"THE RICO LAW"

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-----------------------------"The RICO Law was designed by Rats in order to catch the RATS"~John Gotti

Although the RICO Act can be used in many contexts, the statute is most easily understood in its intended context: the Mafia. In the context of the Maifa, the defendant person (i.e., the target of the RICO Act) is the Godfather. The "racketeering activity" is the criminal activities in which the Mafia engages, e.g., extortion, bribery, loan sharking, murder, illegal drug sales, prostitution, etc. Because the Mafia family has engaged in these criminal actions for generations, the criminal actions constitute a pattern of racketeering activity. The government can criminally prosecute the Godfather under RICO and send him to jail even if the Godfather has never personally killed, extorted, bribed or engaged in any criminal behavior. The Godfather can be imprisoned because he operated and managed a criminal enterprise that engaged in such acts. Moreover, under section 1964(c) of the RICO Act, the victims of the Mafia family (i.e., the extorted businessman, the employers whose employees were bribed, debtors of the loan shark, the family of a murder victim) can sue the Godfather civilly and recover the economic losses they sustained by reason of the Mafia family's pattern of racketeering.

As a practical matter, the closer a plaintiff's case is to the Mafia scenario described above, the better chance the plaintiff has in succeeding under the RICO Act. Given the diverse factual scenarios that may confront attorneys and parties under RICO, it is always helpful to analogize non-Mafia factual scenarios to the prototypical RICO claim against the Mafia. It is always helpful to ask: who stands in the position of the Godfather, i.e., the defendant person? What is the equivalent of the Mafia family, i.e., the enterprise? This will give you a good start in evaluating the merits of any RICO claim you confront. If the facts are well-suited to the Mafia analogy, you likely have a stronger claim.

What constitutes a RICO violation?
RICO's substantive liability provisions are found in section 1962, which has four subsections labeled (a), (b), (c) and (d).

In plain English, section 1962(a) generally makes it unlawful for a person to use an enterprise to launder money generated by a pattern of racketeering activity. Lightening Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1188 (3d Cir. 1993).

Section 1962(b) makes it unlawful for a person to acquire or maintain an interest in an enterprise through a pattern of racketeering activity. Section 1962(b) is perhaps the most difficult RICO claim to express in practical terms. A stereotypical violation of section 1962(b) occurs when a victim business owner cannot make payments to a loan shark; upon default, the loan shark says: "you're either going to die or you're going to give me your business." Given the threat to this life, the victim transfers control of his business to the loan shark. Usually, the victim business owner remains the owner on paper but the loan shark controls the business and receives all income from the business. Thus, the loan shark has acquired and maintained interest or control over an enterprise (i.e. the business) through a pattern of racketeering (i.e., loan sharking and extortion).

Section 1962(d) makes it unlawful for a person to conspire to violate subsections (a), (b) or (c) of the RICO Act.

By far the most useful and common civil RICO claim is found under section 1962(c), which makes it unlawful for a person to manipulate an enterprise for purposes of engaging in, concealing, or benefiting from a pattern of racketeering activity. Given its broad utility, the general elements of a RICO claim will be discussed in the context of a section 1962(c) claim. Distinctions will then be made between section 1962(c) claims and claims under 1962(a), (b) and (d).

Section 1962(c) Claims

Section 1962(c) prohibits any defendant person from operating or managing an enterprise through a pattern of racketeering activity. So long as a civil RICO plaintiff is injured by reason of the defendant's operation or management of the enterprise through a pattern of racketeering, the plaintiff is entitled to treble damages, attorneys' fees and costs under section 1964(c) (commonly referred to as RICO's civil liability provision).

Section 1962(c)'s utility stems from its breadth. Section 1962(a) and (b) claims are relatively narrow. To have standing under sections 1962(a) and (b), the plaintiff must allege more than injury following from the racketeering activity. Under section 1962(a), a civil plaintiff has standing only if he has been injured by reason of the defendants' investment of the proceeds of racketeering activity. Under section 1962(b), a civil plaintiff has standing only if he has been injured by reason of the defendants' acquisition or maintenance of an interest in or control over an enterprise through a pattern of racketeering activity. These distinctions will be discussed in greater detail in the section of this memorandum that is particularly concerned with the section 1962(a) and 1962(b) claims.

The elements of a section 1962(c) civil claim can be described in many ways. Generally, to establish a claim under section 1962(c), the plaintiff must prove that (1) a defendant person (2) was employed by or associated with an enterprise (3) that engaged in or affected interstate commerce and that (4) the defendant person operated or managed the enterprise (5) through a pattern (6) of racketeering activity, and (7) the plaintiff was injured in its business or property by reason of the pattern of racketeering activity.

Defendant Persons

Section 1962 refers to defendants as "persons," and only those defendants who are named as persons under section 1962 can be held liable for violations of RICO. A defendant "person" can be an individual or corporation - it makes no difference so long as the defendant person engaged in a pattern of criminal activity.

Parties often confuse the defendant "person" with the RICO enterprise and equate the RICO enterprise with a criminal enterprise. Many times, the RICO enterprise is an enterprise that perpetrates crime (e.g., a Mafia family), but many other times the RICO enterprise may be the victim of the criminal activity or a passive instrument of the defendants' criminal acts. See National Organization for Women v. Scheidler, 510 U.S. 249, 259 n.5 (1994). For example, John Doe is a purchasing agent for ABC Company. Sally Smith sells office products to ABC Company. Sally's prices are grossly inflated, so John Doe refuses to buy ABC's office supplies from her. One day, Sally offers to make a personal payment of $1000 per month to John for so long as ABC buys its office supplies from her. John accepts the offer. After several months of paying Sally's grossly inflated prices, ABC discovers the bribes, fires John and sues Sally under RICO. For purposes of its RICO claim against Sally, ABC could allege that it was the RICO enterprise through which Sally perpetrated her pattern of racketeering activity. See Reves v. Ernst & Young, 507 U.S. 170, 184 (1993) ("[a]n enterprise . . . might be 'operated' or 'managed' by others 'associated with' the enterprise who exert control over it as, for example, by bribery"). Thus, ABC can be the RICO enterprise even though it is a totally innocent victim and the plaintiff in the case.

The important thing to remember is that only a "person" can be held liable under section 1962(c). Naming an entity as simply a RICO enterprise does not impose any liability on that entity. Banks, law firms, insurance companies, advertising agencies that unknowingly facilitate a defendant's criminal activities are often named as the enterprise or part of the enterprise through which the defendant conducted his pattern of racketeering. No liability can attach to a person or entity who is merely named as a member of the enterprise or who is merely named as the enterprise itself.

Another confusing aspect of RICO is that it uses the term "person" to refer to both defendants and plaintiffs. As noted above, "person" as used in section 1962(c) refers to the defendant person. Section 1964(c), RICO's civil liability provision, states, however, that any "person injured in their business or property by reason of a RICO violation" is entitled to damages under the statute. Person, under section 1964(c), refers to the plaintiff, the victim, or the party injured by the criminal acts - not the defendant.

Enterprise

To establish liability under any subsection of section 1962, a plaintiff must allege the existence of an enterprise. As noted above, an enterprise may be an illegitimate enterprise, such as a Mafia family, or a wholly legitimate enterprise, such as a corporation. United States v. Turkette, 452 U.S. 576, 580-81 (1981). Although an enterprise can be a legal entity, such as a partnership, corporation or association, it can also be an individual or simply a relatively loose-knit group people or legal entities. These latter groups are referred to as "association-in-fact" enterprises under the statute. 18 U.S.C. § 1961(4).

Association-in-fact enterprises are probably the must useful and abundant forms of RICO enterprises, but they are also the most difficult to grasp on an analytical level. When Congress passed the RICO Act, the phrase "association-in-fact" enterprise was probably intended to apply directly to the Mafia, because a Mafia family is not a formal legal entity nor is it an individual, rather it is a "union or group of individuals associated in fact although not a legal entity." Id. Corporate parents and their subsidiaries allegedly engaged in criminal activities have also been named as association-in-fact enterprises. Most courts will accept any informal group as an association-in-fact enterprise so long as the group possesses three characteristics: (a) some continuity of structure and personnel; (b) a common or shared purpose; and (c) an ascertainable structure distinct from that inherent in the pattern of racketeering. Diamonds Plus, Inc. v. Kolber, 960 F.2d 765, 769 (8th Cir. 1992).

Continuity of structure and personnel means that you cannot have a group whose membership is constantly in a state of flux. There must be something more than a fleeting consistency with regard to the number of group members and the identity of the group members.

Enterprise / Racketeering Activity Distinction

There is tension between the last two elements of an association-in-fact enterprise. A group's common or shared purpose can be to carry out criminal activity, but if the group's only common or shared purpose is to carry out criminal activity then the group may not have an ascertainable structure distinct from the pattern of racketeering. This tension is commonly referred to as the enterprise / racketeering activity distinction. To the extent an enterprise carries out legitimate objectives, in addition to allegedly criminal actions, the enterprise / racketeering activity distinction is not problematic. Id. at 770 n.5 ("though it is not required, proof the enterprise conducts lawful activity unrelated to the pattern of racketeering activity will often serve to prove the enterprise is separate from the pattern of racketeering). With regard to wholly criminal association-in-fact enterprises, one court has stated:

[A] distinct structure might be demonstrated by proof that the group engaged in a diverse pattern of crimes or that it has an organizational pattern or system of authority beyond what was necessary to perpetrate the predicate crimes. The command system of a Mafia family is an example of this type of structure as is the hierarchy, planning, and division of profits within a prostitution ring.

United States v. Bledsoe, 674 F.2d 647, 665 (8th Cir.), cert denied, 459 U.S. 1040 (1982). "The focus of the inquiry is whether the enterprise encompasses more than what is necessary to commit the predicate RICO offense." Diamonds Plus, Inc., 960 F.2d at 770. It is not enough than individual members of the enterprise carry an activities distinct from the pattern of racketeering; the group as a whole must have a common link other than the racketeering activity. McDonough v. National Home Ins. Co., 108 F.3d 174, 177 (8th Cir. 1997).

Person / Enterprise Distinction

In addition to being distinct from the pattern of racketeering activity, the enterprise must also be distinct from the defendant person. The person / enterprise distinction arises from the long-standing common law maxim that a person cannot conspire with himself. River City Markets, Inc. v. Fleming Foods West, Inc., 960 F.2d 1458, 1461 (9th Cir. 1992). The person / enterprise distinction is most problematic in the context of corporations. As one court noted: Because a corporation can only function through its employees and agents, any act of the corporation can be viewed as an act of such an enterprise, and the enterprise is in reality no more than the defendant himself. [Citation omitted.] Thus, where employees of a corporation associate together to commit a pattern of predicate acts in the course of their employment and on behalf of the corporation, the employees in association with the corporation do not form an enterprise distinct from the corporation.

Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1995). In short, the person / enterprise distinction is not satisfied (and a RICO claim will fail) where the corporation is named as the defendant person who engages in a pattern of racketeering activity through an association-in-fact enterprise consisting exclusively of its officers and/or employees. Id. On the other hand, a corporation is a separate legal entity from its incorporators - even if the corporation is owned and controlled by a sole shareholder. Thus, one can successfully name as defendant persons the individual shareholder(s), officers, directors or employees who engage in a pattern of racketeering activity through their corporate enterprise. See Cedric Kushner Promotions, Ltd. v. Don King, 533 U.S. 158, 163-64 (2001); Jaguar Cars, Inc. v. Royal Oaks Motor Car Co., Inc., 46 F.3d 258, 269 (3d Cir. 1995). Under such circumstances, however, only the shareholder(s), officers, directors or employees will face individual liability under RICO. Because it is merely the enterprise, the corporation cannot face any liability.

In order for a corporation to be named as a defendant person, the corporation must engage in a pattern of racketeering activity through an enterprise that includes more than itself or its subparts. Some courts do not consider an enterprise consisting of a corporation's subsidiaries, affiliates, dealers or captive agents to be sufficiently distinct from the corporate defendant: [W]here a large, reputable manufacturer deals with its dealers or other agents in the ordinary way, so that their role in the manufacturer's illegal acts is entirely incidental, differing not at all from what it would be if these agents were the employees of a totally integrated enterprise, the manufacturer plus its dealers and other agents (or any subset of the corporate family) do not constitute an enterprise within the meaning of the statute. Fitzgerald v. Chrysler Corp., 116 F.3d 225, 228 (7th Cir. 1997). However, if a complaint alleges that a corporation engages in a pattern of racketeering activity through legal entities beyond its control, such as independent banks, law firms, accounting firms, or public relations firms, the person / enterprise distinction will more than likely be satisfied.

Some defendants have attempted to allege that the person / enterprise distinction cannot be met where an individual defendant person is also alleged to be part of an association-in-fact enterprise consisting of other individuals. For example, Joe Doe is alleged to be the defendant person who engages in a pattern of racketeering activity through an association-in-fact enterprise consisting of John Doe, Sally Smith and Bob Johnson. Most courts have held that in such cases the individual and association-in-fact enterprise that includes the individual -- are distinct: "[l]ogically, one can associate with a group of which he is a member, with the member and the group remaining distinct entities." River City Markets, Inc., 960 F.2d at 1461.

An Enterprise Engaged in or Affecting Interstate Commerce

At first blush, one would think that RICO's interstate commerce requirement would receive a great deal of attention from the courts, given that RICO is a federal statute and a nexus with interstate commerce is necessary to confer jurisdiction on a federal court. RICO's interstate commerce requirement is seldom, however, discussed by the courts - probably because a RICO claim must be predicated upon underlying acts of racketeering. When a RICO claim is based upon violations of federal criminal statutes (see 18 U.S.C. § 1961(1)(B)), the nexus with interstate commerce is necessarily established by the commission of the underlying federal crime. Moreover, because the U.S. Constitution confers the postal powers upon the federal government, acts of mail fraud, even intrastate use of the mails, have an inherent nexus with interstate commerce. United States v. Elliott, 89 F.3d 1360 (8th Cir. 1996). Because violations of the mail fraud statute are almost always alleged in a RICO complaint, a nexus with interstate commerce is almost always present. Finally, the state crimes upon which a RICO claim may be predicated (see 18 U.S.C. § 1961(1)(A)) are not minor offenses, and when such significant crimes are committed through an "enterprise" (rather than a mere individual), they are seldom confined to a single state.

To the extent the courts have discussed RICO's interstate commerce requirement in particular, a plaintiff's burden does not appear onerous. In United States v. Beasley, 72 F.3d 1518 (11th Cir.), cert. denied, 518 U.S. 1027 (1996), the court held that "[t]o satisfy [RICO's] interstate commerce requirement, only a slight effect on interstate commerce is required." Id. at 1526; see also United States v. Riddle, 249 F.3d 529, 538 (6th Cir.), cert. denied, 534 U.S. 930 (2001) ("a de minimus connection suffices for a RICO enterprise that 'affects' interstate commerce"). In short, the interstate commerce requirement is usually not a major stumbling block in RICO litigation. But see Musick v. Burke, 913 F.2d 1390, 1398 (9th Cir. 1990) (holding that the interstate effect of the enterprise's activities must not be insubstantial as a matter of practical economics and that the plaintiff's mere purchase of products drawn from interstate commerce did not demonstrate the "minimal" interstate nexus necessary to establish jurisdiction under RICO).

Defendants' Operation or Management of the Enterprise

Section 1962(c) also requires that the defendant "conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs." The Supreme Court has interpreted this language to mean that a defendant must "operate or manage" the enterprise. Reeves v. Ernst & Young, 507 U.S. 170, 183 (1993). This leads one to the question: what does it mean to operate or manage an enterprise? The Supreme Court has stated that although an enterprise is operated and management by its "upper management" the "operation and management" standard does not limit liability under RICO to "upper management": An enterprise is "operated" not just by upper management but also by lower-rung participants in the enterprise who are under the direction of upper management. An enterprise also might be "operated" or "managed" by "others associated with" the enterprise who exert control over it as, for example, by bribery. Reves, 507 U.S. at 184. Given the Supreme Court's crystal clear guidance in Reves, the question of whether a particular defendant actually operates or manages an enterprise is generally considered by the lower courts to be a question of fact that is left to the jury. United States v. Allen, 155 F.3d 35, 42-43 (2d Cir. 1998).

Professionals, however, are one group of defendants who have clearly benefited from the Supreme Court's "operation or management" test. Generally, courts have held that a professional (such as a lawyer, banker, consultant or an accountant) carrying-out their duties in accordance with generally accepted standards of the professional and without knowledge of the RICO violations, cannot be considered operators or managers of an enterprise and, thus, cannot be held liable under the statute. See Reves, 507 U.S. at 186 (dismissing RICO claim against accounting firm); Handeen v. Lemaire, 112 F.3d 1339, 1350-51 (8th Cir. 1997) (discussing whether the defendant law firm operated or managed the alleged enterprise).

The Pattern

In H.J. Inc. v. Northwestern Bell, 492 U.S. 229 (1989), the Supreme Court determined that the factors of relatedness and continuity combine to produce a pattern of racketeering. As a result of the Supreme Court's decision in H.J. Inc., the statutory definition of pattern (18 U.S.C. § 1961(5)) has been rendered meaningless for all practical purposes.

Relatedness

To be related, the criminal actions that form the pattern must "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics." Id. at 240. For example, a related pattern of criminal activity probably exists when: 1) the defendant's purpose is to defraud insurance companies by burning down his buildings; 2) insurance companies make several loss payments as a result of the defendant's pattern of arson; 3) the defendant uses an individual or group of individuals to ignite the fires that burn his buildings; 4) the victims are always the defendant's insurance companies and the firefighters who are injured or killed as a result of the defendant's acts of arson; and 5) the defendant always uses the same inconspicuous-type of an electrical malfunction and accelerant to ignite the fires. On the other hand, a pattern of criminal activity may not be related when: 1) the defendant's purpose is, at times, to defraud insurance companies while at other times to bribe police officers, extort neighborhood business owners or engage in money laundering; 2) the results of the defendant's activities vary, sometimes people are extorted, other times buildings are burned, other times drugs are traded; 3) the defendant uses a wide variety of people to engage in these activities and seldom (if ever) associates with the same person twice; 4) the defendant's victims are sometimes insurance companies, sometimes neighboring business persons, sometimes the communities served by the police he bribes, sometimes the IRS who is deprived of tax revenue by his money laundering.

Continuity

Continuity may be close-ended or open-ended. Id. at 241. "A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time." Id. at 242.

There is no rigid rule that a close-ended pattern must last one year, but the one year milestone is a good rule of thumb. See Religious Technology Ctr. v. Wollersheim, 971 F.2d 364, 366 (9th Cir. 1992) ("[w]e have found no case in which a court has held the requirement to be satisfied by a pattern of activity lasting less than a year"). Generally, if your pattern lasts a year or more, the courts will find close-ended continuity. If a pattern lasts less than a year, the plaintiff will have to explain persuasively why criminal activity lasting only a few months constitutes a pattern.

Open-ended continuity exists when criminal conduct is a specifically threatened to be repeated or to extend indefinitely into the future. H.J. Inc., 492 U.S. at 242-43. An open-ended pattern is best exemplified by a mobster's threat to burn down a business unless the owner pays $1,000 per month. The extortionate threat is specific and unlimited in duration: whenever you stop paying $1,000 per month (whether it's tomorrow or ten years from now) your building will burn. Thus, the business owner could immediately state a RICO claim on the basis of this single threat, even if the threat was never made again or no money was ever paid. Threats of indefinite duration also exist where criminal conduct has become a regular way of conducting the defendants' ongoing legitimate business.

Multiple Schemes and the Pattern

Before the H.J. Inc. decision, many different tests were used to determine the existence of a pattern. Most popular among these early approaches to the issue of pattern was the "multiple scheme" approach, whereby the courts held that to prove a pattern, the plaintiff had to establish that a defendant engaged in more than one racketeering scheme and injured more than one victim. H.J. Inc. expressly rejected the multiple scheme approach on the basis that it was not supported by the text or history of the statute. H.J. Inc., 492 U.S. at 240.

Regardless of H.J. Inc., some courts have been reluctant to abandon the multiple scheme approach. See, e.g., Western Associates Ltd. Partnership, ex rel. Ave. Associates Ltd. Partnership v. Market Square Associates, 235 F.3d 629, 634-35 (D.C. Cir. 2001); Midwest Grinding Co., Inc. v. Spitz, 976 F.2d 1016, 1021-22 (7th Cir. 1992). Unless a party is litigating in one of these circuits, the multiple scheme approach should not be relied upon. The multiple scheme approach is not only contrary to H.J. Inc. but it can be detrimental to the elements one must establish pursuant to H.J. Inc. For example, H.J. Inc.'s relatedness requirement is more likely met when the "methods of commission" are similar - multiple schemes may indicate a dissimilarity in the methods of commission. Likewise, H.J. Inc. holds that a pattern is related if the victims are similar, arguing that there are multiple, unrelated victims only undermines plaintiffs' relatedness arguments under H.J. Inc.

The fundamental problem with the multiple scheme approach is that almost any pattern can be depicted as either one scheme or multiple schemes, depending upon the outlook of the person analyzing the pattern. For example, a defendant bribes an employee. As a result, the employer's invoices (which are mailed to the defendant) are reduced as a result of the bribes, and the defendant's checks to pay the invoices also reflect the reductions obtained as a result of the illegal bribes. This scenario can be depicted as a single scheme designed to obtain the employer's services at a below market rate, or it can be depicted as multiple schemes: to bribe the employee, to defraud the employer through the use of the U.S. mails by causing the employer to transmit invoices reflecting the unlawfully obtained price breaks, and to defraud the employer through the use of the U.S. mails by transmitting checks that reflect the unlawfully obtained price breaks. There is no objective way to define a pattern as involving either a single scheme or multiple schemes.

Racketeering Activity

Without the element of racketeering activity, a RICO claim would be difficult to prove, but because one must also prove racketeering activity in addition to pattern, enterprise, operation and management, etc., a RICO claim is among the most difficult violations to establish. It has been said that the need to prove racketeering activity essentially requires a plaintiff or prosecutor to prove a crime within a CRIME. A plaintiff or prosecutor has no chance of proving the "greater" CRIME, i.e., the RICO violation, unless they can first establish a "lesser" crime, i.e., an act of racketeering (sometimes called a predicate act).

Section 1961(1) of the RICO Act lists all of the crimes upon which a RICO violation may be predicated. A RICO claim can be predicated on not only numerous federal criminal violations, but also on violations of certain state criminal laws. With regard to the state crimes, the RICO Act states that a violation can be predicated upon "any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance . . . which is chargeable under State law and punishable by imprisonment for more than one year." Thus, to prove a RICO claim, a plaintiff or prosecutor must first allege and prove an entire murder case, kidnapping case, arson case, robbery case, etc. Only if the evidence supports these "lesser" charges, can the plaintiff or prosecutor proceed with the remaining elements of the "greater" RICO claim, e.g., pattern, enterprise, operation and management.

A RICO claim can also be predicated upon the violation of many, many federal criminal statutes. The federal crimes relate to a number of areas, including: counterfeiting, extortion, gambling, illegal immigration, obscenity, obstruction of justice, prostitution, murder for hire, interstate transportation of stolen property, and criminal infringement of intellectual property rights. These are but a few of the areas of federal criminal law out of which a RICO claim can arise.

Regardless of whether a RICO claim is predicated upon state or federal criminal violations (or a combination of both), the defendant need not be criminally convicted before a civil plaintiff can sue for treble damages under RICO. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 493 (1985). The statute requires only that the criminal activities are "chargeable" or "indictable" under state or federal law, not that the defendant has already been charged or indicted. 18 U.S.C. § 1961(1). There is one exception to this rule: since Congress amended the RICO Act in 1995, civil RICO claims cannot be predicated on securities fraud violations unless the defendant has been criminally convicted of a securities fraud violation. 18 U.S.C. § 1964(c). What follows is a discussion of some of the more useful and common acts of racketeering.

Mail and Wire Fraud

The extensive use of RICO in the civil context is almost solely attributable to the inclusion of mail and wire fraud as predicate acts. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 500 (1985). The mail and wire fraud statutes essentially make it criminal for any one to use the mails or wires to advance a scheme to defraud. Note that the fraudulent statements themselves need not be transmitted by mail or wire; it is only required that the scheme to defraud be advanced, concealed or furthered by the use of the U.S. mail or wires. See 18 U.S.C. §§ 1341, 1343. Because every business or corporation in the United States uses the mails or wires to make money, any business who allegedly engages in common law fraud arguably violates the federal mail and wire fraud statutes. As a result, almost any business that allegedly engages in common law fraud can theoretically be sued under the RICO Act.

Use of the mail and wire fraud statutes against businesses, however, is not unlimited. As general rule, a scheme to defraud must involve misrepresentations as to past or presently existing fact. "[I]t is settled law that 'a promise of future action or a prediction of future events cannot, standing alone, be a basis for fraud because it is not a representation, there is no right to rely on it, and it is not false when made.'" Hall v. Burger King Corp., 912 F.Supp. 1509, 1544 (S.D. Fla. 1995) (Kamenesh v. City of Miami, 772 F.Supp. 583, 594 (S.D. Fla.1991) (quoting Cavic v. Grand Bahama Dev. Co., 701 F.2d 879, 883 (11th Cir.1983)). In the context of RICO, one court of appeals has stated: "[b]reach of contract is not fraud, and a series of broken promises therefore is not a pattern of fraud. It is correspondingly difficult to recast a dispute about broken promises into a claim of racketeering under RICO." Perlman v. Zell, 185 F.3d 850, 853 (7th Cir. 1999). Thus, if an advertisement merely promises or opines that a product will perform in a certain way, it may be difficult to prove that the business has engaged in a scheme to defraud. The business must make false factual representations, e.g., falsely say that a survey established that 3 out of 4 dentists prefer brand X toothpaste, when in fact the survey established that 3 out of 4 disfavored use of brand X toothpaste. The RICO Act is almost single-handedly responsible for the small print disclaimers that appear on every newspaper and T.V. advertisement and for the fast-talking and whispered disclaimers that we hear on the radio. All of those disclaimers essentially say that all the statements made in the advertisement are opinions or are based upon assumptions that may or may not apply to the circumstances of any individual consumer. So, the next time you're squinting to read the fine-print or waiting for the radio announcer to run out of breath, you can thank the RICO Act.

Perhaps the biggest limitation on a plaintiff's ability to convert any common law fraud claim into a RICO claim predicated on the federal mail and wire fraud statutes is the aversion most federal courts have toward RICO claims predicated only on mail and wire fraud violations. The Supreme Court commented on this aversion in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985):

Underlying the Court of Appeals' [dismissal of the claim] was its distress at the "extraordinary, if not outrageous," uses to which civil RICO has been put. [Citation omitted.] Instead of being used against mobsters and organized criminals, it has become a tool for everyday fraud cases brought against "respected and legitimate enterprises." [Citation omitted.] . . .

The "extraordinary" uses to which civil RICO has been put appear to be primarily the result of the breadth of the predicate offenses, in particular the inclusion of wire [and] mail . . . fraud. . . .

Id. at 499-500; see also Midwest Grinding, 976 F.2d at 1025 (". . . we do not look favorably upon many instances of mail and wire fraud to form a pattern" (citing numerous cases).) Thus, even if a RICO plaintiff has clearly alleged a pattern of mail and wire fraud violations, courts may still view the RICO claim as beyond the intended scope of the RICO Act and may actively try to find a way to avoid application of the RICO Act to what is more properly a simple claim of common law fraud. Plaintiffs should always attempt to base their RICO claims on more than just alleged violations of the mail and wire fraud statutes. With hard work, a plaintiff should be able to identify other acts of racketeering under almost any factual scenario.

Bank Fraud

The bank fraud statute is potentially just as broad as the mail and wire fraud statutes, but for some reason, plaintiffs often fail to include bank fraud as a predicate act in a RICO claim. The bank fraud statute states:

Whoever knowingly executes, or attempts to execute, a scheme or artifice:
to defraud a financial institution, or
to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises shall be fined not more than $1,000,000 or imprisoned for not more than 30 years, or both.

18 U.S.C. § 1344 (emphasis added). Bank fraud is probably not a common predicate act because people read the first subsection and believe the fraud must be against a financial institution and fail to read the second subsection's language concerning funds "under the custody or control of" a bank. Under section 1344(2), bank fraud potentially arises even if the victim is not a bank and even if the bank did not lose any of its own property pursuant to a scheme to defraud. Bank fraud arguably occurs whenever a scheme to defraud enables the perpetrator to obtain any funds "under the custody or control of" a bank. Thus, if a scheme to defraud results in elderly victims mailing checks to the perpetrator, which are then cashed and the proceeds pocketed by the perpetrator, the perpetrator has arguably engaged in bank fraud. If a scheme to defraud results in "sweepstakes winners" departing with their credit card numbers, which are then used by the perpetrator to acquire goods and services for himself, the perpetrator has arguably engaged in bank fraud. In short, the bank fraud statute is arguably violated whenever a scheme to defraud results in the victim authorizing a bank to release funds to the perpetrator. Bank fraud is a predicate act that should not be overlooked.

An allegation of bank fraud should also be considered whenever the defendant has forged checks or endorsements on checks.

Extortion
What laypeople call extortion, lawyers call a violation of the Hobbs Act. The Hobbs Act states:

Whoever in anyway or degree obstructs, delays, or affects commerce or the movement of any article or commodity in commerce, by robbery or extortion or attempts or conspires so to do, or commits or threatens physical violence to any person or property in furtherance of a plan or purpose to do anything in violation of this section shall be fined under this title or imprisoned not more than twenty years, or both.

As used in this section:
(1) The term "robbery" means the unlawful taking or obtaining of personal property from the person or in the presence of another, against his will, by means of actual or threatened force, or violence, or fear of injury, immediate or future, to his person or property, or property in his custody or possession, or the person or property of a relative or member of his family or of anyone in his company at the time of the taking or obtaining.

(2) The term "extortion" means the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.

(3) The term "commerce" means commerce within the District of Columbia, or any Territory or Possession of the United States, all commerce between any point in a State, Territory, Possession, or the District of Columbia and any point outside thereof, all commerce between points within the same State through any place outside such State and all commerce over which the United States has jurisdiction.

18 U.S.C. § 1951 (emphasis added). In essence, the Hobbs Act elevates all but the simplest acts of robbery and extortion to the level of federal crimes.

The Issue of Consent

The important distinction between robbery and extortion is that consent is not an aspect of the former. Robbery is just that - robbery: the perpetrator takes a club, hits the victim over the head, and runs away with the victim's purse or semi-tractor full of cigarettes. Consent does not enter into the picture; rather, robbery involves the taking of property by force or threat of force, against the victim's will.

By its very nature, however, extortion causes the victim to consent to the taking of property. Extortion does not necessary involve the use of force or the threat of the use of force. For example, all of the following are examples of extortion: the victim storeowner "voluntarily" pays a Mafia enforcer $1000 per month because the Mafia enforcer said, "pay us $1000 per month of we'll break your legs"; a male police officer stops a female driver and demands that she have sex with him or he will cause her license to be cancelled; an employee demands personal payments from customers of his employer or the customers will not receive product they need to stay in business or the customers will receive shoddy service. Only the Mafia enforcers use the threat of force to extort payments. The police officer uses the threat of license revocation. The employee uses the threat of order cancellation or shoddy service. Nonetheless all the acts described constitute extortion because the threat resulted (or was intended to result) in the victim's consent to depart with valuable property or rights.

Because of the aspect of consent, victims of extortion often do not realize they are being extorted, or they may realize they are being extorted but fear reporting the crime to law enforcement because they have "participated" in the offense. For example, the store owner paying $1000 per month to the Mafia may fear that if he reports the payments to police, he will be indicted for aiding and abetting (i.e., financing) the Mafia's illegitimate activities. The female driver who "consented" to sex with the police offer may not report the crime on the basis of a belief that there can be no rape if the woman consents. The customers may not report the extortion of the employee out of fear that the employer will look to the customers to pay damages to the employer's reputation or profitability once the employee's extortion scheme is brought to light.

Perpetrators will also commonly threaten the victim with false charges of bribery if the victim reports the extortion. For example, in the commercial context, an employee may demand personal payments in exchange for the service that the customer is already supposed to receive under its contract with the employer, but when the customer reports the extortion, the employee claims that the customer was bribing the employee to receive favorable treatment (beyond what the employer was obligated to provide the customer under contract), e.g., below market prices, or confidential information that would enable the customer to be more competitive. In highly specialized industries where untrained law enforcement officers may be unable to discern the nature of the benefits running between the business parties, it boils down to the employee's word against the customer's and the apparent credibility of each party. Although the customer may be the victim of extortion, the customer may be reluctant to report the crime out of fear that law enforcement will believe the perpetrator's bribe story, rather than the true extortion story, and charge the victim with bribery.

These legitimate fears, however, are the very reason why extortion is such a serious crime. Robbery is a serious crime because of the use or threatened use of force. Extortion is a serious crime because it causes victims to believe they are perpetrators, and by exploiting that fear, the extortionist can repeatedly and openly engage in acts of extortion with little threat of being prosecuted. Victims of extortion must never forget, however, that extortion by its very nature involves the victim's consent. The mere fact that a victim has consented to depart with property in response to threats of physical or economic injury does not legitimize the perpetrator's actions. The element of consent is an essential element of extortion.

Extortion under Color Of Official Right

Many people are confused by extortion "under color of official right." Extortion under color of official right occurs when an agent of the government uses his or her legitimate governmental powers to obtain an illegitimate objective. For example, a police officer may have the authority to revoke a driver's license but he cannot offer to forego the legitimate exercise of his power in exchange for sexual favors from the driver. Likewise, a city council member may have the authority to rezone an area of town and thereby effectively put a company out of business, but the council member cannot threaten rezoning unless the company contributes to his re-election campaign. In short, governmental agents have a great deal of discretion when deciding how to exercise the powers of the government. When an agent engages in extortion "under color of official right," he is essentially using the governmental powers with which he has been trusted to gain personal or illegitimate rewards.

Extortion vs. Legitimate Exercise of Government Power

Extortion "under color of official right" should not be confused with the legitimate exercise of government power. Governmental power, by its nature, is legalized extortion, e.g.,: unless you abide by the law, you'll go to jail; unless you buy car insurance, your license will be revoked; unless you pay taxes, you'll go to jail and be fined; unless you register your gun, your gun will be confiscated. But for the government's authority to jail people and fine people and confiscate their property, how many of us would abide by the law? If we all naturally treated each other in a decent manner, there would be no need for government. From the first day that man emerged from the wilderness, however, most political philosophers and most of our experiences have taught us that if left to our own devices, people will rob from each other, abuse each other, and kill each other. Thus, pursuant to the basic social contract upon which all governments are based, people have consented to the government's use of extortion to keep all of us in line and to make sure that we all abide by the prevailing standards of decency.

The government's power to extort proper behavior from each of us is limited only by "due process," i.e., the government can't send someone to jail unless they first receive a fair trial, a law cannot be enforced unless it is properly approved by our elected officials and thereafter monitored by our courts, etc. A citizen cannot complain that he or she is being extorted by their government if the government is simply enforcing a law that complies with society's sense of due process. It is difficult to imagine when an official act of government could constitute extortion. When considering official government action, the appropriateness of the government's action is measured by the Constitution -- not by the criminal law of extortion. If the government does not have the power to enforce a law against a citizen (i.e., if the government does not have the power to extort certain behavior from a citizen), the law is unconstitutional - not extortionistic.

Other Predicate Acts Related to Extortion

There are many other predicate acts listed in section 1961(1) that are mirror images of extortion. There are circumstances when obstruction of justice (18 U.S.C. §§ 1503, 1510, 1511, 1512 or 1513) will also constitute extortion, e.g., an employer engaged in illegal activity may threaten an employee: "testify to X when the police talk to you or you'll be fired" or "you'll be killed." By this single threat, the employer may have violated both the Hobbs Act and an obstruction of justice statute. A RICO claim may also be predicated on the extortionate credit transactions (18 U.S.C. §§ 891-894). Such crimes usually arise in the loan-sharking context, where the loan-shark will demand a usurious interest rate and if that usurious rate is not paid, the loan-shark will assault the debtor, burn down the debtor's business, or require the debtor to surrender his business to the loan-shark. Thus, violations of the loan-sharking statutes and the Hobbs Act are also frequently seen hand-in-hand.

Interstate Transportation of Stolen Property

Title 18, section 2314 of the U.S. Code is violated whenever a person (1) has knowledge that certain property has been stolen or obtained by fraud, and (2) transports the property, or causes it to be transported, in interstate commerce. Pereira v. United States, 347 U.S. 1, 9 (1954). The stereotypical violation of section 2314 occurs in the context of stolen vehicles. For example, a defendant steals a car in Minneapolis and drives it to a chop-shop in Chicago, where he sells the car or cars and pockets the cash.

Section 2314, however, is a broad statute. Although the statute is popularly referred to as the Interstate Transportation of Stolen Property Act, the statute not only prohibits the interstate transportation of stolen property, but prohibits the interstate transportation of "any goods, wares, merchandise, securities or money, of the value of $5000 or more." The inclusion of "money" as an item of stolen property that cannot be lawfully transported in the interstate commerce greatly expands the scope of the act. The statute is arguably violated whenever a scheme to defraud results in a check (representing stolen money) being draw on an out-of-state bank. For example, a defendant in Minneasota calls a victim in California and tells the victim that if she sends him $5000 she will get a car worth $50000. The victim sends a check drawn on a bank in California. The defendant receives the check and negotiates it at a Minnesota bank. The funds are ultimately transferred via the interstate banking system from the victim's bank account in California to the defendant's bank account in Minnesota. The defendant never receives the promised car, so there is no property (let alone stolen) property that crosses state lines. Nonetheless, the statute is still violated because the defendant essentially stole $5000 from the victim and caused it to be transported across interstate lines through the interstate banking system. Accordingly, whenever a victim and defendant are located in different states, one should carefully analyze the flow of money because stolen money may very well cross state lines and may give rise to a violation of section 2314.

Civil Remedies Under Section 1964(c)

When passed by Congress in 1970, the expectation was that most RICO claims would be brought by U.S. Attorneys in the criminal context. In the 1980s, however, RICO's tail (i.e., it's civil remedies provision) began to wag the dog. Civil RICO claims exploded, and ever since, the number of criminal RICO claims filed every year is a small fraction of the number of civil actions brought under RICO. Congress paid so little attention to RICO's civil remedy provision that it failed to specify a statute of limitations for civil RICO claims.

RICO's civil remedies provision, section 1964(c), states:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefore in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including reasonable attorney's fees . Although apparently straight-forward, this provision contains several nuances that must be considered before filing any civil RICO claim.

Injured "by reason of" a Violation of Section 1962

Civil RICO is a specialized cause of action intended to control specifically targeted criminal activity. The effectiveness of such a remedy should not be diminished by the misguided attempts of plaintiffs who see mail and wire fraud violations in every civil lawsuit. Recognizing the need to maintain the integrity of the statute, numerous federal courts have held that, in RICO litigation, a cause of action will not lie unless the plaintiff can establish that the subject damages are directly caused "by reason of" the criminal activities that RICO was designed to address. In traditional tort cases, the issue of proximate cause is one of fact that can be resolved only by the jury (sometimes called the finder-of-fact). Given that RICO is a statutory creation reflecting unique Congressional concerns, RICO's proximate cause standard presents policy considerations that are exclusively within the competence of the court. As indicated by the Circuit Court in Brandenburg v. Seidel, 859 F.2d 1179 (4th Cir. 1988) (emphasis added):

[RICO] require[s] not only cause in fact, but "legal" or "proximate" causes as well, the latter involving a policy rather than a purely factual determination: "Whether the conduct has been so significant and important a cause that the defendant should be held responsible." (Citations omitted.) As such, the legal cause determination is properly one of law for the court, taking into consideration such factors as the foreseeability of the particular injury, the intervention of other independent causes, and the factual directness of the causal connection.

Id. at 1189.

In Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), the United States Supreme Court also held that RICO's proximate cause analysis presented a legal, not factual, issue:

Here [in analyzing RICO] we use "proximate cause" to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts. At bottom, the notion of proximate cause reflects "ideas of what justice demands, or of what is administratively possible and convenient." [Citation omitted.]

Id. at 268.

It is difficult to determine whether injuries are proximately caused by a RICO violation. One thing is certain, RICO plaintiffs must do more than merely demonstrate monetary loss. In considering Holmes, the Sixth Circuit stated that "[plaintiffs] employ flawed logic in their insistence that an 'actual monetary loss' equates with a 'direct injury.' . . . The [Holmes] Court held that RICO contains a proximate cause requirement . . . . This requirement forces the plaintiff to demonstrate a direct relationship between the injury suffered and the alleged injurious conduct. Thus, the concept of direct injury refers to the relationship between the injury and the defendants' action, not the plaintiff's pocketbook." Firestone v. Galbreath, 976 F.2d 279,285 (6th Cir. 1992).

Intervening Factors
Generally, there may be a proximate cause defense, i.e., a victim's injuries may be too far removed from the RICO violation, whenever a factor intervenes between the injury and the violation, breaking the direct link that should commonly exist. There are at least three factors that can break the link of proximate causation: intervening non-predicate acts; intervening independent factors; and intervening third-party victims.

Non-Predicate Activity

Only predicate acts of racketeering activity provide a basis for recovery under RICO section 1964(c). Brandenburg, 859 F.2d at 1188. RICO does not provide redress for individuals injured by other wrongful acts, such as negligence or breach of contract. Id. (defendants' acts of negligence were not actionable under RICO); Grantham and Mann v. American Safety Prods., 831 F.2d 596, 606 (6th Cir. 1987) (RICO claim dismissed where defendants' injurious conduct, i.e., breach of contract, did not constitute a predicate act). [In fact, courts should dismiss garden variety business fraud claims masquerading as RICO claims.] Mendelovitz v. Vosicky, 40 F.3d 182, 187 (9th Cir. 1994).

For example, a plaintiff may allege that the defendant breached a contract and that the defendant never intended to perform under the contract, thereby fraudulently inducing the plaintiff to enter the contract. The plaintiff will argue that the mail and wire fraud statutes were violated because the defendant used the mails or wires to lull the plaintiff and fraudulently induce the plaintiff to enter the agreement. Because the mail and wire fraud statutes were allegedly violated, the plaintiff may argue that it not only has a breach of contract claim but a RICO claim. Courts are not likely to find a direct link between injury and proximate cause under such facts. Rather the courts are likely to rule that the defendant's breach of contract is the direct cause of the plaintiff's damages, and breach of contract is not a criminal act upon which a RICO claim can be based.

Similarly, a plaintiff may allege that he invested in a financial institution because he saw advertisements proclaiming how conservatively the institution was managed. In fact, the institution is poorly managed, and because it is poorly managed, the plaintiff eventually loses his entire investment. If the plaintiff brings a common law claim based on the negligent management of the institution and a RICO claim based on the false advertisements (distributed by mail and wire), the courts are likely to rule that the negligence of the institution's management is the direct cause of injury, not the alleged RICO violation. Because negligence is not a criminal act upon which a RICO claim can be predicated, the court would dismiss the RICO claim.

Independent Contributing Factors
The United States Supreme Court has instructed the lower courts not to apportion damages among acts violative of RICO and other independent factors. See Holmes, 503 U.S. at 259 (RICO claim dismissed, in part, because the broker-dealers' bad business practices could have been responsible for the plaintiffs' injury). "When factors other than the defendant's fraud are an intervening direct cause of plaintiff's injury, that same injury cannot be said to have occurred by reason of the defendant's actions." First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 770 (2d Cir. 1994). For example, in First Nationwide Bank, the plaintiff brought a RICO claim alleging that the defendant misrepresented the value of real estate acquired with non-recourse loans made by the plaintiff. The Second Circuit dismissed the claim:

The key reasons for requiring direct causation include avoiding unworkable difficulties in ascertaining what amount of the plaintiff's injury was caused by the defendant's wrongful action as opposed to other external factors, and apportioning damages between causes. (Citing Holmes.)

The value and profitability of multi-unit apartment complexes in New York depend upon many factors that influence the general real estate market including changes in rent controls laws, property taxes, vacancy rates, the level of city services provided, and increased operating expenses including electric and heating oil prices. Given the complexity of the New York real estate market, and the fact that [plaintiff's] losses came in the wake of a downturn in the real estate market, [plaintiff] must allege loss causation with sufficient particularity such that we can determine whether the factual basis for its claim, if proven, could support an inference of proximate cause. (Citation omitted.) [Plaintiff cannot] meet this burden . . . .

[N]o social purpose would be served by encouraging everyone who suffers a [commercial] loss . . . to pick through [a defendant's statements] with a fine tooth comb in the hope of uncovering a misrepresentation.

Id. at 770-72; see also Imagineering, Inc. v. Kiewit Pacific Co.,, 976 F.2d at 1303, 1312 (9th Cir. 1992) ("[e]ssentially, the [RICO proximate cause rule] has more to do with problems of proof than with foreseeability"); Shepard v. American Honda Motor Co. Inc., 822 F. Supp. 625,630 (N.D. Cal. 1993)(dismissing plaintiff's claim for lost profits and losses attributable to the diminished value of an automobile dealership because "here a multitude of imaginable factors have contributed to the diminished profitability of the [plaintiff's] dealership and its diminished market value, apart from the alleged wrongful conduct of defendants.") A civil RICO plaintiff must prove "injury by reason of" the defendant's RICO violation. 18 U.S.C. § 1964(c). Injuries caused by disease, market fluctuations, war, and acts of God are not compensable under RICO. The injuries must be directly caused by the criminal acts upon which the RICO claim is based.

Directly Injured Third-party Victims

In Sedima, the United States Supreme Court expressly stated that a "defendant who violates § 1962 is not liable for treble damages . . . to those who have not been injured." 473 U.S. at 496-97. When the Supreme Court adopted the proximate cause requirement in Holmes, it considered traditional applications of the proximate cause requirement: "[under the common law,] a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts was generally said to stand at too remote a distance to recover." 503 U.S. at 268-69.

Perhaps the best example of the application of this rule is found in Firestone v. Galbreath, 976 F.2d 279 (6th Cir. 1992). In Firestone, the plaintiffs were the biological grandchildren of a decedent and the beneficiaries of the decedent's will. The plaintiffs alleged that, during the decedent's life, the decedent's step-family looted the estate, through a pattern of racketeering, and were liable under RICO. The court disagreed:

The grandchildren allege that by stealing from their grandmother during her lifetime, the defendants decreased the size of [the decedent's] estate, and consequently the size of their inheritance. This is only an indirect injury because any harm to the grandchildren flows merely from the misfortunes allegedly visited upon [the decedent] by the defendants. [Citation omitted.] The estate suffered the direct harm; it, not [the grandchildren], lost the property. Consequently, the grandchildren lack standing to bring an individual RICO claim, and the district court correctly dismissed it.

Id. at 285.

Many visitors to RICOAct.com want to bring RICO claims against the officers of corporations in which they hold shares and claim that the officers defrauded the shareholders through their management of the corporation. The rule expressed in Galbreath, however, would bar the claims of the shareholders against the corporate officers. Like the grandchildren in Galbreath, the shareholders are not directly injured. The corporation, like the estate, is the party directly injured by the officers' alleged fraud. Thus, only the corporation (through a shareholder derivative action) would have standing to bring the claim alleged by the shareholders.

Mail and Wire Fraud - Reasonable Reliance
To establish a criminal violation of the mail or wire fraud statues, the prosecuting attorney need not establish that anyone relied on the defendant's fraudulent statements. To prove injury "by reason of" mail and wire fraud, however, a civil RICO plaintiff must usually establish that they relied upon the defendant's fraudulent statements. As explained by the Fifth Circuit in Summit Properties, Inc. v. Hoechst Celanese Corp., 214 F.3d 556 (2000):
the government can punish unsuccessful schemes to defraud because the underlying [criminal] mail fraud violation does not require reliance, but a civil plaintiff "faces an additional hurdle" and must show an injury caused "by reason of" the violation. . . .
In general, fraud addresses liability between persons with direct relationships - assured by the requirement that a plaintiff has either been the target of the fraud [such as fraudulent statements made to a competitor's customers] or has relied upon the fraudulent conduct of the defendants.

Id. at 559-560. Thus, when a civil RICO claim is predicated upon fraudulent activity, the plaintiff must establish "reasonable reliance," just as a plaintiff has to establish reasonable reliance to obtain judgment in a common law fraud case.

Under civil RICO there is at least one limited exception to the need to prove reasonable reliance. A target of a scheme to defraud may be able to establish injury "by reason of" a RICO violation even if the target of the scheme did not rely on any fraudulent statements. For example, in Procter & Gamble Co. v. Amway Corp., 242 F.3d 539 (5th Cir. 2001), Procter & Gamble ("P&G") alleged that Amway was attempting to lure away customers by falsely representing that P&G was affiliated with satanic worship. P&G, of course, never relied on any alleged misrepresentations of its satanic affiliations. Nonetheless, the court stated that, under the circumstances, P&G was not required to prove reliance:  in [a previous case,] we ruled that a target of a fraud that did not itself rely on the fraud may pursue a RICO claim if the other elements of proximate cause are present.

Consequently, P&G's claims based on Amway's alleged spreading of the Satanism rumor to lure customers from P&G are claims on which relief can be granted. P&G has alleged that using the wire and the mail, Amway attempted to lure P&G's customers away by fraud. Although P&G did not rely on the fraud, this falls into the narrow exception [which states:]. . . . [a] defendant's competitors might recover for injuries to competitive position. [Citation and quotation marks omitted.] Thus, if P&G's customers relied on the fraudulent rumor in making decisions to boycott P&G products, this reliance suffices to show proximate causation.

Id. at 565. Thus, even without reliance, if a plaintiff's business is targeted by and injured by the fraudulent statements of a competitor, the exception set forth in Procter & Gamble may enable the plaintiff to establish proximate cause.

Injury to Business or Property
Damages for emotional distress or any personal injury are not compensible under RICO. See, e.g., Grogan v. Platt, 835 F.2d 844, 846 (11th Cir. 1988); James v. Meow Media, Inc., 90 F. Supp.2d 798, 814 (W.D. Ky. 2000); Moore v. Eli Lilly & Co., 626 F. Supp. 365, 367 (D. Mass. 1986); City and County of San Fransisco v. Philip Morris, 957 F. Supp. 1130, 1138-39 (N.D. Cal. 1997). Thus, if acts of extortion do not allegedly cause any plaintiff to depart with their money or property, the acts of extortion do not afford a civil plaintiff any standing under RICO. 18 U.S.C. § 1964(c). Any emotional distress associated with extortion is not compensable under RICO. Also, if the threat was "pay me a $1000 per month or I will break you legs," and the victim chooses the latter option, RICO does not provide the victim with a means to recover damages for the pain and suffering caused by getting his legs broken.

Likewise, although murder is a predicate act, the survivors of a murder victim cannot recover the lost wages of the victim, i.e., those wages that would have been earned throughout the remainder of the victim's life had he not been murdered. For example, in Grogan v. Platt, 835 F.2d 844 (11th Cir. 1988), two FBI agents were killed in a shoot-out with members of a criminal organization. Other FBI agents were injured. The survivors of the two killed agents and the injured agents brought a RICO claim against the responsible members of the criminal organization, seeking to recover the agents' lost wages. The court dismissed the claims of the killed and wounded FBI agents:

Relying on the assumption that Congress intends the ordinary meanings of the words it employs, [citation omitted], [plaintiffs] argue that the common sense interpretation of the words "business or property" includes the economic damages that result from injury to the person. We are not convinced that [plaintiff's] contention accurately captures the ordinary meaning of those words. In our view, the ordinary meaning of the phrase "injured in his business or property" excludes personal injuries, including the pecuniary losses therefrom. . . .

Id. at 846-47. Although RICO does not enable civil plaintiffs to recover the lost wages of murder victims or those injured by criminal conduct, plaintiffs seeking such damages may seek redress for such losses in more traditional ways, e.g., by bringing a wrongful death claim or assault and battery claims.

SECTION 1962(a) & (b) CLAIMS
Legitimate civil RICO claims under sections 1962(a) & (b) are few and far between. Although frequently alleged, very few survive a motion to dismiss. For this reason, there is a dearth of case law related to civil claims under these subsections. To the extent authority exists, that authority is generally pro-defendant.

Association-in-Fact Enterprises Under Sections 1962(a) & (b)

The relationship of the defendant persons to the enterprise varies, depending upon the subsection serving as the basis for liability. Unlike section 1962(c), liability under sections 1962(a) and (b) does not hinge upon the defendant's operation or management of the enterprise. Under section 1962(a), the defendant must use or invest the proceeds of racketeering activity in the enterprise. As noted, section 1962(a) is primarily concerned with money laundering activities.

Under section 1962(b), the defendant must acquire or maintain an interest in or control of an enterprise through a pattern of racketeering activity. The type of "interest" contemplated in section 1962(b) is not just any "interest" but a proprietary one, such as the acquisition of stock, and the "control" contemplated is the power gained over an enterprise's operations by acquiring such an interest. Whaley v. Auto Club Ins. Assoc., 891 F. Supp. 1237, 1240-41 (E.D. Mich. 1995) (citing Reves v. Ernst & Young, 507 U.S. 170 (1993)).

Given the informal nature of association in-fact enterprises, i.e., they usually do not have any accounts receivable and do not file taxes, it is difficult if not impossible to invest and launder money through an association in fact enterprise for purposes of a section 1962(a) claim. Because association in fact enterprises also do not issue stock and are not legal entities capable as being controlled in the manner envisioned by section 1962(b), such claims are seldom, if ever, based upon association in fact enterprises.

Injury "by reason of" a Section 1962(a) Violation
As noted, a section 1962(c) claim provides relief to persons injured "by reason of" predicate acts. 18 U.S.C. § 1964(c). To have standing under section 1962(a), "the plaintiff must allege an injury resulting [by reason of] the investment of racketeering income distinct from an injury caused by the predicate acts themselves." Id.; Lightening Lube, Inc., 4 F.3d at 1188; St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 441 (5th Cir. 2000); Nugget Hydroelectric, L.P. v. Pacific Gas and Elec. Co., 981 F.2d 429, 437 (9th Cir. 1992). This allegation is required because section 1962(a) "does not state that it is unlawful to receive racketeering income ... [rather] the statute prohibits a person who has received such income from using or investing it in the proscribed manner." Grider v. Texas Oil & Gas Corp., 868 F.2d 1147, 1149 (10th Cir.), cert. denied, 493 U.S. 820 (1989).

To circumvent section 1962(a)'s standing requirement, plaintiffs often allege a "reinvestment" injury caused by reason of a violation of section 1962(a). For example, plaintiffs will allege that the defendants, through an enterprise, acquired money through a pattern of racketeering and then used and invested the proceeds of the racketeering back into the enterprise to keep it alive so that it continued to injure others, and eventually the plaintiff. Lightening Lube, Inc., 4 F.3d at 1188. Such reinvestment injuries are generally an insufficient basis for a section 1962(a) claim: we have held that the fact that a plaintiff claims that the injury allegedly perpetrated on it would not have occurred without the investment of funds from the initial racketeering activity does not change the fact the plaintiff's alleged injury stems from the pattern of racketeering, and not from the investment of funds by the defendant.

Id.
Over the long term, corporations generally reinvest their profits regardless of the source. Consequently, almost every racketeering act by a corporation will have some connection to the proceeds of a previous act. Section 1962(c) is the proper avenue to redress injuries caused by the racketeering acts themselves. If plaintiffs' reinvestment injury concept were accepted, almost every pattern of racketeering by a corporation would be actionable under § 1962(a), and § 1962(c) would become meaningless. Id.; see also Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1083 (9th Cir. 2000), cert. denied, 531 U.S. 1104 (2001) (even if plaintiff was injured by defendants' fraud, plaintiffs section 1962(a) claim was dismissed because plaintiff failed to allege that defendants' "investment drove him out of business or harmed him directly in some way"); but see In re Sahlen & Assoc., Inc. Sec. Litig., 773 F. Supp. 342, 366-67 (S.D. Fla. 1991).

Given that a plaintiff has standing only if he has been injured "by reason of" the defendant's investment, true civil RICO claims under section 1962(a) are rare. The following hypothetical facts may present such a claim: The Godfather buys an interest in "Sven's Grocery." Sven simply thinks the Godfather is a wealthy old gentleman. Two days later, the Godfather is arrested, and newspapers report that "Sven's Grocery" is connected to the Mafia. The Department of Justice ("DOJ") then confiscates all of Sven's business records and seals off the store, causing Sven to close for two weeks. Given the loss of business caused by the DOJ's investigation of the Godfather's investment in Sven's grocery, Sven has arguably been injured "by reason of" a violation of section 1962(a).

What does not constitute a section 1962(a) claim? Sven is the Godfather and uses the grocery store to launder money and forces Lena, the owner of a neighboring knitting shop, to pay him protection money. Lena sues Sven under section 1962(a), claiming that Sven has invested her protection money payments into the grocery store, enabling it to remain open, and enabling Sven to continue to extort protection payments. Lena probably has a claim under section 1962(c), but not under section 1962(a). Her injuries flow from the racketeering activity (extortion), not from Sven's investment of the proceeds of the extortion.

Injury "by reason of" a Section 1962(b) Violation
Just as a civil plaintiff must show injury caused "by reason of" the defendant's investment to prevail under section 1962(a), a plaintiff must show injury "by reason of" the defendant's acquisition or control of an interest in a RICO enterprise to prevail under section 1962(b). 18 U.S.C. § 1964(c); Advocacy Organization for Patients and Providers v. Auto Club Ins. Ass'n, 176 F.3d 315, 329 (6th Cir. 1999); Crowe v. Henry, 43 F.3d 198, 205 (5th Cir. 1995). Injury flowing from defendants' predicate acts is alone not enough to confer standing under section 1962(b). Lightening Lube, Inc., 4 F.3d at 1190. "Such an injury may be shown, for example, where the owner of an enterprise infiltrated by the defendant as a result of racketeering activities is injured by the defendant's acquisition or control of his enterprise." Casper v. Paine Webber Group, Inc., 787 F.Supp. 1480, 1494 (D.N.J.1992). In addition, the plaintiff must establish that the interest or control of the RICO enterprise by the person is as a result of racketeering. Banks v. Wolk, 918 F.2d 418, 421 (3d Cir. 1990).
 

CONSPIRACIES TO VIOLATE RICO - SECTION 1962(d)
A RICO claim is broad but a RICO conspiracy claim is even broader. Anyone who agrees or conspires to pursue the same criminal objective can be held liable for a RICO violation. Salinas v. United States, 522 U.S. 22, 63-64 (1997). "If conspirators have a plan which calls for some conspirators to perpetrate the crime and others to provide support, the supporters are as guilty as the perpetrators." Id. at 64. A conspirator must simply intend to further an endeavor which, if completed, would satisfy all elements of a civil RICO claim. Id. at 65. Thus, there are two ways to effectively defend against a RICO conspiracy claim: 1) the defendant must prove he never intended to further the criminal endeavor; or 2) the defendant must prove that the endeavor did not satisfy the elements of a civil RICO claim. Because the first defense is fact based, it is seldom an appropriate defense to raise in a dispositve motion. The best way to undermine a claim for conspiracy on a dispositive motion is to undermine the legal sufficiency of the allegations supporting the substantive offense. See Howard v. American Online Inc., 208 F.3d 741, 751 (9th Cir. 2000) (a claim under section 1962(d) may not stand unless the plaintiffs can sustain a viable claim under another subsection of section 1962).

A RICO plaintiff does not have standing to bring a RICO claim under section 1962(d) unless it is injured by an act of racketeering. For example, in Beck v. Prupis, 529 U.S. 494 (2000), the plaintiff was an executive who allegedly discovered that his corporation was engaged in a scheme to defraud regulators, shareholders and creditors. The plaintiff claimed that when he discovered the scheme and threatened to expose the conspiracy, he was terminated from his job and thereby sustained his own financial loss. The question was whether the plaintiff sustained a compensable injury since his wrongful termination (although not an act of racketeering itself) occurred in furtherance of the defendants' efforts to conceal the conspiracy to defraud regulators, shareholders, and creditors. The Supreme Court held that the plaintiff lacked standing, stating: "a person my not bring suit under § 1964(c) predicated on a violation of § 1962(d) for injuries caused by an overt act that is not an act of racketeering or otherwise unlawful under the statute." Id. at 507.
 

RICO'S STATUTE OF LIMITATIONS
The most obscure aspects of the RICO Act relate to the statute of limitations applicable to civil RICO claims. Statutes of limitation are designed impose an obligation of diligence on plaintiffs (i.e., if a person is wrongfully injured, they cannot sit on their rights indefinitely) and to enable some degree of predictability and conclusion for defendants (i.e., defendants must be able to assume that after a certain period they cannot be called upon to answer for wrongs they committed in the distant past).

Congress failed to include either a criminal or civil statute of limitations when it passed the RICO Act. Congress' oversight was easily remedied with regard to the criminal statute of limitations. Title 18, section 3282 of the U.S. Code is the "catch-all" statute of limitation for federal crimes. It states that "no person shall be prosecuted . . . unless the indictment is found or the information is instituted within five years next after such offense shall have been committed." With regard to criminal prosecutions, it is generally held that a prosecution is timely so long as the defendant has committed one predicate act (that forms part of the pattern for which he is being prosecuted) within five years or less of the indictment. See United States v. Darden, 70 F.3d 1507 (8th Cir. 1995).

RICO's missing statute of limitations was more problematic with regard to civil claims. First, there is no "catch-all" limitations period applicable to civil claims established by Congress. Second, assuming civil RICO claims are subject to a statute of limitations, when does the statute of limitations begin to run? Does it run with the first predicate act or the last predicate act? Does it re-start with each new predicate act committed by the defendant? Does it run when the plaintiff is injured? What if the plaintiff is unaware of its injury? Is the running of the statute of limitations then postponed until after the plaintiff discovered its injury? Until the United States Supreme Court provided direction, all of these questions presented tremendous problems for the courts confronting statute of limitations defenses under the RICO Act.

Limitations Period
RICO claims are subject to a four-year statute of limitations. The United States Supreme Court adopted this limitations period and applied it to all RICO claims in the case of Agency Holding Corp. v Malley-Duff & Associates, Inc., 483 U.S. 143 (1987). Because RICO did not have its own statute of limitations, common law rules dictated that RICO claims should be subject to the statute of limitations applied to the most analogous claim under state law. The Supreme Court did not favor this approach because it would have resulted in civil RICO claims being subject to 50 different limitations periods, and no one could determine the limitations period until a particular claim was brought in a particular jurisdiction. The Supreme Court decided it was more fair and efficient to borrow the limitations period from another federal statute, which would result in a uniform statute of limitations period regardless of the jurisdiction in which a particular RICO claim was filed. Because Congress essentially copied RICO's civil remedy provision (18 U.S.C. § 1964(c)) from the civil remedies provision of the Clayton Anti-trust Act, 15 U.S.C. § 15(a), the Supreme Court adopted the Clayton Act's four year statute of limitations as the limitations period applicable to all federal civil RICO claims.

Accrual of a Civil RICO Claim
Providing RICO with a limitations period, however, was not the end but the very beginning of the menacing problems that the Supreme Court faced with regard to RICO's statute of limitations. The next immediate question that had to be answered was: when does the limitations period begin to run? When lawyers ask this question, they say: when does a RICO claim accrue? This was a far more difficult question for the Supreme Court to answer.

Early Conflicting Accrual Rules
The United States Courts of Appeals adopted three different accrual rules. The United States Court of Appeals for the Second Circuit was the first to consider the issue in Bankers' Trust Co. v. Rhoades, 859 F.2d 1096 (2d Cir. 1988), cert. denied, 490 U.S. 1007 (1989). In Bankers' Trust, the Second Circuit analogized RICO claims to medical malpractice claims that may give rise to latent injuries. For example, a physician may negligently leave a sponge in a patient during surgery, the sponge may not give rise to problems until years later when it becomes the source of an infection that otherwise would not have occurred. Under these circumstances, one cannot possibly charge the patient with an obligation to bring his malpractice claim before he had any reason to believe that malpractice occurred, i.e., before the forgotten sponge caused an infection. Likewise, in the RICO context, an employee may be taking bribes from a vendor and in exchange the employee may buy products (on behalf of his employer) from the vendor at inflated prices. The employer may not discover this bribe scheme until the employee's personal taxes are audited by the IRS and the bribe payments are discovered and reported by the IRS to the employer. If the employer could not reasonably have discovered the inflated prices before the IRS audit, then he cannot be charged with an obligation to bring a RICO claim at an earlier date. In essence, the common law generally postpones the running of the statute of limitations until the plaintiff knew or reasonably should have known of its injury. The Second Circuit saw no reason to depart from this common law rule in the context of a RICO claim and, accordingly, adopted the common law "discovery of injury" rule as the accrual standard for a RICO claim.

The United States Court of Appeals for the Third Circuit was the next circuit court to consider RICO's accrual rule. In Keystone Ins. Co. v. Houghton, 863 F.2d 1125 (3d Cir. 1988), the Third Circuit was critical of the "discovery of injury" rule adopted by the Second Circuit in Bankers' Trust:

"Because a potential plaintiff has not been injured under RICO until the pattern element has been satisfied, it is inappropriate to start the period before the pattern is fully developed." [Citation omitted.] The simple discovery [of injury] rule mistakenly focuses upon injury - not "RICO injury." Under the simple discovery [of injury] rule if a plaintiff suffers a single injury as a result of a predicate act but the second predicate act which establishes the necessary "pattern" occurs five years after the injury to the plaintiff, that plaintiff's claim is barred by the four-year civil RICO statute of limitations. Yet the original damage to the plaintiff is not in fact a RICO injury until, at a minimum, the second predicate act establishes the necessary pattern. In such cases the purpose of the statute is defeated by the simple discovery [of injury] rule.

Id. at 1134. In short, the Third Circuit was concerned that under the "discovery of injury" accrual rule, a RICO claim could accrue and the statute of limitations could begin to run upon a single act of racketeering that resulted in a single injury, even though a RICO claim can be brought only after a defendant engages in a pattern of racketeering activity. Thus, in the opinion of the Third Circuit, a RICO claim could be barred by the "discovery of injury" rule before the claim ever came into existence, i.e., before the defendant engaged in a pattern of racketeering activity.

To avoid the perceived problems under the "discovery of injury" rule, the Third Circuit adopted the "last predicate act" rule, which postponed the running of the statute of limitations until the commission of the last predicate act that formed the pattern of racketeering upon which the plaintiff's claim was based - regardless of when the plaintiff had knowledge of its injury resulting from the defendant's racketeering. Id.

This tension between the common law's traditional "discovery of injury" rule and RICO's unique pattern of racketeering activity concept appeared to require a completely new accrual rule. A pattern of racketeering activity could last for decades, well beyond four years. Many courts were conflicted by an accrual rule that could bar a civil RICO claim because the plaintiff was aware of its injury four or more years before bringing its lawsuit - even though the defendants' pattern of racketeering activity may have never ended and was still on-going at the time the suit was filed.

Even more troubling was the prospect that, like the plaintiff's injury, a pattern of racketeering activity could be concealed from the plaintiff, and without knowledge of the pattern of racketeering activity, the plaintiff could not file suit even if it was aware of its injury. For example, returning to the bribery scheme discussed above: what if the employer compared the prices it was paying to the bribing vendor to the prices being charged by other vendors and confronted the employee, saying: "why do we pay this vendor so much - other vendors will sell us the same thing for a lot less." The employee receiving the bribes responds: "yes, we are paying a little more but this vendor provides such a high degree of service that it's worth it - anytime we need something, they deliver it immediately; these other vendors may charge less but do we want to risk shutting down the production line if they don't come through?" At this point, the employer is clearly aware of its injury, i.e., is aware that the employer is paying higher than market prices to the bribing vendor, so under the simple "discovery of injury" rule, RICO's statute of limitations could begin to run. On the other hand, however, the employer is completely unaware of the pattern of racketeering activity; the employee receiving the bribes has provided a reasonable (although untrue) explanation for paying the higher prices. In truth, the employer is paying the vendor's higher prices because the employee is being bribed. Without knowledge of this truth, the employer lacks knowledge of the facts necessary to allege a pattern of racketeering.

In recognition of the unique nature of RICO's pattern of racketeering activity requirement, the United States Court of Appeals for the Eleventh Circuit undertook an effort to formulate a completely original accrual rule for civil RICO claims. In Bivens Gardens Office Bldg., Inc. v. Barnett Bank of Florida, Inc., 906 F.2d 1546 (11th Cir. 1990), cert. denied, 500 U.S. 910 (1991), the Eleventh Circuit agreed with the Keystone court in that the simple "discovery of injury" rule failed "to recognize that an injury to a plaintiff from a single predicate act does not evolve into a RICO injury until a 'pattern' of racketeering activity has developed." Id. at 1553. The Eleventh Circuit, however, was also critical of Keystone's "last predicate act" rule because it enabled a plaintiff to sit back and wait for a defendant's last predicate act before filing an action, even though the plaintiff could be wholly aware of its injury and the defendant's pattern of racketeering activity for decades before bringing its claim. Rather than adopting either the "discovery of injury" rule or the "last predicate act" rule, the Eleventh Circuit developed and adopted the "discovery of injury and pattern" rule:  with respect to each independent injury to the plaintiff, a civil RICO cause of action begins to accrue as soon as the plaintiff discovers, or reasonably should have discovered, both the existence and source of his injury and that the injury is part of a pattern.

Id. at 1554-55. Thus, with regard to our bribery scenario, under the "discovery of injury and pattern" rule, the employer's RICO claim would not have accrued merely upon his discovery that the vendor was being paid above-market prices. The accrual of the employer's RICO claim would have been postponed until he discovered or reasonably should have discovered the bribe scheme. Once the bribe scheme was discovered, however, the employer would have only four years to file his claim. Whereas under the "last predicate act" rule, the employer could theoretically sit back after discovering the bribe scheme and allow it to continue for several more decades, knowing that his civil RICO claim would be timely so long as it was brought within four years of the last act of bribery. The Eleventh Circuit's remedy seemed to be a reasonable solution to the unique accrual issues presented by civil RICO claims.

The Supreme Court's Effort to Resolve the Conflict
Given that Keystone's "last predicate act" rule indefinitely allowed a plaintiff to sit on its rights and refrain from bringing a cause of action for so long as the defendant engaged in acts of racketeering, the rule was never adopted outside of the Third Circuit. The Second Circuit's "discovery of injury" rule and the Eleventh Circuit's "discovery of injury and pattern" rule, however, were adopted by almost an even number of federal circuit courts of appeal. The United States Supreme Court was thus required to step-in and resolve the conflict.

In Klehr v. A.O. Smith Corp., 521 U.S. 179 (1984), the United States Supreme Court undertook its first effort to bring uniformity to civil RICO's accrual standard. Under the facts of Klehr, however, the plaintiff's action was timely under either the "discovery of injury" or "discovery of injury and pattern" rules. Thus, in the Klehr decision, the Supreme Court merely rejected "last predicate act" rule, stating:

We conclude that the Third Circuit's rule is not a proper interpretation of the law. We have two basic reasons. First, . . . the last predicate act rule creates a limitations period that is longer than Congress could have contemplated. Because a series of predicate acts . . . can continue indefinitely, such an interpretation, in principle, lengthens the limitations period dramatically. It thereby conflicts with a basic objective - repose - that underlies limitations periods. [Citation omitted.] Indeed, the rule would permit plaintiffs who know of the defendant's pattern of activity simply to wait, "sleeping on their rights," . . . as the pattern continues and treble damages accumulate, perhaps bringing suit only long after the "memories of witnesses have faded or evidence is lost." [Citation omitted.] We cannot find in civil RICO a compensatory objective that would warrant so significant an extension of the limitations period, and civil RICO's further purpose, encouraging potential plaintiffs diligently to investigate [citation omitted], suggests to the contrary.

Second, the Third Circuit rule is inconsistent with the ordinary Clayton Act rule, applicable in private antitrust treble damage actions, under which "a cause of action accrues and the statute begins to run when a defendant commits an act that injures a plaintiff's business." [Citation omitted.] . . . We do not say that a pure injury accrual rule always applies without modification in the civil RICO setting in the same way that it applies in traditional antitrust cases.

Id. at 187-88. In Klehr, the Supreme Court went no further than to reject the "last predicate act" rule and left for future consideration the issue of whether the "discovery of injury" rule or "discovery of injury and pattern" rule was more appropriate.

As noted above, the majority in Klehr noted that the Clayton Act's accrual rule focused on the time of injury. The Clayton Act's outlook on accrual was important because Congress essentially borrowed RICO's civil remedy provision from the Clayton Act. The Clayton Act, however, does not postpone accrual until discovery of injury, rather a claim accrues upon injury - regardless of whether a plaintiff is aware of the injury. Given the nature of antitrust injuries, however, it is rare that a plaintiff is not immediately aware of the injury giving rise to an antitrust claim. The majority never suggested that a pure injury accrual rule should be applied to civil RICO claims. In his dissent, Justice Scalia argued that if the Supreme Court was going to borrow the Clayton Act's statute of limitations (a decision that Justice Scalia disagreed with, believing it was appropriate for Congress, not the courts, to remedy RICO's missing statute of limitation problem), then it was only logical that the Clayton Act's accrual rule should also be applied. Although the Clayton Act's accrual rule presents a fourth alternative, none of the circuit courts have applied the Clayton Act's accrual rule despite Justice Scalia's persuasive dissent in Klehr.

The Supreme Court next considered civil RICO's accrual rule in Rotella v. Wood, 528 U.S. 549 (2000). The Supreme Court used the opportunity to reject the "discovery of injury and pattern" rule: Federal courts, to be sure, generally apply a discovery accrual rule when a statute is silent on the issue, as civil RICO is here. [Citation omitted.] But in applying a discovery accrual rule, we have been at pains to explain that discovery of injury, not discovery of the other elements of the claim [e.g., pattern], is what starts the clock.

In sum, any accrual rule softened by a pattern discovery feature would undercut every single policy we have mentioned. By tying the start of the limitations period to a plaintiff's reasonable discovery of a pattern rather than the point of injury or its reasonable discovery, the rule would extend the potential limitations period for most civil RICO cases well beyond the time when a plaintiff's cause of action is complete . . . .

Id. at 555, 559. Theoretically, the Clayton Act's injury accrual rule continues to remain an accrual option in the wake of the Klehr and Rotella decisions, but no circuit court has ever embraced it. Rather, Rotella has effectively resolved the conflicting accrual rules among the circuit courts in favor of the "discovery of injury" accrual rule.

Tolling Principles
Superficially, the "discovery of injury and pattern" rule was revolutionary because it tied accrual to something other than a plaintiff's discovery of injury. In their practical applications, however, equitable tolling principles largely eviscerated any material distinction between the "discovery of injury" and "discovery of injury and pattern" rules. As the Supreme Court noted in Rotella: In rejecting pattern discovery as a rule, we do not unsettle the understanding that federal statutes of limitations are generally subject to equitable principles of tolling [citation omitted], and where a pattern remains obscure in the face of a plaintiff's diligence in seeking to identify it, equitable tolling may be one answer to the plaintiff's difficulty. . . . [Citation omitted.] The virtue of relying on equitable tolling lies in the very nature of such tolling as the exception, not the rule.

Id. at 560-61. Unlike accrual, that postpones the running of the statute of limitations until discovery of injury, a tolling doctrine, such as fraudulent concealment or duress, suspends the statute of limitations after it has begun to run. In a RICO claim based upon acts of extortion, the victim's RICO claim usually accrues the first time the plaintiff pays money in response to an unlawful threat. By paying money in response to an unlawful threat, the plaintiff is clearly aware of his injury and extortion usually presents threats of indefinite duration (i.e., open-ended patterns of racketeering). For example, the threat pay me $1000 per week or I'll break your legs, is an open-ended pattern based on a threat of indefinite duration. As soon as the plaintiff fails to pay $1000 per week, his legs will be broken regardless of whether that failure to pay occurs next week or in ten years. Thus, the statute of limitations begins to run as soon as the victim makes the first extorted payment. Suppose further, however, that after a year, the victim threatens to sue or report the extortion to the police, and the defendant replies: "if you report me or sue me, I'll kill your whole family." Under these circumstances, the four-year limitations period likely would have run for the first year of the scheme, but would have been tolled or suspended thereafter based on the defendant's additional threat to kill the victim's family if the victim brought a claim or filed a report. If the defendant were later arrested and jailed on unrelated charges, and the duress was then removed, the statute of limitations would restart, and the plaintiff would have only three years from the defendant's imprisonment to bring his civil RICO claim.

The tolling doctrine of fraudulent concealment combined with the "discovery of injury" rule essentially reaches the same result as the "discovery of injury and pattern" rule. Under fraudulent concealment, the running of the statute of limitations is tolled when a defendant engages in some misleading, deceptive or otherwise contrived action or scheme, in the course of committing the wrong, that is designed to mask the existence of a cause of action. Riddell v. Riddell Washington Corp., 866 F.2d 1480, 1491 (D.C. Cir. 1989). A defendant could affirmatively conceal a cause of action by creating false invoices, two sets of books, or by simply lying. In short, for fraudulent concealment to apply, the defendant must simply do something of an affirmative nature designed to prevent discovery of the cause of action. Even if there is an affirmative act of fraudulent concealment, however, the running of the statute of limitations will not be tolled if the defendant can establish that the cause of action could have been discovered if the plaintiff had exercised reasonable diligence. Id. In Klehr, the Supreme Court affirmed the principle that a civil RICO plaintiff cannot take advantage of the doctrine of fraudulent concealment unless the plaintiff has exercised reasonable diligence in discovering the claim. 521 U.S. at 195-96.

Thus, assuming the plaintiff exercises reasonable diligence, the statute of limitations will be tolled (even if the plaintiff is aware of its injury but is unaware that the injury is the result of a pattern of racketeering activity) if the defendant engaged in some affirmative act to conceal the existence of the scheme to defraud. In the context of civil RICO claims based on schemes to defraud, seldom is a scheme to defraud committed in an open and notorious manner. To be effective, schemes to defraud must generally be concealed from the victim, so the doctrine of fraudulent concealment frequently postpones the statute of limitations under such circumstances.

New and Independent Injuries
Although the "discovery of injury" rule stated in the Bankers' Trust opinion has become the prevailing accrual standard, the Bankers' Trust opinion also stood for the proposition that "a plaintiff may sue for any injury he discovers or should have discovered within the four years of commencement of the suit, regardless of when the RICO violation causing such injury occurred." 859 F.2d at 1103. In short, the Second Circuit was opposed to the notion that the statute of limitations could bar a claim based on an injury that had not yet occurred or had occurred within the four-year limitation period. Accordingly, the Bankers' Trust decision guaranteed that the plaintiff could always recover for any injuries that occurred within four years of filing the claim.

Although not as problematic as the "last predicate act" rule, that allowed plaintiffs to bring suit within four years of the defendant's last predicate act and recover for all injuries that were ever caused by the pattern of racketeering activity, Bankers' Trust's four-year free ticket also ran contrary to the plaintiff's obligation to pursue its action with diligence.

To avoid a four-year free ticket and to obligate a plaintiff to act with diligence, most circuit courts have adopted the principle that civil RICO's statute of limitations is restarted only when the plaintiff experiences a "new and independent" injury. For example, in Glessner v. Kenny, 952 F.2d 702 (3d Cir. 1991), the plaintiffs alleged that the defendant engaged in a scheme of fraudulent advertisements that caused them to purchase the defendant's defective furnace. Plaintiff's argued that they were injured when they purchased the furnace and that they were further injured when they had to buy replacement furnaces. Plaintiff's purchases of defendant's defective furnace were beyond the four-year limitations period and, thus, were barred, but plaintiffs argued that they were nonetheless entitled to recover for the expense of replacing the furnaces. The court disagreed: if Glessner's only injury was limited to servicing his "blue flame" unit, the fact that he continued to service his unit after June, 1984 [the suit was filed in June 1988] could not be considered a "further injury" sufficient to revive the RICO cause of action. We do not regard the need ultimately to replace the unit to be a "separate" or "independent" type of injury [necessary to restart the statute of limitations] . . . . While the cost of replacement of the unit may be an element of damage, the mere continuation of damages into a later period will not serve to extend the statute of limitations.

Id. at 708. To constitute a new and independent injury sufficient to restart the statute of limitations with regard to those injuries, the new and independent injuries must be caused by a new pattern of racketeering. As in Glessner, the Klehr plaintiff's initial injury occurred when they purchased an allegedly defective silo. The plaintiffs thereafter experienced on-going injuries as a result of the alleged herd health problems that were caused whenever the silo was used. As explained by the Eighth Circuit in Klehr, the plaintiff's injuries were not new and independent:

[The plaintiff's] injuries are all [part] of . . . one cognizable pattern of conduct - [the defendant's] alleged misrepresentations regarding the [product]. We believe that these separate, discrete "injuries" that the [plaintiffs] identify are more appropriately categorized as one single, continuous injury that was sustained sometime in the 1970s [when the product was purchased] and for which the limitations period [expired long before the plaintiffs filed their complaint] . . . .

Id. at 239. Thus, in both Glessner and Klehr, the courts held that the plaintiffs' damage claims were entirely barred by the statute of limitations even though injuries continued to occur within the limitations period. The injuries occurring within the limitations period were simply a continuation of the same injury that was sustained by the plaintiffs when they bought the allegedly defective products.

CONCLUSION: KEY CONCEPTS OF RICO JURISPRUDENCE
There are 17 key concepts of RICO jurisprudence. Before bringing any civil RICO action or before responding to any civil RICO complaint, a practitioner or party should understand and be able to apply all of these concepts:

RICO encompasses both legitimate and illegitimate enterprises. United States v. Turkette, 452 U.S. 576 (1981).

Under RICO, section 1962(c), there must be a distinction between the RICO "person" and the RICO "enterprise." An individual cannot "associate" with himself. This is known as the person / enterprise distinction. River City Markets, Inc. v. Fleming Foods West, Inc., 960 F.2d 1458 (9th Cir. 1992).

With regard to the person / enterprise distinction, one can associate with a group of which he is a member while the member and the group remain distinct. Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339 (3d Cir. 1995).

RICO's person / enterprise distinction is NOT met by alleging that a corporation associated with its own employees, agents, subdivisions or affiliates. Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339 (3d Cir. 1995).

Under RICO, section 1962(c), there also must be a distinction between the enterprise and the racketeering activity; in other words, members of an enterprise must be linked by more than their participation in the same pattern of racketeering activity. This is known as the racketeering activity / enterprise distinction. McDonough v. National Home Ins. Co., 108 F.3d 174 (8th Cir. 1997).

A RICO enterprise need not be economically motivated. National Organization for Women, Inc. v. Scheidler, 510 U.S. 249 (1993).

To be liable under section 1962(c), a person must participate in the operation or management of the enterprise itself. Reves v. Ernst & Young, 507 U.S. 170 (1993).

Since 1995, a civil RICO claim cannot be based upon allegations of a securities fraud violation; a defendant must be criminally convicted of securities fraud before he can be subject to civil liability on the basis of securities fraud violations. 18 U.S.C. § 1964(c).

A RICO claim can be predicated on mail and wire fraud alone but should not be so predicated. RICOAct.com.

The factors of continuity plus relationship combine to produce a pattern. H.J. Inc. v. Northwestern Bell Tele. Co., 492 U.S. 299 (1989).

A close-ended pattern must generally last one year. Grimmett v. Brown, 75 F.3d 506 (9th Cir. 1996).

A plaintiff has standing only to the extent that she has been injured in her business or property "by reason of" the conduct constituting the violation; a defendant who violates section 1962(c) is not liable for treble damages to everyone she might have injured by other conduct (e.g., breach of contract or negligence) nor is the defendant liable to those who have not been injured. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479 (1985); Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992).

Always bring a section 1962(d) claim; never bring a section 1962(a) or (b) claim without a 1962(c) claim. RICOAct.com

A RICO claim must be brought within 4 years of accrual. Agency Holding Corp. v. Malley-Duff Associates, Inc. 483 U.S. 143 (1987).

Aa RICO claim accrues and the statute of limitations begins to run when the victim discovers or reasonably should have discovered its injury. Klehr v. A.O. Smith Corp., 521 U.S. 179 (1997); Rotella v. Wood, 528 U.S. 549 (2000).

A plaintiff can bring a federal civil RICO claim in either state or federal court. Tafflin v. Levitt, 493 U.S. 455 (1990).

If agreed to by the parties, RICO claims may be arbitrated. Shearson / American Express, Inc. v. McMahon, 482 U.S. 220 (1987).

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