The racketeer influenced and corrupt organizations (RICO) statute has seen a surge in prominence in recent years, valued by plaintiffs for its ability to allow for access to the federal court system, address patterns of illicit conduct, and award treble damages and attorney fees. Originally intended by Congress to dismantle organized crime, civil RICO’s appeal has broadened as the federal courts witnessed an increase in the use of civil RICO against business enterprises. In response to its increased use, courts have attempted to limit the reach of civil RICO. However, some recent cases, such as Yegiazaryan v. Smagin and Medical Marijuana v. Horn, show that the courts are grappling with the statute’s injury requirement and might expand the sense of hope for plaintiffs.

The Core Issue in ‘Medical Marijuana v. Horn’

In Medical Marijuana v. Horn, the U.S. Supreme Court faces the question of whether economic losses tied to personal injuries, such as lost wages, can constitute an injury to “business or property” actionable under RICO. The case revolves around a former truck driver who consumed a CBD product marketed by the CBD companies as free of THC but lost his job after a failed drug test. In 2015, a federal district court dismissed the driver’s RICO claim, holding that he lacked RICO standing because his loss of earnings was derivative of an antecedent personal injury. The U.S. Court of Appeals for the Second Circuit reversed the ruling and reinstated the RICO claim, and the petitioners CBD companies appealed to the Supreme Court.

At oral argument, advocates tried to delineate the boundaries of a RICO injury. The petitioners argued that the “harm” caused by the ingestion of the CBD product was a personal injury claim outside civil RICO. Conversely, the respondent argued that ingestion is not particularly critical in his case and that the right not to be harmed by the predicate acts, in this case, the alleged fraudulent inducements of the CBD companies, is protected by civil RICO.

This pending case will resolve a split among federal circuits on whether civil RICO allows plaintiffs to seek damages for economic losses tied to personal injuries. The Second and Ninth Circuits have permitted such claims, while several other circuits have ruled that the “business or property” requirement in RICO excludes harms linked to personal injuries. See, e.g., Jackson v. Sedgwick Claims Management Services, 731 F.3d 556 (6th Cir. 2013); Keller v. Strauss, 480 Fed. Appx. 552 (11th Cir. 2012); Evans v. City of Chicago, 434 F.3d 916 (7th Cir. 2006).

Horn’s case is not the first time the Supreme Court has dealt with questions regarding the scope of RICO injury. Past decisions have provided guidance on what qualifies as an injury to “business or property.” In Sedima, S.P.R.L. v. Imrex, 473 U.S. 479 (1985), a Belgian corporation sued its business partner, an American corporation, claiming that the partner engaged in mail and wire fraud, which effectively restricted its profits. Overturning the lower court’s ruling that the plaintiff did not have standing because it failed to present a “racketeering injury” distinct from the injury resulting from the predicate acts, the court explained that “the compensable injury necessarily is the harm caused by predicate acts sufficiently related to constitute a pattern, for the essence of the RICO violation is the commission of those acts in connection with the conduct of an enterprise.” The respondent in Horn relied on this case to argue that his economic injury due to lost employment is redressable under RICO. On the other hand, cases like Anza v. Ideal Steel Supply, 547 U.S. 451 (2006) reiterated that for a civil RICO plaintiff to have standing, the injury must have a direct causal connection to the defendant’s racketeering activities. The petitioners in Horn argue that Horn’s lost wages are too indirect, as they flow from and are derivative of his personal injury.

The proponents for a broad interpretation of an injury to “business or property” also find support in RICO statute’s legislative history. The civil RICO damages language in subsection 1964(c), which allows treble damages to “any person injured in his business or property by reason of a violation of section 1962,” is closely modeled after Section 4 of the Clayton Act, which provides for treble damages to “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws.” Moreover, the chief discussion in the legislative history of civil RICO damages includes a characterization of subsection 1964(c) as “another example of the antitrust remedy being adopted for use against organized criminality.” Under the Clayton Act, courts construe “business or property” broadly and inclusively. See Reiter v. Sonotone, 442 U.S. 330 (1979). Therefore, if the courts apply a Clayton Act measure of damages in civil RICO cases, an injury to “business or property” should be construed very broadly.

The Future of RICO

A critical piece of the puzzle comes from the recent Supreme Court decision in Yegiazaryan v. Smagin, 599 US 533 (2023). This case expanded the scope of civil RICO, holding that a context-specific inquiry should be used to determine whether harm qualifies as a domestic injury. In Yegiazaryan, the court found that because the majority of the alleged racketeering activities deployed by the defendant to obstruct the enforcement of a U.S. judgment happened in the U.S., there could be a RICO injury, even though the parties involved were foreign. By holding that foreign plaintiffs can pursue civil RICO claims, the court rejected the rigid “residency test” for domestic injury claims.

Many civil RICO claims are dismissed at the pleadings stage as the courts are hesitant to allow such claims to proceed. Only skilled and experienced attorneys can navigate the many requirements necessary to bring a successful civil RICO claim. Civil RICO claims are commonly dismissed either due to failure to plead fraud with particularity, or to the court finding that the claims are merely “garden-variety claims,” and thus do not support a finding of pattern of racketeering. This article discusses these two specific hurdles to civil RICO claims.

Failure to Plead With Particularity Under Rule 9(b)

Because typical civil RICO claims allege some type of fraud, one of the most common hurdles at the pleading stage is to plead the circumstances of the fraud with particularity under Federal Rules of Civil Rule 9(b). In general, while the plaintiff may generally plead the defendant’s state of mind or intent to deceive or defraud, appellate courts require a plaintiff to make particularized allegations regarding the facts of the fraud itself when pleading wire fraud or mail fraud as a predicate act. See Odom v. Microsoft, 486 F.3d 541 (9th Cir. 2007). Plaintiffs are required to identify specific examples of the fraud. For instance, in Burgess v. Religious Technology College, 600 Fed.Appx. 657 (11th Cir. 2015), the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of a civil RICO claim, finding that the plaintiffs failed to satisfy Rule 9(b) because they failed to identify the time period during which the defendants made the alleged fraudulent statements and the specific content of such statements.. The court noted that even under a relaxed standard with alleged prolonged multi-act schemes, a plaintiff must still allege at least some particular examples of fraudulent conduct to “lay a foundation for the rest of the allegations of fraud.” In addition, the plaintiffs must plead adequate factual allegations for courts to plausibly infer that the defendants specifically intended to defraud. For instance, in Eclectic Properties East v. Marcus Millichap, 751 F.3d 990 (9th Cir. 2014), the Ninth Circuit affirmed the dismissal of a civil RICO claim alleging the defendants’ intentional fraud in the inflation of property values on properties sold to the plaintiffs, finding that the plaintiffs’ fraud theory was not plausible when considered in light of the innocent, alternative explanation that the transactions were merely a group of business deals gone bad during a deep recession.

Failure to Plead a Pattern of Racketeering Activity

Courts also dismiss civil RICO claims of fraud when finding that the plaintiff only alleges a “garden-variety” fraud claim, not a pattern of racketeering activity. Some appellate courts have stated that when the RICO allegations concern only a single scheme with a discrete goal, the plaintiff fails to allege a pattern of racketeering even if the scheme took place over a longer period of time. For instance, in Home Orthopaedics v. Rodriguez, 781 F.3d 521 (1st Cir. 2015), the First Circuit dismissed a civil RICO claim, finding that despite the multiple instances of extortionate threats made over a period of years, the plaintiff failed to adequately allege a pattern of racketeering activity when the action evolved from a single business transaction that only harmed the plaintiff. In not finding a pattern of racketeering activity, the court stated that even if the defendants committed numerous crimes to try to collect a specific sum of money from the plaintiff, all of the unlawful acts had their origin in a single event or a single transaction. The court also found that the plaintiff failed to show that the defendants’ scheme to collect money would continue indefinitely, or that the defendants’ alleged racketeering acts were part of their regular business.

The Takeaways

Civil RICO claims often become the sole avenue for bringing large-scale fraud cases involving numerous victims to federal court. Trying to convert a “regular” fraud case into a RICO case is a mistake, however. Although RICO cases involve fraud, they also require other elements, including a pattern of fraud (not just one-time fraud) and the enterprise (not just one defendant). Practitioners need to understand each of the elements thoroughly. While it appears, there is an upward trend of expanding the scope and applicability of civil RICO cases, practitioners should be careful in making sure that their case meets the elements of a RICO before bringing one.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.