On Monday, the Court will hear arguments in Anza v. Ideal Steel (No. 04-433). This case poses two question: (1) whether a plaintiff must prove reliance on the alleged acts of fraud in order to recover civil damages under RICO when the RICO claim is predicated on acts of mail fraud; and, (2) if so, whether the plaintiff must demonstrate that it relied directly on the fraud, or if it is sufficient that the plaintiff was injured by a third party’s reliance on the fraud, so long as the plaintiff was the direct target of the RICO scheme.
(Disclosure: Darien Shanske, as a member of the Stanford Supreme Court Litigation Clinic, worked on a case that raised a similar issue this fall, Bank of China v. NBM. For the final disposition of that case, click here.)
David C. Frederick, of Washington D.C., will argue for petitioner. Kevin P. Roddy, of Woodbridge, New Jersey, will argue for respondent. The party briefs are available here.
Ideal Supply Corporation (plaintiffs) and National Steel Supply, Inc. (owned by the Anza family) both purchase and sell steel mill products in the New York metropolitan area to professional ironworkers and do-it-yourselfers. Both companies have retail outlets in Queens and Brooklyn. The outlets are near each other, and each company is the only substantial competition for the other. The size of their shared market is fixed by exogenous factors, mostly the New York construction industry. Since the size of the pie is fixed, the competition between the two businesses is essentially a zero-sum game. Thus, if one competitor gains in business through lowering its price, which is the only way to compete, the other must lose. Of course, there would seem to be a limit to how much either business could cut its price before it ceased to be a going concern. This is where Ideal’s RICO charge comes in. According to Ideal, National systematically did not collect New York 8.25% sales tax on sales to customers paying cash. This policy allowed National to significantly undercut Ideal without also undermining its bottom line. Ideal charges that this scheme was so successful in Queens that it is what allowed National to expand into the Bronx.
(National’s side of the story is not relevant at this stage in the litigation, which was resolved a motion to dismiss, but it is worth noting that right from the start of its brief it emphasizes that this is really a fairly ordinary story of a “long-running feud” between competitors, one that has already involved litigation. In fact, a long-running family feud, as it turns out that the principals behind these two closed corporations are related.)
According to Ideal, National has, in subsequent proceedings in the district court, conceded to not reporting sales tax and has amended its tax returns to reflect millions of dollars of unreported revenue (though still not as much as Ideal thinks it should).
Under 18 U.SC. 1964(c), plaintiffs may sue for injuries to its business or property “by reason of” racketeering activity. Racketeering activity requires, among other things, a pattern of predicate acts. Mail fraud is a listed predicate act and several circuits (including the Second) have held that the mailing of false sales tax returns constitutes mail fraud. Ideal filed suit claiming that National’s behavior satisfied the definition of racketeering activity. Ideal claimed a loss of $5,000,000 as a result of this pattern of racketeering activity which it asked to be tripled, along with attorney’s fees.
The district court dismissed the plaintiff’s civil RICO complaint for lack of standing. The court reasoned that Second Circuit precedent required the plaintiff to show that its harm arose directly from its own reliance on the fraud. The Second Circuit cases that seemed to go the other way, namely permitting suit by a plaintiff who had not itself relied directly upon the fraud, were distinguished as not involving fraud as a predicate offense.
The Second Circuit reversed, concluding that its prior precedents established that there needed to be a direct harm and reliance, but that the plaintiff itself need not plead that it relied upon the fraud (even in cases predicated on fraud). In this case, it would be sufficient for Ideal to plead, as it did, that it was the direct target of National’s scheme to defraud and that the State relied upon the fraudulent tax statements, ultimately to Ideal’s detriment.
National argues as petitioner that the Second Circuit erred in accepting what it describes as a “Rube Goldberg-esque” theory of injury. The theory is flawed first in that it does not present a sufficiently direct injury suffered by the plaintiff. Thus, petitioner argues, it was New York that suffered a direct loss, not Ideal. Perhaps, petitioner suggests, National’s customers had other reasons to purchase from National (or to avoid Ideal) or would have purchased from some other supplier. At common law, which the Court looks to as providing the background for understanding civil RICO, only the defrauded party could collect, petitioner asserts. Moreover, petitioner argues, this case implicates the policy concerns underlying the requirement of directness not only because of the uncertainty in damages, but also because such litigation may interfere with the claims of the directly harmed party – in this case, New York. The “direct target” test applied by the Second Circuit inserts subjective intent inappropriate for civil RICO and already rejected by the Court in a related context.
National also argues that the Second Circuit erred in failing to require the plaintiff to plead that it relied on the alleged mail fraud itself, rather than suffering an injury caused by someone else’s reliance. The reliance requirement also emerges from the common law background, and, petitioner argues, at common law there is no exception for a case like this (although National concedes that a plaintiff could sue if the defendant made the representation to a third-party intending that it be passed to the plaintiff).
National and its Amici (the Chamber of Commerce) also have a battery of policy arguments. Accepting the Second Circuit’s test would cause civil RICO to crowd out other areas of substantive federal law, like anti-trust, they say. It would also crowd out state law adjudication of ordinary business disputes in general, and, most problematically, would give a federal forum (and the possibility of triple damages and attorney’s fees) to cases that would not even be cognizable under state law.
Respondent, Ideal, starts with the fact that it had lost on a 12b6 motion. National’s assault on the plausibility of its theory of injury thus comes too early, respondent argues. At this stage in this case, Ideal’s assertion that it was engaged in a zero-sum game with National must be taken as true. And, according to Ideal, National passed (at least some of) the tax savings to its consumers in order to gain an advantage over its only rival. In those circumstances, respondent asks, who else but Ideal has standing to sue for this direct harm, namely the loss of Ideal’s profits? It is true that the party that relied in this case, namely New York, looks able to look after its own interests. But, respondent answers, Ideal is not suing for the revenue New York lost. If the possible action of public authorities had been deemed sufficient by Congress, respondent reasons, then RICO would not allow for private actions in the first place.
Ideal argues that its approach has been recently supported by the Solicitor General (in its amicus brief in the Bank of China case) and has been adopted by several circuits in addition to the Second (since at least 1994). Relatedly, respondents argue that allowing third-party reliance was not exceptional at common law and that looking to intention regarding an intentional tort (namely fraud) is hardly incongruous. Because of the other elements that a civil RICO claim requires and the actual history of the use of civil RICO to date, respondents and their amici, the National Association of Securities and Consumer Attorneys, maintain that there is no reason and no evidence justifying the fear the floodgates.
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