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Supreme Court Decision Update - Anza v. Ideal Steel Supply Corp.

supreme2.jpgOne of today’s Supreme Court decisions, Anza v. Ideal Steel Supply Corp. (PDF of the opinion) is a 41-page whopper dealing principally with the fun topic of “proximate cause” (that is, the connection between an alleged injury and the conduct which supposedly caused that injury).

QuizLaw Analysis: Basically, if you think your competitor is doing sketchy activities to undercut your business, that’s not enough to sue them for RICO violations.

This case is rather sticky in terms of the legal issues it deals with, so you’re really going to have to bare with us here. The law at the center of this case is RICO, the Racketeer Influences and Corrupt Organizations Act. Among other things, RICO prohibits folks from undertaking various racketeering activities and section 1962(c) of RICO allows third-parties to sue someone who has conducted such racketeering activities if that third-party was a proximate cause of the injury (“proximate cause” is a sometimes-complicated legal principal which basically boils down to meaning that the conduct in question must have some causal connection to the alleged injury). Another section of RICO, section 1962(a), makes it illegal for folks to “use or invest” any money which comes from a pattern of racketeering activities relating to interstate or foreign commerce.

Ideal Steel Supply had supply stores in Queens and the Bronx. Anza’s National Steel Supply also had stores in Queens and the Bronx and was, obviously, therefore a chief competitor of Ideal’s. Ideal claims that National had been failing to charge or pay New York’s state sales tax in connection with cash sales, allowing it to undercut Ideal’s prices without losing any profit in the process. Ideal also claims that National used fudged tax returns to cover-up this practice, and that it thereby committed mail and wire fraud in submitting these returns (mail fraud for mailing some returns, and wire fraud for electronically filing other returns). Since mail and wire fraud fall within RICO’s definition of “racketeering activity,” Ideal filed a lawsuit against National under RICO, arguing that the mail and wire fraud was a “pattern” because of National’s submission of tax returns on an ongoing basis.

Ideal’s first claim was brought under section 1962(c), and Ideal argued that it was injured by National’s pattern of racketeering activity and that National’s purpose in taking these actions was specifically to gain a competitive edge over Ideal. Ideal also filed a claim under RICO’s § 1962(a), claiming that the section’s prohibition on the use or investment of racketeering money was violated by National when it used money from its tax scam to open its Bronx location, further cutting into Ideal’s business and market share.

In the District Court, National filed a motion to dismiss. The heart of National’s argument was that mail and wire fraud claims only fall under RICO when the third-party relied on some misrepresentation of the alleged racketeers - since Ideal did not show that it had relied on any such misrepresentations from National, National argued, the claims aren’t RICO claims. The District Court agreed and granted National’s motion. On appeal, however the Second Circuit disagreed. According to the Court of Appeals, someone can bring a RICO claim where they allege that a pattern of racketeering activity gave the racketeers a competitive advantage - the requirement that there be some “proximate cause” is met by the allegation of an intent to gain a competitive advantage. The Second Circuit said this is the rule even if the alleged racketeer made fraudulent communications to someone else (as opposed to the allegedly injured party). Since Ideal made such allegations in its initial section 1962(c) claim against National, the claim should not have been dismissed. Similarly, Ideal’s section 1962(a) claim should not have been dismissed because it claimed that National’s use and investment of racketeering proceeds was a specific cause of injuries to Ideal (separate and apart from any injuries generally caused by Ideal’s racketeering activities).

Don’t worry if this all doesn’t make too much sense - we’ll try to clear it up in discussing the Supremes’ take on the issues. The majority opinion was delivered by Justice Kennedy, and joined by Chief Justice Roberts and Justices Stevens, Scalia, Souter, Ginsburg and Alito. Justice Thomas also joined, but only with regard to one part. The bulk of the majority’s discussion focused on Ideal’s claim under § 1962(c). Specifically, the Court reversed the Second Circuit, finding this claim invalid. The majority relied upon an earlier decision which it says clearly requires the racketeering activity to have been a proximate cause of the alleged injury, which means there must be a direct relation between the racketeering conduct and the ultimate injury. Here, the direct victim of National’s alleged tax scheme was not Ideal, but the State of New York (since the state was deprived of sales tax revenue). While Ideal claims that it was injured because of National’s lower prices, the Court notes that National could have offered lower prices for reasons having nothing to do with the alleged tax scheme and, further, Ideal’s lower sales may have resulted from other things. Thus, there was an “attenuated connection” between Ideal’s injury in its loss of sales and National’s alleged racketeering. In fact, the Court says that if Ideal were allowed to pursue its claims, the result would require much speculation, because the lower court would have to make a determination of how much of National’s lower prices were directly due to the alleged racketeering and then figure out how much of Ideal’s lost sales were a result of that piece of National’s lower prices. The whole point of the “proximate cause” requirement, Kennedy’s majority reasons, is to avoid just such a process.

So the Second Circuit was wrong in saying that there doesn’t have to be proximate cause if there are allegations that the racketeers were trying to increase market share at their competitors’ expense. One has nothing to do with the other, and § 1962(c) claims must always include a proximate cause of the injury in question. Since Ideal’s claims do not include such proximate cause, its claims necessarily fail, contrary to the Second Circuit’s decision. And because Ideal’s claims are out on the proximate cause issue, the Court doesn’t need to address the other issue raised here (whether the injured party is required to have directly relied on misrepresentations when the RICO claims are based on mail and wire fraud).

Now, the above discussion was specifically with regard to Ideal’s claim under § 1962(c). But Ideal also had that claim under § 1962(a), relating to the use and investment of racketeering proceeds. Here, the Supremes vacated the Second Circuit’s decision, rather than flat-out reversing it (and this is the portion of the majority opinion that Justice Thomas joined with). A claim under § 1962(a) also requires a showing of proximate cause. However, the Second Circuit did not look at this issue on the first go-round, as to whether there was such proximate cause, so the Supremes are remanding to let the lower courts look at the specifics and sort it out.

Justice Scalia filed a short one-paragraph concurring opinion to simply note his belief that “it is inconceivable” that Ideal’s alleged § 1962(c) injury is even “within the zone of interests protected by the RICO cause of action for fraud perpetrated upon New York State.”

Justice Thomas filed an opinion considerably longer than one-paragraph (in fact, it was seven pages longer than the majority’s opinion). As mentioned above, Thomas concurred with the Court’s decision regarding the § 1962(a) claim, but dissented with regard to its analysis of the proximate cause requirement for § 1962(c) claims. Thomas believes the majority’s decision will act to preclude recovery in many RICO cases, including cases that Congress specifically intended to fall within RICO’s purview. Thomas’ beef is with the Court’s interpretation of the relevant precedent, which held that there must be proximate cause in the sense that there must be a direct relation between the racketeering and the alleged injury. Thomas says the majority has expanded this by saying that an “attenuated and uncertain relationship” between the conduct and injury can never satisfy this proximate cause requirement, and he doesn’t buy into any of the majority’s reasons for doing so. As mentioned, Thomas believes that this rationale will act to limit civil recovery in other cases which Congress clearly intended to fall within RICO’s scope, particularly, organized crime cases (because, Thomas argues, organized crime could clearly create competitive advantages which, under the majority’s rationale, would not support an injured competitor’s RICO claim).

Finally, Justice Breyer filed an opinion also concurring in part and dissenting in part. Breyer concurs, in part, because he would also reverse the Second Circuit’s decision regarding § 1962(c). But he dissents in part because he would also reverse the § 1962(a) decision. Breyer argues that RICO simply does not authorize any private action like the one at issue here because it doesn’t apply to “claims of injury by one competitor where the legitimate pro-competitive activity of another competitor immediately causes that injury.” As he explains it, “ordinary competitive actions undertaken by the defendant competitor cut the direct causal link between the plaintiff competitor’s injuries and the forbidden acts” (emphasis in original). So he would throw out both of Ideal’s claims because National is a legitimate business, regardless of the tax scheme (because that can be addressed by a lawsuit brought by the State of New York). With regard to the § 1962(a) claim, Ideal’s alleged injuries resulted from legitimate competitive activities such as National’s opening of a new outlet and attempting to attract new customers - that cuts off any finding of proximate cause in Breyer’s mind. As for the § 1962(c) claims, Breyer sidesteps the tax fraud by arguing that the legitimate competitive activity was offering a lower price to customers, and that this was ok because National didn’t tell the customers it was running a tax scam to help support those lower prices.