A Phoenix Rising

• Publication year: 2009
• Pages: 0012

A Phoenix Rising: Elimination of the Requirement of First-Person Reliance Under Civil RICO and Its Implications for Georgia Litigants No. Vol. 14, No. 6, Pg. 12 Georgia Bar Journal April, 2009

By Edward A. Marshall

In June 2008, the U.S. Supreme Court, in Bridge v. Phoenix Bond & Indemnity Co.^[1] (Phoenix Bond), resolved a question that previously had divided the federal courts of appeal sharply: "Whether reliance is a required element of a RICO claim predicated on mail fraud and, if it is, whether that reliance must be by the plaintiff."^[2] Answering the question in the negative, the Court held that a plaintiff's inability to prove reliance on an allegedly fraudulent mailing (or wire communication)^[3] posed no obstacle to success on a claim brought pursuant to the Racketeer Influenced and Corrupt Organizations Act (RICO).

The decision, which breaks with nearly two decades of precedent from the U.S. Court of Appeals for the 11th Circuit, has the potential to expand markedly the use and potency of civil RICO in the Georgia courts.

An (Extremely) Abbreviated Overview of RICO

RICO originally was enacted to combat organized crime, but its scope today extends well beyond traditional conceptions of the purely criminal enterprise into more traditional business disputes. Generally speaking, the statute prohibits acquiring an interest in or operating an enterprise through a "pattern of racketeering activity."^[4] Although there are literally dozens of potential racketeering or "predicate acts,"^[5] two of the most commonly alleged forms of racketeering activity in the arena of civil litigation are mail fraud and wire fraud.

When it comes to these predicate acts, nomenclature can be deceiving. While invoking the construct of "fraud," the mail and wire fraud statutes do not criminalize fraud per se. Instead, these statutes criminalize the use of the mails or wires to effect a "scheme or artifice to defraud."^[6] Traditional elements of common law fraud are not, on the face of the statutes, explicitly made elements of the crimes.^[7]

No matter the predicate acts alleged, however, a civil RICO defendant found liable for violating the statute faces potentially oppressive liability exposure: "Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate U.S. district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee . . . ."^[8] In view of the availability of treble damages and attorney's fees, the outer contours of civil RICO present a substantial concern for even legitimate businesses and associations, which increasingly find themselves facing the threat of RICO lawsuits.

Recent Supreme Court Forays Into the Requirement of Reliance Under RICO

There has been a trend in the judiciary in recent years to limit the reach of civil RICO liability because of the judiciary's concern that the statute's punitive reach has grown too expansive. The Supreme Court's decision in Holmes v. Securities Investor Protection Corp.^[

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] is indicative of that trend. There, the Court construed "by reason of" in Section 1964(c) to incorporate common law concepts of proximate cause — requiring more than mere "but for" causation between a defendant's pattern of racketeering activity and the claimant's injury to sustain recovery.^[10] With that limitation, the Court rejected a claim by investors that they were entitled to recover against firms who had engaged in manipulative accounting practices, causing shares in the firms to lose value, which in turn caused the investors' brokers to go bankrupt, in turn causing the brokers to be unable to provide full compensation to the claimant-investors for investments in other securities. The relationship between the statutory violation and the injury was too attenuated, in the view of the Court, to sustain recovery

That decision did not address whether RICO plaintiffs alleging mail or wire fraud must themselves have received and relied upon an allegedly fraudulent communication to demonstrate RICO liability. Although prosecutors need not demonstrate such reliance to establish a criminal RICO violation,^[11] the federal circuit courts were split on whether a civil claimant must make such a showing. Despite undertaking to address this split of authority on two occasions, the Court (until Phoenix Bond) had been unable to resolve the question.

First, in Bank of China v. NBM L.L.C.,^[12] the Court granted certiorari to resolve the question whether "civil RICO plaintiffs alleging mail and wire fraud as predicate acts must establish "˜reasonable reliance' under 18 U.S.C. § 1964(c)?" Notwithstanding extensive briefing on the merits both by the litigants and amicus curiae, the petition was dismissed per the parties' agreement.^[13]

Less than two weeks after that dismissal in November 2005, the Court again took up the question concerning the role that reliance should play in the context of civil RICO claims predicated on mail fraud. In Anza v. Ideal Steel Supply Corp., it granted certiorari to address "[w]hether a competitor is "˜injured in his business or property by reason of a violation' of the Racketeer Influenced and Corrupt Organizations Act (RICO) where the alleged predicate acts of racketeering activity were mail fraud but the competitor was not the party defrauded and did not rely on the alleged fraudulent behavior."^[

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] Again, however, the Court failed to resolve the question. Instead, it held that competitors of a defendant who allegedly committed tax fraud could not establish proximate causation between defendant's pattern of racketeering activity and their diminished sales in relation to defendant, which, by virtue of its fraud, could achieve lower overhead. Central to the Court's reasoning was that the state of New York—the government body that allegedly was deprived of the tax proceeds—was the "direct" victim of the fraud and had its own incentive to prosecute the allegedly offending business.^[15] Because the case was susceptible to resolution on grounds of proximate causation, the Court found it unnecessary to address directly the question of reliance.

Anza, consequently, did not provide any clear direction as to whether a RICO claimant must prove receipt and reliance of an allegedly fraudulent communication as a prerequisite to bringing suit. The Court did not, however, remain silent on the issue. The majority, in what could be seen as an inclination to incorporate reliance into the civil RICO framework, conspicuously observed that it lacked the "occasion to address the substantial question [of] whether a showing of reliance is required" to sustain such a claim.^[16]

This none-too-subtle insinuation that traditional formulations of reliance might well enter into civil RICO cases predicated on mail fraud, however, was not joined by all members of the Anza Court. Justice Thomas filed a separate opinion, in which he emphasized that a "reliance" element finds no textual basis in the RICO statute. He explained:

[T]here is no language in § 1964(c) that could fairly be read to add a reliance requirement in fraud cases only. Nor is there any reason to believe that Congress would have defined "racketeering activity" to include acts indictable under the mail and wire fraud statutes, if it intended fraud-related acts to be predicate acts under RICO only when those acts would have been actionable under the common law.^[17]

The ...