Who in civil litigation does not love a good RICO claim? Its boundaries are seemingly endless, and in the case of Harvey Weinstein—perhaps one of the most vilified defendants on the planet right now—there is the possibility of catastrophic implications, as if being the face of an entire movement (#MeToo) is not bad enough.
Civil claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sections 1961-1968 (RICO Act), are highly desirable for plaintiffs and their attorneys because, if successful, they provide for treble damages, plus attorney fees and costs of litigation. Very few plaintiffs succeed on a RICO claim, however, so the decision to file one should not be made lightly. Many plaintiffs fail during the pleadings stage, and their claims are dismissed under Rule 12(b)(6). For defendants, like Weinstein, the possible implications of RICO can be disastrous. This potential implication is why defendants of civil RICO claims are eager to settle if the claim survives a motion to dismiss and shows a strong likelihood of surviving a motion for summary judgment. For example, in 2016, Trump University did just that—it settled a civil RICO suit for $25 million, which paled compared to its potential exposure of $170 million.
The RICO Act was passed in 1970 as part of the Organized Crime Control Act of 1970 to combat large organized crime operations led by the American Mafia and their growing infiltration of legitimate businesses and organizations. Although the RICO Act was drafted to bring down gangsters, it is certainly not limited to that purpose and has evolved into a mechanism to confront business fraud and corruption over the last half-century. This is evidenced by the recent high-profile civil RICO lawsuit filed against Harvey Weinstein.
The Weinstein RICO Action
On Dec. 6, 2017, a proposed class-action lawsuit was filed on behalf of six women in New York against former Hollywood movie mogul, Harvey Weinstein and others. The plaintiffs represent a proposed class of hundreds of actresses who claim they suffered sexual assault, false imprisonment, battery, rape and other “predicate acts.” In a 300 paragraph, 104-page complaint, the plaintiffs allege that “over time Weinstein enlisted the aid of … other firms and individuals, to facilitate and conceal his pattern of unwanted sexual conduct. This coalition of firms and individuals became part of the growing ‘Weinstein Sexual Enterprise,’ a RICO enterprise.” The plaintiffs allege that the defendants violated the RICO Act through patterns of racketeering activity involving predicate acts of witness tampering and mail and wire fraud (the most common predicate acts) that restricted them and others from getting additional work in the field.
The Difficulties of Pleading and Proving Civil RICO Claims
In a survey of 145 appellate decisions between 1999 and 2001 that involved RICO civil actions, about 70 percent were dismissed on defendants’ motions to dismiss or for summary judgment. Where the appellate courts addressed the RICO matter, 80 percent of the rulings were for the defendants. Of the 9.6 percent of the suits in which plaintiffs obtained a favorable verdict after a jury trial, only 25 percent of the judgments were affirmed on appeal. Only three out of those 145 cases surveyed resulted in a victory for the plaintiffs. See Pamela H. Bucy, “Private Justice,” 76 S. Cal. L. Rev. 1, 22 (2002).
The struggle for plaintiffs to come out on top of a RICO claim comes from many problems regarding the strict requirements of the RICO Act. Two of the most difficult challenges plaintiffs face in bringing a successful civil RICO claim are meeting the heightened pleading standards under Rule 9(b) and establishing proximate cause.
The Heightened Pleading Standard Under FRCP 9(b) for Predicate Acts
The hardest hurdle to a successful RICO claim is the heightened standard of pleading under Rule 9 for predicate acts based on fraud (mail fraud, wire fraud, bank fraud, etc.). Rule 9(b) requires the plaintiff to allege the circumstances constituting fraud with particularity. Some courts made this challenge even more onerous. The Second Circuit, for instance, held that Rule 9(b) requires fraud complaints to allege facts that lead to a “strong inference” that the defendant has the requisite state of mind even though Rule 9(b) provides that conditions of a person’s mind may be alleged generally, see, e.g., IKB International v. Bank of America, 584 Fed. App’x. 26, 27 (2d Cir. 2014) (“We have repeatedly required plaintiffs to plead the factual basis which gives rise to a strong inference of fraudulent intent.”); Babb v. Capitalsource, 588 Fed. App’x. 66, 68-9 (2d Cir. 2015) (upholding dismissal of civil RICO claim where plaintiff failed to allege facts giving rise to a strong inference of fraudulent intent).
Although no other circuit court has adopted the Second Circuit’s stringent “strong inference” standard, the application of Rule 9(b) still has become more demanding with RICO claims, particularly with pleading the predicate acts for claims of extortion, wire fraud and mail fraud. That means a plaintiff filing a RICO claim in a trial court within the Third Circuit will not be required to plead a “strong inference” of fraud, like the plaintiffs in the Weinstein action. But the standard remains a difficult one to meet as plaintiffs must plead, at a minimum, “all of the essential factual background that would accompany ‘the first paragraph of any newspaper story’—that is, the ‘who, what, when, where and how’ of the events at issue.” In re Rockefeller Center Properties Securties Litigation, 311 F.3d 198, 217 (3d Cir. 2002). It is not enough, for example, to generally allege that defendants “mailed thousands of bank statements, advertisements for credit cards, contracts and promotional materials containing the fraudulent information,” as in Lum v. Bank of America, 361 F.3d 217, 224 (3d Cir. 2004), overruled on other grounds, In re Insurance Brokerage Antitrust Litigation, 618 F.3d 300 (3d Cir. 2010).
Proving Proximate Cause
The inability to prove a direct causal link between the alleged pattern of racketeering activity and the injury the plaintiff has suffered is another common issue for plaintiffs asserting a RICO claim. Section 1964(c) of the RICO Act, as interpreted by the U.S. Supreme Court, imposes a proximate cause requirement on the plaintiff as it authorizes civil suits by “any person injured in his business or property by reason of a violation of [18 U.S.C. Section 1962].” In traditional common law tort cases, the issue of proximate cause is an issue that can be resolved only by the fact-finder. The Supreme Court, however, has held that RICO’s proximate cause analysis is a legal, not factual, issue. See Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268 (1992).
Generally, plaintiffs cannot establish proximate cause where their injuries are too far removed from the RICO violation such that there is no direct link between the two, Anderson v. Ayling, 396 F.3d 265, 270-71 (3d Cir. 2005). In 2010, in Hemi Group v. City of New York, 559 U.S. 1 (2010), a divided Supreme Court held the RICO Act to preclude claims in which the alleged racketeering activity is not the direct cause of the plaintiff’s injuries. The court’s holding in Hemi Group replaces the traditional hallmark of proximate cause—“foreseeability”—with “directness.” While this standard is murky, this decision emphasizes the burden imposed on plaintiffs’ lawyers to set forth a clear causal link between the alleged racketeering and the alleged injury. Otherwise, proximate cause can be a tool for defendants to secure early dismissal of civil RICO claims.
In the Weinstein action, the plaintiffs allege that the “Defendants interfered with their current and prospective contractual relations, because [they] lost employment and employment opportunities, as well [as] contractual and contractual opportunities, as a result of Weinstein’s conduct.” The plaintiffs allege this conduct included witness tampering, mail fraud, and wire fraud. The crux of the claim is that Weinstein and the Weinstein Sexual Enterprise conspired to lure women, under the guise of career advancement opportunities, into situations where they could be sexually harassed or assaulted and then, Weinstein and the Weinstein Sexual Enterprise would allegedly silence the women’s accusations of wrongdoing by blacklisting or threatening to blacklist them. Hence, the plaintiffs must prove to the court that Weinstein’s actions were the reason, or at least primary reason, for their losing an acting part or a job, and that but-for this conduct, the plaintiffs would have been hired for the jobs.
Although the strict requirements of civil RICO claims cause inherent obstacles for many plaintiffs, this is not to say these claims lack merit. These obstacles to plaintiffs can be overcome by focusing heavily on the common issues that cause civil RICO complaints to be dismissed. With careful early planning and analysis of facts, plaintiffs could bring and establish successful RICO claims. In these instances, defendants should proceed with caution towards the potential devastation they could face at trial.
For Weinstein, the outcome remains uncertain. Judge Alvin Hellerstein, a senior U.S. District Judge and Clinton-appointee, has ordered all defendants to respond to the class action complaint by no later than Feb. 20, with no requests for extensions to be considered. As is the case in virtually every civil RICO case, motions to dismiss will likely be filed. A proposed class action with RICO claims will be a complex, lengthy and expensive process. The outcome remains to be seen but will be an interesting one to follow.
Edward T. Kang is the managing member of Kang, Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities.