Case Law May Open Door for RICO Plaintiffs

The most commonly used form of civil RICO is found at 18 U.S.C. § 1962(c). Section 1962(c) is basically aimed at those persons who use some alliance or entity (“the RICO enterprise”) as a vehicle to carry out a related series of wrongful acts to harm another. It focuses on systematic and organized behavior carried out over time; rather than some single event, or number of events, that are short-lived or sporadic. In 1993, the Supreme Court limited section 1962(c)’s breadth by requiring proof that a RICO defendant operated or managed the RICO enterprise. Persons who did not operate or manage the enterprise could not be liable under section 1962(c).

Subsequent Supreme Court case law, however, has arguably opened a back door to escape these limitations. If civil RICO plaintiffs can open that door, a party who could not possibly be held directly liable under section 1962(c) might still be liable as a RICO conspirator under a separate and distinct statute, 18 U.S.C. § 1962(d).

The Reves decision

A person cannot be liable under section 1962(c) unless he or she participated in the operation or management of the alleged RICO enterprise. Reves v. Ernst & Young, 113 S. Ct. 1163, 1172 (1993). This means that the person had to have “some part in directing the enterprise’s affairs in order to be liable.” Id. The person must be “plainly integral” to carrying out the enterprise’s affairs. The person need not hold a formal position in the enterprise, nor need they be in upper management; and even a lower rung participant could be liable if the essential Reves criteria are met. U.S. v. Parisi, 159 F.3d 790, 796 (3d Cir. 1998).

The Reves requirements raised a protective barrier from RICO claims for outside service providers such as accountants and lawyers. For example, in University of Maryland v. Peat, Marwick Main & Co., 996 F.2d 1534 (3d Cir. 1993), an accounting firm did not operate or manage a corporate enterprise even though the firm’s employees provided a wide range of computer and financial services; and even attended board meetings. Under Reves, the accountant’s conduct was simply outside the scope of section 1962(c).

The effect of Reves on RICO’s conspiracy statute

In 1995, the Third Circuit reiterated that even persons within the corporate enterprise cannot be liable under section 1962(c) unless they “exercise some control over the enterprise.” U.S. v. Antar, 53 F.3d 568, 580-581 (3d Cir. 1995). That court had to address a defendant charged with violating RICO’s conspiracy statute, 18 U.S.C. § 1962(d). Section 1962(d) provides liability for those who have conspired to violate RICO’s other substantive sections, e.g., section 1962(c).

The Antar court limited the extent of RICO conspiracy claims where those claims were based on conspiracies to violate section 1962(c). Following Reves, Antar rejected imposing section 1962(d) conspiracy liability on a person who did not operate or manage the RICO enterprise, if that person simply conspired with another person who was operating or managing the section 1962(c) enterprise. However, if a defendant conspired to operate or manage the enterprise, this could create liability under section 1962(d) for conspiring to violate section 1962(c). Id. Thus, consistent with the Supreme Court’s criteria, the Third Circuit mapped Reves‘ section 1962(c) standards onto section 1962(d); and required that the RICO plaintiff establish all of the section 1962(c) elements to make out a conspiracy claim based on section 1962(c).

The Third Circuit believed that it had to protect the essence of the Reves decision by attaching the operation or management requirement to a defendant indirectly charged with violating section 1962(c) via the RICO conspiracy statute. The implicit logic is as follows: It would not make sense to exclude a class of people from section 1962(c)’s scope, only to make those same people liable for violations of section 1962(c) as conspirators. In other words, the Antar court did not want a construction of section 1962(d) that would effectively permit a person being found liable for an act that it was impossible for that person to substantively commit.

The Supreme Court’s Salinas ruling undermines Antar

After Antar was decided, the Supreme Court issued its opinion in Salinas v. U.S., 118 S. Ct. 469 (1997). That case addressed liability under the RICO conspiracy statute, section 1962(d). The result in Salinas undermined Antar’s concern with preserving Reves from a flank attack under the conspiracy statute.

An early case in this circuit interpreting Salinas stated: “To be liable under 1962(d), where the planned conspiracy would involve violations of 1962(c), ‘a conspirator must intend to further an endeavor which, if completed, would satisfy all of the elements of [1962(c)], but it suffices that he adopt the goal of furthering or facilitating the endeavor.'” Manley v. Stark, No. 97-524, 1999 U.S. DIST. LEXIS 22082 at **33-34 (D. N.J. Aug. 10, 1999), quoting, Salinas, 118 S. Ct. at 477. In such a case, the defendant may be liable even if he has not specifically committed or agreed to commit the predicate acts, so long as he has agreed to pursue the same criminal objective. Id., citing, Salinas, 118 S. Ct. at 477. The Salinas Court went so far as to say that “[a] person, moreover, may be liable for conspiracy even though he was incapable of committing the substantive offense.” Salinas, 118 S. Ct. at 477 (emphasis added). The Manley court observed that the Antar standard was narrower than the Supreme Court’s Salinas standard, but did not have to deal with reconciling the two cases. Manley, 1999 U.S. Dist. LEXIS 22082 at *34.

Eight months later, the issue was front and center before a Philadelphia district court. In Smith v. Berg, No. 99-2133, 2000 U.S. Dist. LEXIS 4513 (E.D. Pa. April 10, 2000), the district court found that Antar had been implicitly overruled by the Supreme Court’s Salinas decision. Id. at **11-12. Thus, it appeared that even if the conspirator did not operate or control the enterprise, he or she could still be liable for conspiring with those who did.

The same district court reconsidered its position, however, after the Supreme Court’s later decision in Beck v. Prupis, 120 S. Ct. 1608 (2000), arguably changed that rule. Smith v. Berg, No. 99-2133, 2000 U.S. Dist. LEXIS 9929 at **7-10 (E.D. Pa. July 18, 2000). In Beck, the Supreme Court held that a civil RICO plaintiff could not bring a claim for a RICO conspiracy where the overt act that allegedly harmed the plaintiff was not a racketeering act subject to the RICO statute. Thus, a RICO conspiracy claim is wholly tied to the existence of an underlying RICO violation, and cannot go beyond the scope of what defines that violation. Therefore, one might argue that a RICO conspiracy claim cannot exist against a party who could not have committed the underlying act, and Antar‘s conclusion should not be overruled by Salinas.

On closer examination, however, this argument has two flaws. First, even if the RICO conspirator did not violate section 1962(c) himself or herself, they could still have conspired with someone who did violate section 1962(c). Thus, unlike the situation in Beck, there is an actual underlying RICO violation that falls within the statute’s defined parameters. Second, as set forth in Salinas, conspirator liability is based upon some level of participation in another’s actions which is narrower in scope than the other person’s wrongful conduct. Conspirators are thus potentially liable for another’s conduct in which they played no immediately active part.

This reading is supporting by dicta in Beck. The second Berg opinion observes that the Supreme Court, in dicta, recognized that a co-conspirator could be liable under section 1962(d), if there was a cognizable violation of 1962(c). This was true even if that defendant did not himself violate the underlying RICO section that he conspired to violate, e.g., section 1962(c). Id. The Beck Court had stated that “a plaintiff could … sue co-conspirators [under § 1962(d)] who might not themselves have violated one of the substantive provisions of § 1962.” Beck, 120 S.Ct. at 1617.

The district court certified the case to the Third Circuit to decide this “murky” area of the law.

The Seventh Circuit offers an example of what the law may become in the Third Circuit: “To conspire to commit a subsection (c) offense, one would not need, necessarily, to meet the Reves requirements: one does not need to agree personally to be an operator or manager. On the other hand, one cannot conspire to violate subsection (c) by agreeing that somehow an enterprise should be operated or managed by someone. That would impose a meaningless requirement and cast a frighteningly wide net. Rather, one’s agreement must be to knowingly facilitate the activities of the operators or managers to whom subsection (c) applies. One must knowingly agree to perform services of a kind which facilitate the activities of those who are operating the enterprise in an illegal manner. It is an agreement, not to operate or manage the enterprise, but personally to facilitate the activities of those who do.” Brouwer v. Raffensperger, Hughes & Co.,199 F.3d 961, 967 (2000), cert. denied, 120 S. Ct. 2688 (2000).

Conclusion

Berg‘s resolution, or the Third Circuit’s determination of the issue in another case, will likely permit a defendant who could not be liable under section 1962(c) – because he or she did not manage or operate the enterprise – to remain subject to liability through the back door of section 1962(d). Salinas strongly appears to permit this broader application since a person may be liable for conspiracy, even though he or she was “incapable” of committing the substantive offense; and the Supreme Court’s Beck dicta confirms that interpretation.

More subtly, these developments in the Third Circuit and the Supreme Court provide an excellent example of the flux that often develops around particular elements, or sub-elements, of RICO. We can readily see the interaction of courts at all three levels of the federal judiciary, and the relative speed and frequency with which even the Supreme Court issues RICO decisions that can alter the course of the law in a circuit.

*Mr. Applebaum is a commercial litigator at Fineman Krekstein & Harris, P.C. , and recently co-presented a seminar, “RICO Made Easy”, to the Business Litigation and Federal Courts Committees of the Philadelphia Bar Association in September 2000.

This article was originally printed in The Legal Intelligencer on March 15, 2001.