The possibility of vicarious liability attaching for civil RICO Section 1962(c) 1 violations may exist in every case where the defendant, who actively violated 1962(c), was someone else's agent. Although initially challenged, nearly all circuits recognize its applicability.
Application of 1962(c) vicarious liability comes with significant consequences. Because vicarious liability provides another liable source, potentially a deep pocket, from which to recover treble damages, plaintiffs and their lawyers, whenever possible, may add these potentially liable parties as defendants. The potential application of 1962(c) vicarious liability comes at a great expense to these defendants, who may know nothing of the alleged criminal conduct until the time of suit, but will then be faced with costly litigation and the prospect of significant liability in the form of treble damages.
This article outlines the scope of and requirements for application of 1962(c) vicarious liability, identifying the factors for determining who may be liable and when. This article also considers bases for expanding the scope of 1962(c) vicarious liability and for modifying the analysis applied in determining whether a principal should be vicariously liable for its agent's 1962(c) activity.
RICO claims are subject to ever greater scrutiny. This article provides the practitioner with an outline of the considerations, as they have has so far developed, for determining whether vicarious liability may extend to a principal whose agent has violated 1962(c). This article also looks at two developments that post-date the more recent articles that address the issue of 1962(c) vicarious liability 2 - the adoption of Guidelines for sentencing organizations and the Supreme Court's pronouncement in Reves v. Ernst & Young, 507 U.S. 170 (1993) -- and considers how these developments may impact the scope of 1962(c) vicarious liability and the factors pertinent to analyzing a 1962(c) vicarious liability claim.
2.0 Brief History of Section 1962(c) Vicarious Liability
Initially, some courts suggested that vicarious liability was inconsistent with 1962(c) 3. The courts that urged this inconsistency made a strong argument 4. But that argument ultimately failed to the reasoning best expressed by the Ninth Circuit in Brady v. Dairy Fresh Products Co., 974 F.2d 1149 (9th Cir.1992).
The doctrine of Respondeat superior "can probably be best explained as an outgrowth of the sentiment that it would be unjust to permit an employer to gain from the intelligent cooperation of others without being responsible for the mistakes, the errors of judgment and the frailties of those working under his direction and for his benefit."
Petro-Tech, Inc. v. Western Co. Of North America, 824 F.2d 1349,1358 (3d Cir.1987)(Petro-Tech)(internal quotations omitted). Respondeat superior liability also provides employers with an incentive to monitor employees and deter wrongful conduct. The Third Circuit held in Petro-Tech that the purposes of RICO are furthered by applying the doctrine of Respondeat superior because Congress created a private right of action under RICO at least in part to compensate victims of racketeering. See id. We follow the Third Circuit and "hold that the doctrine of Respondeat superior may be applied under RICO where the structure of the statute does not otherwise forbid it." Id. This approach is consistent with the Supreme Court's admonition that RICO's civil provisions are to be construed liberally to effectuate the statute's "remedial purposes." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497-98, 105 S.Ct. 3275, 3285-86, 87 L.Ed.2d 346 (1985)(Sedima)(internal quotations omitted) 5.We hold that an employer that is benefitted by its employee or agent's violations of section 1962(c) may be held liable under doctrines of Respondeat superior and agency when the employer is distinct from the enterprise. Corporations and other employers that have benefitted from their employees or agents' RICO violations will be forced to compensate the victims of racketeering activity. Respondeat superior and agency liability will encourage employers to monitor more closely the activities of their employees and agents to ensure that these agents are not involved in racketeering activities. Thus, Respondeat superior and agency liability furthers both the compensatory and deterrent goals of the RICO statute. See Petro-Tech, 824 F.2d at 1357-58; Sedima, 473 U.S. at 493, 105 S.Ct. At 3283 6.
Copyright 1999 Bradley J. Haight, J.D. Tulane University 1993.
FOOTNOTES
1 Section 1962(c) provides:
[i]t shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
18 U.S.C. § 1962(c)(bold added). Section 1964(c) extends to individuals a civil cause of action for violating 1962(c) providing:
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.
2 Other articles that address 1962(c) vicarious liability include: James P. Kleinberg & Anne O. Hanna, Rico: Vicarious Liability 155 PLI/Crim 269 (1990); Denise Cote, Vicarious Liability Under Civil RICO 155 PLI/Crim 249 (1990); Michele A. Theroux, Innocent Corporate Employers - Should They Be Held Vicariously Under Civil RICO?, 24 NEW ENG. L. REV. 677 (1989); Barbara Black, Application of Respondeat Superior Principles to Securities Fraud Claims Under the Racketeer Influenced and Corrupt Organizations Act (RICO), 24 SANTA CLARA L. REV. 825 (1984).
3 See e.g. SK Hand Tool Corp. v. Dresser Industries, Inc., 852 F.2d 936 ,942 (7th Cir.1988), cert. denied, 492 U.S. 918, 109 S.Ct. 3241, 106 L.Ed.2d 589 (1989); D&S Auto Parts, Inc. v. Schwartz, 838 F.2d 964, 967 (7th Cir.1988), cert. den'd,, 486 U.S. 1061, 108 S.Ct. 2833, 100 L.Ed.2d 933 (1988); Luthi v. Tonka Corp., 815 F.2d 1229, 1230 (8th Cir.1987); Baglio v. Baska, 940 F.Supp. 819,832 (W.D.Pa.1996); Emery v. American General Finance, Inc., 938 F.Supp. 495,499 (N.D.Ill.1996); Prochaska & Associates v. Merrill Lynch, 798 F.Supp. 1427,1432 (D.Neb.1992); Dynabest, Inc. v. Yao, 760 F.Supp. 704,712 (N.D.Ill.1991); First National Bank of Louisville v. Lustig, 727 F.Supp. 276,280 (E.D.La.1989); Salvador v. Mazzocone, 686 F.Supp. 528,530-32 (E.D.Pa.1987); Bingham v. Zolt, 683 F.Supp. 965,974 (S.D.N.Y.1988); Frota v. Prudential-Bache Securities, Inc., 639 F.Supp. 1186,1192 (S.D.N.Y.1986); Continental Data Systems, Inc. v. Exxon Corp., 638 F.Supp. 432,440 (E.D.Pa.1986).
4 The court in Salvador, 686 F.Supp. 528 presents the most concise of these arguments. The imposition of Respondeat superior liability under § 1962(c) would not advance Congress's purposes and may conflict with such purposes. As previously noted, Congress adopted RICO to combat the infiltration of legitimate businesses by organized crime and to destroy organized crime's economic foundation. Plaintiffs' arguments would impose § 1962(c) liability on "enterprises" which are not actively involved in racketeering activity. Imposing liability on "enterprises" which are simply unwitting employers of racketeers or passive instrumentalities for racketeering activity would not advance the preventative and remedial goals of RICO. Such penalties would not be effective because they focus on the medium not the wrongdoer. Placing penalties on an "enterprise" will not prevent "persons" from conducting racketeering activity through the "enterprise" or from continuing to serve as employees of the "enterprise." Thus, such penalties would not advance Congress' goals in passing the statute. Indeed, I believe that imposing § 1962(c) liability via Respondeat superior would be inconsistent with the goals of RICO. In passing RICO Congress was motivated, in part, by a desire to eliminate the diseconomies existing the in the national economy which resulted from the activities of organized crimes.[fn omitted] For instance, the imposition of liability predicated on § 1962(c) and Respondeat superior would penalize "enterprises" for being the target or vehicle of racketeering activity or for being the employer of a "person" who engages in racketeering activity. The imposition of liability upon an "enterprise" which is simply a racketeering target an employer, or a passive instrumentality places additional costs on that "enterprise" not as a consequence of the "enterprise's" conduct but as a consequence of the racketeer's conduct. In short, plaintiffs would have the "enterprise" pay for the § 1962 violation committed by the racketeer. The end result would be the "enterprise" would pay the costs of the racketeer's activityies - costs which are not necessitated by the free market. On a larger scale, the national economy would also continue to shoulder various costs related to organized crime. Plaintiff's position t would result in continued diseconomies and conflict with Congress' Findings [fn omitted] and RICO's goal to minimize the economic disruptions caused by organized crime. Requiring a passive "enterprise" to pay penalties because of a racketeer's conduct would stand the statute on its head and result in continued diseconomies. As I have noted previously, such a broad interpretation would convert § 1962(c) into a blunt instrument contrary to the intent of Congress. Continental Data Systems, Inc. v. Exxon Corp., 638 F.Supp. 432,440 (E.D.Pa.1986). A review of the legislative history indicates that Congress evinced no desire to extend RICO liability via the doctrine of Respondeat superior to "enterprises" which are simply employers of racketeers or unwitting, passive instrumentalities for racketeering activity. S.Rep. 91-617, 1st Sess. (1969) at pp.34, 76-83; H.Rep. 91-1549, 2nd Sess. (1970), reprinted in 1970 U.S.Code Cong. & Ad.News 4007, 4032-4036. In discussing liability and the definition of the term "person," the House Report[H.Rep. 91-1549, 2nd Sess. (1970), reprinted in 1970 U.S.Code Cong. & Ad.News 4007.] focused exclusively on the active wrongdoer. The Report stated, "Any such `person' who violates the prohibitions of section 1962 is subject to the sanctions of sections 1963 and 1964, below--including forfeiture, divestiture, dissolution, and prohibition of future holding of interest." [Id. at 4032] The Report's discussion of the terms "person" and "enterprise" contained no mention of Respondeat superior liability.[Id.] Moreover, in discussing Title IX no member of Congress ever mentioned the possibility that §1962 would support the application of Respondeat superior liability.[fn omitted]. In the words of Judge Coffin of the First Circuit Court of Appeals, "[t]hers is unlikely to be a situation, in the absence of an express statement, in which Congress more clearly indicates that Respondeat superior is contrary to its intent." Schofield, 793 F.2d at 32. Salvador, 686 F.Supp. at 531-32; see also Black Application of Respondeat Superior Principles to Securities Fraud Claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 24 SANTA CLARA L. REV. 825 (1984).
5 Brady, 974 F.2d at 1153.
6 Brady, 974 F.2d at 154-55.
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