United States: Supreme Court Uses Strict "Proximate Cause" Standard to Limit Private RICO Actions

See Anza v. Ideal Steel Supply Corp.,No. 04-433, 547 U.S. __ (2006); Mohawk Industries, Inc. v. Williams,No. 05-465, 547 U.S. __ (2006).

Since its enactment some 30 years ago, the Racketeer Influenced and Corrupt Organizations Act (RICO) has proved to be an unusually elastic litigation tool. In recent years, it has increasingly been used by private litigants to supplement traditional tort claims, or as a stand alone basis of liability -- thus transforming otherwise garden-variety product liability disputes into alleged federal racketeering violations.

In some ways, a plaintiff’s burden of proving a RICO violation has been less rigorous than for traditional torts, such as when it comes to proving proximate causation for instance. A recent decision by the U.S. Supreme Court, requiring a RICO plaintiff to prove direct causation between the claimed injury and the allegedly RICO-violative conduct, will certainly be an important tool for product manufacturers to use in defending RICO lawsuits, going forward. Indeed, this recent articulation by the U.S. Supreme Court that the plaintiff must prove this causal nexus should make the prosecution of civil RICO cases more difficult.

This term, the United States Supreme Court had two closely watched civil RICO cases on its docket -- Anza and Mohawk, both of which were decided on June 5, 2006. Only Anza, however, generated a substantive analysis of RICO law -- as it pertains to the private right of action created by § 1964(c) for damages "by reason of" RICO violations.¹

Anza involved a dispute between two Bronx-based steel supply companies --Ideal Steel Supply Corporation and National Steel Supply, Inc. Ideal sued National, and its owners, the Anza brothers, under §§ 1962(a) and 1962(c) of RICO.² In a nutshell, Ideal alleged that it lost sales and market share due to National’s practice -- the racketeering scheme -- of not charging New York sales tax to cash-paying customers, which supposedly allowed "National to reduce its prices without affecting its profit margin." Slip op. at 2. Ideal argued that National’s submission of fraudulent tax returns constituted the requisite "predicate acts" (mail and wire fraud) and "pattern of racketeering activity" (because its tax returns were submitted on "an ongoing and regular basis"). Id.

The district court dismissed Ideal’s complaint for failure to state a claim for relief, holding that the alleged acts of mail and wire fraud required reliance on National’s supposed fraud, which Ideal did not (and could not) allege. Id. at 3.Vacating the judgment, the Second Circuit held that "where a complaint alleges a pattern of racketeering activity 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." Id. (quotation omitted).

Writing for the majority, Justice Kennedy rejected the Second Circuit’s "proximate cause" analysis, stating:"[o]ur analysis begins -- and, as will become evident, largely ends -- with Holmes." Id. at 4. In Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268 (1992), the Court "held that a plaintiff may sue under § 1964(c) only if the alleged RICO violation was the proximate cause of the plaintiff’s injury," Anza, slip op. at 1, which it distilled from § 1964(c)’s "by reason of" language, id. at 4. Abjuring a broad statutory interpretation "requir[ing] merely that the claimed violation was a ‘but for’ cause of the plaintiff’s injury," the Court read § 1964(c) as demanding "some direct relation between the injury asserted and the injurious conduct alleged." Id. at 4-5 (quoting Holmes, 503 U.S. at 265- 268) (emphasis added).

Ultimately finding too great an "attenuation" between the claimed RICO § 1962(c) violation and injury in Anza, the Supreme Court reversed, explaining that the "proper referent of the proximate-cause analysis is an alleged practice of conducting National’s business through a pattern of defrauding the State." Id. at 5-6.³ Stressing the need in a private RICO action to connect "plaintiff’s harm and the claimed RICO violation," the Court held:

Id. at 6 (emphasis added). Noting that 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," id. at 9, the Supreme Court advised bench and bar:

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.

Id.

More generally, Anza is interesting because it reveals that at least Justice Breyer takes the circumscribing view that RICO does not cover situations where the plaintiff’s claimed injury is immediately caused by the legitimate commercial acts of the defendant (e.g., sale of a legal product) -- even if this otherwise legitimate business activity is ultimately advanced by allegedly unlawful means. Id. at 1.

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