The recent crackdown on illegal aliens has left companies coast-to-coast reeling from new laws, criminal investigations and lawsuits that target the hiring of undocumented workers.

But the news isn’t all bad for employers. Before a closely watched test case could go to trial, the 9th Circuit threw it out, thus deterring a potential flood of litigation against American business.

The court ruled that municipalities, counties and other government entities cannot use the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO) to sue employers to recover the costs of providing public safety, indigent health care and other government services to the companies’ illegally hired workers.

The appeals court rejected the bid of Canyon County, Idaho, to recover treble damages under the civil RICO provisions from four local agribusinesses the county accuses of hiring hundreds of illegal migrant workers.

The county’s suit claims that because of the undocumented workers, it shelled out millions of dollars it would not otherwise have spent on health care and law enforcement services.

But in a March 21 decision experts predict will discourage similar suits nationwide, the 9th Circuit ruled that government entities don’t have standing under RICO to sue to recover funds expended on public services for undocumented workers. Nor can government agencies prove that their increased expenditures were directly caused by illegal hiring rather than by myriad other possible causes, the court ruled.

“It is a significant victory for employers,” says Donald Benson, a Littler Mendelson shareholder.

Canyon County is the first government body to try to use RICO–originally enacted to attack criminal organizations–to recover damages for alleged illegal hiring. But with an estimated 6 million to 7 million undocumented workers composing about 5 percent of the U.S. labor force, a green light to sue from the 9th Circuit would have created a strong incentive for other local and state governments to follow suit, says Marie Yeates, counsel for one of the defendant companies, Swift Beef Co.

“Imagine all the governmental entities across the country that have significant numbers of illegal aliens in their jurisdictions,” notes Yeates, a partner with Vinson & Elkins in Houston. “Had [the plaintiff's] notion been adopted, it could have had widespread implications.”

Brakes on Litigation

But employers can take comfort that the 9th Circuit applied the brakes on immigration-related RICO suits from governmental units by affirming the 2005 decision of the U.S. District Court for the District of Idaho to dismiss the case at the pleading stage.

“Based on the court’s analysis, it would be difficult for a county to try to recover funds related to its normal governmental processes like health,
welfare or safety, because the court held that those are not things that a county has the right to recover,” says George R. Wood, shareholder in Littler Mendelson and counsel for defendant Syngenta Seeds Inc.

Still, the novel RICO action isn’t quite dead. Canyon County’s counsel, Johnson & Bell shareholder Howard Foster, applied to the 9th Circuit in April for en banc review.

Foster is the Chicago attorney who won a groundbreaking $1.3 million RICO class action settlement in 2006 for the employees of a Washington state-based fruit company who complained their employer’s hiring of undocumented labor hurt them financially.

Foster argues the 9th Circuit’s decision conflicts with its own jurisprudence, appellate precedents from other circuits and Supreme Court authority.

“Unless this court withdraws the opinion, any antitrust or RICO defendant will be able to obtain dismissal at the pleading stage by merely asserting that the damages could have been caused by other parties, aside from the defendant,” Canyon County’s rehearing petition asserts.

Rico Risks
According to the 9th Circuit, the county failed to meet RICO’s twin threshold demands: Before a plaintiff can sue, it must sustain injury to its “business or property,” and the alleged RICO violation must have directly caused the injury. The money spent on public services did not result from injury to the county’s business or property, the court concluded.

“When a governmental body acts in its sovereign or quasi-sovereign capacity, seeking to enforce the laws or promote the public well-being, it cannot claim to have been ‘injured in [its] … property’ for RICO purposes based solely on the fact that it has spent money in order to act governmentally,” the three-judge panel said. Nor do local government services that protect the public’s well-being, such as policing or indigent health care, qualify as “property,” they held.

And even if the county’s claims had qualified as injury to “property” under RICO, the plaintiff would never have been able to prove that the financial harm it sustained was caused directly by the companies, the court said.

“The asserted link between the companies’ hiring practices and the increased demand for county services is far too attenuated,” Justice Wallace Tashima wrote. He said increased demand for health care and law enforcement services can have many causes, including shifts in demographics and health practices.

The 9th Circuit’s decision is an important victory for employers, but companies in areas with growing pools of immigrant workers face an ongoing risk of RICO class actions from employees or competitors, Benson warns.

“It continues as an area of interest for plaintiffs’ counsel. Many of these lawsuits are now developing to a stage where they may be hitting the press and creating a lot more interest, and numbers of these cases are now getting past discovery,” he adds.