The Causation Requiremets of RICO

Anza v. Ideal Steel Supply Corp.

RICO (Racketeer Influenced and Corrupt Organizations) Act provides a private right of action to “[a]ny person injured in his business or property by reason of a violation,” which has been held to require that the RICO violation be the “proximate cause” of the injury. Ideal and National steel companies both operate in the Bronx and are primary competitors in the field of steel mill products, supplies, and services. Ideal alleges that National made a practice of waiving New York sales tax for cash paying customers, thus reducing its price without affecting profit margins. The causes of action alleged by National are that (1) two of Ideal’s owners conducted or participated, directly or indirectly, in the conduct of the affairs of an enterprise affecting interstate commerce through a pattern of racketeering activity or collection of unlawful debt; and (2) that all three owners “use[d] or invest[ed]” income deriving from a pattern of racketeering activity in an enterprise engaged in interstate commerce. A lower court threw out Ideal’s suit because in order for Ideal to state a claim it must allege that it relied on National’s false tax returns. The appeals court held that an intent to create, and the successful creation of, a competitive advantage was an actionable RICO violation.

In Holmes the Court held that the legislative history and the text of the statute showed that Congress modeled the civil action portion of the RICO act on the Clayton Anti-trust laws and the Act therefore required not only that the RICO violation be a “but for” cause of the injury but that it must also be the “proximate cause” of the injury. As this Court sees it, it was the State of New York that was being defrauded, not Ideal and that Ideal was harmed by “a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the State).” The majority argues that this coheres with the fact that the more tenuous the connection is the more difficult it becomes to quantify the harm done. Proximate cause, in the Court’s view, has nothing to do with the particular motive behind the acts as the appeals court seemed to believe. The Court leaves some other questions open on remand.

Justice Thomas, dissenting, seems to see it the other way; “…it was not New York’s injury that cause respondent’s damages; rather, it was petitioners’ own conduct - namely, their underpayment of tax - that permitted them to undercut respondent’s prices and thereby take away its business.” Thomas also rejects the Court’s characterization of the link between the violations and the injuries, saying when the Holmes Court held that “one reason that indirect injuries should not be compensable is that such injuries are difficult to ascertain” it did not “adopt the converse proposition that any injuries that are difficult to ascertain must be classified as indirect.” Thomas also contrasts two concepts of proximate cause and makes a forceful argument for why National could be considered to be the proximate cause of Ideal’s injury. The dissent goes on to suggest that courts have been unhappy with the development of the RICO Act but that this ruling will prevent some cases that Congress clearly contemplated, such as cases of unfair competitive advantage. In short, Justice Thomas accuses the majority of reading the common law requirement for reliance into an area where it was precluded by design.

Justice Breyer says, metaphorically, “ordinary competitive actions undertaken by the defendant competitor cut the direct causal link between plaintiff competitor’s injuries and the forbidden acts.” Breyer supports this argument by noting a lack of contrary precedent, on policy grounds of practical administration, policy grounds of societal need (since there will be those who are directly injured by the illegal acts there is no societal necessity to empower those injured secondarily to sue), by arguing that this would permit the cases that Congress contemplated, and by suggesting that a broader rule would invite the collision of RICO and general antitrust policy.