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The thought of defending a civil Racketeering Influenced and Corrupt Organizations Act (RICO) claim frequently triggers a degree of trepidation in the minds of defense counsel and their clients. The former due to the undeniably complex nature of the RICO statute itself, which even the U.S. Supreme Court has expressed difficulty in interpreting. See H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 251-56 (1989) (Scalia, J., concurring). And the latter due to RICO’s potentially crippling remedial scheme, aptly described by the 1st U.S. Circuit Court of Appeals as “the litigation equivalent of a thermonuclear device.” Miranda v. Ponce Fed. Bank, 948 F.2d 41, 44 (1st Cir. 1991). Recent developments in the Supreme Court provide both good and bad news for litigants seeking clarification on the application of civil RICO’s complex remedial scheme. It appears that the Supreme Court may finally answer questions this year that have divided the lower courts concerning the requisite causation and injury that a plaintiff must demonstrate to recover treble damages under 18 U.S.C. 1964(c), and also may answer whether injunctive relief is available to private plaintiffs prosecuting civil RICO claims. At the same time, however, it is clear that several other questions concerning civil RICO’s remedial scheme, such as the availability of disgorgement, may remain the subject of sharp debate in the lower courts. Civil RICO offers private plaintiffs a very attractive legal remedy, namely treble damages and attorney fees. 18 U.S.C. 1964(c). To recover those damages, however, plaintiffs must demonstrate that they suffered an injury to their business or property “by reason of” a violation of RICO � 1962(a), (b), (c) or (d). In Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), the Supreme Court held that � 1964(c)’s “by reason of” language requires plaintiffs to prove that a RICO violation proximately caused their injury. How plaintiffs must establish that proximate cause, however, has been the subject of some consternation in the lower courts. The vast majority of civil RICO cases are brought under � 1962(c) and allege mail or wire fraud as the predicate acts of racketeering. See William H. Rehnquist, “Remarks of the Chief Justice,” 21 St. Mary’s L.J. 5, 9-10 (1989). In this common civil RICO context, courts have debated whether the proximate-cause requirement established in Holmes requires a showing of reliance on a misrepresentation or concealment. Compare Bank of China v. NBM LLC, 359 F.3d 171, 178 (2d Cir. 2004) (holding that reliance is an element of a civil RICO claim based on mail or wire fraud), cert. granted in part, 125 S. Ct. 2956 (June 27, 2005), cert. dismissed, 126 S. Ct. 675 (Nov. 15, 2005); VanDenBroeck v. CommonPoint Mortgage Co., 210 F.3d 696, 701 (6th Cir. 2000) (same); Sikes v. Teleline Inc., 281 F.3d 1350, 1360 (11th Cir. 2002) (same) with Sys. Mgmt. Inc. v. Loiselle, 303 F.3d 100, 103-04 & n.3 (1st Cir. 2002) (rejecting same). See also Poulos v. Caesars World Inc., 379 F.3d 654, 666 n.3 (9th Cir. 2004) (recognizing split in the circuits on this issue). The confusion among the lower courts is exacerbated by the fact that the mail and wire fraud statutes are criminal statutes that do not require reliance, damages or a completed fraud to sustain a criminal conviction. See Neder v. U.S., 527 U.S. 1, 25 (1999). For example, mere entry into an agreement to commit mail fraud can sustain a criminal conviction for conspiracy, even if the scheme never succeeds. This is similar to the Sherman Act, where merely agreeing to fix prices is a crime, but no trebled damages are recoverable unless the prices are actually fixed and cause injuries. RICO plaintiffs argue that because Congress based RICO’s civil remedy on harm caused by defined criminal acts, including mail and wire fraud, nothing more than a showing of the criminal violation is required under a literal reading of RICO. See Sys. Mgmt., 303 F.3d at 104. This position, however, ignores the fact that, unlike a criminal prosecution, a civil RICO claim for treble damages explicitly requires a showing of injury proximately caused by the predicate act. 18 U.S.C. 1964(c). See Holmes, 503 U.S. at 268-69. Accordingly, civil RICO defendants argue that plaintiffs alleging predicate acts based on criminal fraud must prove all the elements of common law fraud, including the injury-causation requirement-i.e., reliance on a misrepresentation. See Bank of China, 359 F.3d at 176-78. Otherwise, recovery would be possible even when the claimed injuries were not causally related to the alleged fraud scheme. Grants of certiorari Much to the delight of confused civil RICO litigants, the Supreme Court granted certiorari in Bank of China to address this issue. 125 S. Ct. 2956 (June 27, 2005). Much to their dismay, however, the parties in Bank of China subsequently agreed to dismiss the appeal before the Supreme Court had a chance to address the issue. Bank of China, 126 S. Ct. 675 (Nov. 15, 2005). The dismissal of the Bank of China appeal turned out to be a blessing in disguise for civil RICO litigants because the Supreme Court granted certiorari less than two weeks later in a case that presents an opportunity to clarify the proximate-cause standard in a much broader civil RICO context. See Ideal Steel Supply Corp. v. Anza, 373 F.3d 251 (2d Cir. 2004), cert. granted, 126 S. Ct. 713 (Nov. 28, 2005). Ideal Steel provides an opportunity to answer both the question in Bank of China of whether reliance is required in a civil RICO claim based on mail or wire fraud, as well as the question of whether a plaintiff must prove his or her own reliance as opposed to reliance by a third party. In Ideal Steel, the plaintiff sued a competitor for submitting false sales tax returns as part of an alleged scheme to avoid paying sales tax on cash transactions, thereby giving it lower costs and an unfair competitive advantage. The district court dismissed the complaint for failure to allege reasonable reliance ( Ideal Steel, 254 F. Supp. 2d 464, 468 (S.D.N.Y. 2003)), but the 2d U.S. Circuit Court of Appeals reversed, reasoning that the defendants’ fraudulent conduct “was intended to and did give the defendant a competitive advantage over the plaintiff, [and] the complaint adequately pleads proximate cause . . . even where the scheme depended on fraudulent communications directed to and relied on by a third party rather than the plaintiff.” Ideal Steel, 373 F.3d at 263. At the heart of the issue in Ideal Steel is the causal chain required to satisfy � 1964(c)’s causation requirement, described in Holmes as a “direct relation between the injury asserted and the injurious conduct alleged.” Holmes, 503 U.S. at 268-69. Both parties apparently agree that reliance of someone is required in a civil RICO case based on fraud, but they diverge on whose reliance is required. The defendant argues that under Holmes, a fraud-based civil RICO case must involve misrepresentations directly from the defendant to the plaintiff. See Cent. Distrib. of Beer Inc. v. Conn, 5 F.3d 181, 184 (6th Cir. 1993) (fraud “must involve misrepresentations or omissions flowing from the defendant to the plaintiff”). The plaintiff argues that third-party reliance is sufficient if a plaintiff has suffered a direct injury as a result of the fraud. See Ideal Steel, 373 F.3d at 263; Summit Props. Inc. v. Hoechst-Celanese Corp., 214 F.3d 556, 561 (5th Cir. 2000); Mid Atlantic Telecom Inc. v. Long Distance Servs. Inc., 18 F.3d 260, 263-64 (4th Cir. 1994). The standard established by the 7th Circuit in Israel Travel Advisory Service Inc. v. Israel Identity Tours Inc., 61 F.3d 1250, 1257-58 (7th Cir. 1995), could add another wrinkle to this issue for the Supreme Court to consider. In that case, the 7th Circuit begrudgingly accepted the holding in Mid Atlantic Telecom, but added an additional requirement that a plaintiff satisfy a “zone of interests” standard. Cf. Holmes, 503 U.S. at 287-88 (Scalia, J., concurring). Thus, while indirect causation may be sufficient to sustain a civil RICO claim, a plaintiff still must demonstrate that he or she was the party at whom the alleged deception was targeted. Whatever the Supreme Court’s decision in Ideal Steel, it should provide RICO litigants with much needed clarification on causation and injury issues. Disgorgement An important issue on which civil RICO litigants will not receive clarification from the Supreme Court this term is the availability of disgorgement under RICO’s remedial scheme. Last October, the Supreme Court denied the solicitor general’s petition for certiorari in the government’s closely watched civil RICO case seeking disgorgement of profits from the tobacco industry. See U.S. v. Philip Morris USA Inc., 126 S. Ct. 478 (Oct. 17, 2005). Although no circuit has ever upheld an award of disgorgement in a civil RICO case, the high-stakes nature of this remedy will keep it fresh in the minds of RICO litigants. See U.S. v. Philip Morris USA Inc., 396 F.3d 1190, 1193 (D.C. Cir. 2005) (rejecting $280 billion disgorgement claim). Disgorgement, of course, is not even mentioned, let alone expressly authorized, in the RICO statute. The dispute as to its availability centers around RICO’s injunctive provisions in 18 U.S.C. 1964(a). This implicates an even more fundamental unsettled issue concerning civil RICO currently before the Supreme Court, namely: Who may seek injunctive relief under � 1964(a)? The ‘Scheidler’ case In National Organization for Women Inc. v. Scheidler, 396 F.3d 807 (7th Cir.), cert. granted, 125 S. Ct. 2991 (June 28, 2005), the Supreme Court is addressing several issues, including whether a private RICO plaintiff has standing to pursue injunctive relief under � 1964(a) or whether such relief is limited to civil RICO actions instituted by the government. If the Supreme Court reaches that issue, and answers it in the negative, it will by implication preclude disgorgement as a potential remedy in the vast majority of civil RICO cases, i.e., those prosecuted by private plaintiffs. It is entirely possible, however, that the Supreme Court will not reach that issue in Scheidler. That is because the court could dispose of the case altogether by ruling that there was no underlying RICO violation to support the injunction issued by the lower court. The Supreme Court did just that the last time it encountered Scheidler. See Scheidler v. National Organization for Women, 537 U.S. 393, 411 (2003). In any event, RICO defendants will continue to face claims for disgorgement at least in civil cases prosecuted by the government. Although the availability of disgorgement likely will continue to evolve in the lower courts, some common themes have emerged in cases raising the issue to date. Section 1964(a) authorizes injunctive relief to “prevent and restrain” RICO violations. 18 U.S.C. 1964(a). Courts have construed that language as limiting a court’s injunctive power to forward-looking remedies aimed at preventing future violations, not punishing prior violations. See, e.g., Philip Morris, 396 F.3d at 1198; U.S. v. Carson, 52 F.3d 1173, 1181 (2d Cir. 1995); Richard v. Hoechst Celanese Chem. Group Inc., 355 F.3d 345, 355 (5th Cir. 2003). In Philip Morris, however, the government advocated a broader interpretation of � 1964(a), arguing that because � 1964(a) does not expressly limit the equitable powers of the court, courts have broad equitable jurisdiction to employ a full range of inherent equitable powers, including unconditional disgorgement of past ill-gotten gains. See Mitchell v. Robert DeMario Jewelry Inc., 361 U.S. 288, 291 (1960); Porter v. Warner Holding Co., 328 U.S. 395, 397-98 (1946). But to date, the circuits have uniformly rejected that expansive view. Accord U.S. v. Lane Labs-USA Inc., 427 F.3d 219, 233 (3d Cir. 2005) (“RICO’s grant of equitable jurisdiction was far less broad than the FDCA’s grant we consider here.”). Circuits remain split Those circuits, however, remain split on whether disgorgement is ever available under civil RICO. The D.C. Circuit held that disgorgement is never available because it “is a quintessentially backward-looking remedy focused on remedying the effects of past conduct to restore the status quo,” and therefore could not prevent or restrain future RICO violations. Philip Morris, 396 F.3d at 1198. See also Tull v. U.S., 481 U.S. 412, 424 (1987). Cf. SEC v. Colello, 139 F.3d 674, 679 (9th Cir. 1998) (“To order disgorgement, the district court need not have found that [the defendant] was likely to violate securities laws in the future.”). The D.C. Circuit based its ruling in part on Meghrig v. KFC Western Inc., 516 U.S. 479, 484 (1996), which held that the word “restrain” in the injunctive provision of the Resource Conservation and Recovery Act, 42 U.S.C. 6972(a), precluded the district court from ordering restitution or disgorgement because such a remedy was not a forward-looking prohibitory injunction against further violations of the statute. Other circuits have held that disgorgement might be available under � 1964(a) in certain circumstances if it serves to prevent future violations of RICO. See Richard, 355 F.3d at 355; Carson, 52 F.3d at 1182. Plaintiffs, of course, argue in every case that disgorgement would serve as a deterrent to prevent future RICO violations by both the defendant and the public in general. See Porter, 328 U.S. at 400 (“Future compliance may be more definitely assured if one is compelled to restore one’s illegal gains.”). But the 2d Circuit rejected such a sweeping view, instead limiting disgorgement to profits that “are being used to fund or promote the [defendant's] illegal conduct, or constitute capital available for that purpose.” Carson, 52 F.3d at 1182. Unforeseen implications The availability of disgorgement in civil RICO cases will continue to percolate in the lower courts in circuits that have left the door at least partially open for such a remedy. That uncertainty may stir some unforeseen implications for civil RICO defendants. One such concern is whether to seek a bifurcated trial in a civil RICO case seeking disgorgement in order to limit the evidence that may be introduced in front of the jury, which can decide only the merits of the civil damages claim, not equitable remedies. Another implication is whether a civil RICO defendant should voluntarily cease an allegedly fraudulent business activity before trial to hedge its bets against a potential disgorgement award in the event the court determines that activity violated RICO. In that case, even if found liable for an underlying RICO violation, the defendant could argue there was no ongoing RICO violation to justify disgorgement. If the defendant was not found liable for the underlying RICO violation, it could simply resume the activity after the trial without worry. These and undoubtedly other concerns will emerge in civil RICO cases until the courts provide more clarification concerning disgorgement. Likewise, new and innovative arguments concerning disgorgement, as well as new spin on old arguments, will be raised in the lower courts until the Supreme Court resolves these issues. The stakes simply are too high to suggest otherwise. Matthew M. Neumeier is a partner at Chicago-based Jenner & Block and co-chairman of the firm’s class action litigation practice group; he speaks and writes frequently on the topic of class actions. Brian D. Hansen is an associate at the firm and a member of the class action litigation practice group. The authors frequently defend class actions involving RICO, consumer fraud, antitrust and other claims. Shahid U. Haque, an associate at the firm, provided research and assistance with this article.

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