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Court Cites Discovery Costs in Dismissing RICO Case

In-house counsel tired of settling meritless lawsuits out of fear of huge discovery costs can find hope in a recent ruling from the 7th Circuit.

On April 1, Judge Richard Posner sided with a lower court's ruling in Limestone Development Corp. v. Village of Lemont, Ill., dismissing the case for failure to state a claim and taking the opportunity to make a point about
discovery related to merit challenges.

Limestone, which owned 55 acres of land in the Chicago suburb, filed suit against the Village of Lemont, alleging it and other public bodies--in cahoots with the mayor--constituted an enterprise that conducted affairs through a pattern of racketeering activity in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO).

In the suit, filed in August 2005, Limestone claimed the enterprise worked together to prevent Limestone from building on its land, eventually driving down its price and causing Limestone to sell it at a loss.

In January 2007 the U.S. District Court for the Northern District of Illinois granted the defendants' motions to dismiss, finding the plaintiffs failed to state a claim because the four-year statute of limitations on RICO had run out and because the plaintiffs failed to identify an enterprise or pattern of racketeering, both of which are needed to have a valid RICO claim. Posner upheld the ruling, writing, "If discovery is likely to be more than usually costly, the complaint must include as much factual detail and argument as may be required to show that the plaintiff has a plausible claim."

Although the RICO claims were the heart of the case, Posner's comments on discovery attracted attention from defense attorneys.

"What this reinforces is that discovery is not automatic," says Ned Isokawa, litigation chair in the San Francisco office of Paul, Hastings, Janofsky & Walker. He says the more complicated the case, the more details required in stating the claims. Failure to include enough facts will open the door for defense attorneys to argue for limiting discovery. "[This decision] reflects the Supreme Court's recognition that the costs of defending a complicated commercial case are exacting and that courts are empowered, and encouraged, to prevent unsupported claims from going to costly discovery."


Discovery Dilemma
While the court never really addressed the substance of Limestone because the statute of limitations had run out, legal departments should pay attention to Posner's points on discovery.

"What's interesting is that Judge Posner grounds his limitation-of-
discovery reasoning in Limestone, a RICO case, in the Supreme Court's recent similar reasoning in Bell Atlantic v. Twombly, an antitrust case," Isokawa says.

In Limestone, Posner wrote that Twombly teaches "a defendant should not be forced to undergo costly discovery unless the complaint contains enough detail, factual or argumentative, to indicate that the plaintiff has a substantial case." Limestone failed to provide enough information to show a RICO violation, and the District and Circuit courts dismissed the case for
failure to state a claim. Posner's comments signal defendants can be more confident in filing for a stay of discovery.

"Given the respect commanded by Judge Posner individually and by the 7th Circuit collectively, this case has national applicability," Isokawa says. He adds that when it comes to how much discovery will be allowed initially, where the judge draws the line will differ depending on the facts alleged and the discovery sought. "This is a discretionary doctrine, but its mention in Twombly, and now Limestone, shows that courts are aware of the reality of litigation costs," he says.


RICO Reach
The original intent of RICO was to fight organized crime, but according to Jeff Grell, an attorney who has his own RICO practice in St. Paul, Minn., RICO has become popular with civil attorneys because it provides a longer statute of limitations and allows discovery going back as much as 10 years.

Most RICO charges are added onto lawsuits alleging breach of contract, fraud, unjust enrichment or other similar claims. "Plaintiffs have many remedies to address these kinds of claims and they don't necessarily need RICO," Grell says. "If you file your claim with RICO as an addition to one of those types of claims and the court decides you didn't really need that claim, the court will scrutinize [your claims] more."

Most courts, especially the 7th Circuit, have taken a very strong stance against plaintiffs who try to tack on RICO claims when they aren't relevant.

"Based upon my experience, the vast majority of cases that allege RICO claims are dismissed very early in the case for failure to state a claim," says Thomas G. Walker, a partner at Cosho Humphrey. Walker specializes in RICO law.

The facts underlying a RICO claim have to be very specific and have to touch all of the elements of RICO, including that there be an enterprise in place and that the enterprise be engaged in a pattern of racketeering activity.

"It is essential that a plaintiff state his or her claims with particularity," Walker says.

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