Legitimate civil RICO claims under sections 1962(a) & (b) are few and far between. Although frequently alleged, very few survive a motion to dismiss. For this reason, there is a dearth of case law related to civil claims under these subsections. To the extent authority exists, that authority is generally pro-defendant.
A. Association-in-Fact Enterprises Under Sections 1962(a) & (b)
The relationship of the defendant persons to the enterprise varies, depending upon the subsection serving as the basis for liability. Unlike section 1962(c), liability under sections 1962(a) and (b) does not hinge upon the defendant’s operation or management of the enterprise. Under section 1962(a), the defendant must use or invest the proceeds of racketeering activity in the enterprise. Davis-Lynch, Inc. v. Moreno, 667 F.3d 539, 550-51 (5th Cir. 2012) (dismissing section 1962(a) claim because plaintiff failed to show how the alleged proceeds of racketeering were invested in any enterprise). As noted, section 1962(a) is primarily concerned with money laundering activities.
Under section 1962(b), the defendant must acquire or maintain an interest in or control of an enterprise through a pattern of racketeering activity. The type of “interest” contemplated in section 1962(b) is not just any “interest” but a proprietary one, such as the acquisition of stock, and the “control” contemplated is the power gained over an enterprise’s operations by acquiring such an interest. Whaley v. Auto Club Ins. Assoc., 891 F. Supp. 1237, 1240-41 (E.D. Mich. 1995) (citing Reves v. Ernst & Young, 507 U.S. 170 (1993)).
Given the informal nature of association-in-fact enterprises, i.e., they usually do not have any accounts receivable and do not file taxes, it is difficult if not impossible to invest and launder money through an association in fact enterprise for purposes of a section 1962(a) claim. Because association-in-fact enterprises also do not issue stock and are not legal entities capable as being controlled in the manner envisioned by section 1962(b), such claims are seldom, if ever, based upon association-in-fact enterprises.
B. Injury “by reason of” a Section 1962(a) Violation
As noted, a section 1962(c) claim provides relief to persons injured “by reason of” predicate acts. 18 U.S.C. s 1964(c). To have standing under section 1962(a), “the plaintiff must allege an injury resulting [by reason of] the investment of racketeering income distinct from an injury caused by the predicate acts themselves.” Lightening Lube, Inc., 4 F.3d at 1188; St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 441 (5th Cir. 2000); see also Davis-Lynch, Inc., 667 F.3d at 550; Nugget Hydroelectric, L.P. v. Pacific Gas and Elec. Co., 981 F.2d 429, 437 (9th Cir. 1992). This allegation is required because section 1962(a) “does not state that it is unlawful to receive racketeering income … [rather] the statute prohibits a person who has received such income from using or investing it in the proscribed manner.” Grider v. Texas Oil & Gas Corp., 868 F.2d 1147, 1149 (10th Cir.), cert. denied, 493 U.S. 820 (1989).
To circumvent section 1962(a)’s standing requirement, plaintiffs often allege a “reinvestment” injury caused by reason of a violation of section 1962(a). For example, plaintiffs will allege that the defendants, through an enterprise, acquired money through a pattern of racketeering and then used and invested the proceeds of the racketeering back into the enterprise to keep it alive so that it continued to injure others, and eventually the plaintiff. Lightening Lube, Inc., 4 F.3d at 1188. Such reinvestment injuries are generally an insufficient basis for a section 1962(a) claim:
. . . we have held that the fact that a plaintiff claims that the injury allegedly perpetrated on it would not have occurred without the investment of funds from the initial racketeering activity does not change the fact the plaintiff’s alleged injury stems from the pattern of racketeering, and not from the investment of funds by the defendant.
Over the long term, corporations generally reinvest their profits regardless of the source. Consequently, almost every racketeering act by a corporation will have some connection to the proceeds of a previous act. Section 1962(c) is the proper avenue to redress injuries caused by the racketeering acts themselves. If plaintiffs’ reinvestment injury concept were accepted, almost every pattern of racketeering by a corporation would be actionable under section 1962(a), and section 1962(c) would become meaningless. Id.; see also Sybersound Records, Inc., 517 F.3d at 1149-50 (dismissing plaintiff’s section 1962(a) claim where the plaintiff had “not alleged any injury separate and distinct from the injuries incurred from the predicate act itself. . . . [Plaintiff’s] injury stems from the alleged copyright infringement”); Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1083 (9th Cir. 2000), cert. denied, 531 U.S. 1104 (2001) (even if plaintiff was injured by defendants’ fraud, plaintiffs section 1962(a) claim was dismissed because plaintiff failed to allege that defendants’ “investment drove him out of business or harmed him directly in some way”), overruled on other grounds, 486 F.3d 541 (9th Cir. 2007); but see In re Sahlen & Assoc., Inc. Sec. Litig., 773 F. Supp. 342, 366-67 (S.D. Fla. 1991).
In Ideal Steel Corp. v. Anza, 652 F.3d 310 (2d. Cir. 2011), the Second Circuit held that the plaintiff had sufficiently alleged injury by reason of a defendant’s investment of the proceeds of racketeering activity. Ideal Steel has a long and sorted history. In short, Ideal and Anza are competitors. Ideal alleged that Anza violated section 1962(c) by failing to collect sales tax on its cash sales and by submitting false state sales tax returns (via the mails and wires) to the state. Ideal claimed that it was injured by Anza’s fraud because Ideal lost customers to Anza given the perception that its prices were cheaper (when in fact the lower cost was simply the result of Anza’s alleged sales tax evasion). Ideal also alleged a violation of section 1962(a), in that Anza allegedly took the profits it earned through its tax evasion and used them to establish a new business location near Ideal’s location in the Bronx, enabling Anza to unfairly attract even more of Ideal’s customers.
The Supreme Court dismissed Ideal’s section 1962(c) claim, finding that Anza’s alleged fraud directly injured the State of New York, who was denied sales tax revenue. Anza v. Ideal Supply Corp., 547 U.S. 451, 460 (2006). On remand, the district court also dismissed Ideal’s section 1962(a) claim on the basis of proximate cause, but the Second Circuit reversed, finding that Ideal alleged more than a mere reinvestment injury:
First, defendants . . . did not merely reinvest in the same entity, Rather, the Anzas created a new company, Easton Corporation, to purchase the Bronx property for the new National store. Second, even if Congress did not intend subsection (a)’s prohibition to reach the use of RICO tainted funds by the RICO violator in its own ongoing operation, the legislative history does not permit the inference that Congress meant to allow such entities, with impunity, to use those funds to branch out to new locations.
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. . . [T]he court’s suggestion that Ideal may have lost sales because of its “business decisions—e.g., to lower its prices to compete with National,” [citation omitted] seems to have lost sight of the alleged RICO violation, i.e., the investment of racketeering activity funds to establish the National facility in the Bronx. Had the investment not been made, there would have been no National prices for Ideal to match.
Id. at 322, 328. Given the history of this litigation, one can expect that another petition for certiorari will be filed with the Supreme Court. Nonetheless, the Second Circuit’s decision currently provides evidence that a civil claim under section 1962(a) may be more than a mere theoretical possibility.
C. Injury “by reason of” a Section 1962(b) Violation
Just as a civil plaintiff must show injury caused “by reason of” the defendant’s investment to prevail under section 1962(a), a plaintiff must show injury “by reason of” the defendant’s acquisition or control of an interest in a RICO enterprise to prevail under section 1962(b). 18 U.S.C. § 1964(c); Advocacy Organization for Patients and Providers v. Auto Club Ins. Ass’n, 176 F.3d 315, 329 (6th Cir. 1999); Crowe v. Henry, 43 F.3d 198, 205 (5th Cir. 1995). Injury flowing from defendants’ predicate acts is alone not enough to confer standing under section 1962(b). Lightening Lube, Inc., 4 F.3d at 1190. “Such an injury may be shown, for example, where the owner of an enterprise infiltrated by the defendant as a result of racketeering activities is injured by the defendant’s acquisition or control of his enterprise.” Casper v. Paine Webber Group, Inc., 787 F.Supp. 1480, 1494 (D.N.J.1992). In addition, the plaintiff must establish that the interest or control of the RICO enterprise by the person is as a result of racketeering. Banks v. Wolk, 918 F.2d 418, 421 (3d Cir. 1990).