© Copyright 2006. All rights reserved, Emergency Envelopes, Volume 2, Issue 1
Introduction
Since the Racketeer Influenced and Corrupt Organizations Act[1] (“RICO”) was aimed at punishing those who infiltrate or operate legitimate businesses to carry out long-term criminal schemes, it has always been harder to make a RICO case against the businesses themselves. Its most commonly-invoked provision, section 1962(c),[2] prohibits any “person” from “participating in” or “conducting the affairs” of an “enterprise” through a pattern of racketeering activity. When the “person” accused of violating RICO is a corporation, this can be a very difficult standard to meet.
While a corporation can be the defendant “person,” any civil plaintiff or federal prosecutor seeking to impose section 1962(c) RICO liability against a corporate defendant must navigate the narrow channel between the Scylla represented by the person/enterprise rule and the Charybdis of the “operation or management” test. For the corporate RICO claim, steering away from one hazard to the “enterprise” theory invariably leads the claim directly into the other. On one hand, a corporate defendant cannot also serve as the RICO “enterprise”—the defendant “person” and the “enterprise” it manages or controls must be separate and distinct. This prevents a corporation from being liable for managing its own “enterprise,” even when committing a pattern of racketeering activity. On the other hand, simply identifying a separate organization as the “enterprise” might satisfy the person/enterprise rule, but runs up against the requirement that the defendant person have participated in the “operation or management” of that “enterprise.” It is, in practice, quite difficult to show that a corporate defendant participates in the “operation or management” of a totally separate and distinct enterprise.
There is, however, a narrow but well-traveled course between these twin hazards: the “association-in-fact” enterprise theory. Or, from the corporate perspective, the association-in-fact enterprise theory represents a critical gap between the ramparts established by the person/enterprise and “operation or management” defenses. Under RICO, an “enterprise” can include a “group of individuals associated in fact although not a legal entity.” Increasingly, RICO claimants have cast the corporate defendant as a constituent of an association-in-fact enterprise comprised of the corporate defendant and its agents or employees. While the lower courts have struggled to find consensus on the contours of this channel to corporate RICO liability, or even whether it exists, this term the Supreme Court conspicuously punted on the opportunity to decide the issue—leaving the status of one of the largest gateways to corporate RICO liability unclear. One thing is nearly certain, however: the high Court will be forced to address this issue in the near future.
The RICO Statute and the Person/Enterprise Distinction
Congress passed RICO in 1970 as part of a comprehensive legislative package aimed at combating the influence of organized crime on interstate commerce. Enacted as Title IX of the Organized Crime Control Act of 1970,[3] RICO was inspired in part by a 1967 report of the President’s Commission on Law Enforcement and Administration, which identified several methods through which organized crime gained control of legitimate businesses.[4] RICO generally outlaws four types of activities, each of which involves the defendant’s misuse of an “enterprise” in connection with a “pattern of racketeering activity”: 1) investing in an “enterprise” any income derived from a pattern of racketeering activity;[5] 2) using a pattern of racketeering activity to acquire or maintain control over an “enterprise”;[6] 3) conducting or participating in the affairs of an “enterprise” through a pattern of racketeering;[7] and 4) conspiring to commit one of the foregoing RICO violations.[8] RICO defines “enterprise” to include “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.”[9] “Racketeering activity,” on the other hand, includes a broad range of enumerated state and federal crimes.[10] While violating RICO is a federal felony, the statute also includes a civil remedy prevision that allows private parties to sue for treble damages and attorney’s fees caused by a defendant’s RICO violation.[11]
As mentioned above, RICO section 1962(c) prohibits any “person” from “participating in” or “conducting the affairs” of an “enterprise” through a pattern of racketeering activity. To be liable for participating or conducting the affairs of an “enterprise,” a defendant must have “participated in the operation or management of the enterprise itself.”[12] A RICO claimant must show that the defendant “conducted or participated in the conduct of the ‘enterprise’s affairs,’ not just [its] own affairs.”[13]
While corporations fall within the definition of “person” and may be RICO defendants, it is also settled law that section 1962(c) requires that the defendant “person” and the “enterprise” be legally distinct entities: a RICO defendant “person” cannot also be the RICO “enterprise”.[14] For the last 20 years, as civil plaintiffs and (to a lesser extent) prosecutors have pushed the RICO statute beyond the realm of organized crime or traditional “racketeering” activities, and pursued RICO liability against corporations and their agents, federal courts have struggled to define the contours of the person/enterprise distinction between a corporation and its agents.
In 2001, the Supreme Court resolved some of the debate in Cedric Kushner Promotions, Ltd. v. King,[15] by holding that an employee and sole shareholder of a corporation is a legally distinct “person” from the corporate “enterprise” under RICO section 1962(c).[16] Cedric Kushner Promotions made clear that RICO imposes liability on individual corporate employees, officers, or agents who conduct the affairs of their company to engage in racketeering offenses.
But the Cedric Kushner Promotions decision left open the more contentious, and consequential, question of whether a corporate defendant could be the RICO “person” while the role of the “enterprise” is filled by the “association in fact” between the same corporation and its agents and/or employees.[17] As explained earlier, theory that a corporation can form an association-in-fact enterprise with its subsidiaries, agents, or employees has been one of the primary means that civil plaintiffs and (to a lesser extent) federal prosecutors have used to slip between the person/enterprise and “operation or management” tests, which would otherwise insulate corporate defendants from RICO liability in most cases.
Uncertainty Over Corporate/Agent Association-in-Fact RICO Enterprise Liability
While the lower federal courts have generally agreed that a corporate defendant can also be part of the association-in-fact enterprise, there is much less uniformity on whether such an enterprise can consist of the corporate defendant and its agents. In an emerging circuit split—recently highlighted by two civil RICO lawsuits against corporations accused of hiring undocumented workers—the lower federal courts have differed on whether such an association-in-fact enterprise satisfies the person/enterprise rule.
In the Baker v. IBP, Inc.,[18] the Seventh Circuit confronted a class action filed by employees of a meat processor, claiming that their employer violated RICO by hiring undocumented, illegal aliens. The plaintiffs claimed that they were injured as a result of this pattern of predicate immigration offenses because they believed that the hiring of illegal aliens depressed wages across the board, including the plaintiffs’ wages.[19] According to the plaintiffs, their employer was using recruiters and immigrant welfare organizations to assist it in hiring illegal immigrants. The association-in-fact RICO “enterprise,” they claimed, was “IBP plus the persons and organizations who help it find aliens to hire.”[20] The Seventh Circuit flatly rejected this enterprise allegation. The court explained that the notion “that IBP plus its agents and employees is the ‘enterprise,” is a “theory that won’t fly”; that there was no “common purpose” among the constituents of the association-in-fact enterprise; and that the employer-defendant was still conducting its own affairs and not, as required, the affairs of this would-be association-in-fact “enterprise”.[21] The court concluded that this association-in-fact enterprise was not distinct from the corporate defendant, and “[w]ithout a difference between the defendant and the ‘enterprise’ there can be no violation of RICO.”[22] The Second and Third Circuits have likewise held that an “enterprise” consisting of a defendant corporation and its outside agents cannot be distinguished from the corporation itself.[23]
But the Eleventh Circuit reached the opposite result on the same fact pattern last year. In Williams v. Mohawk Industries, Inc.,[24] that court held that a corporate RICO defendant could be held liable for unlawfully conducting the affairs of an association-in-fact enterprise comprised of the corporation and its agents. The Mohawk Industries decision also arose from an employee class action claiming that Mohawk and a group of third-party temp agencies and recruiters conspired to violate the immigration laws by hiring undocumented workers, and that this collaboration established an “association in fact” enterprise.[25] On appeal from the district court’s dismissal, the court sustained this association-in-fact enterprise theory, reasoning: “[t]his Court has never required anything other than a ‘loose or informal’ association of distinct entities. Mohawk and the third-party recruiters are distinct entities that, at least according to the complaint, are engaged in a conspiracy to bring illegal workers into this country for Mohawk’s benefit. As such, the complaint sufficiently alleges an ‘enterprise’ under RICO.”[26] In holding that an employer and outside recruiters could qualify as an association-in-fact enterprise in RICO claims based on the hiring of undocumented workers, the Eleventh Circuit recognized that its “conclusion puts our circuit in conflict with the Seventh Circuit’s decision in Baker v. IBP, Inc., 357 F.3d 685 (7th Cir. 2004), cert. denied, 125 S. Ct. 412 (2004).”
Mohawk Industries, Inc. v. Williams: Profound Questions Raised But Left Unanswered
The Supreme Court granted certiorari in the Mohawk Industries case,[27] to address the question left open in Cedric Kushner Promotions and presumably resolve this emergent split of authority. In Mohawk Industries, Inc. v. Williams, No. 05-465, the Supreme Court granted certiorari to address the following question:
Whether a defendant corporation and its agents can constitute an “enterprise” under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (“RICO”), in light of the settled rule that a RICO defendant must “conduct” or “participate” in the affairs of some larger association of entities to establish an “enterprise”.
The resolution of this issue obviously would have far-reaching consequences for both corporations and potential RICO claimants. From the corporate perspective, this corporate/agent association-in-fact enterprise theory virtually eliminates the “enterprise” requirement from the statute—greatly increasing the risk that ordinary fraud allegations could be transformed into racketeering charges and the corresponding exposure to added civil and criminal penalties. Since companies routinely carry on their affairs with the assistance of outside agents, the corporate/agent association-in-fact “enterprise” could make the separate “enterprise” requirement an almost vestigial part of the RICO case, dramatically increasing corporate exposure to RICO liability.[28]
But from the perspective of RICO plaintiffs and prosecutors, cutting off this avenue of “enterprise” liability would largely close the narrow channel for establishing corporate liability under section 1962(c), and insulate corporate wrongdoers from RICO liability. Taking the Mohawk Industries example, assuming the plaintiffs’ theory that the company was engaged in a long term scheme of racketeering, without the association-in-fact enterprise theory it would likely be immune from RICO liability because there is no other viable “enterprise”. The plaintiffs could not name Mohawk itself as the “enterprise,” because that claim would be destroyed by the person/enterprise rule. And, the plaintiffs could not name the third-party recruiters as the “enterprise” or “enterprises,” because although distinct from Mohawk, there is no indication that Mohawk participated in the operation or management of those organizations.
But the briefing in the Mohawk Industries case reveals that an even broader issue was at stake. The petitioner, supported by a “friend of the court” brief by the Chamber of Commerce and several other business organizations, argued that a corporate defendant can never be part of an association-in-fact enterprise under RICO. Focusing on the statutory definition of “enterprise,”[29] the petitioner and business organizations argued that association-in-fact enterprises can be comprised only of natural persons, not corporations. As they point out, in identifying the association-in-fact “enterprise,” the RICO statute describes it as “any union or group of individuals associated in fact although not a legal entity.”[30] While the RICO statute has defined the term “person” to include corporations,[31] it did not provide such a definition for the term “individual.” The term “individual” usually refers to natural persons,[32] which would exclude corporations and other artificial persons from being members of an association-in-fact enterprise. On the other hand, RICO’s definition of “enterprise” provided that the term “includes” the enumerated entities, which arguably makes the term flexible enough to embrace associations of corporations. Ultimately, if accepted, this argument would altogether eliminate the corporate association-in-fact enterprise theory.
After these issues were briefed and argued, however, the Supreme Court dismissed the appeal for procedural reasons on June 5, 2006. In another case decided that day, Anza v. Ideal Steel Supply Corp.,[33] the Court ruled that a plaintiff who claimed lost sales as a result of the defendant’s sales tax fraud scheme did not have standing to recover under RICO, even if the scheme was motivated to increase the defendant’s market share, because the state tax authority, not the plaintiff, was the direct victim of the scheme. Since the plaintiffs in Mohawk Industries were also pursuing a somewhat indirect theory of causation (Mohawk’s ability to hire undocumented workers depressed the plaintiffs’ wages), the Court dismissed the writ of certiorari as improvidently granted. Instead of ruling on the “enterprise” issue, the Court instructed the Eleventh Circuit to consider the plaintiffs’ standing, while allowing its decision to stand and the circuit split to remain.
Epilogue: the Future of Corporate Association-in-Fact Enterprise Liability
Although the future viability of the corporate/agent association-in-fact RICO enterprise is in doubt, the need for a decision on that issue is not. The resolution of the question presented in Mohawk Industries will determine much of the future of corporate civil and criminal liability under RICO. The Court can be expected to take this issue up again at the next opportunity.
[2] Id. § 1962(c).
[3] Pub. L. 91-452, 84 Stat. 922, codified as amended at 18 U.S.C. §§ 1961-68.
[4] The President’s Commission on Law Enforcement and Administration of Justice, Task Force Report: Organized Crime at 4 (1967).
[5] 18 U.S.C. § 1962(a).
[6] Id. § 1962(b).
[7] Id. § 1962(c).
[8] Id.§ 1962(d).
[9] Id. § 1961(4).
[10] Id. § 1961(1).
[11] Id. § 1964(c).
[12] Reves v. Ernst & Young, 507 U.S. 170, 183 (1993).
[13] Id. at 185.
[14] See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001) (“We do not quarrel with the basic principle that to establish liability under § 1962(c) one must allege and prove the existence of two distinct entities: (1) a ‘person’ and (2) an ‘enterprise’ that is not simply the same ‘person’ referred to by a different name.”)
[15] Id.
[16] Id. at 163.
[17] Id. at 164.
[18] 357 F.3d 685 (7th Cir.), cert. denied, 125 S. Ct. 412 (2004).
[19] Id. at 686.
[20] Id. at 691.
[21] Id. at 691.
[22] Id. at 692.
[23] Discon v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996), vacated on other grounds, 525 U.S. 128 (1998); Brittingham v. Mobil Corp., 943 F.2d 297, 303 (3d Cir. 1991).
[24] 411 F.3d 1252 (11th Cir. 2005).
[25] Id. at 1258.
[26] Id.
[27] Mohawk Industries, Inc. v. Williams, No. 05-465.
[28] See, e.g., Fitzgerald v. Chrysler Corp., 116 F.3d 225, 228 (7th Cir. 1997) (“we cannot imagine . . . applying RICO to a free-standing corporation such as Chrysler merely because Chrysler does business through agents, as virtually every manufacturer does”).
[29] 18 U.S.C. § 1961(4).
[30] Id. (emphasis added).
[31] Id. § 1961(3) (defining “person” to “include[] any individual or entity capable of holding a legal or beneficial interest in property”).
[32] See American Heritage Dictionary 920 (3d ed. 1992) (defining “individual” to mean “[a] single human being considered apart from a society or community”); Black’s Law Dictionary 773 (6th ed. 1990) (“As a noun, this term denotes a single person as distinguished from a group or class, and also very commonly, a private or natural person as distinguished from a partnership, corporation, or association; but it is said that this restrictive signification is not necessarily inherent in the word, and that it may, in proper cases, include artificial persons.”)
[33] 126 S. Ct. 1991 (2006).
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