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Legal Intelligencer: Civil RICO and Proximate Cause: A Tool for Defendants and Challenge for Plaintiffs

Diverse group of business people with arms foldedA recent decision out of the U.S. District Court for the Eastern District of Michigan underscored the RICO “proximate cause” inquiry highlighting yet another, often overlooked, complexity in litigating such cases.

In the July 23, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of KHF wrote “Civil RICO and Proximate Cause: A Tool for Defendants and Challenge for Plaintiffs.

In March 2018, I authored a column on civil RICO claims brought under 18 U.S.C. Section 1962(a) and (b). In that space, I explained the complexity of those sections within RICO cases. A recent decision out of the U.S. District Court for the Eastern District of Michigan underscored the RICO “proximate cause” inquiry highlighting yet another, often overlooked, complexity in litigating such cases.

On July 8, U.S. District Judge Paul Borman of the Eastern District of Michigan issued a ruling on General Motors’ civil RICO lawsuit against Fiat Chrysler Automobiles, holding that GM’s injuries were not caused by Fiat’s alleged racketeering scheme. See General Motors v. Fiat US, (E.D. Mich. July 8, 2020). The court rejected the two theories that GM put forth to support its RICO claims against Fiat for its failure to plead facts to show a “direct relation between the injury asserted and the injurious conduct alleged,” known as the “proximate cause” prong of Section 1962, (quoting Holmes v. Securities Investor Protection (SIPC), 503 U.S. 258, 265–268 (1992)).

According to GM, Fiat bribed the United Auto Workers (UAW) union officials to get lower labor costs and to negotiate a more generous collective bargaining agreement (CBA) while denying GM the same concessions. GM was injured because it incurred higher labor costs as the result of being denied the same savings as those of Fiat. The court found that GM’s allegations support the inference that the defendants’ intent was to lower Fiat’s labor costs by inducing UAW officials to act against the interests of workers, not the inference that the defendants wanted to increase GM’s labor costs” and that GM only suffered “an indirect competitive harm.” Further, any injury GM experienced due to its unfavorable CBA was “far beyond the first step in the causal chain” between Fiat’s action of bribing UAW officials to secure a position that would allow it to negotiate a more favorable CBA.

Borman’s decision highlights the importance of pleading sufficient facts to establish the proximate cause factor in RICO cases. The plaintiffs may often overlook the significance of the proof of a direct causation between their alleged scheme and the injury they suffered while focusing on other factors, like establishing a pattern or enterprise. Causation can even weigh more than said factors because its absence may jeopardize plaintiffs’ standing if they fail to prove that the defendant’s actions were intended to directly harm them. In other words, the proximate cause affects standing to bring suit in the first place. Further, plaintiffs must be wary of avoiding indirect and far removed causal arguments if they desire to prevail in a RICO case. The equally important requirement of pleading facts to show a direct causation has evolved over time. An overview of the history of proximate cause factor sheds light on Borman’s decision and how causation became essential in RICO cases.

The Supreme Court’s ruling in Sedima v. Imrex, 473 U.S. 479 (1985) was one of the first key rulings on the issue of standing in a RICO case. In this case, the court ruled that a civil RICO plaintiff need not additionally prove, for standing purposes, a racketeering injury once having proved a direct injury resulting from the commission of the predicate acts. The ruling “expanded standing under RICO by including both plaintiffs suffering a direct injury from the predicate acts and those suffering an indirect injury.” See Laura Ginger, “Causation and Civil RICO Standing: When Is a Plaintiff Injured ‘By Reason of’ a RICO Violation?,” 64 St. John’s L. Rev. 849, 853 (1990). Early case law, therefore, would seem to be at odds with Borman’s decision, as he rested his ruling partially on the fact that GM was only indirectly harmed by Fiat’s actions. The district courts, however, interpreted Sedima’s ruling on the necessary degree of causation differently.

Some courts interpreted Sedima only to exclude the plaintiffs who failed to plead sufficient facts to show that they are the victims of the fraudulent scheme. See, e.g., Diamond v. Reynolds, (D.Del. July 15, 1986), aff’d in part and rev’d in part and remanded, 853 F.2d 917 (3rd Cir.1988), cert. denied, 488 U.S. 955 (1988) (applying Sedima and holding that the mere fact the plaintiff was fired for refusal to participate in the the defendant’s mail-fraud violations was not sufficient to establish his standing to bring for RICO violations). Sedima “established that a party has standing to sue under RICO only if ‘injured in its business or property by the conduct constituting the violation.’ … The plaintiff does not have standing under Sedima, because he was not ‘injured … by the conduct constituting the RICO violation.’” Others rejected any reading of a distinction between a direct versus indirect injury as the basis for plaintiff’s standing under RICO. See, e.g., Alexander Grant v. Tiffany Industries, 770 F.2d 717 (8th Cir. 1985) (after the Supreme Court reversed and remanded the case, the U.S. Court of Appeals for the Eighth Circuit held that, in Sedima, the U.S. Supreme Court “made plain that no ‘racketeering injury’ is required.”) The Eighth Circuit found that the accounting firm, which was induced into auditing the defendant, had standing to bring a RICO case for its alleged litigation and reputation injuries that followed the investigation into the defendant’s RICO violations. Conversely, although the First Circuit, in Bass v. Campagnone, 838 F.2d 10 (1st Cir. 1988) questioned the direct injury versus indirect injury distinction, it held that “inquiry in determining whether plaintiff has standing to assert RICO claim is whether he or she has alleged injury that ‘flows from’ predicate acts.”

The Supreme Court’s decision in Holmes, 503 U.S. 258 clarified the standard for the causation that establishes the plaintiff’s standing in bringing a RICO claim. The court held that Security Investor Protection Corp. “did not have right to sue a broker dealer under … RICO … as the link between the alleged stock manipulation that caused the injury and the losses to the nonpurchasing customers was too contingent on the broker dealer’s inability to pay the claims and was too remote to satisfy the proximate cause requirement …” Applying Holmes, the Supreme Court’s later decision in Anza v. Ideal Steel Supply, 547 U.S. 451, 458-61 (2006) indicated the legal development of requiring a direct causal relationship between the plaintiff’s injury and the defendant’s RICO violations. In Anza, the court held that “when a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff’s injuries,” which highlights the importance of the degree of directness. The Supreme Court in Bridge v. Phoenix Bond & Indemnity., 553 U.S. 639 (2008) followed the same standard set forth in Anza, stating that the causation had to be “straightforward” and direct. Further, in Hemi Group v. City of New York, 559 U.S. 1 (2010), the court stated that the proximate cause requirement of RICO prevented claims based on indirect injury to plaintiffs. Essentially, RICO claims based on attenuated theories of causation where there are multiple steps that separate the activity and the injury are excluded. By specifically noting “multiple steps” in the standard, the court further qualified the necessary degree of directness.

Against this historical background, it becomes clear that Borman’s decision in General Motors, finding that a direct harm to GM was missing because GM’s own poor bargaining could have been the independent factor that led to its injury, was in line with the most recent precedent set forth by the court.

Another equally important component of causation is the requirement that the plaintiffs must also prove that the defendants had the specific intent to harm them when they engaged in their illegal racketeering activities. See, e.g., Schultz v. Rhode Island Hospital Trust National Bank, 94 F.3d 721, 730-31 (1st Cir. 1996) (finding that “the record contained not a scintilla of evidence that would support the requisite finding that the defendant bank who financed the fraudulent scheme of the principal wrongdoer ‘consciously shared’ in the principal wrongdoer’s specific intent to defraud the plaintiffs.”) The court, therefore, held that the plaintiffs’ claims were deficient and that the plaintiffs must prove that there was intent to harm from the outset of the illegal activity to have a case. Similarly, in General Motors, Borman found that the evidence that GM presented in advance of its claim that Fiat bribed UAW with the specific intent to harm GM was too vague and, therefore, also deficient.

Overall, Borman’s decision draws attention to the importance of proximate cause, which advantages defendants to secure an early dismissal of RICO claims. Plaintiffs counsel should ensure they plead sufficient facts to establish a direct link between the alleged racketeering activities and the plaintiffs’ injury as well as the defendants’ intent to commit the illegal act and to harm them.

Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@khflaw.com.

Reprinted with permission from the July 23, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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