On June 9, 2008, the U.S. Supreme Court issued its opinion in Bridge v. Phoenix Bond & Indemnity Co., a unanimous decision explicitly rejecting the notion that a plaintiff must directly rely on the misrepresentations in a mail fraud scheme in order to bring a civil RICO claim. As recently as 2006, the Court in Anza v. Ideal Steel Supply Corp. indicated that recovery under civil RICO was limited to the immediate victims of misrepresentation. Under the prevailing interpretation of Anza, even if a party suffered a loss proximately caused by a fraudulent scheme, it could not bring a claim unless it directly relied upon the misrepresentations alleged. The ruling in Bridge has enhanced plaintiffs’ ability to bring claims under civil RICO, but has not rendered reliance irrelevant: reliance may no longer be a formal element of a plaintiff’s claim, but it remains an important consideration in determining whether the plaintiff was injured “by reason of” the fraud alleged. It also remains a potentially relevant factor in determining whether class certification is appropriate.
Facts: Cook County, Ill. holds auctions to sell tax liens on defaulted properties. The county imposes a penalty on top of the amount of unpaid taxes and awards liens to the bidder willing to accept the lowest penalty. The county solved the problem of selecting among equal bids by imposing an allocation system and limiting each entity to a single bid. This requirement is enforced via a “Single, Simultaneous Bidder Rule” requiring bidders to submit an affidavit stating that no agent of the entity has also submitted a bid. Phoenix Bond brought suit against Sabre Group LLC, alleging that Sabre violated the county rule by arranging for its affiliates to place concurrent bids. Phoenix Bond brought its claim as a civil RICO action since Sabre used the mail to submit fraudulent affidavits to the county. The district court held that Phoenix Bond lacked standing since it was only “indirectly injured” by Sabre’s misrepresentation. While Sabre’s fraudulent scheme injured Phoenix Bond by preventing it from winning additional tax liens in the auction, the district court held that Cook County was the only party to directly rely on the false affidavits.
The Seventh Circuit reversed, holding that Phoenix Bond’s loss—the opportunity to acquire additional tax liens—was real and actionable. The Court of Appeals held that a plaintiff who did not directly rely on an alleged misrepresentation may nonetheless recover damages under civil RICO, provided that the misrepresentation was the proximate cause of the plaintiff’s injury. Citing a circuit split on the issue of reliance, the Supreme Court granted certiorari to resolve whether fraudulent statements made to a neutral third-party constitute sufficient grounds to sue under civil RICO.
The New Rule: In a unanimous ruling written by Justice Thomas, the Supreme Court affirmed the Seventh Circuit Court of Appeals, and explicitly rejected the existence of a direct reliance requirement. The Court’s decision in Bridge does not completely eliminate the role of reliance in a civil RICO action, however; it simply departs from prior case law in holding that first-party reliance is not a required element. The Court is clear that its new rule does not mean that a civil RICO plaintiff can prevail without showing that someone relied on the misrepresentation. Indeed, in order to have standing to bring a civil RICO suit, a plaintiff must both suffer an injury and demonstrate that the injury was proximately caused by the defendant’s fraudulent scheme. A plaintiff cannot sustain an injury proximately caused by fraudulent statements upon which no one relied. But by allowing claims from “third-party” plaintiffs—those who are injured as a result of someone else relying on a misrepresentation—the Court has increased the number of plaintiffs who can bring a civil RICO action.
Reliance in Civil RICO Prior to Bridge
Lower courts considering RICO claims have long employed different standards regarding the required relationship between a defendant’s fraudulent act and a plaintiff’s injury. Some courts required direct injury while others permitted both direct and indirect injury. One complicating factor was that reliance has long been an element in the common law tort of misrepresentation—a point that several circuits cited as justification for reading it into civil RICO. The Supreme Court initially sought to resolve the issue in Holmes v. Securities Investor Protection (1992) by articulating a proximate cause standard based on the “directness of the relationship” between the parties. Following Holmes, only plaintiffs who could demonstrate an injury directly arising from another party’s fraudulent use of the mail could bring suit. Lower courts struggled to apply the Holmes proximate cause standard, and, once again, a circuit split formed regarding whether reliance was a required element of a civil RICO action—at least two circuits held that direct reliance was required while four (including the Seventh Circuit in Bridge) allowed a third-party plaintiff to bring a successful claim.
In 2006, in Anza v. Ideal Steel Supply Corp., the Supreme Court refined the Holmes proximate cause standard to limit recovery to “immediate victims” of the alleged mail fraud. In Anza, the plaintiff alleged that its competitor unfairly increased its market share by illegally refraining from charging state sales tax on cash purchases and concealing this conduct via tax fraud. The Court held that the plaintiff (a competitor) was an “indirect victim” of the tax fraud and lacked standing to bring a civil RICO action. Consequently, the Court did not reach the question of whether direct reliance by the plaintiff was a required element. In dissent, Justice Thomas argued that the majority misinterpreted Holmes.
Thomas stated that the Court should focus on the purpose behind the alleged misrepresentation—gaining a competitive advantage through unfair competition. Furthermore, he noted that “reliance” is not found in the language of RICO. Two years later, Bridge provided the opportunity to revisit the issue.
- Expansion of defendants’ liability: By adopting a less restrictive view of the elements of a RICO claim, the Bridge decision has increased the number of plaintiffs who may recover damages based on an injury resulting from a fraud scheme. The universe of potential civil RICO plaintiffs has expanded to include entities who neither relied upon nor were even aware of the defendant’s misrepresentation.
- Reliance plays a diminished, but still significant, role in civil RICO: As noted above, the Court in Bridge held that while the plaintiff need not rely on the misrepresentation, someone must rely on it. Indeed, Cook County “relied” upon Sabre’s misrepresentations in the sense that the county processed the fraudulent bids and corresponding affidavits. Without such reliance, no harm could have been suffered by Bridge “by reason of” the misrepresentations. Thus, reliance remains a part of a civil RICO claim by virtue of the causation inquiry. Because it is not a formal element of a plaintiff’s claim, however, it may be more difficult to prevail on a motion to dismiss based on lack of reliance. For instance, one post-Bridge case reversed a dismissal based on lack of reliance with the simple statement that after Bridge it is no longer necessary to plead or prove reliance. Brown v. Cassens Transport Co., 546 F.3d 347, 357 (6th Cir. 2008). On the other hand, another post-Bridge court ruled that while prescription drug users could in theory bring RICO claims based on misrepresentations allegedly made to their doctors, and on which they did not directly rely, the defendant’s motion to dismiss must be granted because of plaintiff’s failure to properly allege proximate cause. Ironworkers Local No. 68 v. AstraZeneca Pharms. LP, No. 6:07-cv-5000-Orl-22-DAB, at *8-*12 (M.D. Fla. Nov. 3, 2008).
- The scope of RICO continues to expand: The Court in Bridge explicitly rejected the argument that anything short of requiring direct reliance would lead to the “over-federalization” of traditional state law claims. The Court held that if their decision results in the undue proliferation of civil RICO suits, then Congress must correct the error with more narrowly crafted statutory language.
- Importance of intervening causes: Defendants accused of a civil RICO offense by a third-party plaintiff are well advised to examine whether an “intervening cause” broke the requisite chain of causation between the alleged misrepresentation and the plaintiff’s injury. For example, Justice Thomas notes that had Sabre been able to prove that Cook County knew Sabre’s affidavits were false (yet permitted them to participate in the auction), then the county would have broken the causal chain, thereby eliminating proximate cause and precluding third-party liability.
- Insurance companies may have standing to bring viable civil RICO claims as third-party plaintiffs: In a multi-billion dollar class action against Eli Lilly for overcharging for its drug Zyprexa, U.S. District Court Judge Jack Weinstein certified a class of third-party insurance company payors who claim injury derived from misrepresentations that physicians relied upon. The plaintiffs’ case has survived motions to dismiss, though an interlocutory appeal appears likely.