Petro-Tech, Inc. v. Western Co. of North America

• Decision Date: 12 August 1987
• Docket Number: Nos. O,No. 86-3361,INC,PETRO-TEC,s. O,86-3361
• Citation: 824 F.2d 1349
• Parties: , RICO Bus.Disp.Guide 6693 , Robert Chuckrow, Gary Goldberg, Sterling Keystone Development, Inc., S. David Friedman, Mallory Group & Company, Inc., John E. Karpac, Financial Programs, Inc., Hummingbird Associates, Inc., Sterling Keystone Services, Inc., Howard L. Ragsdale, Rock Ridge Drilling Associates, Northeast Drilling Associates, L.P., Pine Valley Drilling Associates, L.P., G.G.-I Drilling Associates, L.P., Mountain Drilling Associates, L.P., B.C.-I Drilling Associates, L.P., Sterling Keystone Drilling Associates, 1982-B, Sterling Keystone Drilling Associates, 1982-C, and CDA Drilling Associates, L.P., Appellants, v. The WESTERN COMPANY OF NORTH AMERICA, Joseph Farina, Barry R. Rodkey, Glen Konya, Matt Boese, Fred E. Schriefer, Richard D. Rowell, Michael W. Dory, and John Doesne Through Twenty-Five, Appellees.
• Court: U.S. Court of Appeals — Third Circuit

Page 1349

824 F.2d 1349

56 USLW 2051, RICO Bus.Disp.Guide 6693

PETRO-TECH, INC., Robert Chuckrow, Gary Goldberg, Sterling

Keystone Development, Inc., S. David Friedman, Mallory Group

& Company, Inc., John E. Karpac, Financial Programs, Inc.,

Hummingbird Associates, Inc., Sterling Keystone Services,

Inc., Howard L. Ragsdale, Rock Ridge Drilling Associates,

Northeast Drilling Associates, L.P., Pine Valley Drilling

Associates, L.P., G.G.-I Drilling Associates, L.P., Mountain

Drilling Associates, L.P., B.C.-I Drilling Associates, L.P.,

Sterling Keystone Drilling Associates, 1982-B, Sterling

Keystone Drilling Associates, 1982-C, and CDA Drilling

Associates, L.P., Appellants, v. The WESTERN COMPANY OF NORTH AMERICA, Joseph Farina, Barry

R. Rodkey, Glen Konya, Matt Boese, Fred E. Schriefer,

Richard D. Rowell, Michael W. Dory, and John Does Nos. One

Through Twenty-Five, Appellees.

No. 86-3361.

United States Court of Appeals, Third Circuit.

Argued Jan. 22, 1987.

Decided July 13, 1987.

Rehearing and Rehearing In Banc Denied Aug. 12, 1987.

Arthur M. Schwartzstein (argued), Donald L. Herskovitz, Battaglia and Herskovitz, Washington, D.C., Roger H. Taft, MacDonald, Illig, Jones & Britton, Erie, Pa., for appellants.

James T. Marnen (argued), Sean J. McLaughlin, Know Graham McLaughlin Gornall and Sennett, Inc., Erie, Pa., for appellees.

Before SEITZ, BECKER and MANSMANN, Circuit Judges.

OPINION OF THE COURT

BECKER, Circuit Judge.

This appeal from the dismissal of plaintiffs' complaint in a civil RICO case for failure to state a claim, Fed.R.Civ.P. 12(b)(6), raises important questions concerning the role of aiding and abetting and vicarious liability under the civil RICO statute, 18 U.S.C. Secs. 1961 et seq. Defendants seek to justify the complaint's dismissal on several grounds.

We begin by addressing defendants' request that we define a RICO pattern, and that we hold that requirement unmet in this case. Because the complaint alleges so many related RICO predicate acts, however, by so many persons, and affecting so many victims over so protracted a period, we find it unnecessary in this case to define a RICO pattern: under any conceivable definition the requirement is satisfied by the allegations in this case. We therefore reverse the dismissal of Counts I through VI.

We then turn to Western's contention that there cannot be respondeat superior or aiding and abetting liability under RICO, and therefore that it cannot be liable under either of those theories in connection with its employees' alleged RICO violations. We hold that a corporation which is alleged to be a RICO enterprise under 18 U.S.C. Sec. 1962(c) cannot be held vicariously liable for RICO violations committed by its employees if the employees are the Sec. 1962(c) persons named in the complaint as having conducted the affairs of the enterprise through a pattern of racketeering activity. We hold further that a Sec. 1962(c) enterprise cannot be liable as an aider and abettor. We therefore affirm the district court's dismissal of Counts XI and XII insofar as they operate in tandem with Count III, which is brought under Sec. 1962(c) and which alleges that Western is a RICO enterprise.

Unless the employer is the Sec. 1962(c) enterprise at the same time as its employees are the Sec. 1962(c) persons, however, vicarious liability may be appropriate. Similarly, so long as the aider and abettor is not alleged to have been a Sec. 1962(c) enterprise, aiding and abetting liability may be invoked. In all other constellations of Sec. 1962(c) enterprises and persons, and under subsection (a) of Sec. 1962, we hold that both of these theories of liability may be appropriate so long as the employer/enterprise actually benefited from the persons' predicate acts. We therefore reverse the dismissal of Counts XI and XII to the extent that they operate in tandem with Counts I, II, IV, V and VI.

Lastly, we hold that the complaint's allegations concerning the liability of defendants Western and Michael Dory are sufficiently particular to satisfy the standards imposed by Rule 9, Fed.R.Civ.P. Therefore, except as noted above, we reverse the complaint's dismissal and remand for further proceedings.

I. Facts and Procedural History

Plaintiff Petro-Tech is an oil and gas drilling and well management company. In two contracts covering different time periods and different wells, Petro-Tech agreed to hire defendant Western, and its subsidiary defendant Western Petroleum Services, to provide "fracing" services at wells Petro-Tech managed for its clients. The wells contain oil-permeated rock, and in "fracing" the wells Western would use water and sand to separate the oil from the rock. Petro-Tech's clients are mostly oil and gas exploration, drilling and well operating syndicates. Nineteen of them are also plaintiffs in this case.

Plaintiffs allege that during the relevant time period the market for the services Western sells was quite competitive. Plaintiffs claim that in over eighty instances defendants (Western and various Western employees) responded to this competition and the low profit margins it caused by billing plaintiffs and other customers for more services than were actually provided, and for more materials than were actually used, on the wells Western had agreed to frace. ¹ Plaintiffs allege that Western used the mails to solicit Petro-Tech's business, and that the solicitations thus sent fraudulently described the services that would be provided. Complaint paragraphs 35 and 36. Similarly, plaintiffs claim that after work was done fraudulent reports of the services purportedly provided were sent through the mails. Plaintiffs allege that the manager of the Meadville, Pennsylvania, yard, as well as several high ranking Western officers, knew of the challenged practices, that Western defrauded other customers in the same way, and that "[d]efendants' wrongful conduct was deliberate company policy." Complaint p 43. In civil RICO terms, plaintiffs allege that the defendants conducted the affairs of an enterprise (principally Western, though the complaint also sets out other theories, under which other entities are the enterprise) through a pattern of racketeering activity.

The district court dismissed the complaint on the ground that it alleged only "garden variety" fraud by a legitimate business enterprise, which the district court did not believe RICO capable of reaching. ² But the Supreme Court has squarely rejected reasoning of this kind. The Supreme Court believed that, in passing RICO,

Congress wanted to reach both "legitimate" and "illegitimate" enterprises. United States v. Turkette, [452 U.S. 576, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981) ]. The former enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences. The fact that Sec. 1964(c) is used against respected businesses allegedly engaged in a pattern of specifically identified criminal conduct is hardly a sufficient reason for assuming that the provision is being misconstrued.... "[T]he fact that RICO has been applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth." Haroco, Inc. v. American National Bank & Trust Co. of Chicago, [747 F.2d 384] at 398 [ (7th Cir.1984) ].

It is true that private civil actions under the statute are being brought almost solely against such defendants, rather than against the archetypal, intimidating mobster. Yet this defect--if defect it is--is inherent in the statute as written, and its correction must lie with Congress. It is not for the judiciary to eliminate the private action in situations where Congress has provided it simply because plaintiffs are not taking advantage of it in its more difficult applications.

Sedima v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275 at 3287, 87 L.Ed.2d 346 (1985). This language forecloses us from upholding the district court's view that "garden variety fraud" is beyond RICO's reach.

Defendants do not attempt to justify the dismissal on this ground. Instead, they defend the district court's result on essentially three other bases. We address each of them in turn.

II. The Scope of RICO and The Definition of "Pattern"

Appellees first defend the dismissal of the complaint by suggesting that we construe RICO's pattern requirement to exclude the kind of fraud the plaintiffs allege here. In Sedima, 105 S.Ct. at 3287 (emphasis added), Justice White noted that

[t]he "extraordinary" uses to which civil RICO has been put appear to be primarily the result of the breadth of the predicate offenses, the inclusion of wire, mail and securities fraud, and the failure of Congress and the courts to develop a meaningful concept of pattern.

"The definition of a 'pattern of racketeering activity,' " the Court went on to explain,

differs from the other provisions in Sec. 1961 in that it states that a pattern "requires at least two acts of racketeering activity," Sec. 1961(5) (emphasis added), not that it "means" two such acts. The implication is that while two acts are necessary, they may not be sufficient. Indeed, in common parlance two of anything do not generally form a "pattern." The legislative history supports the view that two isolated acts of racketeering activity do not constitute a pattern. As the Senate Report explained: "The target of [RICO] is thus not sporadic activity. The infiltration of legitimate business normally requires more than one 'racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern." S.Rep. No. 91-617, p. 158 (1969) (emphasis added). Similarly, the sponsor of the Senate bill, after quoting this portion of the Report, pointed out to his colleagues that "[t]he term 'pattern' itself requires the showing of a relationship.... So, therefore, proof of two acts of racketeering activity, without more, does not establish a pattern...." 116...