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Tuesday, June 13, 2006
High Court reins in civil rico
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Anti-civil RICO forces get a win -- but it's not over

Although the U.S. Supreme Court last week ducked the questions everyone
expected it to answer in two unrelated challenges under RICO, the justices
did tighten the reins on the law generally viewed by the business community
as a legal plague.

Even though the Court on Monday turned aside E.I.
du Pont de Nemours & Co.'s petition in a Benlate case, the issues not
resolved last week -- the scope of the "enterprise" definition in RICO and
whether "reliance" is required in RICO mail and wire fraud claims -- will
continue to divide the lower courts and inevitably return to the Supreme
Court, according to RICO litigators and scholars.

But those watching the high court's RICO cases last week viewed the outcome
basically as a victory for anti-civil RICO forces.

In Anza v. Ideal Steel Supply Corp., No. 04-433, a challenge involving two
competing businesses, the justices essentially said they meant what they
said in a 1992 decision: The alleged RICO violation must be the proximate
cause of the plaintiff's injuries. The law does not permit suits by parties
who have been injured only indirectly, wrote Justice Anthony M. Kennedy for
the 7-2 majority.

And, in Mohawk Industries v. Williams, No.
05-465, the high court delivered a blow to a RICO class action arising out
of claims that Mohawk and its outside recruiting agents hired illegal aliens
to depress wages for its legal workers.
The justices, in an unsigned decision, vacated the workers' favorable
judgment by the 11th U.S.
Circuit Court of Appeals and directed that appellate court to reconsider in
light of its proximate cause ruling in Anza.

"I think the Court remains concerned about the potential sweep of civil RICO
litigation," said Gene C. Schaerr of the Washington office of Chicago's
Winston & Strawn, who filed an amicus brief in Anza on behalf of the U.S.
Chamber of Commerce. "The statute was passed originally to allow people to
seek damages for harm as a result of mob activity. In the years since it was
passed, it has gradually metamorphosed into a general purpose, business tort
statute that gets raised in all kinds of business litigation where there is
any allegation of fraud or dishonesty of any kind."

The Supreme Court has been making it more difficult for plaintiffs to bring
civil RICO cases since the early 1990s, said Kevin P. Roddy of Wilentz,
Goldman & Spitzer in Woodbridge, N.J., counsel to Ideal Steel.

"I think the Court doesn't like the statute," he said, adding, "The work
that the [U.S.] Chamber has done over the last 20 years has borne fruit.
They're very concerned about business being targeted with RICO cases, and
that has finally resonated with the Court. But there's roughly the same
number of RICO cases that are filed each year as there are antitrust cases,
and I've never heard anyone say antitrust liability has run amok."

RICO prohibits certain conduct involving a "pattern of racketeering
activity." The statute, which permits the award of treble damages and
attorney fees, provides a private right of action under §1964(c) to any
person "injured in his business or property by reason of a violation" of the
act's substantive provisions.

Ideal Steel Supply Corp. sells steel mill products, supplies and services,
and operates stores in the New York City boroughs of Queens and the Bronx.
National Steel Supply, owned by Joseph and Vincent Anza, is Ideal's
principal competitor and also operates stores in Queens and in the Bronx.

Ideal sued National under §1964(c), charging that National had engaged in an
unlawful pattern of racketeering activity by failing to charge New York
sales tax to cash-paying customers and fraudulently concealing the practice
from the state. Ideal alleged that this practice allowed National to reduce
its prices without affecting its profit margin, and thus put Ideal at a
competitive disadvantage.

The district court dismissed Ideal's complaint, but the 2nd Circuit


The high court originally granted review to decide whether a party seeking
damages under RICO for mail or wire fraud had to prove that it had relied on
the fraudulent conduct and that the reliance had resulted in injury.

"The issue most burning for the bar is where a plaintiff says, 'I didn't
rely on this but my customers relied on it or the bank relied on it.'
Must you always have reliance in a RICO case predicated on mail or wire
fraud?" said Jeffrey E. Grell of, a law firm in Edina, Minn.

"For years, lower courts and parties have been struggling with what degree,
if any, reliance is required," he said. "You've got three different
standards relating to reliance. I was hoping [the justices] would at least
advance that debate,"
said Grell, who teaches civil RICO at the University of Minnesota Law

But, instead, the high court on June 5 said its analysis "begins ... and
largely ends" with its
1992 decision in Holmes v. Securities Investor Protection Corp., 503 U.S.
258. In Holmes, the justices held that §1964(c) requires proof of "some
direct relation between the injury asserted and the injurious conduct

Writing for the majority, Kennedy said Ideal had not satisfied the proximate
cause requirement of Holmes. The direct victim of the alleged RICO
violation, he said, was the state of New York:
"It was the state that was being defrauded and the state that lost tax
revenue as a result."

Ideal's asserted harms, he said, were caused by a set of actions --
National's offering of lower prices -- "entirely distinct" from the alleged
RICO violation, defrauding the state.

The "directness requirement" is necessary because of the difficulty that
courts may have when trying to determine damages caused by some remote
action, he said. There is also an appreciable risk of duplicative recoveries
without it.

"A RICO plaintiff cannot circumvent the proximate-cause requirement simply
by claiming that the defendant's aim was to increase market share at a
competitor's expense," wrote Kennedy.
In evaluating a RICO claim for proximate causation, he said, "the central
question" a court must ask is "whether the alleged violation led directly to
the plaintiff's injuries."

But Justice Clarence Thomas, in dissent, said the majority's "restrictive
proximate-cause test"
would prevent an honest businessman from recovering for competitive injuries
inflicted by an organized crime group using threats of violence on a
supplier to get goods at cost that it could then resell at lower prices than
its competitor. And that kind of organized crime, he wrote, was the
principal concern of RICO.

In Mohawk, the justices agreed to decide whether the carpet manufacturer,
working with outside hiring agencies to employ illegal aliens, was an
association-in-fact enterprise under RICO. But the justices sent the case
back to the 11th Circuit for further consideration in light of the Anza

"Those of us who watch this were surprised when the Court granted cert in
Mohawk not on the issue of causation but on a different issue," said Ideal
Steel counsel Roddy. "I suspect when the court heard argument in Anza on
March 27 and later in Mohawk, it realized there was a connecting thread,
which is causation.

"I think Justice Thomas got it right in Anza," he added. "We had an
extensive discussion in our brief that if you went back to the '50s and '60s
and the organized crime commission reports, there was recognition that one
of the ways organized criminals do business is they evade their taxes.
These competitor versus competitor cases do not arise very often and now
there is another set of fence-posts for plaintiffs."

Plaintiffs now will have a higher pleading burden to show direct injury in
order to overcome a defendant's motion to dismiss or for summary judgment,
he and others said.

With the Anza decision, "The Supreme Court is saying, 'We need to
circumscribe the application of civil RICO and we're going to do so through
the proximate-cause vehicle,'" said Mohawk counsel Juan P. Morillo of the
Washington office of Sidley Austin. "It is requiring the lower courts to
more strictly apply the direct injury requirement and to pay attention to
the related issue of the speculative nature of damages."

The Court's concern, said Morillo, is "how tenuous the link is" between the
alleged RICO activity (in Anza, defrauding the state, and in Mohawk, hiring
illegal aliens) and the alleged injury (in Anza, lowering prices, and in
Mohawk, the effect on wages). "The two situations are perfectly analogous,"
he said.

But Morillo's high court opponent doesn't see it that way.

"Anza says the direct victim is the state," said Howard Foster of Chicago's
Johnson & Bell. "In my case, I assume Mohawk would argue the U.S.
government is really the party that has been injured because illegal
immigrants have been hired. But the government has not suffered a monetary
injury in my case, and I don't think it could bring a lawsuit for money
damages. There is no Anza problem. So the extensive analysis of proximate
causation which 11th Circuit has already done would not be affected."

Since the 11th Circuit found that there was proximate cause, "You could read
into the tea leaves [of what the Supreme Court did in Mohawk] that there was
something wrong in the 11th Circuit's analysis," suggested Grell of

But, he added, "The courts are all very respectful of their respective
authority. The 11th Circuit can make up its own mind and it tends to be more
RICO plaintiff-friendly than some of the other circuits, like the 7th
Circuit, which is very anti-RICO plaintiff."

Foster does agree that the Supreme Court is "reining in" RICO. Anza, he
said, cut back on business competitors' standing to sue.

The Anza decision closes the door on RICO suits based on indirect injuries,
said Winston & Strawn's Schaerr.

"From the standpoint of a business litigator, it's a good thing," he added.
"You don't want to have some vaguely phrased exception that every plaintiff
is going to argue he falls within. What the Court did is very important in
ensuring the RICO statute, at least in the civil arena, goes back to being
confined to cases closer to what Congress had in mind."

Cf, The courtroom is a very serious place, but once in a while, it becomes a
theatre for human comedy as the search for justice unfolds. On this Coast to
Coast show, you'll hear the classic humor of real-life courtroom stories
from special guest, Judge Jerry Buchmeyer, a senior District Court Judge in
Dallas. Judge Buchmeyer has documented funny legal moments since 1980 in his
"Say What!?"
column on the State Bar of Texas website. Join co-hosts and
bloggers, J. Craig Williams and Bob Ambrogi and listen for a laugh.
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