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

In Yellow Bus Lines, Inc., 839 F.2d at 790, the D.C. Circuit, indicated that an exception to the distinctness requirement may exist where the defendant/enterprise operated solely for illegal purposes. Discussing how the Eleventh Circuit in Hartley, 678 F.2d 961 addressed such a situation, the D.C. Circuit stated "because plaintiff could have named [the] culpable corporate directors as [a] defendant 'association-in-fact' distinct from [the] corporate enterprise, [the] court pierced the corporate veil' to allow [the] corporation to be named as both defendant and enterprise" ²⁰ .In effect then, and in order to overcome distinctness problems and to preserve the Government's 1962(c) conviction, the Eleventh Circuit in Hartley, 678 F.2d 961, creatively, permitted modification of the Government's charge to conform with the distinctness requirement.

The exception carved out by Hartley, 678 F.2d 961 may be of limited value, primarily because it comes from the Eleventh Circuit, which is the only Circuit to have not fully recognized the distinctness requirement. Also, as Yellow Bus Lines, Inc., 839 F.2d 782 pointed out, in such situations where the principal was created and operated solely for illegal purposes, liability will likely attach under 1962(a) ²¹, which does not incorporate the distinctness requirement ²². Therefore, in these situations it may not be necessary to plead or rely on a 1962(c) claim.

3.2 The Elements of a 1962(c) Vicarious Liability Claim: Making out a Prima Facie Case; Benefit; Knowledge and Participation

Once past the distinctness issue, vicarious liability does not attach as a matter of course. Various other requirements exist. In addition to general agency considerations, the analysis also involves consideration of the principal's benefit from, knowledge of and participation in its agent's 1962(c) racketeering.

3.2(a) Making out a Prima Facie Case: Agency Considerations

Generally, agency considerations require showing that the activity in question was: "(1) related to and committed within the course of employment; (2) committed in furtherance [of the business] of the corporation ²³; and (3) authorized or subsequently acquiesced in by the corporation." This is the same analysis involved in non-RICO cases ²⁴. Although not all courts discussing 1962(c) vicarious liability claims go through this analysis, this analysis ²⁵, or some form of it, should be the starting point with every 1962(c) vicarious liability claim.

Because application of general agency considerations, alone, could result in imposing liability on legitimate businesses, the courts crafted additional requirements to prevent holding these businesses vicariously liable for their agents' 1962(c) activity ²⁶. To avoid that result, courts also look for the principal's benefit from ²⁷, participation in and/or knowledge of ²⁸ the activity. One or all of these elements or indicia of culpability may apply.

Presumably, the benefit should be substantial and direct ²⁹. Yet some courts have indicated that only "some" benefit is necessary ³⁰. And at least one court has indicated that certain circumstances may support imposing vicarious liability when the principal did not derive a benefit ³¹. Presumably, this view is limited to circumstances where there is other evidence that the principal was not a "legitimate business" deserving protection, such as where it participated in or knew of the racketeering activity.

The victim-entity rule is a corollary of the benefit requirement and also a result of the courts' interest in protecting legitimate businesses from RICO liability ³². Most courts have indicated that vicarious liability does not extend to principals that were victims of the racketeering activity for which a plaintiff seeks to hold them vicariously liable ³³.

Questions of knowledge, at least actual knowledge, should present a presumably hard-and-fast, simple question of whether the principal "knew." But, what should the principal have known?

Section 1962(c) liability attaches only when the agent conducted the affairs of an enterprise through a pattern of racketeering activity. Should the principal's knowledge be of or amount to knowledge of two or more related predicate acts that amount to or pose a threat of continued criminal activity, as the Supreme Court in H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1988) indicated is necessary to prove the requisite pattern? Probably not.

Liberal construction and focus on RICO's remedial purpose, as the Supreme Court in Turkette, 452 U.S. at 586-87, 101 S.Ct. at 2530-31 held necessary, tends to indicate that the principal's knowledge need neither be of nor amount to knowledge of a pattern of racketeering activity. Further, the existence of such knowledge on the part of the principal could, arguably, support imposition of direct liability making the question of vicarious liability irrelevant. Further, one line of decisions indicates that constructive knowledge may be sufficient to hold the principal vicariously liable ³⁴, which therefore indicates that the knowledge need not be of the pattern itself. These factors, therefore, indicate that only some knowledge is necessary. The level and/or nature of the knowledge sufficient to warrant extending vicarious liability should be that which indicates that the principal is not a legitimate business of the type RICO is designed to protect. This is necessarily a fact-sensitive, case-specific question.

3.2(d) Participation

Where the courts have looked for participation, upper-level direction and involvement appears to be necessary ³⁵. This is consistent with the courts' focus on protecting legitimate businesses and on subjecting to vicarious liability only those businesses that do not deserve protection, those that are part of the fraud. Here again, although, and as is the case with knowledge considerations, the courts have not addressed whether the participation must be in the pattern of racketeering activity, itself; although, presumably, this level of participation is unnecessary. Otherwise, direct liability would exist, making the question of vicarious liability irrelevant, and constructive knowledge would not be a legitimate basis for imposing vicarious liability as constructive knowledge indicates the belief that complete participation is not necessary. Again, the participation should be that which indicates that the principal is not a legitimate business of the type RICO is designed to protect. And again, this is necessarily a fact-sensitive, case-specific question.

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

²⁰ Yellow Bus Lines, Inc., 839 F.2d at 790 (citing Hartley, 678 F.2d at 989).

²¹ Section 1962(a) provides:

(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18, United States Code, to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. A purchase of securities on the open market for purposes of investment, and without the intention of controlling or participating in the control of the issuer, or of assisting another to do so, shall not be unlawful under this subsection if the securities of the issuer held by the purchaser, the members of his immediate family, and his or their accomplices in any pattern or racketeering activity or the collection of an unlawful debt after such purchase do not amount in the aggregate to one percent of the outstanding securities of any one class, and do not confer, either in law or in fact, the power to elect one or more directors of the issuer.

18 U.S.C. § 1962(a).

²² See Yellow Bus Lines, Inc., 839 F.2d at 790.

²³ See Cox, 17 F.3d at 1406-07 (quoting Quick v. Peoples Bank of Cullman County, 993 F.2d 793,797 (11th Cir.1993) quoting Liquid Air Corp., 834 F.2d at 1306)(brackets in original).

²⁴ Cf. Liquid Air Corp., 834 F.2d at 1306 (on which Cox, 17 F.3d 1386 and Quick, 993 F.2d 793 rely, adopts rule expressed in 10 W. FLETCHER, Cyclopedia of the Law of Private Corporations, § 4942 at 620-21 as its basis for making out a prima facie case); Petro-Tech, Inc., 824 F.2d at 1358 (references Prosser & Keeton on Torts, § 69 at 500 and Restatement (Second) of Agency § 219, comment a on subsection (1) in explaining why a principal may be vicariously liable for its agent's 1962(c) activity).

²⁵ See e.g. Davis, 6 F.3d at 380 (indicates that agent's conduct could be attributed to principal, but does not discuss the analysis employed in reaching this conclusion); Brady, 974 F.2d 1149.

²⁶ See Liquid Air Corp., 834 F.2d at 1306 (citing Haroco, 747 F.2d at 400).

²⁷ See Davis, 6 F.3d 367; Quick, 993 F.2d at 795-96; Brady, 974 F.2d at 1154; Ashland Oil, Inc. v. Arnett, 875 F.2d 1271,1281 (7th Cir.1989); D&S Auto Parts, Inc., 838 F.2d at 967; Liquid Air Corp., 834 F.2d at 1306 ("To the extent that agency rules would require holding a legitimate, infiltrated business vicariously liable, the rules are at odds with the clear congressional intent to protect such legitimate businesses. See Haroco, 747 F.2d at 400. To accommodate these concerns, we have noted that the doctrine may apply only when 1) the corporation has derived some benefit from the RICO violation and 2) imposing vicarious liability is not inconsistent with intent of Congress."); Petro-Tech, Inc., 824 F.2d at 1361-62; National Elec. Benefit Fund, 931 F.Supp. at 187; Crowe, 848 F.Supp. at 1263; Arenson, 880 F.Supp. at 1213; Laro, Inc. v. Chase Manhattan Bank, 866 F.Supp. 132,139-140 (S.D.N.Y.1994); Stiller v. Sumter Bank and Trust Co., 860 F.Supp. 835,840-41 (M.D.Ga.1994); Center Cadillac v. Bank Leumi Trust Co., 808 F.Supp. 213,236 (S.D.N.Y.1992); Metro Furniture Rental, Inc. v. Alessi, 770 F.Supp. 198,201-02 (S.D.N.Y.1991); Kahn v. Chase Manhattan Bank, N.A., 760 F.Supp. 369 (S.D.N.Y.1991); Amendolare v. Schenkers Int'l Forwarders, Inc., 747 F.Supp. 162,168-69 (E.D.N.Y.1990); Gruber v. Prudential Bache Securities, Inc., 679 F.Supp. 165,181 (D.Conn.1987); Woods, 676 F.Supp. at 147; Connors, 666 F.Supp. at 453; Banque Worms v. Luis A. Duque Pena E Hijos Ltda., 652 F.Supp. 770,772 (S.D.N.Y.1986); Hunt, 626 F.Supp. 1097; Bernstein, 582 F.Supp. at 1083.

²⁸ See e.g. Busby v. Crown Supply, Inc., 896 F.2d 833,839 n.5 (4th Cir.1990); SK Hand Tool Corp., 852 F.2d at 941; Petro-Tech, Inc., 824 F.2d 1349; B.F. Hirsch, 751 F.2d at 633-34; Bennett v. Berg, 710 F.2d 1361,1364 (8th Cir.), cert. denied, 464 U.S. 1008, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983); Schofield, 793 F.2d at 32-33; Laro, Inc., 866 F.Supp. at 139-140; Standard Chlorine of Delaware, Inc., 821 F.Supp. at 250; Mylan Laboratories, Inc. v. Akzo, N.V., 770 F.Supp. 1053,1070 (D.Md.1991); Metro Furniture Rental, Inc., 770 F.Supp. at 201-02; Kahn, 760 F.Supp. at 373; R.E. Davis Chemical Corp. v. Nalco Chemical Co., 757 F.Supp. 1499 (N.D.Ill.1990); Philan Ins. Ltd. v. Frank B. Hall & Co., Inc., 748 F.Supp. 190,198 (S.D.N.Y.1990); FMC Corp. v. Boesky, 727 F.Supp. 1182,1199 (N.D.Ill.1989); Greyhound Financial Corp. v. Willyard, No.87-C-0811B, 1989 WL 201094 (D.Utah 1989); Harrison v. Dean Witter Reynolds, Inc., 695 F.Supp. 959,962 (N.D.Ill.1988); Gruber, 679 F.Supp. at 181; Connors, 666 F.Supp. 434; Banque Worms, 652 F.Supp. at 772-73; Continental Data Systems, Inc., 638 F.Supp. at 440; Rush v. Oppenhemier & Co., 628 F.Supp. 1188,1195 (S.D.N.Y.1985), rev'd on other grounds, 779 F.2d 885 (2d Cir.1985); Intre Sport Ltd. v. Kidder, Peabody & Co., 625 F.Supp. 1303,1309-10 (S.D.N.Y.1985), aff'd as modified, 795 F.2d 1004 (2d Cir.1986), cert. granted, vacated and remanded on unrelated grounds, 482 U.S. 922, 107 S.Ct. 3203, 96 L.Ed.2d 690 (1987); Parnes , 548 F.Supp. at 23-24; Curley v. Cumberland Farms, Inc., 134 F.R.D. 77,81 (D.N.J.1991); K&S Partnership v. Continental Bank, 127 F.R.D. 664,669 (D.Neb.1989).

²⁹ Cf. Gruber, 679 F.Supp. at 181.

³⁰ See Cox, 17 F.3d at 1408 (citing Quick, 993 F.2d at 797); Liquid Air Corp., 834 F.2d at 1306.

³¹ See Bloch v. Prudential-Bache Securities, 707 F.Supp. 189,193 (W.D.Pa.1989)(denying defendant's dismissal motion as it concerned application of vicarious liability, the court, citing Petro-Tech, Inc., 824 F.2d at 1359 n.11, indicated "there could be circumstances in which the common law of Respondeat superior would hold an employer liable even when the employer did not benefit from the employee's conduct.").

³² See Liquid Air Corp., 834 F.2d at 1306 (citing Parnes, 548 F.Supp. at 23-24 and Haroco, 747 F.2d at 400).

³³ See SK Hand Tool Corp., 852 F.2d at 941 (citing Haroco, 747 F.2d 384 court refused to hold victimized corporation vicariously liable); D&S Auto Parts, 838 F.2d at 967 (no vicarious liability because enterprise was a victim of wrongdoing and not a beneficiary); Liquid Air Corp., 834 F.2d at 1306 ("Vicarious liability, however, has only limited application to civil RICO to avoid holding vicariously liable a corporation that was the victim of a RICO violation. See Parnes v. Heinold Commodities, Inc., 548 F.Supp. 20,23-24 (N.D.Ill.1982). To the extent that agency rules would require holding a legitimate, infiltrated business vicariously liable, the rules are at odds with the clear congressional intent to protect such legitimate businesses. See Haroco, 747 F.2d at 400."); Luthi, 815 F.2d at 1230 (relying on Schofield, 793 F.2d 28, which focuses on distinctness issues, for the proposition that vicarious liability has no place in 1962(c) claims, court held that this rule is particularly applicable where the principal was a victim of the perpetrator's activities); Haroco, 747 F.2d at 401 (entity that is a victim of racketeering activity should not be liable); Dept. of Economic Dev., 683 F.Supp. at 1481 n.19 (citing Liquid Air Corp., 834 F.2d at 1306 and Schofield, 793 F.2d at 32 court held that a principal may not be vicariously liable if it too was a victim of the scheme); Dakis Pension Fund, 574 F.Supp. at 759-60 (no vicarious liability for churning by low-level employee that actually injured brokerage firm).

³⁴ See Woods, 676 F.Supp. at 147 (denying dismissal motion, court, relying on Bernstein, 582 F.Supp. at 1083 and Hunt, 626 F.Supp. 1097, held that defendant -- which, interestingly, 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).

³⁵ See e.g. Busby, 896 F.2d at 839 n.5 (quoting D&S Auto Parts, Inc., 838 F.2d at 967, states "[t]he formulation of the statute is designed to impose liability upon a corporation which is a perpetrator of illegal activity but not upon an unwitting conduit of its employees' RICO violations."); Laro, Inc., 866 F.Supp. at 139-140 (citing Kahn, 760 F.Supp. at 373, Gruber, 679 F.Supp. 165, Banque Worms, 652 F.Supp. at 772, Connors, 666 F.Supp. 434 and Petro-Tech Inc., 824 F.2d 1349 in granting summary judgment motion, court refused to apply vicarious liability on bank for alleged conduct of loan officers in part because defendant bank was not a central figure in the alleged fraud where defendant/bank "was neither "central figure" in nor a beneficiary of the alleged fraud"); Mylan Laboratories, Inc., 770 F.Supp. at 1070 (rejected dismissal motion where plaintiff alleged that defendant corporations were involved in their employee's alleged scheme); Metro Furniture Rental, Inc., 770 F.Supp. at 201-02 (granting 12(b)(6) motion court, citing Kahn, 760 F.Supp. at 369, held that evidence of bank's knowledge of or involvement in scheme, of corporate policy consistent with the misconduct or evidence of benefit to the corporation was necessary to support application of vicarious liability); R.E. Davis Chemical Corp., 757 F.Supp. 1499 (granting 12(b)(6) motion, court noted failure to allege knowledge or involvement of upper-level management of corporation in alleged scheme sufficient to support a finding of vicarious liability under section 1962(a), which it interpreted D&S Auto Parts, Inc., 838 F.2d 964, Liquid Air Corp., 834 F.2d 1297 and SK Hand Tool Corp., 852 F.2d 936 to require); Philan Ins. Ltd., 748 F.Supp. at 198 (granting 12(b)(6) motion, court stated "[c]orporate defendants cannot be held vicariously liable under RICO for the individual wrongdoing of their employees on a theory of Respondeat superior where plaintiff has not alleged any facts which portray the company as an active perpetrator of the fraud or a central figure in the criminal scheme. See Banque Worms v. Luis A. Duque Pena E. Hijos, Ltda., 652 F.Supp. 770,773 (S.D.N.Y.1986)("[I]t would be a distortion of both the language and intent of the statute to hold the corporation vicariously responsible under RICO for an elaborate fraud merely because one of its employees may have contributed to the scheme."); FMC Corp., 727 F.Supp. at 1199 (failure to plead direct participation by defendant investment firm precluded firm's liability for employee's actions); Gruber, 679 F.Supp. at 181 ("What constitutes a "central figure" will vary with the factual circumstances of each case. In order to establish corporate liability under Section 1962(c), however, it is necessary to show that an officer or director had knowledge of, or was recklessly indifferent toward, the unlawful activity .... [t]he court may then consider other factors, among them the number of high-level employees involved in the racketeering activity, their degree of participation in the racketeering activity, whether these high-level employees themselves committed the alleged predicate acts, and whether the corporation directly and substantially benefitted from the racketeering activity."); Intre Sport Ltd., 625 F.Supp. at 1310 (refused to impose liability on corporation for conduct of one of many vice presidents who did not operate at a policy-making level); Parnes, 548 F.Supp. at 23-24 (low-level employee and unwitting management insufficient to impose vicarious liability); Curley, 134 F.R.D. at 81 (discussing issuance of protective order to prevent plaintiff from interviewing, ex parte, defendant's former loss prevention specialists who allegedly perpetrated the alleged fraud on defendant's behalf, court, relying on Petro-Tech, Inc., 824 F.2d at 1359 and Schofield, 793 F.2d at 32-33, stated it could not impute predicate acts of low level employees to corporation absent evidence that the corporation "directed" the extortionate activity); K&S Partnership, 127 F.R.D. at 669 (proof of corporate policy to violate RICO necessary to impose liability).

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