The Racketeer Influenced and Corrupt Organizations Act, better known as “RICO,” was enacted to fight organized crime but has evolved into the bane of legitimate businesses. Along with criminal penalties that can only be enforced by federal prosecutors, RICO contains a provision allowing for civil lawsuits. The rewards for a successful civil RICO claim include mandatory treble damages and attorney’s fees. For this reason, civil RICO lawsuits have become a favorite of overzealous plaintiffs hoping to make headlines and scare legitimate businesses into quick settlements. And since private plaintiffs have a greater incentive to be “creative” than federal prosecutors, civil RICO cases often push the statute’s limits. But the Supreme Court’s recent decision in the infamous “Bridgegate” case, Kelly v. United States, may help decelerate this trend by limiting civil RICO claims in important ways.
In the Bridgegate case, three New Jersey state officials were charged with exacting political revenge against a local Democratic mayor for failing to endorse the Republican governor’s reelection bid. In what could have been a deleted scene from The Sopranos, the state officials ordered a “traffic study” that closed down some lanes for commuters in Fort Lee, New Jersey (the home of the Democratic Mayor) traveling across the George Washington Bridge into New York City. The “traffic study” had the predictable result of creating hours of gridlock that ensnared commuters, school buses, and even ambulances. That gridlock was, of course, the goal all along. In fact, upon hearing the news that the Democratic mayor would not endorse the Republican governor, one of the state officials emailed the other, advising: “Time for some traffic problems in Fort Lee.”
Federal prosecutors felt that this was more than petty political retribution and charged the trio of state officials with criminal violations of the federal wire fraud statute, which makes it a crime to use interstate wires (such as telephones and email) to effect “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. § 1343. One of the officials pleaded guilty, and the other two were convicted at trial. The convictions were later affirmed on appeal by the Third Circuit.
A unanimous Supreme Court, however, later reversed, finding that federal prosecutors and the lower courts had taken too expansive of a reading of the “property” element of the crime of wire fraud. See Kelly v. United States, 590 U.S. __, 140 S.Ct. 1565 (2020). The Court, relying on Cleveland v. United States, 531 U.S. 12, 23 (2000), reasoned that the closure of the traffic lanes “was a quintessential exercise of regulatory power” and “a scheme to alter such a regulatory choice is not one to appropriate the government’s property.” Kelly, 140 S. Ct. at 1572. The Court explained that the defendants “did not walk away with the lanes; nor did they take the lanes from the Government by converting them to a non-public use. Rather, [they] regulated use of the lanes…” Id. at 1573. It did not matter that they “did so…for bad reasons; and they did so by resorting to lies” because “run-of-the-mine exercise of regulatory power cannot count as the taking of property.” Id. Similarly, utilizing Port Authority engineers and an additional toll collector as part of the scheme was insufficient to sustain a conviction. This is because the “object of the scheme was never to get the employees’ labor.” Id. Instead, “[t]he use of Port Authority employees was incidental to—the mere cost of implementing—the sought-after regulation of the Bridge’s toll lanes.” Id. at 1572. Ultimately, the Supreme Court held that “not every corrupt act by state or local officials is a federal crime.” Id. at 1574. And “[b]ecause the scheme here did not aim to obtain money or property, [the state officials] could not have violated the federal-program or wire fraud laws.” Id.
Although Bridgegate was a criminal RICO case brought under the wire fraud statute, it has important implications for civil RICO litigation. In order to prevail in a civil RICO action, a plaintiff must establish that the defendant engaged in a “pattern of racketeering activity,” which means, at a minimum, “at least two acts of racketeering activity.” See 18 US.C. §§ 1961(5) and 1962. “Racketeering activity” includes a long list of criminal violations, including violations of the federal wire fraud and mail fraud statutes. See 18 U.S.C. 1961(1). These statutes have similar wording, except for the “medium” used to effectuate the fraudulent scheme (i.e., interstate wires or the U.S. mail), and both contain the amorphous “property” element that was disused in the Bridgegate decision. And because most legitimate businesses do not engage in the type of conduct that would traditionally be thought of as “racketeering activity” (for example, in the words of the statute, “any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery,” etc.), wire fraud and mail fraud are the most common predicate acts of racketeering pleaded in civil RICO cases. The Bridgegate decision, therefore, will have a direct impact on civil RICO claims based on wire and mail fraud that do not “aim to obtain money or property.” Kelly, 140 S. Ct. at 1574.
Because of the “creativity” of civil RICO plaintiffs, such claims are very common in civil RICO litigation. For example, in Roitman v. New York City Transit Authority, 704 F. Supp. 346, 348 (E.D.N.Y. 1989), the wire and mail fraud predicates were not based on a scheme to obtain money or property, but rather to cause “humiliation, emotional distress, pain and suffering” and damage to “reputation, good name, honor and integrity.” Similarly, in Monterey Plaza Hotel Ltd. P’ship v. Local 483 of the Hotel Employees and Rest. Employees Union, AFL-CIO, 215 F.3d 923, 926 (9th Cir. 2000), the wire and mail fraud predicates were alleged to cause “harm to the hotel’s goodwill,” and not theft of money or property.
The Ninth Circuit’s decision in Lancaster Community Hospital v. Antelope Valley Hospital District, 940 F.2d 397 (9th Cir. 1991), vividly illustrates how the “property” element of the wire and mail fraud statutes can neutralize a civil RICO claim between two competing businesses—here, a hospital and medical group, where the hospital accused the “defendants of conducting the affairs of Antelope through a pattern of fraudulent schemes” by purportedly utilizing the U.S. mail. Id. at 399. The Ninth Circuit affirmed the dismissal of the civil RICO claim, explaining that:
Lancaster simply cannot establish that defendants sought to deprive it of property…The allegation [is] that assets were transferred to [the medical group] with the understanding that [the] Group would refer all of its patients to Antelope. This alleged referral activity was not designed to deprive Lancaster of either tangible or intangible property. It was part of an attempt to increase Antelope’s market share at the expense of its competitor’s. Similarly, allegations that false entries were made in corporate records also cannot establish mail fraud under McNally. Again, these false entries were not a part of an attempt to deprive another of property, but were part of an attempt to increase Antelope’s market share. The same is true for all of Lancaster’s claims.
“Market share” is neither tangible or intangible property; its loss is far too amorphous a blow to support a claim of mail fraud under the reasoning of McNally…Put differently, it might be said that defendants hoped to “steal” Lancaster’s customers. But it cannot be said that these customers were Lancaster’s property.
Id. at 406 (emphasis added; internal citations omitted).
The Supreme Court’s Bridgegate decision demonstrates that the Ninth Circuit’s reasoning in Lancaster rested on solid legal grounds. In fact, Bridgegate takes the reasoning of Lancaster an important step further. The Supreme Court has now made clear that even an “incidental” effect on money or property is not enough to satisfy the “property” element of the wire and mail fraud RICO predicates. As the Court put it: “[T]hat property must play more than some bit part in a scheme: It must be an object of the fraud.” Kelly, 140 S. Ct. at 1573.
Future civil RICO litigants will surely have spirited fights over whether money or property is “an object of the fraud” or merely “some bit part in the scheme.” But the Bridgegate decision makes that a fight worth having for defendants seeking to escape the onerous penalties that civil RICO invites.