March 14, 2016 Articles

Pleading a "Pattern of Racketeering Activity" under State and Federal Statutes

Is the government's requirement of "continuity" needed to establish a racketeering pattern?

By Alicia M. Bendana

Let’s face it: Racketeering claims have a certain appeal for victims of commercial fraud. Such claims offer expanded remedies, including treble damages and attorney fees; an expanded scope that allows plaintiffs to expose professionals’ involvement in fraudulent schemes; and statutes of limitations that often exceed those governing the underlying tort claims. Although most state racketeering laws were modeled on the federal Racketeer Influenced and Corrupt Organizations (RICO) Act, some states’ laws deviate from, and are more specific than, the federal law. The differences in these statutes can often mean the survival of a plaintiff’s claim under the state racketeering law instead of its demise under the federal law.

To state a racketeering claim, a plaintiff must allege that the defendant, through the affairs of an enterprise, profited from a pattern of racketeering activity. RICO defines a “pattern of racketeering activity” as “requir[ing] at least two acts of racketeering activity” occurring within 10 years of each other. 18 U.S.C. § 1961(5). However, in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n.14 (1985), the Supreme Court struggled with the meaning of the word “requires” and hinted that while two acts were necessary to establish a pattern, they may not be sufficient. Consequently, a split of authority developed over what constituted a RICO pattern.

In H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (1989), the Supreme Court undertook the task of resolving the split and created the “relationship plus continuity” test. This test requires RICO plaintiffs to show that the alleged racketeering acts are related and that they “amount to or pose a significant threat of continued criminal activity.” Essentially, in order for plaintiffs to prove the “continuity” requirement, they must be able to show “a closed period of repeated conduct, or . . . past conduct that by its nature projects in the future with a threat of repetition.” Despite the Court’s efforts, Justice Scalia suggested that RICO’s “pattern” definition, at best, remains unclear. (“It is clear . . . that the word ‘pattern’ in the phrase ‘pattern of racketeering activity’ was meant to import some requirement beyond the mere existence of multiple predicate acts. . . . But what that something more is, is beyond me.” 492 U.S. at 255 (Scalia, J., concurring))

Knowing exactly what to allege is critical in civil RICO cases because most federal courts have either local rules with strict pleading requirements or standing orders that require the filing of a RICO case statement. These statements must include an exhaustive “detailed” recitation of the facts on which each of the RICO allegations is based. All of the questions must be answered prior to discovery taking place, and if the answers are deficient in any way, counsel can expect a swift motion to dismiss, sometimes accompanied by a motion for Rule 11 sanctions. Local rules often state that the purpose of such recitations is to ensure that the plaintiff’s counsel satisfies the “reasonable inquiry” duty required by Federal Rule of Civil Procedure 11. See, e.g.,RICO Standing Order, General Orders of the U.S. District Court, E.D. La. Along these lines, satisfying the post-H.J. “pattern” element often presents the biggest pleading challenge to plaintiffs. Indeed, many courts routinely dismiss RICO claims when plaintiffs allege complete, or “closed,” predicate acts lasting a year or less, with no threat of future criminal conduct. See, e.g., Kurins v. Silverman, No. 08-civ.6886, 2009 WL 321011, at * 4 (S.D.N.Y. Feb. 10, 2009) (“The Second Circuit has generally held that a two-year period is necessary but not sufficient for establishing closed-ended continuity.”); Hughes v. Consol-Pennsylvania Coal Co., 945 F.2d 594, 60911 (3d Cir. 1991), cert. denied, 504 U.S. 955 (1992) (holding that “twelve months is not a substantial period of time” for continuity purposes in a closed-ended scheme); but see Allwaste, Inc. v. Hecht, 65 F.3d 1523, 1528 (9th Cir. 1995) (declining to adopt a bright-line, one-year rule and indicating that predicate acts occurring over 13 months could satisfy the continuity requirement).

In contrast to the vague definition found in the federal RICO Act, many state racketeering laws contain complete and more precise “pattern” definitions. The Georgia racketeering statute, for example, provides:

“Pattern of racketeering activity” means engaging in at least two incidents of racketeering activity that have the same or similar intents, results, accomplices, victims, or methods of commission or otherwise are interrelated by distinguishing characteristics and are not isolated incidents. . . .

Ga. Code Ann. § 16-14-3(8) (emphasis added).

In other words, while the federal statute provides that a claimant must plead a “pattern of racketeering activity” and that such a pattern requires at least two predicate acts, Georgia’s racketeering statute, which also includes the requirement that the claimant show a “pattern of racketeering,” provides that such “pattern of racketeering activity” means two predicate acts.

In Sedima, the Supreme Court noted the critical linguistic distinction between the words “requires” and “means” relative to the “pattern” definition. There, the Court explained that “the [federal] definition . . . states that a pattern ‘requires at least two acts of racketeering activity,’ . . . not that it ‘means’ two such acts; . . . [t]he implication is that while two acts are necessary, they may not be sufficient.” 473 U.S. at 496 n.14. In addition, because the Georgia statute’s pattern definition is more detailed than the definition provided in its federal counterpart, it embodies a relationship requirement not explicitly set forth in the federal statute.

To this end, in Dover v. State, 385 S.E.2d 417, 421 (Ga. Ct. App. 1989), the Court of Appeals of Georgia recognized that the “pattern of racketeering” definition in the Georgia statute “is narrower than the federal statute.” Consequently, the court declined to adopt RICO’s “continuity” requirement because “that approach ignore[s] the differences between the federal and Georgia statutes.” The court went on to explain:

The Georgia statute requires the interconnectedness not contained in the wording of its federal counterpart. . . . [B]ecause of this difference, our legislature intended to and did . . . subject to the coverage of our RICO statute two crimes . . . which are part of the same scheme, without the added burden of showing that [the] defendant would continue the conduct or had been guilty of like conduct before the incidents charged. . . .

Courts in several other states with similar pattern definitions have also concluded that “continuity” is not required under their state racketeering statutes. In Computer Concepts, Inc. v. Brandt, 801 P.2d 800, 807–9 (Or. 1990), the Supreme Court of Oregon found that Oregon’s racketeering statute does not require “continuity” in order for a “pattern” of racketeering activity to exist. The Oregon racketeering statute provides:

“Pattern of racketeering activity” means engaging in at least two incidents of racketeering activity that have the same or similar intents, results, accomplices, victims or methods of commission or otherwise are interrelated by distinguishing characteristics, including a nexus to the same enterprise, and are not isolated incidents. . . .

Or. Rev. Stat. § 166.715(4) (emphasis added).

In Computer Concepts, the court opined that “[t]he use of the word ‘means’ implies that the legislature intended the definition to be completely self-contained [and] . . . a plaintiff whose allegations track the express requirements of the definition, without doing more, would sufficiently allege a pattern of racketeering activity.” The court also determined that the phrase “not isolated” does not add a “temporal element beyond the express requirements of [the statute]”; rather, it describes “the relationship between or among the predicate acts, including their nexus to the same enterprise.” The court also based its decision on several indications in the Oregon statute’s legislative history that a continuity requirement could not have been intended, though it found that as a whole, the legislative history was inconclusive on this issue. These indications included reference solely to the terms of the statutory definition in discussions of “pattern,” the general bias toward liberal construction in order to ensure relief to victims, the use of examples involving “patterns” occurring over short time periods, and the lack of any case law at the time of passage that had imposed a continuity requirement.

Similarly, in the case of People v. Chaussee, 880 P.2d 749, 757 (Colo. 1994), the Supreme Court of Colorado found that, in order to establish a pattern of racketeering activity under the Colorado Organized Crime Control Act (COCCA), a plaintiff need not prove “continuity” or the “relatedness” of the predicate acts to one another, as would be the case under the federal RICO statute. Rather, the court held that a “pattern of racketeering activity,” within the meaning of COCCA, could be established simply by proving at least two acts of racketeering activity that are related to the conduct of the enterprise.

Again, in State v. Ball, 632 A.2d 1222, 1257–59 (N.J. App. Div. 1993), a New Jersey appellate court held that the “pattern” definition set forth in New Jersey’s racketeering statute does not include a “continuity” element. The New Jersey racketeering statute provides:

“Pattern of racketeering activity” requires

(1) Engaging in at least two incidents of racketeering conduct, one of which shall have occurred after the effective date of this act and the last of which shall have occurred within 10 years (excluding any period of imprisonment) after a prior incident of racketeering activity; and

(2) A showing that the incidents of racketeering activity embrace criminal conduct that has either the same or similar purposes, results, participants or victims or methods of commission or are otherwise interrelated by distinguishing characteristics and are not isolated incidents.

N.J. Rev. Stat. § 2C:41-1(d).

There, even though the statute uses the word “requires,” the court held that the second part of the definition, which is not found in its federal counterpart, embodies the relationship requirement:

[C]onsistent with the reasoning of Computer Concepts, Inc., . . . New Jersey RICO’s more complete “pattern” definition can stand alone. Therefore resort to federal case law for guidance as to its meaning is not necessary. Moreover, since the New Jersey statute explicitly requires only a showing of relatedness among predicate acts, there is no reason why the additional element of continuity, which is associated with Federal RICO, should be grafted onto New Jersey’s statutory definition.

632 A.2d at 1259.

Finally, in Siragusa v. Brown, 971 P.2d 801, 811 (Nev. 1998), the Supreme Court of Nevada considered the Nevada racketeering statute:

“Racketeering activity” means engaging in at least two crimes related to racketeering that have the same or similar pattern, intents, results, accomplices, victims or methods of commission, or are otherwise interrelated by distinguishing characteristics and are not isolated incidents, if at least one of the incidents occurred after July 1, 1983, and the last of the incidents occurred within 5 years after a prior commission of a crime related to racketeering.

Nev. Rev. Stat. 207.390 (emphasis added).

That court found a “clear distinction” between the word “means” found in this statute and “requires” found in federal statute. “Had the state legislature intended Nevada’s RICO provisions to mirror the federal statute in this area, it would have expressly adopted the ‘requires’ language of the federal statute. . . . Accordingly, we hold that there is no pattern/continuity requirement as is required under federal law.”

Every state court that has critically analyzed a state racketeering “pattern” definition that supplants the word “requires” (found in the federal statute) with “means,” or otherwise provides a more complete definition of the term, has concluded that the federal requirement of “continuity” is not required to establish a racketeering pattern. Although some courts in Florida, Indiana, and Oklahoma have read “continuity” into their states’ racketeering statutes, those courts did not provide any reasoning or analysis for doing so; indeed, the distinction between the state and federal statutes was not at issue before those courts. See Schremmer v. State, 578 So. 2d 392, 393 (Fla. Dist. Ct. App. 1991); Kollar v. State, 556 N.E.2d 936, 940–41 (Ind. Ct. App. 1990); Miskovsky v. State, 31 P.3d 1054, 1063 (Okla. Crim. App. 2001). In any event, those cases have been roundly criticized for their lack of reasoning, and other courts, presented with the issue, have declined to follow them. See State v. Ball, 632 A.2d at 1258; Philadelphia Reserve Supply Co. v. Nowalk & Assocs., Inc., 864 F. Supp. 1456, 1466 (E.D. Pa. 1994).

These distinctions can make a significant difference to a racketeering plaintiff who can satisfy every criterion of a racketeering claim but cannot (at least pre-discovery) demonstrate more than two or three predicate acts occurring over a period of a few weeks or months. To the extent that other states have yet to specifically consider and address similar “pattern” definition distinctions, the sound reasoning supplied by the courts that have done so can be used to support an argument that the federal “continuity” requirement is not necessarily required under a state racketeering law, especially when the state statute supplants the word “requires” (used in the federal statute) with “means.”

Keywords: litigation, business torts, RICO, racketeering, pattern of racketeering, continuity, pleading requirements, predicate acts

Alicia M. Bendana – March 14, 2016