Proximate Cause

Civil RICO is a specialized cause of action intended to control specifically targeted criminal activity. The effectiveness of such a remedy should not be diminished by the misguided attempts of plaintiffs who see mail and wire fraud violations in every civil lawsuit. Recognizing the need to maintain the integrity of the statute, numerous federal courts have held that, in RICO litigation, a cause of action will not lie unless the plaintiff can establish that the subject damages are directly caused “by reason of” the criminal activities that RICO was designed to address.

In traditional tort cases, the issue of proximate cause is one of fact that can be resolved only by the jury (sometimes called the finder-of-fact). Given that RICO is a statutory creation reflecting unique Congressional concerns, RICO’s proximate cause standard presents policy considerations that are exclusively within the competence of the court. As indicated by the Circuit Court in Brandenburg v. Seidel, 859 F.2d 1179 (4th Cir. 1988), overruled on other grounds, 517 U.S. 706 (1996) (emphasis added):

[RICO] require[s] not only cause in fact, but “legal” or “proximate” causes as well, the latter involving a policy rather than a purely factual determination: “Whether the conduct has been so significant and important a cause that the defendant should be held responsible.” (Citations omitted.) As such, the legal cause determination is properly one of law for the court, taking into consideration such factors as the foreseeability of the particular injury, the intervention of other independent causes, and the factual directness of the causal connection.

Id. at 1189.

In Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), the United States Supreme Court also held that RICO’s proximate cause analysis presented a legal, not factual, issue:

Here [in analyzing RICO] we use “proximate cause” to label generically the judicial tools used to limit a person’s responsibility for the consequences of that person’s own acts. At bottom, the notion of proximate cause reflects “ideas of what justice demands, or of what is administratively possible and convenient.” [Citation omitted.]

Id. at 268.

It is difficult to determine whether injuries are proximately caused by a RICO violation. One thing is certain, RICO plaintiffs must do more than merely demonstrate monetary loss. In considering Holmes, the Sixth Circuit stated that “[plaintiffs] employ flawed logic in their insistence that an ‘actual monetary loss’ equates with a ‘direct injury.’ . . . The [Holmes] Court held that RICO contains a proximate cause requirement . . . . This requirement forces the plaintiff to demonstrate a direct relationship between the injury suffered and the alleged injurious conduct. Thus, the concept of direct injury refers to the relationship between the injury and the defendants’ action, not the plaintiff’s pocketbook.” Firestone v. Galbreath, 976 F.2d 279, 285 (6th Cir. 1992).

i.    Intervening Factors

Generally, there may be a proximate cause defense, i.e., a victim’s injuries may be too far removed from the RICO violation, whenever a factor intervenes between the injury and the violation, breaking the direct link that should commonly exist. See Anderson v. Ayling, 396 F.3d 265, 270-71 (3d Cir. 2005) (complaint failed to establish that plaintiffs’ injury was proximately caused by the alleged RICO violation where “the causal connection between wrongdoing and harm is attenuated, as several independent causes . . . intervened between defendants’ alleged fraud and plaintiffs’ termination”). There are at least three factors that can break the link of proximate causation: intervening non-predicate acts; intervening independent factors; and intervening third-party victims.

a.    Non-Predicate Activity

Only predicate acts of racketeering activity provide a basis for recovery under RICO section 1964(c). Brandenburg, 859 F.2d at 1188. RICO does not provide redress for individuals injured by other wrongful acts, such as negligence, breach of contract, or wrongful termination. See, e.g., id. (defendants’ acts of negligence were not actionable under RICO); Grantham and Mann v. American Safety Prods., 831 F.2d 596, 606 (6th Cir. 1987) (RICO claim dismissed where defendants’ injurious conduct, i.e., breach of contract, did not constitute a predicate act); Anderson, 396 F.3d at 270-71 (the court stated: “the nature of the injury, job loss, is one that has been found not normally to create RICO standing”).

For example, a plaintiff may allege that he invested in a financial institution because he saw advertisements proclaiming how conservatively the institution was managed. In fact, the institution is poorly managed, and because it is poorly managed, the plaintiff eventually loses his entire investment. If the plaintiff brings a common law claim based on the negligent management of the institution and a RICO claim based on the false advertisements (distributed by mail and wire), the courts are likely to rule that the negligence of the institution’s management is the direct cause of injury, not the alleged RICO violation. Because negligence is not a criminal act upon which a RICO claim can be predicated, the court would dismiss the RICO claim.

b.    Independent Contributing Factors

The United States Supreme Court has instructed the lower courts not to apportion damages among acts violative of RICO and other independent factors. See Holmes, 503 U.S. at 259 (RICO claim dismissed, in part, because the broker-dealers’ bad business practices could have been responsible for the plaintiffs’ injury). “When factors other than the defendant’s fraud are an intervening direct cause of plaintiff’s injury, that same injury cannot be said to have occurred by reason of the defendant’s actions.” First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 770 (2d Cir. 1994). For example, in First Nationwide Bank, the plaintiff brought a RICO claim alleging that the defendant misrepresented the value of real estate acquired with non-recourse loans made by the plaintiff. The Second Circuit dismissed the claim:

The key reasons for requiring direct causation include avoiding unworkable difficulties in ascertaining what amount of the plaintiff’s injury was caused by the defendant’s wrongful action as opposed to other external factors, and apportioning damages between causes. (Citing Holmes.)

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. . . The value and profitability of multi-unit apartment complexes in New York . . . depend upon many factors that influence the general real estate market including changes in rent controls laws, property taxes, vacancy rates, the level of city services provided, and increased operating expenses including electric and heating oil prices. Given the complexity of the New York real estate market, and the fact that [plaintiff's] losses came in the wake of a downturn in the real estate market, [plaintiff] must allege loss causation with sufficient particularity such that we can determine whether the factual basis for its claim, if proven, could support an inference of proximate cause. (Citation omitted.) [Plaintiff cannot] meet this burden . . . .

* * * *

. . . [N]o social purpose would be served by encouraging everyone who suffers a [commercial] loss . . . to pick through [a defendant's statements] with a fine tooth comb in the hope of uncovering a misrepresentation.

Id. at 770-72; see also Canyon County v. Syngenta Seeds, Inc., 519 F.3d 969, 983 (9th Cir. 2008) (dismissing county’s RICO claim seeking damages arising from its provision of law enforcement and health care services to illegal aliens hired by defendants in that numerous other factors may have been responsible for the county’s alleged harm, including changes in public health practices; shifts in economic variable such as wages, insurance coverage, and unemployment; and improved community education); Sybersound Records, Inc. v. UAV Corp., 517 F.3d 1137, 1148 (9th Cir. 2008) (dismissing RICO claim where the court would have to engage in a complicated analysis of whether the plaintiff’s alleged damages “were attributable to the Corporation Defendants’ decision to lower their prices or a Customer’s preference for a competitor’s products over [plaintiff's], instead of to acts of copyright infringement or mail and wire fraud”). A civil RICO plaintiff must prove “injury by reason of” the defendant’s RICO violation. 18 U.S.C. § 1964(c). Injuries caused by disease, market fluctuations, war, and acts of God are not compensable under RICO. The injuries must be directly caused by the criminal acts upon which the RICO claim is based.

It can be difficult to predict when intervening independent factors render a chain of causation too tenuous.  BCS Services, Inc. v. Heartwood 88, LLC, 637 F.3d 750 (7th Cir. 2011), was the second appeal resulting from the circumstances alleged in Phoenix Bond & Indemnity Co. v. Bridge, 553 U.S. 639 (2008) (see infra § ii).  Both appeals arose out of auctions held in Cook County, Illinois, pursuant to which the county sold its tax liens. Essentially, the county imposed a single-bidder rule, which required each bidder to affirm that no other related bidders were participating in the auction.  The plaintiffs alleged that the single-bidder rule was regularly violated by many auction participants.  In BCS, the defendants alleged that there were multiple causes (in addition to their violation of the single-bidder rule) of the plaintiffs’ failure to obtain more liens.  For example, regardless of defendants’ fraud, plaintiffs may not have obtained legitimate competition from third-party bidders, the auctioneers’ subjective perception of which bidder raised their hand first, the failure of the plaintiffs to keep pace with the auction, and the plaintiff’s relative seating position at the auction.  The Seventh Circuit held that such circumstances did not destroy the chain of causation between the defendants’ violation of the single-bidder rule and the plaintiffs’ loss of liens:

The defendants stole a business opportunity from the plaintiffs by flooding the auction room with raised hands that shouldn’t have been there. The only intermediate cause and effect pair was the raising of hands (cause) and the auctioneer’s determination of the winning bid (effect), and this pair doesn’t weaken the inference that by having more hands in the air the defendants stole tax liens from the other bidders. . . .

The defendants argue that if there is any possible slip ‘twixt cup and lips (to continue law by proverb), the plaintiff must prove that it did not occur. Not so. The plaintiff doesn’t have to prove a series of negatives; he doesn’t have to “ ‘offer evidence which positively exclude[s] every other possible cause of the accident.’ ” .  . . .

Once a plaintiff presents evidence that he suffered the sort of injury that would be the expected consequence of the defendant’s wrongful conduct, he has done enough to withstand summary judgment on the ground of absence of causation. . . .

Id. at 757-758; see also Williams v. Duke Energy Int’l, Inc., 681 F.3d 788, 803 (6th Cir. 2012) (defendant’s motion to dismiss was denied; the plaintiff had sufficiently pled injury resulting from defendant’s payment of rebates, effectively reducing the favored customers’ utility rates fixed by the public utilities commission; the plaintiff was not obligated to prove that the public utilities commission would have found the rebates to be unlawful).

c.    Directly Injured Third-party Victims

In Sedima, the United States Supreme Court expressly stated that a “defendant who violates section 1962 is not liable for treble damages . . . to those who have not been injured.” 473 U.S. at 496-97. When the Supreme Court adopted the proximate cause requirement in Holmes, it considered traditional applications of the proximate cause requirement: “[under the common law,] a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant’s acts was generally said to stand at too remote a distance to recover.” 503 U.S. at 268-69.

Perhaps the best example of the application of this rule is found in Firestone v. Galbreath, 976 F.2d 279 (6th Cir. 1992). In Firestone, the plaintiffs were the biological grandchildren of a decedent and the beneficiaries of the decedent’s will. The plaintiffs alleged that, during the decedent’s life, the decedent’s step-family looted the estate, through a pattern of racketeering, and were liable under RICO. The court disagreed:

The grandchildren allege that by stealing from their grandmother during her lifetime, the defendants decreased the size of [the decedent's] estate, and consequently the size of their inheritance. This is only an indirect injury because any harm to the grandchildren flows merely from the misfortunes allegedly visited upon [the decedent] by the defendants. [Citation omitted.] The estate suffered the direct harm; it, not [the grandchildren], lost the property. Consequently, the grandchildren lack standing to bring an individual RICO claim, and the district court correctly dismissed it.

Id. at 285; see also Walters v. McMahen, 684 F.3d 435, 444-445 (4th Cir. 2012) (the defendant’s allegedly false representations on immigration forms that facilitated the employment of illegal aliens was a crime against the United States government that did not directly impact the wage levels of the plaintiffs, who were U.S. workers); Anza v. Ideal Steal Corp., 547 U.S. 451, 460 (2006) (the defendant’s filing of false sales tax returns directly injured the state, which lost the tax revenue; the plaintiff was only indirectly injured to the extent that the defendant’s lower cash prices enabled it to unfairly compete for customers); but see RWB Services, LLC v. Hartford Computer Group, Inc., 539 F.3d 681, 688 (7th Cir. 2008) (“[s]aying that the injury to the plaintiff is ‘direct’ is akin to saying that the victim was reasonably foreseeable. . . . The existence of multiple victims with different injuries does not foreclose a finding of proximate cause . . . .”).

Many visitors to Ricoact.com want to bring RICO claims against the officers of corporations in which they hold shares and claim that the officers defrauded the shareholders through their management of the corporation. The rule expressed in Galbreath, however, would bar the claims of the shareholders against the corporate officers. Like the grandchildren in Galbreath, the shareholders are not directly injured. The corporation, like the estate, is the party directly injured by the officers’ alleged fraud. Thus, only the corporation (through a shareholder derivative action) would have standing to bring the claim alleged by the shareholders. See Bixler v. Mineral Energy and Technology Corp., 596 F.3d 751, 758-759 (10th Cir. 2010).

As explained above, RICO’s chain of causation is usually broken by an intervening third-party victim. In Hemi Group, LLC v. City of New York, 130 S.Ct. 983 (2010), the Supreme Court was confronted with an unusual twist: the intervening wrong-doer. The City of New York brought a RICO claim against Hemi, a foreign company that sells cigarettes over the internet, alleging that Hemi committed fraud by failing to report to the State of New York the names of Hemi’s customers residing in the State of New York. Without Hemi’s customer reports, the State could not pass the customer information on to the City. Without Hemi’s customer information, the City could not determine which customers paid the City’s cigarette tax and, thus could not bring collection actions against those customers. Id. at 989. The Supreme Court dismissed the City’s claim on the basis that there was no proximate causation: “Put simply, Hemi’s obligation was to file the [customer] reports with the State, not the City, and the City’s harm was directly caused by the customers, not Hemi. We have never before stretched the casual chain of a RICO violation so far, and we decline to do so today.” Id. Such intervening-wrongdoer cases are most likely to arise when the immediate wrongdoers, such as the customers in Hemi, lack deep pockets or would be difficult to prosecute. Under such circumstances, the plaintiff may attempt to allege a more attenuated chain of causation to reach an easier target, or a target that presents a greater chance of collecting a judgment.

ii.    Mail Fraud, Wire Fraud, and Bank Fraud – Reasonable Reliance

To establish a criminal violation of the mail or wire fraud statues, the prosecuting attorney need not establish that anyone relied on the defendant’s fraudulent statements. To prove injury “by reason of” mail and wire fraud, however, many courts previously required a civil RICO plaintiff to establish that it relied upon the defendant’s fraudulent statements. See, e.g., American Chiropractic Ass’n v. Trigon Healthcare, Inc., 367 F.3d 212 (4th Cir.), cert. denied, 125 S.Ct. 479 (2004) (“a plaintiff must ‘plausibly allege both that [he] detrimentally relied in some way on the fraudulent mailing [or wire] … and that the mailing [or wire] was a proximate cause of the alleged injury to [his] business or property’”); Bank of China v. NBM LLC, 359 F.3d 171, 178 (2d Cir. 2004) (“in order to prevail in a civil RICO action predicated on any type of fraud, including bank fraud, the [civil RICO] plaintiff must establish ‘reasonable reliance’ on the defendants’ purported misrepresentations and omissions”).

Not all courts agree, however, with the principle that a civil RICO plaintiff claiming injury by acts of mail, wire, or bank fraud must – under all circumstances – prove its reliance on the defendant’s false statements. See, e.g., Procter & Gamble Co. v. Amway Corp., 242 F.3d 539 (5th Cir. 2001) (“a target of a fraud that did not itself rely on the fraud may pursue a RICO claim if the other elements of proximate cause are present”); Systems Management, Inc. v. Loiselle, 303 F.3d 100 (1st Cir. 2002) (“RICO bases its own brand of civil liability simply on the commission of specified criminal acts–here, criminal fraud. . . ; and criminal fraud under the federal statute does not require “reliance” by anyone: it is enough that the defendant sought to deceive, whether or not he succeeded. . . . Thus, under a literal reading of RICO–the presumptive choice in interpretation–nothing more than the criminal violation and resulting harm is required”); Living Designs, Inc. v. E.I. Dupont De Nemours and Co., 431 F.3d 353, 363 (9th Cir. 2005) (“we have in the past declined to announce a black-letter rule that reliance is the only way plaintiffs can establish causation in a civil RICO claim predicated on mail or wire fraud).

On June 9, 2008, the Supreme Court published its opinion in Bridge v. Phoenix Bond & Indemnity Co., 128 S.Ct. 2131 (2008) and resolved this split among the circuit courts of appeal.  The defendants argued that they falsely represented their compliance with the single-bidder rule to the county, and since only the county relied upon those false statements, only the county suffered a direct injury.  At best, according to the defendants, other auction participants (who never saw the defendants’ false attestations) were mere indirect victims of their fraud upon the county.  The Supreme Court held that although the plaintiff’s [i.e., the first-party's] reliance may often establish that a defendant’s acts of mail or wire fraud were the proximate cause of injury, the plaintiff’s reliance is not a required element in a civil RICO claim and proximate cause may be established by other factors:

. . . “[T]he fact that proof of reliance is often used to prove an element of the plaintiff’s cause of action, such as an element of causation, does not transform reliance itself into an element of the cause of action. [Citation omitted.] Nor does it transform first-party reliance into an indispensable requisite of proximate causation. Proof that the plaintiff relied on the defendant’s misrepresentations may in some cases be sufficient to establish proximate cause, but there is no sound reason to conclude that the absence of first-party reliance may in some cases tend to show that an injury was not sufficiently direct to satisfy section 1964(c)’s proximate cause requirement, but it is not in and of itself dispositive. A contrary holding would ignore Holmes’ instruction that proximate cause is generally not amenable to bright-line rules.

Id. at 2144-45see also St. Germain v. Howard, 556 F.3d 261, 263 (5th Cir. 2009) (overruling Fifth Circuit precedent to the extent it is in conflict with Bridge).

The Supreme Court’s opinion in Bridge echoes the opinion expressed in an article published by Ricoact.com in 2004:

. . . RICO’s proximate cause standard may be established by a plaintiff’s reliance on fraudulent statements, but reliance is not the only means to establish proximate cause. . . . Courts must be mindful that although reliance is an element of common law fraud claims, it is not an element of a RICO claim. RICO requires injury “by reason of” the RICO violation, and a RICO plaintiff may experience direct harm even when reliance is absent. . . . In the context of RICO, proximate cause – not reliance – is the relevant issue. Reliance is one way to establish proximate cause, but not the only way.

Ideal Steel Supply Corp. v. Anza (July 2, 2004): The Second Circuit Determines that No Reliance is Necessary When a Defendant’s Alleged Acts of Mail and Wire Fraud Directly Cause Injuries to a Competitor or the Target of the Scheme to Defraud.

RICO’s proximate cause standard is a very flexible standard. Although proximate cause has traditionally been used to strike down civil RICO claims, Bridge has ushered in an era where courts are more open to causation arguments focused on foreseeability and specific intent, regardless of whether other intervening factors are present.  In Neurontin Marketing and Sales Pract. Litig., 712 F.2d 21 (1st Cir. 2013), the court rejected a defendant’s proximate cause defense based on intervening third-parties, saying that it “undercut the core proximate causation principle of allowing compensation for those who are directly injured, whose injury is plainly foreseeable and was in fact foreseen, and who were the intended victims of a defendant’s wrongful conduct.”  Id. at 38.  The court further held that the burden of proving an “intervening cause” — something that snaps the chain of causation — is on the defendant.  Id. at 45.  “A tort plaintiff need not prove a series of negatives; he doesn’t have to offer evidence which positively excludes every other possible cause of the accident.”  Id.; see also Wallace v. Midwest Financial & Mortgage Serv., Inc., 714 F.3d 414, 422 (6th Cir. 2013) (“the application of traditional proximate-cause considerations supports a minimal finding that [Plaintiff] has raised a genuine issue of material fact regarding causation. The connection between the scheme to manufacture inflated appraisals and [Plaintiff's] financial injuries is not so indirect, unforeseeable, or illogical that the defendants must prevail as a matter of law”).

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