Second Circuit applies defense of in pari delicto to Racketeer Influence Corrupt Organization Act claim.

• Author: Fasano, Robert
• Position: Case note

CRIMINAL LAW--Second Circuit Applies Defense of in Pari Delicto to Racketeer Influence Corrupt Organization Act Claim--Republic of Iraq v. ABB AG, 768 F.3d 145 (2d Cir. 2014).

The Racketeer Influenced and Corrupt Organization Act (RICO) makes it unlawful for an individual that is employed or associated with any enterprise to participate, directly or indirectly, in racketeering activity, which affects interstate or foreign commerce. (1) In pari delicto is a well-established common law defense, applicable to federal statutes, that bars plaintiffs from recovery when the plaintiff bears substantial fault and responsibility for the wrongdoing. (2) In Republic of Iraq v. ABB AG (3), the United States Court of Appeals for the Second Circuit considered whether in pari delicto was an appropriate defense to a civil RICO claim, and whether the illegal acts committed during the Hussein Regime were attributable to a subsequent new government. (4) The Second Circuit held that the doctrine of in pari delicto was a valid defense after establishing that the Republic of Iraq endures substantially equal responsibility for the acts committed during the Hussein Regime, and that the application of in pari delicto did not violate public policy. (5)

In 1996, the President of Iraq, Saddam Hussein agreed to participate in the Oil-for-Food Programme (the Programme), which was created by the United Nations. (6) The Programme allowed Iraq to use their proceeds from petroleum and petroleum products to purchase food and other humanitarian goods to benefit Iraq's population. (7) The United Nations International Committee (661 Committee) supervised the Programme to prevent Iraqi leaders from using the profits from petroleum sales for anything other than food and humanitarian goods for their civilians. (8) After seven years, Iraq had deposited USD64.2 billion into the escrow account from the sales of oil; approximately USD37 billion went to purchasing humanitarian goods, and USD18 billion was paid to Kuwait as restitution for the former invasion. (9) Although the United Nations established strict requirements and oversight of the Programme, the Hussein Regime discovered secret methods to take advantage of the Programme, undermining the economic sanctions. (10)

After the downfall of the Hussein Regime, the Republic of Iraq filed a complaint against three groups of defendants for violations of the RICO, Foreign Corrupt Practices Act (FCPA) and state law claims of breach of fiduciary duty, fraud, and conspiracy to commit fraud. (11) The three groups of defendants were comprised of oil purchasers, bank entities, and vendors. (12) The oil purchasers (collectively Oil Purchasing Defendants) consisted of eight defendants that either pled guilty or signed nonprosecution agreements. (13) The bank entities (collectively BNP) consisted of six other defendants, BNP Paribas USA and five other affiliates. (14) The last group, known as the Vendor Defendants, were those involved in the sale of humanitarian goods to Iraq. (15) The complaint alleged that all of the defendants violated RICO because the Programme was a RICO enterprise, and the defendants conducted racketeering activity within the enterprise. (16)

The District Court dismissed the civil RICO claims because the Republic of Iraq was barred by the common-law defense in pari delicto. (17) Applying the two-prong test, the District Court found that the Hussein Regime established an equal or greater responsibility in the racketeering than the defendants, and that public policy was not harmed. (18) Further, the District Court dismissed the FCPA because the statute does not provide a private right of action. (19) After an appeal by the Republic of Iraq, the Second Circuit affirmed the District Court's decision that the doctrine of in pari delictio is a valid defense for civil RICO claims, the wrongful acts by the Hussein Regime were attributable to Iraq, and the FCPA does not offer a private right of action. (20)

Congress enacted RICO to prohibit an individual that is employed or associated with any business to participate, directly or indirectly, in racketeering activity with intent to allow plaintiffs to file action for criminal or civil claims. (21) The RICO statute provides a civil right of action, which deals with the compensable injury caused by the acts that violate this provision. (22) Furthermore, in a civil action alleging a conspiracy under the RICO statute, the conspiracy must be in furtherance of a violation of one of the enumerated provisions of the RICO statute; it is not enough to just allege that a conspiracy has taken place. (23) The United States Supreme Court stated that to determine whether a plaintiff has alleged an extraterritorial claim, a court must assess the central actions which are the objects of the RICO statute's solicitude; in other words the court must determine the intent of the statute, then whether it was meant to apply exterritorialy. (24) Unfortunately, the United States Court of Appeals for the Second Circuit has not stated whether the statute was meant to apply exterritorialy, and district court judges have been inconsistent in its application. (25)

The common-law defense for federal statutes, in pari delicto, was established to prevent courts from hearing or mediating actions when both sides are wrongdoers, and to deter parties that contributed to the wrongdoing from seeking relief. (26) The United States Supreme Court in Perma Life Mufflers, Inc. v. International Parts Corp. (27) first addressed whether in pari delicto applied to antitrust cases. (28) The Supreme Court ruled that the in pari delicto defense should not be applicable to federal antitrust laws, but rather where the plaintiff bears at least substantially equal responsibility. (29) Years later, the United States Supreme Court in Bateman Eichler, Hill Richards, Inc. v. Berner addressed whether in pari delicto applied to federal securities law, where the plaintiff in the case filed suit for private damages under federal securities laws against the defendants, corporate insiders and broker-dealers who wrongfully enticed investors to buy securities through false insider information. (30) The Supreme Court held that there was no basis for applying the in pari delicto defense, however, the Court established a two prong standard that incorporates the plaintiffs degree of fault and public policy consideration. (31) Unfortunately, neither the Supreme Court nor the Second Circuit Court has established in pari delicto as a valid defense under the federal civil RICO statute, meaning that it is uncertain whether in pari delicto is applicable to civil RICO claims. (32)

The first prong to an in pari delicto analysis holds that the plaintiff must be a voluntarily functioning participant in illegal actions that are subject to the suit, and their fault must be equal or greater than the defendant's. (33) In cases where one of the parties is a foreign state, United States law declares that a foreign state's prior conduct or liabilities do not disappear when there is a transformation in their government. (34) Therefore, a sovereign state's rights are attached to the state itself rather than to the current government. (35) The second prong requires the court to consider public policy before applying the in pari delicto defense, ensuring that the application of the defense does not undermine congressional policy; thus, courts must prove that the in pari delicto defense advances the congressional intent under the federal statute. (36)

The Second Circuit Court commenced its analysis of the two-prong standard by evaluating the responsibility of the Republic of Iraq in the corruption of the Programme. (37) Specifically, the court stated that the Hussein Regime designed, instigated, and dominated the scheme, thereby, meeting the threshold of responsibility. (38) The Republic of Iraq cannot escape responsibility for the Hussein Regime because the Court declared that Iraq's legal position remained the same, even after a transformation within its government. (39) Moreover, the liabilities of a state are unchanged by an alteration or variation in the state's government. (40) The dissent interpreted the first prong as reflecting the idea that a party cannot invoke the court's equitable powers when it has morally tainted itself, and that the immoral conduct must touch and taint the party (plaintiff) personally. (41) Therefore, the dissent concluded that the Hussein Regime's actions did not establish direct responsibility and thus, the first prong of the in pari delicto defense was not satisfied. (42)

Next, the Court analyzed the second prong, which required the court to address whether applying in pari delicto to a civil RICO claim would violate public policy. (43) The Court found that the purpose of the RICO statute was to eliminate organized crime and reasoned that allowing recovery to a plaintiff that bore at least substantial responsibility for the injury would be inconsistent with the purpose of the RICO statute. (44) The dissent, however, found that the majority misapplied the second prong of in pari delicto and stated that public policy should be analyzed out of a concern for public welfare, rather than on the Congressional intent of the statute. (45) The dissent stressed that the majority should focus on the motivation that led to the United Nations placing economic sanctions on the Hussein Regime in its consideration of public policy. (46) Furthermore, the dissent focused on the purpose of implementing the Programme, which was to reprimand the Hussein Regime through economic sanctions in order to benefit the state of Iraq and its citizens, demonstrating that the United States viewed the Hussein Regime's conduct separate from the...