Last month I blogged about the massive Toyota litigation that the Cincinnati law firm of Waite, Schneider, Bayless & Chesley is trying to bring as RICO claims.  (In an interesting development the President of that firm, Stanley M. Chesley, has just been found to have pocketed an undisclosed $7 million in the “fen-phen” diet drug class action settlement.  The Kentucky Supreme Court is in the process of disbarring him  I must confess to a moment of schadenfreude at the demise of yet another high-profile plaintiff’s lawyer who turns out to be a common thief.  A RICO case against him would be seem to be in order as the charges detail a pattern of theft from lawyers and clients alike which Chesley pereptrated with co-counsel and a corrupt state judge. The Kentucky Court labeled this group a “criminal enterprise”.)   I was hoping to discuss something entirely different today, but the extraordinary lawsuit filed by Chevron Corp. in federal court in the Southern District of New York alleging RICO claims against the lawyer prosecuting a huge environmental damage claim against the company is more consequential.  The case stems from oil spills and related environmental damage caused by drilling in Ecuador from the 1960’s to 1992.  The drilling was conducted partly by Texaco (now owned by Chevron) and partly by the Ecuadoran government.  Texaco ceased its Ecuadorian operations in 1990, but in 1993 New York lawyer Steven R. Donziger filed a class action in federal court on behalf of citizens of Ecuador who claimed injuries from contamination caused by Texaco.  Texaco responded to the suit by settling all claims (or so it thought) being asserted in the case with the Ecuadoran government.  It paid a sum of money, agreed to certain “remediation” of the environmental damage, and and received a “release” of all environmental claims from Ecuador in 1998.  Then Texaco succeeded in transferring the class action to Ecuador on the theory it was a more convenient forum to have the case litigated.  Texaco may also have thought it would stand a much better chance of having it terminated in light of the settlement. 

Texaco was wrong. Mr. Donziger, in league with certain environmental activists, persuaded Ecuador to enact a law permitting localities to sue for environmental damages on behalf of their citizens.  One Ecuadoran jurisdiction, Lago Agrio, did so, subjecting Texaco to a lawsuit seeking an unspecified amount of damages.  The damages were to be determined by a court-appointed expert.  Chevron, by now having acquired Texaco, got wind of potentially corrupt activities by Mr. Donziger and the environmental groups financing and publicizing the Lago Agrio case, including “ghostwriting” the court-appointed expert’s damages report (Donziger allegedly substituted pages he had written for pages the expert had written, thereby jacking up the damage numbers), fabricating evidence of contamination, and organizing mobs of angry citizens to surround the courthouse demanding a judgment be entered against Chevron. 

Chevron has filed a number of actions in federal courts around the U.S. over the last several years to obtain evidence about the goings on in Ecuador.   It learned a great deal that calls into doubt the fairness of the proceedings.  In addition to what I’ve alleged above, Chevron obtained outtakes from a documentary commissioned by Mr. Donziger and financed by backers of the case containing some outrageous statements by Donziger:  “The only language that I believe this judge is going to understand is one of pressure, intimidation and humiliation.”  In re Chevron Corp., _F. Supp.- 2d, 2010 WL 4910248 at *4 (S.D.N.Y. . 2010).  And he even recounted favorably this quotation from a former employer: “Facts do not exist.  Facts are created.”  Id.   In February Chevron took the most unusual step of filing a high-profile lawsuit against Mr. Donziger, his environmental allies (Rainforest Action Network and Amazon Watch, both operating from the same San Francisco office) and videographer, who produced the documentary, entitled Crude, alleging they and other co-conspirators damaged Chevron through violating RICO. Chevron Corp. v. Donziger et al.,case 11-cv-691 (S.D.N.Y. 2011). The Complaint also alleges common law torts against the defendants for interfering in Chevron’s business relationships, fraud, etc.

If Mr. Donziger did what Chevron alleges, then he should be disbarred and prosecuted for forgery, perpetrating a fraud on the Ecuadoran court and other related crimes, as U.S. Dist. Judge Kaplan stated in his opinion requiring Donziger to produce his documents about the case.  In re Chevron Corp. at *4. But are these RICO violations?  To answer that we need to understand what “predicate acts” Chevron is accusing Donziger (I’ll refer to the the defendants collectively that way) of having committed, and whether these crimes “proximately” harmed Chevron.  The major crime Chevron trumpets throughout its interminable Complaint is extortion.  This requires that Donziger has obtained property from Chevron through fear or violence.  But Chevron has not given any property to Donziger.  Although the Lago Agrio case ended with an $8.6 billion judgment against Chevron just days after Chevron filed its lawsuit, the company has obtained an injunction from Judge Kaplan preventing Donziger from enforcing it.  (Chevron is also seeking relief from the judgment in the international tribunal at the Hague.)   So the only damages Chevron has actually incurred are the money it’s had to spend in attorney’s fees to defend the Donziger suit.  The federal courts in the Second Circuit (where Chevron filed the case) have all held that the threat of a lawsuit, or the actual prosecution of a lawsuit, even one that’s groundless, does not amount to extortion.  Thus, this type of RICO claim is not going to succeed and likely does not even state a cause of action.

Chevron also asserts it was harmed by mail and wire fraud, the most commonly used RICO predicate acts in civil cases.  It details almost 200 mails and wires sent by Donziger, all in furtherance of the scheme to win the Lago Agrio case and maximize the amount of the judgment.  But, once again, the scheme against Chevron has not succeeded, at least not yet.  So all Chevron can complain about for RICO purposes is damage caused from those mails and wires, again basically its attorney’s fees.  The Second Circuit has allowed RICO claims for attorney’s fees is they are caused by the RICO violations.  But these particular mailings did not initiate the Lago Agrio litigation; they may have prolonged it or complicated it.  However Donziger had a legal right to file the case in Ecuador, and Chevron, as a condition of obtaining dismissal of the initial class action filed in the U.S. agreed to be sued there.  It took a calculated risk that it could do better in a court in that nation.  It lost that gamble and cannot complain that the suit was frivolous from the start.  In conclusion, Chevron will find it extremely difficult to prove it theory of damage caused by mail and wire fraud after the case began.  Chevron’s more plausible remedy for litigation misconduct is to seek sanctions from the court and if unsuccessful, appeal. 

There are other potential fatal flaws with the suit, particularly that most of the activity occurred in Ecuador.  The Second Circuit recently held that RICO does not apply to “extraterritorial” conduct (committed out of the U.S.).  Additionally, the RICO claims do not allege a pattern of racketeering activity.  As the courts have defined the “pattern” concept, it requires the defendant commit multiple injuries against one victim or injuries to multiple victims.  Chevron is basically alleging one injury, the expenditure of attorney’s fees to defend the Lago Agrio case.  The case has dragged on for years, but nobody else has been harmed by Donziger.  Chevron would argue that its damages are ongoing, i.e., a new injury every time its law firm sends it a bill.  But all of these bills stem from the same alleged predicate acts which amount to one overall “scheme.”  It will be difficult to sustain the argument that this constitutes a pattern.

It will be fascinating to see how Judge Kaplan rules on all of these issues, and I will update this entry as these rulings are issued.