Flinders v. Datasec Corp., Douglas Callaway, 742 F. Supp. 929 (Eastern District of Va. (E.D. VA) 1990)

MEMORANDUM OPINION

ELLIS, District Judge.

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 Counsel for Datasec has withdrawn.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. Individu

al 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 Da-tasec 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).

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:

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 proximate

ly 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 Para-dyne 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 Para-dyne, 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 F.Supp. 639 (E.D.Ky.1988). In short, three circuits require that a RICO conspiracy injury be caused by a predicate offense, while one circuit takes a broader view of RICO conspiracy standing and holds that any overt act of the conspiracy, even if not a predicate offense, is sufficient to confer standing. As the Fourth Circuit has not yet decided this issue, it is here a question of first impression.

The source of this circuit split seems to be a dispute over the scope of Sedima. The three circuits adopting the narrow view of standing assume, without discussion, that Sedima’s predicate offense causation requirement applies to the § 1962(d) conspiracy offense as well as to the § 1962(a)-(e) substantive offenses. By contrast, the Third Circuit, noting that the Supreme Court’s discussion of RICO standing focused solely on the § 1962(c) substantive violation, concluded that Sedima’s predicate offense causation requirement should be limited to those injuries caused by substantive violations. Articulating the Shearin panel’s position more fully, Chief Judge Gibbons commented that Sedima merely states a truism about RICO sub-stantivé violations. The three substantive violations — namely (i) investing in, (ii) acquiring, or (iii) conducting an enterprise through a pattern of predicate racketeering activities — literally require that any injury “flow” from the predicate offenses. The predicate offenses, as the essential, fundamental elements of the pattern of racketeering activity must, by definition, be the cause of a substantive RICO injury. This is plainly so. But Judge Gibbons goes on to note that this premise is not true for RICO conspiracies because “[predicate acts for conspiracy do not of necessity consist of section 1961(1) racketeering activity.” Shearin, 885 F.2d at 1169.

Sedima provides little assistance in resolving this dispute over RICO conspiracy standing. For while the underlying complaint there contained both § 1962(c) and § 1962(d) claims, see Sedima, 473 U.S. at 484, 105 S.Ct. at 3278, 87 L.Ed.2d 346 (1985); Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482, 485 (2d Cir.1984), the Supreme Court, as Shearin noted,5 inexplicably did not address standing for the § 1962(d) conspiracy violation then before it. This omission fuels this dispute. Since both substantive and conspiracy claims were present in Sedima, the opinion may arguably be read to require predicate act causation for all RICO violations. But this interpretation is no more persuasive than the Shearin panel’s conclusion that, because the Supreme Court did not address conspiracy, Sedima is inapplicable to § 1962(d). Inferences drawn from silence are often unreliable. Upon further review, this Court concludes that the Third Circuit’s approach to RICO conspiracy standing is correct, but a different result is required on the facts at bar.

Semantically, the Third Circuit’s approach is sounder, for it follows more closely the plain meaning of the statute. Nothing in RICO limits compensable conspiracy injuries solely to those caused by overt acts that also happen to be predicate offenses. Section 1964(c) authorizes a civil action by “[a]ny person injured in his business or property by reason of a violation of section 1962.” And § 1962(d) makes it “unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.” Thus, a RICO conspiracy violation arises from the mere agreement to violate one of the substantive RICO provisions; it does not require the completion of a substantive violation or predicate offense.6 The conspiracy

violation is complete whether or not a predicate offense has been committed.7 From this analysis emerges the principle, recognized in Shectrin, that RICO conspiracy standing does not require an injury caused by a predicate offense. It further follows (although not recognized in Shearin) that in accordance with established civil conspiracy law, standing for RICO conspiracy claims exists for injuries proximately caused by any wrongful overt act.8

None of the opinions restricting RICO conspiracy standing to injuries caused by predicate offenses offers any persuasive argument against this result. The Cullom and Morast opinions merely cite Sedima, without discussion, as the reason for denying recovery for RICO conspiracy injuries to employees terminated for not participating in RICO violations. See Cullom, 859 F.2d at 1214-16;9 Morast, 807 F.2d at 932-33. Hecht, in reaching the same conclusion, refers to Congress’s lack of intent to permit recovery for non-predicate offense overt acts. See Hecht, 897 F.2d at 25. This intent argument is unpersuasive; it is refuted by the statute’s plain meaning. Moreover, such a restrictive reading of RICO flies in the face of the many recent admonitions to construe RICO broadly. See Sedima, 473 U.S. at 497, 105 S.Ct. at 3285; Busby v. Crown Supply, Inc., 896 F.2d 833, 838 (4th Cir.1990). Further, the series of Tenth Circuit decisions relied on by defendants also does not undermine the principle that RICO conspiracy standing is satisfied by an injury proximately caused by any wrongful overt act. Dismissal of the RICO conspiracy in those cases resulted, from a fatal defect in the conspiracy claim and not, as defendants argue, merely and necessarily because the substantive RICO claims were dismissed.10

These decisions are not contrary to the proposition that RICO conspiracy standing may exist even when RICO substantive standing does not. The latter requires predicate offense proximate causation, while the former may be met by proximate causation flowing from any wrongful overt act, of which predicate offenses are a subset. It seems an appealing symmetry would result from imposing predicate offense causation on both the RICO substantive violations and the related RICO conspiracy. But the appeal disappears as soon as it is recalled that these are different violations with different constituent elements. See Iannelli v. United States, 420 U.S. 770, 777-78, 95 S.Ct. 1284, 1289-90, 43 L.Ed.2d 616 (1975).

Given this principle of RICO conspiracy standing, the question at bar is whether the overt act here in issue — defendants’ termination of plaintiff — was a wrongful act. Virginia law compels the conclusion that it was not. At most, the termination was a breach of contract, not an unlawful act. Even a contract breach is doubtful, for it seems plaintiff was an at-will employee. The complaint is silent on whether plaintiffs contract was for a term. In Virginia, where an employment contract does not specify the duration of performance, a rebuttable presumption arises that the employment is terminable at will. See Miller v. SEVAMP, Inc. 234 Va. 462, 362 S.E.2d 915, 917 (1987). The only exception to Virginia’s at-will employment doctrine is that an at-will employee discharged in contravention of an announced public policy of the state has a tort cause of action for wrongful discharge. See Bowman v. State Bank of Keysville, 229 Va. 534, 331 S.E.2d 797, 801 (1985). To date, this narrow public policy exception has been limited to public, rather than private rights. See Miller, 362 S.E.2d at 918. And it also appears that this exception has thus far been correctly limited to public rights embodied in state statutes. See Bowman, 331 S.E.2d 797, and cases cited therein. But see Fielder v. Southco, Inc., 699 F.Supp. 577 (W.D.Va.1988) (finding improper discharge cause of action based on public policy embodied in Title VII). Thus, assuming plaintiff was an at-will employee, his termination was not wrongful as it contravened no public policy of the state.

The same result obtains even if plaintiff’s employment contract was for a specific duration. The termination of this contract may give rise to a breach of contract claim, but it was not unlawful, provided, as is here the case, that the termination violated no public policies embodied in state statutes. Put another way, the discharge of an employee for refusing to participate in a scheme violative of the federal RICO law is not wrongful under the Virginia law. Hence the termination is not a wrongful overt act that gives rise to standing for plaintiff to bring a RICO conspiracy action.

Nor can plaintiff claim that his discharge was wrongful because the RICO conspirators tortiously interfered with his employment contract. Virginia recognizes a tort for conspiracy to induce a breach of contract. See Bowman, 331 S.E.2d at 801. But the facts alleged here do not support such a claim. Datasec, as a party to the contract, cannot tortiously interfere with the contract. And defendants Callaway and Williams, as Datasec employees, also cannot conspire with Datasec in this regard because the intra-corporate conspiracy doctrine holds that a corporation cannot conspire with its own agents or employees. See Buschi v. Kirven, 775 F.2d 1240, 1251 (4th Cir.1985).11 While unnamed Paradyne

employees are eligible co-conspirators, the complaint is devoid of any facts to support a claim that Paradyne employees tortiously interfered with plaintiff’s employment contract. Cf. Bowman, 331 S.E.2d at 801-02 (on analogous facts, the Supreme Court of Virginia upheld demurrer to conspiracy to tortiously interfere with contract claim).

In sum, standing to recover for RICO conspiracy injury is appropriate where the injury is proximately caused by predicate offenses or by overt acts that are not predicate offenses, but are themselves wrongful. As plaintiffs discharge was not wrongful under Virginia law, he lacks standing to recover under the RICO conspiracy claim.12

Defendants’ motions to dismiss raise a number of other issues not treated here or decided; they remain under advisement. As defendants’ counsel has recently withdrawn and as there is some doubt over whether Datasec has filed for bankruptcy, the Court has concluded that it would be useful to hold a pre-trial status conference in this matter for purposes of scheduling a trial date, hearing further oral argument on any remaining issues and entry of an order reflecting the conclusions of this Memorandum Opinion.