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 . . . .
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. . . [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, 559 U.S. 1 (2010), concerned a fairly unique situation where the chain of causation was broken by an intervening wrong-doer. The City of New York brought a RICO claim against Hemi, a foreign company that sold cigarettes over the Internet. The city alleged that Hemi committed fraud by failing to report to the State of New York the names of Hemi’s customers residing in 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 failed to pay the city’s cigarette tax and, thus, the city could not bring collection actions against those customers. Id. at 9.