The Supreme Court decision yesterday allowing civil lawsuits under a federal racketeering law will result in more costly litigation for businesses and probably further encourage out-of-court settlements, legal experts and corporate executives said.
Under provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO), a law originally aimed at organized crime, plantiffs may sue businesses that show a "pattern of racketeering" -- which amounts to two or more acts from a long list of crimes in such areas as federal security law violations, federal mail fraud and wire fraud.
The broad language of the statute has given rise to a sharp increase in RICO litigation in the past several years, to the extent that lawyers say lawsuits involving just about any business dispute contain at least one such complaint. One reason for this explosion is that, under provisions of the law, plantiffs may collect triple damages and lawyers' fees if they win.
The court, by a 5-to-4 vote, reversed a lower court's ruling that narrowed the scope of the federal law. The decision is expected to be felt most heavily in service industries such as banking, insurance, accounting and securities, but it also could have far-reaching implications in making it easier to bring suits against companies that sell defective products, legal experts said.
"Anybody who gives opinions on how things will turn out in the future is bound to have disappointed clients," said David Hyman, an executive with Bear Stearns & Co. in New York. He added that the decision would inspire such clients to bring "new cases that would never been brought at all" if the law were interpreted narrowly.
Under the current circumstances, "Just about every bit of commercial litigation, with a little bit of ingenuity, can be alleged as a RICO violation," he said. Hyman is chairman of an ad hoc committee formed by the Security Industry Association to deal with the issue.
Officials with Shearson-Lehman Brothers said that RICO claims are attached to most of the complaints filed in federal court against their firm. Of the 150 to 200 suits filed against the firm each year, 40 percent are heard in federal court, they said. The suits allege various violations of federal securities laws.
They said that no jury has awarded damages yet on a RICO violation for such allegations, and that Shearson will continue to fight RICO allegations. But the Supreme Court has increased the incentive for companies to settle out of court those cases in which the facts are not clear-cut, they added.
"The risk intensifies threefold, and it is going to force you to settle cases you would otherwise try," Les Klein, a senior vice president and attorney for Shearson, said of the RICO law.
Corporate executives contacted yesterday said the law in current form distorts the intent of Congress, and they urged lawmakers to amend the provisions to focus on organized crime, not "legitimate" businesses.
Lawyers who bring product-liability suits, however, said the court's decision could help consumers greatly in their efforts to sue corporations that knowingly manufacture bad products.
One reason RICO violations are alleged is that, under the provisions of the law, courts hearing such cases can subpoena witnesses and information from outside that state in which a complaint is brought, said Dale Larson, a Minneapolis lawyer who has been involved in product-liability litigation.
Although no product-liability case has been heard by a jury on the basis of a RICO violation, this process may provide evidence of defects in the product, failure to warn or other violations that could lead to punitive damages, Larson said.
"If you don't permit the discovery in the first place, you may never know the answer to any of those questions," Larson said, adding that the Supreme Court decision would encourage courts not to throw out RICO claims preemptorily.