Seventh Circuit Determines That Retaliation Can Form The Basis Of A RICO Violation

On December 15, 2011, the United States Court of Appeals for the Seventh Circuit issued a blow to corporate defendants by determining that retaliation against an employee for reporting alleged criminal activity to law enforcement can constitute a racketeering “predicate act,” resulting in liability under the Racketeer Influenced and Corrupt Organizations Act (“RICO”).  DeGuelle v. Camilli, No. 10-2172 (7th Cir. Dec. 15, 2011).  This unprecedented decision provides whistleblowers with yet another possible cause of action and expanded remedies.

SOX Adds Retaliation as a RICO “Predicate Act”

Under RICO, it is unlawful for an employee of an enterprise engaged in interstate commerce to “conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity,” which requires the commission of at least two “predicate acts” of racketeering within a span of ten years.  In enacting the Sarbanes-Oxley Act (“SOX”) in 2002, Congress added retaliation for “providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense” to the list of statutorily-defined predicate acts.  To prove that predicate acts are part of a pattern under RICO, a plaintiff must demonstrate a relationship between the predicate acts and a threat of continuing activity - known as the “continuity plus relationship” test. 

Seventh Circuit: Retaliatory Acts are “Inherently Connected” to Conduct Exposed by Whistleblowers

In DeGuelle, plaintiff Michael DeGuelle filed a lawsuit against his former employer, S.C. Johnson & Son, Inc. (the “Company”) that alleged, among other things, RICO violations.  Specifically, DeGuelle claimed that he was terminated in retaliation for reporting an alleged tax fraud scheme to federal law enforcement agencies.  DeGuelle argued that, in addition to the Company’s alleged tax fraud, his termination constituted a further predicate act as part of a single continuous pattern of racketeering activity.  The district court for the Eastern District of Wisconsin disagreed, finding that DeGuelle’s complaint alleged two unrelated schemes: the tax fraud and the retaliation.  DeGuelle v. Camilli, No. 10-CV-0103, 2010 WL 1484236 (E.D. Wis. Apr. 12, 2010).  In so holding, the district court noted that the alleged tax scheme and DeGuelle’s termination involved “different victims, participants, and motives.” 

The Seventh Circuit, however, disagreed with the district court, finding that the DeGuelle had sufficiently pled that the Company’s motivation for terminating him was retaliation for disclosing the alleged tax scheme.  The court acknowledged that most courts, both pre- and post-SOX, have not considered retaliation against an employee a racketeering act, but disagreed with this approach, concluding that “[r]etaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower.”  The Seventh Circuit thus found that DeGuelle had sufficiently alleged that his termination was related to the alleged tax scheme to constitute a predicate act giving rise to potential RICO liability.

Notably, the Court acknowledged that the Company had taken efforts to investigate DeGuelle’s allegations of tax fraud, including hiring an outside law firm to conduct an investigation of his claims and revoking a negative performance evaluation that Company officials determined was potentially retaliatory.  Despite these clear indications that the Company had taken DeGuelle’s concerns seriously (and despite the court’s acknowledgement that some of the actions of the defendants were “inconsistent with any alleged involvement in the tax fraud scheme”), the court determined that there were “enough allegations within the complaint to conclude, at this stage in the proceedings, that [defendants] were participants in the RICO scheme.”

Implications

This decision is notable as it is one of the first in the country to hold that retaliation against an employee who reports potential criminal activity to law enforcement constitutes a predicate act under RICO.  As RICO only requires a plaintiff to prove the commission of two predicate acts, this decision may produce more litigation from disgruntled employees who seek to tie their termination or demotion to a single alleged bad act of the employer.

Furthermore, as the statutory scheme provides that retaliation for providing “any truthful information relating to the commission or possible commission of any Federal offense” constitutes a predicate act, this decision indicates that a whistleblower who provides information to law enforcement about potential crimes could possibly state a claim even if no crime was actually committed.  For example, if an employee alleged that he or she was both discouraged from cooperating with law enforcement and then retaliated for doing so, the employee could argue that the employer committed two predicate acts - witness tampering and retaliation - despite the fact that the underlying complaint to authorities did not lead to a determination that a crime had actually been committed.

However, in addition to the Seventh Circuit acknowledging that the majority of courts have concluded that alleged retaliation is not a predicate act, it should also be noted that in order to prevail on a RICO retaliation theory, a plaintiff must allege that he or she complained to law enforcement authorities about a violation of federal law.  Retaliation for internal reporting alone or violations of state or local laws would not constitute a RICO predicate act even under the Seventh Circuit’s holding.  The Seventh Circuit also recognized that “there is a danger, as expressed by many courts prior to the enactment of the Sarbanes-Oxley Act, that plaintiffs will bring claims which should be handled by state law (i.e., wrongful termination) into federal court under the guise of RICO,” but concluded that the other requirements of RICO would “weed out” these improperly filed claims.  Nonetheless, employers should be aware that they face increased risks in managing an employee where they learn that the employee has contacted law enforcement authorities about possible federal criminal violations.

By: Christopher F. Robertson and Dawn Mertineit.

Christopher F. Robertson is a partner in Seyfarth’s Boston office and Dawn Mertineit is an associate in the Chicago office. If you would like further information, please contact your Seyfarth attorney, any member of the firm’s SOX Whistleblower Team, Chris Robertson at crobertson@seyfarth.com or Dawn Merineit at dmertineit@seyfarth.com.