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

3.0 The Parameters: When 1962(c) Vicarious Liability Applies

As the Brady court indicated, 1962(c) vicarious liability will not attach to every principal. The courts have adopted significant and various limitations to its imposition.

3.1 The Person-Enterprise Distinctness Requirement

The distinctness requirement⁷ is the most-often-cited obstacle to a 1962(c) vicarious liability claim. The roots of this requirement are in the language of 1962(c), which provides:

[i]t 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 ⁸.

Section 1962(c) imposes liability on an employee or associate of an enterprise ⁹, who conducts the affairs of the enterprise through a pattern of racketeering activity. This "person," ¹⁰ cannot employ or associate with himself: The "person" and the entity that employs him must be distinct, and the absence of distinction precludes 1962(c) liability. Only the Eleventh Circuit holds otherwise ¹¹.

Some courts early on indicated that the distinctness rule did not prevent applying vicarious liability to a principal that was also the enterprise ¹². The clear majority now, however, have uniformly extended the rule to disallow vicarious liability where its imposition would result in holding the enterprise liable ¹³. Except in the Eleventh Circuit, therefore, vicarious liability does not provide a means around the distinctness rule ¹⁴.

Exceptions to the distinctness requirement - which are possibly better identified as distinctions - do exist. One such exception, or distinction, exists where the defendant is one of multiple entities comprising the enterprise. An offshoot of this exception, or distinction, may also exist where the enterprise operated primarily for criminal purposes and by criminal means.

[W]here the overlap between the RICO person and the alleged RICO enterprise is only partial, a § 1962(c) claim may be sustained. Jacobson v. Cooper, 882 F.2d 717, 720 (2d Cir.1989). As stated in Cullen v. Margiotta, 811 F.2d 698,730 (2d Cir.), cert. denied, 483 U.S. 1021, 107 S.Ct. 3266, 97 L.Ed.2d 764 (1987), a defendant may be a "RICO person and one of a number of members of the RICO 'enterprise.'" ¹⁵

Thus, distinctness problems may not exist where the enterprise consists of an association-in-fact¹⁶ made up of the vicariously liable defendant(s) and others ¹⁷. Other courts have disagreed with this principle where "the relationship among the members of the enterprise association is the relationship of parts to a whole" or "the organization associates with its member to form the enterprise 'association-in-fact'"; ¹⁸ however, as a general rule a principal that is part of an association-in-fact enterprise may be vicariously liable ¹⁹.

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

⁷ Many courts also refer to this requirement as the non-identity rule. See e.g. Cox v. Administrator U.S. Steel & Carnegie, 17 F.3d 1386,1404 (11th Cir.1994); Yellow Bus Lines, Inc. v. Drivers, Chauffers, & Helpers Local Union 639, 839 F.2d 782,790 (D.C.Cir.1988).

⁸ 18 U.S.C. § 1962(c)

⁹ The statute defines an enterprise as "any individual, partnership, corporation, association, or other alleged legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4).

¹⁰ The statute defines a person as "any individual or entity capable of holding a legal or beneficial interest in property." 18 U.S.C. § 1961(3).

¹¹ See Cox, 17 F.3d at 1398 (citing United States v. Hartley, 678 F.2d 961,986 (11th Cir.1982) held that a corporation can simultaneously be a defendant and satisfy the enterprise requirement).

¹² See e.g.Woods v. Piedmonte, 676 F.Supp. 143,147 E.D.Mich.1987)(denying defendant's dismissal motion, court relying on Bernstein v. IDT Corp., 582 F.Supp. 1079,1083 (N.D.Cal.1983) and Hunt v. Weatherbee, 626 F.Supp. 1097 (D.Mass.1986) held that defendant/employer -- which appears also to have been the enterprise -- could be liable for employees RICO violations if the employer benefitted from the employee's acts or had reason to question the employees' actions); Onesti v. Thomson McKinnon Securities, Inc., No.85-4375 (N.D.Ill.1/26/87); Bernstein, 582 F.Supp. at 1082-84 (employer/enterprise could be vicariously liable for employee's violations); B.F. Hirsch v. Enright Refining Co., Inc, 577 F.Supp. 339, 346-47 (D.N.J.1983)(held that person and enterprise are not mutually exclusive), rev'd in part B.F. Hirsch, 751 F.2d at 633-34 (held defendant and enterprise must be distinct).

¹³ See e.g.Crowe v. Henry, 43 F.3d 198,206 n.19 (5th Cir.1995)(cites Landry v. Air Line Pilots Ass'n Int'l, 901 F.2d 404,425 n.70 (5th Cir.1990), cert. denied, 498 U.S. 895, 111 S.Ct. 244, 112 L.Ed.2d 203 (1990) for proposition that an enterprise may not be vicariously liable under 1962(c) when this would violate the person-enterprise distinction); Gasoline Sales, Inc. v. Aero Oil Co., 39 F.3d 70,73 (3d Cir.1994)(affirmed Rule 12(b)(6) dismissal based on distinctness requirement holding that corporation/enterprise could not be vicariously liable for 1962(c) violations committed by its vice president; Brady, 974 F.2d at 1154 ("Respondeat superior and agency liability is inappropriate when the person is the RICO enterprise"); Miranda v. Ponce Federal Bank, 948 F.2d 41,45 (1st Cir.1991); Landry, 901 F.2d 404,425 n.70 (Fifth Circuit adopted rationale of Seventh Circuit in Haroco v. American Nat. B.&T. Co. of Chicago,747 F.2d 384,400 (7th Cir.1984), aff'd, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985) in rejecting application of vicarious liability to 1962(c) claim where doing so would violate the person-enterprise distinctness requirement); SK Hand Tool Corp., 852 F.2d at 941; Liquid Air Corp. v. Rogers, 834 F.2d 1297,1306 (7th Cir.1987), cert. denied, 492 U.S. 917, 109 S.Ct. 3241, 106 L.Ed.2d 588 (1989)(postulates that "Congress intended that "enterprises" not be held vicariously liable as defendants" under RICO); Petro-Tech, Inc., 824 F.2d at 1358-59 (application of vicarious liability is proper where the corporation is not also the enterprise); Schofield v. First Commodity Corp. of Boston, 793 F.2d 28,32- 33 (1st Cir.1986); B.F. Hirsch v. Enright Refining Co., Inc., 751 F.2d 628,633-34 (3d Cir.1984); Tatum v. Smith, 887 F.Supp. 918,925 (N.D.Miss.1995)(granting summary judgment for brokerage houses, court relying on Crowe, 43 F.3d at 206 n.19, held alleged enterprises/brokerage houses could not be vicariously liable); Arenson v. Whitehall Convalescent & Nursing Home, 880 F.Supp. 1202,1213 (N.D.Ill.1995)(ruling on motion to dismiss, court indicated that distinctness requirement foreclosed application of vicarious liability); Crowe v. Henry, 848 F.Supp. 1258,1262 (W.D.La.1994)(indicates that distinctness requirement forecloses holding enterprise vicariously liable); Hilliard v. Shell Western E &P, Inc., 836 F.Supp. 1365,1373 (W.D.Mich.1993)(ruling on summary judgment motion, court, in dicta and citing Davis v. Mutual Life Ins. Co. of New York, 6 F.3d 367 (6th Cir.1993), stated that enterprise cannot be vicariously liable as such would violate the distinctness requirement of 1962(c)); Standard Chlorine of Delaware, Inc. v. Sinibaldi, 821 F.Supp. 232,250 (D.Del.1992)(notes that distinctness requirement ensures that a corporate defendant also named as an enterprise will not be vicariously liable for its employees actions); Arioli v. Prudential-Bache Securities, Inc., 811 F.Supp. 303,310 (E.D.Mich.1993)(distinctness requirement foreclosed application of vicarious liability that would render corporation/enterprise liable); Benet-Soto v. Chase Manhattan Bank, N.A., 791 F.Supp. 914,922 (D.PuertoRico1992)(granting defendants Rule 9(b) motion, court, in discussing insufficiencies of complaint, which included the failure to identify the alleged enterprise, noted that an enterprise cannot be vicariously liable for the acts of its employees); Dynabest, Inc., 760 F.Supp. at 712 (granting, in part, defendants' motion to dismiss, court, citing Liquid Air Corp., 834 F.2d at 1306, held that "[T]he express language of subsection (c) has been read to proscribe vicarious liability." Although not clearly expressed, indication is that court relied on Liquid Air Corp., 834 F.2d 1297 and granted defendants' motion as to 1962(c) claims because of distinctness considerations); Collective Federal Sav. v. Creel, 746 F.Supp. 1307 (M.D.La.1990)(followed Landry and rejected Petro-Tech, Inc., 824 F.2d 1349 in granting defendant law firm's Rule 12(b)(6) and 12(c) motions holding law firm/enterprise vicariously liable would violate the distinctness requirement); In Re Conticommodity Services, Inc. Securities Lit., 733 F.Supp. 1555,1566 (N.D.Ill.1990)(denying defendants' summary judgment motion based on D&S Auto Parts, Inc., 838 F.2d at 966-68, and assertion that vicarious liability is inapplicable in civil RICO claims, court, citing D&S Auto Parts, Inc, 838 F.2d at 966-68 and Liquid Air Corp., 834 F.2d at 1306-07, indicated that the D&S Auto Parts' exclusion applies only when the defendant corporation is also the enterprise); Meyer v. First Nat. Bank & Trust Co. of Dickinson, 698 F.Supp. 798,808 (D.N.D.1987)(granting, in part, defendant's Rule 12(b)(6) motion, court relied on distinctness rule in holding that enterprise, bank, could not be vicariously liable for alleged fraud of employee); Rowland v. Mutual Life Ins. Co. of New York, 689 F.Supp. 793,799 (S.D.Ohio 1988)(denying defendants' summary judgment motions, court noted that distinctness requirement, as espoused in Petro-Tech, Inc., 824 F.2d 1349 would preclude application of vicarious liability if such would result in identity of enterprise and defendant); Salvador, 686 F.Supp. 528,530 (though denying application of vicarious liability under any circumstances, citing B.F. Hirsch, 751 F.2d at 633-34 court indicated that distinctness alone may be a basis for rejecting application of vicarious liability in this case where plaintiff sought to hold the bank/enterprise liable under application of vicarious liability); Dept. of Economic Dev. v. Arthur Andersen & Co., 683 F.Supp. 1463,1481 (S.D.N.Y.1988)(generally recognized distinctness requirement); Connors v. Lexington Ins. Co., 666 F.Supp. 434,453 (E.D.N.Y.1987)(held that application of vicarious liability is proper where the corporation is not also the enterprise); Continental Data Systems, Inc., 638 F.Supp. at 432; Schofield v. First Commodity Corp. of Boston, 638 F.Supp. 4,8-9 (D.Mass.1985); Northern Trust Bank/O'Hare, N.A. v. Inryco, Inc., Inc., 615 F.Supp. 828,835 (N.D.Ill.1985); Parnes v. Heinhold Commodities, Inc., 548 F.Supp.20,24 (N.D.Ill.1982).

¹⁴ See e.g. Dakis Pension Fund v. Chapman, 574 F.Supp. 757,759 (N.D.Cal.1983)(citing Parnes, 548 F.Supp.at 24 n.9, rejected argument that vicarious liability allowed holding principal/enterprise liable despite distinctness requirement).

¹⁵ National Elec. Benefit Fund v. Heary Bros., 931 F.Supp. 169,186-87 (W.D.N.Y.1995).

¹⁶ "'enterprise' includes 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(4)(emphasis added)(bold added). To establish an association-in-fact enterprise plaintiffs must show "evidence of an ongoing organization, formal or informal, and ... evidence that the various associates function as a continuing unit." See United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981). This unit must also be "separate and apart from the pattern of activity in which it engages." See Turkette, 452 U.S. at 583, 101 S.Ct. at 2529.

¹⁷ See Rowland, 689 F.Supp. at 799 (denying defendants' summary judgment motions, court noted that distinctness requirement, as espoused in Petro-Tech, Inc., 824 F.2d 1349, would preclude application of vicarious liability if such would result in identity of enterprise and defendant but that "no 'transformance' of the kind contemplated by Petro-Tech occurr[ed]" here, where the enterprise consisted of an association in fact made up of defendants and others); Dept. of Economic Dev., 683 F.Supp. at 1481 (denying, in part, dismissal motion based on distinctness argument, court, relying on Cullen, 811 F.2d at 723-30 and Connors, 666 F.Supp. at 448, held that defendant, which was "one of a number of entities comprising a single enterprise" may be vicariously liable).

¹⁸ See e.g. Yellow Bus Lines, Inc., 839 F.2d at 791.

¹⁹ See e.g. Cullen, 811 F.2d 729-30; Petro-Tech, Inc., 824 F.2d at 1361-62 (vicarious liability available where corporation defendant was member of association-in-fact enterprise); McCullough v. Suter, 757 F.2d 142,143-44 (7th Cir.1985)(sole proprietorship and employees could be enterprise with which proprietor could associate); Rowland, 689 F.Supp. at 799 (denying defendants' summary judgment motions, court noted that distinctness requirement, as espoused in Petro-Tech, Inc., 824 F.2d 1349, would preclude application of vicarious liability if such would result in identity of enterprise and defendant but that "no 'transformance' of the kind contemplated by Petro-Tech occurs" here, where the enterprise consisted of an association in fact made up of defendants and others); Dept of Economic Dev., 683 F.Supp. 1463; United States v. Sciences Corp., 511 F.Supp. 1125,1128-31 (E.D.Va.1981), rev'd in part on other grounds, 689 F.2d 1181 (4th Cir.1982).

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