Amicus Curiae Brief — Sedima, S. P. R. L. v. Imrex Co.

+) No. 84-648

IN THE

Supreme Court of the United States

OcTOBER TERM, 1984

SEDIMA, S.P.R.L.,

Petitioner,

V.

IMREX COMPANY, INC., GIDON ARMON

AND JACOB ARMON,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

MOTION FOR LEAVE TO FILE A BRIEF AND BRIEF OF

THE ALLIANCE OF AMERICAN INSURERS,

THE AMERICAN COUNCIL OF LIFE INSURANCE,

THE AMERICAN INSURANCE ASSOCIATION,

THE NATIONAL ASSOCIATION OF INDEPENDENT

INSURERS, AND STATE FARM INSURANCE

COMPANIES AS AMICI CURIAE IN SUPPORT

OF RESPONDENTS

JAMES F. FITZPATRICK

Counsel of Record

JOHN M. QUINN

Louis M. BOGRAD

ARNOLD & PORTER

1200 New Hampshire Ave. N.W.,

Washington, D.C. 20036

(202) 872-6700

Attorneys for Amici Curiae

March 29, 1985

\>

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

No. 84-648

SEDIMA, S.P.R.L.,

Petitioner,

Vv.

IMREX COMPANY, INC., GIDON ARMON

AND JACOB ARMON,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

MOTION OF THE ALLIANCE OF AMERICAN

INSURERS, THE AMERICAN COUNCIL OF LIFE

INSURANCE, THE AMERICAN INSURANCE

ASSOCIATION, THE NATIONAL ASSOCIATION OF

INDEPENDENT INSURERS, AND STATE FARM

INSURANCE COMPANIES FOR LEAVE TO FILE A

BRIEF AS AMICI CURIAE IN SUPPORT

OF RESPONDENTS

To the Honorable, the Chief Justice of the United States

and the Associate Justices of the Supreme Court of the United

States: the Alliance of American Insurers, the American Council

of Life Insurance, the American Insurance Association, the

National Association of Independent Insurers, and State Farm

Insurance Companies respectfully move, pursuant to Rule 36 of

the Rules of this Court, for leave to file the attached brief as

amici curiae. Although counsel for respondents has consented

to the filing of this brief, counsel for petitioner has declined to

consent.

2

INTEREST OF THE AMICI CURIAE

The National Association of Independent Insurers

(“NAII”) is the nation’s largest property and casualty insur-

ance trade association with more than 500 member companies.

NAII members write nearly 40% of the property and casualty

insurance in force in the United States.

The American Insurance Association (“AIA”) is a na-

tional trade association of 174 property and casualty insurance

companies. Its member companies account for approximately

25% of the property and casualty insurance written in the

United States.

The Alliance of American Insurers (the “Alliance”’) is also

a national property and casualty trade association. Its 175

member companies write approximately 12% of the nation’s

property and casualty insurance.

The American Council of Life Insurance (““ACLI’’) is the

largest national trade association of the life insurance industry

in the United States. Its 615 member companies account for

approximately 95% of the life insurance in force in the United

States.

The State Farm Insurance Companies (“State Farm’) are

a group of insurance companies composed of State Farm

Mutual Automobile Insurance Company and its wholly-owned

subsidiaries and affiliates. The State Farm Insurance Com-

panies together constitute the nation’s largest property and

casualty insurer, accounting for approximately 10% of the

property and casualty insurance in force in the United States.

The insurance company members of the Alliance, ACLI,

AIA, and NAII, as well as State Farm, have been the victims of

insurance fraud schemes perpetrated by organized criminal

groups. Such schemes are among the types of activity that the

Racketeer Influenced and Corrupt Organizations Act

(“RICO”), 18 U.S.C. §§ 1961-68 (1982), was designed to

deter and State Farm and members of the Alliance, ACLI, AIA,

and NAII have on occasion sought to recover treble damages

for their injuries from these schemes under the civil provisions

of RICO.

3

At the same time, however, these insurance companies

have found themselves named as defendants in private civil

RICO suits involving nothing more than garden-variety com-

mercial disputes over the construction of a statute or contract.

They have been labeled as “racketeers” for activities bearing no

resemblance to the sorts of organized criminal activity that

RICO was designed to prevent. These suits have significantly

threatened the all-important business reputations of amici’s

members and have been costly to defend.

Like the RICO cases brought against insurers, the present

case and the other civil RICO case before the Court this term,

American National Bank and Trust Company of Chicago v.

Haroco, Inc., involve attempts by private plaintiffs to apply

RICO to alleged business frauds bearing none of the indicia of

organized criminal activity. A decision by this Court broadly

interpreting the scope of private civil RICO would expose

insurance companies and other legitimate businesses to many

more such suits. On the other hand, an overly narrow

interpretation of the statute might bar insurers from recovering

when they are victimized by the type of organized criminal

behavior Congress enacted RICO to prevent.

Wherefore, it is respectfully requested that the Court grant

leave to ACLI, AIA, NAii, the Alliance, and State Farm to file

the attached brief as Amici Curiae.

Respectfully submitted,

JAMES F. FITZPATRICK

Counsel of Record

JOHN M. QUINN

Louis M. BOGRAD

ARNOLD & PORTER

1200 New Hampshire Ave., N.W.

Washington, D.C. 20036

(202) 872-6700

Attorneys for Amici Curiae

March 29, 1985

i

QUESTION PRESENTED FOR REVIEW

Whether a plaintiff must plead and prove racketeering

enterprise injury in order to establish a claim for treble

damages under Section 1964(c) of the Racketeer Influenced

and Corrupt Organizations Act.

ss

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .............::eeseceeeseeeressensenreeeeees ill

STATEMENT OF INTEREST ............22eeseecseeeeeeeeseeeeeenees l

SUMMARY OF ARGUMENT. ..........:cceeseeereeeeeneensersenenes 5

ARGUMEN T. ....-...cccccocccoccsccsssscssccccccsonsccssssescsosssccooccossoees 6

* RICO WAS ENACTED TO COMBAT OR-

GANIZED CRIME; JUDICIAL INTER-

PRETATION OF RICO MUST TAKE THIS

LEGISLATIVE PURPOSE INTO ACCOUNT.. 6

A. RICO Was Enacted To Combat Organized

Crime and To Prevent Its Infiltration of

Legitimate Business ...............ssssrsseseeseeeeeeees 6

B. Many Private Civil RICO Suits Have Been

Filed in Situations Bearing No Connection

to Organized Criminal Activity.............+2++++: 9

C. RICO Must Be Interpreted in Light of Its

Legislative Purpose ............-.ssssssseseseeseseeeees 10

Il. A PRIVATE CIVIL RICO PLAINTIFF MUST

PROVE THAT HE HAS _ SUFFERED

“RACKETEERING ENTERPRISE INJURY,”

THAT IS, INJURY OF THE TYPE RICO

WAS INTENDED TO PREVENT.............00000000++ 12

Ill. RACKETEERING ENTERPRISE INJURY

DEFINED ..............cccccsssesscscseensesnsrscccssossssssonseenses 15

1. A Private RICO Plaintiff's Injury Must Be

Characteristic of That Suffered by a Victim

Of Organized Crime...........sscsesseseesersseseneeeesees 16

2. To Demonstrate Racketeering Enterprise In-

jury Under Section 1962(c), the Plaintiff

Must Have Suffered Injuries from Two or

More Separate but Related Episodes of

Racketeering ACtivity...........:ssssseseeeeseresersees 20

CONCLUSION ..........:csssseccsssssreetesreessssecesessnssnssensesnsensens 25

TABLE OF AUTHORITIES

CASES:

Activision, Inc. v. National Union Fire Insurance C.

Civil Action No. C-84-5352-MHP (N od

S$ yanmar ' tcc csene

Alexander Grant & Co. v. Ti Ind. i

F.2d 408 (8th Cir. iti easiese ili

Bankers Trust Co. v. Rhoades, 741 F.2d 511 (1984) ..

Barker v. Underwriters at Lloyd’s, London, 564

Supp. 352 (E.D. Mich. 1983) ................... 7" '

Bateman v. State Farm Mutual Automobile I

Co., Civil Action No. CV-183-254 (S.D. Ga. te.

moved to fed. ct. Nov. 23, 1983) .....cccccccscesseesceeseeee

Bennett v. Berg, 685 F.2d 1059 (1982), aff'd en ba

710 F.2d 1361 (8th Cir.), cert. deni Ct

527 (1983) wi Neca 7 pees sae ee

Bohannon v. Allstate Insurance Co., Civil Action N

CV-484-362 (S.D. Ga. filed Oct. il, 1984)...

Brunswick Corp. v. Pueblo Bowl-o-

477 ( ee

Bunker Ramo Corp. v. United Busi

713 F.2d 1272 (ath Cir. 1983) usiness Forms, Inc.,

Church of the Holy Trinity v. Uni

457 (1892)...... d Sih wis Stes ee

Congregation Beth Yitzhok v. Brisk 5

555 (E.D.N.Y. 1983) .....0...... . ae

Erlbaum v. Erlbaum, {1982 Transfer Binder] Fed

Sec. L. Rep. (CCH) { 98,772 (E.D. Pa. 1982 ) sd

Griffiths v. Commissioner, 308 U.S. 355 (1939) ..........

Haroco, Inc. vy. American National Bank and Trust

Co. of Chicago, 747 F.2d 384 (7th Cir. 1984

granted, 105 S. Ct. 902 (1985 \ Cs ), cert.

SOOTHES HEHEHE EEE E EEE

Page

iV

Harper v. New Japan Securities Int'l, 545

F. Supp. 1002 (C.D. Cal. 1982) ...........scsscsseereeeeenes

In re Action Industries Tender Offer, 572 F. Supp.

BOS CEE. Ve. FOG) cccccscesncsccsvsnsecnnseczscssnessscsssessessses

In re Catanella and E. F. Hutton ond Co. Sec.

Litigation, 583 F. Supp. 1388 (E.D. Pa. 1984)........

Landmark Savings & Loan v. Loeb Rhoades,

Hornblower & Co., 527 F. Supp. 206 (E.D. Mich.

DIO Pcciedessisesiennncnstnensensenancancsntinsanunnacesnsuincimmnnpeunemnens

Margolis v. Republic National Bank, 585 F. Supp.

SIS CB.BIIN. F.. 1GG6) ccrcccecceccecscsnsscnsorensnesesmessssnsesse

May v. Travelers Insurance Co., Civil Action No. CV-

484-411 (S.D. Ga. filed Oct. 11, 1984) oc.

Moss v. Morgan Stanley, Inc., 553 F. Supp. 1347

(S.D.N.Y.), aff'd on other grounds, 719 F.2d 5 (2d

Cir. 1983), cert. denied, 104S. Ct. 1280 (1984) ......

Ozawa v. United States, 260 U.S. 178 (1922)..............

Ralston v. Capper, 569 F. Supp. 1575 (E.D. Mich.

ETE i ciniccstvrnicieeenasinnieninentnséngntbeamennscensemmenenenenmmensenanseneen

Russello vy. United States, 464 U.S. 16 (1983) .............

Salisbury v. Chapman, 527 F. Supp. 577 (N.D. Ill.

PUTED cccsinsniscsnsinnndtnnantessenesteesasnsidiiinbedieainiumanioniniiedasenasnte

Schacht v. Brown, 711 F.2d 1343 (7th Cir.), cert.

denied, 1048S. Ct. 509 (1983) ou... eeccssseseeeeeseeees

Southeastern Fidelity Insurance Co. v. Nails, Ga. Sup.

Ct., Docket No. 41178 (decided March 14, 1985) ..

State Farm Fire and Casualty Co. vy. Estate of Caton,

540 F. Supp. 673 (N.D. Ind. 1982) ...........ccescesseeeees

Teleprompter of Erie, Inc. v. City of Erie, 537

BP. Beam. 6 CUED. PPO. UGE ) ccccccccrcncsesasenscocesesssossssece

Toussie v. United States, 397 U.S. 112 (1970) ............

United States v. American Trucking Associations, 310

as Be 0 DID Peiceccccstsvesnnnnsssnessnsccantensentnnninentamcansanaes

an

United States v. Becker, 461 F.2d 230 (2d Cir. 1972),

vacated on other grounds, 417 U.S. 903 (1974) .......

United States v. Brooklier, 685 F.2d 1208 (9th Cir.

1982), cert. denied, 459 U.S. 1206 (1983)...

United States v. Elliott, 57\ F.2d 880 (Sth Cir. ), cert.

denied, 439 U.S. 953 (1978) ......ccccccccsccscesseecsceseeceees

United States v. Field, 432 F. Supp. 55 (S.D.N.Y.

1977), aff'd, 578 F.2d 1371 (2d Cir.), cert. dis-

missed, 439 U.S. 801 (1978) .........ccccccccssessssescessceseees

United States v. Huber, 603 F.2d 387 (2d Cir. 1979),

cert. denied, 444 U.S. 1085 (1980) wo...ccccceceeeeeeeeees

United States v. Kaye, 556 F.2d 855 (7th Cir.), cert.

denied, 434 U.S. 921 (1977) .....ccccccssscsccesscsescssceees

United States vy. Marubeni America Corp., 611 F.2d

PE aiiiniihenitihderiinitcampniiaididisaapesccmnien

- ~ States v. Moeller, 402 F. Supp. 49 (D. Conn.

SPOT iescsleiiiahilaiiaiaiteaaielibieauitandtantaasiitaniactianas

United States v. Parness, 503 F.2d 430 (2d Cir.

1974), cert. denied, 419 U.S. 1105 (1975) wo...

United States v. Starnes, 644 F.2d 673 (7th Cir.),

cert. denied, 454 U.S. 826 (1981) ..ccccccccccccceeee ceseeeee

United States v. Stofsky, 409 F. Supp. 609 (S.D.N.Y.

1973), aff'd, 527 F.2d 237 (2d Cir. 1975), cert.

denied, 429 U.S. 819 (1976) .......ccccesccccsesccesecceeseee

United States v. Turkette, 452 U.S. 576 (1981) .........

United States v. Weisman, 624 F.2d 1118 (2d Cir.),

cert. denied, 449 U.S. 871 (1980) .o..ccceccccceeeeeeeeeeene

—— States v. White, 386 F. Supp. 882 (E.D. Wis.

i aseenscpeeitaaniiiniaeaibpealincabinedinteteaaatinaniiedentennistneinmtees

Van Schaick v. Church of Scientology, 535 F. Supp.

Ree ec nee renenene re nan

Yancoski v. E.F. Hutton & Co., 581 F. Supp. 88

ee Ny Ci icersciissenscinniccisintennnisiinidesiecnessenismmiemnetiine

21,22,24

11,12

17,21

21

9

21

vl

Zahn v. International Paper Co., 414 U.S. 291

( 1973 ) ....ccccscsecersscerencoressosee-eresensnesscnssssersosesessesenssoesess

STATUTES:

Clayton Act, Section 4. 15 U.S.C. § 15 (1982)............

McCarran-Ferguson Act, 15 U.S.C. §§ 1011-15

({” :)

Organized Crime Contiol Act of 1970, Pub. L. No.

91-452, 84 Stat. 922 ( 1970) ...........cccecccerccersrerreseneees

Racketeer Influenced and Corrupt Organizations Act,

18 U.S.C. $§ 1961-68 ( 1982 )................0ccccrcceseseeeseess

18 U.S.C. § 1341 (1982) ......ccccsceeseesseeeeeeeesereseneseeseenees

18 U.S.C. § 1343 (1982) ......cecsceseeseseeesenssressrsssnreeenees

18 U.S.C. § 3575 (1982) .....cesccesseeeseeersesseesenesseseensees

CONGRESSIONAL MATERIALS:

115 Cong. Rec. 6993 (daily ed. Mar. 3, 1969) ............

115 Cong. Rec. 9567 (daily ed. Apr. 28, 1969)...........

116 Cong. Rec. 18,939 (daily ed. Jun. 9, 1970)...........

116 Cong. Rec. 18,940 (daily ed. Jun. 9, 1970)...........

116 Cong. Rec. 35,227 (daily ed. Oct. 6, 1970)...........

H.R. Doc. No. 105, 91st Cong., Ist Sess. (1969).........

H.R. Rep. No. 1549, 91st Cong., 2d Sess., reprinted in

1970 U.S. Code Cong. & Ad. News 4007.............0++.

Measures Relating to Organized Crime: Hearings on

S.30, $.974, $.975, $.976, §.1623, $.1624, S.1861,

§.2022, S.2122 and §.2292, Before the Subcom-

mittee on Criminal Laws and Procedures of the

Senate Committee on the Judiciary, 9\st Cong., Ist

Sess. ( 1969) ....ccccccccccescecoressscessccocerccsorerssnvecnsessressoesocs

Organized Crime Control: Hearings on S.30, and

Related Proposals, Relating to the Control of Or-

ganized Crime in the United States, Before

Subcommittee No. 5 of the House Committee on the

Judiciary, 91st Cong., 2d Sess. (1970 ).......ssseeeeeees

S. Rep. No. 617, 91st Cong., Ist Sess. (1969)........++0++

6,14

6,10,11

passim

10

18,19

19

14,15,22

passim

Vii

Page

OTHER AUTHORITIES:

P. Areeda & D. Turner, Antitrust Law ( ee 16

Blakey & Gettings, Racketeer Influenced and Corrupt

Organizations ( RICO): Basic Concepts— Criminal

and Civil Remedies, 53 Temp. L.Q. 1009 ( 1980) .... 19,20

Bridges, Private RICO Litigation Based Upon “Fraud

in the Sale of Securities,” 18 Ga. L

____SEREREEDe sRO ce aNneAi a 11,12

Brief as Amici Curiae of 34 State Attorneys General

> appre of Petitioner, Sedima, S.P.R L Vv. ; sea

D aiiemaiennnaibenidebbieietareneiatareianuinctinsinsniiaseniasnniaiits ec aaaen 4

Executive Office for U.S. Attorne

Ss. ys, United States

Attorneys’ Staff Manual, RJCO Guidelines (1981)... 18,24

National Advisory Committee on Criminal Justi

Standards and Goals, Organized Crime: y Sey of

the Task Force on Organized Crime (1976)

’ 9

New York Times, February 19, 1985 ......ccccccccccccoeeee---. 9

New York Times, February 20, 1985 ..0...-.ccccccccccocoee---. 9

New York Times, February 27, 1985 9

New York Times, March 3, 1985 9

Note, RICO and Securities Fraud: A Workable Limi-

tation, 83 Colum. L. Rev. 1513 ( 1983). a sical 10,14,19

: : sine

President’s Commission on Law Enforcement and

Administration of Justice, The Chall

in a Free Society ( 1967)......... : piiisads . —— 7

Report of the Ad Hoc Civil RICO Task Forc th

ABA Section of Corporation, Banking pe =

i, IER RISE SEER T te RN 20,23

16 Sec. Reg. & L. Rep. (BNA) 639 (April 13, 1984) . 9

Strafer, Massumi & Skolnick, Civil RICO in the

Public Interest: “Everybody’s Darling,”

Crim. L. Rev. 655 (1982) .occccscssses. nel —— 24

IN THE

Supreme Court of the United States

OcTOBER TERM, 1984

No. 84-648

SEDIMA, S.P.R.L.,

Petitioner,

Vv.

IMREX COMPANY, INC., GIDON ARMON

AND JACOB ARMON,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

BRIEF OF THE ALLIANCE OF AMERICAN INSURERS,

THE AMERICAN COUNCIL OF LIFE INSURANCE,

THE AMERICAN INSURANCE ASSOCIATION,

THE NATIONAL ASSOCIATION OF INDEPENDENT

INSURERS, AND STATE FARM INSURANCE

COMPANIES AS AMICI CURIAE IN SUPPORT

OF RESPONDENTS

STATEMENT OF INTEREST

The Alliance of American Insurers, the American Council

of Life Insurance, the American Insurance Association, the

National Association of Independent Insurers, and State Farm

Insurance Companies respectfully submit this brief as amici

curiae to urge this Court to construe the Racketeer Influenced

and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-

2

1968 (1982), in a manner that will preserve the availability of

its civil treble-damage relief to persons who have been injured

by activity characteristic of organized crime, but prevent its

unwarranted extension to everyday commercial disputes not

intended by Congress to be covered by the Act.

RICO was enacted to inhibit organized criminal activity

and to protect innocent businesses from victimization by or-

ganized crime through infiltration, unfair criminal competition,

and massive fraud. One of the businesses Congress intended to

protect through RICO was the insurance industry, which had

been injured repeatedly through concerted fraud schemes,

especially arson frauds. See, e.g.,S. Rep. No. 617, 91st Cong.,

Ist Sess. 76, 77 (1969). As a result, insurance companies have

brought a number of civil RICO actions in egregious cases to

recover damages from such fraud schemes. E.g., State Farm

Fire and Casualty Co. v. Estate of Caton, 540 F. Supp. 673

(N.D. Ind. 1982) (private RICO suit against convicted arson

ring which had also engaged in extortion and murder).

In the last several years, however, civil RICO has been

turned on its head. Many legitimate businesses, the intended

beneficiaries of civil RICO, have found themselves named as

defendants in federal RICO suits for treble damages based on

incidents bearing no relation to the kinds of activity RICO was

intended to prevent. In fact, these cases usually involve nothing

more than garden-variety commercial disputes over the inter

pretation of statutes or contracts. The costs of defending

against these RICO suits have been substantial and some

businesses have felt forced to settle unmenitorious suits because

of the risk of treble damages. In addition, these businesses

have suffered significant injury to their reputation simply by

being labeled as “racketeers” in complaints filed without

restraints by private parties.

The insurance industry has been one of the major victims

of this perversion of the purposes of RICO. Thus, insurance

- ae A ae ne Ot

3

companies have been sued under civil RICO in situations where

the companies have merely conformed with standard industry

practices.! In a series of Georgia cases, for example, approxi-

mately fifteen insurance companies have been sued under

RICO for mail fraud. E.g., May v. Travelers Insurance Co.,

Civil Action No. CV-484-411 (S.D. Ga. filed Dec. 12, 1984);

Bohannon v. Allstate Insurance Co., Civil Action No. CV-484-

362 (S.D. Ga. filed Oct. 11, 1984); Bateman v. State Farm

Mutual Automobile Insurance Co., Civil Action No. CV-183-

254 (S.D. Ga. removed to fed. ct. Nov. 23, 1983). In these

cases, plaintiffs, often as purported representatives of a class,

contend that under the Georgia no-fault statute insurers may

not subrogate claims for which they have made full payment

under automobile collision coverage and that these companies

have injured their policyholders by limiting them to a single full

recovery. Thus, through RICO, a disagreement regarding the

proper interpretation of a state insurance law has been esca-

lated into federal causes of action alleging fraud and racketeer-

ing and seeking treble damages and attorneys’ fees.2

Barker v. Underwriters at Lloyd’s, London, 564 F. Supp.

352 (E.D. Mich. 1983), provides another example of the

inappropriate use of private RICO against an insurer. In that

case, Lloyd’s of London and the Lincoln Insurance Company,

' The following is a partial list of insurance companies which have been

named as defendants in private RICO suits: Allstate Insurance Co., American

Motorists Ins. Co., Atlanta Casualty Ins. Co., Cotton States Mutual Ins. Co.,

Georgia Farm Bureau Mutual, Lincoln Ins. Co., National Union Fire Ins. Co.,

Nationwide Ins. Co., Prudential Life Ins. Co. of America, Societe Com-

merciale de Reassurance, Southeastern Fidelity Ins. Co., Standard Guaranty

Ins. Co., State Farm Fire and Casualty Ins. Co., State Farm Mutual

Automobile Ins. Co., Travelers Ins. Co., Underwriters at Lloyd’s, London,

and United Services Automobile Association.

2 Fearing their potential exposure in treble-damage civil RICO class

actions, a number of insurance companies agreed to multimillion dollar

settlements in two of these cases. Shortly thereafter, the Georgia Supreme

Court upheld the insurance industry’s position and rejected the plaintiff's

interpretation of the no-fault statute. Southeastern Fidelity Insurance Co. v.

Nails, Ga. Sup. Ct., Docket No. 41178 (decided March !4, 1985}. Thus, by

combining the threat of treble damages under RICO with potential classwide

liability, plaintiffs extracted a substantial payment from these companies and

coerced them to abandon a valid defense.

4

consistent with state-mandated claim settlement procedures,

denied a claim under a fire insurance policy because they

believed that the fire had been set by one of the plaintiffs.

Plaintiffs sued, alleging, inter alia, a violation of RICO in that

“defendants [through the use of the mails] have engaged in a

scheme to defraud by fraudulently refusing to pay claims

without valid reasons in order to force persons to compromise

their claim for an amount less than they are entitled to under

the insurance policies.” Jd. at 356.

Similarly, in Activision, Inc. v. National Union Fire Insur-

ance Co., Civil Action No. C-84-5352-MHP (N.D. Cal. filed

Aug. 2, 1984), an imsurance company was sued as a racketeer

when it refused to make payments under, and sought to rescind,

a directors and officers liability policy on the ground that

misstatements had been made in the policy application. Plain-

tiffs alleged as a RICO violation that defendant was engaged in

a scheme to issue such policies and collect premiums therefor

with no intention of fulfilling its obligations under those

policies. Jd., complaint at paras. 57-66.%

Thus, the insurance industry, an intended beneficiary of

the statute, has become an unintended victim of civil RICO. As

representatives of that industry, the American Council of Life

Insurance, the American Insurance Association, the Alliance of

American Insurers, the National Association of Independent

Insurers, and State Farm Insurance Companies believe they

offer a unique perspective on RICO that will aid the Court’s

consideration of this case. In this brief amici curiae, we suggest

to this Court a principled interpretation of the statutory lan-

guage of RICO, consistent with congressional intent, which

distinguishes between proper and improper applications of

3 It is important to note that in such cases RICO has been used in an

effort to circumvent the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015

(1982). That Act prohibits the application to the insurance industry of any

federal law not specifically relating to the business of insurance if that law

would impair, invalidate, or supersede a state law regulating the business of

insurance. By invoking the federal cause of action created by RICO, piaintiffs

in these actions have forced into a federal forum the adjudication of actions

that Congress intended be left to the states.

ae ee ee ne ee

—_ - -

5

private civil RICO and which does not in any way hinder

criminal enforcement of the statute. This interpretation re-

_ quires a plaintiff to prove injury of the type RICO was enacted

to prevent, injury characteristic of organized crime, in order to

invoke the treble-damage remedy of civil RICO.4

SUMMARY OF ARGUMENT

RICO was passed by Congress with one purpose in mind:

to eradicate organized crime and prevent its infiltration of

legitimate businesses. It was not intended to provide new

federal treble-damage remedies for everyday commercial in-

juries for which other remedies already exist. In the last several

years, however, many hundreds of civil RICO suits seeking

treble-damage relief have been filed in federal court in situ-

ations having nothing to do with organized criminal activity.

Conversely, very few private RICO actions have been brought

against members of organized crime.

This Court should interpret RICO in light of its clear

legislative purpose to eliminate organized crime and prevent its

infiltration of legitimate businesses and thereby stem the tide of

inappropriate civil RICO litigation. Specifically, a private

RICO plaintiff should be required to prove “racketeering

enterprise injury” in order to recover treble damages. Such a

requirement is explicit in the statutory language of Section

1964(c) and is consistent with the interpretation given by this

Court in Brunswick Corp. v. Pueblo Bowl-o-Mat, Inc., 429 US.

‘This brief does not address the other issue raised by the

Appeals decision in Sedima: whether criminal convictions pm a Sane

to the recovery of civil damages under RICO. Amici note the substantia!

arguments being advanced by the American Institute of Certified Public

Accountants as amicus curiae and by respondents in support of the proposi-

uon that prior criminal convictions are required. Amici urge that, regardless

of the conclusion reached by the Court on the prior conviction requirement

the Court should require proof of racketeering enterprise injury as a pre-

requisite to recovery in a private RICO action.

6

477 (1977), to virtually identical language in Section 4 of the

Clayton Act, 15 U.S.C. § 15 (1982), upon which Congress

modeled Section 1964(c).

As it did in the antitrust context in Brunswick, this Court

should take the opportunity presented by this case and by

American National Bank and Trust Company of Chicago v.

Haroco, Inc. to define the type of racketeering enterprise injury

required by private RICO. Such a definition should have at

east two components:

(1) that the plaintiffs injury must be of the type

characteristically suffered by a victim of organized crime’s

infiltration, takeover, or operation of a business; and

(2) in a private RICO action based upon an alleged

violation of Section 1962(c) of the statute, that the plain-

tiff must have suffered injuries from a “pattern of

racketeering activity,” i.e, two or more separate but

related episodes of criminal conduct.

Both of these injury limitations are consistent with the structure

and statutory language of RICO. They serve to distinguish

between proper and improper applications of civil RICO, by

focusing treble-damage relief on prolonged, organized criminal

behavior.

ARGUMENT

I. RICO WAS ENACTED TO COMBAT ORGANIZED

CRIME; JUDICIAL INTERPRETATION OF RICO

MUST TAKE THIS LEGISLATIVE PURPOSE iNTO

ACCOUNT

A. RICO Was Enacted To Combat Organized Crime

and To Prevent Its Infiltration of Legitimate Business

RICO was enacted as Title IX of the Organized Crime

Control Act of 1970, Pub. L. No. 91-452, 84 Stat. 922, 941

(1970). The stated purpose of that act was “to seek the

eradication of organized crime in the United States... by

providing enhanced sanctions and new remedies to deal with

the unlawful activities of those engaged in organized crime.” Jd.

7

The history of the Organized Crime Control Act reinforces

this stated legislative purpose. The act evolved from the report

of the President’s Commission on Law Enforcement and Ad-

ministration of Justice, The Challenge of Crime in a Free Society

(1967). That report concluded that “[i]nvestigation and

prosecution of organized criminal groups in the 20th Century

has seldom proceeded on a continuous, institutionalized basis.”

Id. at 196. President Nixon, therefore, early in 1969 urged

Congress to take action because “the threat of organized crime

cannot be ignored or tolerated any longer.” H.R. Doc. No. 105,

9ist Cong., Ist Sess. at 2 (1969). Congress responded by

enacting the Organized Crime Control Act which was a com-

bination of eight separate bills dealing with various aspects of

the problem of organized crime. S. Rep. No. 617 at 46-47.

Title IX of the act was RICO. RICO “has as its purpose

the elimination of the infiltration of organized crime and

racketeering into legitimate organizations operating in inter-

state commerce.” S. Rep. No. 617 at 76. This purpose

reflected Congress’ growing awareness “of the depth of pene-

tration of the forces of organized crime into the fabric of our

society and our commercial life.” Jd. The Senate Report noted,

for example, that, in one midwestern city, racketeers controlled

or had large interests in 89 businesses with total assets of more

than $800 million. Jd. Once in control of a business, these

crime syndicates would utilize techniques of violence and

intimidation to gain an improper advantage in the marketplace.

Id.

The principal tools chosen by Congress to effectuate

RICO’s purposes were criminal prosecutions, which may result

in substantial jail sentences, stiff fines and even criminal

forfeiture. 18 U.S.C. § 1963 (1982). In addition, Congress

made available to the Federal Government civil reme-

dies—such as injunctions and divestitures. 18 U.S.C.

§ 1964(a), (b) (1982). As a last-minute amendment, without

any extended explanation or consideration, the House of Rep-

resentatives added a provision for private treble-damage ac-

tions, 18 U.S.C. § 1964(c) (1982), explicitly modeled on

Section 4 of the Clayton Act. See Sedima, S.P.R.L., v. Imrex

Co., 741 F.2d 482, 488-92 (2d Cir. 1984) (discussing lack of

8

congressional consideration of private treble-damage provi-

sion). It was clearly anticipated that this private treble-damage

provision would be used against organized criminals to effec-

tuate the statute’s purposes and to permit victims of organized

crime to recover their economic losses.

There is no indication whatsoever in the legislative history

that Congress intended either criminal or civil RICO to apply to

anything other than the activities of organized crime.5 As the

United States Court of Appeals for the Ninth Circuit noted in

United States vy. Marubeni America Corp., 611 F.2d 763 (9th

Cir. 1980):

We believe anyone who reads the legislative history

must be struck by the singlemindedness with which

Congress drafted RICO. Congress declared over and

over again that its purpose was to nid legitimate

organizations of the influence of organized crime.

This purpose must be the linchpin of any construction

of RICO.

611 F.2d at 769 n. 11.

5 Several Senators and Congressmen, as well as civil liberties groups,

warned Congress that the terms of RICO could be applied to areas far

removed from organized crime. See S. Rep. No. 617 at 215 (individual views

of Sens. Hart and Kennedy); H.R. Rep. No. 1549, 9lst Cong., 2d Sess. 187,

reprinted in 1970 U.S. Code Cong. & Ad. News 4007, 4083 (dissenting views

of Reps. Conyers, Mikva, and Ryan); Measures Relating to Organized Crime:

Hearings on S. 30, S. 974, S. 975, S. 976, S. 1623, S. 1624, S. 1861, S. 2022,

S. 2122 and S. 2292, Before the Subcommittee on Criminal Laws and

Procedures of the Senate Committee on the Judiciary, 9\st Cong., lst Sess. 475

(1969) (Statement of the American Civil Liberties Union). It cannot,

however, be inferred from the fact that several opponents of the bill foresaw

this potential distortion of RICO that Congress intended such distortion.

9

B. Many Private Civil RICO Suits Have Been Filed in

Situations Bearing No Connection to Organized

Criminal Activity

Despite this clear statutory purpose, private treble-damage

actions under RICO against organized crime figures have been

exceedingly rare. Instead, in the last several years, many

hundreds, if not thousands,® of civil RICO suits seeking treble

damages have been brought in situations having nothing to do

with organized criminal activity.? Private R{CO actions have

been filed in landlord-tenant disputes, Salisbury v. Chapman,

527 F. Supp. 577 (N.D. Ill. 1981), domestic relations disputes,

Erlbaum v. Erlbaum, {1982 Transfer Binder] Fed. Sec. L. Rep.

(CCH) ¥ 98,772 (E.D. Pa. 1982), and intra-church disputes,

Van Schaick vy. Church of Scientology, 535 F. Supp. 1125 (D.

Mass. 1982); Congregation Beth Yitzhok v. Briskman, 566

F. Supp. 555 (E.D.N.Y. 1983). Most frequently, treble-

damage civil RICO claims have been added to ordinary

commercial lawsuits and securities litigation. See, e.g., Haroco,

Inc. vy. American National Bank and Trust Co. of Chicago, 747

F.2d 384, 386-87 (7th Cir. 1984), cert. granted, 105 S. Ct. 902

(1985); see also 16 Sec. Reg. & L. Rep. (BNA) 639 (April 13,

1984) (in one survey, 84 of 118 reported civil RICO cases

® In their brief amici curiae supporting an expansive construction of civil

RICO, the 34 state Attorneys General estimate that there may be as many as

5,000 private RICO suits filed in federal court each year. Sedima, S.P.R.L. v.

Imrex Co., Brief for Amici Curiae in Support of Petitioner at 23 n.31.

7 This contrasts sharply with the use by prosecutors of RICO’s criminal

sanctions. Criminal RICO prosecutions have been brought most frequently

against organized crime families, e.g., U.S. Indictment Says 9 Governed New

York Mafia, N.Y. Times, Feb. 27, 1985, at Al, col. 2 (RICO indictment of

Mafia “Commission” ); /9 Are Charged in City in Racketeering Inquiry, N.Y.

Times, Feb. 20, 1985, at B3, col. 5 (RICO indictment of Genovese crime

family leader and members), criminal gangs, e.g., 25 Members of a Notorious

Chinatown Gang Are Accused of Racketeering, N.Y. Times, Feb. 19, 1985, at

Bl, col. | (RICO indictment of youth gang accused of extortion, shakedowns,

protection rackets, and murder), and corrupt public officials, e.g., U.S. Indicts

Gov. Edwards, Washington Post, March 1, 1985, at Al, col. 4 (RICO

indictment of Governor of Louisiana). “In the past two years, Federal

prosecutors have used the RICO statute to obtain indictments of more than

2,000 people in the United States as part of a national crackdown on

organized crime.” N.Y. Times, March 3, 1985, § 4, at 6, col. 2.

10

involved either securities or commercial fraud); Note, Rico and

Securities Fraud: A Workable Limitation, 83 Colum. L. Rev.

1513, 1513 (1983) (invocation of civil RICO in ordinary

commercial and securities litigation “has become a routine

event”).

These cases highlight the ease with which a plaintiff's

attorney can construct a RICO claim under an expansive

reading of the statute. Both mail fraud, 18 U.S.C. § 134!

(1982), and wire fraud, 18 U.S.C. § 1343 (1982), are included

among the list of predicate acts of racketeering activity in

Section 1961(1). A person, claiming injury from a commercial

misrepresentation, need only identify two telephone calls or

mailings (or one of each) made by a business in connection

with the alleged misrepresentation in order to assert a treble-

damage claim for violation of Section 1962(c). He can allege

that the person(s) making the calls or signing the letters

conducted the affairs of an enterprise, the business, through a

pattern of racketeering activity, the two communications. See

Haroco, Inc. vy. American National Bank, 747 F.2d at 387. Such

a distorted construction of RICO’s civil provisions was clearly

not what Congress intended in enacting the statute.

C. RICO Must Be Interpreted in Light of Its Legislative

Purpose

Judicial interpretation of RICO must take into account the

clear congressional purpose to combat organized crime and

prevent its infiltration of legitimate businesses. This is so for

two reasons. First, the statute explicitly directs that it be

construed with reference to its purpose. Second, the private

damage provision of RICO is ambiguous, as evidenced by the

divergent interpretations of the lower courts.

Congress explicitly ordered consideration of RICO’s legis-

lative purpose in Section 904(a) of the statute which provides:

“The provisions of this title shall be liberally construed to

effectuate its remedial purposes.” 84 Stat. at 947 (emphasis

added). See Sedima, 741 F.2d at 488 (“We are, then, obliged

to study the legislative history of RICO and particularly of

section 1964(c) to inform our reading of that statute and, in

- —

1]

particular, of the scope of the private civil remedy created by

the Congress”); see also Bridges, Private Rico Litigation Based

Upon “Fraud in the Sale of Securities,” 18 Ga. L. Rev. 43, 57

n.92 (1983) (“The law itself calls for reference to legislative

intent... since the liberal construction clause declares that the

text should be construed to ‘effectuate its remedial purposes’ ”).

Section 904(a) does not simply require that RICO be broadly

construed. Instead, that section calls for a construction which

would best “effectuate its remedial purposes.” 84 Stat. at 947.

Thus, in the two prior Supreme Court decisions interpreting

RICO, United States v. Turkette, 452 U.S. 576 (1981), and

Russello v. United States, 464 US. 16 (1983), this Court

construed RICO’s Statutory terms broadly in order to prevent

organized criminals from escaping punishment ( Turkette) and

forfeiture ( Russello) under the statute. The two private civil

RICO cases now before the Court by contrast, present a

situation where a precise construction of the statute is necessary

“to effectuate its remedial purposes.”

In addition, reference to legislative purpose is appropriate

to ascertain the meaning of statutory language where, as here,

that language is ambiguous. Griffiths v. Commissioner, 308

US. 355, 358 (1939) (“Legislative words are not inert, and

derive vitality from the obvious purposes at which they are

aimed”); Church of the Holy Trinity v. United States, 143 US.

457, 459 (1892) (“It is a familiar ruie, that a thing may be

within the letter of the statute and yet not within the statute,

because not within its spirit, nor within the intention of its

makers”). See also United States v. American Trucking

Associations, 310 U.S. 534, 543 (1940) (“Frequently, however,

even when the plain meaning did not produce absurd results

but merely an unreasonable one ‘plainly at variance with the

policy of the legislation as a whole’ this Court has followed that

Purpose, rather than the literal words”) (quoting Ozawa

v. United States, 260 U.S. 178, 194 (1922)).

. The sharp disagreements among lower federal courts in

their attempts to construe a variety of RICO provisions indicate

that RICO “presents a classic case of a statute whose am-

biguous language needs to be construed in light of Congress’s

Purpose in enacting it.” Sedima, 741 F.2d at 488: see also

12

Bridges, 18 Ga. L. Rev. at 57 n.92. Therefore, for this reason as

well, RICO must be construed in light of the congressional

purpose to eradicate organized crime and to remove its in-

fluence from legitimate business. Such a construction leads to

the conclusion that a plaintiff must demonstrate “racketeering

enterprise injury” in order to recover damages under civil

RICO.

Il. A PRIVATE CIVIL RICO PLAINTIFF MUST PROVE

THAT HE HAS SUFFERED “RACKETEERING

ENTERPRISE INJURY,” THAT IS, INJURY OF THE

TYPE RICO WAS INTENDED TO PREVENT

The main substantive provision of RICO is Section 1962.

That section makes it unlawful, inter alia, (1) to invest income

derived from a pattern of racketeering activity in any enterprise

engaged in interstate commerce, 18 U.S.C. § 1962(a) (1982);

(2) to acquire or maintain control of such an enterprise through

a pattern of racketeering activity, 18 U.S.C. § 1962(b) (1982);

(3) to conduct or participate in the conduct of such an

enterprise’s affairs through a pattern of racketeering activity, 18

U.S.C. § 1962(c) (1982); or (4) to conspire to engage in any

of these activities, 18 U.S.C. § 1962(d) (1982). Taken

together, the various subsections of Section 1962 form a

coherent scheme for dealing with the problem of infiltration of

legitimate businesses by organized crime. Subsection (a)

prevents the infiltration of a business with profits derived from

organized criminal activity; subsection (b) prevents the take-

over of a business by means of organized criminal activity; and

subsection (c) prohibits the illegitimate operation of a iegiti-

mate business that has been taken over by organized crime. ®

8 As this Court made clear in Turkette, Section 1962(c) also applies to

the operations of an illegitimate enterprise. 452 U.S. at 580-93 (“enterprise”

encompasses both legitimate and illegitimate enterprises). Congress clearly

was aware of, and concerned about, such criminal enterprises and their effects

on legitimate business. Jd. at 591. Nevertheless, the primary focus of RICO

was on the infiltration by organized crime of legitimate business and the

various subsections of Section 1962 form a coherent plan for dealing with that

problem. /d. and n.13.

Rc

13

In order for a plaintiff to recover through a private RICO

action he must satisfy the requirements of Section 1964(c) of

the Act. That section provides that:

Any 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) (1982).

The plain language of Section 1964(c) makes it clear that

RICO does not provide a civil remedy to plaintiffs who have

merely suffered injury from predicate acts of racketeering

activity. Such acts of racketeering activity, defined in Section

1961(1) of RICO, were already criminal under existing provi-

sions of state or federal law and persons injured by such acts

already had available avenues of legal recourse in state or

federal courts. Rather, in enacting RICO, Congress was

concerned with a very particular type of criminal activity—that

connected with organized crime’s infiltration of legitimate

businesses. Therefore, Congress only provided private civil

relief under RICO for plaintiffs who had been injured “by

reason of a violation of section 1962.” As Judge Oakes correctly

concluded in the Court of Appeals decision below:

RICO was intended not simply to provide additional

remedies for already compensable injuries, but rather

to provide added remedies and procedures to fight

certain specific kinds of organized criminality. The

“by reason of” language, therefore, requires that

plaintiffs allege injury caused by an activity which

RICO was designed to deter, which, whatever it may

be, is different from that caused simply by such

predicate acts as are alleged here.

14

Sedima, 741 F.2d at 494 (footnote omitted ).9

This interpretation of the “by reason of” language of

Section 1964(c) is consistent with its legislative history. In

enacting RICO, Congress sought to utilize the “weapons avail-

able under the antitrust laws to attack the ‘property’ of

organized crime,” Organized Crime Control: Hearings on S.30,

and Related Proposals, Relating to the Control of Organized

Crime in the United States, Before Subcommittee No. 5 of the

House Committee on the Judiciary, 91st Cong., 2d Sess. 157

(1970) (statement of Attorney General Mitchell); see alzo S.

Rep. No. 617 at 81; therefore, Congress deliberately adopted

the language of Section 1964(c) from Section 4 of the Clayton

Act. That section created a treble damage remedy for “[a]ny

person who shall be injured in his business or property dy

reason of anything forbidden in the antitrust laws....” 15

U.S.C. § 15 (1982) (emphasis added). In Brunswick Corp. v.

Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977), this Court

ruled that Section 4 treble-damage relief was available only to a

plaintiff who had suffered “injury of the type the antitrust laws

were intended to prevent.” 1° By direct analogy, for a plaintiff

to recover treble damages on account of a violation of Section

9 This distinction is quite clear in the context of a violation of subsection

(a) or (b) of Section 1962. Frequently, in such situations, the person injured

by a racketeer’s acquisition of an interest in or takeover of an enterprise will

not have suffered injury from the underlying pattern of racketeering activity.

The predicate acts made it possible for the racketeer to gain control of the

enterprise, but it is the person injured by that control, such as a minority

partner in the enterprise or a competitor, that is the victim of a RICO injury.

Note, supra p. 10, at 1532.

10 The Court stated further:

We therefore hold that for plaintiffs to recover treble damages on

account of §7 violations, they must prove more than injury

causally linked to an illegal presence in the market. Plaintiffs

must prove antitrust injury, which is to say injury of the type the

antitrust laws were intended to prevent and that flows from that

which makes defendants’ acts unlawful.

429 U.S. at 489 (emphasis in orginal).

15

1962 of RICO, he should be required to prove “racketeering

enterprise injury,” that is, injury of the type RICO was intended

to prevent."!

Ill. RACKETEERING ENTERPRISE INJURY DEFINED

A majority of the lower federal courts considering the

problem have concluded that a civil RICO plaintiff must prove

“racketeering enterprise injury” in order to recover treble

damages. See, e.g., Alexander Grant & Co. v. Tiffany In-

dustries, 742 F.2d 408, 413 (8th Cir. 1984); Bankers Trust Co.

v. Rhoades, 741 F.2d 511, 516 (2d Cir. 1984); Margolis v.

Republic National Bank, 585 F. Supp. 595, 597 (S.D.N.Y.

1984); In re Action Industries Tender Offer, 572 F. Supp. 846,

852 (E.D. Va. 1983); Harper v. New Japan Securities Int’l,

Inc., 545 F. Supp. 1002, 1006-08 (C.D. Cal. 1982); Landmark

Savings & Loan v. Loeb Rhoades, Hornblower & Co., 527

F. Supp. 206, 208-09 (E.D. Mich. 1981). Courts which have

rejected this injury requirement have done so in part because of

difficulty in defining this term adequately. See, e.g., Haroco,

Inc. v. American National Bank and Trust Co., 747 F.2d 384,

389 (7th Cir. 1984), cert. granted, 105 S. Ct. 902 (1985); In re

Catunella and E.F. Hutton and Co. Sec. Litigation, 583

F. Supp. 1388, 1436-37 (E.D. Pa. 1984).

Courts which have rejected special RICO injury requirements have

stressed that Congress expressly chose not to attach RICO to the antitrust

laws. See, e.g., Schacht v. Brown, 711 F.2d 1343, 1357 (7th Cir.), cert.

denied, 104 S. Ct. 509 (1983); Ralston v. Capper, 569 F. Supp. 1575, 1580

(E.D. Mich. 1983). They argued that this was done so as to avoid importing

antitrust principles of standing into RICO. Subcommittee No. 5 Hearings on

S.30, supra p. 14, at 149 (statement of the Antitrust Section of the American

Bar Association; 115 Cong. Rec. 9567 (daily ed. April 28, 1969) (statement

of Sen. McClellan); 115 Cong. Rec. 6993 (daily ed. March 3, 1969)

(statement of Sen. Hruska). From these arguments, one may conclude that

RICO should not be interpreted to require an antitrust-type, “competitive”

injury. See, e.g., Bunker Ramo Corp. v. United Business Forms, Inc., 713

F.2d 1272, 1288 (7th Cir. 1983); Schacht v. Brown, 711 F.2d at 1358; Bennett

v. Berg, 685 F.2d 1053, 1059 ( 1982), aff'd en banc, 710 F.2d 1361 ( 8th Cir. ),

cert. denied, 104 S. Ct. 527 (1983). But it does not follow therefrom that

Congress intended no limitation on private civil RICO actions. As the Court

of Appeals below noted: “By borrowing language imposing a standing

limitation, it is reasonable to believe that Congress indicated a desire to have

an analogous standing limitation imposed in RICO.” Sedima, 741 F.2d at

495.

16

As it did in the antitrust context in Brunswick, this Court

should take the opportunity presented by this case and ly

American National Bank vy. Haroco, Inc. to define the para-

meters of racketeering enterprise injury. Such a definition need

not be so precise as to resolve every case which may conceiv-

ably be brought under the private civil provisions of RICO.

Under the antitrust laws, from which the private civil provisions

of RICO were adapted, Congress intended that the courts

would develop a common law of the conduct prohibited and

the types of antitrust injuries which can be compensated. See P.

Areeda & D. Turner, Antitrust Law J 302 (1978) (Sherman

Act gave federal courts general authority to develop antitrust

law through common law method). Analogously, the lower

federal courts, with guidance from this Court, can evolve the

standards for permitting private treble-damage civil RICO

actions.

This Court must enunciate the broad principles which will

guide the lower Federal courts. Any definition of racketeering

enterprise injury must be consistent with both the statutory

language and the legislative purpose of RICO. It should limit

recovery to plaintiffs who have suffered “injury of the type

[RICO was] intended to prevent.” Amici curiae suggest that

any such definition should have two components, both reflec-

tive of RICO’s concern with ongoing, concerted criminal behav-

ior. First, the plaintiff's injury must be of the type character-

istically suffered by victims of organized crime and its infil-

tration, takeover, and operation of a business. Second, where a

violation of Section 1962(c) is alleged, the plaintiff must be

injured by the conduct of an enterprise through a pattern of

racketeering activity; that is, his injury must stem from multiple

episodes of criminal conduct linked by common objectives or

means.

1. A Private RICO Plaintiffs Injury Must Be Charac-

teristic of That Suffered by a Victim of Organized

Crime

First, in order to show that he has suffered racketeering

enterprise injury, a plaintiff should be required to prove that his

injury was characteristic of that suffered by a victim of or-

17

ganized crime in its infiltration, takeover, or operation of an

enterprise. This conclusion is implicit in the structure of RICO.

RICO proscribes conduct that is committed often, but not

always, by organized crime groups. The statute then calls for a

discretionary determination whether, in a particular case, a

plaintiff's injury which fits within the literal terms of the statute

is characteristic of that suffered by victims of organized crime.

As noted, supra p. 12, the various subsections of Section

1962 proscribe different stages of a course of conduct character-

istic of the manner in which organized crime infiltrates legiti-

mate businesses. S. Rep. No. 617 at 123 (Letter from Deputy

Attorney General Kleindienst) (“The prohibitions contained in

section 1962 of the bill appear to be broad enough to cover

most of the methods by which ownership, control, and oper-

ation of business concerns are achieved”). An element of each

such course of conduct is the commission of a pattern of

racketeering activity. Racketeering activity, as defined in the

statute, is not limited to acts always or primarily committed by

organized crime syndicates. Instead, Section 1961(1) identifies

a set of offenses “characteristic of organized crime.” 116 Cong.

Rec. 18,940 (daily ed. June 9, 1970) (Statement of Sen.

McClellan); see also S. Rep. No. 617 at 34. The statutory

language sweeps broadly in order to ensure that all incidents of

organized crime infiltration of legitimate businesses are within

its scope.

RICO then demands an exercise of discretion. In the

criminal context, this discretion is prosecutorial in nature. See,

e.g., United States v. Weisman, 624 F.2d 1118, 1123 (2d Cir.),

cert. denied, 449 U.S. 871 (1980) (warning against “danger of

abuse where a prosecutor attempts to apply the statute to

situations for which it was not primarily intended”) (quoting

United States v. Huber, 603 F.2d 387 (2d Cir. 1979), cert.

denied, 444 U.S. 1085 (1980)). Prosecutors will not bring

criminal RICO actions against all persons whose conduct fits

within the literal terms of the statute, but will only prosecute

cases in which the conduct involved is characteristic of or-

ganized crime. Indeed, the Department of Justice has estab-

lished such a policy in published RICO Guidelines designed to

18

protect against the statute’s potential abuse. Executive Office

for U.S. Attorneys, United States Attorneys’ Staff Manual,

RICO Guidelines (1981).

In the context of private RICO civil suits, prosecutorial

discretion is absent. The potential for abuse is consequently

manifest; the sheer number of civil RICO claims asserted in

ordinary commercial litigation demonstrates that the plainuff’s

bar does not consider itself bound to employ RICO only in

situations characteristic of organized crime. To prevent unwar-

ranted applications of the treble-damage provision of RICO,

Congress drafted Section 1964(c) in a manner that requires

courts to exercise discretion and see that RICO is “not abused

and applied to contexts outside those intended by Congress.”

Moss v. Morgan Stanley Inc., 553 F. Supp. 1347, 1359

(S.D.N.Y.), aff'd on other grounds, 719 F.2d 5 (2d Cir. 1983),

cert. denied, 104 S. Ct. 1280 (1984). Congress did so by

including the “by reason of” language in Section 1964(c). As

with antitrust injury following Brunswick, a court must deter-

mine whether a plaintiff's injury is of the type RICO was

intended to prevent, that is, whether it is characteristic of that

suffered by victims of organized crime as a result of the

infiltraton, takeover, or operation of an enterprise. If plainuff’s

injury is not of that type, his RICO claim must be dismissed.

Congress gave courts ample guidance to make this

determination. The legislative history of RICO is replete with

examples of injuries characteristic of organized criminal con-

duct. These include: insurance companies defrauded by arson

rings, S. Rep. No. 617 at 77, creditors’ losses from bankruptcy

scams, S. Rep. No. 617 at 35, 77; 116 Cong. Rec. 18,939 ( daily

ed. June 9, 1970) (statement of Sen. McClellan), businesses

lost through extortion and usurious loan-sharking, S. Rep. No.

617 at 35, 77, injury to workers due to the takeover of labor

unions followed by sweetheart contracts and the theft of union

funds, S. Rep. No. 617 at 78, and consumers forced to pay

higher prices and competitors driven out of business by the

monopolization of an industry through the use of force, S. Rep.

No. 617 at 77. Other examples can readily be identified.

19

More generally, Congress has identified a set of indicia

which themselves are characteristic of organized criminal . »n-

duct and the infiltration by organized crime of legitimate

businesses. Such indicia include: (1) the use of violence or the

threat of violence, S. Rep. No. 617 at 41, 76, 77, 81; 116 Cong.

Rec. 18,939-40 (daily ed. June 9, 1970) (statement of Sen.

McClellan); 116 Cong. Rec. 35,227 (daily ed. Oct. 6, 1970)

(statement of Rep. Steiger); (2) techniques of intimidation, S.

Rep. No. 617 at 35, 76, 77; 116 Cong. Rec. 18,939 (daily ed.

June 9, 1970) (statement of Sen. McClellan); (3) corruption,

S. Rep. No. 617 at 41, 81; 116 Cong. Rec. 35,227 (daily ed.

Oct. 6, 1970) (statement of Rep. Steiger); and (4) the

involvement of multiple criminal actors, see Blakey & Gettings,

Racketeer Influenced and Corrupt Organizations (RICO): Basic

Concepts— Criminal and Civil Remedies, 53 Temp. L. Q. 1009,

1025 (1980) (RICO “directed at groups of individuals infor-

mally organized for a common purpose”); National Advisory

Committee on Criminal Justice Standards and Goals, Organized

Crime: Report of the Task Force on Organized Crime, p. 7

(1976) (organized crime involves “the hierarchical coordina-

tion of a number of persons in the planning and execution of

illegal acts... .”).

In order to show that he had suffered a racketeering

enterprise injury, therefore, a civil RICO plaintiff should be

required to prove that he has suffered injury characteristic of

the victims of organized crime. This could be demonstrated

either by showing that the plaintiff had been victimized by a

pattern of organized criminal conduct in a manner described in

RICO’s legislative history or by showing the presence of several

indicia of organized criminal behavior. Cf. Note, supra p. 10,

at 1539 (the term “fraud in the sale of securities” in RICO

should be limited to types of securities fraud mentioned in

RICO’s legislative history and closely analogous violations).

Such a showing would necessarily be highly fact-specific;

however, it would likely exclude most of the garden-variety

commercial fraud civil RICO suits that have been flooding the

federal courts.

It is important to stress that this requirement that a civil

RICO plaintiff's injury be of the type suffered by victims of

20

organized crime is not the same as requiring that all RICO

defendants be members of organized crime. This element of a

racketeering enterprise injury focuses not on a defendant’s

status, but on the nature of the plaintiffs injury. Only “injury of

the type [RICO was] intended to prevent” is injury “dy reason

of a violation of Section 1962” and compensable under Section

1964(c).

Two commentators, who advocate an expansive appli-

cation of civil RICO, stated “there is nothing in RICO that says

that, if legitimate businessmen act like racketeers, they should

not be treated like racketeers.” Blakey & Gettings, supra p. 19,

at 1029 n.91. The insurance industry agrees. When legitimate

businessmen act like racketeers, and cause injury characteristic

of racketeers, they should be treated like racketeers. But before

a civil RICO action can be brought against legitimate business-

men, they must have acted like racketeers.

2. To Demonstrate Racketeering Enterprise Injury Un-

der Section 1962(c), the Plaintiff Must Have Suf-

fered Injuries from Two or More Separate but Re-

lated Episodes of Racketeering Activity

The second suggested element of racketeering enterprise

injury attacks another aspect of the problem of organized

crime, focusing on its ongoing, repetitive nature. A private

RICO plaintiff, alleging a violation of Section 1962(c) of the

statute,12 should be required to prove that he has suffered

injuries from at least two separate but related episodes of

criminal conduct. '$

12Section 1962(c) of RICO is the provision alleged to have been

violated in both Sedima and Ha:oco, and in 97% of all RICO treble-damage

actions. Report of the Ad Hoc Civil Rico Task Force of the ABA Section of

Corporation, Banking and Business Law 55 (1985).

13 In a civil RICO class action, each member of the plaintiff class must

have been injured by two separate, but related episodes of criminal conduct

committed by the defendant(s). Class members may not aggregate their

injuries to satisfy the racketeering enterprise injury requirement. Cf. Zahn v.

International Paper Co., 414 U.S. 291 (1973) (each class member must

independently satisfy the jurisdictional-amount requirement).

21

Section 1964(c) provides treble-damage relief only to

persons who have been injured “by reason of a violation of

Section 1962.” The violation proscribed by subsection (c) of

Section 1962 is “the conduct of [the affairs of an enterprise

engaged in interstate commerce } through a pattern of racketeer-

ing activity” (emphasis added). Therefore, in order to have

sustained racketeering enterprise injury, a private RICO plain-

uff must have been injured by the pattern of racketeering

activity carried out on behalf of the enterrrise.

To have been injured by the pattern, the plaintiff first must

have been injured by multiple predicate acts of criminal

conduct, because RICO explicitly provides that a pattern of

racketeering activity “requires at least two acts of racketeering

activity.” 18 U.S.C. § 1961(5) (1982). Cf. Yancoski v. E. F.

Hutton & Co., Inc., 581 F. Supp. 88, 96 (E.D. Pa. 1983) (“The

requirement of injury by reason of a violation of section 1962

should therefore be read as simply requiring that the plaintiff

was injured by at least two acts of racketeering activity—a

pattern—charged to the defendant’’).

au In addition, in order for a RICO plaintiff to have been

injured by a pattern of racketeering activity, the predicate acts

of racketeering that injured him must bear some relationship to

each other, such as a common scheme, plan, or motive. See,

e.g., United States v. Brooklier, 685 F.2d 1208, 1222 (9th Cir.

1982), cert. denied, 459 U.S. 1206 (1983) (acts must be

connected by common scheme, plan, or motive); United States

v. Starnes, 644 F.2d 673, 678 (7th Cir.), cert. denied, 454 U:S.

826 (1981) (acts must be logically connected ); United States v.

Kaye, 556 F.2d 855, 860-61 (7th Cir.), cert. denied, 434 US.

921 (1977) (acts must be interrelated); United States v.

Stofsky, 409 F. Supp. 609, 614 (S.D.N.Y. 1973) (common

scheme, plan, or motive required), aff'd, 527 F.2d 237 (2d Cir.

1975), cert. denied, 429 U.S. 819 (1976); United States v.

White, 386 F. Supp. 882, 883-84 (E.D. Wis. 1974) (inter-

relationship between acts required). But see United States v.

Weisman, 624 F.2d at 1121-23; United States v. Elliott, 571

m_— 899 n.23 (Sth Cir.), cert. denied, 439 U.S. 953

22

Such a relationship is required by RICO’s statutory lan-

guage. Unlike all of the other definitions in Section 1961,

Section 1961(5) does not define a pattern of racketeering

activity. Instead, it establishes a minimum that is necessary, but

may not be sufficient, to constitute a pattern of racketeering

activity. A pattern of racketeering activity “requires at least two

acts of racketeering activity.” 18 U.S.C. § 1961(5) (1982)

(emphasis added). As Senator McClellan, one of the Or-

ganized Crime Control Act’s principal sponsors, noted: “The

term ‘pattern’ itself requires the showing of a relationship .. . .

[ P Jroof of two acts of racketeering activity, without more, does

not establish a pattern... .” 116 Cong. Rec. 18,940 (daily ed.

June 9, 1970). See also, Subcommittee No. 5 Hearings on S.30,

supra p. 14, at 664-65 (testimony of Will Wilson, Assistant

Attorney General, and Ronald Gainer, Deputy Chief of the

Criminal Division, Department of Justice) (“‘acts of racketeer-

ing activity proved must be related” ( Wilson); “[i]f they are

not related they would not form a pattern” (Gainer) ).'4

Finally, to form a pattern of racketeering activity, the

predicate acts which injured the plaintiff must have occurred in

‘separate criminal episodes; Congress, in enacting RICO, was

concerned with continuous, ongoing criminal activity. See, e.g.,

S. Rep. No. 617, 91st Cong., Ist Sess. at 158 (1969) (“The

infiltration of business normally requires more than one

‘racketeering activity’ and the threat of continuing activity to be

effective. It is this factor of continuity plus relationship which

14 Additional evidence that Congress intended a “pattern of racketeering

activity” to require a relationship between the predicate acts can be found in

the use of the word “pattern” in a similar, simultaneously enacted provision of

the Organized Crime Control Act of 1970. In 18 U.S.C. § 3575(e) (1982),

concerning dangerous special offender sentencing, Congress provided that

“criminal conduct forms a pattern if it embraces criminal acts that have the

same or similar purposes, results, participants, victims, or methods of

commission, or otherwise are interrelated by distinguishing characteristics and

are not isolated events” (emphasis added). Construing the provisions of the

Organized Crime Control Act in pari materia, United States v. Becker, 461

F.2d 230, 232 (2d Cir. 1972), vacated on other grounds, 417 U.S. 903 (1974),

it is reasonable to conclude that Congress intended a “pattern of racketeering

activity” to require that the predicate acts be similarly interrelated. See

United States v. Stofsky, 409 F. Supp. at 614. _

i

23

combines to produce a pattern”). Therefore, Congress enacted

the pattern requirement in RICO to ensure that the statute

would only apply to persons engaged in repeated criminal

conduct. See United States v. Field, 432 F. Supp. 55, 59

(S.D.N.Y. 1977), aff'd, 578 F.2d 1371 (2d Cir.), cert. dis-

missed, 439 U.S. 801 (1978) (“The language of the Act, which

makes a pattern of conduct the essence of the crime, ‘clearly

contemplates a prolonged course of conduct’”) ( quoting

Toussie v. United States, 397 U.S. 112, 120 (1970)); see also

Teleprompter of Erie, Inc. v. City of Erie, 537 F. Supp. 6, 12-13

(W.D. Pa. 1981) (Two act requirement “was included to

ensure that RICO was utilized to prevent incidents constituting

or likely to constitute a continuous course of unlawful conduct.

The stress is on a series of incidents and schemes which are

ongoing” ) (emphasis in original). Apart from this legislative

history, some courts have found a separate episode requirement

implicit in the meaning of “pattern.” See United States v.

Meeller, 402 F. Supp. 49, 57 (D. Conn. 1975) (“[{T]he

common sense interpretation of the word ‘pattern’ implies acts

occurring in different criminal episodes, episodes that are at

least somewhat separated in time and place yet still sufficiently

related by Purpose to demonstrate a continuity of activity”)

(emphasis in original). But see United States vy. Parness, 503

F.2d 430 (2d Cir. 1974), cert. denied, 419 U.S. 1105 (1975).

Requiring a private RICO plaintiff to show that he had

been injured by two or more related episodes of criminal

conduct as part of a racketeering enterprise injury requirement

would have two salutary effects on the application of civil

RICO. First, it would limit civil RICO to patterns of criminal

activity “that tend[ ] to characterize the perpetrator as a person

who regularly uses crime as a means of achieving his desired

ends.” Report of the Ad Hoc Civil RICO Task Force of the ABA

Section of Corporation, Banking and Business Law 8 ( 1985)

(supporting a separate but related episodes interpretation of

pattern of racketeering activity). Second, unlike some other

Proposed definitions of racketeering enterprise injury, this

requirement would allow a civil RICO plaintiff to recover treble

damages for all of the injuries he suffered as a result of

24

underlying predicate acts of criminal conduct; his RICO recov-

ery would not be limited to “indirect injury. See, e.g., Haroco,

Inc. v. American National Bank, 747 F.2d at 392; Schacht v.

Brown, 711 F.2d at 1356-58; Strafer, Massumi & Skolnick, Civil

RICO in the Public Interest: “Everybody's Darling,” 19 Am.

Crim. L. Rev. 655, 706 (1982) (ail criticizing limitation of civil

RICO to indirect injuries).

At the same time, this element of racketeering enterprise

injury would not hinder criminal enforcement of RICO. The

Department of Justice RICO Guidelines already prohibit a

prosecutor from seeking a RICO indictment where all of the

acts of racketeering arise from a single criminal episode or

transaction, RICO Guidelines, supra p. 18, Guideline IV, No. 9-

110.340, and federal prosecutors usually insist upon some

relationship between the predicate acts. See, e.g., United States

v. Stofsky, 409 F. Supp. at 613 (prosecutor suggested to the

court that RICO requires predicate acts to be connected by

common scheme, plan, or motive). Finally, unlike a private

civil action, a RICO prosecution could still be brought where

the defendants committed several related predicate offenses

against different victims.

=a

25

CONCLUSION

ror the reasons stated herein, amici curiae respectfully

urge this Court to hold that a plaintiff must plead and prove

racketeering enterprise injury in order to state a claim and

recover treble damages under RICO. Such an injury can be

demonstrated by proof that the injury was characteristic of that

suffered by victims of organized crime and, in a suit alleging a

violation of Section 1962(c), that the plaintiff has suffered

injuries from a pattern of two or more related episodes of

racketeering activity. Such a holding, consistent with the

statutory language, structure, and legislative intent of RICO,

would allow true victims of organized criminal conduct to

recover fully for their injuries. At the same time, this construc-

tion would limit the perverse application of RICO, never

intended by Congress, to everyday commercial disputes.

In the case before the Court, the petitioner has allegedly

suffered injury from repeated overcharges. The acts com-

plained of bear none of the indicia of organized criminal

conduct. They involve no violence, intimidation, or corruption,

and could have been carried out by a single criminal actor.

Instead, if the allegations are true, Sedima, S.P.R.L., is the

victim of a straightforward case of business fraud. Petitioner is

entitled to seek recovery of its losses in a state fraud action. Its

civil RICO claim, however, should be dismissed and the

judgment of the Court of Appeals of the Second Circuit should

be affirmed.

Respectfully submitted,

JAMES F. FITZPATRICK

Counsel of Record

JOHN M. QUINN

Louis M. BoGRaD

ARNOLD & PORTER

1200 New Hampshire Ave., N.W.

Washington, D.C. 20036

(202) 872-6700

Attorneys for Amici Curiae

March 29, 1985