Opinion Recap: Bridge v. Phoenix Bond & Indemnity Co.
on Jun 11, 2008 at 12:32 pm
Monday’s unanimous decision in Bridge v. Phoenix Bond & Indemnity, No. 07-210, settled an interesting question that has been kicking around the circuits for years in various forms, and which the Court has twice before tried unsuccessfully to address: what role does reliance play in a civil RICO action predicated on mail fraud?
I. Background
Justice Thomas’s opinion gives a nice overview of RICO as it relates to this question, but here’s the thumbnail version: RICO (short for the “Racketeering Influenced and Corrupt Organizations Act,” passed by Congress to get at mob-related enterprises, but written so broadly that it applies to all sorts of bad behavior) criminalizes engaging in a “pattern of racketeering activity.” The term “racketeering activity,” in turn, is defined as one of a long list of criminal activities, including violations of the federal mail fraud statute. Finally, a provision of RICO allows recovery of treble damages by any person “injured in his business or property by reason of a violation” of RICO. The net result: treble damages for any injury suffered “by reason of” a pattern of mail fraud.
The reader will notice that although I said that the case centered on the role of reliance in a civil RICO action, the word “reliance” does not appear in the description of the statute I just gave (or, for that matter, in the text of the statute itself). But reliance is an element of the common law tort of misrepresentation, and it is hard to imagine how anyone can be injured “by reason of” a fraud that nobody relied upon. (Imagine, for example, a lie that no one believed. How can anyone be injured by that?)
The question, then, is whether courts should infer a reliance requirement in RICO cases predicated upon mail fraud, in light of either the common-law background or the statutory requirement of causation (that is, by the requirement that the plaintiff’s injured must have occurred “by reason of” the RICO violation).
The question arises in various forms all the time, and has resulted in an enduring division in the lower courts that the Supreme Court tried twice before to resolve, without success. The facts of those cases illustrate the basic problem. In Bank of China v. NBM LLC, No. 03-1559, the Court granted cert. to decide whether reliance was required in a case where the plaintiff (a bank) alleged that the defendant (a bank customer) had lied to it in order to secure loans (upon which it eventually defaulted). The defendant alleged that the bank knew that the forms it had filed included incorrect information, but knowingly looked the other way because it really wanted to make the lucrative loans. The Second Circuit held that the bank was required to prove that it relied upon the lies to prevail under RICO and sent the case back down for a retrial with a reliance instruction. The Supreme Court granted cert., in light of a circuit split, but for whatever reason declined to stay the retrial, which the bank won before briefing was completed in the Supreme Court. As a result, the bank withdrew its petition, and the Court had to start looking for another case to resolve the split.
The Court tried again Ideal Steel Supply Corp. v. Anza, 547 U.S. 451 (2006). That case presented a different twist to the reliance question. The plaintiff and the defendant both sold steel products. The plaintiff alleged that its competitor was not charging state sales tax on cash purchases, thereby obtaining a competitive advantage that injured the plaintiff’s business. The defendant then filed false tax returns with the State, hence committing mail fraud. When the plaintiff sued under RICO, the defendant argued that it could not prevail because it could not show that it had relied in any way on the lies the defendant told state tax officials. The Court granted cert., but ended up deciding the case on proximate cause grounds and did not reach the reliance issue. (It held that the competitive injury suffered by the plaintiff was too remote to be considered proximately caused by the mail fraud).
The third time proved the charm. In Bridge v. Phoenix Bond & Indemnity Co., the plaintiff and defendant were again competitors. This time, they both bid to purchase county tax liens. Under the rules of the auction, each company had to place bids in its own name and could not use agents or proxies. (The reason for this rule was that the auction didn’t really end up working like an auction in practice and, as a result, the county essentially doled out the liens to qualifying bidders on a rotating basis – hence, a bidder that used proxies would get more liens than a company that bid solely in its own name). The defendant allegedly violated this rule, arranging for other businesses to place bids and then transfer the acquired liens to them. And in the course of executing the scheme, it used the mails, thereby violating the mail fraud statute. The plaintiff alleged that it was injured by this scheme because as a result of the fraud, the defendant ended up receiving more liens and the plaintiff got fewer. The defendant, however, argued that because the plaintiff was not the recipient of the fraudulent statements – and therefore could not have relied upon them – it failed to establish the reliance element it insisted is part of every civil RICO claim predicated on mail fraud.
II. The Opinion
On Monday, the Supreme Court unanimously disagreed. Writing for the Court, Justice Thomas explained that although reliance is an element of a common law fraud claim, the predicate act under RICO is a violation of the federal mail fraud statute, not common law fraud. And, importantly, the Court had previously held that reliance is not an element of a criminal mail fraud violation – the government can prosecute you for using the mails as part of a scheme to defraud even if no one believes your lies. The Court likewise rejected the view that a requirement of reliance was implicit in the plaintiff’s obligation to show that it was injured “by reason of” the RICO violation in order to recover under the Act’s civil remedies provision. Justice Thomas explained that “a person can be injured ‘by reason of’ a pattern of mail fraud even if he has not relied on any misrepresentations.” Indeed, he wrote, “[t]his is a case in point.” The plaintiff suffered a direct injury by reason of the fraud when, as a result, it was awarded fewer tax liens than it would have received but for the fraud.
The Court thus rejected the defendant’s argument that reliance should be required in light of common law principles that Congress should be presumed to have incorporated into the statute. For one thing, as noted above, the predicate act here was a statutory violation (mail fraud) that had no direct common law analog. For another, although the Court has assumed that Congress intended the “by reason of” requirement to incorporate a proximate cause standard, that did not mean that Congress intended to require the plaintiff to show that it had, itself, relied on the misrepresentation. Harkening back to the problem presented in Bank of China (where the recipient of the false documents allegedly did not believe them), the Court acknowledged that “a misrepresentation can cause harm only if a recipient of the misrepresentation relies on it.” But that doesn’t mean, the Court held, that the plaintiff herself must have relied on the fraudulent statement. So long as the plaintiff suffered an injury with a sufficiently direct connection to the fraud, the requirement of proximate causation is satisfied.
In light of these conclusions, the Court made short shrift of the defendant’s argument that direct reliance should be required “in order to avoid the ‘over-federalization’ of traditional state law claims.” The basic problem with RICO, the defendants argued, is that it threatens to supplant traditional state law torts (like common law fraud) with a federal remedy. Making it easier to prove a RICO violation than a common law tort would exacerbate the federalism costs. But the Court was unsympathetic, concluding that if the statute, as written and most sensibly construed, was leading to too many RICO suits, it was Congress’s responsibility to fix it.
III. Observations
The fact that the decision here was unanimous, and the rather dismissive tone the opinion takes toward the losing argument, may make one wonder why so many courts of appeals had reached the opposite conclusion. I suspect that it is due in part to the last consideration dismissed by the Court – the feeling that RICO is out-of-control, inundating the federal courts with common tort claims that many judges probably believe have no place in federal court, have little bearing of the main object of RICO (mob-controlled businesses), and infringe on the traditional authority of the states. The perceived problem is exacerbated by the availability of treble damages under RICO, making a federal RICO claim enormously more attractive to the plaintiff’s bar than a traditional state law tort claim. Judges worried about the proper division of authority between state and federal courts (not to mention those who, perhaps from experience, have come to believe that the temptation of treble damages have led to a lot of meritless RICO claims being brought against businesses in federal court in the hopes of extorting big settlements), might well find attractive the facially plausible assertion that RICO should be construed to incorporate the elements of a traditional fraud claim.
Why, then, would these arguments not also appeal to a largely conservative Supreme Court? For one thing, I think that the Court has traditionally been less swayed than the lower courts by such pragmatic concerns and less willing to find “give” in a statute that would allow a more pragmatically satisfying result. That is not to say that the Justices are not a pragmatic bunch, some are very much so. It is simply a matter of degree – how far against the grain is the judge or Justice willing to read a statute to avoid practical problems? I think that on average, Supreme Court Justices are willing to bend less than some circuit court judges. (Moreover, I think that Justice Alito is showing himself to be less pragmatic and more doctrinal than his predecessor, Justice O’Connor).
The second thing I suspect may be going on is that this Court – with the departures of former Chief Justice Rehnquist and Justice O’Connor – has less fire in its belly on federalism issues that it had in the past. The “over-federalization” argument Justice Thomas brushed aside is really the kind of argument that would have been most appealing to those two Justices, and we have yet to see many decisions from the new Court testing the new Chiefs’ and Justice Alito’s fervor for protecting the sphere of traditional state authority. (Interestingly, in two recent opinions in the related context of federal sovereign immunity, Justice Alito has rejected arguments that statutes should be construed narrowly in light of the sovereign immunity of the federal government — Gomez-Perez v. Potter, in construing the federal sector provision of the Age Discrimination in Employment Act, and in Richlin Security Services Co. v. Chertoff, in construing the United States’ liability for legal fees).
