Opinion ID: 546947
Heading Depth: 2
Heading Rank: 1

Heading: Federal Civil RICO: Pattern Requirement

Text: 15 In support of its initial motion for summary judgment, Busch argued that the RICO counts should be dismissed because of UST's failure to allege a pattern of racketeering activity sufficient to support those claims. The district court rejected this argument, concluding that UST had satisfied the pattern requirement of the RICO statute. We disagree. 16 A crucial element of any RICO claim under 18 U.S.C. Sec. 1962 is proof of either a pattern of racketeering activity or the collection of an unlawful debt. Elliot v. Chicago Motor Club Ins., 809 F.2d 347, 349 (7th Cir.1986). With this fact in mind, UST alleged in support of its RICO claims that Busch had engaged in a pattern of racketeering activity through the commission of various acts of extortion, mail fraud and wire fraud. 5 The fact that a pattern is alleged, however, does not necessarily satisfy the pleading requirements of the RICO statute. Rather, the allegations which come together to form the alleged pattern must be examined to determine whether they justify the potential application of the enhanced penalties of the federal RICO statute. As the fourth circuit recently noted in Menasco v. Wasserman, 886 F.2d 681, 683 (4th Cir.1989): 17 [t]he 'pattern' requirement is more than incidental to the operation of the RICO statute. In providing a remedy of treble damages for injury 'by reason of a violation of' RICO's substantive provisions, 18 U.S.C. Sec. 1964(c), Congress contemplated that only a party engaging in widespread fraud would be subject to such serious consequences. 18 Regrettably, however, a concrete definition for precisely what activity will constitute a pattern for purposes of the RICO statute has eluded the federal courts. 19 Focusing on the continuity plus relationship formulation set forth by the Supreme Court in Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985), this circuit has adopted and followed a fact-specific, multifactor approach in determining whether a particular defendant's conduct constitutes a pattern for purposes of the RICO statute. Specifically, we have held that four factors should be considered in making this determination: (1) the number and variety of predicate acts and the length of time over which they were committed; (2) the number of victims; (3) the presence of separate schemes; and, (4) the occurrence of distinct injuries. Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir.1986); see also Triad Associates, Inc. v. Chicago Housing Authority, 892 F.2d 583, 594 (7th Cir.1989); Ashland Oil, Inc. v. Arnett, 875 F.2d 1271, 1277 (7th Cir.1989). Our approach, however, was just one among many. 20 The Supreme Court's most recent pronouncement on this issue came in H.J. Inc. v. Northwestern Bell Telephone Co., --- U.S. ----, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989). In that case, the Court was presented with the issue of whether RICO's pattern requirement requires a plaintiff to prove the existence of more than one scheme. The Court concluded that it did not. In so doing, the Court took the opportunity to make some general observations concerning what will now be required to establish the existence of a pattern for purposes of the RICO statute. Largely reaffirming the position earlier taken in Sedima, the Court stated, a plaintiff or prosecutor must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity. Id. at ----, 109 S.Ct at 2900 (emphasis in original). 21 Predicate acts are related if they 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. Id. at ----, 109 S.Ct. at 2901 (quoting 18 U.S.C. Sec. 3575(e)); see also Morgan, 804 F.2d at 975 ([r]elationship implies that the predicate acts were committed somewhat closely in time to one another, involve the same victim, or involve the same type of misconduct). If relationship were the only prerequisite to the existence of a pattern for purposes of RICO, UST's allegations would clearly support a determination that Busch engaged in a pattern of racketeering activity. The relationship of the predicate acts one to another does not, however, by itself define a pattern for purposes of RICO. To establish a RICO pattern it must also be shown that the predicates themselves amount to, or that they otherwise constitute a threat of, continuing racketeering activity. H.J. Inc., --- U.S. at ----, 109 S.Ct. at 2901 (emphasis in original). The rather amorphous concept of continuity was defined by the Court in H.J. Inc. as both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition. Id. at ----, 109 S.Ct. at 2902. Precisely what this latter phrase means, however, is not clear. As Justice Scalia points out in his concurrence in H.J. Inc.: 22 Virtually all allegations of racketeering activity, in both civil and criminal suits, will relate to past periods that are 'closed' (unless one expects plaintiff or the prosecutor to establish that the defendant not only committed the crimes he did, but is still committing them), and all of them must relate to conduct that is 'repeated,' because of RICO's multiple-act requirement. 23 Id. at ----, 109 S.Ct. at 2907 (emphasis in original). Nevertheless, we are left to derive meaning from the guidance provided by the Court on this already elusive issue. 24 We do not, however, write on a clean slate. In both Sutherland v. O'Malley, 882 F.2d 1196 (7th Cir.1989) and Management Computer Serv. v. Hawkins, Ash, Baptie & Co., 883 F.2d 48 (7th Cir.1989), this court has addressed the pattern requirement of the RICO statute in light of the Court's decision in H.J. Inc. In Management Computer, we noted that a general principle which may be derived from H.J. Inc. is that, Congress intended 'a natural and commonsense approach to RICO's pattern element,' [H.J., Inc.] id. at ----, 109 S.Ct. at 2899, and that 'Congress was concerned in RICO with long-term criminal conduct,' [H.J. Inc.] id. at ----, 109 S.Ct. at 2902. Management Computer, 883 F.2d at 51; see also, Marshall-Silver Constr. Co., Inc. v. Mendel, 894 F.2d 593, 596-97 (3d Cir.1990) (focusing on a natural and common sense approach to the pattern element of RICO). Specifically addressing the continuity element of the pattern requirement in Sutherland, we stated: 25 The Court has not formulated any general test for continuity in the abstract. Instead, the specific facts of each case must be examined to determine whether the predicate acts relied upon by the plaintiff establish a threat of continuing racketeering activity. 26 882 F.2d at 1204. Both of these decisions indicate that this circuit will still look to the factors identified in Morgan in determining whether a pattern sufficient to support a RICO claim has been alleged. The impact of the Court's decision in H.J. Inc., beyond its express holding that two schemes need not be shown to prove a pattern, is that we now analyze these various factors with an eye towards achieving a natural and common sense result. See H.J. Inc., --- U.S. at ----, 109 S.Ct. at 2907 (the Court does little more than repromulgate [the 'continuity' and 'relationship' test], though with the caveat that Congress intended that [it] be applied using a 'flexible approach' ) (Scalia, J., concurring). 27 The first Morgan factor is the number and variety of predicate acts and the length of time over which they were committed. UST alleges a scheme which lasted from December of 1980 through April of 1982 involving a considerable number (we do not know how many) instances of mail and wire fraud. At first glance, it would seem from the duration of the scheme and the number of predicate acts that this factor, by itself, would mandate a conclusion that a pattern has been alleged. See H.J. Inc., --- U.S. at ----, 109 S.Ct. at 2902. We have previously noted, however, that allegations of mail fraud and wire fraud are unique among predicate acts when it comes to determining the existence of a RICO pattern. As we recently reiterated in Sutherland : 28 Mail fraud and wire fraud are perhaps unique among the various sorts of 'racketeering activity' possible under RICO in that the existence of a multiplicity of predicate acts ... may be no indication of the requisite continuity of the underlying fraudulent activity. Thus, a multiplicity of mailings does not necessarily translate into a 'pattern' of racketeering activity. 29 882 F.2d at 1205 n. 8 (quoting Lipin Enterprises v. Lee, 803 F.2d 322, 325 (7th Cir.1986) (Cudahy, J., concurring)); see also Ashland Oil, 875 F.2d at 1278 (number of [mail fraud and wire fraud] offenses is only tangentially related to the underlying fraud, and can be a matter of happenstance). In this case, each allegation of mail fraud and wire fraud apparently relates back to the extortion allegedly achieved by the December, 1980 contract. 6 Indeed, the economic injury which UST alleges, although it may have been felt over the course of the two years immediately following the December 1980 contract, stems from and was complete at the time that UST agreed to assume the cost of the $2.55 million inventory shortage. Under these circumstances, we believe that the raw number of transactions and the length of time over which those transactions occurred was pure happenstance in light of the underlying concern which is the continuity of the criminal activity. A similar observation prompted the third circuit in Marshall-Silver to conclude that a pattern for purposes of RICO had not been established. That court stated: 30 Virtually every garden-variety fraud is accomplished through a series of wire or mail fraud acts that are 'related' by purpose and spread over a period of at least several months. Where such a fraudulent scheme inflicts or threatens only a single injury, we continue to doubt that Congress intended to make the availability of treble damages and augmented criminal sanctions dependent solely on whether the fraudulent scheme is well enough conceived to enjoy prompt success or requires pursuit for an extended period of time. Given its 'natural and common sense approach to RICO's pattern element,' we think it unlikely that Congress intended RICO to apply in the absence of a more significant societal threat. 31 894 F.2d at 597. Applying a natural and common sense approach, we like the third circuit think it unlikely that Congress intended the draconian measures of RICO to apply to this allegation of garden-variety fraud. 32 The second factor to which we look in determining the existence of a RICO pattern is the number of victims. While this factor cannot be dispositive of any pattern determination, we believe it is highly significant in this case when combined with the other factors. The scheme alleged in this case took over two years to achieve and encompassed an unknown number of alleged acts of mail and wire fraud. Yet, UST is the only victim. Even single schemes as contemplated by the Court in H.J. Inc. may target multiple victims. See --- U.S. at ----, 109 S.Ct. at 2902. Moreover, in light of the fact that our concern in this context is with the alleged continuity of the criminal acts, we note as significant the fact that UST has given no indication that this is a type of activity in which Busch normally engages or, indeed, that there are other potential Busch victims waiting in the wings. See Sedima, 473 U.S. at 496, 105 S.Ct. at 3285 n. 14 (RICO is not aimed at the isolated offender). 33 In H.J. Inc., the Supreme Court held that a plaintiff or prosecutor need not prove multiple schemes to show a pattern for purposes of the RICO statute. This, however, does not mean that the fact that there is only one scheme involved is of no consequence to the pattern determination. To the contrary, [w]hile a RICO pattern can be established, in some circumstances, by proof of a single scheme, it is not irrelevant, in analyzing the continuity requirement, that there is only one scheme. Sutherland, 882 F.2d at 1204; Menasco, 886 F.2d at 684. Like the court in Sutherland, we are presented with allegations of only one dishonest undertaking--i.e., the extortionate scheme by which Busch allegedly forced UST to assume the responsibility for a $2.55 million inventory shortage. Thus, while we realize that the fact of only a single scheme cannot preclude a finding of a RICO pattern, we do believe it is significant when combined with the other relevant factors in showing a lack of the required continuity. 34 Finally, we consider whether the alleged predicate acts brought about the occurrence of distinct injuries. Arguably, UST suffered an economic injury each time Busch ordered and it shipped discounted t-shirts under the terms of the December 1980 contract. The question arises, however, whether each of these injuries was distinct in the sense that it signalled, or by itself constituted, a threat of continuing criminal activity. We do not believe that it did. Clearly, the duration of the alleged scheme is a factor to be taken into consideration. If the concern is continuity, however, and the price for that continuity is treble damages, costs and reasonable attorneys fees, see 18 U.S.C. Sec. 1964, a natural and common sense approach to the pattern element of RICO would instruct that identical economic injuries suffered over the course of two years stemming from a single contract were not the type of injuries which Congress intended to compensate via the civil provisions of RICO. 35 We do not believe UST's allegations of extortion, mail fraud and wire fraud rise to the level of a pattern of racketeering activity sufficient to support a RICO claim. Our conclusion is not premised solely upon the fact that there was only one scheme; such a premise is forbidden by the Court's decision in H.J. Inc. Nor do we premise our conclusion solely upon the fact that UST is the only victim or upon the fact that the injuries which UST has suffered, while arguably distinct, are nevertheless economically identical. Rather, our conclusion is premised upon a natural and common sense application of the Morgan factors to the facts and circumstances of this case. Simply put, we do not believe that Congress intended RICO to apply to allegations of fraud such as this absent a showing of criminal activity which presents a more significant social threat. Cf. Marshall-Silver, 894 F.2d at 597.