THE CONCEPT OF DISGORGEMENT
IN THE “RICO” ACT
By
Manuel J. Laserna Jr.
In the very recent case of U.S. vs. PHILIP MORRIS USA INC., et. al., No. 04-5252, February 4, 2005, involving an appeal from an interlocutory order of the U.S. District Court of Columbia in Case No. 99cv02496, the U.S. Court of Appeals for the District of Columbia reversed the District Court and held that under the Racketeer Influenced and Corrupt Organizations Act (“RICO” Act), 18 U.S.C. §§ 1961-68, the District Court had jurisdiction “only for forward-looking remedies that prevent and restrain violations of the Act”.
It held that the District Court had no jurisdiction to issue a disgorgement order, the purpose of which was to “remedy the effects of past conduct to restore the status quo”.
In 1999 the US Government brought a civil case before the U.S. District Court of Columbia against the appellant cigarette manufacturers and research organizations, claiming that they engaged in “a fraudulent pattern of covering up the dangers of tobacco use and marketing to minors”.
In the said case, the US Government sought “disgorgement of $280 Billion that it had traced to proceeds from appellants’ cigarette sales to the ‘youth addicted population’ between 1971 and 2001”.
The Government sought damages under the Medical Care Recovery Act (“MCRA”), 42 U.S.C. §§ 2651-53, and the Medicare Secondary Payer (“MSP”) provisions of the Social Security Act, 42 U.S.C. § 1395, “to recover health-care related costs that the appellants had allegedly caused”.
The US Government also claimed that the appellants engaged in “a criminal enterprise to effect
this cover-up”, and sought equitable relief under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-68, including “injunctive relief and disgorgement of proceeds from appellants’ allegedly unlawful activities”.
The Government sought the relief under 18 U.S.C. § 1964(a), which gives the District Court jurisdiction
“to prevent and restrain violations of [RICO] by issuing appropriate orders”, including, but not limited to “ordering any person to divest himself of any interest, direct or indirect, in any enterprise; imposing reasonable restrictions on the future activities or investments of any person, including, but not limited to, prohibiting any person from engaging in the same type of endeavor as the enterprise engaged in, the activities of which affect interstate or foreign commerce; or ordering dissolution or reorganization of any enterprise”.
Appellants moved to dismiss the complaint in 2000. The District Court dismissed the MCRA and MSP claims, but the Second Circuit “remanded for determination of which disgorgement amounts were sufficiently directed to prevention and restraint to qualify under § 1964(a), thus treating the language on availability of disgorgement as essential to the outcome of the case”. [United States v. Carson, 52 F.3d 1173, 1182 (2d Cir. 1995); Richard v. Hoechst Celanese Chem. Group, Inc., 355 F.3d 345, 354 (5th Cir. 2003); United States v. Private Sanitation Indus. Ass'n, 914 F. Supp. 895, 901 (E.D.N.Y. 1996); United States v. Philip Morris, Inc., 116 F. Supp. 2d 131, 134 (D.D.C. 2000)].
The case proceeded, and the Government sought “disgorgement of $280 billion that it traced to proceeds from appellants’ cigarette sales to the ‘youth addicted population’ between 1971 and 2001”. This population included “all smokers who became addicted before the age of 21, as measured by those who were smoking at least 5 cigarettes a day at that age”.
After availing of the necessary discovery procedures, the appellants moved for summary judgment on the disgorgement claim arguing that:
“(1) disgorgement is not an available remedy under § 1964(a);
(2) even if disgorgement were available, the Government’s model fails the Carson test for permissible disgorgement that will “prevent and restrain” future violations; and
(3) even if disgorgement were available, the Government’s proposed model is impermissible because it includes both legally and illegally obtained profits in violation of SEC v. First City Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989).”
The District Court denied the motion of the appellants. [United States v. Philip Morris USA, Inc., 321 F. Supp. 2d 72 (D.D.C. 2004)]. The appellants appealed the ruling to the U.S. Court of Appeals for the District of Columbia.
The Government urged that the review by the Appeals Court should be limited to “the narrow question of whether the disgorgement it seeks is consistent with the standards” of United States v. Carson, 52 F.3d 1173, 1182 (2d Cir. 1995) United States v. Carson, 52 F.3d 1173, 1182 (2d Cir. 1995), and “not whether disgorgement vel non is an available remedy under civil RICO”.
The Government argued that § 1964 contains “a grant of equitable jurisdiction that must be read broadly to permit disgorgement in light of Porter v. Warner Holding Co., 328 U.S. 395 (1946), and its progeny”.
The Porter Court considered reimbursement awards under the Emergency Price Control Act of 1942 (“EPCA”) and concluded that “where a statute grants general equitable jurisdiction to a court, all the inherent equitable powers are available for the proper and complete exercise of that jurisdiction.”
The Appeals Court held that Section 1964(a) provides jurisdiction to issue a variety of orders “to prevent and restrain” RICO violations which indicated that the jurisdiction was “limited to forward-looking remedies that are aimed at future violations”.
It explained that “divestment, injunctions against persons’ future involvement in the activities in which the RICO enterprise had been engaged, and dissolution of the enterprise are all aimed at separating the RICO criminal from the enterprise so that he cannot commit violations in the future”.
It added that “disgorgement is a quintessentially backward looking remedy focused on remedying the effects of past conduct to restore the status quo”, citing Tull v. United States, 481 U.S. 412, 424 (1987).
It is measured by “the amount of prior unlawful gains and is awarded without respect to whether the defendant will act unlawfully in the future”. Thus, disgorgement is “both aimed at and measured by past conduct”.
It held that the District Court had jurisdiction “only to prevent and restrain violations of [RICO]” by issuing appropriate orders, including, but not limited to:
“ordering any person to divest himself of any interest, direct or indirect, in any enterprise; imposing reasonable restrictions on the future activities or investments of any person, including but not limited to, prohibiting any person from engaging in the same type of endeavor as the enterprise engaged in, the activities of which affect interstate commerce; or ordering dissolution or reorganization of any enterprise”. [18 U.S.C. § 1964(a)].”
It held that § 1964(a) of the RICO Act “does not provide for disgorgement” and that it provides only for orders which “prevent or restrain future violations”. “Disgorgement does not do that”, the Appeals Court said.
Applying the canons of noscitur a sociis and ejusdem generis, and citing Wash. State Dep't of Soc. & Health Servs. v. Guardianship Estate of Keffeler, 537 U.S. 371, 384 (2003), the Appeals Court held that the remedies explicitly granted in § 1964(a) are “all directed toward future conduct” and in “separating the criminal from the RICO enterprise to prevent future violations”. It added that “disgorgement is a very different type of remedy aimed at separating the criminal from his prior ill-gotten gains and thus may not be properly inferred from § 1964(a).”
In a criminal RICO action the defendant “must forfeit his interest in the RICO enterprise and unlawfully acquired proceeds, and may be punished with fines, imprisonment for up to twenty years, or both”. [18 U.S.C. § 1963(a)].
In a civil case the Government may request limited equitable relief under § 1964(a). “Individual plaintiffs are made whole and defendants punished through treble damages” under 18 U.S.C. § 1964(c). Congress “intended to limit relief under § 1964(a) to forward-looking orders, ruling out disgorgement”, the Appeals Court held.
On the Government’s view that it could collect sums paralleling – perhaps exactly – the damages available to individual victims under § 1964(c), the Appeals Court held that not only would “the resulting overlap allow the Government to escape a statute of limitations that would restrict private parties seeking essentially identical remedies” [Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 156 (1987)], but it raises issues of “duplicative recovery” that the Supreme Court had rejected in Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 269 (1992).
The Second and the Fifth US Circuit Courts of Appeals seemed to have varying rulings on the propriety of disgorgement.
The Second Circuit in Carson had interpreted “prevent and restrain” not to eliminate the possibility of disgorgement altogether, but to limit it to cases where there is a finding “that the gains are being used to fund or promote the illegal conduct, or constitute capital available for that purpose.” (Carson, F.3d at 1182).
The Fifth Circuit had adopted the interpretation in a case holding that “disgorgement after the defendant had ceased production of an allegedly defective product would be inappropriately punitive rather than directed toward future violations”. [Richard v. Hoechst Celanese Chemical Group, 355 F.3d 345, 355 (5th Cir. 2003)].
As of today, there is no Supreme Court case dealing with the jurisdiction of a district court to order disgorgement under RICO § 1964(a).
Insofar as the US Circuit Court of Appeals for the District of Columbia was concerned, it held that the District Court of Columbia had “erred when it found that disgorgement was an available remedy under 18 U.S.C. § 1964(a)”.
It thus granted “summary judgment in favor of appellants as to the Government’s disgorgement claim”.
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