Plaintiffs' use of RICO limited.

This year marks the 30th anniversary of the enactment of the federal Racketeer Influenced and Corrupt Organizations Act (RICO).(1) Congress could not possibly have imagined how frequently this law would be used in all areas of civil litigation.

RICO is Title IX of the Organized Crime Control Act of 1970, and its stated purpose is "the eradication of organized crime in the United States."(2) However, the broad wording of the statute has allowed it to be used in a vast array of situations totally unrelated to organized crime. For example, RICO's authorization for civil suits is frequently invoked in commercial and business litigation, particularly when there is a claim of fraud.

The Supreme Court recently has addressed two important issues concerning civil RICO claims: When does the statute of limitations period on a RICO action commence? Is there a cause of action under RICO if a person is injured by an overt act in furtherance of a RICO conspiracy if the overt act does not constitute "racketeering activity"? In answering both questions, the Court has strongly favored defendants in RICO litigation and has created significant new obstacles for plaintiffs bringing these claims.

Statute of limitations

The U.S. courts of appeals have been divided over the approach to use in determining when the statute of limitations period begins to run on a civil RICO claim. The act makes it a federal crime "to conduct" an enterprise's activity "through a pattern of racketeering activity."(3) "Pattern" is defined as requiring "at least two acts of racketeering activity ..., the last of which occurred within 10 years ... after the commission of a prior act of racketeering activity."(4) The statute broadly defines racketeering activity. The law also authorizes civil actions by "any person injured in his business or property by reason of a violation" of RICO and provides for the recovery of treble damages and attorney fees.(5)

The Supreme Court has held that there is a four-year limitations period for civil RICO claims.(6) An issue frequently arises as to when the clock begins to run. Three major approaches have developed among the federal courts of appeals.

One approach is the "last predicate act" rule. Under this view, the statute of limitations begins to run as soon as the plaintiff knew or should have known of the last injury or the last predicate act that is part of the same pattern of racketeering activity.

The limitations period begins anew with each predicate act. In determining whether the statute of limitations is met, the court is to determine the date of the last predicate act of a pattern of racketeering activity.(7)

A second approach is the "injury discovery" rule, where the statute begins to run when the plaintiff knew or should have known of his or her injury.(8) In other words, the focus is entirely on the harm suffered by the plaintiff. The time at which the plaintiff discovered or should have discovered the pattern of racketeering activity is irrelevant.

A third approach is the "injury and pattern discovery" rule, under which the limitations period begins to run only when the plaintiff discovers or should have discovered both an injury and a pattern of racketeering activity.(9) This view favors plaintiffs, as knowledge of the injury is not sufficient to trigger the limitations period--not until the plaintiff knew or should have known of both the injury and the existence of a pattern of racketeering activity does the statute begin to run.

In light of the enormous quantity of RICO litigation and the importance of the statute of limitations issue in many cases, it would seem that the Supreme Court would want to end the division among the circuits and choose a clear rule as to when the clock begins to run on civil RICO claims. However, that is not what the Court has done. Instead, it has rejected particular approaches without adopting a specific rule.

In the 1997 Klehr v. A.O. Smith Corp. opinion, the Court expressly rejected the "last predicate act" rule. The Court noted that a pattern of racketeering activity can continue for decades and the last predicate act rule dates the limitations period from the final act. The result is a limitations period that can include decades of racketeering activities. The Court explained that preserving a cause of action for such a vast stretch of time is inconsistent with the very idea of a statute of limitations.(10) In Klehr, the Court simply rejected one approach to determining when the statute accrues. It recognized the split among the circuits between the two other approaches but indicated no view as to which was preferable.

Rule rejected

This year, in Rotella v. Wood, the Court rejected the "injury and pattern discovery" rule.(11) In 1985, the plaintiff, Mark Rotella, was admitted to the Brookhaven Psychiatric Pavilion with a diagnosis of major depression. He was discharged in 1986. Eight years later, in 1994, Brookhaven's parent company and one of its directors pleaded guilty to criminal fraud. In 1997, Rotella brought a civil suit under RICO, claiming that a group of doctors and their business entities conspired to confine him for their own financial gain, rather than to meet his treatment needs.

Whether the suit could go forward depended on when the clock for the RICO claim began to run. The defendants argued that the four-year limitations period started when Rotella was injured by his confinement, meaning that the RICO claim was time barred in 1990, four years after his release. Rotella, in contrast, contended that the clock did not start until he learned of the pattern of racketeering activity as a result of the defendants' guilty pleas in 1994. The Fifth Circuit ruled against the plaintiff,(12) and the Supreme Court unanimously affirmed.

The Court, in an opinion by Justice David Souter, explained that beginning the statute of limitations clock only when the plaintiff knew or should have known of both the injury and the pattern unduly extends the limitations period. Souter stated:

   A pattern discovery rule would allow proof of a defendant's acts even more
   remote from time of trial and, hence, litigation even more at odds with the
   basic policies of all limitations provisions: repose, elimination of stale
   claims, and certainty about a plaintiff's opportunity for recovery and a
   defendant's potential liabilities.(13)

The Court concluded:

   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 to 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....(14)

By process of elimination, and by implication, it would seem that the Court has finally chosen a rule for when RICO claims accrue: when the injury is or should have been discovered. However, in an important footnote to Rotella, Souter explicitly rejected doing so. He stated: "We do not ... settle upon a final rule."(15)

He noted that Justice Antonin Scalia endorsed in Klehr an "injury occurrence" rule, under which the statute begins to run when the plaintiff is actually injured, not when the plaintiff knew or should have known of the harm.(16) This approach, of course, would go much further in precluding plaintiffs' recovery and protecting defendants than any federal court of appeals has done.

The Court said that it was not choosing between an injury discovery rule and an injury occurrence rule because there had not been briefing on the issue by the parties. The results are continued litigation and confusion over the question of when the statute of limitations begins to run on a RICO claim.

In another recent decision, Beck v. Prupis, the Supreme Court considered whether a person injured by an overt act in furtherance of a RICO conspiracy has a cause of action if the overt act is not an act of racketeering.(17) Beck involved a claim by a former president and CEO of Southeastern Insurance Group against the company's former officers and directors. The company wrote surety bonds for construction contractors. Beginning in 1987, it began engaging in fraud, including demanding fees from contractors in exchange for surety bonds; diverting corporate funds to personal uses; and submitting false statements to regulators, shareholders, and creditors.

In 1988, Robert Beck discovered this fraudulent activity, and the defendants then fired him. Beck sued under the civil RICO provisions. The defendants argued that since firing Beck was not itself a racketeering activity under RICO, there was no cause of action under the statute. Beck contended that there was a claim under RICO because the firing was in furtherance of racketeering activity. He claimed he was terminated as part of the defendants' attempt to cover up their fraud.

The Supreme Court, in an opinion by Justice Clarence Thomas, sided with the defendants and concluded that an overt act in furtherance of the conspiracy is not sufficient unless the overt act itself constitutes racketeering activity. Thomas wrote:

   [W]e conclude 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.... As 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 "act of a
   tortious character," ... meaning an act that is independently wrongful
   under RICO.(18)

The result is that the ability of plaintiffs to sue under RICO is limited. No one denied that Beck was fired because of a RICO conspiracy. But the Court said that he could not sue under the law because the firing was not itself a violation of RICO.

Both of the Supreme Court's recent RICO decisions strongly favor defendants. By narrowing when the statute of limitations begins to run--even opening the door to a further restriction--and by requiring that the overt act itself violates RICO, the Court has dealt serious blows to plaintiffs in bringing suits under the statute.

Court favors defendants

The Court has strongly favored defendants in RICO litigation and created significant new obstacles for plaintiffs bringing these claims.

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Notes

(1.) 18 U.S.C. [subsections] 1961-1968 (1994 ed. and Supp. IV).

(2.) Pub. L. No. 91-452, 84 Stat. 922 (codified at 18 U.S.C. [sections] 1961).

(3.) 18 U.S.C. [sections] 1962(c).

(4.) Id. [sections] 1961(5).

(5.) Id. [sections] 1964(c).

(6.) Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 156 (1987).

(7.) See, e.g., Keystone Ins. Co. v. Houghton, 863 F.2d 1125, 1130, 1132 (3d Cir. 1988).

(8.) See, e.g., Grimmett v. Brown, 75 F.3d 506, 511 (9th Cir. 1996), cert. dismissed, 519 U.S. 233 (1997); McCool v. Strata Oil Co., 972 F.2d 1452, 1464 (7th Cir. 1992).

(9.) See, e.g., Caproni v. Prudential Securities, Inc., 15 F.3d 614, 619-20 (6th Cir.), reh'g denied (1994); Granite Falls Bank v. Henrikson, 924 F.2d 150,154 (8th Cir. 1991).

(10.) 521 U.S. 179, 187 (1997).

(11.) 120 S. Ct. 1075 (2000).

(12.) 147 F.3d 438 (5th Cir. 1998).

(13.) 120 S. Ct. 1075, 1081.

(14.) Id. at 1082.

(15.) Id. at 1080 n.2.

(16.) 521 U.S. 179,198 (Scalia, J., concurring in part and concurring in the judgment).

(17.) 120 S. Ct. 1608 (2000).

(18.) Id. at 1616.

Erwin Chemerinsky is the Sydney M. Irmas Professor of Public Interest Law, Legal Ethics, and Political Science, at the University of Southern California Law School.