Civil RICO Section 1962(c) - Vicarious Liability And Arguments For Expanding Its Scope And Elements ~ Part V

Though these Guidelines do not outline the elements of an organization's potential liability, their structure concerning imposition of a Guidelines' fine evidences Congress's approval of punishing vicariously liable organizations, which punishment is generally regarded as the purpose of treble damages ⁵⁹, such as those imposed when RICO liability attaches. As such, these Guidelines may offer guidance for determining the elements of a 1962(c) vicarious liability analysis and, arguably, therefore, for determining what principals should be liable for RICO treble damages. An example of these Guidelines' potential operation best demonstrates these considerations.

Assume a $1,000,000.00 loss resulting from an agent's racketeering activity, which consisted of various counts of mail and/or wire fraud directed at a single victim. Also assume that the organization did not operate primarily for a criminal purpose or primarily by criminal means ⁶⁰, but that it is financially able to pay the fine ⁶¹; that is, assume that the organization is much like the organizations discussed in the cases referenced above. Generally, these Guidelines will require that the organization make restitution or remedy the harm ⁶² and pay a fine ⁶³. Again, as the fine is the analog of RICO treble damages, the analysis involved in determining the organization's potential fine may bear on the analysis for determining whether 1962(c) vicarious liability should attach.

Setting the fine involves a three step process: 1) determining the base fine, 2) determining the minimum and maximum multipliers to be applied to the base fine and then 3) determining the fine within the Guidelines' fine range.

The base fine equals the greater of: 1) the amount that corresponds to the offense level as per the offense level fine table ⁶⁴, 2) the "pecuniary gain to the organization from the offense" or 3) "the pecuniary loss from the offense caused by the organization to the extent the loss was caused intentionally, knowingly, or recklessly." ⁶⁵ Notably, the pecuniary gain and loss figures are not totals but are instead tied to the organization's benefit and/or involvement ⁶⁶. In the case of an organization that did not benefit and that was not itself involved in the underlying activity, then these figures should be irrelevant. For purposes of this analysis assume that the base fine is $1,000,000.00.

Section 8C2.6 prescribes the applicable minimum and maximum multipliers. The applicable multiplier depends on the organization's culpability score. Section 8C2.5 provides the outline for determining this score; the greater the organization's size, the more culpable its higher ups, the more higher up those culpable and/or the less assistance it provided in its investigation, then the greater the multiplier. In the case of an organization that had less than 1000 employees one of whom was high-level personnel who participated in, condoned or was wilfully ignorant of the offense, but which organization accepted responsibility for the misconduct, then the minimum multiplier equals .20 and the maximum multiplier equals .40 ⁶⁷.

The base fine times the minimum and maximum multiplier determines the fine range. In this hypothetical, the fine range would be from $200,000.00 to $400,000.00.

In this overly-simplistic hypothetical, the criminally-liable organization faces a maximum financial punishment of $400,000.00 plus whatever restitution is due, $1,000,000.00 in this scenario, for a total liability of $1,400,000.00 ⁶⁸.

This framework demonstrates that like courts considering whether to impose 1962(c) vicarious liability, the Commission focuses on organizations' culpability in determining their liability beyond restitution and for punitive fines, an analog of RICO's treble damages, which focus Congress has approved. For the most part, courts considering 1962(c) vicarious liability claims consider the same principles Congress endorsed in approving the adoption of these Guidelines. The focus is on the organization's culpability.

The courts have defined culpability as benefit from, knowledge of and participation in the illegal activity. This is, generally, consistent with the Guidelines. But, the Guidelines go further than do the courts expanding on these considerations and identifying additional considerations. As these considerations are pertinent to the analysis involved in determining the Guidelines' fine, the analog of RICO treble damages, to be assessed the vicariously liable organization, there is support for employing these considerations when considering 1962(c) vicarious liability claims.

Thus, referencing and/or borrowing from these Guidelines, benefit remains an appropriate consideration, but only to the extent that the benefit flows from the offense, itself. In addition, the victim's loss, alone, may be an appropriate consideration, but only to the extent that the organization intended, knew of or was reckless with respect to the loss. But, neither gain nor loss is essential, indicating that 1962(c) vicarious liability may apply where the principal did not benefit from or necessarily cause the loss ⁶⁹.

Participation by high-level members of the organization also remains an appropriate consideration. But participation is not essential. Condoning or willfully ignoring the offense may also support vicarious liability attaching. Constructive knowledge, even constructive knowledge alone, may be sufficient to support punishing an organization ⁷⁰. This supports the notion that constructive knowledge is an appropriate factor for analyzing a 1962(c) vicarious liability claim and that it alone may be a sufficient basis for imposing liability; although if these Guidelines bear on 1962(c) vicarious liability constructive knowledge considerations, then the steps taken by the organization prior to the offense to detect and prevent the criminal conduct may also be an appropriate consideration ⁷¹.

The Guidelines framework indicates that no one factor should be determinative. Rather, all of these factors should be taken into consideration when determining whether an organization is culpable and therefore whether it should be punished for its agent's racketeering activity. In some respects application of the Guidelines's framework expands the potential application of 1962(c) vicarious liability by making additional considerations such as victim loss and constructive knowledge pertinent and possibly even by themselves sufficient to support imposing vicarious liability. Yet, this framework also calls for some tightening of the analysis by requiring a direct link between the organizations' gain, and now the victim's loss, and the organization's connection to the scheme ⁷², where the courts do not always appear to focus on this connection in considering 1962(c) vicarious liability claims.

In Reves v. Ernst & Young, 507 U.S. 170 (1993), the Supreme Court addressed the meaning of the phrase in Section 1962(c) "to conduct or participate, directly or indirectly, in the conduct of such enterprises affairs." The Court held that this language requires that "one must participate in the operation or management of the enterprise itself" before Section 1962(c) liability will attach ⁷³. This holding and the Court's analysis may bear on application of vicarious liability for 1962(c) violations.

5.1 The Apparent Elimination of Aider and Abettor Liability that has Flowed from Reves May Call for Reconsidering Application of Vicarious Liability for Section 1962(c) Violations

Aiding and abetting liability for RICO violations did not likely survive Reves. This may be cause to reconsider application of vicarious liability.

Reves adopted a restrictive "operation or management" test ⁷⁴. Since Reves, then, it is more difficult to assert RICO claims against outside participants. This change invited reconsideration of the courts' prior treatment of aiding and abetting in RICO cases ⁷⁵, and the courts appear to accept that since Reves aiding and abetting is not an available basis for imposing liability under Section 1962(c) ⁷⁶. This invalidation of aider and abettor liability, in some respects, may support the invalidation, or modification in the application, of 1962(c) vicarious liability.

An aider and abettor must have "participated in the fraud as something [he] wished to bring about, and sought by [his] actions to make it succeed. Armco Indus. Credit Corporation v. SLT Warehouse Co., 782 F.2d 475 (5th Cir.1986)." ⁷⁷ He must have provided substantial assistance in the performance of the primary violation ⁷⁸. In some courts and in some situations, nothing near this level of participation is necessary to impose 1962(c) vicarious liability. Constructive knowledge, alone, may be sufficient to support imposing vicarious liability. Therefore, the logic continues, if one, possibly even the same principal, cannot be liable for participating in and seeking to bring about its agent's fraud then it should not be liable for lesser activity.

Admittedly, there are different policies behind vicarious liability and aider and abettor liability. The point of vicarious liability is to encourage the principal, usually an employer who stands to benefit from its employee's actions, to monitor its employees or to punish it for failing to do so. These same concerns are not behind aider and abettor liability. At the very least then, it seems proper that where these concerns, benefit and deterrence, are not front and center, such as in the case of a principal other than an employer or where the employer is not one we would expect society to want to punish -- such as one other than an organization identified by the Sentencing Commission and Congress -- then the anomaly should compel the inapplicability of vicarious liability. Otherwise, one who has actually facilitated the commission of predicate acts of racketeering activity is immune from the threat of treble damages while one who maybe only knew of the racketeering activity may find himself liable for conduct he did not facilitate or wish to succeed. Accepting this argument, then, would mean that vicarious liability would be unavailable in 1962(c) claims where the principal does not have the same interests as an employer or is not an "organization" identified by the Guidelines ⁷⁹. This would eliminate these anomalous results following the elimination of aider and abettor liability.

According to Reves, the RICO person -- the definition of which does not include a vicariously liable principal -- must have participated in the "operation or management"of the enterprise. An alleged principal, itself, may not have this connection. Therefore, the argument could continue, applying restrictive statutory construction as dictated by Reves results in finding that the principal cannot be liable.

At least one court has addressed, at least implicitly, the impact of Reves on the application of vicarious liability in 1962(c) cases. Stating that the defendant's connection to the enterprise was sufficient to satisfy Reves and that there was sufficient evidence to support attributing the defendant's acts to the principal -- the court had previously noted that the principal had promoted, sponsored and benefitted from the scheme -- the Sixth Circuit in Davis, 6 F.3d 367, apparently sua sponte, indicated that Reves did not prevent applying vicarious liability to the principal ⁸⁰. The court did not provide any other analysis.

Given that a principal can act only through its agents, it makes sense that vicarious liability should exist, even despite Reves and any contrary interpretation of Reves's "operation or management" requirement. Further, the availability of 1962(c) vicarious liability is consistent with RICO's liberal construction clause. Yet Reves may still bear on the elements necessary to impose Section 1962(c) vicarious liability. Reves's tightening of the "operation or management" requirement may compel a corresponding tightening of the requirements for imposing vicarious liability, particularly to the extent that knowledge and/or participation are elements of the vicarious liability analysis.

"In the Court's view, it is clear from the statutory language and the legislative history that Congress did not intend to extend RICO liability under section 1962(c) beyond those who participate in the operation or management of an enterprise through a pattern of racketeering activity." ⁸¹ Post-Reves, therefore, more significant conduct involving and bearing on the enterprise than before is necessary to find 1962(c) liability. The principal's agent must participate in the operation or management of the enterprise through a pattern of racketeering activity. The knowledge and participation necessary to impose vicarious liability, therefore, should relate to this more significant conduct and connection to the enterprise, at least to the extent that knowledge and participation must be knowledge of and participation in the racketeering activity conducted through the enterprise.

Whether prosecuting or defending a 1962(c) vicarious liability claim, a number of factors exist, each of which presents a separate hurdle and consideration. Understanding these factors is key to identifying solvent and responsible parties, in the case of plaintiffs, and to avoiding unwarranted RICO claims, treble damages and protracted litigation, in the case of defendants. There are a wealth of cases, the great majority of which are identified in this article, that discuss these factors in a variety of contexts. Identifying these factors at the outset is essential to avoiding or securing dismissal or summary judgment. I hope this article assists you in that process.

Copyright 1999 Bradley J. Haight, J.D. Tulane University 1993.

⁵⁹ See e.g. Abell v. Potomac Insurance Co., 858 F.2d 1104,1141 (5th Cir.1988)(RICO damages in excess of actual damages are penal in nature), vacated on other grounds, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989); Southwest Marine, Inc. v. Triple A Mach. Shop, Inc., 720 F.Supp. 805,810 (N.D.Cal.1989)(holds RICO treble damages are punitive).

⁶⁰ If the organization operated primarily for a criminal purpose or primarily by criminal means, then the court should set a fine sufficient to divest the organization of all of its net assets. See USSG§8C1.1. The analysis in this portion of this article assumes that Section 8C1.1 does not apply.

⁶¹ The court may not impose a fine if the organization cannot make restitution as required under Section 8B1.1 or would not be able to pay a fine imposed under the Guidelines. See USSG § 8C2.2.

⁶² See USSG §§8B1.1,2.

⁶³ See USSG §8C.

⁶⁴ Determining the base fine first requires identifying the applicable offense level. Section 8C2.3 provides the mechanism for making this determination. It refers back to Chapter Two of the Guidelines. Section 2E1.1 pertains to racketeering and provides for a base offense level of the greater of 19 or of the offense level applicable to the underlying activity. Assuming, as in most cases of racketeering, that the underlying activity consists of mail and/or wire fraud, then the base offense level equals six plus an increase that corresponds to the amount of the loss. See USSG §2F1.1. A loss of $1,000,000.00, for example, requires adding 11 to the base offense level for a total offense level of 17. If the offense involved more than minimal planning, as a pattern of racketeering activity presumably would, then the court would be directed to add two more levels yielding an offense level of 19. See USSG §2F1.1(b)(2).

⁶⁵ See USSG §8C2.4.

⁶⁶ See USSG §8C2.4 comment (n.1).

⁶⁷ See USSG §§8C2.5,6.

⁶⁸ Interestingly, this is less than one half of the organization's exposure should it be found vicariously liable by a civil trier of fact required to impose RICO treble damages. The statute provides that "(c) [a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee." 18 U.S.C. § 1964(c)(bold added). The Sentencing Commission and Congress have also provided that a court may depart from these Guidelines and impose an even smaller fine. Section 8C4 outlines the bases upon which a court may depart. For example, subsection 8C4.9 allows for departure when "the organization has paid or has agreed to pay remedial costs arising from the offense that greatly exceed the gain that the organization received from the offense, ...." See USSG § 8C4.9. Application of this potentially applicable departure rule could even reduce to zero the organization's total financial liability. The disparity in potential financial liability is also particularly noteworthy when considering that mandatory treble damages and attorney's fees, see 18 U.S.C. § 1964(c)(provides for mandatory imposition of treble damages), flow from a finding of civil liability under a lesser standard of proof. See Bieter Co. v. Blomquist, 987 F.2d 1319 (8th Cir.1993)(preponderance standard applies to civil RICO claims); Liquid Air Corp., 834 F.2d at 1302 (same); Wilcox v. First Interstate Bank of Oregon, 815 F.2d 522,531 (9th Cir.1987)(same); Cullen, 811 F.2d at 731(same); Armco Industrial Credit Corp., 782 F.2d at 480-81(same); United States v. Local 560, Int'l Brotherhood of Teamsters, 780 F.2d 267,279-80 n.12 (3d Cir.1985), cert. den'd, 476 U.S. 1140, 106 S.Ct. 2247, 90 L.Ed.2d 693 (1986)(same); Ford Motor Co. v. B&H Supply, Inc., 646 F.Supp. 975,1001 (D.Minn.1986)(same); Bosteve, Ltd. v. Marauszwski, 642 F.Supp. 197,202 n.7 (E.D.N.Y.1986)(same); Owl Constr. Co., Inc. v. Ronald Adams Contractor, Inc., 642 F.Supp. 475,477 (E.D.La.1986)(same); Platsis v. E.F. Hutton & Co., 642 F.Supp. 1277, 1309 (W.D.Mich.1986)(same); Stainton v. Tarantino, 637 F.Supp. 1051,1070 (E.D.Pa.1986)(same).

⁶⁹ Section 8C2.4 prescribes that the base fine is the greater of the corresponding offense level, gain or loss.

⁷⁰ See e.g. USSG Ch.8 intro.comment ("Culpability generally will be determined by the steps taken by the organization prior to the offense to prevent and detect criminal conduct"); USSG §8C2.4 (ties the "pecuniary loss" aspect of the "base fine" analysis to that loss the organization caused "intentionally, knowingly, or recklessly."); USSG §8C2.5 (ties organizations' potential culpability score to their willful ignorance of the offense).

⁷¹ Cf. USSG Ch.8 intro. comment. ("Culpability generally will be determined by the steps taken by the organization prior to the offense to prevent and detect criminal conduct,....)(italics in original).

⁷² See e.g. USSG § 8C2.4 (excluding consideration of the corresponding offense level, these Guidelines direct the courts to consider what the organization gained from the offense or what loss resulted from the organization's knowledge of or indifference to the offense); USSG § 8C4.9 (in determining whether to depart, these Guidelines look to whether the organization's remedial costs exceed what it gained from the offense).

⁷³ See Reves, 507 U.S. at 185.

⁷⁴ See Reves, 507 U.S. at 183-184.

⁷⁵ See Taurie M. Zeitzer, In Central Bank's Wake, RICO's Voice Resonates: Are Civil Aiding and Abetting Claims Still Tenable?, COLUMBIA J. L. AND SOCIAL PROBLEMS p.569 1 (1996)(citations in journal omitted). In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), brought for alleged violation of 15 U.S.C. § 78j(b) and of 17 C.F.R. § 240.10b-5 and premised, as against the defendant bank, on aiding and abetting principles, the Court addressed the right to proceed for aiding and abetting liability under §10(b). Applying the rules of statutory construction, the Court concluded that the statute's prohibition against employing manipulative or deceptive devices in connection with the purchase or sale of any security did not include giving aid to a person engaging in such acts. See Zeitzer, In Central Bank's Wake, p.557 1 (1996)(citations in journal omitted). "[W]hen Congress enacts a statute under which a person may sue and recover damages from a private defendant for the defendant's violation of some statutory norm, there is no general presumption that the plaintiff may also sue aiders and abettors." Central Bank, 511 U.S. at 1440, 114 S.Ct. at 1450-1451. With this and because the Court found no basis in the statute for imposing aider and abettor liability, it concluded that no such cause of action existed. Arguably, the same result should prevail in RICO where the statute, likewise, does not provide for imposition of aider and abettor liability, where the High Court has held restrictive statutory construction, particularly in the context of the "operation and management" component, should prevail and where the risk of abuse is great.

⁷⁶ See e.g. U.S. v. Viola, 35 F.3d 37,40-41 (2d Cir.1994)(indicates 1962(c) liability based on aiding and abetting did not survive Reves); In Re American Honda Motor Co., Inc. Dealerships, 965 F.Supp. 716,717 (D.Md.1997)(indicates 1962(c) liability based on aiding and abetting did not survive Reves and Central Bank); In Re American Honda Motor Co., Inc. Dealerships, 958 F.Supp. 1045,1057-58 (D.Md.1997)(same).

⁷⁷ Crowe, 43 F.3d at 206.

⁷⁸ See Armco, 782 F.2d at 485-86.

⁷⁹ For example, vicarious liability would not be available in cases such as St. Paul Mercury Ins. Co. v. Williamson, 986 F.Supp. 409,413 (W.D.La. 1997)(plaintiffs asserted lawyer's clients were vicariously liable for lawyer's alleged racketeering).

⁸⁰ See Davis,6 F.3d at 380.

⁸¹ DAVID B. SMITH & TERRANCE G. REED, CIVIL RICO 5-36 (1996).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.