June 21, 2006
By David M. Ryan and Kelly B. Kramer
By David M. Ryan and Kelly B. Kramer
On June 5, 2006, the Supreme Court issued two highly anticipated rulings interpreting the Racketeer Influenced and Corrupt Organizations Act (RICO): Anza v. Ideal Steel Supply Corp. and Mohawk Indus., Inc. v. Williams. These decisions were expected to resolve two significant questions about civil RICO claims: (1) whether civil RICO claims based upon mail or wire fraud require allegations of reliance; and (2) whether a corporation can be part of a RICO association-in-fact enterprise.
Somewhat surprisingly, the Supreme Court did not resolve either question. Instead, it took the opportunity to emphasize—as it had held in Holmes v. Securities Investor Trust Protection Corp.—that civil RICO claims can only survive if the plaintiff alleges that its injuries were proximately caused by the alleged RICO violation. Businesses defending RICO claims must carefully test the plaintiff’s allegations against proximate causation principles at every stage in the litigation.
Congress originally enacted RICO to combat organized crime, not to remedy general statutory criminal violations. The statute has evolved, however, into a much broader remedy to address private, civil wrongs. Plaintiffs commonly graft RICO claims onto fraud cases in an effort to obtain RICO’s treble damages and attorneys’ fees. Whether plaintiffs need to have relied on the allegedly fraudulent statements, and whether a RICO association-in-fact enterprise has been adequately pleaded often become critical issues in these cases.
RICO was written in broad terms. To state a claim, a plaintiff must allege four elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Each element of a RICO claim requires additional analysis: an “enterprise” is marked by association and control; a “pattern” requires a showing of “continuity”—continuous and related behavior that amounts to, or poses a threat of, continued criminal violations; and “racketeering activity” involves the violation of designated federal laws.
In addition, a civil RICO plaintiff must allege that it was injured in his business or property “by reason of” a violation of RICO’s substantive provisions. This “by reason of” language provides the basis for the proximate cause requirement, established by the Supreme Court in Holmes and amplified in Anza and Mohawk Indus.
In Anza v. Ideal Steel Supply Corp., the plaintiff, Ideal Steel, brought a RICO claim against its primary competitor, National Steel, alleging that National undercut Ideal by failing to collect New York taxes from cash customers. Ideal argued that National’s failure to collect this tax artificially lowered National’s prices without reducing its profits. Ideal alleged that National’s two owners committed mail and wire fraud in violation of RICO by filing false New York State tax returns.
The district court dismissed Ideal’s claim because there was no allegation that Ideal relied on National’s false tax returns. The Second Circuit reversed, holding that Ideal’s claim that National reaped competitive advantage by filing false tax returns sufficiently alleged proximate cause. The stage was thus set for the Supreme Court to resolve the circuit split concerning whether a RICO plaintiff must have relied on alleged false statements in order to state a RICO claim.
The Supreme Court reversed the Second Circuit, but expressly declined to address reliance. Instead, the Supreme Court held that Ideal’s RICO claim failed to allege proximate cause because National could have lowered its prices for other reasons unrelated to its tax fraud and its false tax returns, but still caused Anza’s alleged damages. Moreover, the Supreme Court noted that National’s tax fraud did not necessarily have to lead to lowered prices—National could have simply done something else with the fruits of the fraud. The Court was also persuaded by the difficulty of determining what portion of Ideal’s damages would have been caused by National’s tax fraud.
Thus, although the Supreme Court did not resolve the circuit split concerning reliance, it did reaffirm that a RICO plaintiff must allege proximate causation. Defendants—particularly those facing RICO claims in jurisdictions where reliance is not required—should look carefully at whether the claims allege proximate cause adequately.
In Mohawk Indus., Inc. v. Williams, current and former employees of Mohawk Industries alleged that their employer illegally suppressed their wages by systematically hiring illegal workers. The plaintiffs alleged that Mohawk Industries and its outside recruiting companies constituted a RICO association-in-fact enterprise engaged in illegal employment practices in violation of RICO. The district court denied the defendant’s motion to dismiss the RICO claims, and the Eleventh Circuit affirmed. Among other things, the Eleventh Circuit held that the plaintiffs had alleged proximate cause because hiring illegal workers depressed wages.
On appeal, Mohawk Industries acknowledged that a corporation, standing alone, could be a RICO enterprise, but argued that a corporation could not be part of a broader, association-in-fact enterprise. Mohawk Industries argued that the word “corporation” is included in the definition of an “enterprise,” but not in the definition of an “association-in-fact enterprise.”
The Supreme Court declined to reach this issue. Instead, the Court’s per curiam order remanded the case to the Eleventh Circuit for further consideration in light of the Anza decision. Thus the Supreme Court is plainly emphasizing that RICO claims must be carefully analyzed to determine whether they allege proximate cause. Applying the Court’s logic in the Anza decision to Mohawk Indus. suggests that the Eleventh Circuit should consider whether hiring illegal workers necessarily results in lower wages, and whether the damages to the plaintiffs can be reliably quantified.
Civil RICO claims have proliferated in recent years, in part because the statute provides for treble damages and attorneys’ fee awards to successful plaintiffs. The Supreme Court’s decision in Anza (and somewhat more obliquely in Mohawk Indus.), demonstrates that the Court is serious about limiting civil RICO claims by strictly applying concepts of proximate causation. The Court’s rulings highlight a potential opportunity for companies and businesses defending against civil RICO claims.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.