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Nick Akerman

The traditional corporate litigation response to an ex-employee or competitor stealing confidential business information is to file a lawsuit using the standard array of state causes of action-misappropriation of trade secrets, if the information qualifies as a trade secret; breach of fiduciary duty if the theft occurred during employment; breach of contract, if there are violations of post-employment restrictive covenants or confidentiality agreements; and tortious interference, if the perpetrator used the information to breach business relationships. All of these state causes of action provide for monetary damages and injunctive relief. A potent cause of action that is rarely used, and under the right factual circumstances should be considered, is a violation of 18 U.S.C. 1961, et seq., the federal Racketeer Influenced and Corrupt Organizations Act. RICO permits a company that has been victimized by a criminal violation of the statute to bring a civil action against the perpetrator. For example, in Formax Inc. v. Hosert, 841 F.2d 388, 389 (Fed. Cir. 1988), the court held that a civil RICO count was properly pleaded against a former employee “alleged to have stolen some drawings claimed to be trade secrets” from both the former employer and from one of the former employer’s vendors. The advantages of using a RICO count are enormous: the ability to bring the lawsuit in federal court based on the federal question jurisdiction created by the RICO violation, which in turn allows all of the state causes of action to be filed in the federal court on the basis of supplemental jurisdiction; treble damages as opposed to actual damages under state causes of action; and reasonable attorney fees and costs, which are not usually collectible under the state causes of action. Also, because a RICO judgment is premised on fraudulent activity, it is non-dischargeable in bankruptcy. This article will examine the factual circumstances that must be pleaded and proven to support a RICO claim based on a theft of confidential business information. The elements of RICO that must be proven The obvious starting place is the critical elements that a jury must find to return a verdict in favor of a plaintiff for a RICO violation. The plaintiff “must show that he was injured by defendants’ (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima SPRL v. Imrex Co. Inc., 473 U.S. 479, 496 (1985). As an initial matter, the critical issue in determining whether RICO applies to the theft of confidential business information is whether that conduct is outlawed by one of the predicate criminal acts which RICO defines as racketeering activity and which are expressly enumerated in 18 U.S.C. 1961. The Economic Espionage Act, 18 U.S.C. 1831, which makes it a federal crime to steal trade secrets, is not one of the RICO predicate criminal acts listed in � 1961. There are, however, two RICO predicate acts in the federal criminal code, U.S.C. Title 18, that encompass the theft of trade secrets and confidential business information: mail fraud, � 1341, and wire fraud, � 1343. Both RICO predicates make it a crime to engage in a “a scheme to defraud” another of property and “a scheme to deprive another of . . . property by means of false or fraudulent pretenses, representations or promises” through use of the U.S. Postal Service or interstate wires. What makes the mail and wire fraud statutes applicable to the theft of trade secrets and confidential business information is the opinion of the U.S. Supreme Court in Carpenter v. United States, 484 U.S. 19, 26, (1987). In Carpenter, the court defined the scope of the “property” that Congress intended to protect by these two criminal statutes to include “confidential business information.” Id. The court held that information later published in a Wall Street Journal article was confidential information belonging to the Journal, and that a Journal reporter providing this information to an outside securities broker to buy stock in advance of the publication of the column was a violation of the mail fraud statute. In upholding the criminal conviction of the Journal reporter and the stockbroker, the Supreme Court relied on the fact that ” ‘[c]onfidential information acquired or compiled by a corporation in the course and conduct of its business is a species of property to which the corporation has the exclusive right and benefit, and which a court of equity will protect through the injunctive process or other appropriate remedy.’ ” 484 U.S. at 26. The U.S. Court of Appeals for the Federal Circuit in Formax Inc. v. Hosert, 841 F.2d at 390, reversed the district court’s dismissal of a RICO count because it failed to recognize the applicability of Carpenter to the alleged mail fraud violations predicating the civil RICO count. Given that the mail and wire fraud statutes protect confidential business information, the key element in determining whether a RICO count can properly be established is whether the mail and wire fraud violations constitute a “pattern of racketeering activity.” The Supreme Court has interpreted the definition of “pattern” to be more than simply the statutory requirement of “at least two acts of racketeering activity . . . within ten years” of each other. 18 U.S.C. 1961(5). Instead, the Supreme Court stated that “a plaintiff or prosecutor must show that the predicate acts of racketeering activity are related, and that they amount to or pose a threat of continued criminal activity.” H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989). As to proving relatedness, “[c]riminal conduct forms a pattern if it embraces criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.” See id. at 240. In terms of stealing confidential business information, this “relatedness” element can be shown, for example, if there were multiple thefts from the same company by the same individuals or an initial scheme to defraud whose object was the theft and a subsequent scheme to defraud whose object was the dissemination and use of the confidential business information competitively against the victim. Time periods that satisfy the continuity requirement The Supreme Court has defined the threat of ” ‘[c]ontinuity’ . . . [as] both a closed and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition.” Id. at 241. Continuity over a closed period must constitute related criminal activity over “a substantial period of time.” Id. at 242. Criminal acts “extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement.” Id. While there is no bright-line test for determining precisely what period of time is substantial, a standard benchmark is at least two years. DeFalco v. Bernas, 244 F.3d 286, 321 (2d Cir. 2001). Open-ended continuity is proven by “past criminal conduct coupled with a threat of future criminal conduct.” GICC Capital Corp. v. Technology Finance Group Inc., 67 F.3d 463, 466 (2d Cir. 1995), cert. denied, 518 U.S. 1017 (1996). “[T]he nature of the predicate acts themselves” could imply “a threat of criminal activity.” Cofacredit S.A. v. Windsor Plumbing Supply Co. Inc., 187 F.3d 229, 243 (2d Cir. 1999). In the context of a theft of confidential business information, it is less likely that a plaintiff will find itself with a closed period of two years, since most thefts of business information are discovered shortly after they occur when the information is used in the marketplace. The more likely scenario confronted by companies whose confidential business information has been stolen is the ability to prove past criminal conduct-the theft of the confidential business information-with the future threat of the information being disseminated and used to compete against the victim in the marketplace. It is this same “threat of the unbridled continuation of the violation” that justifies courts finding the irreparable harm to justify the entry of a preliminary injunction based on the traditional state causes of action designed to protect the integrity of confidential business information. John G. Bryant Co. Inc. v. Sling Testing and Repair Inc., 369 A.2d 1164, 1167 (Pa. 1977) Determining what makes a RICO ‘enterprise’ The only other RICO element besides damages that also must be alleged and proven is the “enterprise,” which is defined broadly by the statute to include “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. 1961(5). The Supreme Court’s decision in Cedric Kushner Promotions Ltd. v. King, 533 U.S. 158 (2001), has eliminated various restrictions some of the circuit courts had previously engrafted on this broad statutory definition. Thus, the defendant’s corporation, his new employer or the confederation of other individuals or corporations involved in the theft or use of the confidential business information can in most instances properly constitute the RICO enterprise. Finally, in pleading a civil RICO count based on mail and wire fraud violations, the plaintiff must be mindful of its obligations under Fed. R. Civ. P. 9(b) to plead the fraud allegations with “particularity,” meaning that the complaint should carefully allege all dates, times, occurrences, facts showing guilty knowledge, the individual roles of each defendant and specifics on each mailing and/or use of interstate wires. In short, a company that has decided to seek judicial redress for the theft of its confidential business information should carefully review the facts of what occurred and what is likely to occur to determine whether a RICO count is appropriate. Nick Akerman is a partner in the New York office of Dorsey & Whitney.

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