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Eleventh Circuit Holds That a Corporation Is Not Distinct From Its Agents For Purposes of a RICO Enterprise, Following Sister Circuits

In Ray v. Spirit Airlines, Inc., No. 15-13792, 2016 WL 4578347 (11th Cir. Sept. 2, 2016), the United States Court of Appeals for the Eleventh Circuit held that a defendant corporation is not distinct from its own officers and employees for purposes of forming an “enterprise” under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. (“RICO”).  The Eleventh Circuit thus joins the SecondSeventh and Tenth Circuits in holding that a corporation cannot form an enterprise with its own agents, as the only way the corporation can act is through those agents.

Plaintiffs were consumers who sued Spirit Airlines, Inc.’s (“Spirit”) on behalf of a class alleging that the low-cost airline conspired with its own corporate officers and several outside vendors to misrepresent the nature of its $8.99 Passenger Usage Fee.  Plaintiffs alleged that placement of the Passenger Usage Fee alongside government taxes and fees on the confirmation page of its ticket-purchasing web platform “was a coordinated effort to conceal the true nature of the fee by leading customers to believe that it was an official government tax or sanctioned fee.”

Plaintiffs alleged a RICO claim.  RICO makes it “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).  The complaint contained the general assertion that plaintiffs “were harmed in that they relied to their detriment on Spirit’s conduct and, as a result, needlessly incurred excessive and unconscionable [Passenger Usage Fees].”  According to the complaint, Spirit’s use of the internet to advertise and engage in sales with the deceptive inclusion and placement of the Passenger Usage Fee constituted mail and wire fraud.  Spirit allegedly engaged in this fraudulent activity while associated with, operating, or controlling a RICO enterprise consisting of Spirit itself, two of its officers and several third-party vendors and consultants to Spirit.

The United States District Court for the Southern District of Florida dismissed the complaint.  The district court held that, among other things, a defendant corporation cannot act in concert with its own officials, agents or employees for purposes of establishing a RICO enterprise “when those individuals are operating in their official capacities for the corporation.”  Plaintiffs appealed.

The Eleventh Circuit affirmed.  The Court agreed with the district court that there must be a distinction between the defendant and the enterprise itself, otherwise the statutory language making it “unlawful for any person employed by or associated with any enterprise” (18 U.S.C. § 1962(c)) to engage in racketeering activities through that enterprise would be meaningless.  Spirit, the only defendant, is a corporation, and as such it can only act through its agents, employees, or officers.  As the Eleventh Circuit observed, allowing a defendant corporation to conspire with its employees, agents or officers, does not make sense, because it would be the equivalent of a person employing or associating with himself.

Notably, the Court observed that the inverse situation would not necessarily result in dismissal.  Had the plaintiffs named the corporate individuals as defendants, rather than the corporation itself, the result may have been different, assuming the complaint was otherwise free of defects.  While a corporation is not distinct from its agents, those same agents are distinct from the corporation.  RICO was, in part, enacted to prevent individuals from using seemingly legitimate corporate forms to conduct illegal activities.  The Court drew upon an earlier decision from the United States Supreme CourtCedric Kushner Productions, Ltd. v. King, 533 U.S. 158 (2001), which dealt with an individual defendant and allegations regarding his use of his closely held corporation, to make its point.  In that case, plaintiffs alleged that the individual defendant misused his closely held corporation to conduct illegal activities, thereby forming an enterprise with a separate entity distinct from himself.  Conversely, as the Eleventh Circuit recognized, a corporation acting through its agents “is simply a corporation.  Labeling it as an enterprise as well would only amount to referring to the corporate ‘person’ by a different name.”

At first blush, the principle set forth in Spirit Airlines may seem somewhat counterintuitive.  The same underlying facts and allegations can form the basis of both a sufficient and insufficient complaint.  The result will vary depending entirely on whether a corporation or an individual actor is named as the defendant.  The individual is distinct from, and can thereby conspire and form an enterprise with, the corporation.  But this is not a two-way street — at least for purposes of forming a RICO enterprise.  “Because every corporation acts through its own employees as a matter of course,” the Eleventh Circuit cautioned, allowing pleadings such as plaintiffs’ to go forward “would turn every claim of corporate fraud into a RICO violation.”  In announcing its adherence to the precedent set forth by the Supreme Court and its sister circuits, the Eleventh Circuit has joined the ranks of jurisdictions narrowing the avenues of relief for potential civil RICO plaintiffs.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Jeff Kern, Business Trial and White Collar Attorney, Sheppard Mullin,
Special Counsel

Jeff Kern is a special counsel in the Government Contracts, Investigations, and International Trade Practice Group in the firm's New York and Los Angeles offices.  He is admitted to practice in New York and Massachusetts.

Areas of Practice

Mr. Kern's practice encompasses securities regulation, compliance, and litigation as well as internal investigations and white collar defense.  He represents broker-dealers and associated individuals who are the focus of SEC, FINRA and other regulatory investigations and provides guidance in the FINRA membership application...

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Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
Associate

Sarah Aberg is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's New York office.

Areas of Practice

Ms. Aberg’s practice encompasses securities regulation, compliance, and litigation as well as internal investigations and white-collar defense. She frequently represents broker-dealers and associated individuals who are the focus of SEC, FINRA, and other regulatory investigations. She has conducted numerous internal investigations into a wide variety of allegations, including insider trading, unauthorized trading, and other retail brokerage sales practice violations. Ms. Aberg has also represented banks, broker-dealers, securities professionals and individuals in connection with investigations and inquiries by the Department of Justice, FINRA, and the New York Attorney General’s and District Attorney’s Offices.

Experience

Representative Experience 

  • The Private Bank division of a global investment bank in connection with ongoing FINRA, SEC and state securities regulatory inquiries and investigations.
  • Senior mortgage finance professionals in RMBS-related investigations and litigations.
  • Financial advisors in connection with SEC investigation into Forex trading platform.
  • A securities broker in DOJ/SEC investigation regarding bond trading practices.
  • A federal savings bank charged with mortgage and securities fraud by the Manhattan District Attorney.
  • An international retailer in a federal civil asset forfeiture action concerning structuring allegations.
  • Skaarup Shipping International in successfully defeating a $50 million prejudgment attachment in the District of Connecticut.
  • CIT Financial Services, Inc. in a New Jersey arbitration over breach of contract.
  • General Dynamics Corp. in filings with the US. Maritime Administration.

Practices

  • Government Contracts, Investigations & International Trade
  • Litigation
  • White Collar Defense and Corporate Investigations
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