Ninth Circuit Holds that Prior Case Law Concerning “Enterprises” under Racketeer Influenced and Corrupt Organizations Act (RICO) is Confusing and Inconsistent with Supreme Court Authority, Overrules Prior Authority and Under new Standard Reverses Dismissal of RICO Class Action
Plaintiffs filed a putative class action against Microsoft and Best Buy alleging violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) based on an agreement under which Microsoft paid Best Buy to promote MSN Internet service. Odom v. Microsoft Corp., 486 F.3d 541, 543 (9th Cir. 2007). Defense attorneys moved to dismiss the class action complaint under Rule 12(b)(6) because it did not “allege an ‘associated in fact’ ‘enterprise’ under RICO” and under Rule 9(b) because it did not “plead wire fraud with particularity,” id. The district court agreed, dismissing the class action without leave to amend. Id. The Ninth Circuit reversed.
The putative RICO class action alleged that Microsoft and Best Buy agreed that Microsoft would invest $200 million in Best Buy and to promote Best Buy through its MSN Internet service, that Best Buy in turn would promote MSN and other Microsoft products. Odom, at 543. Best Buy allegedly gave customers different MSN trial software depending in 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. Id. Specifically, plaintiff 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. Id., at 543-44. Plaintiff telephoned Microsoft and canceled the service, id., at 544. The putative class action was transferred to the Western District of Washington pursuant to the MSN subscriber agreement where plaintiff amended the complaint to include an additional plaintiff who, following the purchase of a cell phone from Best Buy and receiving a 30-day MSN trial CD, found that MSN had been billing her debit card for 1½ years without her knowledge or consent. Id.
The class action complaint alleged that defendants violated RICO 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.” Odom, at 544. The amended complaint additionally alleged that defendants had issued a joint press release describing their agreement as “a comprehensive strategic alliance that encompasses broadband, narrowband, in-store and online efforts” that “provides for significant joint marketing in Best Buy’s retail stores, online and through print/broadcast vehicles, profit sharing, the promotion of BestBuy.com to the 40 million users throughout Microsoft’s properties, and technology assistance” pursuant to which “MSN® Internet access and Microsoft’s full range of connectivity solutions will be demonstrated and sold at the more than 350 Best Buy stores in the U.S. and through BestBuy.com,” and “Best Buy and BestBuy.com will receive prominent and preferred placement across Microsoft Properties, including MSNBC, and the Expedia.com® travel service, Hotmail® Web-based e-mail service, WebTV Network®, and the newly launched MSN eShop online shopping service.” Id., at 544-45.
The district court granted defendants’ motion to dismiss the RICO claims: “It held that an associated-in-fact enterprise had not been alleged within the meaning of RICO under Rule 12(b)(6), and that wire fraud had not been pled with particularity under Rule 9(b).” Odom, at 545. The Ninth Circuit reversed.
The Circuit Court began its analysis by noting “judicial resistance to RICO, manifested in narrow readings of its provisions by lower federal courts,” Odom, at 545, and then discussed four Supreme Court opinions that “corrected these narrow readings,” id., at 545-47. The appellate court then explained at page 547 that the case turned on whether the class action complaint adequately alleged a RICO violation under 18 U.S.C. §1962(c), which provides:
It 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.
It is well settled that to state a claim under §1962(c), a plaintiff must allege “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima, 473 U.S. at 496 (footnote omitted). Defense attorneys challenged only the second and fourth elements, arguing that the class action complaint failed to adequately allege an “associated in fact” “enterprise” under RICO, and that it failed to plead the wire fraud – a predicate act of “racketeering activity” – with the requisite particularity. Odom, at 547-48. Turning first to the issue of an enterprise, the Ninth Circuit noted that “[i]t is undisputed that a corporation can be an ‘individual’ for purposes of an associated-in-fact enterprise” and that the question before it “is the manner in which a group must be associated.” Id., at 548.
The starting point is United States v. Turkette, 452 U.S. 576 (1981), which clarified that a “pattern of racketeering activity” and an “enterprise” are separate, explaining at page 583:
The enterprise is an entity, for present purposes 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. The former is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit. The latter is proved by evidence of the requisite number of acts of racketeering committed by the participants in the enterprise. While the proof used to establish these separate elements may in particular cases coalesce, proof of one does not necessarily establish the other. The “enterprise” is not the “pattern of racketeering activity”; it is an entity separate and apart from the pattern of activity in which it engages.
The Ninth Circuit summarized at page 549, “The ‘enterprise’ is the actor, and the ‘pattern of racketeering activity’ is an activity in which that actor engages.” It then reviewed and reversed its prior decisions on RICO enterprise, holding “We take this opportunity to join the circuits that hold that an associated-in-fact enterprise under RICO does not require any particular organizational structure, separate or otherwise.” Id. (citations omitted).
The criteria for determining the existence of an associated-in-fact enterprise turns on Turkette’s holding that it is “a group of persons associated together for a common purpose of engaging in a course of conduct.” Under this test, the Circuit Court concluded that the complaint adequately alleged that defendants associated for a “common purpose,” specifically, “the common purpose of increasing the number of people using Microsoft’s Internet Service, and doing so by fraudulent means.” Odom, at 552. The court also had no difficulty in concluding that the class action allegations adequately alleged an “ongoing organization,” id., and that the enterprise functioned as a “continuing unit,” id., at 552-53. Accordingly, the Ninth Circuit held that plaintiffs “have sufficiently alleged an associated-in-fact enterprise.” Id.
Turning to the wire fraud allegations, the Ninth Circuit stated that the only “arguable deficiency” in the class action allegations “is that the names of the individual Best Buy employee who established their MSN accounts are not alleged.” Odom, at 554. Under the facts of this case, however, the Circuit Court concluded that this deficiency did not support the district court’s ruling, id., 554-55. Accordingly, it held the allegations in the class action complaint were “sufficiently particularized to satisfy the pleading requirements of Rule 9(b).” Id., at 555. It therefore reversed the district court’s rulings.
NOTE: 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, see 486 F.3d 541 at 555-56, but concurring in the result because the district court should have granted leave to amend the complaint, id., at 556. 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.” Id.