Establishing injury "by reason of" racketeering activity: a critical analysis of the 11th Circuit's per se detrimental reliance requirement and its impact on RICO class actions.

• Author: Hanzman, Michael A.

In Sikes v. Teleline, Inc. USA, 281 F.3d 1350 (11th Cir. 2002), the 11th Circuit Court of Appeals held that a plaintiff alleging a civil RICO claim based on predicate acts of mail or wire fraud must prove that "`he was a target of the scheme to defraud' and that he `relied to his detriment on misrepresentations made in furtherance of that scheme.'" (1) The court reasoned that absent a showing of detrimental reliance, a plaintiff could not establish injury "by reason of" racketeering activity, as is required under 18 U.S.C. [section] 1964(c). (2) To satisfy this burden, Sikes holds that a plaintiff must demonstrate not only subjective reliance, but also that the misrepresentation in question "would have been relied upon by a reasonable person." (3) Simply put, in the 11th Circuit, a civil RICO plaintiff must prove the same type of "justifiable" and "detrimental" reliance typically required to state a claim for common law misrepresentation.

The 11th Circuit is not alone. Based on the unassailable premise that RICO provides redress only to those actually injured by the operative predicate acts, other appellate courts also reason that a showing of detrimental reliance on the alleged mail fraud is required to ensure the existence of a direct relation between the conduct alleged and the resulting injury. (4) Some of these courts, however, also recognize that in appropriate cases "a target of a fraud that did not itself rely on the fraud may pursue a RICO claim if the other elements of proximate causation are present." (5)

At the other end of the spectrum, the First Circuit recently held that reliance is not a required element of RICO claims based on predicate acts of mail fraud. (6) The Third Circuit also has concluded that the "assertion that the mailings involved must themselves be relied upon by the victim of the fraud in order for a RICO claim to be established is inaccurate." (7) And the Second and Seventh circuits likewise apply a traditional proximate causation analysis, under which RICO's "by reason of" standard is deemed satisfied if the commission of the underlying predicate acts are "a substantial factor in the sequence of responsible causation, and if the injury is reasonably foreseeable or anticipated as a natural consequence." (8) Many courts embracing a flexible proximate causation analysis have done so in response to the Supreme Court's decision in Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258 (1992), holding that [section] 1964(c)'s "by reason of" requirement is satisfied by a showing of proximate cause. (9)

The debate, crystalized by the above-referenced conflict among the circuits, is whether a showing of detrimental reliance is the only way to establish proximate causation in civil RICO claims based on predicate acts of mail or wire fraud. This issue has generated confusion not only among, but within, the federal circuits. The Fifth Circuit, for example, first rejected a detrimental reliance requirement in civil RICO cases. (10) In Summit Props., Inc. v. Hoechst Delanese Corp., 214 F.3d 556, 562 (5th Cir. 2000), the court then made an abrupt about face, holding that reliance is required in civil RICO claims based on predicate acts of mail fraud. (11) But most recently, the Fifth Circuit explained that its holding in Summit Properties did not foreclose the possibility that "a target of a fraud that did not itself rely on the fraud may pursue a RICO claim if the other elements of proximate causation are present." (12) And while the 11th Circuit purports to cling to a detrimental reliance requirement, (13) the court's precedent is not without confusion. Indeed, in Cox v. Admin. U.S. Steel & Carnegie, 17 F.3d 1386 (11th Cir. 1999), the court appeared to adopt (or, at the very least, cited with approval) the more flexible "substantial factor in the sequence of responsible causation" test articulated by the Second Circuit in Hecht v. Commerce Clearing House, Inc., 897 F.2d 21 (2d Cir. 1990). (14) And, even more recently, so has one court in the Southern District of Florida. (15) District courts, including those within the same circuit, are even more divided on this issue. (16)

Imposing a per se requirement of direct detrimental reliance in all civil RICO claims predicated on mail or wire fraud undoubtedly will ring the death knell in cases where a plaintiff--although the obvious target and victim of a fraudulent scheme--did not detrimentally rely upon communications used in furtherance of the fraud. This inflexible rule also limits a defendant's liability to those with whom the defendant (or the defendant's RICO enterprise) has had direct contact, and judicially engrafts onto RICO a requirement that the mailings used in furtherance of a fraudulent scheme themselves contain a misrepresentation or omission of fact; a requirement that is not an element of the underlying mail fraud offense. (17) Moreover, because it is often difficult to establish detrimental reliance by class-wide proof, requiring it often forecloses the ability to pursue RICO class actions on behalf of similarly situated persons targeted by an organized scheme to defraud. (18)

This article advocates that the 11th Circuit's rigid approach is inconsistent with the plain language of RICO and Holmes' admonition that application of the statute's "by reason of" requirement should be guided by general tort principles of proximate causation. (19) Proximate causation and reliance, although often intertwined, are two distinct legal elements which the 11th Circuit conflates by requiring proof of the latter to establish the former. Proof of direct detrimental reliance is, of course, one way to establish injury proximately caused by fraud. And it is equally true that in some cases a lack of reliance will be fatal to a finding of proximate causation; an example being cases where the predicate acts of mail fraud are pre-raised solely on misrepresentations contained in specific documents that the plaintiff admittedly never received. But this should not prevent a plaintiff, who was the target of an organized and widespread fraudulent scheme facilitated by use of the mails, from establishing proximate causation by methods other than detrimental reliance. Most sophisticated frauds of the type that RICO was intended to eradicate simply are not based on misrepresentations contained within isolated documents sent by RICO enterprises to their intended victims. Today's schemes to defraud are often more creative, and rarely do they fit neatly into a common law misrepresentation paradigm. Attempting to shoehorn the concept of detrimental reliance into cases not based on discreet misrepresentations or omissions of fact is a futile endeavor.

This article also advocates that, in appropriate cases, a plaintiff should be permitted to rely on circumstantial evidence to demonstrate injury "by reason of" racketeering activity, and that such circumstantial evidence, regardless of whether reliance is required, should be deemed self-proving when the fraudulent nature of the transaction itself conclusively establishes injury caused by the scheme.

Reach of RICO and Initial (but ultimately rejected) Judicial Obstacles

The Organized Crime Control Act (RICO) was enacted by Congress in an effort "to provide new weapons of unprecedented scope for an assault upon organized crime and its economic roots." (20) The statute provides a private civil remedy to persons injured in their business or property "by reason of" a substantive violation. (21) Congress passed this legislation based upon its belief that then-available legal remedies were "unnecessarily limited in scope and impact," (22) and explicitly directed that the statute's provisions "shall be liberally construed to effectuate its remedial purposes." (23)

Despite the obvious breadth of this legislation, civil RICO cases first met with judicial hostility. Some courts initially concluded that the statute was available only in cases involving organized crime, but that view was rejected as having no statutory support. (24) Also rejected were cases holding that a civil RICO plaintiff must demonstrate a "competitive injury" in order to possess RICO standing. (25) Other courts, including a divided Second Circuit, began to require that a plaintiff demonstrate "racketeering injury" Caused by activities resulting in a "criminal conviction," concluding that civil RICO was not aimed at legitimate enterprises. (26) Reversing, the Supreme Court found nothing in the legislation suggesting that a civil action could proceed only after a criminal conviction, (27) and similarly concluded that there was "no room in the statutory language for an additional, amorphous `racketeering activity' requirement." (28) Given Congress' objective, the Court refused to sanction judicial obstacles not supported by RICO's legislative history or text. (29)

The Detrimental Reliance Obstacle

As explained above, civil recovery under RICO is limited to only those injured "by reason of" a substantive violation. Observing that Congress modeled [section] 1964(c) on the civil action provisions of federal antitrust laws, the Supreme Court has held that to satisfy RICO's "by reason of" requirement, a plaintiff must show "that a defendant's violation not only was the `but for' cause of his injury, but was the proximate cause as well." (30) Ultimately, Holmes instructs that federal courts should employ traditional notions of proximate causation when assessing the nexus between a plaintiff's injuries and the underlying RICO violation. (31) The Court used the term proximate cause "to label generically the judicial tools used to limit a person's responsibility for the consequences" of his acts; at bottom, a notion that demands "some direct relation between the injury asserted and the injurious conduct alleged." (32)

Consistent with Holmes' directive that the proximate cause inquiry under RICO focus on the directness between the predicate acts and the...