No RICO liability for out-of-state vendors

By Anna Christensen
on Jan 26, 2010 at 12:11 pm

Below, Brian Goldman of Stanford Law School recaps the Court’s opinion in Hemi Group, LLC v. City of New York, which was decided on Monday.  Brian’s preview and recap of oral arguments in the case were published on the blog in early November, and are also available on the Hemi Group (08-969) SCOTUSwiki page.

On January 25, New York City was handed a defeat in its effort to recoup thousands of dollars in unpaid tobacco taxes when the Court ruled, by a vote of five to three, that the City could not use the Racketeer Influence and Corrupt Organizations Act (RICO) to go after out-of-state on-line cigarette retailers.

The case, Hemi Group, LLC v. City of New York, No. 08-969, arose out of the City’s effort to collect treble damages from out-of-state internet vendors who sell cigarettes to City residents at deep-discount prices – discounts made possible, the City contended, because the vendors do not collect the $4.25 per pack in state and local taxes that vendors within the City must include in their prices.  The on-line vendors are not required to collect such taxes, however; rather, the individual purchasers are required to report and pay the taxes themselves.  To assist states with enforcing the taxes, the federal Jenkins Act requires out-of-state vendors to report the names and addresses of purchasers to each customer’s home state.  Hemi and other such vendors had committed mail and wire fraud, the City alleged, by failing to file the required reports and by advertising cigarettes to purchasers as “tax free.”  Because that fraud deprived it of tax revenues, the City sought to recover the lost revenues by suing the vendors under RICO’s civil provision.  After the district court dismissed the suit, the Second Circuit reinstated it.  (Justice Sotomayor, who was a member of the panel that heard the case below, did not participate in its review at the Court.)  The Court granted cert. in May 2009 and heard argument last November.

The Court reversed, holding that the City could not use RICO to seek damages from vendors, who were under no obligation to collect taxes in the first place.  Writing for the Court, the Chief Justice described the case as one “about imposing [RICO] liability to substitute for or complement a governing body’s uncertain ability or desire to collect taxes directly from those who owe them”—the individual purchasers.  (Justices Scalia, Thomas, and Alito joined the opinion in full; Justice Ginsburg, who concurred separately, joined only in limited part.  Consequently, the thrust of the Chief Justice’s analysis commanded only a plurality of the Court.*)

The Court observed that Hemi presented two distinct challenges to the City’s RICO claim: First, it denied that lost tax revenues were cognizable as an injury to “business or property.”  Second, Hemi disputed that the City’s asserted injury arose “by reason of” its allegedly fraudulent requirement, as RICO requires.  Though the courts of appeals had been divided over the first question, and notwithstanding an amicus brief filed by twenty states urging recognition of the injury, the Court declined to reach the first question because it determined that the causation requirement had not been met.

RICO’s limited applicability to injuries incurred “by reason of” a predicate fraud imposed not only a “but for” requirement, the Chief Justice explained, but also a “proximate cause” one as well.  Here, the City’s causal theory was too attenuated to satisfy this standard: Hemi’s alleged fraud was its failure to submit the required Jenkins Act reports to the State, which would have then had to pass on the information to the City.  The City’s injury, meanwhile, arose most directly from purchasers who were legally obligated to pay the cigarette tax on their own, but failed to do so.  Although receiving the purchasers’ information from Hemi (via the State) might have enabled the City to pursue non-paying purchasers for a tax assessment, there were too many links in that causal chain.  Rejecting the City’s theory, the Chief Justice explained that it  would “require[] that we extend RICO liability to situations where the defendant’s fraud on the third party (the State) has made it easier for a fourth party (the taxpayer) to cause harm to the plaintiff (the City).”  Citing to the Court’s RICO precedents, the lead opinion noted that the kind of “direct relationship” required between the fraud and the injury was lacking here.

In her concurring opinion, Justice Ginsburg observed that the City could not compel Hemi, a New Mexico corporation, to collect City taxes.  She viewed its RICO action as nothing more than an attempt “to overcome that disability,” and to broaden the “quite limited remedies” available under the Jenkins Act itself.  Moreover, she noted, because the City had not even brought any claim under the Jenkins Act, it effectively conceded that no predicate fraud had been committed at all.  Justice Ginsburg, however, declined to join the Chief Justice’s proximate-cause analysis.

Justice Breyer filed a dissenting opinion, joined by Justices Stevens and Kennedy.  He viewed Hemi’s fraud as a clear proximate cause of the City’s injury.  The City’s losses were foreseeable, he observed, and moreover Hemi intended them; indeed, Hemi’s entire competitive advantage stems from shielding customers from cigarette taxes.  Citing to torts treatises, he noted that both foreseeable and intended consequences of an intentional act are “proximate” at common law.  Taking issue with the Chief Justice’s suggestion that the intervening acts of third parties – purchasers not paying the tax they owed – made the harm attenuated here, Justice Breyer noted that “an intervening third-party act, even if criminal, does not cut a causal chain where the intervening act is foreseeable and the defendant’s conduct increases the risk of its occurrence.”  And while Hemi’s alleged fraud deprived the State, rather than the City, of the required customer reports, Justice Breyer suggested that the State’s contractual obligation to pass the information on to the City made that step in the causal link insignificant.  Moreover, the harm incurred through such inter-state tobacco tax arbitrage is “well within the set of risks that Congress sought to prevent” through the Jenkins Act, and liability generally flows when a defendant’s fraudulent misrepresentations cause the intended beneficiaries of a statute to suffer pecuniary loss.  Justice Breyer distinguished the precedents upon which the Chief Justice relied, noting that they concerned unintended or unforeseeable harms.

Turning to the first question – whether the City’s loss of tax revenue is “business or property” under RICO, and thus a cognizable injury at all – Justice Breyer argued that it should be.  While acknowledging the concern that such a result “would turn RICO into a tax collection statute,” he pointed to Justice Department guidelines demanding prosecutorial restraint to suggest that RICO would only be employed in large-scale cases of fraud, not for individual cases of tax collection.  The Chief Justice, responding to this argument in a footnote, noted that such guidelines are “not only changeable, but have no applicability whatsoever to state or local governments.”

(* For apparently only the second time in its modern history, the Court issued an “opinion of the Court in part” that did not explicitly delineate – for example, by reference to Roman numeral-designated parts – which portions of the opinion commanded a majority and which were supported by only a plurality.  See also Daniels v. United States, 532 U.S. 374 (2001).  In this case, Justice Ginsburg joined “the Court’s opinion to the extent it is consistent with” her concurrence, but “[w]ithout subscribing to the broader range of the Court’s proximate cause analysis.”)