Tobacco Firm Asks High Court to Reconsider Review of Extraterritorial Reach of RICO

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

British American Tobacco (Investments) Limited (BATCo) has petitioned the U.S. Supreme Court for rehearing of its June 28 denial of certiorari in British American Tobacco (Investments) Limited v. U.S. (Docket No. 09-980). BATCo asked the Court to consider the extraterritorial reach of RICO in light of its June 24 decision in Morrison v. National Australia Bank Ltd. (Docket No. 08-1191).

In Morrison, the Court held that the “conduct” and “effects” tests for determining the extraterritorial reach of a statute could not be used to provide a cause of action for foreign plaintiffs suing under sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (and under SEC Rule 10b-5) for alleged misconduct in connection with securities traded on foreign exchanges.

Presumption Against Extraterritoriality

In U.S. v. Philip Morris USA Inc., CCH RICO Business Disputes Guide ¶11,688, the D.C. Circuit affirmed a finding that six tobacco companies were liable for conducting the affairs of a RICO enterprise, through a pattern of mail and wire fraud, in a scheme to deceive consumers about the adverse health effects of cigarette smoking.

According to BATCo, the D.C. Circuit created a “flawed exception” to the traditional presumption against extraterritoriality when it held that BATCO’s foreign activities were subject to RICO claims because the alleged misconduct had “substantial, direct, and foreseeable effects in the United States.”

BATCo asked the Supreme Court to decide whether the federal appellate court had: correctly held that the traditional presumption against extraterritoriality was irrelevant to the question of whether a statute was intended to reach a foreign corporation’s “wholly foreign conduct” when that conduct has allegedly had a direct and substantial domestic effect.

It also asked the Court to determine whether the appellate court had improperly:

(1) Ignored the presumption against extraterritoriality and affirmative evidence that Congress never intended RICO to apply extraterritorially;

(2) Borrowed the “ill-suited” effects test from federal securities and antitrust cases to determine the territorial reach of RICO;

(3) Approved a “watered-down” version of the effects test; and

(4) Relied on the domestic effects of the U.S. conduct of other co-defendants and of the overall alleged RICO scheme.

Text of the petition for rehearing in British American Tobacco (Investments) Limited v. United States (Docket No. 09-980) appears here.

Further information regarding BATCo’s original petition for Supreme Court review appears in a March 1, 2010 posting on Trade Regulation Talk.

High Court Delineates Structure of RICO Association-in-Fact Enterprise

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

An association-in-fact enterprise in a federal RICO claim must have an ascertainable structure beyond that inherent in a pattern of racketeering activity, the U.S. Supreme Court ruled in a 7-2 decision on June 8.

In a criminal RICO case against a loosely-organized group of individuals who had participated in numerous bank thefts over an eight-year period, the Court concluded that a trial court did not err by instructing a jury that an enterprise existed when a group of individuals, without structural hierarchy, associated solely for the purpose of carrying out a pattern of racketeering acts.

Structure

An association-in-fact enterprise must have at least three structural features: (1) purpose; (2) relationships among those associated with the enterprise; and (3) longevity that was sufficient to permit its members to pursue the enterprise’s purpose.

The term “structure,” however, did not need to appear in the jury instructions, the Court held. As long as the substance of the relevant point was adequately expressed, the language of a jury instruction was subject to the “considerable discretion” of the trial judge.

Informing the jury that it had to find an “ascertainable” structure would be “redundant and potentially misleading,” at least in a criminal context, where the jury had to determine beyond a reasonable doubt that the elements of the crime were present.

Finally, qualifying the meaning of “ascertainable structure” with the phrase “beyond that inherent in the alleged pattern of racketeering activity” was appropriate, as long as the qualifying phrase was interpreted to mean that the existence of the enterprise was a separate element that must be proved.

Enterprise Element

As the Court explained in United States v. Turkette (RICO Business Disputes Guide ¶6100), the existence of an enterprise was an element of RICO that was distinct from the pattern of racketeering element; proof of one did not necessarily establish the other.

Nevertheless, the Court cautioned that it would be a mistake to interpret the qualifying phrase to mean that the existence of an enterprise could never be inferred from evidence showing that persons associated with the enterprise had engaged in a pattern of racketeering activity. In Turkette, for example, the Court recognized that the evidence used to prove a pattern of racketeering and the evidence used to prove an enterprise “may in particular cases coalesce.”

Attributes

The petitioner—an individual who had participated in the bank thefts—unsuccessfully argued that an association-in-fact enterprise must have some additional structural attributes, such as a structural hierarchy, role differentiation, a unique modus operandi, a chain of command, professionalism and sophistication of organization, diversity and complexity of crimes, membership dues, rules and regulations, uncharged or additional crimes aside from predicate acts, an internal discipline mechanism, regular meetings regarding enterprise affairs, an enterprise name, and induction or initiation ceremonies or rituals.

These attributes, however, could not be fairly inferred from the language of RICO, according to the Court.

Nothing in the RICO statute supported the structural requirements asserted by the petitioner, the Court determined, and nothing exempted the enterprise whose associates had engaged in spurts of activity punctuated by periods of inactivity.

Jury Instructions

The jury instructions in this case were “correct and adequate,” in the Court’s view. The instructions explicitly informed the jurors that they could not convict the individual defendants under RICO unless they found that the government had proven the existence of an enterprise. The instructions also made it clear that the enterprise was a separate element from the pattern of racketeering activity.

The instructions adequately stated that the enterprise had to have the structural attributes that could be inferred from the statutory language. More specifically, the trial judge told the jury that the government was required to prove that there was an ongoing organization with some sort of framework—formal or informal—for carrying out its objectives, and that the various members and associates of the association had functioned as a continuing unit to achieve a common purpose.

Telling the jury that the existence of an association-in-fact enterprise was often more readily proven by determining what the enterprise does, rather than by performing abstract analysis of its structure, was appropriate. The instruction properly conveyed the point made in Turkette—that proof of a pattern of racketeering activity may be sufficient in a particular case to permit a jury to infer the existence of an association-in-fact enterprise.

Dissent

Dissenters Justice Stevens and Justice Breyer would have limited the term “enterprise” to “business-like entities” because nothing in the text or legislative history of the RICO statute indicated that Congress had intended to reach an “ad hoc association of thieves” whose purpose and activities were limited to sporadic acts of theft.

According to the dissenting justices, the RICO statute and the Court’s earlier decisions indicated that Congress had used the term “enterprise” in the sense of a business organization. Although the dissenters agreed with the majority that the word “structure” was not “talismanic,” they nevertheless would have stipulated that jury instructions must convey the requirement that the alleged enterprise had an existence apart from the alleged pattern of predicate acts.

The majority permitted juries to infer the existence of an enterprise “in every case involving a pattern of racketeering activity undertaken by two or more associates.” By allowing the government to prove both elements with the same evidence, the majority rendered the enterprise requirement “essentially meaningless” in associated-in-fact cases, the dissent maintained.

In the dissenters' view, proof of the separate existence of an association-in-fact enterprise would “generally require evidence of rules, routines, or processes through which the entity maintains its continuing operations and seeks to conceal its illegal acts.”

The decision, authored by Justice Alito, is Boyle v. United States, Docket No. 07-1309, issued June 8, 2009. The opinion will appear in CCH RICO Business Disputes Guide.

Illinois Prosecutors Seek State RICO Law

This posting was written by John W. Arden.

In order to help them fight political corruption, white collar crime, and gang activity, the Cook County, Illinois chief prosecutor and the head of her special prosecution bureau are urging the Illinois legislature to pass a state racketeering law, according to an article posted on the Chicago Tribune website on April 7.

A new state RICO law would give law enforcement officials “a little more bite” in handling political corruption and some of the more violent gang and drug conspiracy cases, said Cook County States Attorney Anita Alvarez.

The current state racketeering law—called the Narcotics Profit Forfeiture Act (725 ILCS 175/1 to 175/11)—covers only narcotics cases.

Alvarez proposes that the state enact a statute based on the federal Racketeer Influenced and Corrupt Organizations Act (RICO), as 29 other states, Puerto Rico, and the Virgin Islands have done.

A state RICO law could help the state investigate political corruption cases, such as the case against former Governor Rod Blagojevich, according to Assistant State's Atty. John Robert Blakey, chief of the office's Special Prosecutions Bureau and the son of G. Robert Blakey, the Notre Dame law professor credited with drafting the federal RICO statute.

The prosecutors said that they hope the Illinois General Assembly would consider RICO legislation this term. Such a bill has not attracted a sponsor as of yet.

Further information about state RICO laws—including full text of the statutes—appears in the CCH RICO Business Disputes Guide.

eBay Insufficiently Pled RICO Pattern, Enterprise Against Advertising Affiliates

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Online auction company eBay Inc. failed to sufficiently plead an enterprise and a pattern of racketeering against advertising affiliates that allegedly engaged in a “cookie stuffing scheme” to collect unearned advertising fees from the auctioneer, the federal district court in San Jose, California has ruled.

eBay claimed that Digital Point Solutions, Inc. and other advertising affiliates had engaged in mail and wire fraud by surreptitiously placing, on the computers of third-party users, software that would cause the users’ web browsers to visit eBay’s website, where “cookies” would be placed on their computers.

The “cookies” identified the defending affiliates as the referring advertisers, eBay explained, and therefore permitted the affiliates to collect commissions on auction transactions that were subsequently made by the affected users, even though the users had not clicked on an affiliate’s ad.

Enterprise

According to eBay, Digital Point Solutions was the RICO enterprise through which the other defendants had associated for the common purpose of defrauding eBay of commission fees. eBay failed, however, to state clearly whether one defendant had associated with Digital Point Solutions at all relevant times or had done so during the certain periods only.

Although eBay surmised that this defendant may have functioned as a separate association-in-fact enterprise for certain time periods, the assertion was not articulated in sufficient detail, as required by the heightened pleading standards for fraud in the Federal Rules of Civil Procedure, the court held.

Pattern of Racketeering

eBay failed to sufficiently plead a pattern of racketeering activity, according to the court. Because the auctioneer failed to identify specific incidents of suspected “cookie-stuffing” activity, its claim was dismissed for failure to plead fraud with particularity, as required by the Federal Rules of Civil Procedure.

The February 24 decision is eBay Inc. v. Digital Point Solutions, Inc., CCH RICO Business Disputes Guide ¶11,627.