Today a unanimous U.S. Supreme Court held that the Racketeer Influenced and Corrupt Organizations Act doesn’t require a plaintiff to show reliance on underlying fraud. The plaintiff may satisfy the causal element under RICO simply by proving that the predicate act proximately caused injury to its business or property. That usually will happen when the plaintiff relies on a falsehood, but the unanimous Court concluded it can also occur when a third-party’s reliance result in the plaintiff’s harm. Bridge v. Phoenix Bond & Indemnity Co., No. 07-210 (U.S. June 9, 2008).
Blawgletter found the issue interesting — so much so that we co-wrote an amicus brief pro bono for the States of Connecticut, Arizona, Illinois, Montana, New Mexico, Ohio, Oklahoma, and Tennessee. The Argument section says:
I. THE INJURY “BY REASON OF” LANGUAGE IN SECTION 1964(c) MEANS INJURY BECAUSE OF THE PREDICATE ACT – NOT BECAUSE OF RELIANCE ON THE PREDICATE ACT As we read their complaint, Respondents lost chances to buy tax liens at Cook County auctions because Petitioners cheated. Petitioners’ cheating – what Blackstone called an “Offense Against Public Trade” – consisted of lying about their independence from one another. They in fact ganged up to deprive Respondents of seats at the lien auctions and then to split the profits from acquiring extra liens. Petitioners’ zero-sum game resulted, as they intended, in wins for them and losses for Respondents. Section 1964(c) of RICO authorizes civil remedies for injuries that occur “by reason of” serious criminal conduct. The complaint alleges that Petitioners used the mails to facilitate their cheating and so committed a predicate offense under the mail fraud statute. They now deny liability on the ground that Respondents’ losses did not result from their reliance on Petitioners’ misrepresentations. But in this Court Petitioners do not contest Respondents’ allegation that Petitioners proximately caused Respondents actual injury in their business and property. Petitioners argue instead that the Court – having deemed “by reason of” to incorporate the common law element of “proximate cause” in Holmes and Anza – ought now to augment those words to mean “by reason of reliance” by the plaintiff on the underlying mail fraud. The “by reason of” phrase itself – which of course says nothing about reliance – will not bear Petitioners’ interpretation. As the Court recognized in Holmes, the language “can . . . be read to mean that a plaintiff is injured ‘by reason of’ a RICO violation, and therefore may recover, simply on showing that the defendant violated § 1962, that plaintiff was injured, and the defendant’s violation was a ‘but for’ cause of plaintiff’s injury.” Holmes, 503 U.S. at 265-66 (footnote omitted). But the literal construction “is hardly compelled”, and it would ignore the “meaning that courts had already given” the same formulation in decades of antitrust decisions. Id. at 266 & 268. “Proximate cause is thus required.” Id. at 268. No such interpretive history supports adding “reliance by the plaintiff” after “by reason of”. Victims of monopolization, boycotting, or price-fixing do not have to show that they suffered injury “by reason of” their reliance on anticompetitive conduct. Many antitrust cases on the contrary arise from openly coercive and predatory behavior – the very opposite of deception. E.g., Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988) (involving overt influence on private association whose standards gave defendant competitive advantage). And this Court has expressly recognized that the acquisition of monopoly power through fraud on a governmental entity – but not on the plaintiff – provides a basis for recovery of treble damages under the Sherman Act. Walker Process Equip., Inc. v. Food Machinery & Chem. Corp., 382 U.S. 172, 176 (1965) (authorizing “recovery of treble damages for fraudulent procurement of the patent [from the U.S. Patent and Trademark Office] coupled with violations of § 2”). Reliance by the plaintiff is thus a concept alien to the historical meaning of “by reason of”. Nor would engrafting a reliance element onto section 1964(c) make sense with respect to most instances of possible “racketeering activity”. Section 1961(1) defines “racketeering activity” to include about 100 indictable offenses, many of which do not involve fraud – things like “sports bribery”, “transmission of gambling information”, “obscene matter”, “murder-for-hire”, “infringement of a copyright”, “trafficking in contraband cigarettes”, and “chemical weapons”. 18 U.S.C. § 1961(1). Does “by reason of” shift meaning according to the peculiar common law roots of each different underlying offense – assumpsit, deceit, and the like? Does the phrase add an element to the “proximate cause” inquiry for “forgery or false use of passport” in section 1961(1) but not for mere “misuse of passport”? Or does it instead simply signify, as the Court held in Holmes and Anza, a proximate cause requirement? But even if section 1964(c) shifts meaning depending on the predicate offense, the path that Petitioners invite the Court to embark upon – “to interpret § 1341 in conjunction with § 1964(c)” – simply does not lead to the conclusion they wish. For nothing in section 1341, either, so much as hints at a reliance element. Yes, the Court in Neder v. United States, 527 U.S. 1 (1999), read “scheme or artifice to defraud” in section 1341 to require materiality, but in the same case the Court construed the same language not to require reliance, id. at 25 (“The common-law requirements of ‘justifiable reliance’ and ‘damages,’ for example, plainly have no place in the federal fraud statutes.”). The “conjunction” of one statute – which does not incorporate a reliance element – with another one – which likewise does not incorporate it – cannot generate the absent element. Petitioners do not venture to explain where in the statutory text one finds the reliance element. One must conclude that they cannot. II. THE NATURAL READING OF SECTION 1964(c) WILL ENHANCE WISE LAW ENFORCEMENT To us, the dispute between Petitioners and Respondents presents a question of enforcing an important federal statute and, by analogy, its state law offspring. We submit that interpreting RICO not to incorporate a reliance element will promote sound law enforcement without penalizing legitimate business practices. A. An Unduly Restrictive Construction of Section 1964(c) Would Thwart Congressional Intent and Hinder State Law Enforcement The Court has noted that “narrow readings” of section 1964(c) ignore the intent of Congress to enact “an aggressive initiative to supplement old remedies and develop new methods for fighting crime.” Sedima, 473 at 498. RICO thus “is to be read broadly” and “is to be ‘liberally construed to effectuate its remedial purposes,’ Pub. L. 91-452, § 904(a), 84 Stat. 947.” Id. at 497 & 498. “The statute’s ‘remedial purposes’ are nowhere more evident than in the provision of a private action for those injured by racketeering activity.” Id. at 498. “Indeed, if Congress’ liberal-construction mandate is to be applied anywhere, it is in § 1964, where RICO’s remedial purposes are most evident.” Id. at 491 n.10. Curtailing the reach of section 1964(c) by engrafting a “reliance” element on it in 2008 would defeat the mandate of Congress in 1970 just as surely as adding a “racketeering injury” element or a “prior-conviction requirement” to it would have in 1985. Id. at 495 & 488 (rejecting both). As this case demonstrates, state and local governments will not discover and correct all frauds. Indeed, “[p]rivate attorney general provisions such as § 1964(c) are in part designed to fill prosecutorial gaps.” Id. at 493. True, as Chief Judge Easterbrook noted, “governments always have some ability to detect and penalize frauds.” Pet. App. at 7a (emphasis added). And, in an ideal world of limitless resources, state and local governments could “detect and penalize” all of the various “frauds” that may game their normal functions. State and local governments have the legal means and resources to take enforcement action and punish only a fraction of those they do discover. States are not offended when private litigants pursue available remedies. We respectfully differ with the argument that prosecutorial discretion does not inform ourdecisions about whether to pursue civil RICO claims. See Brief for Petitioners at 37-38; Brief for the Chamber of Commerce at 22. Although the argument may aim at private lawyers, it hits us, too. Trying to cabin civil RICO (unduly, we believe) in hopes of discouraging expensive strike suits would at the same time deprive many states of a tool that we use judiciously in the service of our citizens within the parameters intended by Congress. B. Other Arguments Do Not Justify Adding a “Reliance” Element We respectfully disagree with suggestions that declining to impose an extra-statutory condition on RICO claims sounding in fraud would open litigation floodgates. See Brief of Washington Legal Foundation at 18 (claiming an “ever increasing number of civil RICO suits filed each year”). Since 2000, private RICO cases in federal court have averaged 753 annually (and totaled 703 in the year that ended March 31, 2007) – representing less than 0.3 percent of the more than 250,000 average federal filings each year during that period. Of these, no more than a handful may relate to rigging of auctions or the making of misrepresentations to third parties. In 97 pages of briefs, Petitioners and their supporting amici have identified none. The notion that the Court should bend its statutory construction to create a “reliance” barrier to class actions deserves comment as well. Brief for McKesson Corp. at 29-33. In the first place, this case does not involve class allegations; and we question the appropriateness of bringing class certification issues into the discussion of the questions on which the Court granted review. Second, the point that “class actions that are certified almost always settle”, if true, hardly distinguishes class actions from all other civil cases, which likewise “almost always settle”; nor does it say anything about whether the defendants in those cases overpaid, after rationally taking into account the cost of litigating and the probability of losing on the merits. Third, we believe that aggregate litigation, including class actions, more often than not serves the salutary purpose of leveling the parties’ respective bargaining positions; absent aggregation, an individual who has lost $5 or even $500 as a proximate result of a company’s RICO violation enjoys a purely theoretical right to a civil remedy. We therefore do not see the possibility of thwarting aggregation as a legitimate reason to narrow RICO. The concept that the antitrust case of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), provides any help here strikes us as inapposite. See Brief of Washington Legal Foundation at 13-15. The Court in Illinois Brick, for policy and administrative reasons, limited standing to the first victims of price fixing – the ones who purchased directly from a member of the price fixing conspiracy regardless of whether they passed on the overcharge to their customers. This case of course does not involve price fixing. Nor does it concern any question of whether Cook County, the entity that relied on Petitioners’ misrepresentations, suffered pecuniary loss; it manifestly did not. And it therefore, unlike the direct purchasers in Illinois Brick, could not possibly have passed its (non-existent) losses on to Respondents, a circumstance that might conceivably raise a question about allocation of damages. Finally, the suggestive citations to Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008), actually underscore the fundamental difference between this case and securities fraud litigation. No one doubted that section 10(b) of the Securities Exchange Act and the Securities and Exchange Commission’s Rule 10b-5 required proof of reliance on something fraudulent. The reliance element existed from the moment the cause of action sprang from the Court’s brow. See id. at 776. In this case, Congress enacted section 1964(c) and defined mail fraud as an instance of “racketeering activity” with knowledge of the distinctive requirements of securities fraud claims and yet chose language that made “proximate cause” simpliciter the test of causation. That, we submit, should end the matter.