Googling RICO can yield quite the rabbit hole with all sorts of nonsense. If you operate outside the legal world, you might be asking, why does it matter at all?
The RICO Act, short for Racketeer Influenced and Corrupt Organizations, in short, has taken a place in the public imagination far beyond its utility, but it is, in reality, a complex and difficult statute designed to prevent fraudulent acts through the penalty of steep financial damages. Misused and misunderstood, yes, frequently. This is why most people, when deciding if a case meets the legal criteria for a RICO lawsuit simply throw up their hands and say, “It’s never RICO!” But it might be — and it does matter.
Let’s back up a bit. “RICO” stands for Racketeer Influenced and Corrupt Organizations, a federal statute that has both criminal and civil components. There are some subtle differences between the two. Civil RICO is when a private plaintiff sues another for monetary damages or, in rare instances, injunctive relief. It is awarded to “any person injured in his business or property” because of a RICO violation.
RICO allows plaintiffs to bring a federal claim that, if successful, entitles them to triple damages and attorneys’ fees. Triple damages are a pretty powerful incentive. All sorts of plaintiffs in all sorts of contexts have asserted RICO claims, which has contributed to RICO’s pop-culture popularity. If you can win, you win big.
A RICO claim is not simply a dressed-up fraud claim, nor is it a statute that applies only in situations when the defendants are really, really bad. RICO was drafted to be used against organized crime, and the elements required to state a RICO claim reflect that intent.
To state a claim for RICO, a plaintiff must allege that the defendants conducted an enterprise through a pattern of racketeering activity and that the plaintiff was harmed in that process.
The terms conducted, enterprise, pattern, and racketeering activity are all legal terms of art whose definitions are hotly debated.
RICO is far from obsolete. Something as mundane as an insurance company growing weary of excessive payments on auto accident claims can result in a RICO filing. Let’s look at one recent RICO case and see what it can tell us about the current state of civil RICO.
In 2014, State Farm Insurance filed a RICO complaint against a chiropractic clinic, alleging, in the court’s words, that there had been “a concerted scheme to defraud [State Farm] through the submission of claims for medically unnecessary, and in some cases entirely unperformed, services.” State Farm’s complaints included sham treatments, improperly soliciting accident-victim clients, excessive billing, false charges through unnecessary testing, and receiving payments under the table for services.
The chiropractic clinic moved to dismiss but lost. Why? Because the court ruled State Farm had stated a viable RICO claim.
State Farm alleged that the chiropractic clinic and its associates were working in collusion to run a complex scam that, in the Supreme Court’s words, was “a continuing unit that functions with a common purpose.” That’s known in the legal world as an “association-in-fact.” It is not difficult to picture, for example, an organized crime family or a street gang meeting this same definition. State Farm alleged the defendant’s chiropractic clinic, its owners, and its staff constituted an association in fact. The Court found this allegation plausible.
State Farm next alleged that each defendant “made or carried out decisions on behalf of the enterprise,” an allegation required by the Supreme Court’s Reves v. Ernst & Young decision. This means that each person named in the lawsuit was included because they were high enough on the food chain to have participated in the “operation or management” of the enterprise.
This inclusion of each person directly involved is important because, according to the Supreme Court, RICO should not sweep up lower-level people as defendants if they’re not decision-makers. Only those who satisfy the Reves test should be sued. The chiropractic defendants countered that State Farm’s allegations on this point did not satisfy the legal definition for each to be included in the suit, but the Court found that they did.
The defendants’ other arguments did not fare any better. The Court found that State Farm satisfied all of the remaining elements of RICO and therefore stated a RICO claim. This case was settled about a year later.
Was State Farm, one of the largest insurance companies in the US, what RICO’s drafters had in mind as a civil RICO plaintiff? Probably not. In fact, they probably were thinking more of snaring an Al Capone.
However, the scheme alleged by State Farm is the type of scheme that RICO was designed to stop. RICO was aimed at punishing people who use otherwise legitimate businesses for nefarious ends, which is exactly what State Farm alleged.
The settlement, in this case, was confidential, meaning we don’t know what a jury would have made of these allegations. We do know that a federal judge found that State Farm’s claim was plausible and specific enough to survive a motion to dismiss. Racketeering is alive and well if you can prove it, and individuals aren’t always the only victims.
While “it’s never RICO” is more than likely the case, in business litigation, civil RICO will — every now and again — bare its very real teeth.
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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):
This is an updated version of an article originally published on September 8, 2017. It has been updated by Cathy Cagle.]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Adam is Of Counsel with ROETZEL, Chicago, and focuses his practice on commercial and business litigation, representing a wide variety of clients ranging from individuals to small business owners to large corporations. He has a particular focus on investment disputes and business fraud claims and has represented investors and investment companies as plaintiffs and defendants…
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