Franchising & Distribution

Franchising & Distribution


Troubled Waters Ahead? High Court Expands RICO

March 23, 2009 The Legal Intelligencer

© March 23, 2009, The Legal Intelligencer.

Racketeer. Con artist. Professional fraudster. Although these stigmatizing labels hardly resemble franchisers — indeed, they often bear little resemblance to most defendants in civil lawsuits — many franchisees have leveled serious allegations of racketeering, corruption and fraud at franchisers in federal lawsuits premised on the Racketeer Influenced and Corrupt Organizations Act, or RICO.

With increasing frequency, disgruntled franchisees assert allegations of RICO violations — the legal equivalent of a nuclear strike — against franchisers along with routine claims for breach of contract, breach of the duty of good faith and fair dealing and unjust enrichment. A franchisee's decision to include a RICO claim in a lawsuit against a franchiser is with good reason: The statute provides a winning franchisee with an award of three times its actual financial losses and reasonable attorney fees. In Bridge v. Phoenix Bond & Indemnity Co. , the Supreme Court issued a decision that likely will increase the number of RICO claims filed by franchisees against franchisers.

Although it initially enacted the RICO statute to combat organized crime, Congress also allowed civil claims to be brought by a person injured in his or her business or property as a result of a RICO violation. In order to state a civil claim under RICO, a plaintiff must allege (among other elements that are beyond the scope of this article) that a defendant engaged in at least two acts of criminal activity over a significant period of time, usually at least 12 months. The types of criminal activity — also known as "racketeering" — that may give rise to a civil RICO claim include bribery, embezzlement, extortion, mail fraud and wire fraud. A person violates the mail and wire fraud statutes if he or she knowingly participates in a scheme to defraud and advances the scheme through the use of the U.S. mail or interstate wires. Because virtually all businesses — legitimate or otherwise — conduct affairs by mail, telephone, fax machine and e-mail, the most commonly asserted civil RICO claims are predicated on allegations of mail or wire fraud.


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