Academic journal article Vanderbilt Law Review

Small Claim Mass Fraud Actions: A Proposal for Aggregate Litigation under RICO

Academic journal article Vanderbilt Law Review

Small Claim Mass Fraud Actions: A Proposal for Aggregate Litigation under RICO

Article excerpt

INTRODUCTION

Assume that, tomorrow, a large company advertises a "miracle pill" that it claims will cure all forms of cancer. The company uses a sophisticated national marketing campaign to convey a strong health assurance message, which it tailors to specific audiences: women with breast cancer, men with prostate cancer, older adults with intestinal cancer, and children with leukemia. In response to the national campaign, consumers across the country purchase the pill, which costs $10. Only then do consumers discover that the pill is worthless and that the company intentionally defrauded them.

The Racketeer Influenced and Corrupt Organizations ("RICO") statute provides a basis for prosecution of the hypothetical company. In essence, RICO prohibits securing control of an economic enterprise through a pattern of racketeering.1 RICO defines "racketeering activity" to include mail and wire fraud;2 thus, it would encompass the hypothetical miracle pill fraud perpetrated through a national advertising campaign. RICO's central statutory objective is to deter the unlawful racketeering conduct it proscribes, and to support this objective, the statute authorizes dual enforcement: in addition to providing for public prosecution under § 1964(a), the statute authorizes private lawsuits by the injured consumers under § 1964(c).

The decision in U.S. v. Phillip Morris U.S.A., Inc.,3 however, has significantly weakened public prosecution under RICO of the hypothetical miracle pill company. In Phillip Morris, the United States Court of Appeals for the District of Columbia held that the government may not seek the disgorgement of a RICO defendant's illegitimate profits, including profits acquired by defrauding consumers.4 Other federal courts have adopted rules similar to Phillip Morris U.S.A.5 Without the disgorgement remedy, the government in a civil RICO case can request only limited equitable relief under § 1964(a).6 Thus, private enforcement under § 1964(c)-which is not restricted to prospective relief-is the more effective vehicle to vindicate the statute's deterrence objective. Only under § 1964(c) will perpetrators of mass fraud, such as the company that marketed the miracle pill, face a real threat of litigation commensurate with their harmful behavior.

Economic considerations, however, currently cripple private enforcement of the type of fraud illustrated in the miracle pill hypothetical. The hypothetical presents "small claim mass fraud": mass fraud that results in injuries where "the claim of any individual class member for harm done is too small to provide any rational justification to the individual for incurring the costs of litigation."7 For example, the miracle pill campaign harmed millions of consumers. But each claimant lost only $10. With a potential recovery of only $10, no individual has incentive to seek redress in the legal system. Even if a claimant purchased multiple pills over a given time period, litigating a case against a large company that has defrauded millions of consumers requires a substantial investment, one that completely eclipses a paltry individual recovery of $10. Accordingly, no rational consumer will seek to vindicate his individual claim against the miracle pill company.

However, where the uniformity of the defendant's conduct defines the contours of the lawsuit, and where an individual's stake in the case is too low to make private enforcement viable, claim aggregation by way of a class action under Federal Rule of Civil Procedure 23 ("Rule 23") offers an efficient mechanism to facilitate private enforcement. While an individual's $10 miracle pill claim is unmarketable, combining it with the claims of similarly defrauded miracle pill consumers can make a suit sufficiently attractive for entrepreneurial attorneys to justify the investment necessary to pursue the claims in court.

Despite the practical reality that these small claims will be pursued only in the aggregate, courts repeatedly have rejected class certification of small claim mass fraud actions brought under RICO. …

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