Anza, Joseph, et al. v. Ideal Steel Supply Corp. (06/05/2006)

Question presented: Whether 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?

BY EMILY WITHROW, MEDILL NEWS SERVICE

Steel customers in the Bronx had only two choices: Ideal Steel Supply Corp. or National Steel Supply Inc. The two companies offered competitive prices to attract business, so for most customers, the choice was a toss up — until word got out that if they paid National in cash, customers didn't have to pay the state sales tax.

In New York, this amounted to 8.25 percent, which for some customers, made all the difference. They chose to do business with National.

With the added profits, National was even able to open an additional location in the Bronx.

But when the owners at Ideal learned that National had been cheating on its taxes, they sued National and its owners, Joseph and Vincent Anza, to recover damages — no, three times the damages, plus attorneys' fees.

The statute that allows this treble payback is the Racketeer Influenced and Corrupt Organizations Act (RICO). Congress passed it in 1970 as part of the Organized Crime Control Act. It was meant to hit the mob with significant financial punishment and to protect private businesses from being infiltrated by organized crime.

But it has long since strayed beyond that purpose. Because of its vague, broad language, RICO has opened the door to many civil suits, which have nothing to do with the mob.

Suing under RICO is a tantalizing notion since it reaps such a great financial reward. If a judge or jury decides that Ideal does indeed have a RICO claim, the company automatically receives three times the determined damages, plus the cost of an attorney.

In order to be liable for damages under RICO, the defendant must have committed any two or more crimes on the long, laundry list of offenses mentioned in the act. There are 27 federal crimes and eight state crimes, including wire and mail fraud, which bear perhaps the broadest interpretation of any on the list.

The question at hand is whether or not Ideal even has a claim to begin with. The District Court for the Southern District of New York dismissed the case initially, ruling that since National's tax fraud scheme defrauded the state, it was the state that was directly damaged, and not National's competitor.

The 2nd Circuit Court of Appeals unanimously reversed in July 2004, ruling that National's intent in not charging customers sales tax was not to harm the state, but to gain a competitive advantage over Ideal.

"Despite the fact that [Ideal] did not itself rely on National's mail and wire frauds, it has standing to assert its civil RICO claims because it alleged facts sufficient to show that injury to its business was proximately caused by National's pattern of racketeering activity and investment of racketeering income," Judge Amalya Kearse wrote in the opinion. "Ideal was a competitor of National and was an entity directly targeted for injury by National's racketeering activity."

The Anzas appealed the decision.

On Nov. 28, 2005, the U.S. Supreme Court accepted the case for review. The question at stake is whether Ideal needs to prove that they relied on the mail or wire fraud and so were directly defrauded by National's illegal actions.

Almost any kind of fraud these days comes under federal wire and mail fraud laws, since any fraudulent activity conducted over the telephone or on paper counts. The advent of telecommunications technology has expanded the statute's breadth, but in deciding this case, the Supreme Court is looking all the way back to England, and the common law handed down to the U.S.

According to common law, any fraud requires the damaged party to truly rely on the fraudulent activity when making its decisions. For example, if a used car salesman rolls back an odometer to sell the car for more, and the customer buys the car because it's brand new, then the customer has relied on the salesman's fraud in making that purchase. He suffers because the saleman's fraud directly affected him. But if the customer buys the car because it's his favorite shade of green, he wouldn't be a victim of fraud because he didn't rely on the fake odometer when making his decision.

The United States Chamber of Commerce supports National's appeal, presenting a doomsday scenario in which any disgruntled competitor can bring its adversary into federal courts for big money.

"A plaintiff-reliance requirement reduces the number of meritless civil RICO claims draining judicial resources from more pressing priorities, and creating needless litigation costs for businesses around the country," Gene C. Schaerr wrote on behalf of the Chamber of Commerce.

Ideal argues, however, that they do have a RICO claim. They say that the state would eventually recover the money from the unpaid sales tax, and so Ideal was the most directly damaged. They point to additional disadvantages that they suffered because of National's opening a new store. The traditional role of the courts, they contend, has been to interpret Congress's language, not its intent. If Congress feels that the scope of RICO has strayed too far from its original intent, it can amend the act accordingly.

On June 5, 2006, the Court issued its opinion, siding with the Anzas in dismissing the RICO allegations because the scheme primarily defrauded the state without a sufficient link to Ideal's own decline in sales.

In the lead majority opinion, Justice Anthony Kennedy cited the Court's 1992 opinion in Holmes v. Securities Investor Protection Corporation in concluding that Ideal had not shown sufficient proximate cause for its injury. The case was remanded for fuller consideration of that issue.

Justice Antonin Scalia concurred, though noting that "it is inconceivable" to him that Ideal would be able to show proximate cause on remand.

Justices Clarence Thomas and Stephen Breyer dissented in part.

Thomas argued that the theory of proximate causation is supported neither by RICO nor by the decision in Holmes, and is particularly misguided because it would eliminate recovery for plaintiffs whose injuries are precisely those that Congress aimed to remedy through the authorization of civil RICO suits.

"Today, however, the Court not only eliminates private RICO actions in some situations Congress may have inadvertently regulated," wrote Thomas, "but it substantially limits the ability of civil RICO to reach even those cases that motivated Congress' enactment of this provision in the first place."

Breyer's concern was that there should not be recovery under RICO for injury by one competitor where the legitimate pro-competitive activity of another competitor immediately causes that injury.

Breyer viewed National's acts, though illegal, as not damaging their customers. "They have in effect cut the price of the item by the amount of the sales tax and then kept the money instead of passing it on to the State," Breyer concluded. "They funded the price cut from the savings, but the source of the savings is, in my view, beside the point as long as the price cut itself is legitimate."