February 13, 2002

Second Circuit Allows Rico Claim Against Competitor Using Illegal Aliens

Holland & Knight Newsletter
Frederick D. Braid

Victims of unfair competition at the hands of employers using illegal aliens may be able to recover treble damages in addition to stopping the unlawful activity. The possibility for such relief arises out of the decision of the United States Court of Appeals for the Second Circuit, reversing the lower court's dismissal of a RICO (Racketeer Influenced Corrupt Organizations Act) claim, in Commercial Cleaning Services, LLC v. Colin Service Systems, Inc.

Commercial, a cleaning contractor, alleged that it was a victim of a pattern of racketeering activity engaged in by Colin. Specifically, Commercial alleged that Colin systematically hired illegal aliens in violation of the Immigration and Naturalization Act, took advantage of such illegal aliens by paying them substandard wages, and thereby gained an unlawful competitive advantage that made it possible for Colin to underbid Commercial and others who complied with all legal requirements. According to Commercial's complaint, Colin paid less than the prevailing wage, and failed to withhold or pay federal and state payroll taxes and workers' compensation insurance fees.

In allowing Commercial's suit to go forward, the Second Circuit rejected Colin's claim that its unlawful activity was not the legal cause of Commercial's loss of contract bids. Colin had successfully argued in the court below that there was no direct relation between its hiring of illegal aliens and Commercial's misfortunes. Colin relied on earlier cases where investors whose broker-dealers had failed under financial pressure caused by the stock manipulation of others were unable to establish a "direct relation" between the stock manipulation and their losses flowing from the broker-dealers' insolvency. In reversing the lower court, the Second Circuit found on this key element of a RICO violation that Commercial's injuries were directly related to Colin's unlawful activity. In so doing, it distinguished the broker-dealer cases, where it found the investors' injuries derivative of the broker-dealers' failures. In other words, it was the broker-dealers who were directly injured by the stock manipulation, and the investors were secondarily injured. Here, the Second Circuit found, Commercial was directly injured by Colin's unlawful hiring scheme. If successful, Commercial could recover damages of three times its actual losses under RICO's civil remedy provisions.

The decision may have an impact beyond a competitor's use of illegal aliens. RICO applies to any party that has maintained an enterprise and caused injuries through a pattern of racketeering activity. A pattern of racketeering involves repeated violations of a long list of federal laws, including mail and wire fraud. As a result, the Commercial Cleaning decision may provide an additional remedy to employers faced with injuries caused by other illegal and anticompetitive conduct by a competitor.

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