More on Ideal Steel

Michael Mueller and Jim Sherry, both of Akin Gump’s DC office, have this discussion of today’s opinion in Anza v. Ideal Steel:

On Monday, the Supreme Court issued its decision in No. 04-433, Anza v. Ideal Steel Supply Corp., clarifying the causal directness requirement in private civil actions under the Racketeer Influenced and Corrupt Organizations Act (RICO). By a vote of 7-2, the Court held that a company failed to state a civil RICO claim against a competitor where the company alleged only that the competitors fraudulent evasion of state sales taxes had placed the company at a competitive disadvantage. Such allegations, the Court held, are insufficient to establish that a plaintiffs injuries were the direct result of a RICO violation.

The case arose under 18 U.S.C. § 1962(c) and was brought pursuant to 18 U.S.C. § 1964(c), which creates a private right of action for [a]ny person injured in his business or property by reason of a violation of RICOs substantive provisions. Ideal Steel Supply Corporation invoked Section 1964(c) in a civil suit against its competitor, National Steel Supply, Inc., in the Southern District of New York. Ideal alleged that National had engaged in an unlawful pattern of racketeering activity by failing to charge its customers New York state sales taxes and then by fraudulently concealing this practice from the State. Ideal alleged that Nationals sales tax scheme allowed National to reduce its prices without affecting its profit margin, thereby placing Ideal at a competitive disadvantage. Ideals argument proved unavailing in the district court, which dismissed the complaint, but the Second Circuit adopted Ideals theory of the case, holding that where a complaint alleges a pattern of racketeering activity that was intended to and did give the defendant a competitive advantage over the plaintiff, the complaint adequately pleads proximate cause, and the plaintiff has standing to pursue a civil RICO claim.

The Supreme Court reversed, finding that Ideals complaint failed the test set forth in Holmes v. Securities Investor Protection Corporation, where the Court held that Section 1964(c) requires proof of some direct relation between the injury asserted and the injurious conduct alleged. Such a direct relation cannot exist, the Court concluded, where the immediate victim of the alleged unlawful conduct is a party other than the plaintiff, and where the cause of the plaintiffs injuries is a set of actions entirely distinct from the alleged RICO violation. In the majoritys view, Ideal failed to state a civil RICO claim because the direct victim of Nationals alleged tax evasion was the State of New York, rather than Ideal itself, and because Ideals injuries were caused by a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the state). In reaching this conclusion, the Court emphasized that the directness requirement serves the important functions of preventing intricate, uncertain [causal] inquiries from overrunning RICO litigation and preserving a bright line between RICO and the antitrust laws. The court remanded a separate claim under Section 1962(a) for reconsideration in light of its decision with respect to Ideals claim under Section 1962(c).

Justice Thomas concurred in part and dissented in part. In his view, [t]he Courts stringent proximate-causation requirement . . . eliminates recovery for plaintiffs whose injuries are precisely those that Congress aimed to remedy through the authorization of civil RICO suits, namely, persons injured by organized crime. Although Justice Thomas acknowledged that Ideals suit had no apparent connection to organized crime, he had no trouble identifying the causal connection between Ideals injury and Nationals conduct: Here, the relationship between the alleged RICO violation and the alleged injury is clear: Petitioners underpaid sales tax, permitting them to undercharge sales tax, inflicting competitive injury on respondent.

Justice Breyer concurred in part and dissented in part, concluding that RICO does not cover claims of injury by one competitor where the legitimate pro-competitive activity of another competitor immediately causes that injury. In Justice Breyers view, Ideal had failed to allege a harm caused directly by something other than ordinary competitive activity, i.e., lower prices a better product, a better distribution system, or a better production method. Although Justice Breyer recognized that Ideal had alleged an illegal scheme to defraud the state, he contended that National had in effect cut the price of the item by the amount of the sales tax and then kept the money instead of passing it on to the State. In Breyers view, the source of the savings is . . . beside the point as long as the price cut itself is legitimate.

Also on Monday, the Court issued a brief order in the case of Mohawk Industries v. Willliams (05-465). The Court determined that certiorari in Mohawk had been improvidently granted as to the question of whether a corporation and its agents could constitute a RICO association-in-fact enterprise, and remanded the case to the Eleventh Circuit for reconsideration of proximate causation in light of the decision in Ideal.