The U.S. Supreme Court in October refused to review a Ninth Circuit Court of Appeals decision allowing a RICO suit against Microsoft and Best Buy to proceed in civil court.
The Racketeer Influenced and Corrupt Organizations Act (RICO) was passed by Congress in 1970 with the clear intent to “seek the eradication of organized crime in the United States.” How can this same tool be used by disgruntled customers to threaten and extort Fortune 500 companies?
The answer lies in a provision within the statute that permits “any person injured in his business or property” on account of an alleged RICO violation to file a civil suit in district court. This isn’t particularly groundbreaking, since all of these qualifying violations (ranging from murder to copyright infringement) are already illegal, and therefore actionable. Under RICO, however, a plaintiff is entitled to “threefold the damages he sustains.”
The lead attorney in a civil lawsuit brought by an aggrieved consumer against Microsoft and Best Buy believes this clause entitles his clients to more than $100 million.
Original Intent
The civil provisions of RICO were intended to enable citizens to fight back against organized crime, including not just the mafia but also gangs, drug dealers, and even corrupt politicians. For the first 10 years of its existence, RICO was applied almost exclusively for its intended purpose.
In the 1980s, however, civil lawyers noticed mail and wire fraud are included as qualifying violations under the statute. They quickly realized any civil claim could be turned into a RICO case if the defendants used a telephone at least twice in furtherance of their alleged crime.
RICO Abuse
Since adding a RICO claim to a civil suit triples the damages, this has become common practice. A friend-of-the-court brief filed by the U.S. Chamber of Commerce in the Microsoft case notes, “since 2001, a staggering 4,500 civil RICO cases have been filed, only 35 of which were brought by the government.”
While RICO cases have been filed against accounting firms, abortion clinic protesters, and Don King, virtually no cases now involve organized crime.
It is particularly troubling that the threat of triple damages can be used in RICO suits to extort large settlements from legitimate businesses. This is ironic, considering that RICO statutes were designed to protect against extortion.
In the current suit, a Best Buy customer alleges he was fraudulently charged for Microsoft’s Internet service without permission when he purchased a new laptop. The key issue for the Ninth Circuit was not whether Microsoft and Best Buy defrauded customers but whether their business arrangement constituted a criminal “enterprise” under RICO.
Perverse Interpretation
Clearly, Microsoft and Best Buy are not participants in an organized criminal underworld as envisioned by the RICO statute. They are publicly traded companies that entered into an open and transparent marketing arrangement.
If the plaintiff had sued Microsoft or Best Buy individually for fraud, RICO would not apply. However, by naming both companies as defendants, solely on the basis of their co-marketing arrangement, the plaintiff can seek a “criminal enterprise” ruling and claim damages under RICO statutes.
Subjecting companies to the threat of triple damages merely for entering into a business agreement could have a chilling effect on commerce in every sector of the economy.
Innovation requires a free flow of information and ideas. By opting not to review Odom v. Microsoft, the Supreme Court created a significant roadblock for innovation that will impede economic growth and damage America’s competitiveness in the global economy.
Daniel R. Ballon ([email protected]) is policy fellow for technology studies at the Pacific Research Institute.
