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Anza v. Ideal Steel Supply Corp.: Did the Supreme Court Punt or Send a Signal?
Jeffrey E. Grell
On June 5, 2006, the United States Supreme Court published its decision in Anza v. Ideal Steel Supply Corp., ___ U.S. ___, 126 S.Ct. 1991, 2006 WL 1519365 (2006). For years lower courts and many practitioners have struggled with the issue of whether a civil plaintiff, bringing RICO claims predicated on mail, wire or bank fraud, can establish proximate cause under section 1964(c) even if the plaintiff does not rely on any fraudulent statements made by the defendant. The hope was that the Supreme Court would clarify the issue.
In order to have standing to bring a civil RICO claim, a plaintiff must establish that it was injured "by reason of" the RICO violation under section 1964(c). When considering claims under mail, wire, and/or bank fraud (18 U.S.C. §§ 1341, 1343, 1344), some courts have held that a plaintiff is not injured "by reason of" the RICO violation unless the plaintiff alleges and establishes that it detrimentally relied on the defendant's fraudulent statement. See, e.g., American Chiropractic Ass'n v. Trigon Healthcare, Inc., 367 F.3d 212, 233 (4th Cir.), cert. denied, 543 U.S. 979 (2004); Caviness v. Derand Resources Corp., 983 F.2d 1295, 1305 (4th Cir. 1993). For example, if a defendant sends an email to a victim falsely stating that the a victim has won a trip to Hawaii and need only provide their credit number, but then the defendant makes unauthorized charges to the credit card, the victim has detrimentally relied on the defendant's false statement that the victim won a trip to Hawaii. The victim would likely be able to recover the unauthorized charges to her/his credit card (which would further be trebled under section 1964(c)). Meanwhile, other courts have taken a contrary view, holding that a civil RICO plaintiff can establish proximate cause even if it does not rely on any false statements. Systems Management, Inc. v. Loiselle, 303 F.3d 100, 104 (1st Cir. 2002) ("[t]here is no good reason here to depart from RICO's literal language by importing a reliance requirement into RICO").
Still other courts have taken a third approach, holding that although reliance is required in civil RICO cases predicated on fraud, that requirement can be fulfilled by persons other than the plaintiff. For example, in Procter & Gamble Co. v. Amway Corp., 242 F.3d 539 (5th Cir. 2001), P&G alleged that Amway, P&G's competitor, was luring P&G customers away by falsely representing that P&G was owned and operated by a satanic cult. Of course, P&G did not rely on these false rumors of a satanic association, but its customers did, and accordingly to P&G, the rumors caused many customers to buy competing Amway products. Because Amway's alleged false representations were made by mail and wire, P&G brought a RICO claim. In ruling on Amway's motion to dismiss the RICO claim, the Fifth Circuit stated: "if P&G's customers relied on the fraudulent rumor in making decisions to boycott P&G products, this reliance suffices to show proximate causation." Id. at 565.
In Ideal Steel Supply Corp. v. Anza, 373 F.3d 251 (2d Cir. 2004), the Second Circuit applied similar reasoning in finding that the plaintiff had adequately alleged proximate cause. In Anza, the plaintiff alleged that its competitor did not charge customers sales tax for cash transactions. The competitor also submitted by mail and wire false tax returns to the state tax department, concealing the cash transactions and failing to pay taxes related thereto. As a result its sales tax avoidance scheme, according to the plaintiff, the competitor was able to charge lower prices for its products, which caused the plaintiff's customers to buy the competitor's products rather than its own. The plaintiff sought relief under RICO. The Second Circuit held that the plaintiff had adequately alleged proximate cause:
. . . the principle governing the present case is that where a complaint contains allegations of facts to show that the defendant engaged in a pattern of fraudulent conduct that is within the RICO definition of racketeering activity and that was intended to and did give the defendant a competitive advantage over the plaintiff, the complaint adequately pleads proximate cause, and the plaintiff has standing to pursue a civil RICO claim. This is so even where the scheme depended on fraudulent communications directed to and relied on by a third party rather than the plaintiff.
Defendants' mailings or electronic transmissions of fraudulent sales tax reports to the State Tax Department were an essential part of the "cash, no tax" scheme, for without the fraudulent reports, and the State's reliance on them, defendants would have had to pay the uncollected sales taxes out of their own assets. The principal intended victim of the scheme was [plaintiff], over which defendants sought to secure a competitive advantage by giving certain cash customers an unlawful benefit, and by concealing that unlawful conduct and retaining the resulting profits by means of racketeering activity. Accordingly, we conclude that Ideal, as a competitor directly targeted by defendants for competitive injury, has standing to assert its RICO claims against defendants for violations of § 1962(c) based on the alleged predicate acts of mail and wire fraud.
Id. at 263.
The Supreme Court granted the defendant's petition for certiorari. The legal community anticipated that the Supreme Court would announce some rule relating to reliance in civil RICO cases predicated on fraud. The most likely "candidates" for this rule were: 1) a plaintiff cannot establish proximate cause under section 1964(c) unless the plaintiff alleges and establishes its detrimental reliance; or 2) detrimental reliance is only one of many factors that indicate proximate cause, even without reliance a plaintiff may have standing under section 1964(c) if it can establish, by other means, that its injury is a direct result of the acts of racketeering.
In Anza, however, the Supreme Court threw a curve ball. With regard to the pivotal issue of reliance, the Supreme Court simply stated: "we have no occasion to address the substantial question [of] whether a showing of reliance is required." 2006 WL 1519365 at *7. By avoiding the pivotal issue, some may say that the Supreme Court punted in the Anza opinion.
Looking at the court's reasoning more closely, however, one can argue that the Supreme Court is once again signaling that proximate cause under RICO is a different animal than under the common law. RICO's proximate cause is more concerned about questions of legal policy rather than the fact-based causation analysis traditionally employed in tort cases. In other words, the Supreme Court reiterated that lower courts should move away from the common law concept of reliance and instead focus on the unique proximate cause considerations set forth fourteen years ago in Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268 (1992).
In reversing the Second Circuit and holding that Ideal Steel failed to plead proximate cause, the Supreme Court reasoned:
Our analysis begins-and, as will become evident, largely ends-with Holmes.
The proper referent of the proximate-cause analysis is an alleged practice of conducting [defendants'] business through a pattern of defrauding the State. To be sure, [plaintiff] asserts it suffered its own harm when the [defendants] failed to charge customers for the applicable sales tax. The cause of [plaintiff's] asserted harms, however, is a set of action (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the State). The attenuation between the plaintiff's harms and the claimed RICO violation arises from a different source in this case than in Holmes, where the alleged violations were linked to the asserted harms only through the broker-dealers' inability to meet their financial obligations. Nevertheless, the absence of proximate cause is equally clear in both cases.
This conclusion is confirmed by considering the directness requirement's underlying premises. [Citing Holmes.] One motivating principle is the difficulty that can arise when a court attempts to ascertain the damages caused by some remote action. . . . The instant case is illustrative. The injury [plaintiff] alleges is its own loss of sales resulting from [defendants'] decreased prices for cash-paying customers. [Defendants], however could have lowered [their] prices for any number of reasons unconnected to the asserted pattern of fraud. It may have received a cash inflow from some other source or concluded that the additional sales would justify a smaller profit margin. Its lowering prices in no sense required it to defraud the state tax authority. Likewise, the fact that a company commits tax fraud does not mean the company will lower its prices; the additional cash could go anywhere from asset acquisition to research development to dividend payouts. . . .
There is, in addition, a second discontinuity between the RICO violation and the asserted injury. [Plaintiff's] lost sales could have resulted from factors other than petitioners alleged acts of fraud. Businesses lose and gain customers for many reasons, and it would require a complex assessment to establish what portion of [plaintiff's] lost sales were the product of [Defendants'] decreased prices. . . .
The attenuated connection between Ideal's injury and the [defendants'] injurious conduct thus implicates fundamental concerns expressed in Holmes. . . . Further illustrating this point is the speculative nature of the proceedings that would follow if [plaintiff] were permitted to maintain its claim. A court considering the claim would need to begin by calculating the portion of [defendants'] price drop attributable to the alleged pattern of racketeering activity. It next would have to calculate the portion of [plaintiff's] lost sales attributable to the relevant part of the price drop. The element of proximate causation recognized in Holmes is meant to prevent these types of intricate, uncertain inquiries from overrunning RICO litigation. It has particular resonance when applied to claims brought by economic competitors, which, if left unchecked, could blur the line between RICO and the antitrust laws.
The requirement of a direct causal connection is especially warranted where the immediate victims of an alleged RICO violation can be expected to vindicate the laws by pursuing their own claims. . . . Again, the instant case is instructive. [Plaintiff] accuses the [defendants] 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 [plaintiff] lost due to [defendants'] tax practices, it is considerably easier to make the initial calculation of how much tax revenue the [defendants] 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 of Appeals reached a contrary conclusion, apparently reasoning that because the [defendants] allegedly sought to gain a competitive advantage over Ideal, it is immaterial whether they took an indirect route to accomplish their goal. See 373 F.3d, at 263. This rationale does not accord with Holmes. 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. . . . When a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff's injuries. In the instant case, the answer is no. We hold that Ideal's § 1962(c) claim does not satisfy the requirement of proximate causation.
2006 WL 1519365 at 4-6 (emphasis added).
When explaining the "direct causal connection" required by the Supreme Court in Holmes and Anza, this website refers to intervening factors that commonly break the chain of causation between a RICO violation and a plaintiff's injury. See RICO in a Nutshell, § III(A)(1)(a-c). Those common intervening factors are divided into three categories: intervening non-predicate acts (i.e., acts that may give rise to liability under other theories but are not acts of racketeering under RICO (e.g., breach of contract, breach of fiduciary duty, wrongful termination)), intervening independent factors (e.g., market forces, acts of God, disease), and intervening third-party victims. The Anza decision does not involve any intervening non-predicate acts, but the Supreme Court discusses intervening independent factors and intervening third-party victims.
With regard to intervening independent factors, the Supreme Court stated that defendants' lower prices could have been the result of: 1) "cash inflow from some other source"; or 2) "a smaller profit margin. If these independent factors were the cause of the defendants' price advantage (rather than their sales tax evasion), then the plaintiff was not injured "by reason of" the alleged fraud on the Tax Authority.
Moreover, the Supreme Court implied that another independent factor was at play - the defendants' free-will. Plaintiff's theory of the case required the court to assume that the defendants' applied their ill-gotten tax savings in a manner that allowed them to reduce the price of their goods. The Supreme Court pointed out, however, that the defendants could have chosen to apply their tax savings in other ways, e.g., "asset acquisition", "research development", or "dividend payouts" to shareholders. Obviously, if defendants chose to invest the tax savings in something other than price reduction, the plaintiff was not injured "by reason of" the alleged fraud.
Finally, the Supreme Court repeatedly noted that the intervening third-party victim, or the person directly injured by the defendants' failure to pay sales tax, was the New York State Tax Authority. If defendants were evading taxes, the Tax Authority was denied revenue directly, and the court could rely on the Tax Authority (rather than the indirectly competitor plaintiff) to seek sanctions against the defendant.
An analysis of whether these factors intervene between the plaintiff's injury and the RICO violation - not an analysis of whether there is or is not reliance - should guide the courts' consideration of whether there is proximate cause under RICO.
The Supreme Court's reasoning in Anza echoes Systems Management, Inc. v. Loiselle, 303 F.3d 100 (1st Cir. 2002), wherein the First Circuit looked to the unique federal policies sought to be advanced by RICO rather than the common law concept of reliance:
It is true that at common law a civil action for fraud ordinarily requires proof that the defrauded plaintiff relied upon the deception, and some courts have imported this requirement into RICO actions where the predicate acts comprise mail or wire fraud. [Footnote omitted.] But RICO bases its own brand of civil liability simply on the commission of specified criminal acts-here, criminal fraud-so long as they comprise a "pattern of racketeering activity"; and criminal fraud under the federal statute does not require "reliance" by anyone: it is enough that the defendant sought to deceive, whether or not he succeeded. [Citation and footnote omitted.]
Perhaps there is some surface incongruity in allowing a civil RICO plaintiff to recover for fraudulent acts even though the same plaintiff could not (for lack of reliance) recover for fraud at common law. But Congress structured its civil remedy to allow recovery for harm used by defined criminal acts, including violation of section 1341; and, as noted, the federal mail fraud statute does not require reliance. Thus, under a literal reading of RICO-the presumptive choice in interpretation-nothing more than the criminal violation and resulting harm is required.
This is not a conclusive argument; common law (and other) concepts can often be imported to flesh out a federal statute. Indeed, we assume here that Congress intended to require not only "but for" but also "proximate cause" to link the criminal act with the harm to the plaintiff, even though the statute says nothing specific on this point. But proximate cause-largely a proxy for foreseeability-is not only a general condition of civil liability at common law but is almost essential to shape and delimit a rational remedy: otherwise the chain of causation could be endless.
By contrast, reliance is a specialized condition that happens to have grown up with common law fraud. Reliance is doubtless the most obvious way in which fraud can cause harm, but it is not the only way. . . . There is no good reason here to depart from RICO's literal language by importing a reliance requirement into RICO.
Id. at 103-4. Of course, the Supreme Court's decision in Anza stops short of rejecting a reliance requirement under section 1964(c), but the reasoning in Anza is closer to Loiselle than to those decisions that apply reliance as a litmus test for proximate cause in civil RICO cases.
At this point, the Supreme Court does not appear prepared to reject a reliance requirement altogether, but it seems to be encouraging the lower courts to be more creative in their application of RICO's unique proximate cause standard. In other words, the Supreme Court is saying to lower courts: "We gave you plenty of tools in Holmes - use them, rather than the common considerations."
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