stretch the create a criminal violation—it was apparent on its face.
These are the types of cases where a RICO action is warranted.
 18 Pa.C.S. 4107.
 2020 WL 1476171 (E.D.N.Y. Mar. 26, 2020).
 Id. At *9.
 Boyle v. United States, 556 U.S. 938 (2009).
 H.J. Inc. v, Northwestern Bell, 492 U.S. 229 (1989).
 2020 WL 1476171 (E.D.N.Y. Mar. 26, 2020) at * 16.
 Agency Holding Corp. v. Malley-Duff Associates, 483 U.S. 154 (1987).
 See, Doe et al v Trump Corp et al, U.S. District Court, Southern District of New York, No. 18-09936