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Supreme Court Narrows RICO Conspiracy Cause Of Action

(August 2000, Business & Securities Litigator)


  By Stephen A. Radin

The United States Supreme Court’s decision in Beck v. Prupis, 120 S. Ct. 1608 (U.S. Apr. 26, 2000), addressed the civil cause of action for conspiracy created by the Racketeer Influenced and Corrupt Organizations Act (“RICO”).  The Supreme Court held that “a person injured by an overt act done in furtherance of a RICO conspiracy” has a cause of action only if the overt act itself is a racketeering act.  There is no cause of action if the overt act is not itself a racketeering act.

Justice Clarence Thomas wrote the Court’s majority opinion, and Chief Justice William H. Rehnquist and Justices Stephen G. Breyer, Ruth Bader Ginsburg, Anthony M. Kennedy, Sandra D. O’Connor and Antonin Scalia joined the majority opinion.  Justice John Paul Stevens wrote a dissenting opinion, and Justice David H. Souter joined the dissenting opinion.


The Facts Underlying The Decision
Until its bankruptcy in 1990, Southeastern Insurance Group (“SEG”) was a Florida insurance holding company with three operating subsidiaries engaged in the business of writing surety bonds for construction contractors.  From approximately 1987 until approximately 1990, the defendants in the case, who were SEG directors and officers, engaged in a series of racketeering acts.  The acts included the creation of an entity called Construction Performance Corporation that demanded fees from contractors in exchange for qualifying the contractors for SIG surety bonds, the diversion of corporate funds for personal uses, and the submission of false financial statements to regulators, shareholders and creditors.  


During most of the time he was employed at SIG, Robert A. Beck II, the president and chief executive officer of SIG, was unaware of these activities.  When Beck discovered the unlawful conduct, he contacted regulators concerning the false financial statements.  The defendants responded by hiring an insurance consultant to write a false report suggesting that Beck had failed to perform his duties.  This report was presented to SIG’s board of directors, and, the following day, the board fired Beck based upon a clause in his contract providing for termination in the event of an “inability or substantial failure to perform [his] material duties.”  Beck sued defendants and alleged violations of RICO.  

The Majority’s Decision
The Supreme Court’s majority began its opinion by describing the purpose of the RICO statute:


Congress enacted RICO as Title IX of the Organized Crime Control Act of 1970, Pub. L. 91-452, 84 Stat. 922, for the purpose of “seek[ing] the eradication of organized crime in the United States,” id., at 923.  Congress found that “organized crime in the United States [had become] a highly sophisticated, diversified, and widespread activity that annually drain[ed] billions of dollars from America’s economy by unlawful conduct and the illegal use of force, fraud, and corruption.”  Id., at 922.  The result was to “weaken the stability of the Nation’s economic system, harm innocent investors and competing organizations, interfere with free competition, seriously burden interstate and foreign commerce, threaten the domestic security, and undermine the general welfare of the Nation and its citizens.”  Id., at 923.  Finding the existing “sanctions and remedies available to the government [to be] unnecessarily limited in scope and impact,” Congress resolved to address the problem or organized crime “by strengthening the legal tools in the evidence-gathering process, by establishing new penal prohibitions, and by providing enhanced sanctions and new remedies to deal with the unlawful activities of those engaged in organized crime.”  Ibid.


The Court stated that “RICO attempts to accomplish these goals” in Section 1963 of the statute by providing severe criminal penalties “for violations of Section 1962” of the statute and in Section 1964(c) of the statute by creating “a civil cause of action for any person ‘injured in his business or property by reason of a violation of section 1962.’”  The court summarized the four subsections of Section 1962 as follows:


Subsection (a) makes it “unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt . . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce”;


subsection (b) makes it “unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce”;

subsection (c) makes it “unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt”; and, finally, subsection (d) makes it unlawful “for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.”


The court noted that Section 1961(1 aud.”  Section 1961(4) defines “enterprise” as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.”

In the case before the Court, Beck alleged that defendants

• “used or invested income derived from a pattern of racketeering activity to establish and operate an enterprise, in violation of § 1962(a)”;
• “acquired and maintained an interest in and control of their enterprise through a pattern of racketeering activity, in violation of § 1962(b)”;
• “engaged in the conduct of the enterprise’s affairs through a pattern of racketeering activity, in violation of § 1962(c)”; and
• “conspired to commit the aforementioned acts, in violation of § 1962(d).”  


With respect to the conspiracy claim under § 1962(d), Beck’s “theory was that his injury was proximately caused by an overt act – namely, the termination of his employment – done in furtherance of [the] conspiracy.”


The United States District Court for the Southern District of Florida dismissed Beck’s conspiracy claim and the United States Court of Appeals for the Eleventh Circuit affirmed in a decision reported at 162 F.3d 1090.  The Supreme Court granted certiorari to decide “whether a person injured by an overt act in furtherance of a conspiracy may assert a civil RICO conspiracy claim under § 1964(c) for a violation of § 1962(d) even if the overt act does not constitute ‘racketeering activity.’”  The Court noted the following split in the Circuits on this issue:  the First, Second, Eighth and Ninth Circuits have answered this question “no”, and the Third, Fifth and Seventh Circuits have answered this question “yes.”  Compare Miranda v. Ponce Fed. Bank, 948 F.2d 41, 48 (1st Cir. 1991), Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 25 (2d Cir. 1990), Bowman v. Western Auto Supply Co., 985 F.2d 383, 388 (8th Cir.), cert. denied, 508 U.S. 957 (1993), and Reddy v. Litton Indus., Inc., 912 F.2d 291, 294-95 (9th Cir. 1990), cert. denied, 502 U.S. 921 (1991) (all holding “no”) with Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1168-69 (3d Cir. 1989), Khuranav. Innovative Health Care Systems, Inc., 130 F.3d 143, 153-54 (5th Cir. 1997), vacated sub nom. Teel v. Khurana, 525 U.S. 979 (1998), and Schiffels v. Kemper Financial Services, Inc., 978 F.2d 344, 348-49 (7th Cir. 1992) (all holding “yes”).


The Supreme Court began its analysis of this legal issue by stating that the case “turns on the combined effect of two provisions of RICO that, read in conjunction, provide a civil cause of action for conspiracy.”  Section 1964(c), the court stated, “states that a cause of action is available to anyone ‘injured . . . by reason of a violation of section 1962.’”  Section 1962(d), in turn, “makes it unlawful for a person ‘to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.’”  


The Court stated that “[t]o determine what it means to be ‘injured . . . by reason of’ a ‘conspir[acy],’ we turn to the well-established common law of civil conspiracy.”  According to the Court, “[b]y the time of RICO’s enactment in 1970, it was widely accepted that a plaintiff could being suit for civil conspiracy only if he had been injured by an act that was itself tortious.”  In support of this statement, the Court cited twelve cases, Restatement (Second) of Torts § 876 comment by (1977), and William Prosser, Law of Torts § 46, at 293 (4th ed. 1971).


The Court stated that “when Congress uses language with a settled meaning at common law, Congress ‘presumably knows and adopts the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken and the meaning its use will convey to the judicial mind unless otherwise instructed’” (quoting Morissette v. United States, 342 U.S. 246, 263 (1952)).  In such a case, “absence of contrary direction may be taken as satisfaction with widely accepted definitions, not as a departure from them” (also quoting Morissette).  Thus, “[w]e presume . . . that when Congress established in RICO a civil cause of action for a person ‘injured . . . by reason of’ a ‘conspir[acy],’ it meant to adopt these well-established common-law civil conspiracy principles.”

The Court accordingly held that “injury caused by an overt act that is not an act of racketeering or otherwise wrongful under RICO . . . is not sufficient to give rise to a cause of action under § 1964(c) for a violation of § 1962(d).”  The Court stated that “[a]s at common law, a civil conspiracy plaintiff cannot bring suit under RICO based on injury caused by any act in furtherance of a conspiracy that might have caused the plaintiff injury.  Rather, consistency with the common law requires that a RICO conspiracy plaintiff allege injury from an act that is analogous to an ‘ac[t] of a tortious character,’ . . . meaning an act that is independently wrongful under RICO.”  Applying this rule of law, the Court held the alleged overt act in furtherance of the conspiracy in the case before the Court – the alleged false report suggesting that Beck had failed to perform his duties, which led to Beck’s termination – was not “independently wrongful under any substantive provision of the statute” and thus the injury allegedly caused by this act was not sufficient to give rise to a cause of action under § 1964.


The Court rejected a contention that “under our view of the statute, any person who had a claim for a violation of § 1962(d) would necessarily have a claim for a violation of § 1961(a), (b), or (c)” and thus that the Court’s view of the statute rendered to statute “meaningless or superfluous.”  According to the court, “[u]nder our interpretation, a plaintiff could, through a § 1964(c) suit for a violation of § 1962(d), sue co-conspirators who might not themselves have violated one of the substantive provisions of § 1962.”
The Court noted a contention by the defendants in the case that “a § 1962(d) claim must be predicated on an actionable violation of §§ 1962(a)-(c)” but concluded that “the merit of this view is a different (albeit related) issue from the one on which we granted certiorari, namely, whether a plaintiff can bring a § 1962(d) claim for injury flowing from an overt act that is not an act of racketeering.”  The majority accordingly stated that contrary to the suggestion in the dissent “we do not resolve whether a plaintiff suing under § 1964(c) for a RICO conspiracy must allege an actionable violation under §§ 1962(a)-(c), or whether it is sufficient for the plaintiff to allege an agreement to complete a substantive violation and the commission of at least one act of racketeering that caused him injury.”


The Dissent
Justice Stevens’s dissent stated his view that “the plain language of RICO makes it clear” that a “civil cause of action under § 1964(c) for a violation of § 1962(d) does not require that he be injured in his business or property by any particular kind of overt act in furtherance of the conspiracy.”


Justice Stevens explained that “[a] ‘conspiracy’ is an illegal agreement” and that “[t]here is, of course, a difference between the question whether an agreement is illegal and the question whether an admittedly illegal agreement gives rise to a cause of action for damages.”  Justice Stevens stated that “Section 1962(d), which makes RICO conspiracies unlawful, addressed the former question” – i.e., whether an agreement is illegal – and “§ 1964(c), which imposes civil liability, concerns the latter” – i.e., “whether an illegal agreement gives rise to a cause of action for damages.”  In Justice Stevens’s words: “Section 1964(c) requires a person to be ‘injured in his business or property’ by a violation before bringing an action for damages.  And because that kind of injury only results from some form of overt act in furtherance of the conspiracy, liability under § 1964(c) naturally requires injury via an overt act.  But there is nothing in either § 1962(d) or § 1964(c) requiring the overt act to be a racketeering activity.”


Justice Stevens also stated his view that “the Court’s recitation of the common law of civil conspiracy does not prove otherwise, and, indeed, contradicts its own holding.”  According to Justice Stevens, the cases cited by the majority do not support the majority’s central premise:  “that common-law civil conspiracy cases support the notion that liability cannot be imposed unless the overt act that furthered the conspiracy and harmed the plaintiff was a particular kind of overt act, namely, an act of a tortious character.”  To the contrary, Justice Stevens stated, “no case cited by the majority actually parallels the Court’s premise.  That is, no case involved a situation in which (a) there was an illegal agreement, (b) there was an injury to the plaintiff proximately caused by an overt act in furtherance of that agreement, but (c) there was a refusal to impose civil liability because the overt act was not itself tortious.”  


Justice Stevens added that even assuming that the majority’s conclusion that “a RICO conspiracy plaintiff [must] allege injury from an act that is analogous to an ‘ac[t] of an tortious character’” were correct, “it is not at all clear to me why an overt act that ‘injure[s]’ a person ‘in his business or property’ (as § 1964(c) requires) would not be ‘analogous to an ‘ac[t] of a tortious character’’ simply because the overt act is not listed in § 1961(1).  Nor do I understand why the only qualifying ‘tortious act’ must be ‘an act that is independently wrongful under RICO.’”


Moreover, Justice Stevens continued, even “if one assumes further that the Court is correct to say that the only qualifying ‘’ac[t] of a tortious character’’ is ‘an act that is independently wrongful under RICO,’ the analogy does not actually support what the Court has held.”  Justice Stevens reasoned as follows:

The majority holds that § 1964(c) liability could be imposed if the overtacts injuring the plaintiff are among those racketeering activities listed in § 1961(1) – such as murder, bribery, arson, and extortion.  Racketeering activities, however, are not “independently wrongful under RICO.”  They are, of course, independently wrongful under other provisions of state and federal criminal law, but RICO does not make racketeering activity itself wrongful under the Act.  The only acts that are “independently wrongful under RICO” are violations of the provisions of § 1962.  Thus, even accepting the Court’s own analogy, if petitioner were harmed by predicate acts defined in § 1961(1), that still would not, by itself, give rise to a cause of action under § 1964(c).  Only if those racketeering activities also constituted a violation of § 1962(a), (b), or (c) would petitioner be harmed by “an act that is independently wrongful under RICO.”  And, of course, it petitioner were already harmed by conduct covered by one of those provisions, he would hardly need to use § 1962(d)’s conspiracy provision to establish a cause of action.


The majority noted that Justice Stevens did “not challenge our view that Congress meant to incorporate common-law principles when it adopted RICO” and “[n]or does he attempt to make an affirmative case from the common law for his reading of the statute by pointing to a case in which there was (a) an illegal agreement; (b) injury proximately caused to the plaintiff by a nontortious overt act in furtherance of the agreement; and (c) recovery by the plaintiff.”  Instead, according to the majority, Justice Stevens “argues only that courts, authoritative commentators, and even dictionaries repeatedly articulated a rule with no meaning or application.”  The majority stated that “[w]e find this argument to be implausible and, accordingly, understand RICO to adopt the common-law principles we have cited.”
   
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