RULE 11 AND CIVIL RICO: RESISTING THE IRRESISTIBLE

by John L. Cooper*
[T]he potential for treble damages and attorneys fees is a powerful, if not irresistible, temptation to bring civil suits under RICO. Gramercy 222 Residents Corp. v. Gramercy Realty Associates, 591 F. Supp. 1408, 1413 (E.D.N.Y. 1984). Given the ... proliferation of civil RICO claims and the potential for frivolous suits in search of treble damages, greater responsibility will be placed on the bar to inquire into the factual and legal bases of potential claims or defenses prior to bringing such suit or risk sanctions for failing to do so. Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 444 (5th Cir. 1992). Particularly with regard to civil RICO claims, plaintiffs must stop and think before filing them. Pelletier v. Zweifel, 921 F.2d 1465, 1522 (11th Cir. 1991).

John L. Cooper is a partner in the San Francisco law firm of Farella Braun + Martel LLP . He holds university degrees in engineering, law, and law & economics. He is a fellow of the American College of Trial Lawyers. His practice includes concentrations in RICO antitrust issues and technology-related litigation.

Copyright 1998 John L. Cooper

TABLE OF CONTENTS
Page I. INTRODUCTION...........................................................................................................................................................................1 A. The tension between civil RICO pleading and Rule 11 comes from their opposing impulses..................................1 1. Notice pleading.................................................................................................................................................................1 2. Impulse behind RICO.......................................................................................................................................................1 3. Impulse behind Rule 11....................................................................................................................................................2 4. Reconciling the impulses.................................................................................................................................................2 II. RICO AND THE LURE OF TREBLE DAMAGES ...................................................................................................................3 A. Origins of civil RICO.............................................................................................................................................................3 1. Meaning of the word........................................................................................................................................................3 2. Contents of the RICO Act...............................................................................................................................................3 3. Origins of RICO.................................................................................................................................................................3 4. State RICO statutes ..........................................................................................................................................................3 B. The common elements of a RICO violation........................................................................................................................4 1. RICO violation and civil recovery distinguished.........................................................................................................4 2. Elements of a RICO violation..........................................................................................................................................4 3. Racketeering activity........................................................................................................................................................5 4. Pattern requirement ..........................................................................................................................................................8 5. Enterprise requirement.....................................................................................................................................................9 6. Economic motive.............................................................................................................................................................11 C. The specific elements of the individual subsection violations.....................................................................................11 1. The four violations distinguished................................................................................................................................11 2. Investment violations ....................................................................................................................................................12 3. Acquisition and control violations..............................................................................................................................13 4. Conducting of affairs violations...............................................................................................................................14 5. Conspiracy violations....................................................................................................................................................15

D. Elements of a RICO private action ....................................................................................................................................16 1. Statutory definition ........................................................................................................................................................16 2. Causation.........................................................................................................................................................................17 3. Specialized injury ............................................................................................................................................................17 4. Interstate nexus...............................................................................................................................................................18 5. Limitations period...........................................................................................................................................................18 6. Equitable remedies..........................................................................................................................................................18 7. Prevailing defendants ....................................................................................................................................................18 8. Concurrent juris diction..................................................................................................................................................18 E. The lure of treble damages has made pleading RICO routine .......................................................................................18 1. Treble damages plus costs............................................................................................................................................18 2. Other advantages ...........................................................................................................................................................19 3. Policy arguments favoring use of civil RICO .............................................................................................................20 4. Broad use of civil RICO .................................................................................................................................................20 III. RULE 11 .....................................................................................................................................................................................21 A. Overview of Rule 11............................................................................................................................................................21 1. Summary...........................................................................................................................................................................21 B. History of the Rule...............................................................................................................................................................22 1. Original Rule ....................................................................................................................................................................22 2. Amendments ...................................................................................................................................................................22 C. Sanctions, once mandatory, are now discretionary........................................................................................................23 1. Shifting requirement.......................................................................................................................................................23 D. Rule 11 violations ................................................................................................................................................................23 1. Elements of violation......................................................................................................................................................23 2. Winning argument not required...................................................................................................................................23 3. Factual contentions........................................................................................................................................................24 4. Legal contentions...........................................................................................................................................................25 5. Continuing obligation....................................................................................................................................................26 E. Attorneys representation ..................................................................................................................................................27 1. Original meaning.............................................................................................................................................................27 2. 1983 amendment..............................................................................................................................................................27 3. 1993 amendment..............................................................................................................................................................27 F. Prefiling inquiry ....................................................................................................................................................................28 1. Imposition of requirement .............................................................................................................................................28 2. Requirements...................................................................................................................................................................28 G. Good faith..............................................................................................................................................................................28 1. Subjective good faith.....................................................................................................................................................28 H. Professional standards .......................................................................................................................................................29 1. Reliance on others ..........................................................................................................................................................29 2. Incompetence and inexperience ...................................................................................................................................29

ii

I. [Reserved]..............................................................................................................................................................................30 J. Other factors influencing courts judgment......................................................................................................................30 1. Snapshot rule ..................................................................................................................................................................30 2. Reliance on client............................................................................................................................................................30 K. Court may act sua sponte ...................................................................................................................................................31 1. Amended rule ..................................................................................................................................................................31 2. What court may consider.............................................................................................................................................31 3. Due process.....................................................................................................................................................................31 L. Safe harbor...........................................................................................................................................................................31 1. Safe harbor provision.....................................................................................................................................................31 M. Other issues.........................................................................................................................................................................31 1. Forbidden mo tives..........................................................................................................................................................31 2. Jurisdiction ......................................................................................................................................................................32 3. Explanation required.......................................................................................................................................................32 4. Exclusion of discovery...................................................................................................................................................32 N. Who may be sanctioned.....................................................................................................................................................33 1. Sanctions against attorney and firm............................................................................................................................33 2. Sanctions against a party..............................................................................................................................................33 O. [Reserved].............................................................................................................................................................................33 P. Variety of sanctions available ............................................................................................................................................33 1. Sanctions are for deterrence rather than punishment...............................................................................................33 2. Monetary sanctions.......................................................................................................................................................33 3. Non-monetary sanctions...............................................................................................................................................34 4. Factors to be considered...............................................................................................................................................34 5. Costs defined ..................................................................................................................................................................34 6. Costs of sanctions proceedings...................................................................................................................................34 7. Costs on appeal on sanctions ......................................................................................................................................34 8. Other sources of sanctioning authority......................................................................................................................35 Q. Review for abuse of discretion..........................................................................................................................................35 1. Standard of review..........................................................................................................................................................35 R. Private Securities Litigation Reform Act ..........................................................................................................................36 1. Private Securities Litigation Reform Act.....................................................................................................................36 IV. APPLICATION OF RULE 11 TO CIVIL RICO......................................................................................................................36 A. Tendency to abuse .............................................................................................................................................................36 1. Incentives for abuse.......................................................................................................................................................36 2. RICO elements varied and complex..............................................................................................................................36 3. Notice pleading...............................................................................................................................................................36 4. Unsettled law...................................................................................................................................................................36 5. Reinforcement for ethical practitioners .......................................................................................................................37 6. Use with respect to client..............................................................................................................................................37 B. Caselaw on Rule 11 and RICO............................................................................................................................................37 1. Special emphasis in RICO cases...................................................................................................................................37

iii

2. 3. 4. 5.

Lack of factual foundation ............................................................................................................................................38 Lack of legal foundation................................................................................................................................................38 Cases analyzed................................................................................................................................................................43 Multiple claims ................................................................................................................................................................45

V. PRACTICAL SUGGESTIONS..................................................................................................................................................45 A. Study the statutes ...............................................................................................................................................................45 B. Investigate the facts ............................................................................................................................................................48 C. Investigate the law...............................................................................................................................................................48 D. Check your papers...............................................................................................................................................................49 E. Check your motives .............................................................................................................................................................49 F. Remember your continuing obligations............................................................................................................................50 G. The complaint is not your last chance..............................................................................................................................51

iv

RULE 11 AND CIVIL RICO: RESISTING THE IRRESISTIBLE by John L. Cooper I. A. INTRODUCTION The tension between civil RICO pleading and Rule 11 comes from their opposing impulses. 1. Notice pleading. The system of notice pleading embodied in the Federal Rules of Civil Procedure was intended to be broadly expansive. a) The Federal Rules, which came into effect in 1938, was the final step in replacing a rigid common law pleading system under which litigants were very strictly limited to what they had pleaded. Accordingly it is ordinarily permitted to plead grievances broadly, based on circumstances reasonably believed or suspected to be true without necessarily having the proof available at the time of filing the complaint. (1) In part this was because serving notice of the grievance was one of the most important functions of the complaint (see Rule 8(a)) ... ... and in part this was to enable people who had been harmed to state a claim even though they did not yet have all the evidence necessary to prove their entitlement to recovery. Therefore it was expected and even encouraged that litigants would put their grievances at issue and resolve them in a truth-finding process which evolved as the case developed.

b)

(2)

(3)

2.

Impulse behind RICO. Similarly the RICO statute came from an expansive impulse on the part of Congress to get at the influence of organized crime on legitimate business. a) The civil RICO device permits the law to be used aggressively and creatively against legitimatization of criminal activities and proceeds, without the limitations on pleading and statutory construction which attend a criminal proceeding. RICO was an aggressive initiative to supplement old remedies and develop new methods of fighting crime Sedima, S.P.R.L. v. Inrex Co., Inc., 105 S. Ct. 3275, 3286 (1985) (Justice White) citing Russello v. United States, 464 U.S. 16, 26-29, 104 S. Ct. 296, 302-303 (1983). (1) See, e.g., Sedima, S .P.R.L. v. Imrex Co., Inc, 473 U.S. 479, 498, 105 S. Ct. 3275, 3285-3286 (1985), characterizing Congress language as self-consciously expansive; accord H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 249, 109 S. Ct. 2893, 2905 (1989) [T]he civil sanctions provided under RICO are dramatic ... but ... such dramatic consequences are necessary incidents of the deliberately broad swath Congress chose to cut in order to reach the evil it sought ... Schacht v. Brown, 711 F.2d 1343, 1353 (7th Cir. 1983), citing United States v. Turkette, 452 U.S. 576, 587, 101 S. Ct. 2524, 2531 (1981).

b)

(2)

c)

The purpose of civil RICO is to use private civil actions to fill prosecutorial gaps Sedima, supra, 473 U.S. at 493, 105 S. Ct. at 3283. Also 904(a) of the Organized Crime Control Act of 1970 provided that [t]he provisions of this title shall be liberally construed to effectuate its remedial purposes. (1) Text of this uncodified provision can be found at, e.g., CCH RICO Business Disputes Guide 3120. See also Sedima, 473 U.S. 479, 498, 105 S. Ct. 3275, 3286 (1985).

d)

e)

The Supreme Court has been unsympathetic to complaints that civil RICO has been used against respected and legitimate enterprises rather than mobsters and organized criminals. See Sedima, 473 U.S. at 499, 105 S. Ct. at 3286. It has held that Congress wanted to reach both legitimate and illegitimate enterprises. Id. (1) [Legitimate businesses] enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences. The fact that 1964(c) is used against respected businesses allegedly engaged in a pattern of specifically identified criminal conduct is hardly a sufficient reason for assuming that the provision is being misconstrued. Sedima, 473 U.S. at 499, 105 S. Ct. at 3286. [T]he fact that RICO has been applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth. Sedima, quoting Haroco, Inc. v. American National Bank & Trust Co. of Chicago, 747 F.2d 384, 398 (1984).

(2)

3.

Impulse behind Rule 11. Rule 11, on the other hand, proceeds from a restrictive rather than an expansive impulse. Its core idea is to deter and thereby limit claims and representations made without adequate and factual support. While proof need not be complete at time of filing, counsel are nevertheless expected to have conducted serious legal and factual investigation prior to filing. a) The limiting impulse of Rule 11 resonates with Rule 9(c), which requires particularity when pleading fraud. (1) Under 1962(a-c), Rule 9(b) means that the allegations must identify the time, place, and manner of each fraud, plus the role of each defendant in each scheme. McFarland v. Memorex Corp., 493 F. Supp. 631, 637 (N.D.Cal. 1980). But even Rule 9(c) permits malice, intent, knowledge and other mental states bearing on fraud to be pleaded generally, subject to later proof.

(2)

4.

Reconciling the impulses. That is not to say that these two principles cannot be reconciled, for of course they can. But it will help us to understand the development of the law of Rule 11 in the civil RICO pleading context to remember that the two sources proceed from opposing impulses and require the zealous but ethical advocate to be expansive and restrictive at the same time. Rule 11 requires that imagination be tempered by close attention to substance, and that pleading be based on facts rather than hope or fantasy.

II. A.

RICO AND THE LURE OF TREBLE DAMAGES Origins of civil RICO 1. Meaning of the word. RICO is an acronym for Racketeer Influenced and Corrupt Organizations, and is shorthand for Title IX of the Organized Crime Control Act of 1970, Act of October 15, 1970, P.L. 91-452, codified at 18 U.S.C. 1961-1968. Contents of the RICO Act. The RICO act contains criminal provisions, civil provisions such as forfeiture and equitable relief generally available only on motion of the United States, and a private civil right of action, with mandatory treble damages (plus costs and attorney fees) available to any person injured in his business or property by reason of a RICO violation. See 18 U.S.C. 1964(c). a) The treatment of RICO in these materials is concerned exclusively with the private civil right of action, for which the relevant materials are 18 U.S.C. 1861 (definitions), 1862 (prohibited activities which constitute the predicate acts needed for recovery), and 1864(c) (establishing the right of action). (1) The history of RICO reflects a tension between its widely praised use on the criminal side as an innovative weapon and its widely criticized use on the civil side as a basis for dubious private actions. Jed Rakoff and Howard W. Goldstein, RICO: CIVIL AND CRIMINAL LAW AND STRATEGY 1.01 (1997). Although criminal cases can sometimes help define the scope of application of the RICO statute, they have generally been omitted from the source materials consulted for these materials except when decided by the Supreme Court.

2.

(2)

3.

Origins of RICO. The RICO statute came out of the Congressional concern with organized crime that traces back to the Kefauver Committee hearings of the 1950s and Joseph Valachis testimony before the McClellan Committee about La Cosa Nostra. See Rakoff & Goldstein, RICO: CIVIL AND CRIMINAL LAW AND STRAT EGY at 1.01. a) RICOs major purpose [was] to address the infiltration of legitimate business by organized crime. United States v. Turkette, 452 U.S. 576, 591, 101 S. Ct. 2524, 2532 (1981) Although undocumented, there may be a connection between the acronym RICO and the gangster character Rico, played by Edward G. Robinson in the classic film Little Caesar (1930). Based on Al Capone, Robinsons Rico created an archetypal image of an organized crime figure which must have been known to the framers of the RICO law, and which persists in the American imagination to this day. See Parnes v. Heinold Commodities, Inc., 548 F. Supp. 20, 21 n.1 (N.D.Ill. 1982).

b)

4.

State RICO statutes. There are also state RICO statutes in many states. They are beyond the scope of these materials. Among the purposes of state RICO laws is to bring violations of state criminal laws (which of course do not require an interstate nexus) within a RICO scheme. a) State RICO laws often do not provide for private recovery, or permit it only when sought by a public official. (1) For example, the main civil remedy available under the California Control of Profits of Organized Crime Act, Cal. Penal Code 186-186.8, is forfeiture on

the petition of a prosecutor. Individuals may file claims to seized or forfeited property and may benefit from subsequent distribution, but may not sue on their own behalf and are not entitled to multiply damages. (2) For an example of a state RICO law which does provide for private recovery on the federal model, see Arizona Revised Statutes 13-2314.04.

b)

Pendent state RICO claims can sometimes be a source of punitive damages in addition to the treble damages available under federal RICO. (1) State statutes may also extend the reach of RICO liability by including crimes and theories not on the federal list, or by allowing procedures and relief not available under federal law. For example, the Arizona statute provides for a lien procedure and for equitable relief on the motion of a private party. Texts of the state RICO laws are collected in the CCH RICO Business Disputes Guide at pages 3001 et seq. At the time of writing the laws of 31 states and territories are included.

(2)

c)

Although the topic is not discussed here, wise counsel will always investigate the possibility of state RICO liability in drafting a complaint, and will include such counts where justified and permitted.

B.

The common elements of a RICO violation 1. RICO violation and civil recovery distinguished. Proof of a RICO violation and proof of entitlement to civil recovery are not the same thing. But proof of a RICO violation (to a civil standard) is one of the elements required for civil recovery. Elements of a RICO violation. The elements of a RICO violation are set out in 1962. There are four kinds of RICO violations, see section II.C. below. An example is the violation defined by 1962(a). a) Section 1962(a) makes it unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt ... to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. (1) This defines the paradigmatic RICO crime, under which for example an organized crime syndicate could take money obtained through activities such as extortion, prostitution, drug dealing, loan-sharking, or the like, invest them in legitimate enterprises, and so cleanse (if not exactly launder) their money and legitimate themselves and their successors. A pattern of racketeering activity is the main element of most RICO actions. Here as elsewhere in the statute it is bracketed with collection of an unlawful debt. The unlawful debt provision relates primarily to gambling and to loansharking, defined as usury where the rate is at least twice the enforceable rate. See 18 U.S.C. 1961(6). (a) Except in unusual situations, the unlawful debt provisions do not figure in RICO actions arising out of business disputes which are

2.

(2)

the focus of these materials, and so they are generally omitted from the following discussion without further comment. The omitted material is considered to be understood without the need for tedious repetition. (3) Similarly the word enterprise is defined in the statute to mean one which is engaged in, or the activities of which affect, interstate or foreign commerce. (a) This is of course necessary for federal jurisdictional purposes, and in some cases there may be a legitimate question whether the enterprise in question meets this definition. But as with collection of an unlawful debt, this phrase will be omitted hereafter in these materials without further comment, and will be considered to be understood. For a case where the RICO claim failed for lack of an adequate interstate nexus, see Gramercy 222 Residents Corp. v. Gramercy Realty Associates, 591 F. Supp. 1408, 1412-1413 (S.D.N.Y. 1984) (allegations that some construction materials for subject renovation were shipped interstate, and that architect was licensed in another state, held de minimis and insufficient to show required nexus).

(b)

b)

With these omissions, the RICO violation set out in 1962(a) reads as follows: It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity ... to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise ...

3.

Racketeering activity. Racketeering activity is defined in 1961(1) primarily although not exclusively by reference to a very long list of federal criminal statutes. a) The majority of these crimes, such as threat of murder, kidnapping, arson, robbery, theft from interstate shipment, and the like (including many less serious ones such as sports bribery, gambling violations and citizenship fraud) are of a kind genuinely associated with the traditional sort of criminal enterprise. But many can be applied to ordinary commercial or financial activities gone wrong. (1) The most important predicate crimes are 18 U.S.C. 1341 (mail fraud) and 1342 (wire fraud). These are of surpassing importance in RICO cases, as in federal prosecutions of business crimes generally, because use of the mail or the telephone in the course of any arguably fraudulent scheme federalizes the entire scheme. (a) As all business arrangements of any complexity almost invariably involve the mail (or any private or commercial interstate carrier such as Fedex or UPS) or phone (including fax, e-mail and internet) in some way, this is the royal road to RICO implication for any business dispute. The language extending the mail fraud statute to private or commercial interstate carriers was added by the Violent Crime Control and Law Enforcement Act of 1994, P.L. 103-322, 250006.

b)

(b)

(c)

Although the new language was specifically intended to [m]ake the mail fraud statute applicable to matter sent or delivered by any private or commercial interstate carrier, see S.Rep. 103-403 (103rd Cong. 2d Sess., 1994, 1994 WL 577580), some courts have continued to hold, even after the amendments effective date, that the mail fraud statute requires use of the mails. See, e.g., United States v. Sneed, 63 F.3d 381, 388 n.5 (5th Cir. 1995). These holdings, based on obsolete pre-amendment authority, are probably incorrect. For a recent mail fraud case based entirely on use of private carriers, see, e.g., United States v. Berkovich, 932 F. Supp. 582, 583 (S.D.N.Y. 1996) (indictment alleged only use of UPS).

(d)

c)

Securities fraud was once also a very common predicate act of racketeering activity for civil RICO purposes. But the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737, amended 1964(c) to provide that a criminal conviction is now required for securities fraud to be a predicate act in a civil RICO action, and without that element no person may rely on such acts for civil recovery. (1) In ABF Capital Management v. Askin Capital Management, L.P., 957 F. Supp. 1308, 1319-1322 (S.D.N.Y. 1997) the court held that the amendment bars new actions based on pre-amendment predicate acts of securities fraud. But cases already pending as of the amendments effective date are unaffected. See, e.g., Fujisawa Pharmaceutical Co., Ltd. v. Kapoor, 115 F.3d 1332, 1338 (7th Cir. 1997). The precise limits of the retroactive reach of the PSLRA will probably require further definition by the courts.

(2)

d)

Other important crimes which can be predicate acts for RICO purposes include: (1) (2) financial institution fraud, commonly called bank fraud (18 U.S.C. 1344); various forms of money laundering (18 U.S.C. 1956-1957) and violations of the Currency and Foreign Transactions Reporting Act, 31 U.S.C. 5211 et seq.; various forms of bribery and extortion, including violations of the Hobbs Act (18 U.S.C. 1961(b)(2)); criminal copyright violations of various kinds; And others. Counsel involved in a potential RICO case should study 18 U.S.C. 1961(1) with a careful eye. Some state crimes are also included in the federal list, including bribery, extortion, and some violations of state usury laws. The extraordinary breadth of the statute, as drafted by Congress and as interpreted by the Supreme Court, has allowed it to predicate suits in both federal and state courts for a broad range of activities including such disparate conduct as securities fraud, industrial espionage, product counterfeiting, false advertising, price fixing, commercial and public bribery, insurance and bankruptcy fraud, labor disputes, wrongful terminations, accountant and lawyer malpractice and glorified breaches of contract.

(3)

(4) (5)

(6)

(7)

Rakoff & Goldstein, RICO: CIVIL AND CRIMINAL LAW AND PRACTICE , 7.01 (footnotes with case references omitted). e) All the elements of the predicate crime must be proved, in every RICO case under whatever section it is brought. (1) Therefore if the predicate crime has a mens rea, scienter, or other mental state requirement, it must be established by the plaintiffs proof. See, e.g., Rini v. Zwirn, 886 F. Supp. 270, 294 (E.D.N.Y. 1994). (a) The mens rea element necessary for a substantive RICO conviction is the same as is required for the predicate crime... United States v. Baker, 63 F.3d 1478, 1493 (9th Cir. 1995). For a civil example see Stitt v. Williams, 919 F.2d 516, 525 (9th Cir. 1990). There is no mens rea requirement beyond that of the predicate crime. United States v. Blinder, 10 F.3d 1468, 1477 (9th Cir. 1993).

(2)

To use mail fraud as a predicate act, for example, it is not sufficient simply to show the elements of civil fraud as defined in state law, see e.g. Cal. Civil Code 1709-1710, and add use of the mails. To qualify for RICO purposes the predicate acts must satisfy all the elements of the underlying referenced criminal statute. (a) For example, the mail fraud statute requires that the fraudulent scheme or artifice be one for obtaining money or property. This is not true for ordinary civil fraud. Civil Code 1709 requires only that the accused person willfully deceive another with intent to induce him to alter his position to his injury or risk. See, e.g., Barbara A. v. John G., 145 Cal.App.3d 369, 375-376, 193 Cal.Rptr. 422, 426-427 (Cal.App. 1983) (claim that man induced woman to consent to sexual intercourse by false claim that he could not possibly impregnate her stated cause of action for damages for ectopic pregnancy). [C]ommon-law fraud concepts inform -- but do not control -- our discussion of the evidence necessary to support a conviction under the mail fraud statute, especially in the light of the requirement that federal criminal statutes be interpreted narrowly. United States v. Brown, 79 F.3d 1550, 1559 (11th Cir. 1996).

(b)

(3)

But in a civil RICO action the elements of the predicate crimes need only be proved to a civil preponderance standard, rather than to a criminal reasonable-doubt standard. (a) This is based on strong dictum in Sedima, supra, 479 U.S. 479, 491, 105 S. Ct. 3275, 3281, although the Supreme Court has not actually held this to be the law. But unsurprisingly, lower courts have held that the elements of the predicate crimes (like all elements in a civil tort action) need be proved only to a civil standard. E.g., Wilcox v. First Interstate Bank of Oregon, N.A., 815 F.2d 522, 531 (9th Cir. 1987) (preponderance of evidence standard applies to proof of predicate acts in civil RICO litigation) accord, e.g., Aetna Casualty & Surety Co. v. P & B Autobody, 43 F.3d 1546, 1560 (1st Cir. 1994).

f)

Except in the case of securities fraud (since the 1995 amendment of the RICO statute), there does not have to have been a conviction or even an indictment for such predicate criminal activity to count for RICO purposes. See Sedima, S .P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S. Ct. 3275 (1985).

4.

Pattern requirement. To support RICO recovery there must be not only racketeering activity as defined above, but a pattern of racketeering activity. a) The statutory minimum for a pattern is two predicate criminal acts within ten years. See 18 U.S.C. 1961(5). But it is well established that two isolated acts in ten years are insufficient by themselves to constitute a pattern. The main authority for the meaning of pattern in the RICO context is H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 109 S. Ct. 2893 (1989). The H.J. case laid out the equation that pattern = relationship + continuity. (1) [T]o prove a pattern of racketeering activity a plaintiff ... must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity. H.J., 492 U.S. at 239, 109 S. Ct. at 2900. See also Sedima, supra, 473 U.S. 479, 105 S. Ct. 3275. In H.J. the Supreme Court adapted a test for relatedness from 829 F.2d 648, 650 (8th Cir. 1987), then 18 U.S.C. 3575(e). 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. H. J., 492 U.S. at 240, 109 S. Ct. 2901.

b)

(2)

c)

As for continuity, the H.J. court held that [c]ontinuity is both a closed- and openended 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 241, 2902. (1) A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement. H. J., 492 U.S. at 242, 109 S. Ct. 2902. But even a single act may meet the continuity requirement if it projects into the future with a threat of repetition. H.J., 492 U.S. at 241, 109 S. Ct. 2902. In Justice Brennans evocative example, if a hoodlum were to sell insurance to a neighborhoods storekeepers to cover them against breakage of their windows, telling his victims he would be reappearing each month to collect the premium that would continue their coverage, that would be sufficient to establish continuity. H.J., 492 U.S. at 242, 109 S. Ct. at 2902. (a) This would be so even if an intervening cause should prevent the hoodlum from returning-- there would still have been a threat of repetition even if there was no actual repetition. For a relatively recent Ninth Circuit treatment of the continuity requirement, see Allwaste, Inc. v. Hecht, 65 F.3d 1523 (9th Cir. 1995);

(2)

(b)

see also Religious Technology Center v. Wollersheim, 971 F.2d 364 (9th Cir. 1992). d) The presence of these two factors must be determined on a case-by-case basis. Whether the predicates proved establish a threat of continued racketeering activity depends on the specific facts of each case. *** The limits of the relationship and continuity concepts that combine to define a RICO pattern, and the precise methods by which relatedness and continuity or its threat may be proved, cannot be fixed in advance with such clarity that it will always be apparent whether in a particular case a pattern of racketeering activity exists. H.J., 492 U.S. at 242-243, 109 S. Ct. at 29022903 (Justice Brennan) A series of related acts in furtherance of a single criminal scheme are sufficient to make a pattern for RICO purposes; multiple schemes are not required. H.J., 492 U.S. at 240241, 109 S. Ct. at 2901-2902; and see, e.g., United States v. Freeman, 6 F.3d 586, 595-596 (9th Cir. 1993); United Energy Owners Committee, Inc. v. United Energy Management Systems, Inc., 837 F.2d 356, 361 (9th Cir. 1988). There is no requirement that the predicate acts be performed by a group; a single individual would be sufficient under the statute. There is likewise no requirement that the predicate acts or the pattern or scheme be of a kind, or by people, traditionally associated with organized crime. This so-called violin-case element has been firmly rejected by the Supreme Court. See, e.g., H.J., 492 U.S. 229, 109 S. Ct. 2893 (1989). (1) Congress acknowledges the breakdown of the traditional conception of organized crime, and responds to a new situation in which persons engaged in long-term criminal activity often operate wholly within legitimate enterprises. Congress drafted RICO broadly enough to encompass a wide range of criminal activity, taking many different forms and likely to attract a broad array of perpetrators operating in many different ways. It would be counterproductive and a mismeasure of congressional intent now to adopt a narrow construction of the statutes pattern element that would require proof of an organized crime nexus. H. J., 492 U.S. at 248-249, 109 S. Ct. at 2905. Nevertheless, despite clear Supreme Court precedent, some courts still persist in requiring some gangster-appearing conduct for RICO liability. See, e.g., Emery v. American General Finance, Inc., 134 F.3d 1321, 1324 (7th Cir. 1998): The firm must be shown to use its agents or affiliates in a way that bears at least a family resemblance to the paradigmatic RICO case in which a criminal obtains control of a legitimate (or legitimate-appearing) firm and uses the firm as the instrument of his criminality.

e)

f)

g)

(2)

5.

Enterprise requirement. Enterprise is defined as any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity. 18 U.S.C. 1961(4). a) Except for the limiting factor of the jurisdictional nexus to interstate or foreign commerce, on the surface this leaves nothing and no one excluded, as it covers a single individual, any legal entity, and any group associated in fact. Nevertheless a vast jurisprudence has developed about the meaning of this word, about the elements required for an enterprise, distinguishing among different kinds of

b)

enterprises, defining the required separation between the enterprise and the person in stating RICO offenses, and many other scholastic distinctions about which the circuits do not agree. (1) This is the single most complex area in the law of RICO, and parsing the details of the various conflicting theories and tests is beyond the scope of these materials. Nevertheless counsel should be aware that some study will be required in order to plead the enterprise element correctly according to local circuit requirements. As entities with a legal structure clearly qualify, most of the disputes about sufficiency of an enterprise concern entities allegedly associated only in fact. An enterprise based on informal association in fact is sometimes called an enterprise in fact. See, e.g., In re American Honda Motor Co., Inc. Dealerships Relations Litigation, 965 F. Supp. 716, 723 (D.Md. 1997). It is clear that a enterprise may be either a legitimate or an illegitimate one. United States v. Turkette, 452 U.S. 576, 578, 101 S. Ct. 2523, 2526 (1981). Enterprise and pattern are distinct concepts. The enterprise is an entity, ... a group of persons associated together for a common purpose of engaging in a course of conduct. The pattern of racketeering activity is, on the other hand, a series of criminal acts as defined by the statute. United States v. Turkette, 452 U.S. 576, 583, 101 S. Ct. 2524, 2528 (1981). (a) The Ninth Circuit follows the majority rule in explicitly requiring the enterprise to have an existence separate from the pattern. Chang v. Chen, 80 F.3d 1293, 1298 (9th Cir. 1996). A few circuits have a more lenient interpretation of Turkette.

(2)

(3)

(4)

(5)

(6)

An enterprise need not have any natural persons-- a group of corporations associated in fact for a common purpose can constitute an enterprise for RICO purposes. See, e.g., United States v. Blinder, 10 F.3d 1468, 1473 (9th Cir. 1993). A typical test for the existence of an enterprise is that stated by the Eighth Circuit in United HealthCare Corp. v. American Trade Ins. Co., Ltd., 88 F.3d 563, 570 (8th Cir. 1996): an enterprise must exhibit three characteristics: (1) a common or shared purpose; (2) some continuity of structure and personnel; and (3) an ascertainable structure distinct from that inherent in a pattern of racketeering. (internal quotation marks omitted). (a) The Ninth Circuit requires that a plaintiff show an ongoing organization, that is, that some sort of structure exists within the group for the making of decisions, whether it be hierarchical or consensual. There must be some mechanism for controlling and directing the affairs of the group on an on-going, rather than an ad hoc, basis. Also the organization must have some function wholly unrelated to the racketeering activity. Chang v. Chen, 80 F.3d 1293, 1299 (9th Cir. 1996) (citing United States v. Riccobene, 709 F.2d 214, 222-223 (3d Cir. 1983)) (upholding dismissal where plaintiff failed to allege an organization separate and apart from that

(7)

10

inherent in the perpetration of the alleged fraudulent real estate transactions). c) Despite the clear language of the statute there is scant precedent for applying the term enterprise to a single individual. But that this is both theoretically possible and contemplated by the statute is shown by Chief Judge Peckhams hypothetical in United States v. Benny, 559 F. Supp. 264, 270-271 (N.D.Cal. 1983), affd. 786 F.2d 1410 (9th Cir. 1983): Jones devises a plan to take control of a shopping center. Acting alone, he extorts money from three shopowners, murders a fourth shopowner and burns down a fifth shopowners store. In addition, Jones rents an office from which he operates a security service and begins to operate several of the stores he has taken over. Here ... the defendants activities are the affairs of an enterprise, i.e., to take control of the shopping center. We cannot believe that Congress intended such a person to be immunized for his acts of racketeering merely because his status is that of a lone racketeer.

6.

Economic motive. Neither the pattern of racketeering activity nor the predicate acts need have an economic motive. This was settled by the Supreme Court in National Organization for Women, Inc. v. Scheidler, 510 U.S. 249, 114 S. Ct. 798 (1994), where use of RICO was upheld against anti-abortion groups who used threatening tactics to try to close abortion clinics. See also, e.g., Huntingdon Life Sciences, Inc. v. Rokke, 986 F. Supp. 982 (E.D.Va. 1997) (animal rights activists).

C.

The specific elements of the individual subsection violations 1. The four violations distinguished. The four RICO violations set out in 1962 have their own individual elements, which differ from each other. a) For example, the acquisition and control violations set out in subsection (b), and the conducting of affairs violations set out in subsection (c), both require that these acts themselves be done through a pattern of racketeering activity ... But the investment [subsection (a)] and conspiracy [subsection (d)] violations do not carry this requirement. Ignoring this distinction can lead to potentially sanctionable pleading errors. To take another example, civil recovery may be had under subsection (c) for injury from the predicate acts themselves, even if injury does not stem from the RICO offense itself. See Sedima, 473 U.S. at 495, 105 S. Ct. at 3284. But this is not so, for example, for subsection (a). See, e.g., Ouaknine v. MacFarlane, 897 F.2d 75, 83 (2d Cir. 1990). The distinctions among the various subsections are highly abstract and hard to distinguish one from another. This may be one reason why plaintiffs (and crossplaintiffs) tend to plead them all based on the same facts. The Supreme Court has provided a useful lesson in H.J. There the underlying claim was that Northwestern Bell maintained telephone rates at an artificially high level, to the economic detriment of its customers, through a pattern of bribing memb ers of the Minnesota Public Utilities Commission [MPUC]. With his customary lucidity Justice Brennan recapitulated the pleadings this way before holding that the plaintiff had sufficiently pleaded a cause of action on all of them. (1) Based upon these factual allegations, petitioners alleged in their first count a pendent state-law claim, asserting that Northwestern Bell violated the Minnesota bribery statute ... as well as state common law prohibiting bribery. They also raised four separate claims under 1962 of RICO. Count II alleged

b)

c)

11

that, in violation of 1962(a), Northwestern Bell derived income from a pattern of racketeering activity involving predicate acts of bribery and used this income to engage in its business as an interstate enterprise. Count III claimed a violation of 1962(b), in that, through this same pattern of racketeering activity, respondents acquired an interest in or control of the MPUC, which was also an interstate enterprise. In Count IV, petitioners asserted that respondents participated in the conduct and affairs of the MPUC through this pattern of racketeering activity, contrary to 1962(c). Finally, Count V alleged that respondents conspired together to violate 1962(a), (b), and (c), thereby contravening 1962(d). H.J., supra, 492 U.S. at 233-234, 109 S. Ct. at 2897-2898. 2. Investment violations. As noted above, 1962(a) forbids any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity ... in which such person has participated as a principal ... to use or invest, directly or indirectly, any part of such income, or [its] proceeds ... in acquisition of any interest in, or the establishment or operation of, any enterprise ... a) [A] plaintiff seeking civil damages for a violation of section 1962(a) must allege facts tending to show that he or she was injured by the use or investment of racketeering income rather than merely from the underlying predicate crimes. Nugget Hydroelectric v. PG&E Co., 981 F.2d 429, 437 (9th Cir. 1992). (1) This the rule in all circuits except the Fourth. A Fourth Circuit decision, Busby v. Crown Supply, Inc., 896 F.2d 833, 837-38 (4th Cir. 1990) holds that a 1962(a) claim need only allege injury from the predicate acts that generated income that, in turn, was subsequently used or invested. This decision has been widely criticized.

b)

Because injury must flow proximately from the RICO violation itself, subsection (a) is of more use as basis for criminal prosecution than for civil recovery. A large proportion of the cases analyzing subsection (a) in a civil context have held the elements unsatisfied. See, e.g., Schwartz v. The Upper Deck Co., 956 F. Supp. 1552, 1559 (S.D.Cal. 1997) (claim dismissed; plaintiffs failed to allege that defendant received racketeering income and used it in a way which harmed plaintiffs). (1) We believe the evidence is insufficient to create a material issue of fact as to whether defendants' use or investment of racketeering income was a substantial factor in causing plaintiffs to pay higher prices for the degradable bags. The causal connection is tenuous at best. The direct cause of plaintiffs' alleged injuries was the fraudulent conduct. Plaintiffs have neither alleged nor demonstrated a connection with the use or investment of racketeering income other than the normal reinvestment of corporate profits. If this remote connection were to suffice, the use-or-investment injury requirement would be almost completely eviscerated when the alleged pattern of racketeering is committed on behalf of a corporation. Brittingham v. Mobil Corp., 943 F.2d 297, 305 (3d Cir. 1991). For a rare example of an investment violation upheld at the pleading level, see In re American Honda Motor Co., Inc. Dealerships Relations Litigation, 941 F. Supp. 528 (D.Md. 1996).

(2)

c)

The verbs use and invest describe what acts constitute a violation of 1962(a). The remaining language in the subsection merely describes the circumstances and conditions under which these acts are prohibited. The use or investment is the crux

12

of the violation. Therefore, in order to allege injury by reason of a violation of 1962(a), a RICO plaintiff must claim he was injured by reason of the use or investment of the income derived from racketeering. Palumbo v. I.M. Simon & Co., 701 F. Supp. 1407, 1410 (N.D.Ill. 1988) (holding connection too tenuous to support recovery). (1) [T]he remaining language sets forth: who cannot use or invest (any person who ...); what cannot be used or invested (any income derived ...); and how one is prohibited from using or investing (in the acquisition of ...). Ibid at n.5.

d)

The statutory requirement that a defendant have participated as a principal avoids criminalizing the conduct of those who, for example, receive the proceeds of a pattern of racketeering activity innocently or unknowingly. Rakoff & Goldstein, RICO: CIVIL AND CRIMINAL LAW AND STRATEGY 1.06[1]. In the Ninth Circuit a single entity may be both person and enterprise for purposes of subsection (a). Wilcox v. First Interstate Bank of Oregon, N.A., 815 F.2d 522, 529-530 (9th Cir. 1997). (1) But the majority rule is that an enterprises reinvestment of illicit proceeds in its own general operations is not sufficient to ground recovery under subsection (a). See, e.g., Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 657 (S.D.N.Y. 1996).

e)

f)

The statute provides that [a] purchase of securities on the open market for purposes of investment, and without the intention of controlling or participating in the control of the issuer, or of assisting another to do so, shall not be unlawful under this subsection if the securities of the issuer held by the purchaser, the members of his immediate family, and his or their accomplices in any pattern or racketeering activity ... after such purchase do not amount in the aggregate to one percent of the outstanding securities of any one class, and do not confer, either in law or in fact, the power to elect one or more directors of the issuer. 18 U.S.C. 1962(a). (1) This exemption operates to exclude ordinary purchase of common stock in modest amounts through standard investment channels from the reach of the RICO statute. But such phrases as intention of ... participating in ... control and in law or in fact may limit the applicability of the exemption in some contexts.

(2)

3.

Acquisition and control violations. Section 1962(b) forbids any person through a pattern of racketeering activity ... to acquire or maintain, directly or indirectly, any interest in or control of any enterprise ... a) Note that, unlike an investment violation, to be forbidden the acquisition and control must be through a pattern of racketeering. Also unlike an investment violation, there is no requirement that proceeds of racketeering be used to acquire or control the target enterprise. (1) Unlike Section 1962(a), which can cover conduct unrelated to the enterprise in which the investment is made, Section 1962(b) requires that the object of the [racketeering] activity be to gain an interest in or control of the particular

b)

13

enterprise. Rakoff & Goldstein, RICO: CIVIL AND CRIMINAL LAW AND STRATEGY 106[2]. c) But as with an investment violation, in order to state a claim under 1962(b), a plaintiff must allege that the injury was caused by the acquisition or maintenance of control and not by the predicate acts. By failing to allege how she was injured by an acquisition or maintenance of control, Katzman has failed to plead a violation of 1962(b). Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 657 (S.D.N.Y. 1996) (citations omitted). (1) To distinguish it from injury from predicate acts, the injury required to recover under 1962(b) is sometimes called acquisition injury. See, e.g., Discon, Inc. v. Nynex Corp., 93 F.3d 1055, 1063 (2d Cir. 1996) (citing cases from other circuits); Danielsen v. Burnside-Ott Aviation Training Center, Inc., 941 F.2d 1220, 1237 (D.C.Cir. 1991). This requirement causes many civil subsection (b) claims to fail (criminal cases are easier). As a result, cases construing interest and control as terms of art are scarce. For a valiant try, based on dictionary definitions, see Nafta v. Feniks International House of Trade (U.S.A.) Inc., 932 F. Supp. 422, 428 (E.D.N.Y. 1996).

(2)

d)

Unlike the situation under subsection (c), the accused person and the affected enterprise need not be distinct under 1962(b). Schreiber Distributing Co. v. ServWell Furniture Co., Inc., 806 F.2d 1393, 1398 (9th Cir. 1986); accord, e.g., In re Burzynski, 989 F.2d 733, 743 (5th Cir. 1993);(insider, although a member of the enterprise, can use racketeering activity to maintain or increase his interest in the enterprise).

4.

Conducting of affairs violations. Section 1962(c) forbids any person employed by or associated with any enterprise ... to conduct or participate, directly or indirectly, in the conduct of such enterprises affairs through a pattern of racketeering activity. a) A violation of 1962(c) ... requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. The plaintiff must, of course, allege each of these elements to state a claim. Sedima, 473 U.S. at 496, 105 S. Ct. at 3285 (1985) (footnote omitted). But because injury from the conduct of an enterprises affairs is much easier to show than injury from investment or acquisition, subsection (c) claims often succeed where those based on other subsections fail. Unlike the other 1962 violations, compensable injury in a subsection (c) case may be from the predicate acts themselves. Sedima, S .P.R.L. v. Imrex Co., 473 U.S. 479, 494-95, 105 S. Ct. 3275, 3283-84 (1985), and see American National Bank & Trust Co. v. Haroco, Inc., 473 U.S. 606, 105 S. Ct. 3291 (1985). (1) Although this is sometimes loosely understood to allow recovery from predicate acts alone, the acts must have been done in the context of the RICO violation. Where the plaintiff alleges each element of the violation, the compensable injury necessarily is the harm caused by predicate acts sufficiently related to constitute a pattern, for the essence of the [subsection (c)] violation is the commission of those acts in connection with the conduct of an enterprise. Those acts are, when committed in the circumstances delineated in 1962(c), an activity which RICO was designed to deter.

b)

c)

14

Any recoverable damages occurring by reason of a violation of 1962(c) will flow from the commission of the predicate acts. Sedima, supra, 473 U.S. at 497, 105 S. Ct. at 3285 ( footnote omitted). See also, e.g., Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996) (subsection (c) recovery requires proof of pattern of racketeering activity). d) The verb conduct is the important one in the infelicitous phrase to conduct or participate, directly or indirectly, in the conduct of such enterprises affairs. Passive or low-level participation may not be enough; to meet this element requires an element of direction. Reves v. Ernst & Young, 507 U.S. 170, 178, 113 S. Ct. 1163, 1169 (1993). (1) But RICO liability is not limited to those with primary responsibility for an enterprises affairs, with formal positions in the enterprise, or with significant control over or within the enterprise. Reves v. Ernst & Young, 507 U.S. 170, 113 S. Ct. 1163 (1993). Even relatively low-ranking people may have RICO liability. In Reves the Supreme Court held outside auditors were not participating in the conduct of the enterprises affairs sufficiently for RICO liability. For a Ninth Circuit case applying Reves, see Baumer v. Pachl, 8 F.3d 1341, 1344-1345 (9th Cir. 1993) (no RICO liability for attorney with only sporadic involvement).

(2)

(3)

e)

Unlike the situation with a subsection(a) investment violation, for the purposes of section 1962(c), RICO plaintiffs must allege a defendant -- the person or persons -who is distinct from the enterprise whose business the defendant is conducting. Under RICO, an enterprise is a being different from, not the same as or part of, the person whose behavior the act was designed to prohibit. Therefore, for the purposes of a single action, a corporate defendant cannot be both the RICO person and the RICO enterprise under section 1962(c). Sever v. Alaska Pulp Corp., 978 F.2d 1529, 1533 (9th Cir. 1992) (citations and internal quotation marks omitted). See also, e.g., Doyle v. Hasbro, Inc., 103 F.3d 186, 190 (1st Cir. 1996); United HealthCare Corp. v. American Trade Ins. Co., Ltd., 88 F.3d 563, 570 (8th Cir. 1996).

5.

Conspiracy violations. Conspiracy violations are forbidden by 1962(d). a) A conspiracy to violate RICO is not the same as a conspiracy to commit the predicate acts. Rather, it is a conspiracy to commit one of the activities prohibited under Sections 1962(a), (b) or (c). Rakoff & Goldstein, RICO: CIVIL AND CRIMINAL LAW AND STRATEGY , 1.06[4]. It is the agreement to violate the law (here the RICO law, requiring a pattern of at least two predicate acts) which is the key element. The RICO conspiracy law is thus more comprehensive than the general federal conspiracy law defined in 18 U.S.C. 371, which also requires an overt act to effect the object of the conspiracy. Salinas v. United States, ___ U.S. ___, 118 S. Ct. 469, 476 (1997). (1) The accused conspirator need not have agreed to commit any of the predicate acts personally; it is sufficient that he agreed to further the endeavor. Salinas, supra, 118 S. Ct. at 477. Agreement to commit the predicate acts but not the rest of the RICO violation may not be enough. See United States v. Viola, 35 F.3d 37, 43-45 (2d Cir.

b)

(2)

15

1994) (reversing RICO conspiracy conviction; defendant committed two acts of selling stolen goods, but insufficient proof he knew the general nature of the enterprise and ... that the enterprise extend[ed] beyond his individual role.). c) It is elementary that a [RICO] conspiracy may exist ... whether or not the substantive crime ensues, for the conspiracy is a distinct evil ... Salinas, supra, 118 S. Ct. at 477. Thus there may be a conspiracy to acquire control of an enterprise, for example, even if control is not ultimately achieved. (1) For a Ninth Circuit criminal case applying this principle see United States v. Brooklier, 685 F.2d 1208, 1215 (9th Cir. 1982).

d)

A conspiracy requires at least two actors, so no one may conspire with himself. But the Ninth Circuit has recently held that a corporation may conspire with its own officers, representatives or employees. See Webster v. Omnitrition Intern., Inc., 79 F.3d 776, 787 (9th Cir. 1997). (1) But compare, e.g., New Beckley Mining Corp. v. International Union, United Mine Workers of America, 18 F.3d 1161, 1164-1165 (4th Cir. 1994) (claim dismissed because allegedly conspiring entities insufficiently distinct).

e)

The circuits are split as to whether a plaintiff alleging conspiracy injury under 1962(d) may base his claim on injury caused by any overt act in furtherance of the conspiracy, or only on injury from acts which are themselves RICO predicate acts. Compare, e.g., Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 25 (2d. Cir. 1990) (requiring injury from predicate acts), with K. Kay Shearin v. The E.F. Hutton Group, Inc., 885 F.2d 1162, 1168-1170 (3rd Cir. 1989) (injury from overt act furthering conspiracy sufficient even if not itself a predicate act); and see discussion in Gagan v. American Cablevision, Inc., 77 F.3d 951, 958-959 (7th Cir. 1996) (holding overt nonpredicate act sufficient). The Ninth Circuit inclines more to the view that injury must flow from a predicate act. See Reddy v. Litton Industries, Inc., 912 F.2d 291 (9th Cir. 1990).

D.

Elements of a RICO private action 1. Statutory definition. Section 1964(c) provides in pertinent part that [a]ny person injured in his business or property by reason of a violation of section 1962 ... 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 attorneys fee ... a) To recover under the RICO civil damages provision, a civil plaintiff must therefore show: (1) (2) A RICO violation (discussed above, see section II.B.). that the injury was by reason of the RICO violation, that is, a proximate cause connection to injury; injury to business or property and that the business or property injured was his (a question of standing) (a) or, of course, hers or its.

(3) (4)

16

2.

Causation. The quantum of causation required for RICO liability occupied the courts for quite a while until it was settled by Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 112 S. Ct. 1311 (1992) that proximate cause in the classical sense is required. a) Holmes applied to RICO the legislative history of the antitrust treble damage provisions, which have been interpreted to require proximate rather than merely butfor causation. Holmes, 503 U.S. at 267-8, 112 S. Ct. at 1317-8. Accord, e.g., Forsyth v. Humana, Inc., 114 F.3d 1467, 1481 (9th Cir. 1997). This requires a direct connection and absence of intervening agency. The policy reasons supporting this type of causation requirement were set out by Justice Souter in the Holmes opinion. (1) First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiffs damages attributable to the violation, as distinct from other, independent, factors. Second, quite apart from problems of proving factual causation, recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries. And, finally, the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely. Holmes, 503 U.S. 258, 269-270, 112 S. Ct. 1311, 1319-1320 (1992) (citations omitted)

b)

c)

An intervening act breaking the chain of causality can defeat RICO liability. (1) In Holmes conspirators were said to have manipulated the stock market, causing injury to broker-dealers who could then not meet their nonpurchasing customers claims. Held: a (subrogated) claim on behalf of customers was too remote. The broker-dealers simply cannot pay their bills, and only that intervening insolvency connects the conspirators acts to the losses suffered by the nonpurchasing customers and general creditors. Holmes, 503 U.S. at 271, 112 S. Ct. at 1319. For a similar Ninth Circuit example see Hamid v. Price Waterhouse, 51 F.3d 1411 (9th Cir. 1995), where depositors were held without standing to sue under RICO against third parties who looted bank; their injuries were derivative of the banks injuries, and only the bank could recover.

(2)

3.

Specialized injury. a) At first many courts were unwilling to accept the broad reach of the civil RICO statute, and attempted to impose restrictions on civil RICO by requiring a gangster-like situation, a racketeering injury, a competitive injury, or even a prior conviction. These attempts were defeated by the Supreme Courts 5-4 decision in Sedima, S .P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 105 S. Ct. 3275 (1985), which held the statute unambiguous and therefore permitting no such restriction. (1) b) Cases sugges ting such limitations are obsolete.

Only business or property injury is compensable under RICO.

17

(1)

Thus personal injury and injury to intangible interests are not compensable under RICO. See, e.g., Bowen v. Oistead, 125 F.3d 800, 806 (9th Cir. 1997) (civil rights violations and injury to reputation); Oscar v. University Students Co-op. Assn., 965 F.2d 783 (9th Cir. 1992) (en banc) (personal injuries; right of enjoyment of tenancy); Berg v. First State Ins. Co., 915 F.2d 460, 464 (9th Cir. 1990) (emotional distress).

c)

To be compensable under civil RICO the injury must flow from the RICO violation itself, including all elements, not just from the predicate crime (although for subsection (c) claims the injury may flow from predicate acts undertaken in a RICO context). Sedima, 473 U.S. 479, 105 S. Ct. 3275 (1985); American National Bank and Trust Co. of Chicago v. Haroco, Inc., 473 U.S. 606, 105 S. Ct. 3291 (1985) (per curiam).

4.

Interstate nexus. Although the nexus to interstate or foreign commerce has been excluded from the present discussion, it remains an essential element of a federal RICO violation and must be pleaded and proved. Limitations period. Civil RICO has a four-year limitations period, established by the Supreme Court by analogy to the Clayton Act. Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 107 S. Ct. 2759 (1987). Equitable remedies. Equitable remedies such as injunction, compelled divestiture and dissolution, and restrictions on future activities and investments, available to the government under 1964(a), are ordinarily (but perhaps not always) unavailable to civil RICO plaintiffs under caselaw. a) For cases allowing some form of equitable relief to private plaintiffs, see CCH RICO BUSINESS DISPUTES GUIDE 1815; see also Rakoff & Goldstein, RICO: CRIMINAL AND CIVIL LAW AND STRATEGY 1.08[2][a].

5.

6.

7.

Prevailing defendants. Prevailing defendants may not recover fees under the RICO statute. See, e.g., Chang v. Chen, 95 F.3d 27, 28 (9th Cir. 1996). Concurrent jurisdiction. State courts have concurrent jurisdiction over civil (but not criminal) RICO claims, following the presumption of concurrent jurisdiction absent legislative intent to the contrary. Tafflin v. Levitt, 493 U.S. 455, 458-460, 110 S. Ct. 792, 794-795 (1990); see also 18 U.S.C. 3231. So not only may a state RICO claim be brought as a pendent claim in state court, a federal claim may be brought in state court if for some reason that is thought tactically or procedurally preferable.

8.

E.

The lure of treble damages has made pleading RICO routine 1. Treble damages plus costs. Section 1964(c) makes treble damages (plus costs and fees) mandatory without any extra element of proof. So the RICO angle can triple damages, but can be pleaded within the same complaint as other statutory or common-law bases for recovery. a) [T]he potential for treble damages and attorneys fees is a powerful, if not irresistible, temptation to bring civil suits under RICO. Gramercy 222 Residents Corp. v. Gramercy Realty Associates, 591 F. Supp. 1408, 1413 (E.D.N.Y. 1984). Since it has become a matter of standard practice to add private RICO claims to most civil complaints, traditional commercial disputes are often transformed into complicated federal RICO proceedings. Petra J. Rodrigues, The Civil RICO Racket:

b)

18

Fighting Back with Federal Rule of Civil Procedure 11, 64 St. Johns Law Review 931, 936 (1990) (footnotes omitted). 2. Other advantages. There are other advantages as well to pleading under the civil RICO statute. a) If a federal forum is thought desirable for whatever reason (such as use of federal procedure), civil RICO provides a federal forum without a jurisdictional minimum. State law claims, or federal claims which would not otherwise qualify for the federal forum, may be included as pendent claims. Similarly, because 1965(a) provides that a RICO action may be instituted in ... any district in which [a defendant] resides, is found, has an agent, or transacts his affairs, pleading civil RICO offers expanded scope for service of process and therefore for venue. (1) But see Butcher's Union Local No. 498, United Food and Commercial Workers v. SDC Investment, Inc., 788 F.2d 535, 539 (9th Cir. 1986) ([T]he right to nationwide service in RICO suits is not unlimited. For nationwide service to be imposed under section 1965(b), the court must have personal jurisdiction over at least one of the participants in the alleged multidistrict conspiracy and the plaintiff must show that there is no other district in which a court will have personal jurisdiction over all of the alleged coconspirators.)

b)

c)

Because a pattern of racketeering activity can go back ten years (or more counting tolling periods), this broadens very significantly the area of inquiry on discovery. RICO may also enable plaintiffs to avoid restrictive judicial interpretations of other federal statutes which might otherwise on their face provide relief. For example, a plaintiff might have been injured by collusive conduct which violates both the antitrust laws and the federal fraud statutes. If the action were brought under the antitrust laws, the plaintiff would have to show antitrust injury and might be barred from recovery under the indirect purchaser rule. Arguably, these limitations do not apply to a civil RICO claim when the predicate acts are mail and wire fraud. Rakoff & Goldstein, RICO: CRIMINAL AND CIVIL LAW AND STRATEGY 7.02[1] (footnotes citing cases omitted). There are tactical as well as procedural advantages for pleading civil RICO. (1) The most important of these is the stigma of being called a racketeer. Defendants (and cross-defendants) fear this stigma and may be motivated to settle rather than risk public accusation of racketeering. (a) The only reason Pelletier could have had for charging Rickertsen, Carmines, and Crumley with violating the federal RICO statute would be to bring about a quick settlement. Rickertsen, Carmines, and Crumley, concerned that being labeled RICO coconspirators might damage their professional reputations, would want the case terminated at the earliest moment, with as little publicity as possible, and they would put pressure on Zweifel to settle. Pelletier v. Zweifel, 921 F.2d 1465, 1520 (11th Cir. 1991).

d)

e)

(2)

The risk of treble damages (plus costs and attorney fees) can encourage settlement even where a case is not particularly strong.

19

(a)

Many a prudent defendant, facing a ruinous exposure, will decide to settle even a case with no merit. It is thus not surprising that civil RICO has been used for extortive purposes, giving rise to the very evils it was designed to combat. Justice Thurgood Marshall, quoted in the debate on the Private Securities Litigation Reform Act, see In re Prudential Securities Inc. Ltd. Partnerships Litigation, 930 F. Supp. 68, 80 (S.D.N.Y. 1996).

(3)

Also the increased complexity which the RICO element brings to discovery and proof can increase the costs in time and money to the defendant (or plaintiff, if RICO is alleged by cross-claim in the answer). This may also encourage settlement. (a) Of course, pleading a RICO claim solely for this reason would be unethical. But if the RICO claims are otherwise justified by the law or facts, the availability of treble damages makes pleading them not only ethical but practically mandatory for a zealous advocate.

3.

Policy arguments favoring use of civil RICO. There are significant policy arguments against expansive use of civil RICO. a) It federalizes and quasi-criminalizes many ordinary business disputes. (1) Given the prevalence of mail and wire use in commercial transactions, RICO's provision for a private cause of action predicated on violations of the mail and wire fraud statutes virtually federalizes common law fraud. Note, Civil RICO: The Temptation and Impropriety of Judicial Restriction, 95 Harvard L. Rev. 1101, 1105 (1982).

b) c)

It makes targets of companies the statute was supposed to protect. It makes satisfying RICO a primary goal of litigation, beyond (and sometimes eclipsing) the issues which would have been present (and perhaps settled) if RICO were not a factor. But the Supreme Court has stated clearly that policy arguments against the breadth of the civil RICO statute are unavailing because the statutory language is unambiguous, and these arguments must be directed to Congress. See, e.g., Sedima, supra, 473 U.S. 479, 518, 105 S. Ct. 3275, 3287. (1) In one important instance Congress has narrowed the statute, by limiting the use of securities fraud as a predicate for civil (but not criminal) RICO. See section III.R above. (Securities fraud may still be used as before as a predicate act for civil forfeiture.)

d)

4.

Broad use of civil RICO. Civil RICO has been used in a great many contexts hardly contemplated by a Congress which was thinking about organized crime. a) The courts recognize that the capacious terms of the statute can be stretched to include ordinary commercial dis putes that do not merit a treble damage remedy in federal court. Rakoff & Goldstein, RICO: CIVIL AND CRIMINAL LAW AND STRATEGY at 7.01.

20

b)

The scope of the civil RICO statute is breathtaking. An allegation of fraud in a contract action can transform an ordinary state law claim into a federal racketeering charge. Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 447 (5th Cir. 1992), citing R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350, 1355 (5th Cir. 1985). But, as noted, the Supreme Court has insisted in a number of decisions that, given the plain language of the statute, its arguably over-wide reach is a matter for Congress rather than the courts to remedy. See, e.g., Sedima, 473 U.S. 479, 105 S. Ct. 3275 (1985). Examples include: (1) Marital dissolution dispute. See Perlberger v. Perlberger, RICO Bus.Disp.Guide 9438, 1998 WL 76310 (E.D.Pa. 1998) (allegation that husband and others participated in a fraudulent scheme to conceal the true value of [husbands] income during the couples divorce proceedings stated RICO claim based on mail and wire fraud. Threats to abortion clinics. See National Organization of Women v. Scheidler, 510 U.S. 249, 114 S. Ct. 798 (1994). Cattle rustling. See Barrett v. Tallon, 30 F.3d 1296 (10th Cir. 1994) (defendants auctioned cattle entrusted to them under a grazing agreement) (sanctions reversed). Dispute about improper representations in sale of insurance policies. See Creative Bath Products, Inc. v. Connecticut General Life Ins. Co., 837 F.2d 561 (2d Cir. 1988) (denial of sanctions upheld) Dispute about hospital privileges for doctor. Was he suspended for legitimate reasons or because of personal dislike and a rivals jealousy? Hospital was the enterprise, phone calls supplied wire fraud even though the calls themselves were not fraudulent. See Smith v. Our Lady of the Lake Hospital, Inc., 960 F.2d 439 (5th Cir. 1992) (sanctions reversed on appeal). Garden variety dispute about whether a car, sold retail, was as advertised. See OFerral v. Trebol Motors Corp., 45 F.3d 561, 563 (1st Cir. 1995) (sanction upheld on appeal) Examples could be vastly multiplied.

c)

d)

(2)

(3)

(4)

(5)

(6)

(7) e)

One commentator has characterized civil RICO as being itself a sort of racket. See Petra J. Rodrigues, The Civil Rico Racket: Fighting Back with Federal Rule of Civil Procedure 11, 64 St. Johns Law Review 930 (1990).

III. A.

Rule 11 Overview of Rule 11 1. Summary. In abbreviated summary, Rule 11 provides that a person signing (or submitting or advocating from) a court paper thereby represents to the court that to the best of his or her knowledge, information or belief, formed after reasonable inquiry: a) it is not being presented for any improper purpose,

21

b)

the factual contentions it contains have evidentiary support (or are likely to have some after investigation and discovery), and the legal contentions on which it is based are warranted by existing law or by a nonfrivolous argument for its extension or change. Violations are subject to a variety of sanctions in the courts discretion, on motion of a party or on the courts own motion. For an exhaustive history of Rule 11, as well as deep analysis of issues arising under it, practitioners are referred to Georgene M. Vairo: RULE 11 SANCTIONS: CASE LAW PERSPECTIVES AND PREVENTIVE M EASURES, an enormous looseleaf volume published and supplemented by Prentice-Hall.

c)

d)

e)

B.

History of the Rule. 1. Original Rule. Rule 11 was part of the original Federal Rules of Civil Procedure, adopted in 1937. a) It was based on former Equity Rules and on English practice. See Advisory Committee Note to original rule. The original Rule 11 stated that an attorneys signature on a pleading or motion constituted a certification that the attorney had read it, that to the best of his knowledge, information and belief there is good ground to support it, and that it was not interposed for delay. Sanctions were discretionary. (1) c) The text of the original Rule 11 can be found at 97 F.R.D. at 165.

b)

Rule 11 was little used for the next 45 years. Scant attention was paid to its existence and sanctions were seldom imposed.

2.

Amendments. Two important amendments, in 1983 and 1993, made significant changes in Rule 11. a) As practitioners are primarily concerned with the Rule as it now stands, and under which they must operate, these materials will analyze the law by subject rather than by version. But it is very important to consider the date of any Rule 11 case and what version of the rule was being applied. (1) The 1983 amendments became effective August 1, 1983; the 1993 amendments became effective December 1, 1993. In promulgating the 1993 version of Rule 11, the Supreme Court ordered that that version shall govern all proceedings in civil cases thereafter commenced and, insofar as just and practicable, all proceedings in civil cases then pending. See, e.g., Espinoza v. United States, 52 F.3d 838, 840 (10th Cir.1995) (quoting the Supreme Courts Order of April 22, 1993). (a) It has therefore been held that, when there are reasons justifying applying either version (for example, a motion filed after the change based on actions taken before), it is within the discretion of the trial court which version to apply. See, e.g., Runfola & Associates, Inc. v. Spectrum Reporting II, Inc., 88 F.3d 368, 373 (6th Cir. 1997).

(2)

22

(b)

But the contrary has also been held: that where the conduct sought to be sanctioned took place before the change, the earlier rule must apply (except insofar as it made sanctions mandatory) lest counsel be held to a standard of conduct not in force at the time of his or her actions. See, e.g., Knipe v. Skinner, 19 F.3d 72, 77-78 (2d Cir. 1994). As 1993 recedes into history this distinction will become of less practical importance, but counsel must continue to be careful to understand what version of the Rule is applied in any case studied or cited, a circumstance which cannot always be deduced from the date of the case.

(c)

b)

The Advisory Committee wrote in its Note to the 1983 Amendment that [e]xperience shows that in practice Rule 11 has not been effective in deterring abuses. There has been considerable confusion as to (1) the circumstances that should trigger striking a pleading or motion or taking disciplinary action, (2) the standard of conduct expected of attorneys who sign pleadings and motions, and (3) the range of available and appropriate sanctions. The new language is intended to reduce the reluctance o f courts to impose sanctions ... by emphasizing the responsibilities of the attorney and reenforcing those obligations by the imposition of sanctions. (emphasis added; citations omitted) The 1993 Amendment was intended to remedy problems that have arisen in the interpretation and application of the 1983 revision of the rule. Advisory Committee Notes to 1993 Amendment

c)

C.

Sanctions, once mandatory, are now discretionary. 1. Shifting requirement. Originally Rule 11 sanctions were discretionary. As part of an attempt to make the Rule a more vital force in governing attorney conduct, the 1983 amendment made sanctions mandatory upon showing of a violation. a) During the period where sanctions were mandatory, courts sometimes tended not to find violations in close cases where they thought sanctions would not be warranted. (1) See, e.g., cases cited in Rodrigues, The Civil RICO Racket: Fighting Back with Federal Rule of Civil Procedure 11, 64 St. Johns Law Review 930 (1990) at n.7 (judicial resistance to the imposition of Rule 11 sanctions is particularly prevalent in civil RICO actions).

b) D. Rule 11 violations 1.

Imposition of sanctions was made discretionary again by the 1993 amendment.

Elements of violation. [T]hree types of conduct warrant the imposition of Rule 11 sanctions: (1) when a party files a pleading that has no reasonable factual basis; (2) when the party files a pleading that is based on a legal theory that has no reasonable chance of success and that cannot be advanced as a reasonable argument to change existing law; and (3) when the party files a pleading in bad faith for an improper purpose. Pelletier v. Zweifel, 921 F.2d 1465, 1514 (11th Cir. 1991) (citations and footnote omitted). Winning argument not required. Of course, the fact that an argument or claim loses, even on summary judgment, is not enough to make it sanctionable.

2.

23

a)

It is obvious from the text of the Rule that the pleader need not be correct in his view of the law. Thus the granting of a motion to dismiss the complaint for failure to state a claim, or the granting of a summary judgment against the pleader is not dispositive of the issue of sanctions. Zaldivar v. City of Los Angeles, 780 F.2d 823, 830 (9th Cir. 1986). (1) See also, e.g., Westlake North Property Owners Assn. v. City of Thousand Oaks, 915 F.2d 1301, 1306 (9th Cir. 1990) (standard for dismissal under Rule 12(b)(6) differs from that for imposing sanctions under Rule 11).

3.

Factual contentions a) Only where no factual basis exists is Rule 11s factual inquiry requirement violated. . . . We conclude that plaintiffs did have a sufficient factual basis under Rule 11 for implicating Smith in the scheme. Many of the facts do not support the allegation that Smith was involved in the scheme. A factual basis for the allegation does exist, however. Brubaker v. City of Richmond, 943 F.2d 1363, 1377 (4th Cir. 1991) (emphasis added). If there is reasonable ground to believe that discovery or investigation may provide evidentiary support for factual contentions, it does not violate Rule 11 to make those contentions in anticipation of such support, even if that support is ultimately not forthcoming. (1) Rule 11 must not bar the courthouse door to people who have some support for a complaint but need discovery to prove their case. Kraemer v. Grant County, 892 F.2d 686, 689-690 (7th Cir.1990); accord, e.g., Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 447 (5th Cir. 1992). Rule 11 does not seek to stifle the exuberant spirit of skilled advocacy or to require that a claim be proven before a complaint can be filed. Cleveland Demolition Co. v. Azcon Scrap Corporation, 827 F.2d 984, 988 (4th Cir. 1987).

b)

(2)

c)

The certification is that there is (or likely will be) evidentiary support for the allegation, not that the party will prevail with respect to its contention regarding the fact. That summary judgment is rendered against a party does not necessarily mean, for purposes of this certification, that it had no evidentiary support for its position. On the other hand, if a party has evidence with respect to a contention that would suffice to defeat a motion for summary judgment based thereon, it would have sufficient evidentiary support for purposes of Rule 11. Advisory Committee Notes to 1993 Amendment. Often ... a denial is premised upon the existence of evidence contradicting the alleged fact. At other times a denial is permissible because, after an appropriate investigation, a party has no information concerning the matter or, indeed, has a reasonable basis for doubting the credibility of the only evidence relevant to the matter. A party should not deny an allegation it knows to be true; but it is not required, simply because it lacks contradictory evidence, to admit an allegation that it believes is not true. Advisory Committee Notes to 1993 Amendments. But where a complaint is filed without adequate investigation or factual support, but after-acquired information provides factual support, sanctions are unwarranted. In re Keegan Management Co., Securities Litigation, 78 F.3d 431, 433-435 (9th Cir. 1996) (noting contrary view in other circuits, at 435 n.1).

d)

e)

24

4.

Legal contentions a) A legal contention is unjustified when a reasonable attorney would recognize [it] as frivolous. Put differently, a legal position violates Rule 11 if it has absolutely no chance of success under the existing precedent. In re Sargent, 136 F.3d 349, 352 (4th Cir. 1998) (combining two most frequently used tests) (citations and internal quotation marks omitted) (emphasis added). (1) The Ninth Circuit tends to prefer the word frivolous to the phrase absolutely no chance of success favored in other circuits but as the above quotation shows, the two tests have been considered to mean the same thing. (a) A claim is frivolous if it is both baseless and made without a reasonable and competent inquiry. A frivolous claim is one that is legally unreasonable, or without legal foundation. In re Grantham Bros., 922 F.2d 1438, 1442 (9th Cir. 1991) (citations and internal quotation marks omitted). See also Townsend v. Holman Consulting Corp., 929 F.2d 1358) (9th Cir. 1990) (leading case). The Ninth Circuit has quoted with approval the absolutely no chance of success formula as a gloss on frivolous. See United States v. Stringfellow, 911 F.2d 225, 226 (9th Cir. 1990) (quoting Eastway Construction Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir. 1985). Rule 11 sanctions should be applied if a competent attorney, after reasonable inquiry, would not have a good faith belief in the merit of a legal argument. Amwest Mortgage Corp. v. Grady, 925 F.2d 1162, 1164 (9th Cir. 1991).

(b)

(c)

b)

Governing precedent is what counts; a legal contention is not sanctionable because it is rejected by applying later-decided law, or law from another circuit, or non-binding district court precedent. (1) For example, in Brubaker v. City of Richmond, 943 F.2d 1363, 1378 (4th Cir. 1991), a RICO case, the court held as follows: Appellants contend, among other things, that the district court should not have based sanctions on the Citys incapacity to form criminal intent because the Fourth Circuit case law in this area was non-existent and there is not enough other authority to conclude that it was objectively unreasonable to believe that the City could form criminal intent. We agree. The district court relied on three district court cases from courts in other circuits as demonstrating that the City was incapable of forming criminal intent. Where neither the Supreme Court nor any courts within this circuit have ruled on the issue and the statute itself does not offer a clear answer, the issue is not one on which a plaintiff has absolutely no chance of success. A plaintiff under such circumstances has a right to come to court seeking to obtain a different result from that reached by other districts. He need not advance a winning argument to avoid Rule 11 sanctions. Any other conclusion would chill an attorneys enthusiasm or creativity in pursuing legal theories, a result that the advisory committee sought to avoid.

25

(2)

[C]reative claims, coupled even with ambiguous or inconsequential facts, may merit dismissal, but not punishment. Davis v. Carl, 906 F.2d 533, 538 (11th Cir.1990).

c)

The lack of legal basis need not affect the substantive elements of the claim. When a reasonable investigation would have revealed that a claim is barred, for example, by res judicata or collateral estoppel, Rule 11 sanctions may be imposed. See Buster v. Greisen,104 F.3d 1186, 1189-1190 (9th Cir. 1997); see also, e.g., Estate of Blue v. City of Los Angeles, 120 F.3d 982, 985 (9th Cir. 1997) (sanctions upheld where action timebarred). (1) A motion for someting procedurally impossible can count as friovolous for purposes of Rule 11. See Townsend v. Holman Consulting Corp., 929 F.2d 1358) (9th Cir. 1990) (motion for district court reconsideration after appeal had been taken).

d)

Arguments for change in the law. (1) Although arguments for a change of law are not required to be specifically so identified, a contention that is so identified should be viewed with greater tolerance under the rule. Advisory Committee Notes to 1993 Amendments. For a Ninth Circuit example where rather far-fetched arguments for extension of the law were held not to merit sanctions, see Ault v. Hustler Magazine, 860 F.2d 877 (9th Cir. 1987). [T]he extent to which a litigant has researched the issues and found some support for its theories even in minority opinions, in law review articles, or through consultation with other attorneys should certainly be taken into account in determining whether there has been a violation. Advisory Committee Notes to 1993 Amendments.

(2)

(3)

5.

Continuing obligation a) The circuits are divided as to whether Rule 11 imposes a continuing duty on an attorney to modify or abandon previously stated legal or factual positions when conditions change, or when investigation has revealed them no longer to be justified. (1) One line of cases [holds] that Rule 11 does not impose a continuing duty; another line of cases holds or suggests that there is a continuing duty; and [a] final line of cases suggests that while there technically is no continuing duty to withdraw a particular paper filed, there is an implicit duty not to file new papers after becoming aware that a position lacks merit. Georgene M. Vairo, RULE 11 SANCTIONS: CASE LAW PERSPECTIVES AND PREVENTIVE M EASURES 5.04[b][2]. The Advisory Committee Notes to the 1993 Amendment strongly suggest that the third line of cases is the favored one, saying if evidentiary support is not obtained after a reasonable opportunity for further investigation or discovery, the party has a duty under the rule not to persist with that contention. Subdivision (b) does not require a formal amendment to pleadings for which evidentiary support is not obtained, but rather calls upon a litigant not thereafter to advocate such claims or defenses.

(2)

26

(3)

In a case decided before the 1993 amendment, the Ninth Circuit held that Rule 11 applies only to the initial signing and imposes no continuing duty on the signer. MGIC Indemnity Corp. v. Moore, 952 F.2d 1120, 1121 (9th Cir. 1991). It is unclear at this writing whether the Ninth Circuit will persist in this position. For an astute case study of when an attorney may come under a duty to stop prosecuting a RICO claim, see Rodriguez v. Banco Central, 155 F.R.D. 403 (D.P.R. 1994) (applying 1983 version of the rule).

(4)

b)

Many courts now routinely require a RICO case statement, by standing order or otherwise, including complete answers to a series of difficult questions. Rakoff & Goldstein, RICO: CRIMINAL AND CIVIL LAW AND STRATEGY 7.02 (listing jurisdictions and cases at n.25). The RICO case statement must reflect the attorneys current understanding of the facts and the law. (1) In OFerral v. Trebol Motors Corp., 45 F.3d 561, 563 (1st Cir. 1995) the First Circuit held that an attorney who did not sign the original pleading, but did sign a RICO case statement in which the original allegations were reasserted, had Rule 11 exposure.

E.

Attorneys representation. 1. Original meaning. Originally the attorneys representation (or certification) meant only that to the best of his knowledge, information and belief there is good ground to support the pleading or motion and that it is not interposed for delay. 1983 amendment. The 1983 amendment substituted a more focused standard: now it meant that to the best of his knowledge, information and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or cause unnecessary delay or needless increase in the cost of litigation. (Emphasis added) a) The 1983 revisers noted that the new language was intended to clarify the law/fact problem and to recognize that there were other improper motives for abusive filings other than delay. The use of the masculine pronoun was rectified by a 1987 amendment which had no substantive effect on the meaning of the rule.

2.

b)

3.

1993 amendment. The 1993 Amendment expanded this further in the new subsection (b). a) b) Arguments for changes in the law must now be nonfrivolous. Allegations and factual contentions must have evidentiary support or be likely to have such support after further investigation or discovery if specifically so identified. The scope of the certification now covers defense and other legal contentions and denials of factual contentions. While none of these additions changed the law, they did make explicit what had formerly been implicit and had developed as a matter of federal common law.

c)

d)

27

F.

Prefiling inquiry. 1. Imposition of requirement. The 1983 language imposed an explicit requirement of prefiling inquiry. There needs to be inquiry into both the facts and the law to satisfy the affirmative duty imposed by the rule. Advisory Committee Notes to 1983 Amendment. Requirements. [W]hat constitutes a reasonable inquiry may depend on such factors as how much time for investigation was available to the signer; whether he had to rely on a client for information as to the facts underlying the pleading, motion, or other paper; whether the pleading, motion, or other paper was based on a plausible view of the law; or whether he depended on forwarding counsel or another member of the bar. Advisory Committee Notes to 1983 Amendment. a) For a similar but not identical list, see Beverly Gravel, Inc. v. DiDomenico, 908 F.2d 223, 225 (7th Cir. 1990). Tolerance of factual contentions in initial pleadings by plaintiffs or defendants when specifically identified as made on information and belief does not relieve litigants from the obligation to conduct an appropriate investigation into the facts that is reasonable under the circumstances; it is not a license to join parties, make claims, or present defenses without any factual basis or justification. Advisory Committee Notes to 1993 Amendment. To be reasonable, the prefiling factual investigation must uncover some information to support the allegations in the complaint. A complaint containing allegations unsupported by any information obtained prior to filing violates the required prefiling factual investigation. That is, where there is no factual basis for a plaintiffs allegations, the complaint violates Rule 11s factual inquiry requirement. The prefiling investigation must also uncover some basis in law to support the claims in the complaint. A prefiling investigation of the law will not pass muster under Rule 11 where the complaint has absolutely no chance of success under the existing precedent. Brubaker v. City of Richmond, 943 F.2d 1363, 1373 (4th Cir. 1991) (citations and internal quotation marks omitted) (emphasis added). (1) Since, however, we find that [plaintiff] Pelletier and [attorney] Schlanger actually knew from the beginning that Pelletiers [RICO] claims were frivolous but proceeded to prosecute them anyway, it is unnecessary for us to examine what a reasonable inquiry by Schlanger would have revealed. Pelletier v. Zweifel, 921 F.2d 1465, 1514 n.88 (11th Cir. 1991).

2.

b)

c)

d)

For a Ninth Circuit example of sanctions imposed for filing a general form pleading that had not been properly revised to reflect the facts of the case, see Terran v. Kaplan, 109 F.3d 1428, 1343-1345 (9th Cir. 1997). An unmodified boilerplate RICO count would be subject to the same sanctions.

G.

Good faith. 1. Subjective good faith. Under the original Rule there was considerable confusion about whether subjective good faith was a defense to imposition of sanctions. The word wilful, stricken in 1983, contributed to this confusion. The 1983 amendment substituted an objective standard, which continues under the 1993 amendment. a) Objective standard. The 1983 revisers said the new standard is more stringent than the original good-faith formula and thus it is expected that a greater range of

28

circumstances will trigger its violation. See Zaldivar v. City of Los Angeles, 780 F.2d 823, 828-829 (9th Cir.1986). b) This change was intended to eliminate any empty-head pure-heart justification for patently frivolous arguments. Advisory Committee Notes to 1993 Amendments. (1) [C]ounsel can no longer avoid the sting of Rule 11 sanctions by operating under the guise of a pure heart and empty head. Smith v. Ricks, 31 F.3d 1478, 1488 (9th Cir. 1994) (quoting Zuniga v. United Can Co., 812 F.2d 443, 452 (9th Cir.1987)).

c)

Under Rule 11, attorney conduct is measured objectively against a reasonableness standard, which consists of a competent attorney admitted to practice before the involved court. In re Grantham Bros., 922 F.2d 1438, 1441 (9th Cir. 1991), citing Zaldivar v. City of Los Angeles, 780 F.2d 823, 829-30 (9th Cir.1986). If, judged by an objective standard, a reasonable basis for the position exists in both law and in fact at the time that the position is adopted, then sanctions should not be imposed. Golden Eagle Dist. Corp. v. Burroughs Corp., 801 F.2d 1531, 1538 (9th Cir.1986). [B]ecause of the objective standard applicable to Rule 11 analyses, a complaint that is found to be well-grounded in fact and law cannot be sanctioned as harassing, regardless of the attorney's subjective intent. Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1159 (9th Cir. 1988) (en banc). Our conclusion that Pelletier brought this suit purely for the purpose of harassing Zweifel and forcing a quick settlement does not answer the question whether Schlanger has prosecuted this case in bad faith. We determine that he has done so, however, because he knew from the start that Pelletiers claims were frivolous. Pelletier v. Zweifel, 921 F.2d 1465, 1520 (11th Cir. 1991).

d)

e)

f)

H.

Professional standards. 1. Reliance on others. An attorney is personally responsible for pleadings filed over his or her signature. a) For example, in In re Kunstler, 914 F.2d 505, 514 (4th Cir.1990), the court held that an attorneys reliance on other attorneys to prepare the complaint was an improper delegation of his responsibility under Rule 11 to certify that pleading filed over his name was well grounded in fact and in law, and therefore he would not be heard to protest that he does not share in any violations of Rule 11 which are evident on the face of the complaint. [A]n attorney receiving a case from another attorney is entitled to place some reliance upon that attorneys investigation. Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 446 (5th Cir. 1992), citing Thomas v. Capital Securities Services, 836 F.2d 866, 875 (5th Cir. 1988).

b)

2.

Incompetence and inexperience. Incompetence and inexperience are also disfavored as excuses. For example, the Fourth Circuit said in Cabell v. Petty, 810 F.2d 463, 466 (4th Cir.1987) that Rule 11 does not prohibit merely intentional misconduct. Inexperience, incompetence, willfulness or deliberate choice may all contribute to a violation. 810 F.2d at 466.

29

a)

But the same court also held that an attorney is inexperienced or incompetent would, of course, be relevant where ... the attorney is accused of filing the pleading for an improper purpose. As this circuit recognized in [In re Kunstler 914 F.2d 505, 519 (4th Cir. 1990)], inexperience or incompetence may have caused their inclusion in a pleading, rather than or in addition to willfulness or deliberate choice. Inexperience may also be relevant in determining the amount of the sanction. Brubaker v. City of Richmond, 943 F.2d 1363, 1373 n.14 (4th Cir. 1991) (citations omitted) In Smith v. Ricks, 31 F.3d 1478, 1488 (9th Cir. 1994) an attorney was sanctioned for renoticing a motion already denied; the attorney had filed the paper without reading it, thinking it was a notice of appeal.

b)

I. J.

[Reserved] Other factors influencing courts judgment 1. Snapshot rule. Reasonableness is reviewed according to the snapshot rule, focusing upon the instant the attorney affixes his signature to the document. Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 444 (5th Cir. 1992), citing Thomas v. Capital Securities Services, 836 F.2d 866, 874 (5th Cir.1988) (en banc); see also, e.g., West Coast Theater Corp. v. City of Portland, 897 F.2d 1519, 1522 (9th Cir. 1990) ([w]hen evaluating the pleading, we apply an objective standard and look at the attorney's conduct at the time of signing.) a) The rule is not intended to chill an attorneys enthusiasm or creativity in pursuing factual or legal theories. The court is expected to avoid using the wisdom of hindsight and should test the signers conduct by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted. Advisory Committee Notes to 1983 Amendment. Avoiding the wisdom of hindsight, courts must judge the signers conduct by what was reasonable to believe at the time the pleading, motion or other paper was submitted. The proper focus is on whether the complaint or other paper constitutes abusive litigation or misuse of the courts process, and, in that light, Rule 11 sanctions are inappropriate simply because an attorney, after time for discovery, is unable to produce adequate evidence to withstand a motion for summary judgment. Martin v. Brown, 151 F.R.D. 580, 585 (W.D.Pa. 1993) (citations and internal quotation marks omitted).

b)

2.

Reliance on client. An attorney is permitted to rely, to a reasonable extent, on what his client tells him, especially if no other source of information is yet available. a) Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 446-447 (5th Cir. 1992) illustrates this principle. The court said ...virtually all of the factual materials relevant to proving the RICO case were beyond Smiths reach, in the hands of the defendants. The essence of the alleged offense was the defendants agreement and intent to defraud, which cannot be ascertained easily from extrinsic evidence; a party should be given some leeway in making allegations about such matters, as long as the lawyers investigation is otherwise reasonable. Because conspiracies are carried out in secret, direct proof of agreement is rare.... We cannot require an attorney to procure a confession of participation in a conspiracy from one of the prospective defendants before filing suit.... Until some other source of information [becomes] available ... [the plaintiffs lawyer] ha[s] to rely on his client for the factual foundation for the claim. There [is] simply no other source to which he [can] turn. (citations omitted)

30

b)

But an attorney may not substitute reliance on a client for adequate investigation where circumstances permit it. See, e.g., Hendrix v. Naphtal, 971 F.2d 398, 400 (9th Cir. 1992) (upholding sanctions for incorrect allegation of diversity jurisdiction, based on statement of domicile by lay client who had three homes); Lloyd v. Schlag, 884 F.2d 409, 412-413 (9th Cir. 1989) (upholding sanctions for bringing infringement action on copyright whose transfer had not been recorded, based on statements of client).

K.

Court may act sua sponte. 1. Amended rule. The 1983 amendment confirmed the authority of the trial court to impose sanctions sua sponte as well as on motion of the aggrieved party. See Hurd v. Ralphs Grocery Co., 824 F.2d 806, 809 (9th Cir. 1987). a) 2. The 1993 Amendment provided that this should be done through a show cause order.

What court may consider. The court acting on motion is not limited to what the moving party asserts. a) The district court below, apparently of the view that its examination of Pelletiers complaint was circumscribed by the allegations in Zweifels motion for sanctions, limited its inquiry to the merits of Pelletiers allegation that Zweifel intended to participate in Culpeppers scheme. A district court, however, must impose sanctions sua sponte whenever it finds a complaint to be frivolous. The court below operated under an erroneous view of the law: it should have conducted -- on its own initiative -a much more searching inquiry into the merits of Pelletiers complaint. Because it failed to conduct such an inquiry, it developed a clearly erroneous assessment of the evidence. Pelletier v. Zweifel, 921 F.2d 1465, 1514 (11th Cir 1991). (1) At the time this case was decided sanctions were still mandatory. But the principle is still in effect that a court may conduct its own inquiry.

3.

Due process. But the basic due process requirements of notice and a hearing still apply. See Feminist Women's Health Center v. Codispoti, 63 F.3d 863, 869-870 (9th Cir. 1995); see also, e.g., Jones v. Pittsburgh National Corp., 899 F.2d 1350, 1357 (3rd Cir. 1990) (requiring particularized notice; mere existence of the Rule insufficient to satisfy due process).

L.

Safe harbor. 1. Safe harbor provision. A safe harbor provision was added in 1993, allowing a party to avoid a formal motion for sanctions by withdrawing and correcting a pleading or motion after a challenge by the other side. a) This emphasizes the duty of candor by subjecting litigants to potential sanctions for insisting upon a position after it is no longer tenable and by generally providing protection against sanctions if they withdraw or correct contentions after a potential violation is called to their attention. Advisory Committee Note to 1993 Amendment.

M.

Other issues. 1. Forbidden motives. Although it will not be discussed extensively in thee materials, one of the most frequent bases for awarding Rule 11 sanctions is a finding that litigation has been started or continued for an improper purpose such as harassment.

31

a)

Rule 11 motions should not be made or threatened for minor, inconsequential violations .... They should not be employed as a discovery device or to test the legal sufficiency or efficacy of allegations in the pleadings .... Nor should Rule 11 motions be prepared to emphasize the merits of a partys position, to exact an unjust settlement, to intimidate an adversary into withdrawing contentions that are fairly debatable, to increase the costs of litigation, to create a conflict of interest between attorney and client, or to seek disclosure of matters otherwise protected by the attorney-client privilege or the work-product doctrine. Advisory Committee Notes to 1993 Amendment. A complaint that is non-frivolous is, objectively, not filed for an improper purpose. Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir.1990) (en banc). In Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1162-1163 (9th Cir. 1988) (en banc), the Ninth Circuit held that even though the underlying actions were not frivolous, an enormous damage claim in the prayer, unsubstantiated and out of all proportion to the possible injury, was included for an improper purpose and was therefore sanctionable.

b)

c)

2.

Jurisdiction. Applicability of Rule 11 does not depend on jurisdiction over the underlying action. a) Because a violation of Rule 11 is complete when the offending paper is filed, district courts may enforce Rule 11 even after the plaintiff has filed a notice of voluntary dismissal under Rule 41(a)(1). Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 395, 110 S. Ct. 2447, 2455 (1990); and see, e.g., Greenberg v. Sala, 822 F.2d 882, 885 (9th Cir. 1987). Rule 11 sanctions can stand even if it is later determined that the federal court was without jurisdiction of the underlying action, because the sanctions punish the conduct of a party or his counsel in filing papers, a matter collateral to the merits of the dispute. Willy v. Coastal Corp., 503 U.S. 131, 112 S. Ct. 1076 (1992); see also Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 395, 110 S. Ct. 2447, 2455 (1990). Because it is collateral to the merits, [e]ven if a district court indicated that a complaint was not legally tenable or factually well founded for Rule 11 purposes, the resulting Rule 11 sanction would nevertheless not preclude the refiling of a complaint. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 396, 110 S. Ct. 2447, 2456 (1990). But such a maneuver would be ill-advised. Rule 11 applies in all actions in federal court, including civil actions removed from state court. See Rule 81(c); and see also Willy v. Coastal Corp., 503 U.S. 131, 112 S. Ct. 1076 (1992). For a Ninth Circuit case implementing this rule, see Buster v. Greisen, 104 F.3d 1186, 1190 (9th Cir. 1997).

b)

c)

d)

e)

3.

Explanation required. When imposing sanctions, the court shall describe the conduct determined to constitute a violation of this rule and explain the basis for the sanction imposed. Rule 11(c)(3). Exclusion of discovery. Rule 11 does not apply to disclosures and discovery requests, responses, objections, and motions that are subject to the provisions of Rules 26 through 37. Rule 11(d).

4.

32

N.

Who may be sanctioned. 1. Sanctions against attorney and firm. a) The old rule was silent on whether an attorney could be sanctioned personally. The 1983 amendment made it clear that this could be done. Sanctions may now be imposed on a law firm as well as on an individual attorney or party. (1) This 1993 change in the Rule was intended to overturn the Supreme Courts decision in Pavelic v. Marvel Entertainment Group, 493 U.S. 120, 110 S. Ct. 456 (1989), holding that a firm could not be sanctioned for the violation of an individual attorney.

b)

2.

Sanctions against a party. a) b) Where culpable, a party may be sanctioned as well as an attorney. But a represented party may not be sanctioned for a frivolous legal argument. Advisory Committee Notes to 1993 Amendments. (1) This restriction does not limit the courts power to impose sanctions or remedial orders that may have collateral financial consequences upon a party, such as dismissal of a claim, preclusion of a defense, or preparation of amended pleadings. Ibid.

O. P.

[Reserved] Variety of sanctions available. 1. Sanctions are for deterrence rather than punishment. Sanctions are to be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated. Rule 11(c)(2). a) The Supreme Court settled what had been a lively dispute as to whether Rule 11 sanctions were to be punitive or compensatory, by holding in Pavelic & LeFlore v. Marvel Entertainment Group, 493 U.S. 120, 126, 110 S. Ct. 456, 459-460 (1989) that the sanctioning mechanism of Rule 11 is not reimbursement but sanction, and that, accordingly, Rule 11 sanctions shall be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others. The 1993 Amendment codified this approach. See, e.g., Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 661 (S.D.N.Y. 1996).

2.

Monetary sanctions. Monetary sanctions may include attorney fees and costs of suit, and/or a fine payable to the court. Ibid. a) The amount of a monetary sanction ... should always reflect the primary purpose of Rule 11 -- deterrence of future litigation abuse. Accordingly, a district court should expressly consider the four factors adopted by this circuit ...: (1) the reasonableness of the opposing partys attorneys fees; (2) the minimum to deter; (3) the ability to pay; and (4) factors related to the severity of the Rule 11 violation. Brubaker, supra, 943 F.2d at 1374 (citations and internal quotation marks omitted)

33

b)

Sanctions of up to a million dollars are not unknown. See cases cited in Rakoff & Goldstein, RICO: CRIMINAL AND CIVIL LAW AND STRATEGY 7.03[1] n.1.

3.

Non-monetary sanctions. But sanctions need not be monetary. They may include striking the offending paper; issuing an admonition, reprimand, or censure; requiring participation in seminars or other educational programs or referring the matter to disciplinary authorities. Advisory Committee Notes to 1993 Amendments. a) Rule 11 sanctions have included public censure, see Pony Express Courier Corp. of America v. Pony Express Delivery Service, 872 F.2d 317, 319 (9th Cir. 1989); compulsory legal education, see LaVigna v. WABC Television, Inc., 159 F.R.D. 432 (S.D.N.Y. 1995), requiring leave of the Court before filing additional papers, see Binghamton Masonic Temple, Inc. v. Bares, 168 F.R.D. 121 (N.D.N.Y. 1996) and Fariello v. Campbell, 860 F. Supp. 54 (E.D.N.Y. 1994), mandatory pro bono representation, see Bleckner v. General Accident Insurance Co., 713 F. Supp. 642, 653 (S.D.N.Y. 1989), and even requiring an attorney to copy out, legibly, in his own handwriting a section of Wright, Miller & Coopers FEDERAL PRACTICE & PROCEDURE (with supplement but omitting footnotes), see Curran v. Price, 150 F.R.D. 85, 87 (D.C.Md.1993).

4.

Factors to be considered. The Advisory Committee Notes to 1993 Amendment suggest the following factors to be considered in imposing sanctions: a) b) c) d) e) f) g) h) whether the improper conduct was willful, or negligent; whether it was part of a pattern of activity, or an isolated event; whether it infected the entire pleading, or only one particular count or defense; whether the person has engaged in similar conduct in other litigation; whether it was intended to injure; what effect it had on the litigation process in time or expense; whether the responsible person is trained in the law; what amount, given the financial resources of the responsible person, is needed to deter that person from repetition in the same case; [and] what amount is needed to deter similar activity by other litigants.

i) 5.

Costs defined. Costs in federal proceedings are defined by 28 U.S.C. 1920. a) But see OFerral v. Trebol Motors Corp., 45 F.3d 561, 564 (1st Cir. 1995): It is true that some of the costs allowed by the district court went beyond those listed in 28 U.S.C. 1920], but a district court has discretion to award costs other than those so enumerated.

6.

Costs of sanctions proceedings. Since the 1993 amendment, costs of sanctions proceedings may now be recovered. See, e.g., Margolis v. Ryan, 140 F.3d 850, 854 (9th Cir. 1998). Costs on appeal on sanctions. Costs and fees on appeal of a Rule 11 sanction (or its denial) are not covered by Rule 11; they must instead be sought under Rule 38 of the Federal Rules of

7.

34

Appellate Procedure. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 407-409, 110 S. Ct. 2447, 2462-2463 (1990). And see Partington v. Gedan, 923 F.2d 686 (9th Cir. 1991) (en banc) (Rule 11 not incorporated by reference into circuit rules). 8. Other sources of sanctioning authority. Note that there are other bases for sanctions, including other Rules, 28 U.S.C. 1927, provisions of substantive statutes, and the inherent power of the court. a) Other sources of sanctioning authority in the Rules include Rule 16(f) (disobeying scheduling or pretrial order); Rule 26(g)(3) (improper discovery certification); Rule 30(d)(2) (impeding deposition); Rule 37 (A)(2)(b)(4) (discovery sanctions); Rule 56(g) (summary judgment affidavits made in bad faith). See also corresponding Bankruptcy Rules (e.g., Bankruptcy Rule 9011, see In re Marsch, 36 F.3d 825, 829-830 (9th Cir. 1994)). 28 U.S.C. 1927 provides that Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys fees reasonably incurred because of such conduct. [W]hen there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power. But if in the informed discretion of the court, neither the statute nor the Rules are up to the task, the court may safely rely on its inherent power. Chambers v. NASCO, Inc., 501 U.S. 32, 50, 111 S. Ct. 2123, 2136 (1991); accord, Western Systems, Inc. v. Ulloa, 958 F.2d 864, 873 (9th Cir. 1992) (Rule 11 did not preempt inherent powers). (1) For a Ninth Circuit case where sanctions were held outside 1927 (which only covers attorneys) and outside Rule 11 (which only covers filed papers), but were nevertheless held within the district courts inherent powers (subject to a finding of bad faith, for which the matter was remanded), see Primus Automotive Financial Services, Inc. v. Batarse, 115 F.3d 644, 648 (9th Cir. 1997).

b)

c)

Q.

Review for abuse of discretion 1. Standard of review. [A]n appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district courts Rule 11 determination. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S. Ct. 2447, 2461 (1990) a) Because the district court is [f]amiliar with the issues and litigants, the district court is better situated than the court of appeals to marshal the pertinent facts and apply the fact-dependent legal standard mandated by Rule 11. Montrose Chemical Corp. of California v. American Motorists Ins. Co., 117 F.3d 1128, 1133 (9th Cir. 1997) (quoting Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 402, 110 S. Ct. 2447, 2459 (1990)). One common reason for reversing application of Rule 11 sanctions is that the district court misunderstood the substantive law, and under a correct understanding of the law the sanctioned contentions were not objectively frivolous. A district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence. Cooter & Gell, 496 U.S. at 405, 110 S. Ct. at 2461; accord, e.g., Security Farms v. International Brotherhood of

b)

35

Teamsters, 124 F.3d 999, 1016 (9th Cir. 1997); Smith v. Our Lady of the Lake Hospital, Inc., 960 F.2d 439 (5th Cir. 1992); Brubaker v. City of Richmond, 943 F.2d 1363 (4th Cir. 1991). R. Private Securities Litigation Reform Act. 1. Private Securities Litigation Reform Act. Under the PSLRA a district court, upon a final adjudication of the merits in a private securities class action governed by the Act, must include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading or dispositive motion. 15 U.S.C. 78u4(c)(1). a) Although sanctions under the Rule itself are now discretionary, Rule 11 sanctions under the PSLRA are mandatory. See 15 U.S.C. 78u-4(c)(2); see also, e.g., Richter v. Achs, 174 F.R.D. 316, 318 (S.D.N.Y. 1997). This will be a fruitful source of Rule 11 jurisprudence in future years.

b) IV. A.

APPLICATION OF RULE 11 TO CIVIL RICO Tendency to abuse 1. Incentives for abuse. As has been seen, see section II.E. above, there are very substantial incentives, financial, procedural and tactical, to pleading RICO in a civil action. RICO elements varied and complex. As has also been seen, see section II.B. above, establishing a civil RICO claim requires individual proof of a great many separate elements: a) b) for the predicate acts under whatever criminal statute is selected, for the RICO context, both in terms of pattern and interstate nexus, and in terms of the particular requirements of each subsection of 1962, and for the entitlement to recovery under 1964(c).

2.

c) 3.

Notice pleading. The lenient orientation of the Rules of Civil Procedure expressly permits and indeed expects that grievances will be pleaded before the facts to support them are gathered. a) [I]n cases alleging civil RICO violations, particular care is required to balance the liberality of the Civil Rules with the necessity of preventing abusive or vexatious treatment of defendants. Miranda v. Ponce Federal Bank, 948 F.2d 41, 44 (1st Cir. 1991).

4.

Unsettled law. The law on many specifics of RICO jurisprudence is still not completely settled, courts sometimes resist applying rules that have been established, and the application of RICO outside the organized crime context for which it was designed encourages strained and artificial application of the statute. a) RICO is extremely broad and undefined in scope, and was even more so at the time plaintiffs filed their RICO count. Plaintiffs effort to take advantage of this fact was acceptable, satisfactory representation; it was not frivolous. Beverly Gravel, Inc. v. DiDomenico, 908 F.2d 223, 227 (7th Cir. 1990), quoting the district court.

36

(1)

This is still true in many respects even though the law has been further defined in the intervening years.

5.

Reinforcement for ethical practitioners. These conditions all foster advocacy of RICO claims which are at best marginal and at worst entirely unfounded. Rule 11 provides useful reinforcement for the reservations of ethical practitioners and a similarly useful check on the temptations RICO offers to practitioners of all degrees. a) We think that imposing sanctions in this case would serve the dual purpose of deterring the filing of frivolous claims and defenses while not chilling attorneys legitimate enthusiasm and creativity in advancing legal and factual theories. At a time when the federal courts -- which are a scarce dispute resolution resource, indeed -- are straining under the pressure of an ever-increasing caseload, we simply cannot tolerate this type of litigation. Particularly with regard to civil RICO claims, plaintiffs must stop and think before filing them. If used correctly, the civil RICO provisions may have many salutary effects. When used improperly, as in this case, those provisions allow a complainant to shake down his opponent and, given the expense of defending a RICO charge, to extort a settlement. Such improper use of the civil RICO provisions comes at the expense of the federal judiciary and those who need ready access to the courts. Pelletier v. Zweifel, 921 F.2d 1465, 1522 (11th Cir. 1991) Rule 11s deterrence value is particularly important in the RICO context, as the commencement of a civil RICO action has an almost inevitable stigmatizing effect on those named as defendants. Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 660 (S.D.N.Y. 1996), quoting Figueroa Ruiz v. Algeria, 896 F.2d 645, 650 (1st Cir. 1990 (internal quotation marks omitted). To stem the rising tide of RICO suits commenced without thoughtful attention to fundamental principles attendant upon that cause of action, the imposition of Rule 11 sanctions may serve the salutary purpose of discouraging such thoughtless litigation and of compensating Travelers for the expense it incurred in responding to it. The realization that not every business letter deposited in a postal box is mail fraud must somehow be forcefully aroused. Asbeka Industries v. Travelers Indemnity Co., 831 F. Supp. 74, 90-91 (E.D.N.Y. 1993).

b)

c)

6.

Use with respect to client. The formal inhibitions Rule 11 places on unfounded pleading, and the possible exposure of the party as well as the lawyer for violations, can be a useful tool for the lawyer in resisting unreasonable demands by clients for excessively aggressive statement of claims.

B.

Caselaw on Rule 11 and RICO. 1. Special emphasis in RICO cases. a) Some courts have taken an especially stern approach to Rule 11 in RICO cases. See, e.g., Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 444 (5th Cir. 1992): Given the resulting proliferation of civil RICO claims and the potential for frivolous suits in search of treble damages, greater responsibility will be placed on the bar to inquire into the factual and legal bases of potential claims or defenses prior to bringing such suit or risk sanctions for failing to do so. (1) But in fact, because the standards are so low -- to merit sanctions there must be no basis in fact for a factual allegation, no possibility of success for a legal contention and no reasonable argument for the laws extension,

37

modification or reversal -- sanctions are often refused or reversed (or denial upheld). 2. Lack of factual foundation. a) Even a tenuous factual basis is sufficient to defeat Rule 11 sanctions. See, e.g., Ford Motor Co. v. Summit Motor Products, Inc., 930 F.2d 277, 290 (3rd Cir. 1991) (reasonable, albeit tenuous, factual basis for a RICO claim protects against sanctions). (1) We must determine whether there is any factual basis for this allegation. Only where no factual basis exists is Rule 11s factual inquiry requirement violated. *** Rule 11 does not require that a judge or jury agree with a plaintiffs allegation. For Rule 11 purposes, the allegation merely must be supported by some evidence. Because we are unable to say that plaintiffs had no factual basis for their allegation, we cannot conclude that plaintiffs violated Rule 11s factual inquiry requirement. Brubaker v. City of Richmond, 943 F.2d 1363, 1377 (4th Cir. 1991) (emphasis added).

b)

For a classic example of sanctionably baseless factual pleading, see Avirgan v. v. Hull, 932 F.2d 1572 (11th Cir. 1991). (1) There, although the plaintiff Christic Institute must have known prior to suing that they had no competent evidence to substantiate the theories alleged in their [RICO] complaint, counsel supplemented the complaint with a detailed affidavit outlining the purported testimony of seventy-nine witnesses who Mr. Sheehan stated had factual knowledge supporting their claim. It developed that none of the witnesses could provide any admissible support for the Institutes position, some disclaiming any knowledge of the facts and denying ever having heard of the Institute or its counsel, others offering only inadmissible hearsay, yet others being long dead. Sanctions were upheld against counsel, his firm, and the Institute, because they must have known this in advance.

c)

On the other hand, where discovery might reasonably develop a factual basis for a RICO claim, sanctions are not warranted. (1) See, e.g., Beverly Gravel, Inc. v. DiDomenico, 908 F.2d 223, 226 (7th Cir. 1990): Counsel relied on information from his clients in making this [RICO] allegation. It appears that plaintiffs knew prior to filing that Dadco was a problem account for Road Materials. This was sufficient to support the filing of the complaint. The details of Road Materials relationship with defendants and the status of its accounts receivables, as well as those of the other suppliers which Dadco could have allegedly defrauded, are not readily ascertainable upon pre-filing investigation. It is not unreasonable to file a complaint so as to obtain the right to conduct discovery where that discovery is necessary to establish a claim. Because the focus under Rule 11 is on what counsel knew at the time the complaint was filed, not what subsequently was revealed in discovery, the district court did not abuse its discretion in concluding that this did not rise to the level of sanctionable conduct. (citations omitted)

3.

Lack of legal foundation.

38

a)

Under the most widely used test, the legal foundation must be one which on an objective basis has absolutely no chance of success under the existing precedent. Cleveland Demolition Co. v. Azcon Scrap Corp., 827 F.2d 984, 988 (4th Cir. 1987). To require more would forbid pursuit of claims even though they objectively have some chance of success. (1) A classic example of a RICO claim made without legal support is Fred A. Smith Lumber Co. v. Edidin, 845 F.2d 750 (7th Cir. 1988), where the claims were time-barred at the time of filing. (Although there was at that time a dispute about the correct limitations period, the claim was barred whatever the period.) Also only one fraud was alleged, and concealing the fraud was alleged (without legal basis) as the second act required for a pattern. Reversing denial of sanctions, the Court of Appeals said This case presents an appropriate occasion for imposing sanctions. It is apparent that FASCOs counsel failed to do the requisite legal research, that it persisted in advancing the objectively unreasonable claims already discussed, and that it generally acted in bad faith by filing a complaint for fraud in the hope that future discovery might uncover the allegations of wrongdoing. 845 F.2d at 754. (a) For another complaint held sanctionable for alleging a RICO pattern (which requires at least two predicate crimes) on the basis of a single act of wrongdoing, see Medical Emergency Service Associates, S.C. v. Foulke, 844 F.2d 391 (7th Cir. 1988). See also, e.g., Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 660 (S.D.N.Y. 1996) (failure to plead even one predicate act, and omission of other statutory elements for RICO recovery).

(2)

Another example of a RICO claim made without legal support is Ryan v. Clemente, 901 F.2d 177, 180-181 (1st Cir. 1990) (Judge Breyer). This case, involving sale of police promotion examinations, alleged the corrupt officer and the state officials who supposedly failed to investigate the scheme to have been part of an enterprise. But as the members of an enterprise have in some sense to share a common purpose, and there was no factual basis for thinking that they did, there was no legal basis (as well as no factual basis) for the RICO allegations, and sanctions were justified. Merely citing the correct legal formulations will not save an attorney from sanctions in the absence of factual support for his contentions. See, e.g., Davis v. Hudgins, 896 F. Supp. 561, 573 (E.D.Va. 1995): Although Plaintiffs claims reference the proper legal criteria under RICO, Plaintiff has presented no factual basis for the claims. The facts as alleged by Plaintiff do not support any pattern of racketeering activity, or the existence of an enterprise, both of which are essential elements of a RICO claim. Plaintiffs complaint therefore violates the requirement that a complaint be wellgrounded in fact. In the case at bar, it is clear from the complaint filed that had the plaintiff conducted even a cursory investigation into the laws of RICO prior to filing his complaint, he would have had ample opportunity to realize the inadequacy of his pleading. Plaintiffs attempt to base his RICO claim on predicate acts not listed in 18 U.S.C. 1961(1) -- larceny, defamation and libel -- is indication of plaintiffs failure to investigate prior to his filing of the complaint. Furthermore, even when plaintiff based his RICO claim on legitimate predicate acts listed in 18 U.S.C. 1961(1) -- obstruction of justice

(3)

(4)

39

and extortion -- plaintiff failed to realize that these predicate acts require the showing of certain elements which the plaintiff cannot in good faith allege is [sic] present in the instant case. All this coupled with the fact that plaintiff did not submit any opposition papers to defendants motion for sanctions can lead only to the conclusion that plaintiff failed to investigate the laws as required under Rule 11. Segarra v. Messina, 153 F.R.D. 22, 30 (N.D.N.Y. 1994). (5) For a contrasting case, where the attorneys legal position (although incorrect) was defensible under the law at the time of filing, see, e.g., Smith v. Our Lady of the Lake Hospital, 960 F.2d 439, 444-445 (5th Cir. 1992)

b)

Inadequate pleading. (1) As noted see section III.D.-G. above, RICO recovery requires detailed pleading of elements on least three levels of factual circumstances, and the elements differ according to which 1962 violation is involved. Conclusory or shotgun pleading of all four violations without a good-faith effort to satisfy these elements individually can result in Rule 11 exposure. A classic example is Pelletier v. Zweifel, 921 F.2d 1465, 1518-1519 (11th Cir. 1991). One extract from this factually complex opinion will do for present purposes. (a) In his ... RICO claim, Pelletier ... attempted to assert not one claim but four claims. That is, he sought treble damages under 1964(c) for Zweifel's alleged violation of all four of RICO's criminal provisions: 1962(a), (b), (c), and (d). Thus, by alleging in count one that Zweifel had violated each of section 1962's subsections, Pelletier was claiming that Zweifel had injured him (1) by investing income derived from a pattern of racketeering activity in the operation of two enterprises engaged in interstate commerce ...; (2) by acquiring or maintaining, through a pattern of racketeering activity, an interest in or control over such enterprises; (3) by conducting or participating in the conduct of (as an employee or associate) the affairs of such enterprises through a pattern of racketeering activity and (4) by conspiring to accomplish each of these objectives. The amended complaint, however, ... does not explain how Zweifel purportedly did these things. For example, in claiming that Zweifel violated section 1962(a), the amended complaint does not identify any income that Zweifel obtained from a pattern of racketeering activity; nor, assuming that he obtained such income, does it explain how, if at all, he invested it in the two enterprises. In claiming that Zweifel violated section 1962(b), the amended complaint does not indicate how Zweifel acquired or maintained, through a pattern of racketeering activity, an interest in or control over House of Travel; nor does it describe such interest. The amended complaint does say that Zweifel had a partnership interest in the Lokey & Bowden enterprise, but it does not allege any facts rom which one could infer that he acquired or maintained his partnership interest in that enterprise through a pattern of racketeering activity. In claiming that Zweifel violated section 1962(c), the amended complaint does not indicate how, if at all, Zweifel, as an employee or associate of House of Travel and Lokey

(2)

40

& Bowden, conducted, or participated in the conduct of, the affairs of those enterprises through a pattern of racketeering activity. To be sure, the amended complaint alleges that Zweifel engaged in such conduct, but the allegation is nothing more than a bald conclusion. To discern whether, in fact, Zweifel engaged in the proscribed conduct, one has to look to the exhibits attached to the amended complaint and then attempt to make the factual allegations Pelletier failed to make. * * * Finally, in claiming that Zweifel violated section 1962(d), the amended complaint does not indicate how an unexecuted conspiracy to violate sections 1962(a), (b), and (c), which is all that section 1962(d) requires to make out an offense, could have injured [Pelletier] in his business or property. (section and title numbers and footnotes omitted) (3) The Plaintiffs' RICO claim has no chance of success. Apparently, Mr. Marin believed that a compilation of unsubstantiated allegations was all that was necessary to bring a claim before the Court. From an objective standpoint the Plaintiffs' RICO claim was not well grounded in fact or law. Thus, the assertion of such a claim supports the imposition of sanctions. Binghamton Masonic Temple, Inc. v. Bares, 168 F.R.D. 121, 127 (N.D.N.Y. 1997). For an example of a RICO complaint based simply on section 1962 dismissed without prejudice for failure to distinguish among the four separate prohibited acts, see Slattery v. Costello, 586 F. Supp. 162, 168 (D.D.C. 1983).

(4)

c)

Rule 11 sanctions will not be imposed where the parties have raised legal issues sufficient to constitute a differing interpretation of the law. Red Ball Interior Demolition Corp. v. Palmadessa, 908 F. Supp. 1226, 1247 (S.D.N.Y. 1995) (deciding against sanctions after resolving ambiguities in favor of the filing party). (1) See also, e.g., Freilob v. Trustees of Alpine Mutual Fund Trust, 905 F. Supp. 843, 861 (D.Colo. 1995): In dismissing plaintiffs claims, I found two issues dispositive: (1) the non-tolling application of the statute of limitations and repose to plaintiffs securities law claims; and (2) the absence of fraud allegations sufficiently willful to constitute a criminal violation under RICO. As the federal courts differing interpretation and application of the pertinent law and my lengthy analysis of these matters show, I cannot say that it was patently clear that plaintiffs claims had absolutely no chance of success. (citations and internal quotation marks omitted.)

d)

Where the operative legal source is ambiguous, it is not sanctionable to proceed under any defensible interpretation. (1) See, e.g., Ford Motor Co. v. Summit Motor Products, Inc., 930 F.2d 277, 289 (3rd Cir. 1991): in most cases where a court order is ambiguous, any interpretation would be reasonable for the purposes of Rule 11, so long as it stays within the framework established by the surrounding language. Therefore, Altrans construction of the order, though we decline to adopt it, is nevertheless reasonable.

e)

Unlike the situation on appeal (where the decision below is upheld if a ground exists for doing so, even if it is not the ground the court below actually used), Rule 11 sanctions aim at deterring improper conduct, and the ingenuity of the reviewing court should not be used to defeat counsels responsibility.

41

(1)

We must determine whether counsels actual arguments were reasonable in light of the relevant facts and law, not whether reasonable arguments could have been advanced in support of counsels position. Beverly Gravel, Inc. v. DiDomenico, 908 F.2d 223, 225 (7th Cir. 1990) (denying sanctions).

f)

An attorney is not to be sanctioned because, absent local law, the law of other jurisdictions holds against his position, see e.g., Brubaker v. City of Richmond, 943 F.2d 1363 (4th Cir. 1991), where the law of other jurisdictions can form the basis for a reasonable argument for extension, reversal or modification of local law sufficient to defeat sanctions. (1) Although the [local] Circuit has taken a strict view toward the pattern requirement, it would appear that plaintiff, by relying largely on cases from other circuits, may argue in good faith that it met the continuity prong of the pattern test. Pobel v. Hans Christian Yachts, Inc., 933 F. Supp. 494, 496 (D.Md. 1996) (citations omitted). But the argument must be a genuine one, not merely an attempt to avoid contrary precedent. As the court said in Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 660 (S.D.N.Y. 1996): Plaintiffs claim under RICO, however, cannot reasonably be said to constitute a good faith attempt to extend existing law. Although litigants are not required to specifically identify good faith claims for the extension or modification of existing law, mere assertions contrary to existing precedent do not automatically qualify as such arguments. While rigid rules for good faith arguments for the extension of present law should not be established, focused policy arguments, or citation to contrary authority or law review articles, will be more likely to lead the court to characterize the argument as such. Plaintiffs counsel offers no explanation or argument for why this otherwise wholly deficient claim should be viewed as an argument for the extension of present RICO requirements. Plaintiffs RICO claim is not a reasoned argument for the extension of the law but merely a woefully inadequate and fatally flawed pleading. (citations omitted)

(2)

g)

Despite the objective standard, good faith still counts for something. (1) For example, in Clifford v. Hughson, 992 F. Supp. 661, 671 (S.D.N.Y. 1998), the court declined to impose sanctions, saying [o]f primary importance is the fact that plaintiffs amended their complaint each time with leave of the Court, in a good faith effort to supply the missing elements of a RICO claim. In these circumstances, it would be inappropriate to impose sanctions for plaintiffs ultimate failure to do so. We conclude that a reasonable attorney could believe that the RICO claim had a chance to succeed, particularly in light of the Courts encouragement. See also, e.g., Scheiner v. Wallace, 860 F. Supp. 991, 1002-1003 (S.D.N.Y. 1994) (attempt to cure pleading deficiency, although unsuccessful, weighed against imposition of sanctions) (citations omitted). The Clifford court contrasted cases such as Keles v. Yale University, 889 F. Supp. 729, 736 (S.D.N.Y. 1995) (imposing Rule 11 sanction where court has admonished plaintiffs that sanctions could be imposed upon amendment); McLoughlin v. Altman, 1995 WL 640770 (S.D.N.Y. 1995) (imposing Rule 11 sanctions where court had warned plaintiff of the possibility of such sanctions prior to amendment). Ibid.

(2)

42

(3)

The need to impose a sanction here was enhanced by [plaintiffs] continuing to press his RICO claim after receiving advice to withdraw the suit [from the Magistrate-Judge] at the pre-trial conference and after being warned by defendants that they would reques t a rule 11 sanction if he were to pursue the RICO claim. OMalley v. New York City Transit Authority, 896 F.2d 704, 709 (2nd Cir. 1990). [T]he court is not to delve into the attorneys subjective intent in filing the paper, but rather should assess s uch objective factors as whether particular papers or proceedings caused delay that was unnecessary, whether they caused increase in the cost of litigation that was needless, or whether they lacked any apparent legitimate purpose. Findings on these points would suffice to support an inference of an improper purpose. Sussman v. Bank of Israel, 56 F.3d 450, 458 (2d Cir. 1995), citing William W. Schwarzer, Sanctions Under the New Federal Rule 11: A Closer Look, 104 F.R.D. 181, 195 (1985). This passage has been quoted in a RICO context in, e.g., Binghamton Masonic Temple, Inc. v. Bares, 168 F.R.D. 121, 128 (N.D.N.Y. 1996). (a) Accord, e.g., Victorias Secret Catalogue, 167 F.R.D. 649, 661 (S.D.N.Y. 1996: The total lack of substance in the Plaintiffs RICO claims and the egregious and unjustified neglect of the required statutory elements gives rise to the inference that the action was filed for improper purposes.

(4)

(5)

In short, plaintiffs had no evidence with which to prove a violation of RICO on the part of these defendants. As has been noted, [t]here is a point beyond which zeal becomes vexation, the novel approach to a legal issue converts to frivolity and steadfast adherence to a position transforms to obdurateness. Cruz v. Savage, 691 F. Supp. 549, 556 (D.P.R.1988). The plaintiffs attorneys reached and surpassed this point in continuing to litigate this case when it became clear that any viable legal theory, especially as to these defendants, had long before been foregone. The remaining legal claim had no basis in fact. Rodriguez v. Banco Central, 155 F.R.D. 403, 407 (D.P.R. 1994) Given the fact that the RICO claim was added when Plaintiff amended her complaint, there was sufficient time available for her attorney to examine the facts and to ascertain the propriety of prosecuting a RICO claim. Instead, Plaintiffs attorney chose to file first and investigate later, which is unacceptable. Burnette v. Godshall, 828 F. Supp. 1439, 1448 (N.D.Cal. 1993), citing Hale v. Harney, 786 F.2d 688, 692 (5th Cir.1986).

(6)

4.

Cases analyzed. A review of 73 federal cases indexed under West key number 170Ak2771(11), covering federal sanctions in racketeering cases, revealed that Rule 11 sanctions were imposed or upheld in only about a third of them. In most of the cases the sanctionable conduct was improper motive, defective factual investigation, or defective pleading of predicate crimes, enterprise, or pattern, with a smattering of other situations. Almost never were sanctions imposed or upheld for failure to satisfy tort requirements such as causation or secondary injury. a) Improper purpose. Williams v. Prince Georges County Hospital Center, 932 F. Supp. 687, 690 (D.Md. 1996) (baseless action pursued after warning, for purpose of harassment and needless cost); Rodriguez v. Banco Central, 155 F.R.D. 403, 408 (D.P.R. 1994) (continuing to litigate RICO claims after awareness of lack of factual basis for them evidenced disregard for whether the litigation was vexatious); Harris

43

Custom Builders, Inc. v. Hoffmeyer, 834 F. Supp. 256, 263 (N.D.Ill. 1993) (intention to harass and delay); Project 74 Allentown, Inc. v. Frost, 143 F.R.D. 77, 89 (E.D.Pa. 1992) (intention to harass and annoy, and as preemptive strike to forestall foreclosure); Damiani v. Adams, 657 F. Supp. 1409 (S.D.Cal. 1987) (action brought in bad faith for purposes of harassment, based on claims rejected in prior litigation); Barlow v. McLeod, 666 F. Supp. 222) (D.D.C. 1986) (RICO pleaded solely for treble damages effect); Nixon v. Individual Head of St. Joseph Mortgage Co., 615 F. Supp. 898) (N.D.Ind. 1985) (action filed in bad faith). b) Defects in pleading enterprise. See Ryan v. Clemente, 901 F.2d 177 (1st Cir. 1990) (no factual support for common purpose requirement of enterprise); Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 660 (S.D.N.Y. 1996) (incoherently articulated enterprise); Davis v. Hudgins, 896 F. Supp. 561, 573 (E.D.Va. 1995) (facts did not support existence of enterprise); Barlow v, McLeod, 666 F. Supp. 222) (D.D.C. 1986) (same); Project 74 Allentown, Inc. v. Frost, 143 F.R.D. 77, 88 (E.D.Pa. 1992) (no evidence of existence of enterprise); Harrison v. Dean Witter Reynolds, Inc., 132 F.R.D. 184 (N.D.Ill. 1990) (failure to allege liable person and enterprise as separate entities). Facts did not support elements of predicate crimes. See Katzman v. Victorias Secret Catalogue, 167 F.R.D. 649, 660 (S.D.N.Y. 1996) (allegations did not support elements of mail fraud); Asbeka Industries v. Travelers Indemnity Co., 831 F. Supp. 74, 90 (E.D.N.Y. 1993) (same); Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324 (S.D.N.Y. 1993) (same: mail fraud, securities fraud); Brandt v. Schal Associates, Inc., 121 F.R.D. 368 (N.D.Ill. 1988) (same: mail fraud, robbery, extortion, Travel Act [18 U.S.C. 1952]); Segarra v. Messina, 153 F.R.D. 22, 30 (N.D.N.Y. 1994) (some alleged predicate crimes were not on the statutory list; others require the showing of certain elements which the plaintiff cannot in good faith allege); Henry v. Farmer City State Bank, 127 F.R.D. 154 (C.D.Ill. 1989) (predicate crimes were not and could not have been adequately pleaded; one arguable forgery was not RICO predicate crime nor pattern of activity). Facts did not support pattern of racketeering activity. See Davis v. Hudgins, 896 F. Supp. 561, 573 (E.D.Va. 1995) (conclusory claim; facts did not support pattern of racketeering activity); Barlow v. McLeod, 666 F. Supp. 222) (D.D.C. 1986) (same); Harris Custom Builders, Inc. v. Hoffmeyer, 834 F. Supp. 256, 263 (N.D.Ill. 1993) (failure to meet pattern requirement under established precedent); Henry v. Farmer City State Bank , 127 F.R.D. 154 (C.D.Ill. 1989) (claim of repeated violations unsubstantiated; one arguable forgery was not pattern of activity) supposed unlawful debt did not meet statutory elements); Chris & Todd, Inc. v. Arkansas Dept. of Finance & Administration, 125 F.R.D. 491 (E.D.Ark 1989) (failure to allege elements of continuity requirement). Failure to make reasonable inquiry into factual claims . See Chris & Todd, Inc. v. Arkansas Dept. of Finance & Administration, 125 F.R.D. 491 (E.D.Ark 1989); see also Chapman & Cole v. Itel Container International B.V., 116 F.R.D. 550 (S.D.Tex. 1987) (persisting in action after investigation produced no evidence of wrongdoing to support counsels subjective belief); Barlow v. McLeod, 666 F. Supp. 222) (D.D.C. 1986) (action based on conclusory allegations based on hope that something would turn up in discovery, and persisted in after nothing did). Defective conspiracy allegation. See Williams v. Prince Georges County Hospital Center, 932 F. Supp. 687, 690 (D.Md. 1996) (no allegation of predicate acts which were object of supposed RICO conspiracy); Barlow v. McLeod, 666 F. Supp. 222) (D.D.C. 1986) (no basis for alleging conspiracy). Other defects.

c)

d)

e)

f)

g)

44

(1) (2) (3) (4)

Failure to plead proximate causation. See Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324 (S.D.Ill. 1993). Failure to plead fraud or fraudulent conspiracy with specificity. See Henry v. Farmer City State Bank, 127 F.R.D. 154 (C.D.Ill. 1989). Failure to meet elements of unlawful debt provision. See Henry v. Farmer City State Bank , 127 F.R.D. 154 (C.D.Ill. 1989). Other grounds. (a) (b) Jennings v. Emry, 133 F.R.D. 134 (N.D.Ind. 1990) (plaintiff persisted in action after being warned of defendants absolute immunity). Henry v. Farmer City State Bank, 127 F.R.D. 154 (C.D.Ill. 1989) (no cognizable RICO injury pleaded).

h) 5.

Pelletier v. Zweifel and a few other cases previously noted sanctioning shotgun pleading are omitted.

Multiple claims . a) For a good example of careful parsing of Rule 11 sanctions as applied to a number of differing claims, upholding RICO claims while reversing civil rights claims, see Brubaker v. City of Richmond, 943 F.2d 1363, 1374 (4th Cir. 1991). In Barrett v. Tallon, 30 F.3d 1296 (10th Cir. 1994) the Court of Appeals held that while the district court was within its discretion in imposing sanctions on some grounds, it abused its discretion as to others. As the trial court had not apportioned sanctions by ground, the Court of Appeals remanded for reconsideration.

b)

V.

Practical suggestions. An attorney who follows the following suggestions is unlikely to have to face sanctions in any RICO matter. A. Study the statutes . 1. As noted, a RICO claim requires specific pleading on three levels: elements of the particular RICO violation alleged, elements of the predicate crimes, and elements of injury. It will not do to plead any RICO claim, much less all four statutory claims, without careful study of the applicable statutes. Remember that civil RICO is not one big thing, but four smaller things, the elements of each laid out in separate subsections of 1962, and in 1964(c). Each must be separately considered and separately pleaded, with its own separate elements independently met. a) For example, suppose your client has been injured by wrongful conduct. That establishes the basis for an ordinary tort claim, but is it also a RICO claim? Before pleading a RICO injury (based for example on subsection (c)), you must ask: (1) (2) (3) Was the wrongful conduct criminal? If not, there is no RICO violation. If so, what specific criminal statutes did the conduct violate? Is at least one of these criminal statutes on the list of crime defined in 1961(1) as racketeering activity? If not, there is no federal RICO violation. (a) State RICO statutes have their own lists of predicate crimes.

2.

45

(4)

For each such statute identified, does the supposedly violative conduct meet every element of the substantive crime? If not it doesnt count for RICO purposes. (a) For example, not every fraud is a federal mail, wire or bank fraud. These crimes are defined by criminal statutes which must be narrowly construed. Does the supposedly violative conduct arguably satisfy the mental state elements, if any, of the predicate crimes you plan to allege? If not, the crime was not committed and so cannot support a RICO claim.

(b)

(5)

If there were crimes, and they were on the list, was there more than one such racketeering act? If not, there is no RICO violation. If there was more than one racketeering act, do the acts form a pattern in the sense required by governing authority? That is, can a reasonable case be made that the acts were related and continuous (or presented a threat of continuity)? If not, there is no RICO violation. (a) A separate analysis is required where the RICO violation is premised on collection of an unlawful debt rather than on a pattern of racketeering activity. Here as elsewhere in these materials this is taken as understood, but will not be discussed.

(6)

(7)

If there was a pattern of racketeering activity as defined by the above tests, was the defendant separate from, and employed by or associated with, an enterprise as defined by local circuit authority? If not, or if the enterprise does not meet the tests of the case law, there is no subsection (c) violation. (a) If so, was the enterprise engaged in (or its activities affect) interstate or foreign commerce? If not, there is no RICO violation.

(8)

If so, was the pattern of racketeering activity part of the conduct of the enterprises affairs? If not, there is no subsection (c) violation. If the pattern of racketeering activity meets all the above requirements, was it a proximate cause of your clients injury? If not, your client cannot recover under RICO (although recovery may be possible under another theory). Finally, are your clients injuries to his business or property rather than to intangible interests, or to interests which really belong to someone else? Only injuries to ones own business or property are compensible under RICO.

(9)

(10)

b)

A similar checklist approach must be followed for each subsection you contemplate pleading. (1) For a subsection (a) investment violation, first inquire if there was a pattern of racketeering activity, using the same checklist as above. If the activity you think may ground the violation does not qualify as a pattern of racketeering activity according to the above checklist, there is no RICO violation. Then inquire whether the other elements of subsection (a) have been met.

(2)

46

(a)

Does the enterprise you are using to frame your subsection (a) violation meet the requirements in your circuit? If not, there is no violation. If so, did the prospective defendant establish, operate, or acquire an interest in the enterprise? If not, there is no subsection (a) violation. If so, did the prospective defendant do so using income derived (directly or indirectly) from the pattern of racketeering activity already identified? If not, there is no subsection (a) violation. (i) There is a statutory exemption for certain stock purchases. Does the targeted investment come under this exemption? If so, no violation.

(b)

(c)

(d)

Finally, was the investment in the enterprise (rather than the predicate crimes themselves) the proximate cause of injury to your clients business or property? If not, in most circuits your client may not recover under subsection (a). If all these questions were answered affirmatively, check again. Are you sure? It is worth double-checking because entitlement to civil recovery for a subsection (a) violation is very rare indeed, and a conclusion that you have such a rare item should be viewed with some skepticism.

(e)

(3)

For a subsection (b) violation the analysis is similar, substituting the specific requirements of subsection (b). (a) Is there a pattern of racketeering activity, under the above multi-part test? Is there an enterprise under the local circuit formula? Was your clients injury to his/her/its own business or property, and proximately caused not by the pattern of racketeering activity itself but by the defendants acquisition or maintenance of an interest in or control of that enterprise? Are you sure? Entitlement to civil recovery for subsection (b) injury is also very rare.

(b) (c)

(d)

(4)

For subsection (d) violations the analysis is similar. (a) Was there a conspiracy? That is, was there an agreement to violate subsections (a), (b) or (c) of RICO (not, usually, just agreement to commit predicate crimes), with all the elements we have seen those violations require? Were there enough conspirators? Activity of a single person will not qualify, and agreement of several may not qualify either, depending on the rule in your circuit.

(b)

47

(c)

Was the injury to your clients business or property, and was it proximately caused not by the predicate acts, but by the conspiracy itself? Are you sure?

(d) (5)

Similar analyses need to be made for state RICO claims, according to the elements of the state RICO statutes.

B.

Investigate the facts. 1. Do you have reasonable basis for believing that what you allege is both true and sufficient to ground your claim, or that you may reasonably expect to discover facts which support your claim? Articulate that basis. Is it more than just hope that something may turn up, or do you have a genuine reason to think discovery may provide factual support, rather than just an inchoate hope. What is that reason? a) Rule 11(b)(3) requires that factual positions propounded on the basis that they are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery be specifically so identified. Can you do that?

2.

3.

If you are relying on your clients representations to you, can you justify doing so? How? Is the necessary proof under adversary control? If material is under friendly control, have you reviewed it to the extent possible or reasonable? Are you being pressured by your client to allege these facts? If so, think twice before taking legal action based on pressure. Have you mentioned to your client the effect Rule 11 may have not only on you but on the party? Imagine you are before the court, defending against a sanctions motion. The court asks you what investigation you did into the facts, to satisfy your responsibilities under Rule 11. Does your imagined reply satisfy you? Are you comfortable with the propriety of your allegations, or not? Listen respectfully to your inner doubts. It is not good practice to skate too close to the edge of unethical or sanctionable conduct.

4.

5.

6.

C.

Investigate the law. 1. Have you researched the elements of RICO violation, predicate crimes, and RICO injury, as discussed above? a) Have you checked your circuits local wrinkles? For example, the Fourth Circuit permits recovery for predicate acts alone under subsection (a), while others do not. Sometimes these local wrinkles help your case and sometimes they hurt, but either way you need to know what they are.

2.

If your legal theory is based on an argument for the extension, modification, or reversal of existing law or the establishment of new law, as the Rule permits, is it a thoughtful and reasonable one?

48

a)

Rememb er that just saying the law should be different is not a reasonable argument unless supported by legal or policy justifications for the change. Can you provide respectable authorities supporting your point of view, whether cases in other jurisdictions, or proposals in law reviews, or policy reasons a court can legitimately consider? If you provide these they will likely protect you from sanctions; if you cant provide them you should think again whether your argument for change really is nonfrivolous as the Rule requires.

b)

3.

Have all other legal and factual requirements for your pleading, such as the limitations period, absence of estoppel, and so on, been satisfied? Are you being pressured to make these claims, either to gain treble damages or for other tactical or strategic advantage? If so, think again. Have you mentioned Rule 11 to your client? Imagine you are before the court, defending against a sanctions motion. The court asks you what investigation you did into the law, to satisfy your responsibilities under Rule 11. Does your imagined reply satisfy you? Are you comfortable with the propriety of the theory you are propounding?

4.

5.

6. D.

Check your papers. 1. Dont file anything without reading and understanding it. If something you read troubles you or you would like to know what its based on, inquire before filing. Your busy schedule is not an acceptable defense to sanctionable negligence. Dont rely uncritically on the work of paralegals, prior counsel, or anyone else. Reliance is fine, but only if it is reasonable. If you are relying on the work of others ask yourself why your reliance is justified. Is each RICO cause of action independently justified in terms of its own elements and requirements? If you plead fraud, have you pleaded it with particularity as required by Rule 9? Have you specifically identified factual positions you are propounding only on the likelihood of finding support after investigation or discovery, as Rule 11 requires? Can the court determine from your pleading exactly what each claim is based on, legally and factually? When you have finished reading, are you satisfied ethically and intellectually that what you have read may honorably be presented to the court? If you would feel uncomfortable saying something in your papers directly to the judge in person, you should feel just as uncomfortable saying it in writing and filing it-- think again.

2.

3.

4. 5. 6.

7.

E.

Check your motives. 1. It is fine to plead RICO in order to get treble damages and costs, and indeed if there is a proper basis for doing so your duty of zeal requires you to do so. And if you have a legitimate basis for doing so, it is fine to accept whatever tactical advantage it may offer. BUT is your pleading animated by an improper motive, pecuniary, tactical or procedural? If so, be sure you have a legitimate basis for proceeding.

49

2.

Are you responding to pressure from your client? If so, be sure in your heart that your actions are independently justified.Remember that, even apart from sanctions themselves, no client, and no recovery, is worth damage either to your reputation or your honor (or that of your client or your firm).

F.

Remember your continuing obligations. 1. If your investigation has disclosed facts which undermine positions you have taken earlier, does your circuit impose a continuing duty to update (or even modify or withdraw) your pleadings accordingly? Are you in compliance with what the law of your circuit demands of you? Even if Rule 11 does not impose such obligations, do your ethics as a practitioner, and the rule of professional conduct in your jurisdiction, impose them?

2.

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3.

Even if you do not have to modify existing pleadings, are future filings and advocacy (including a civil RICO statement, if any) properly grounded legally and factually?

G.

The complaint is not your last chance. 1. If you are not justified in raising a RICO claim at the time of filing, but you have other claims to file, you can file them and wait on RICO When your factual investigation has produced sufficient grounds, or at least a justifiable reason to believe further investigation and discovery will produce what is needed, you can move to amend to add RICO claims. If you plead a RICO violation now, are you in a position to meet a motion for summary judgment? If your opponent moves for summary judgment, and the court imposes a discovery cut-off, will you be able to produce sufficient facts to meet it, under current summary judgment jurisprudence, within the time allowed? If not, perhaps you should wait and amend later.

2.

51