Flinders v. Datasec Corp.

• Decision Date: 16 July 1990
• Docket Number: Civ. A. No. 89-1763-A.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Richard C. FLINDERS, Plaintiff, v. DATASEC CORPORATION, Douglas Callaway, and Frank Williams, Defendants.

742 F. Supp. 929

Richard C. FLINDERS, Plaintiff, v. DATASEC CORPORATION, Douglas Callaway, and Frank Williams, Defendants.

Civ. A. No. 89-1763-A.

United States District Court, E.D. Virginia, Alexandria Division.

July 16, 1990.

John A. Keats, Law Offices of John Keats, William F. Krebs, Stephenson, Kellogg, Krebs & Moran, P.C., Fairfax, Va., for plaintiff.

Nathaniel Rayle, Edward J. Smith, Jr., Santarelli, Smith, Kraut & Carroccio, Washington, D.C., for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

Introduction

Not yet decided in this Circuit is whether an employee terminated for threatening to expose, or refusing to participate in, his employer's allegedly unlawful racketeering practices has standing to sue his employer under RICO¹ to recover for the termination. Defendants' threshold dismissal motions in this case present this question. And while the answer to this question is the same for both the substantive RICO offense alleged in Count I and the RICO conspiracy offense alleged in Count II, the analytical path to the answer is different for each count. With respect to the substantive RICO offense alleged in Count I, settled authority from other circuits persuades the Court that plaintiff's termination is not an "injury" that occurred "by reason of" the alleged racketeering acts. See 18 U.S.C. § 1964(c). In the case of the RICO conspiracy alleged in Count II, authority is sparse and in conflict. But the same answer applies because plaintiff's termination was not caused by a predicate offense or a wrongful overt act. Accordingly, for the reasons stated here, the RICO counts (Counts I and II) must be dismissed for failure to state a claim upon which relief may be granted. See Rule 12(b)(6), Fed.R.Civ.P. The Court reserves its ruling with respect to the state claims asserted in Counts III and IV. Counsel for Datasec has withdrawn. Upon notification that new counsel has been acquired, the Court may order new briefs with respect to these Counts.

Background²

Defendant, Datasec Corporation, is a New Hampshire company with its principal place of business in New Hampshire and an office in Virginia. It is engaged chiefly in the sale of "Tempest" computer products and technology.³ Plaintiff, a Virginia citizen, was hired by Datasec in July 1988 to serve as Vice President of Sales. Individual defendants, Callaway and Williams, are New Hampshire citizens and respectively, Datasec's president and vice-president for business development.

At the times relevant to the complaint, Datasec sold the "Paradyne" computer line. Acquired by AT & T in 1989, Paradyne followed a practice of handling only those equipment orders that exceeded $25,000. Smaller orders were handled by certain dealers, including Datasec, specifically authorized by Paradyne to do so. Wary of the potential for kickbacks in return for steering orders, Paradyne had a strict policy in force prohibiting its employees from soliciting or accepting gratuities from dealers. Despite this, plaintiff alleges that Datasec paid gratuities to Paradyne's customer referral personnel to induce them to steer business to Datasec. According to the complaint, this kickback scheme used interstate telephone communications and the U.S. mails, in violation of the mail and wire fraud statutes. See 18 U.S.C. §§ 1341, 1343.

By early 1989, plaintiff had become aware of this scheme. In April 1989, plaintiff informed defendants that he would not participate in the scheme. In response, defendant Callaway (i) demoted plaintiff to vice president of Eastern Regional Sales, (ii) named himself to replace plaintiff as "acting Vice President of Sales" and (iii) attempted unilaterally to change plaintiff's compensation-commission agreement. Thereafter, on April 24, 1989, defendants terminated plaintiff. The complaint alleges this occurred because plaintiff persisted in his refusal either to countenance, or to participate in, the kickback scheme. The complaint also alleges that plaintiff, at all times, fully and satisfactorily performed his corporate duties.

On these facts, plaintiff asserts four claims against defendants. In Count I, plaintiff seeks treble damages and attorneys' fees under RICO, claiming an injury to his business or property by reason of defendants' conduct of an enterprise's affairs through a pattern of racketeering activity. See 18 U.S.C. §§ 1962(c), 1964(c). Count II alleges a conspiracy to violate RICO and seeks the same damages. See 18 U.S.C. §§ 1962(d), 1964(c). Treble damages are also sought in Count III, which alleges that defendants conspired to injure plaintiff in his trade, business or profession in violation of Virginia Code §§ 18.2-499 and 18.2-500. Finally, Count IV asserts a breach of contract claim against Datasec for failure to pay plaintiff $8,690 in commissions due and owing, and refusing to sell plaintiff 2,000 shares of Datasec stock pursuant to a stock option. Defendants, in response, filed a motion to dismiss all claims pursuant to Rules 12(b)(1) and 12(b)(6).

Analysis

A. Count I: RICO

Under § 1964(c), standing to sue under RICO requires that a plaintiff's injuries occur "by reason of" the predicate racketeering acts. As the Supreme Court in Sedima put it:

`a defendant who violates section 1962 is not liable for treble damages to everyone he might have injured by other conduct. ...'

... The compensable injury necessarily is the harm caused by predicate acts sufficiently related to constitute a pattern. ... Any recoverable damages occurring by reason of a violation of § 1962(c) will flow from the commission of the predicate acts.

Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-97, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985) (quoting Haroco, Inc. v. American Nat'l Bank & Trust Co., 747 F.2d 384, 398 (7th Cir.1984), aff'd per curiam, 473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985)). Put simply, the "by reason of" language in § 1964(c) imports a proximate causation requirement into civil RICO. See O'Malley v. O'Neill, 887 F.2d 1557, 1561 (11th Cir.1989); Brandenburg v. Seidel, 859 F.2d 1179, 1189 (4th Cir.1988); Cullom v. Hibernia Nat'l Bank, 859 F.2d 1211, 1214 (5th Cir.1988); Sperber v. Boesky, 849 F.2d 60, 63 (2d Cir.1988); Haroco, 747 F.2d at 398.

The question presented here, therefore, is whether plaintiff's firing was proximately caused by any of the alleged predicate acts. A negative answer necessarily follows from an analysis of the relationship between the firing and the alleged predicate acts. These acts, it appears, are the telephone calls between Datasec and Paradyne personnel setting up the kickback arrangements and arranging for the customer referrals. Also included are Datasec's mailings of the kickback checks to the cooperating Paradyne employees. Manifestly, plaintiff was not the target of these acts. They were not aimed at him; rather, they were aimed at Datasec's competitors.⁴ Thus, the firing was not proximately caused by the predicate acts; instead, it was an incidental result of circumstances surrounding those acts. Put in conventional tort analysis terms, the scope of the risk created by the RICO scheme was harm to Datasec's competitors and perhaps to Paradyne, but not the loss of plaintiff's job. That occurred not as a result of the predicate acts, but of his refusal to participate in them. So viewed, it is readily apparent that plaintiff's termination injury did not occur "by reason of" the alleged RICO scheme.

Most courts have reached the same result on essentially the same reasoning. See Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 24 (2d Cir.1990); O'Malley, 887 F.2d at 1561; Burdick v. American Express Co., 865 F.2d 527, 529-30 (2d Cir.1989) (per curiam); Cullom, 859 F.2d at 1216; Pujol v. Shearson/American Express Inc., 829 F.2d 1201, 1205 (1st Cir. 1987); Kouvakas v. Inland Steel Co., 646 F.Supp. 474, 477 (N.D.Ind.1986); Diamond v. Reynolds, 1986 WL 15375 (D.Del.), aff'd in part and rev'd on other grounds, 853 F.2d 917 (3d Cir.), cert. denied, 488 U.S. 955, 109 S.Ct. 392, 102 L.Ed.2d 381 (1988); cf. Warren v. Manufacturers Nat'l Bank, 759 F.2d 542 (6th Cir.1985) (bankrupt corporation's terminated chief executive officer, suing to recover for his job loss from bank that allegedly defrauded company and precipitated the bankruptcy, lacked standing under RICO). Nor should the result be any different where the firing occurs because the person refuses to cooperate or threatens to blow the whistle on the scheme. In either event, the firing is only incidental to the RICO scheme; it may facilitate the scheme, but is not itself caused by the racketeering acts. See, e.g., Nodine v. Textron, Inc., 819 F.2d 347, 349 (1st Cir.1987) (discharge for reporting RICO scheme to authorities did not occur "by reason of" the RICO scheme).

The reasoning of these authorities is persuasive and requires that Count I be dismissed.

B. Count II: RICO Conspiracy

Analysis of plaintiff's standing to bring the RICO conspiracy claim is more problematic. Recently, several circuits have split over whether Sedima's mandate that RICO injuries must flow from a section 1961(1) predicate offense applies to an employee terminated allegedly in furtherance of a RICO conspiracy. The Second, Fifth, and Eleventh circuits have held that terminated employees do not have standing to recover on RICO conspiracy causes of action. See Hecht; Cullom; Morast v. Lance, 807 F.2d 926 (11th Cir.1987). Hecht explicitly, and Cullom and Morast implicitly, read Sedima as limiting standing narrowly to those RICO conspiracy plaintiffs whose injuries are caused by predicate offenses. The Third Circuit, however, has reached a different result. That court upheld a RICO conspiracy claim on the ground that an injury caused by any overt act furthering the unlawful agreement, not just predicate offenses, is sufficient to confer standing for a RICO conspiracy claim. Shearin v. E.F. Hutton Group, 885 F.2d 1162 (3d Cir.1989); accord Williams v. Hall, 683...