Monday, June 5, 2006

Supreme Court Imposes Stricter Proximate Cause Requirement for Civil RICO

The Supreme Court reemphasized that private RICO claims must meet a fairly high standard of proximate causation if they will survive a motion to dismiss in its decision in Anza v. Ideal Steel (here).  The civil cause of action granted under RICO is unique in federal law by providing private parties a means to recover treble damages plus attorney's fees for a claim based on conduct by defendants that can be shown to violate a variety of federal criminal laws, most importantly the mail and wire fraud statutes.  The "catch-all" provision of RICO, Sec. 1962(c), arguably allows almost every business dispute to be turned into a RICO claim because the plaintiff only needs to show that the defendants conducted or participated in the conduct of the enterprise through a pattern of racketeering activity.  Because the pattern requirement is fairly minimal -- only two illegal acts, one of which is within the past ten years -- a creative lawyer can make most contractual claims into possible RICO actions because there will be mailings, faxes, e-mails, and the like in most of them that can support a complaint. 

A key limitation on the civil claims is Sec. 1964(c), which requires that the plaintiff be "injured in his business or property by reason of a violation of" RICO, which the Court has interpreted as requiring proof of proximate cause.  Anza involves a fairly straightforward scheme by the defendant, National Steel (owned by the Anzas), in which it did not charge customers who paid cash the applicable (and purportedly exorbitant) New York City and State sales taxes on purchases, a rather substantial discount for purchasers.  The plaintiff, Ideal Steel,  was a competitor of National, and filed the RICO suit alleging that the Anzas and National engaged in mail and wire fraud by not paying the requisite taxes, which resulted in an injury to the plaintiff's business.  Simple enough, but the Supreme Court rejected the claim, holding that the plaintiffs were not harmed by the racketeering activity directly, applying its earlier decision in Holmes v. SIPC.  The Court stated in Anza:

The proper referent of the proximate-cause analysis is an alleged practice of conducting National’s business through a pattern of defrauding the State. To be sure, Ideal asserts it suffered its own harms when the Anzas failed to charge customers for the applicable sales tax.  The cause of Ideal’s asserted harms, however, is a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the State).

The Court also considered who was better able to vindicate their interests, the state which was directly affected by the harm and a competitor only indirectly harmed.  The Court noted that RICO is not the proper vehicle protecting the indirect victim:

Ideal accuses the Anzas of defrauding the State of New York out of a substantial amount of money. If the allegations are true, the State can be expected to pursue appropriate remedies. The adjudication of the State’s claims, moreover, would be relatively straightforward; while it may be difficult to determine facts such as the number of sales Ideal lost due to National’s tax practices, it is considerably easier to make the initial calculation of how much tax revenue the Anzas withheld from the State.  There is no need to broaden the universe of actionable harms to permit RICO suits by parties who have been injured only indirectly.

The Court did not consider the application of the proximate cause analysis to a Sec. 1962(a) claim, which requires proof of different elements than Sec. 1962(c), and remanded the case to the Second Circuit to consider that claim. 

Interestingly, Justice Thomas dissented from the majority's proximate cause analysis, arguing that Ideal Steel also was directly harmed in addition to the state, and that "[t]he Court’s reliance on the difficulty of ascertaining the amount of Ideal’s damages caused by petitioners’ unlawful acts to label those damages indirect is misguided."  Justice Breyer offered a slightly different analysis of causation, dissenting from the majority's analysis although not the final result (I think).  He stated:

In my view, the “antitrust” nature of the treble-damage provision’s source, taken together with both RICO’s basic objectives and important administrative concerns, implies that a cause is “indirect,” i.e., it is not a “proximate cause,” if the causal chain from forbidden act to the injury caused a competitor proceeds through a legitimate business’s ordinary competitive activity. To use a physical metaphor, ordinary competitive actions undertaken by the defendant competitor cut the direct causal link between the plaintiff competitor’s injuries and the forbidden acts.

The Court's analysis in Anza now imposes a higher pleading burden on plaintiffs to establish at least the rough outlines of a direct link between the racketeering activity and the injury to their business.  Anza is typical of most RICO cases in that the decision came at a preliminary stage, either in a Rule 12(b)(6) motion to dismiss for failure to state a claim or a Rule 56 summary judgment, and not after a trial.  Therefore, all the plaintiff's allegations here are accepted as true, and the decision means that there is another basis to dismiss civil RICO claims before trial on the basis of the failure to plead adequately the proximate cause element.  The premium for both sides is on the pleadings in the case and the sufficiency of the evidence at summary judgment, because if the plaintiff surmounts those two hurdles then the pressure on the defendant to settle will be enormous because of the possibility of treble damages.  The Court's decision does not affect criminal RICO actions, such as those filed against class action firm Milberg Weiss or former Hollinger International CEO Lord Conrad Black.  (ph)

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Tracked on Jun 5, 2006 5:43:21 PM


another dose of intellectual dishonesty from the supremes. . .

here is no need to broaden the universe of actionable . . . what about the simple proposition that the plaintiffs want to recover their damages (For every wrong there is a remedy)

the fact of the matter is that mail and wire fraud cover garden variety crimes. the government and the courts will go to any extent possible to hide this basic truth from the public. had this been a criminal case and the sentence based on harm to competitors, it would have been affirmed 9-0

Posted by: John L. Davidson | Jun 6, 2006 5:44:34 AM

This proximate cause argument is not impossible to overcome in the right case. If you have proximate cause under traditional state tort law causes of action then you have proximate cause under RICO. We were able to meet those arguments in the underlying case referred to in this attorneys' fee award opinion. Dahlgren v. First National Bank of Holdrege, Slip Copy, 2007 WL 397009, RICO Bus.Disp.Guide 11,225, , D.Neb., February 01, 2007. While the case is on appeal, we do not view the Bank's arguments on proximate cause as being problematic even under Anza.

Jeanelle R. Lust

Posted by: Jeanelle R Lust | Oct 2, 2007 1:02:33 PM

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