Claiming to follow the Supreme Court’s HJ v. Northwestern Inc. decision, which established the “contours” of RICO’s crucial pattern requirement, the Second Circuit has decided that there are two pattern tests: one for the government in criminal cases and a much tougher one in civil RICO cases. Here’s a bit of background before I get to the Second Circuit’s unfortunate conclusion. In HJ the Supreme Court decided that the term “pattern of racketeering activity” had two parts, duration and relatedness. Duration, the length of time over which the racketeering occurred, could be shown by a short burst of crime that threatened to go on indefinitely (called “open continuity”) or a long-term series of crimes that was over (“closed continuity”). The Court held these standards applied in both criminal and civil RICO cases. It also stated a normal, legitimate business could be a RICO enterprise and those who run it violate the law: “The continuity requirement is likewise satisfied where it is shown that the predicates [RICO violations] are a regular way of conducting a legitimate business.” This means a civil RICO case brought against the persons running a “legitimate enterprise” should meet the continuity test if the plaintiff can show it regularly engages in some type of criminal conduct. The persons the Court had in mind are professionals who cut corners through fraud or, as in HJ, pay bribes to get state regulators to raise their prices.
Yet the Second Circuit refused to apply this standard to the case as presented by Plaintiff Otto Reich, a former ambassador to Venezuela. Mr. Reich sued three Venezuelan nationals for interfering with his Washington, D.C. consulting business after he was engaged by a Venezuelan bank. The defendants, powerful politically connected businessmen in that notoriously corrupt nation, were afraid Reich’s work for the bank might expose their bribery of Venezuelan government officials to obtain state contracts to build power plants. So they took steps to harm Reich’s relations with two of his U.S. clients, a sort of warning shot to stay out of Venezuela. (The interference with his U.S. clients occurred in the U.S. So that extraterritoriality was not an issue.)
The Second Circuit held the district court was correct in its view of the racketeering activity. It saw two distinct schemes: the bribery in Venezuela to get the power plant contracts (which violated the Travel Act via the Foreign Corrupt Practices Act), and the later interference with Reich’s clients via the wire fraud state. They were unrelated despite being committed by the same defendants because there was nothing to connect them except the fear of exposure. But since when is the fear of exposure of one crime unrelated to a second? What about the murder of a witness, which happens frequently?
The Second circuit plainly evinced a desire to make it tougher to bring civil RICO cases. It conceded Reich had satisfied a low-threshold of relatedness in that both schemes were committed through the same enterprise. And it held that would be enough for cases where the enterprise is “an organized crime family.” But it also required Reich to show the racketeering acts are related to each other, which he could not do, because the enterprise was a legitimate business. Yet, as I said at the beginning the Supreme Court did not so differentiate the rules. So under HJ the bribery of the
Venezuelan state officials to get power contracts would be related to the scheme directed at Reich if the admittedly legitimate business regularly resorted to crime. Reich’s complaint did show that. His case should not have been dismissed on this basis.
The question is would the Supreme Court hear it? Probably not because this higher standard for civil cases has not expressly been created by the other circuits. So there is no clear circuit split. But I hope the issue will get to the Supreme Court one day. In the meantime, plaintiffs in the Second circuit must show a related pattern of RICO violations that holds together more tightly than a common perpetrator or the mere desire to derive income from repeated criminal activity.