Management and Operation Test Applies to Associated-In-Fact Enterprises

Posted on August 19, 2008 by Thomas Walker

On August 18, 2008, the Ninth Circuit ruled that the management and operation test applies to associated-in-fact enterprises in Walter v. Drayson, --- F.3d ----, 2008 WL 3823027 (C.A.9 (Hawai'i)). In Walter, Robert W. Walter, a beneficiary of a trust established by his mother asserted violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c) and (d), as well as various state law claims, against a trustee, the trustee’s  CPA, who was also a trustee; and Karen Temple, a lawyer, together with her law firm, Bodden & Temple, who provided legal services to the trustor and the trustees. Robert's RICO theory was that the trustees, the CPA, the lawyer and her law firm were an associated-in-fact enterprise whose purpose was to gain and maintain control of the trust and to facilitate the wrongful taking of trust assets.

The district court dismissed Robert’s second amended complaint in a published opinion. Walter v. Drayson, 496 F.Supp.2d 1162 (D.Haw2007). It held that Temple's role was limited to providing legal services such that she did not operate or manage the enterprise and so, could not be liable for conducting its affairs under Reves v. Ernst & Young, 507 U.S. 170, 179 (1993), and Baumer v. Pachl, 8 F.3d 1341, 1344 (9th Cir.1993). For this reason the court also dismissed the RICO conspiracy allegations. Robert appealed to the Ninth Circuit, arguing that the district court misapprehended the “operation and management” test in the context of an associated-in-fact enterprise. The Ninth Circuit disagreed with Robert and affirmed the district court dismissal of his RICO claims with prejudice.

The Ninth Circuit noted that Robert's second amended complaint showed that Temple and her firm were part of the enterprise but failed to show that she or her firm had “some part in directing its affairs.”Reves, 507 U.S. at 179. One can be “part” of an enterprise without having a role in its management and operation. Simply performing services for the enterprise does not rise to the level of direction, whether one is “inside” or “outside.” Accordingly, neither reasonable inferences, nor triable issues, exist sufficient to subject Temple or her firm to liability under § 1962(c).

Thus, in order to be subject to RICO liability a member of an associated-in-fact enterprise must operate, manage or direct the enterprise.

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Ninth Circuit Overrules Prior Circuit Law Defining "Enterprise" Under RICO

Posted on August 3, 2007 by Thomas Walker

The Ninth Circuit overruled prior Ninth Circuit precedent in Odom v. Microsoft Corp., 486 F.3d 541, 543 (9th Cir. 2007), holding that its prior case law concerning “enterprises” under Racketeer Influenced and Corrupt Organizations Act (RICO) is confusing and inconsistent with United States Supreme Court authority.

Odom v. Microsoft was filed as a class action alleging a RICO violation because “Best Buy and Microsoft, acting together pursuant to their agreement, constituted an associated-in-fact enterprise under RICO; that their actions, involving ‘thousands’ of consumers, constituted a ‘pattern of racketeering activity’ under RICO; and that they committed the RICO ‘racketeering activity’ predicate act of wire fraud in violation of 18 U.S.C. § 1343.” The complaint alleged that Best Buy gave customers different MSN trial software depending on the product purchased, and scanned debit/credit card information with the trial software not for “inventory control” (as purportedly represented to customers) but so Microsoft would have billing information for customers who failed to cancel their trial subscriptions to MSN.  Specifically, one of the plaintiffs alleged that he purchased a laptop computer from Best Buy and told the company that he did not need the MSN trial software because he used another Internet service, that he never used the MSN software during the 6-month trial period following his purchase, and that after 6 months MSN began charging the credit card he used to purchase the laptop for Internet service.

Best Buy and Microsoft moved to dismiss the case under Rule 12(b)(6), Federal Rules of Civil Procedure, and United States District Court Judge for the Western District of Washington, Marsha J. Pechman, dismissed the customers' class action Racketeer Influenced and Corrupt Organizations Act (RICO) suit for failure to allege an “associated in fact” “enterprise” and for failure to plead wire fraud with particularity. The Ninth Circuit reversed and remanded the case for trial holding that (1) an associated-in-fact enterprise under RICO does not require any particular organizational structure, separate or otherwise; overruling Wagh v. Metris Direct, Inc., 348 F.3d 1102;Simon v. Value Behavioral Health, Inc., 208 F.3d 1073 and Chang v. Chen, 80 F.3d 1293; (2) the customers sufficiently alleged that manufacturer and retailer formed an associated-in-fact enterprise; and (3) employee of retailer's store did not need to be named in order to plead predicate act of wire fraud.

Judge Silverman wrote a concurring opinion, joined in by Rymer, Tallman, Rawlinson and Bea, that argued the class action complaint failed to plead an “enterprise” within the meaning of RICO because it fails to allege an “ongoing organization” between Microsoft and Best Buy, but concurred in the result because the district court should have granted leave to amend the complaint. Judge Bybee also wrote a concurring opinion, joined in by Reinhardt, that argued it was “outlandish that what Judge Silverman correctly describes as a ‘marketing contract’ between Microsoft and Best Buy could subject them to a private RICO action.”
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