OPINIONS BELOW
The opinion of the district court is unreported and reproduced in the Joint Appendix
(“J.A.”) at 13–18.
JURISDICTION
The judgment of the district court was entered on November 20, 2006. (J.A. 18). This
Court granted Appellant’s timely notice of appeal on January 6, 2007. (J.A. 20). The district
court’s jurisdiction was based on 28 U.S.C. § 1331 (2000) and 18 U.S.C. § 1964(c) (2000). This
Court has jurisdiction pursuant to 28 U.S.C. § 1291 (2000).
STATEMENT OF THE CASE
Plaintiff-Appellant Mammoth Oil Co., Inc. (“Mammoth”), a Delaware corporation with
its principal place of business in Ames, is a petrochemical company that provides fuel products
to nearly one million industrial and wholesale customers. (J.A. 2). Defendant-Appellee Bantam
Oil Co., Inc. (“Bantam”), a Delaware corporation with its principal place of business in Ames, is
a petrochemical company that directly competes with Mammoth in all fifty states. (J.A. 2).
In 1998, Bantam contracted with Mass Marketing and Media, Inc. (“Mass Marketing”),
an Ames corporation with its principal place of business in Ames, to create and launch
advertising and marketing campaigns for Bantam. (J.A. 2). Mass Marketing replaced Bantam’s
previous advertising agency. (J.A. 8). Mass Marketing has been in the advertising business for
over thirty years and currently has over two hundred customers. (J.A. 2). It has launched several
conventional print advertising and marketing campaigns for Bantam. (J.A. 3, 9).
1
In addition to employing conventional tools, such as print, radio, and television
advertisements, Mass Marketing specializes in “viral marketing” techniques. (J.A. 3). Viral
marketing exploits preexisting social networks to produce exponential increases in brand
awareness. (J.A. 3). Teresa Chu (“Chu”), Mass Marketing’s Director of Internet Marketing and
Advertising, is an industry leader in the creation of viral marketing campaigns. (J.A. 4).
In early 2006, Mass Marketing launched a “viral marketing” campaign for Bantam that
induced consumers to boycott Mammoth. (J.A. 3–4). As part of the campaign, Mass Marketing
sent an email (the “Bantam Email”) to thousands of consumers, which falsely accused Mammoth
of price gouging. (J.A. 3–4, 10–11). Chu worked closely with Amy Weber (“Weber”),
Bantam’s Executive Vice President for Sales & Marketing, to devise the Bantam Email. (J.A. 4).
Weber authorized and approved the creation and dissemination of the Bantam Email. (J.A. 4).
The Bantam Email encouraged its recipients to stop buying gasoline from Mammoth and to
forward the email to others. (J.A. 3–4, 10–11). The Bantam Email, whose true source was not
identified, purported to come from a grassroots organization, Gasoline for All—a fictitious
organization invented by Mass Marketing. (J.A. 3–4, 10–11).
The Bantam Email reached and influenced millions of consumers in the United States.
(J.A. 4). From February 2006, when the Bantam Email was first disseminated, through
September 2006, Mammoth received hundreds of thousands of letters and emails from
consumers who received the Bantam Email. (J.A. 4). These consumers indicated that they were
boycotting Mammoth gasoline solely because of the Bantam Email. (J.A. 4). During that time
period, sales of Mammoth gasoline in the United Stated dropped twenty-two percent, while sales
of Bantam gasoline rose fifteen percent. (J.A. 4–5). During that same period, the price of
2
Mammoth stock fell thirty-four percent, from $56 per share to $37 per share, while the price of
Bantam stock rose over fifty-four percent, from $22 per share to $34 per share. (J.A. 4–5).
In October 2006, Mammoth filed suit against Bantam claiming a violation of the
Racketeer Influenced and Corrupt Organization Act (“RICO”) and defamation. (J.A. 1).
Mammoth alleged that Bantam and Mass Marketing constituted an association-in-fact enterprise,
and that each Bantam Email sent by the enterprise constituted an act of wire fraud under 18
U.S.C. § 1343 (2000). (J.A. 5). Bantam moved to dismiss the RICO claim under Federal Rule
of Civil Procedure 12(b)(6). (J.A. 12). The District Court of Ames granted the motion, holding
that “a civil RICO plaintiff alleging wire fraud as predicate acts must have relied on the
fraudulent conduct of the defendant in order to successfully state a cause of action,” (J.A. 15),
and that a defendant and its agent cannot form a RICO enterprise. (J.A. 18).
Mammoth filed the present appeal on December 1, 2006. (J.A. 19).
SUMMARY OF THE ARGUMENT
Mammoth was intentionally harmed by a campaign of fraudulent advertising designed
and conducted by Bantam and Mass Marketing. Mammoth should be allowed to bring suit under
RICO for injuries it sustained by reason of Bantam’s fraud, without alleging that it relied upon
Bantam’s fraudulent misstatements.
The plain text of RICO and the congressional intent behind it indicate that RICO does not
require reliance. Congress explicitly mandated in the text of RICO that the Act should be
liberally construed to effectuate its broad remedial purposes. Plaintiffs should only be required
to demonstrate that their injuries were proximately caused by the RICO violation. Mammoth can
establish that its drop in revenue and share price was proximately caused by Bantam’s fraudulent
activity. Replacing fact-sensitive proximate cause analysis with a formulaic reliance requirement
3
would hinder RICO’s effectiveness and create perverse incentives for wrongdoers to target third
parties.
Courts should not impute a reliance requirement from common law fraud when the
underlying RICO violation does not require reliance. The effectiveness of RICO’s private
enforcement mechanisms would be greatly reduced if injured persons who did not rely on
fraudulent activity were prevented from bringing suit. Courts should follow Congress’s and the
Supreme Court’s express commands that RICO should be interpreted broadly and should not be
narrowed by imposing artificial requirements upon plaintiffs.
In order to perpetrate this fraud against Mammoth, Bantam exploited its association with
Mass Marketing. RICO seeks to deter precisely this type of conduct—manipulating legitimate
business associations for illegitimate ends. Thus, Bantam should not be allowed to escape RICO
liability by simply asserting that Mass Marketing was its agent.
RICO prohibits a person from associating with an enterprise to conduct a pattern of
racketeering. A RICO enterprise can be any group of individuals associated in fact. Because
one of the aims of RICO is to protect the public from those who would use an enterprise as a
vehicle for committing unlawful activity, courts require that members of an association-in-fact
be separate from each other and that the RICO person be distinct from the RICO enterprise.
Bantam and Mass Marketing are sufficiently separate to constitute an association-in-fact
enterprise. Unlike a corporation and its employees, divisions, or subsidiaries, Bantam and Mass
Marketing are legally separate, practically separate, and operate independently of the other’s
control. Moreover, the association-in-fact enterprise consisting of Bantam and Mass Marketing
is distinct from Bantam. Courts have recognized three ways to demonstrate that a RICO person
is distinct from a RICO enterprise: (1) the RICO person and the RICO enterprise are legally
4
distinct; (2) the RICO enterprise consists of the RICO person and a separate entity; or (3) the
RICO person participates in affairs of the RICO enterprise that are distinct from its own affairs.
Bantam is distinct from the association-in-fact enterprise discussed above, under all three of
these approaches.
Holding corporations like Bantam liable furthers RICO’s goal of eradicating racketeering
and corruption. There is a special danger present when separate entities associate together and
use their association as a vehicle for illegal activity. Further, society is harmed when entities,
especially corporate entities, veil their unlawful activity from the public. RICO was designed to
protect against these dangers, and its purpose can only be effectuated by recognizing that two
separate corporations (Bantam and Mass Marketing), can form an association-in-fact, and that a
corporate member of that association (Bantam) is distinct enough from the enterprise to be held
liable under RICO.
STANDARD OF REVIEW
On a motion to dismiss a court must accept all allegations in the complaint as true,
Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164
(1993), and draw all reasonable inferences in favor of the appellant. Walker v. City of New
York, 974 F.2d 293, 298 (2d Cir. 1992). A court may dismiss the action only if, from the face of
the complaint, “it appears beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45–46 (1957). In
reviewing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure
12(b)(6), a federal appellate court reviews de novo the district court’s conclusions of law.
Herring v. United States, 424 F.3d 384, 390 (3d Cir. 2005).
5
ARGUMENT
I.
RICO PLAINTIFFS DO NOT HAVE TO RELY ON DEFENDANTS’
FRAUDULENT BEHAVIOR TO BRING SUIT, WHEN THE PREDICATE ACTS
ARE WIRE FRAUD.
The civil remedies provision of RICO provides that “[a]ny person injured in his business
or property by reason of a violation of section 1962 . . . may sue therefor in any appropriate
United States district court and shall recover threefold the damages he sustains.” 18 U.S.C.
§ 1964(c) (2000). This statute allows plaintiffs to act as private attorneys general by authorizing
them to bring civil suits against defendants who have proximately caused their injuries “through
a pattern of racketeering activity,” id. § 1962(c), defined in part as acts “indictable under section
1343 (relating to wire fraud).” Id. § 1961(1).
Neither the plain texts of these statutes nor the relevant congressional intent suggest that
RICO plaintiffs must allege reliance upon defendant’s fraudulent misstatements. Under current
Supreme Court jurisprudence, only proximate causation is necessary. See Holmes v. Sec.
Investor Prot. Corp., 503 U.S. 258, 268 (1992). Courts must avoid reading in a reliance
requirement derived from common law fraud. Reliance is not an element of federal wire fraud,
the RICO predicate act in the instant case. 18 U.S.C. § 1343. Moreover, the Supreme Court has
expressly rejected courts’ attempts to impose limitations on RICO. See, e.g., H. J. Inc. v. Nw.
Bell Tel. Co., 492 U.S. 229, 249 (1989). Imposing a reliance requirement would significantly
narrow the reach of RICO and weaken its private enforcement mechanisms.
A.
The Plain Text of RICO and the Congressional Intent Behind It Indicate
That RICO Does Not Require Reliance.
A plain reading is the preferred method of statutory interpretation. See INS v. CardozaFonseca, 480 U.S. 421, 432–33 (1987). The language of the RICO statute clearly does not
6
require reliance. Moreover, an examination of congressional intent supports this textual
interpretation.
1.
Under a Plain Reading, 18 U.S.C. § 1964(c) and 18 U.S.C. § 1343 Do Not
Require Reliance.
When a statute is unambiguous, a plain reading is ordinarily determinative. See Davis v.
Michigan Dep’t of Treasury, 489 U.S. 803, 808 n.3 (1989). Sections 1964(c) and 1343 are
clear—reliance is plainly absent from the text. 18 U.S.C. §§ 1343, 1964(c). Because clear
“language must ordinarily be regarded as conclusive,” a RICO plaintiff alleging predicate acts of
wire fraud need not prove reliance. United States v. Turkette, 452 U.S. 576, 580 (1981) (quoting
Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980)).
2.
Congressional Intent Supports the Plain Text Reading that RICO Does Not
Require Reliance.
One need not delve deep into committee reports and floor debates to ascertain the
congressional intent behind RICO. Congress expressed its intention explicitly through the
statutory language: RICO must “be liberally construed to effectuate its remedial purposes.”
Racketeer Influenced and Corrupt Organizations Act, Pub. L. No. 91-452, § 904(a), 84 Stat. 941,
947 (1970). Congress has thus anticipated judicial inquiries regarding the scope of RICO and
already provided courts with an answer: construe the statute liberally. Here, the court must
choose between narrowing RICO’s scope by requiring reliance, or construing the statute liberally
by holding that reliance is not an element. Only the latter is in accord with the clear legislative
command. See Turkette, 452 U.S. at 587 (“[C]ourts are without authority to restrict the
application of the statute.”). To comply with this congressional mandate, courts should not limit
the scope of RICO by reading in a reliance requirement.
7
In addition to the clear statutory command, legislative history demonstrates that Congress
did not intend for RICO to require reliance. By modeling RICO on federal antitrust laws,
Congress evinced its intention that a § 1964(c) plaintiff need not prove reliance. See Holmes,
503 U.S. at 267 (“We have repeatedly observed, that Congress modeled § 1964(c) on the civilaction provision of the federal antitrust laws, § 4 of the Clayton Act.”) (internal citations
omitted). Because the Clayton Act contained the language “injured by reason of,” an antitrust
plaintiff need only prove proximate cause. See Assoc. Gen. Contractors of Calif. v. Calif. State
Council of Carpenters, 459 U.S. 519, 533–34 (1983). Congress used the same language in
§ 1964(c). Compare § 1964(c) (“injured in his business or property by reason of a violation of
section 1962 of this chapter”) with 15 U.S.C § 15 (2000) (“injured in his business or property by
reason of anything forbidden in the antitrust laws”). Therefore, “we can only assume [Congress]
intended [the words ‘by reason of’] to have the same meaning that courts had already given
them.” Holmes, 503 U.S. at 268. By intentionally selecting language that has been held to
require only a showing of proximate cause, Congress demonstrated its intent to exclude reliance
as an element of § 1964(c).
Only “clearly expressed legislative intent to the contrary” of clear statutory language will
support the narrowing of RICO’s text. Nat’l Org. of Women, Inc. v. Scheidler, 510 U.S. 249,
261 (1994); see also Cardoza-Fonseca, 480 U.S. at 432 n.12 (noting “the strong presumption that
Congress expresses its intent through the language it chooses”). Because legislative history does
not provide an indication, let alone the requisite clear indication that Congress intended RICO to
contain a reliance element, this Court should not impute such a requirement here.
The Supreme Court has consistently rebuked lower court efforts to narrow RICO by
imposing extratextual requirements. See, e.g., Scheidler, 510 U.S. at 259 (rejecting the
8
narrowing of RICO through the imposition of an “economic purpose” requirement); H. J. Inc.,
492 U.S. at 249 (rejecting “the invitation to invent a rule that RICO’s pattern of racketeering
concept requires an allegation and proof of an organized crime nexus”); Sedima, S.P.R.L. v.
Imrex Co., 473 U.S. 479, 498 (1985) (rejecting the narrowing of RICO by requiring plaintiffs to
prove “racketeering injury”); Turkette, 452 U.S. at 581 (rejecting an effort to limit RICO’s scope
to legitimate enterprises). In these cases, the Court has recognized that “rewriting [RICO] is a
job for Congress . . . and not for courts.” H. J. Inc., 492 U.S. at 249. “[T]o ensure that Congress’
intent is not frustrated by an overly narrow reading of the statute,” this Court should not read a
reliance requirement into RICO. Reves v. Ernst & Young, 507 U.S. 170, 183 (1993).
B.
RICO Only Requires a Plaintiff to Show that a Defendant Proximately
Caused the Injuries, Not that a Plaintiff Relied upon Defendant’s Fraudulent
Statements.
Section 1964(c) requires that a plaintiff’s injuries occur “by reason of” a defendant’s
RICO violations. 18 U.S.C. § 1964(c). In Holmes, the Supreme Court definitively interpreted
this language as requiring “a showing that the defendant’s violation was the proximate cause of
the plaintiff’s injury.” 503 U.S. at 268. In the present case, Mammoth can establish that Bantam
proximately caused both its sales and stock price to decline. This causation analysis satisfies the
three policy rationales discussed in Holmes: substantial factor, remoteness, and directness. See
Holmes, 503 U.S. at 269. The court below erroneously restricted RICO by requiring plaintiffs to
rely upon defendant’s fraudulent misstatements. (J.A. 16). This conclusion is a misapplication
of the Holmes analysis because proximate cause can be demonstrated in the absence of reliance.
9
1.
Bantam and Mass Marketing Engaged in a Pattern of Racketeering that
Proximately Caused Mammoth’s Sales to Decline.
The Bantam Email was the proximate cause of the decline in Mammoth’s sales. Bantam
and Mass Marketing successfully injured their intended victim, Mammoth, by conducting a
pattern of racketeering designed to increase Bantam’s gasoline sales at the expense of
Mammoth’s sales. Mass Marketing sent the Bantam Email to thousands of email accounts on
behalf of Bantam. (J.A. 3, 4). This email, which eventually reached millions of people in the
United States, falsely accused Mammoth of price gouging and encouraged recipients to boycott
Mammoth. (J.A. 3, 4). Mammoth received hundreds of thousands of letters and emails from
consumers who indicated that as a direct result of this email, they were no longer purchasing
gasoline from Mammoth. (J.A. 4). The Bantam Email was the sole cause of the boycott.
(J.A. 4). Thus, Mammoth’s injuries were proximately caused by the fraudulent Bantam Email.
The instant case is distinguishable from Anza v. Ideal Steel Supply Corp., the Supreme
Court’s most recent discussion of proximate cause in the RICO context. 126 S. Ct. 1991 (2006).
In Anza, the plaintiff, Ideal, alleged that Anza engaged in tax fraud, allowing Anza to reduce its
prices and divert customers from Ideal. Id. at 1996–97. The Court held that Ideal could not
show that Anza’s fraud proximately caused the harm to Ideal because the fraudulent activity, not
charging its customers sales tax, was distinct from the harmful behavior, lowering prices—in
other words, Anza could have committed tax fraud, but not lowered its prices. Id. at 1997. In
the present case, both the fraud and the alleged harm stem from the same action, the
dissemination of the Bantam Email. (J.A. 4).
10
2.
Bantam and Mass Marketing Engaged in a Pattern of Racketeering that
Proximately Caused Mammoth’s Stock Price to Decline.
The Bantam Email was also the proximate cause of the decline in Mammoth’s stock
price. Because of the Bantam Email, Mammoth’s stock price fell thirty-four percent while
Bantam’s stock price rose fifty-four percent during the same time period. (J.A. 4, 5).
Mammoth’s lower stock price incorporated the Bantam Email’s fraudulent statements and its
effects “[b]ased on the hypothesis that, in an open and developed securities market, the price of a
company’s stock is determined by the available material information regarding the company and
its business.” Basic, Inc. v. Levinson, 485 U.S. 224, 241–42 (1988) (quoting Peil v. Speiser, 806
F.2d 1154, 1160–61 (3d Cir. 1986)). Information about both the fraudulent statements contained
in the Bantam Email and the resulting decline in sales was publicly available. This information
was incorporated into and reflected by Mammoth’s stock price. Thus, Bantam perpetrated a
“fraud on the market” that devalued Mammoth’s stock price.
In complex fraud cases like the present one, courts have increasingly looked to the fraud
on the market theory to demonstrate proximate cause in the absence of reliance. See, e.g., Enron
Corp. Secs. v. Enron Corp., 439 F. Supp. 2d 692, 702 (D. Tex. 2006); In re WorldCom, Inc. Sec.
Litig., 219 F.R.D. 267, 291 (S.D.N.Y. 2003). Rather than requiring individual proof of reliance
upon the fraudulent statements, plaintiffs could demonstrate proximate cause by showing a lack
of integrity and accuracy in the stock price.
The present case is distinguishable from other situations in which courts did not extend
the fraud on the market theory to RICO litigation. In those cases, the relevant markets were not
sufficiently efficient to justify the theory’s underlying presumption. See Summit Props. Inc. v.
Hoechst Celanese Corp., 214 F.3d 556, 561 (5th Cir. 2000) (“An efficient market is a critical
element of a market’s role as an intermediary. There is no pretense of such a market here and the
11
fraud on the market doctrine is not applicable.”); Appletree Square I, Ltd. v. W.R. Grace & Co.,
29 F.3d 1283, 1287 (8th Cir. 1994) (“The real estate market, unlike the stock market, is not a
well-developed market in which the price of a building reflects all publicly available
information. Thus, [plaintiff] cannot employ the fraud-on-the-market theory.”). The fraud on
the market theory is applicable here because the stock market is the quintessential efficient
market. See Basic, 485 U.S. at 246. In the absence of Mammoth’s reliance, the fraud on the
market theory helps show that Bantam proximately caused the decline in Mammoth’s stock
price.
3.
Mammoth’s Showing of Proximate Cause Satisfies the Holmes Tripartite Policy
Analysis.
The Holmes Court announced three policy reasons for requiring a showing of proximate
causation in the RICO context, but refrained from establishing a definite test. See Holmes, 503
U.S. at 272 n.20 (“[T]he infinite variety of claims that may arise make it virtually impossible to
announce a black-letter rule that will dictate the result in every case.”) (internal quotation marks
omitted). These policy reasons reflect traditional approaches to proximate causation: whether a
defendant’s actions constituted a substantial factor in producing a plaintiff’s injury (“substantial
factor”), see Restatement (Second) of Torts § 431 (1965); whether the injury was remote in time
and place (“remoteness”), see W. Page Keeton et al., Prosser and Keeton on The Law of Torts
§ 42, at 276 (5th ed. 1984); and whether a defendant’s actions caused the alleged injury directly
or indirectly (“direct vs. indirect injury”), see Restatement at § 431.
a. A RICO Violation Must Constitute a Substantial Factor in Producing
Plaintiff’s Injury So That Damages Can Be Ascertained.
Courts must be able to distinguish injuries caused by the RICO violation from injuries
caused by other acts, so that they may ascertain damages. “[T]he less direct an injury is, the
12
more difficult it becomes to ascertain the amount of a plaintiff’s damages attributable to the
violation, as distinct from other factors.” Holmes, 503 U.S. at 269. The requirement of
proximate cause reduces the risk of inaccurate or unfairly burdensome judgments against
defendants.
In the case at bar, the jury will be able to assess the damages attributable to Bantam’s
fraudulent activities. These damages are readily ascertainable given the rapid decline in
Mammoth’s sales and corresponding increase in Bantam’s sales after the dissemination of the
Bantam Email. See supra section I.B.1–2. In contrast, the causal connection between a
plaintiff’s decreased sales and a defendant’s alleged tax evasion was much more tenuous in
Anza. 126 S. Ct. at 1997. Furthermore, courts have allowed factual issues similar to the ones in
the instant case to reach the jury. See, e.g., Procter & Gamble Co. v. Amway Corp., 242 F.3d
539, 565 (5th Cir. 2001) (holding that Procter & Gamble stated a sufficient RICO claim where its
competitor had allegedly spread a rumor that caused consumers to stop purchasing products);
Summit, 214 F.3d at 561 (RICO violation existed when “competitor lured the plaintiff’s
customers away by a fraud directed at the plaintiff's customers”).
b. A RICO Violation Cannot Be so Remote as to Allow Multiple Recoveries.
The Holmes Court also expressed concern that “recognizing claims of the indirectly
injured would force courts to adopt complicated rules apportioning damages among plaintiffs
removed at different levels of injury from the violative acts, to obviate the risk of multiple
recoveries.” 503 U.S. at 269. A proximate cause inquiry reduces this risk by precluding
recovery by remote victims. Mammoth is a direct, not a remote, victim of Bantam. Bantam, in
association with Mass Marketing, targeted Mammoth customers to draw them away from
Mammoth and toward itself. (J.A. 4). Moreover, there is simply no risk of multiple recoveries
13
here, as there was only one injured party, Mammoth. Contra Anza, 126 S. Ct. at 1997 (“The
direct victim of this [fraud] was the State of New York, not Ideal.”).
c. A RICO Violation Must Be the Direct Cause of Injury to Encourage Only the
Appropriate Parties to Bring Suits.
Congress passed RICO to provide enhanced sanctions and new remedies to deal with
unlawful activities. Turkette, 452 U.S. at 589. One of the reasons for the establishment of civil
RICO liability was the creation of private attorneys general, individuals who were injured by a
pattern of racketeering activity and who have an incentive to sue to recover damages. Holmes,
503 U.S. at 283. Allowing recovery for indirectly injured plaintiffs is not necessary to deter
injurious conduct, “since directly injured victims can generally be counted on to vindicate the
law as private attorneys general.” Holmes, 503 U.S. at 269. In this case, Mammoth is the only,
and the most directly, injured victim. The customers to whom the fraudulent email was directed
were not actually harmed, as they were simply redirected to another gas station. (J.A. 10–11).
These customers cannot make out a claim under RICO. In contrast, in Holmes, other, more
directly injured plaintiffs either did, or could have, brought suit. See Holmes, 503 U.S. at 273
(noting that “those directly injured . . . the broker-dealers[,] have in fact sued in this case”); see
also Anza, 126 S. Ct. at 1998 (“[I]f the allegations are true, the [‘directly injured’] State can be
expected to pursue appropriate remedies” and have the claims adjudicated in a “relatively
straightforward” manner.). In the instant case, only Mammoth can file suit and deter Bantam’s
injurious conduct.
Because the lawsuit by Mammoth satisfies all three policy rationales for proximate
causation voiced by the Holmes Court, and because the Holmes Court required only proximate
causation, Mammoth should not be stopped from bringing suit although it did not rely on
Bantam’s fraudulent statements.
14
4.
Reliance is Not Necessary to Show Proximate Cause.
“Reliance is doubtless the most obvious way in which fraud can cause harm, but it is not
the only way.” Sys. Mgmt., Inc., v. Loiselle, 303 F.3d 100, 104 (1st Cir. 2002). Plaintiffs can
demonstrate that their injuries were caused by defendants’ fraud even if they did not rely upon
the misstatements.
The Holmes Court stressed the importance of fact-sensitive proximate cause analyses and
declined to create rigid rules limiting the ability of plaintiffs to recover. Holmes, 503 U.S. at 272
n.20. In Anza, the Supreme Court endorsed this proposition. 126 S. Ct. at 1996–98 (applying a
fact-sensitive proximate cause analysis); accord Loiselle, 303 F.3d at 104 (noting that because a
“reasonably predictable consequence” of defendant’s fraud was the harm to a third party, “[t]here
is no good reason here to depart from RICO’s literal language by importing a reliance
requirement into RICO”); Or. Laborers-Employers Health & Welfare Trust Fund v. Philip
Morris, Inc., 185 F.3d 957, 963–66 (9th Cir. 1999) (holding that a direct relationship between the
plaintiff and defendant was unnecessary, but concluding that the plaintiffs were too remote to
demonstrate proximate cause).
Several courts have misapplied Holmes by requiring plaintiffs to demonstrate that they
relied upon defendant’s fraudulent statements to their detriment. See Bank of China v. NBM
L.L.C., 359 F.3d 171, 178 (2d Cir. 2004); Am. Chiropractic Ass’n v. Trigon Healthcare, Inc.,
367 F.3d 212, 233 (4th Cir. 2004); Appletree, 29 F.3d at 1286. Without detailed analysis, these
courts limited RICO to plaintiffs who could demonstrate reasonable or detrimental reliance.
Using reliance as a shortcut to proximate cause, these courts ignored the explicit warning in
Holmes to avoid a black-letter restriction. See Holmes, 503 U.S. at 272 n.20. Although reliance
may be sufficient, it is not necessary to show proximate cause.
15
The instant case is a prime example of how a plaintiff can be hurt by fraud without
relying on it. Not only was Mammoth injured by Bantam, but it was also its target.
C.
The Common Law Fraud Requirement of Reliance Should Not Be
Incorporated Into RICO.
Certain courts have mistakenly imposed a reliance requirement based on principles of
common law fraud for civil RICO plaintiffs injured by the predicate acts of wire fraud. See, e.g.,
Summit, 214 F.3d at 560. Civil RICO provides remedies to victims of predicate criminal acts.
The criminal predicate act of federal wire fraud does not require reliance as it is fundamentally
different from the common law crime of fraud. See Atlas Pile Driving Co. v. DiCon Fin. Co.,
886 F.2d 986, 991 (8th Cir. 1989). Finally, both Congress and the Supreme Court declined the
opportunity to incorporate a common law fraud reliance requirement into RICO.
1.
Civil RICO Provides Incentives for Private Attorneys General to Bring Suit
Against Racketeers.
The civil remedies provision of RICO provides that “any person injured . . . by reason of”
a pattern of racketeering activity, defined in part as acts “indictable under section 1343 (relating
to wire fraud)” may recover treble damages. 18 U.S.C. §§ 1961(1), 1964(c). Private civil RICO
suits may be brought regardless of whether the government chooses to prosecute the criminal
RICO violation. See Sedima, 473 U.S. at 493. To recover civil damages, a plaintiff must prove
the elements of the criminal predicate act by a preponderance of the evidence. See, e.g., Aetna
Casualty Sur. Co. v. P & B Autobody, 43 F.3d 1546, 1560 (1st Cir. 1994). Reliance is not an
element of the predicate act of federal wire fraud, Neder v. United States, 527 U.S. 1, 24–25
(1999), and therefore need not be alleged by a RICO plaintiff.
The purpose of allowing victims of criminal activities to recover treble damages is to
bring “the pressure of ‘private attorneys general’ on a serious national problem for which public
16
prosecutorial resources [were] deemed inadequate.” Holmes, 503 U.S. at 283 (alteration in
original) (quoting Agency Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 151 (1987)).
In contrast, common law fraud only aims to make the plaintiff whole again. See, e.g., Vogt v.
Hayes, 54 S.W.3d 207, 211 (Mo. Ct. App. 2001). Narrowing RICO by reading in additional
requirements would impede civil plaintiffs from bringing suit and undermine the statute’s
enforcement capabilities.
The federal wire fraud statute1 encompasses more illegal acts and perpetrators than
common law fraud. See Atlas, 886 F.2d at 991 (rejecting reliance requirement because RICO
mail fraud’s reach “is broader than the concept of common-law fraud”) (citing Durland v. United
States, 161 U.S. 306, 312–14 (1896)). The federal wire fraud element of “scheme to defraud” is
not limited to the common law crime of obtaining money by false pretenses. Durland, 161 U.S.
at 313. Thus, reading a reliance requirement into RICO would restrict legitimate lawsuits against
defendants committing a pattern of racketeering through federal wire fraud.
2.
The Criminal Predicate Act of Wire Fraud Is Substantially Different from
Common Law Fraud.
Federal wire fraud claims do not require reliance. Neder, 527 U.S. at 24–25 (finding that
the common law fraud requirement of justifiable reliance does not belong in federal fraud
statutes). To prove the RICO predicate act of wire fraud, a plaintiff must show the existence of a
plan or scheme to defraud, and the use of the wires for the purpose of carrying out that fraudulent
scheme. 18 U.S.C. § 1343. In contrast, a common law claim for fraud in most states, including
Ames, requires victim reliance on the fraudulent statements. See (J.A. 16); see also Restatement
1
Because federal wire fraud and mail fraud provisions are similar, cases construing the mail fraud statute are also
applicable to the wire fraud statute. United States v. Feldman, 711 F.2d 758, 763 n.1 (7th Cir. 1983).
17
(Second) of Torts § 525 (1965). The federal wire fraud statute cannot include a requirement of
reliance because it criminalizes a scheme to defraud, not the successful realization of a fraud.
Because of the different proof structure, two different inquiries must be conducted for
common law fraud and the RICO predicate violation of mail or wire fraud. See, e.g., Hofstetter
v. Fletcher, 905 F.2d 897, 902, 906 (6th Cir. 1988). The dismissal of a common law claim of
fraud does not require dismissal of RICO claims based upon mail fraud. See Atlas, 886 F.2d at
991 (holding that “proof of mail fraud is not dependent on a showing of common-law fraud”).
Even an adverse jury verdict on a common law fraud claim does not preclude later RICO
litigation based on the same underlying facts. See Wilcox v. First Interstate Bank of Or., 815
F.2d 522, 531–32 (9th Cir. 1987).
Some courts mistakenly draw on elements of traditional common law fraud to require a
RICO plaintiff alleging wire fraud to rely on fraudulent statements. See, e.g., Am. Chiropractic,
367 F.3d at 233 (The alleged fraud “must be a ‘classic’ one[,] . . . the plaintiff must have
justifiably relied, to his detriment, on the defendant’s material misrepresentation.”) (quoting
Chisolm v. TranSouth Fin. Corp., 95 F.3d 331, 337 (4th Cir. 1996)). These courts incorrectly
read in a reliance requirement, failing to recognize the broader nature of wire fraud. The
predicate act required for RICO is federal wire fraud, not common law fraud. Because federal
wire fraud does not require reliance, and because the RICO plaintiff has to prove the elements of
federal wire fraud, the RICO plaintiff should not have to allege reliance in order to bring a claim.
3.
Congress and the Supreme Court Have Both Declined Opportunities to Impose a
Reliance Requirement.
No language in 18 U.S.C. §§ 1964(c), 1962(c), or 1961(1) suggests that Congress
intended to duplicate the common law fraud element of reliance as an element of a RICO
violation of federal wire fraud predicate acts. Congress expressly listed the crime of federal wire
18
fraud, codified at 18 U.S.C. § 1343, as a predicate act. This federal crime does not require
reliance, in direct contrast with common law principles. When Congress wanted to draw on
common law criminal elements, it did so expressly. For example, it noted that predicate acts
such as “murder, kidnapping, [or] gambling [must be] chargeable under State law.” 18 U.S.C
§ 1961(1).
Similarly, although the Holmes Court addressed in detail the boundaries of a proximate
causation inquiry, it did not expressly require reliance as a necessary element of establishing a
violation. 503 U.S. at 268. In Anza, the Supreme Court was also confronted with this question
but refused to address it. 126 S. Ct. at 1998 (“Because Ideal has not satisfied the proximatecause requirement articulated in Holmes, we have no occasion to address the substantial question
whether a showing of reliance is required.”). The Anza Court clearly suggested that the Holmes
proximate causation inquiry does not require a showing of reliance. Therefore, under current
Supreme Court jurisprudence, a showing of reliance is not required to bring a RICO claim for the
predicate act of federal wire fraud.
D.
A Reliance Requirement Hinders RICO’s Effectiveness.
Congress’s mandate that RICO “be liberally construed to effectuate its remedial
purposes” prevents the Act from becoming obsolete in the face of rapidly evolving and complex
crimes. Racketeer Influenced and Corrupt Organizations Act, Pub. L. No. 91-452, § 904(a), 84
Stat. 941, 947 (1970). The increasing sophistication and technological complexity of fraud has
outpaced its traditional common law understandings. Rather than continuously updating laws to
match the development of innovative frauds, Congress chose to enact a flexible, catchall statute.
Reading a reliance requirement into RICO not only would violate Congress’s express command,
but also would vitiate the Act’s enforcement capability.
19
Reading a reliance requirement into RICO would create a loophole through which clever
fraudsters could escape liability. Requiring plaintiffs to prove they relied upon the fraudulent
statements would encourage the innovation of complex frauds where the defendant defrauds
innocent third parties in order to harm the defendants’ actual targets. Proximate cause analysis
allows courts to recognize legitimate plaintiffs, whereas reading in a reliance requirement would
result in a mechanical test that would not effectuate the broad remedial purpose of RICO. See
Loiselle, 303 F.3d at 104 (noting that a reliance requirement would deny recovery to the target of
the fraud and thus concluding that “[t]here is no good reason here to depart from RICO’s literal
language by importing a reliance requirement into RICO”). Requiring reliance would allow
wrongdoers to shield themselves from liability by defrauding third parties in order to harm their
intended target.
Even courts generally requiring reliance have recognized that it would be inconsistent
with the purposes of RICO to deny standing to the intended target of the fraud. See Amway, 242
F.3d at 564–65 (holding 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 causation are present”); Summit, 214 F.3d at 562
(holding that “fraud addresses liability between persons with direct relationships—assured by the
requirement that a plaintiff has either been the target of a fraud or has relied upon the fraudulent
conduct of the defendants”). A strict reliance requirement is underinclusive and would wrongly
prevent the target of a fraud from recovering damages under RICO. Here, Mammoth was both
the target and sole victim of the fraud. It would be inconsistent with the purposes of RICO to
allow Bantam to benefit by denying Mammoth the ability to bring suit.
20
II.
A DEFENDANT CORPORATION CAN FORM AN ASSOCIATION-IN-FACT
ENTERPRISE WITH ITS NON-EMPLOYEE AGENT CORPORATION AND
CAN BE LIABLE, UNDER RICO, FOR CONDUCTING THAT ENTERPRISE’S
AFFAIRS THROUGH A PATTERN OF RACKETEERING.
RICO prohibits “any person employed by or associated with any enterprise” from using
that enterprise to conduct a “pattern of racketeering activity.” 18 U.S.C. § 1962(c) (2000). A
RICO enterprise can be any “group of individuals associated in fact although not a legal entity.”
18 U.S.C. § 1961(4). Courts require that members of an association-in-fact be separate from
each other and that the RICO person be distinct from the RICO enterprise. See, e.g., United
States v. Goldin Indus., 219 F.3d 1271, 1277 (11th Cir. 2000).
A corporation and its non-employee agent corporation can form an association-in-fact
enterprise because they are legally separate, practically separate, and operate independently of
the other’s control. Further, the corporation can be held liable under RICO because it is distinct
from that enterprise. Several aspects of Bantam’s relationship to the enterprise can show
Bantam’s distinctness. First, the corporation and the enterprise are legally distinct. See Cedric
Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). Second, the enterprise consists of
the corporation and a separate entity. See, e.g., Goldin, 219 F.3d at 1277. Third, the corporation
and the enterprise have distinct affairs, allowing the defendant corporation to satisfy the
requirement that it has “conducted or participated in the conduct of the ‘enterprise’s affairs,’ not
just [its] own affairs.” Reves v. Ernst & Young, 507 U.S. 170, 185 (1993).
Accordingly, the holdings of the court below that Mass Marketing “is not sufficiently
distinct from Bantam to create an enterprise for purposes of RICO liability” and that “the
statutory requirement of a RICO enterprise distinct from the corporate defendant has not been
met,” (J.A. 18), are incorrect and should be reversed. Affirming the district court’s judgment
would undermine RICO’s goals of combating the inherent dangers of illicit cooperation and
21
confederation, encouraging greater transparency for enterprises, and ensuring that corporations
are held accountable for their actions.
A.
A Defendant Corporation Can Form an Association-in-Fact Enterprise with
Its Non-Employee Agent.
The term “enterprise” is defined in 18 U.S.C. § 1961(4) as including “any individual,
partnership, corporation, association, or other legal entity, and any union or group of individuals
associated in fact although not a legal entity.” A corporation can be an “individual” for
§ 1961(4) purposes. See, e.g., Goldin, 219 F.3d at 1277. In the instant case, the alleged
enterprise is an association-in-fact between Bantam and Mass Marketing. (J.A. 5). A plain
reading of § 1961(4) does not prohibit a corporation and its non-employee agent from forming an
association-in-fact. Rather, § 1961(4) states that any “group of individuals associated in fact
although not a legal entity” can constitute an enterprise.
An association-in-fact is “a group of persons associated together for a common purpose
of engaging in a course of conduct . . . proved by evidence of an ongoing organization, formal or
informal, and by evidence that the various associates function as a continuing unit.” United
States v. Turkette, 452 U.S. 576, 583 (1981). Turkette has been interpreted as generally
requiring three elements to prove the existence of an association-in-fact: (1) a group of persons,
(2) sharing a common purpose, (3) that function as a continuing unit.2 See, e.g., United States v.
Cianci, 378 F.3d 71, 84 (1st Cir. 2004); United States v. Weinstein, 762 F.2d 1522, 1537 (11th
Cir. 1985); United States v. Mazzei, 700 F.2d 85, 89 (2d Cir. 1983).
Some circuit courts have required associations-in-fact to satisfy a fourth element of an “ascertainable structure”
distinct from that inherent in the pattern of racketeering activity. See, e.g., United States v. Bledsoe, 674 F.2d 647,
665 (8th Cir. 1982). It is clear that a corporation and its non-employee agent can have an ascertainable structure.
An ascertainable structure can be demonstrated by “an organizational pattern or system of authority beyond what
was necessary to perpetrate the predicate crimes.” Id. In the instant case, Bantam and Mass Marketing had an
organizational pattern beyond the fraudulent acts. Bantam was a client of Mass Marketing and Mass Marketing
launched several conventional print advertising and marketing campaigns for Bantam. (J.A. 3).
2
22
The common purpose and continuing unit elements ensure that Bantam and Mass
Marketing are sufficiently related to one another. See, e.g., Cianci, 378 F.3d at 85 (finding a
close relationship between members of an enterprise because the enterprise functioned as a
continuing unit and was animated by a common purpose). In contrast, the group of persons
element ensures that a corporation and its non-employee agent are separate enough from one
another. See, e.g., Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 448–49 (1st Cir. 2000). This
separateness requirement stems from the intuition that individuals cannot associate with
themselves. See McCullough v. Suter, 757 F.2d 142, 144 (7th Cir. 1985). Because a corporation
and its non-employee agent can satisfy all three requirements, they are capable of forming an
association-in-fact.
1.
A Corporation and Its Non-Employee Agent Can Have a Common Purpose.
The common purpose requirement has been interpreted broadly and, as a result, almost
any interest in an enterprise will suffice. See, e.g., Ryan v. Clemente, 901 F.2d 177, 181 (1st Cir.
1990) (holding that making money can be the objective of an enterprise); Procter & Gamble Co.
v. Big Apple Indus. Bldgs., 879 F.2d 10, 22 (2d Cir. 1989) (holding that a common goal of
inflating profits satisfied the common purpose requirement). A corporation and its nonemployee agent can easily satisfy this requirement. In the present case, Bantam and Mass
Marketing were both interested in increasing Bantam’s sales and stock price. (J.A. 5).
Therefore, Bantam and Mass Marketing shared a common purpose.
2.
A Corporation and Its Non-Employee Agent Can Form a Continuing Unit.
The continuing unit requirement is “centrally a temporal concept,” ensuring that
individuals forming an association-in-fact are connected through time. Atlas Pile Driving Co. v.
Di Con Financial Co., 886 F.2d 986, 994 (8th Cir. 1989). A corporation and its non-employee
23
agent can easily satisfy this requirement. In the instant case, Bantam has been a client of Mass
Marketing since 1998 and over the course of nine years, Mass Marketing launched several
advertising and marketing campaigns for Bantam. (J.A. 3, 9). Therefore, Bantam and Mass
Marketing formed a continuing unit.
3.
A Corporation and Its Non-Employee Agent Can Be Separate Enough to
Constitute a Group of Persons.
A corporation and its non-employee agent must be separate from one another in order to
form a group of persons. See McCullough, 757 F.2d at 144 (“[Y]ou cannot associate with
yourself, any more than you can conspire with yourself, just by giving yourself a nom de
guerre.”). Two or more separate corporations can come together to form an association-in-fact.
See, e.g., Goldin, 219 F.3d at 1277. In contrast, circuit courts have generally held that a
defendant corporation and its own employees are not separate enough to form an association-infact. See, e.g., Bachman v. Bear, Stearns & Co., 178 F.3d 930, 932 (7th Cir. 1999). Similarly, a
defendant corporation and its own divisions or subsidiaries are not separate enough to form an
association-in-fact. See, e.g., Bessette, 230 F.3d at 448–49; Brannon v. Boatmen’s First Nat’l
Bank of Okla., 153 F.3d 1144, 1148–49 (10th Cir. 1998). Because a defendant corporation and
its own employees, divisions and subsidiaries are so closely related, the unique harms RICO tries
to prevent—the dangers of association and the ability to shield wrongful acts from the public—
are not a concern. See infra II.C.
Some circuit courts have extended this separateness analysis too far by refusing to allow
a corporation and its non-employee agent to form an association-in-fact. See, e.g., Riverwoods
Chappaqua Corp. v. Marine Midland Bank, 30 F.3d 339, 344 (2d Cir. 1995); Bd. of County
Cmmr’s v. Liberty Group, 965 F.2d 879, 885–86 (10th Cir. 1992). By imposing an overly
narrow separateness requirement, these decisions conflict with a broad construction of the term
24
“enterprise.” See Cianci, 378 F.3d at 79 (“It is important to stress that the Supreme Court has
admonished that RICO and the term ‘enterprise’ be construed expansively.”) (citing Sedima,
S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 497–98 (1985); Turkette, 452 U.S. at 586–87). Many
different factors can establish separateness between two entities, such as legal separateness,
practical separateness, and the ability to operate independently of the other’s control. A
corporation and its non-employee agent can satisfy all of these factors and are thus separate
enough to form an association-in-fact.
a. A Corporation and Its Non-Employee Agent Can Be Legally Separate.
Legal separateness can be sufficient for a group of individuals to form an association-infact. See, e.g., Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 263 (2d Cir. 1995)
(“[E]ven if Schnabolk owned 100% of the shares of each corporation, the corporations would be
separately existing legal entities capable of constituting an association-in-fact enterprise.”). A
corporation and its non-employee agent can be legally separate. On the other hand, a corporation
and a division of that corporation cannot be legally separate. See generally Copperweld Corp. v.
Indep. Tube Corp., 467 U.S. 752 (1984). The instant case is distinguishable from an associationin-fact between a corporation and its divisions. Bantam and Mass Marketing are completely
separate corporations. Bantam is a Delaware corporation and Mass Marketing is an Ames
corporation. (J.A. 2). Cf. Goldin, 219 F.3d at 1277 (“[E]ach Goldin corporation is a separate
and distinct corporation. Each is incorporated in a separate state.”). Thus, Bantam and Mass
Marketing are separate legal entities capable of forming an association-in-fact.
b. A Corporation and Its Non-Employee Agent Can Be Practically Separate.
A multitude of factors can establish sufficient practical separateness between
corporations to find an association-in-fact. One factor is whether corporations constituting an
25
association-in-fact have different employees. See, e.g., United States v. London, 66 F.3d 1227,
1244 (1st Cir. 1995). A second factor is whether corporations constituting an association-in-fact
have different customers. See, e.g., Goldin, 219 F.3d at 1277 (holding two corporations were
separate in part because each was a “separate ongoing business with a separate customer base”).
A third factor is whether corporations constituting an association-in-fact operate in different
industries. See, e.g., Securitron, 65 F.3d at 263 (holding that a manufacturer of electromagnetic
locks and a marketer of security systems were two different businesses in part because they
operated in different industries).
In general, a corporation and its non-employee agent can satisfy all of these elements.
Corporations and non-employee agents can, and often do, have different employees. Bantam and
Mass Marketing have different employees. (J.A. 4). Corporations and non-employee agents can
also have different customers. Because Bantam supplies fuel products to industrial and
wholesale customers and Mass Marketing provides advertising and marketing services to clients,
Bantam and Mass Marketing have different sets of customers. (J.A. 2).
Lastly, corporations and non-employee agents can, and often do, operate in different
industries. In fact, an agent’s expertise in a different industry is often the reason why an
association is formed. See generally Williams v. Mohawk Indus., 465 F.3d 1277 (11th Cir.
2006) (using a recruiting agency to hire and harbor illegal workers). In this case, Bantam is a
petrochemical company and Mass Marketing is an advertising and marketing firm. This
difference indicates practical separateness between the two companies. (J.A. 2).
In contrast, a corporation and its own employees or divisions do not satisfy any of the
practical separateness factors discussed above. Employees and divisions logically cannot have
different employees from their corporation. In addition, employees and divisions can neither
26
operate in a different industry nor have different customers than their corporation—anything that
an employee or a division does is included in the scope of their corporation. Thus, a corporation
cannot be practically separate from its own employees or divisions.
c. A Corporation and Its Non-Employee Agent Have the Ability to Operate
Independently of the Other’s Control.
Because a corporation is controlled by its shareholders through its board of directors,
courts frequently look to the composition of each to determine the level of control between
members of an enterprise. See, e.g., Securitron, 65 F.3d at 263; Davis v. Mutual Life Ins. Co.,
6 F.3d 367, 377 (6th Cir. 1993). If a corporation hires a legally separate, non-employee agent
corporation, they can have different shareholders and boards of directors. In the present case,
Bantam and Mass Marketing are two separate corporations that most likely have different
shareholders and boards of directors. In contrast, all of the shares in a wholly owned subsidiary
are owned by the parent corporation. See Copperweld, 467 U.S. at 771. These shares give the
parent the necessary votes to determine the composition of the board of the subsidiary and so
exercise control. Del. Code Ann. Tit. 8, § 141 (2007).
The ability of a corporation to make independent decisions is also indicative of the level
of control. See, e.g., Goldin, 219 F.3d at 1277 (holding that each corporation constituting the
association was separate in part because each was “free to act independently and advance its own
interests contrary to those of the other two corporations”). A corporation and its non-employee
agent have independent decisionmaking ability because, in general, a non-employee agent is able
to advance its own interests contrary to those of the corporation that hired it. In the present case,
absent contractual restrictions, Mass Marketing would be free to work for one of Bantam’s
competitors. In contrast, a subsidiary is not able to advance its own interests contrary to those of
its parent corporation. See Copperweld, 467 U.S. at 772 (holding that a corporation and its
27
wholly owned subsidiary always “share a common purpose whether or not the parent keeps a
tight rein over the subsidiary; the parent may assert full control at any moment if the subsidiary
fails to act in the parent’s best interests”).
Therefore, a non-employee agent should not be compared to an employee, division or
subsidiary. A corporation and its non-employee agent can be two independent corporations
separate enough to form an association-in-fact. Imposing an overly narrow separateness
requirement would violate the expansive construction of the term “enterprise” mandated by
Turkette. 452 U.S. at 586–87.
B.
A Defendant Corporation Can Be Liable Under RICO Where the Enterprise
Is Comprised of that Corporation and a Non-Employee Agent Corporation.
RICO prohibits a “person employed by or associated with [an] enterprise” from
conducting a pattern of racketeering activity. 18 U.S.C. § 1962(c). The “employed by or
associated with” language of this provision requires some distinctness between the RICO
“person” (the defendant) and the RICO “enterprise.” Kushner, 533 U.S. at 162–63. This
distinctness requirement, often referred to as the person-enterprise rule, is satisfied if the person
and the enterprise have distinct legal identities, id. at 163, if the enterprise consists of the person
and a separate entity, see, e.g., Securitron, 65 F.3d at 263, or if the person “conducted or
participated in the conduct of the ‘enterprise’s affairs,’ not just their own affairs.” Id. (quoting
Reves, 507 U.S. at 185) (emphasis omitted); accord Brannon, 153 F.3d at 1146. Bantam has a
distinct legal identity from the association-in-fact enterprise, is separate from Mass Marketing,
and participated in enterprise affairs different from its own. Accordingly, Bantam is distinct
from the enterprise and is liable under RICO.
28
1.
The Distinctness Requirement Is Satisfied When the Person and the Enterprise
Have Separate Legal Identities.
RICO requires only a “formal legal distinction between ‘person’ and ‘enterprise.’”
Kushner, 533 U.S. at 165 (quoting 18 U.S.C. § 1962(c)). The different rights and responsibilities
that arise from two entities’ different legal statuses make the entities sufficiently separate to
satisfy the person-enterprise rule. Id., 533 U.S. at 163. Thus, in Kushner, the sole owner and
employee of a corporation was distinct from the corporation itself because the two entities were
legally separate. Id. at 165.
Similarly, Bantam and the enterprise satisfy the person-enterprise rule because they are
legally distinct. Bantam is a legally formed corporation; the enterprise has no formal legal
status. (J.A. 2). Therefore, Bantam and the enterprise have different rights and different
responsibilities. For example, Bantam must pay income taxes. Del. Code Ann. Tit. 8, § 127
(2007). This difference in legal status fulfills the distinctness requirement of § 1962(c). See
Kushner, 533 U.S. at 165.
It is appropriate to apply Kushner’s reasoning to the present controversy even though
Kushner declined to extend its holding to a case in which the alleged RICO enterprise consisted
of the defendant corporation and several of its officers. Kushner, 533 U.S. at 164 (citing
Riverwoods, 30 F.3d at 344). In distinguishing its facts from those of Riverwoods, Kushner used
a linguistic argument, asserting that “[i]t is less natural to speak of a corporation as ‘employed
by’ or ‘associated with’ [the type of] oddly constructed entity” alleged as an enterprise in that
case. Id., 533 U.S. at 164. However, the facts of Riverwoods are materially distinguishable
from those in the present case. Whereas in Riverwoods, plaintiffs alleged that a corporation
associated with an enterprise consisting of itself and a subset of its employees, Riverwoods, 30
F.3d at 344–45, in this case the enterprise is an association of two distinct corporations, each of
29
which has distinct employees. There is nothing unnatural about speaking of an entity as
associated with an enterprise consisting of itself and a separate corporation. For example, it is
perfectly natural to speak of Bantam as associating with a trade association, like the American
Petroleum Institute, even if Bantam were one of its members. Therefore, the primary holding of
Kushner—that legal distinctness is sufficient to satisfy the person-enterprise rule—is applicable
to the present case and requires a finding that Bantam and the enterprise are distinct.
2.
The Distinctness Requirement Is Satisfied When the Enterprise Consists of the
Person and a Separate Entity.
When two entities are sufficiently separate to form an association-in-fact RICO
enterprise, it logically follows that their association is distinct from each of the individual
entities. Cf. Atlas, 886 F.2d at 995 (“A collective entity is something more than the members of
which it is comprised.”). Thus, courts have relied on separateness between corporations within
an enterprise, to find distinctness between each of those corporations and the enterprise as a
whole. For example, in Goldin, the court held that because three corporations were separate
from each other, each was distinct from the association-in-fact that they together made up. 219
F.3d at 1277; see also Securitron, 65 F.3d at 263; Atlas, 886 F.2d at 995; Fleischhauer v. Feltner,
879 F.2d 1290, 1297 (6th Cir. 1989). Though Goldin, Securitron, Atlas, and Fleischhauer
predate Kushner, their reasoning is consistent, if not required, by its holding. See United States
v. Philip Morris USA, Inc., 327 F. Supp. 2d 13, 18 (D.D.C. 2004) (holding, post-Kushner, that
when an enterprise is made up of at least two separate legal entities, the individual entities are
distinct from the enterprise).
Because Bantam and Mass Marketing are separate entities, see supra II.A.3, Bantam and
the enterprise are distinct.
30
3.
The Distinctness Requirement Is Satisfied When the Defendant Participated in the
Affairs of the Enterprise, Not Just Its Own Affairs.
A defendant who “conducted or participated in the conduct of the ‘enterprise’s affairs,’
not just [its] own affairs” is distinct from that enterprise. Reves, 507 U.S. at 185. In this case,
Bantam’s affairs and the enterprise’s affairs are distinct, and Bantam conducted these distinct
affairs. Therefore, Bantam and the enterprise are distinct, and Bantam is liable under RICO.
In the instant case, the enterprise had distinct enterprise affairs and Bantam conducted
them. Bantam is a petrochemical company that produces and distributes gasoline. (J.A. 2).
Bantam does not create marketing and advertising campaigns. (J.A. 2). It is for this very reason
that Bantam associated with Mass Marketing. (J.A. 3). Incorporating Mass Marketing’s
expertise in unconventional advertising with Bantam’s illicit desire to unfairly benefit from its
competitor’s losses, the enterprise conducted an advertising campaign involving fraud,
misrepresentation, and the instigation of a consumer boycott against a competitor. (J.A. 3–4).
The result was an enterprise with distinct affairs: legitimate advertising praising Bantam’s
honesty and decency and the pattern of fraud and deception attacking Mammoth as evil and
corrupt. (J.A. 9–11). Bantam used both Amy Weber, who met with Mass Marketing’s Teresa
Chu to devise the enterprise’s distinct advertising campaign, and its general funding of the
advertising campaign to conduct the affairs of the enterprise. (J.A. 4).
An enterprise’s affairs are not the same as a member’s affairs simply because the member
benefits from them. It is common for large corporations to form associations with an expert
corporation to utilize that expert’s special abilities. This type of association benefits both parties.
Nevertheless, these associations can have affairs distinct from either member’s affairs. For
example, an association-in-fact between a large chemical corporation and its law firms has the
distinct affairs of providing legal counsel to the corporation, even though these affairs directly
31
benefit the corporation. See Living Designs, Inc. v. E.I. DuPont de Nemours & Co., 431 F.3d
353, 361–62 (9th Cir. 2005); see also Mohawk, 465 F.3d at 1284–85 (holding that an
association-in-fact comprised of Mohawk, a rug manufacturer, and firms that recruited illegal
immigrant labor had affairs of “the reduction of wages paid to Mohawk’s hourly workforce” and
these were distinct from Mohawk’s affairs).
An enterprise member’s hypothetical capacity to engage in behavior in-house is
irrelevant to determining whether that member’s affairs are distinct from the enterprise’s affairs.
RICO is concerned with what was, not what might have been. A large corporation and a law
firm can form an association-in-fact with distinct enterprise affairs even though the corporation
could have hired in-house counsel instead. See Living Designs, 431 F.3d at 362. A rug
manufacturing corporation can have an in-house human resources department yet still form an
association-in-fact with recruiters with distinct affairs. See Mohawk, 465 F.3d at 1285.
Similarly, Bantam can form an association-in-fact with an advertising agency and the
enterprise’s affairs can be distinct from Bantam’s own affairs. Moreover, it is far from certain
that Bantam could have devised this marketing scheme on its own. Bantam has retained Mass
Marketing as its advertising agent for nine years, and another advertising firm before that.
(J.A. 8). This outsourcing demonstrates that Bantam did not feel it could engage in effective
advertising by itself. Also, Mass Marketing has extensive experience in unconventional
advertising, indicating that it was essential in devising the campaign at issue. (J.A. 3).
Therefore, the enterprise had distinct affairs and Bantam conducted them. This is all that is
necessary for RICO liability.
This case is very different from cases in which enterprises comprised of corporations and
their subsidiaries have been found not to have affairs distinct from the parent corporation. See,
32
e.g., Brannon, 153 F.3d at 1148–49. In those cases, the parent directly commands and controls
the subsidiary and the benefits enjoyed by the enterprise stem entirely from the benefits enjoyed
by the subsidiary. Conversely, in the present case both parties provided independent
participation through their collaboration: Mass Marketing provided its expertise in advertising,
both conventional and unconventional, (J.A. 3), and Bantam provided both the resources to
execute the campaign and the target of the campaign. (J.A. 2). Further, both parties to the
enterprise received independent benefits: Bantam gained an increased market share and stock
price due to the harms it caused to Mammoth, (J.A. 4), and Mass Marketing was paid by Bantam,
received increased visibility and produced an effective campaign it can tout to other potential
clients. (J.A. 2). Thus, the instant case is very different from the sorts of situations in which
courts have found that a defendant corporation’s affairs were identical to the enterprise’s affairs.
Allowing Bantam to classify the enterprise’s interests as its own would undermine
RICO’s goals. First, a defendant could argue that any affairs conducted through its racketeering
activity were necessarily its affairs because, as a profit-maximizing entity, it would have no other
reason to engage in them. See Baker v. IBP, Inc., 357 F.3d 685, 691–92 (7th Cir. 2004). If
Bantam can claim that anything that increases its profits is necessarily its own affairs, then any
corporation could claim that, since its activities are designed to increase the corporation’s value,
they are necessarily its own affairs. Further, a holding that hypothetical capacity could
undermine distinctness would severely limit RICO, because any defendant could claim that it
could hypothetically engage in all of the enterprise’s behavior by itself. A highly diversified
corporate conglomerate should not escape RICO liability simply because it is involved in several
different industries and has broad affairs; similarly, Bantam should not escape RICO liability
33
simply because it could have decided not to hire Mass Marketing. This construction would
render RICO a dead letter.
Bantam’s affairs are distinct from the affairs of the association-in-fact enterprise formed
of Bantam and Mass Marketing. Bantam then conducted these distinct affairs. Accordingly,
Bantam is distinct from the enterprise. Thus, Bantam can be held liable as a defendant for its
role in conducting that enterprise’s criminal affairs.
C.
Holding That a Corporation and Its Non-Employee Agent Cannot Constitute
an Association-in-Fact Enterprise Distinct From the Corporation Would
Allow Intended Targets of RICO to Escape Liability.
One of the primary aims of § 1962(c) is to protect the public from those who would use
an enterprise as a vehicle for committing unlawful activity. Kushner, 533 U.S. at 164. Three
significant societal concerns underlie this goal—reducing the unique dangers that arise when
associations are used to commit illegal acts, making it more difficult for wrongdoers to shield
their identity from the public, and holding corporations, not just their executives, accountable for
their actions. These concerns are so important that Congress created a private right of action
with a treble damage remedy for victims of a § 1962(c) violation, in order to encourage civil
enforcement of the prohibitions. 18 U.S.C. § 1964(c). Because a corporation that takes
advantage of its association with a non-employee agent to conduct a pattern of racketeering
implicates all of these concerns, RICO should not be narrowed to exclude this situation.
1.
A Corporation that Takes Advantage of Its Association with a Non-Employee
Agent to Conduct a Pattern of Racketeering Poses a Unique Danger to the Public.
RICO was intended to reduce the unique dangers that arise when associations are used to
commit wrongdoings. An agreement by two parties to commit an unlawful act is a “distinct
evil,” Salinas v. United States, 522 U.S. 52, 65 (1997), that poses a “threat to the public” over
34
and above the threat of the commission of the relevant substantive crime, Callanan v. United
States, 364 U.S. 587, 593 (1961). See also United States v. Rabinowich, 238 U.S. 78, 88 (1915)
(recognizing that the existence of a conspiracy “sometimes quite outweigh[s], in injury to the
public, the mere commission of the contemplated crime”). These types of associations increase
the likelihood that an unlawful act will be successful and that future unlawful acts will be
committed, decreases the probability “that the individuals involved will depart from their path of
criminality,” and makes it easier for entities with limited resources and expertise to commit
wrongdoings. Callanan, 364 U.S. at 593–94; see also Neal Kumar Katyal, Conspiracy Theory,
112 Yale L.J. 1307 (2003).
The present case illustrates how an association can make it easier for entities with limited
resources and expertise to violate the law. Bantam is a petrochemical company that supplies
gasoline to customers around the world. (J.A. 2). Bantam is a direct competitor of Mammoth,
(J.A. 2), and, consequently, has a strong financial motive to tarnish Mammoth’s reputation.
However, while Bantam may be an expert in gasoline, they lack expertise in advertising. Mass
Marketing, on the other hand, is in the business of producing and promoting advertisements and
mass marketing campaigns for a variety of products and services. (J.A. 2). They have provided
advertising and marketing services to clients for over thirty years and currently have over 200
different customers. (J.A. 2). Moreover, Mass Marketing has specific expertise in viral
marketing and viral advertising. (J.A. 3). However, on its own, Mass Marketing had no
incentive to attack Mammoth. Thus, it was not until Bantam and Mass Marketing joined forces
that means met motive and a viral marketing campaign that deceived the public and defrauded
Mammoth was conceived of and implemented. (J.A. 5). It is precisely this type of union that
RICO was designed to deter.
35
2.
A Corporation that Takes Advantage of Its Association with a Non-Employee
Agent to Conduct a Pattern of Racketeering Shields Its Identity from the Public.
RICO was also intended to make it more difficult for wrongdoers to shield their identity
from the public. Allowing corporations to shield their identity from the public causes two major
problems. First and foremost, corporations that are allowed to hide their identity are less likely
to be associated with their illegal conduct and held liable for their involvement, therefore
increasing the expected value of the illegal activity. Second, concealing a corporation’s identity
may be a necessary component of their illegal activity, particularly in the case of fraud. See,
e.g., United States v. Feldman, 853 F.2d 648, 656 (9th Cir. 1988) (“It was [the corporations’]
very separate existence that made Feldman’s activities possible and profitable.”). “It is just this
sort of legal shield for illegal activity that RICO tries to pierce.” Id. (quoting McCullough, 757
F.2d at 144).
In the instant case, Bantam took advantage of its association with Mass Marketing to
conceal its identity through multiple layers of obfuscation. The Bantam Email that was sent to
thousands of consumers purported to come from a grassroots organization, Gasoline for All.
(J.A. 3–4, 10–11). Even if consumers were able to see through this fictitious organization,
(J.A. 4), and track down the actual source of the fraudulent emails, they would be led to Mass
Marketing. (J.A. 3, 4). If, in contrast, Bantam had used an in-house advertising department to
create and disseminate the emails, it would have been less difficult to trace the emails back to
Bantam. Moreover, the concealment of Bantam’s identity was vital to the success of their
fraudulent activity—it is highly unlikely that the Bantam Email would have had its desired effect
had consumers known that the email was coming from Bantam, one of Mammoth’s direct
competitors. Thus, not only did Bantam use its association with Mass Marketing (coupled with
36
the creation of a fictitious organization) to reduce the probability of prosecution and liability, but
the concealment of Bantam’s identity was also a critical component of the fraud.
3.
A Corporation that Takes Advantage of Its Association with a Non-Employee
Agent to Conduct a Pattern of Racketeering Is Not Held Sufficiently Accountable
for Its Actions if Only Its Corporate Executives Are Held Liable.
RICO was intended to extend past individual wrongdoers and attack the organizations at
the root of illegal activity. Because the power of an enterprise transcends its membership, and
because enterprises engaging in unlawful activities can continue to thrive despite successful
individual prosecutions, RICO was aimed at organizations, rather than individuals. See 116
Cong. Rec. 591 (1970); see also 115 Cong. Rec. 9567 (1969) (statement of Sen. McClellan)
(“Constant references have been made to the frustration resulting when the only consequence of
a conviction is that organized crime and its infiltrated organizations are run by a new leader, and
the organizations which are the real threat are not affected.”); S. Rep. No. 91-617, at 76 (1969)
(“What is needed here . . . are new approaches that will deal not only with individuals, but also
with the economic base through which those individuals constitute such a serious threat to the
economic well-being of the Nation.”). These concerns are just as relevant in the corporate
context—when an entire corporation is taking advantage of its association with non-employee
agents to perpetrate a pattern of racketeering, penalizing corporate executives does little to alter
the underlying structure of the corporation or deter the corporation from engaging in similar
unlawful, but profitable, activities in the future. See Task Force on Civil RICO, ABA Section of
Corporation, Banking and Business Law, Report of the Ad Hoc Civil RICO Task Force 375
(1985). In addition to the deterrent and preventive rationales, holding a corporation liable for its
RICO violations will ensure full compensation of losses suffered by victims. Id.
37
The plain language of the Act, its legislative history, and its interpretation by the
Supreme Court, all mandate that RICO be construed broadly. Only through broad application
can RICO achieve its promise to serve as an “extraordinary” weapon, 116 Cong. Rec. 819 (1970)
(remarks of Sen. Hruska), that attacks organizations engaged in racketeering “on all available
fronts,” S. Rep. No. 91-617, at 79 (1969). Interpreting RICO to exclude situations like the
present case would allow corporations to take advantage of agency relationships to exercise
unfair business practices, shield their wrongdoings from the public, and avoid accountability.
38
CONCLUSION
For the foregoing reasons, this Court should reverse the district court’s grant of
Appellee’s motion to dismiss.
Respectfully submitted,
MAMMOTH OIL CO., INC.
By its counsel,
______________________
Shannon R. Delahaye
______________________
Joseph H. Dvorkin
______________________
Frederick B. Fedynyshyn
______________________
Adam D. Hosmer-Henner
______________________
Yelena Konanova
______________________
David Oliwenstein
39