What Is RICO? Racketeer Influenced and Corrupt Organizations (RICO) Act 18 U.S.C. § 1961 et seq. became law 1970 Designed to help prosecutors convict the person who manages the criminal activity along with those who actually engage in the criminal acts Purpose was to reduce the influence of the Mafia over the U.S. economy
Prohibited Activities § 1962 (a) and (b) (a) Prohibits anyone from using racketeering proceeds to invest in an enterprise that engages in interstate commerce (business used as a vehicle for money laundering) (b) Prohibits a defendant from acquiring or maintaining interest or control over an enterprise through a pattern of racketeering (defendant uses racketeering to seize and imprison the business)
§ 1962 (c) (c) “It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.”
Civil RICO Suits § 1964 (c) RICO act also provides a civil cause of action for anyone who is damaged by the racketeering acts of a defendant If the plaintiff succeeds in a civil RICO claim the award would include three times the actual damages plus attorneys’ fees and costs Damages must be directly caused by criminal activity The defendant must be proven to have engaged in racketeering – can not violate RICO negligently or unintentionally
Elements of RICO violation § 1962(c) I. Defendant Persons II.Enterprise III.Enterprise engaged in interstate activity IV. Defendants’ operation or management of the enterprise V. Pattern of racketeering activity VI. Racketeering Activity (most common is mail and wire fraud)
I. Defendant Persons Can be an individual or corporation so long as the defendant person engaged in a pattern of criminal activity Defendant “person” is sometimes confused with the RICO enterprise. The enterprise may perpetrate crimes (e.g. a Mafia family) but often the enterprise is the victim or passive instrument of the criminal activity
II. Enterprise Can be a legal entity such as a partnership, corporation or association – it can also be an individual or a relatively loose-knit group of people or legal entities “association-in-fact” enterprise is the loose-knit group (like the Mafia family).
association-in-fact The association-in-fact enterprise has three characteristics 1. a purpose, 2. relationship among those associated with the enterprise and 3. longevity sufficient to permit these associates to pursue the enterprise's purpose
III. Engaged in or Affecting Interstate Commerce A nexus with interstate commerce is necessary to confer federal jurisdiction Because the U.S. Constitution confers postal powers upon the federal government, acts of mail fraud, even intrastate use of the mails, have a nexus with interstate commerce.
IV. Defendants’ Operation or Management of the Enterprise An enterprise is “operated” not just by upper management but also by lower-rung participants in the enterprise who are under the direction of upper management A professional (lawyer, banker, consultant or accountant) performing their duties in accordance with generally accepted standards of the professional AND without knowledge of the RICO violations, cannot be considered operators or managers of an enterprise
V. Pattern of Racketeering The factors of relatedness and continuity combine to produce a pattern of racketeering Relatedness – the pattern must have the same or similar purposes, results, participants, victims or methods of commission Continuity – a substantial period of time may be as little as a year but if less than a year it will not be sufficiently continuous. Open-ended continuity exists when criminal conduct is threatened to be repeated in the future.
VI. Racketeering Activity (Predicate Act) RICO claim can be predicated not only on violations of federal statutes but also violations of certain state criminal laws The defendant need not be criminally convicted before a civil plaintiff can sue for treble damages Mail and Wire Fraud is the most common racketeering allegation
Mail and Wire Fraud Mail and wire fraud statutes essentially make it criminal for any one to use the mails or wires to advance a scheme to defraud The fraudulent statements themselves need not be transmitted by mail or wire; it is only required that the scheme to defraud be advanced, concealed or furthered by the use of the mail or wires Scheme to defraud must involve misrepresentations as to past or presently existing fact
Brown et al v. Cassens Transport Co., et al U.S. 6 th Circuit [writ denied by U.S. Sup. Ct.12/7/09] Plaintiffs – Employees of Cassens who made WC claims Defendants – Cassens (employer); Crawford & Company (TPA for Cassens) and Dr Saul Margules (Second Medical Opinion physician selected by TPA)
RICO Allegations Former employees who had filed WC claims against the employer allege that the employer, TPA and SMO physician committed mail and wire fraud in a scheme to deprive them of WC benefits The employer and TPA selected Dr. Margules who is known as a “cut-off” physician who was encouraged to either find no disability or that injury was not work related
Elements of the Claim Enterprise – Crawford and Cassens through the personnel with decision power; alternatively the enterprise included Dr. Margules Racketeering activity – mail and wire fraud Pattern – over many years cut-off doctors paid to send cut-off reports Damages – benefits withheld
Defenses Defenses – Reverse Preemption Under McCarran-Ferguson Act McCarran-Ferguson Act provides “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance…unless such [federal] Act specifically relates to the business of insurance.”
the business of insuranceThe McCarran-Ferguson Act thus precludes application of a federal statute in face of state laws enacted for the purpose of regulating the business of insurance if the federal measure does not specifically relate to the business of insurance and would invalidate, impair or supersede the State law. business of WC insuranceDefendants argued that the Michigan WC law was enacted to regulate the business of WC insurance (specifically the self-insured employer).
Business of Insurance 1.The state law need not itself constitute the “business of insurance” or “directly regulate the business of insurance” so long as it “possesses the end, intention or airm of adjusting, managing, or controlling the business of insurance” [citing US Dep’t of Treasury v. Fabe, 508 U.S. 491 (1993)] 2. There is a transference of risk of workplace injuries from the employee to the employer without regard to fault.
3.Even the 6 th Cir has noted that an employee’s right to an award of WC benefits under the WC act “arises out of the contractual relationship between employers and employees” (citing Nat’l Union Fire Ins. Co. v. Richman, 517 N.W. 2d 278 (Mich. Ct. App. 1994) 4.Although there is no “contract” of insurance in which this risk is transferred, the WC act imposes the benefits and burdens of the statutory bargain upon them.
5.By operation of law the WC act “becomes a part of every contract of employment” [citing Brown v. Eller Outdoor Advertising Co., 360 N.W. 2d 322 (Mich. Ct. App. 1984)] 6. The WC act expressly requires risk reallocation via insurance – the employer must either obtain WC insurance or qualify as a self-insured. The act also specifies what must be included in an insurance policy
RICO and Exclusive Remedy Defendants also argued that the RICO act if applied in WC cases would invalidate, impair or supersede the WC Act. Specifically they maintained that the exclusive remedy is impaired by the availability of suits under the RICO statute
Decision of the 6 th Circuit Original decision (7/10/07) affirmed district court’s dismissal of suit on grounds that plaintiffs failed to plead detrimental reliance on the alleged fraud. U.S. Supreme Court vacated judgment and remanded to 6 th Circuit (reliance NOT required) On remand the 6 th Circuit held that the claimants stated a cause of action and rejected the defenses of defendants.
Reasoning of the Court 1.Plaintiffs sufficiently pleaded that their injuries were “by reason of” the defendants’ alleged fraud; 2. Reverse preemption under McCarran- Ferguson Act does not apply as the workers compensation act was not enacted for the purpose of regulating the business of insurance; 3. RICO would not invalidate, impair or supersede the workers compensation act
Implications of 6 th Cir. Decision After the release of the decision the same law firm filed additional suits for multiple plaintiffs against Sedgwick Claims Management, Coca-Cola Enterprises Inc., Dr. Paul Drouillard, United Parcel Service, and Liberty Mutual Similar suits are likely to be filed in all states Targets would include TPA, Insurer, SMO, vocational counselor and defense attorney
Impact on Administration of WC Federal judges would be involved in deciding compensability issues that are peculiar to WC law There is no requirement that employee must first exhaust the administrative remedy of state WC Likely expansion of RICO claim via class action suits RICO suits ignores the quid pro quo of the exclusive remedy in WC