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WASHINGTON � Although the U.S. Supreme Court last week ducked the questions everyone expected it to answer in two unrelated challenges under RICO, the justices did tighten the reins on the law generally viewed by the business community as a legal plague. The high court turned down the opportunity next term to answer the unanswered civil Racketeer Influenced and Corrupt Organizations Act questions from last week when it denied review this week in another petition, a challenge stemming from litigation about Benlate, a fungicide. That petition had the unusual dimension of an alleged RICO enterprise consisting of E.I. du Pont de Nemours & Co. and its outside lawyers who handled that litigation. Even though the court turned aside the du Pont petition, the issues not resolved last week � the scope of the “enterprise” definition in RICO and whether “reliance” is required in RICO mail and wire fraud claims � will continue to divide the lower courts and inevitably return to the Supreme Court, according to RICO litigators and scholars. But those watching the high court’s RICO cases last week viewed the outcome basically as a victory for anti-civil RICO forces. In Anza v. Ideal Steel Supply Corp., 04-433, a challenge involving two competing businesses, the justices essentially said they meant what they said in a 1992 decision: The alleged RICO violation must be the proximate cause of the plaintiff’s injuries. The law does not permit suits by parties who have been injured only indirectly, wrote Justice Anthony Kennedy for the 7-2 majority. And, in Mohawk Industries v. Williams, 05-465, the high court delivered a blow to a RICO class action arising out of claims that Mohawk and its outside recruiting agents hired illegal aliens to depress wages for its legal workers. The justices, in an unsigned decision, vacated the workers’ favorable judgment by the Eleventh Circuit U.S. Court of Appeals and directed that appellate court to reconsider in light of its proximate cause ruling in Anza. “I think the court remains concerned about the potential sweep of civil RICO litigation,” said Gene Schaerr of the Washington office of Chicago’s Winston & Strawn, who filed an amicus brief in Anza on behalf of the U.S. Chamber of Commerce. “The statute was passed originally to allow people to seek damages for harm as a result of mob activity. In the years since it was passed, it has gradually metamorphosed into a general purpose, business tort statute that gets raised in all kinds of business litigation where there is any allegation of fraud or dishonesty of any kind.” The Supreme Court has been making it more difficult for plaintiffs to bring civil RICO cases since the early 1990s, said Kevin Roddy of Wilentz, Goldman & Spitzer in Woodbridge, N.J., counsel to Ideal Steel. “I think the court doesn’t like the statute,” he said, adding, “The work that the [U.S.] Chamber has done over the last 20 years has borne fruit. They’re very concerned about business being targeted with RICO cases, and that has finally resonated with the court. But there’s roughly the same number of RICO cases that are filed each year as there are antitrust cases, and I’ve never heard anyone say antitrust liability has run amok.” RICO prohibits certain conduct involving a “pattern of racketeering activity.” The statute, which permits the award of treble damages and attorneys fees, provides a private right of action under Section 1964(c) to any person “injured in his business or property by reason of a violation” of the act’s substantive provisions. Ideal Steel Supply Corp. sells steel mill products, supplies and services, and operates stores in the New York City boroughs of Queens and the Bronx. National Steel Supply, owned by Joseph and Vincent Anza, is Ideal’s principal competitor and also operates stores in Queens and in the Bronx. Ideal sued National under Section 1964(c), charging that National had engaged in an unlawful pattern of racketeering activity by failing to charge New York sales tax to cash-paying customers and fraudulently concealing the practice from the state. Ideal alleged that this practice allowed National to reduce its prices without affecting its profit margin, and thus put Ideal at a competitive disadvantage. The district court dismissed Ideal’s complaint, but the Second Circuit reversed. FRAUDULENT-CONDUCT RELIANCE The high court originally granted review to decide whether a party seeking damages under RICO for mail or wire fraud had to prove that it had relied on the fraudulent conduct and that the reliance had resulted in injury. “The issue most burning for the bar is where a plaintiff says, ‘I didn’t rely on this but my customers relied on it or the bank relied on it.’ Must you always have reliance in a RICO case predicated on mail or wire fraud?” said Jeffrey Grell of Ricoact.com, a law firm in Edina, Minn. “For years, lower courts and parties have been struggling with what degree, if any, reliance is required,” he said. “You’ve got three different standards relating to reliance. I was hoping [the justices] would at least advance that debate,” said Grell, who teaches civil RICO at the University of Minnesota Law School. But, instead, the high court on June 5 said its analysis “begins . . . and largely ends” with its 1992 decision in Holmes v. Securities Investor Protection Corp., 503 U.S. 258. In Holmes, the justices held that Section 1964(c) requires proof of “some direct relation between the injury asserted and the injurious conduct alleged.” Writing for the majority, Kennedy said Ideal had not satisfied the proximate cause requirement of Holmes. The direct victim of the alleged RICO violation, he said, was the state of New York: “It was the state that was being defrauded and the state that lost tax revenue as a result.” Ideal’s asserted harms, he said, were caused by a set of actions � National’s offering of lower prices � “entirely distinct” from the alleged RICO violation, defrauding the state. The “directness requirement” is necessary because of the difficulty that courts may have when trying to determine damages caused by some remote action, he said. There is also an appreciable risk of duplicative recoveries without it. “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,” wrote Kennedy. In evaluating a RICO claim for proximate causation, he said, “the central question” a court must ask is “whether the alleged violation led directly to the plaintiff’s injuries.” But Justice Clarence Thomas, in dissent, said the majority’s “restrictive proximate-cause test” would prevent an honest businessman from recovering for competitive injuries inflicted by an organized crime group using threats of violence on a supplier to get goods at cost that it could then resell at lower prices than its competitor. And that kind of organized crime, he wrote, was the principal concern of RICO. In Mohawk, the justices agreed to decide whether the carpet manufacturer, working with outside hiring agencies to employ illegal aliens, was an association-in-fact enterprise under RICO. But the justices sent the case back to the Eleventh Circuit for further consideration in light of the Anza decision. “Those of us who watch this were surprised when the court granted cert in Mohawk not on the issue of causation but on a different tissue,” said Ideal Steel counsel Roddy. “I suspect when the court heard argument in Anza on March 27 and later in Mohawk, it realized there was a connecting thread, which is causation. “I think Justice Thomas got it right in Anza,” he added. “We had an extensive discussion in our brief that if you went back to the ’50s and ’60s and the organized crime commission reports, there was recognition that one of the ways organized criminals do business is they evade their taxes. These competitor versus competitor cases do not arise very often and now there is another set of fence-posts for plaintiffs.” Plaintiffs now will have a higher pleading burden to show direct injury in order to overcome a defendant’s motion to dismiss or for summary judgment, he and others said. With the Anza decision, “The Supreme Court is saying, ‘We need to circumscribe the application of civil RICO and we’re going to do so through the proximate-cause vehicle,’” said Mohawk counsel Juan Morillo of the Washington office of Sidley Austin. “It is requiring the lower courts to more strictly apply the direct injury requirement and to pay attention to the related issue of the speculative nature of damages.” The court’s concern, said Morillo, is “how tenuous the link is” between the alleged RICO activity (in Anza, defrauding the state, and in Mohawk, hiring illegal aliens) and the alleged injury (in Anza, lowering prices, and in Mohawk, the effect on wages). “The two situations are perfectly analogous,” he said. But Morillo’s high court opponent doesn’t see it that way. “ Anza says the direct victim is the state,” said Howard Foster of Chicago’s Johnson & Bell. “In my case, I assume Mohawk would argue the U.S. government is really the party that has been injured because illegal immigrants have been hired. But the government has not suffered a monetary injury in my case, and I don’t think it could bring a lawsuit for money damages. There is no Anza problem. So the extensive analysis of proximate causation which Eleventh Circuit has already done would not be affected.” Since the Eleventh Circuit found that there was proximate cause, “You could read into the tea leaves [of what the Supreme Court did in Mohawk] that there was something wrong in the Eleventh Circuit’s analysis,” suggested Grell of Ricoact.com. But, he added, “The courts are all very respectful of their respective authority. The Eleventh Circuit can make up its own mind and it tends to be more RICO plaintiff-friendly than some of the other circuits, like the Seventh Circuit, which is very anti-RICO plaintiff.” Foster does agree that the Supreme Court is “reining in” RICO. Anza, he said, cut back on business competitors’ standing to sue. The Anza decision closes the door on RICO suits based on indirect injuries, said Winston & Strawn’s Schaerr. “From the standpoint of a business litigator, it’s a good thing,” he added. “You don’t want to have some vaguely phrased exception that every plaintiff is going to argue he falls within. What the court did is very important in ensuring the RICO statute, at least in the civil arena, goes back to being confined to cases closer to what Congress had in mind.” Marcia Coyle is a reporter with The National Law Journal, a Recorder affiliate based in New York.

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