Commercial Litigation and Arbitration

RICO Causation

Gregory P. Joseph*

Proximate cause is a statutorily-mandated prerequisite for standing to bring a civil RICO action. 18 U.S.C. § 1964(c) limits standing to persons injured "by reason of a violation of § 1962...." The "by reason of" language of imposes the proximate cause requirement, under the Supreme Court's decision in Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992). In recent high-profile litigation, this requirement (among others) has proved the bкte noire of unions (as indirectly-injured plaintiffs) suing the tobacco industry. See, e.g., Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912 (3d Cir. 1999); Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., 172 F.3d 223 (2d Cir. 1999); Oregon Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc., 1999 U.S. App. LEXIS 15711 (9th Cir. July 14, 1999).

Judge Jed S. Rakoff, a noted RICO scholar before assuming the bench, once observed that, until Holmes, "the Supreme Court's attitude toward RICO was that of a scolding aunt toward an unruly nephew: 'Rico's an ugly little beast but it's up to his father to discipline him.'" Rakoff, The Supreme Court Scolds RICO, 15 RICO L. REP. 668 (1992). Congress, however, did nothing, and matters festered. Holmes' firmness on proximate cause changed that.

Whether the proximate cause requirement has been satisfied is inherently a case-specific question. Meaningful benchmarks are few and far between. "[T]he [statutory] language is general and there is little legislative history." Sperber v. Boesky, 849 F.2d 60 (2d Cir. 1988).

Proximate cause is satisfied if the RICO "pattern of racketeering activity" is a substantial factor in causing the plaintiff's injury, provided that the injury is reasonably foreseeable as a natural consequence of those acts. Cox v. Administrator, 17 F.3d 1386 (11th Cir. 1994) ("A proximate cause is not ... the same thing as a sole cause. Instead, a factor is a proximate cause if it is 'a substantial factor in the sequence of responsible causation'"); Hecht v. Commerce Clearing House, 879 F.2d 21 (2d Cir. 1990) ("the RICO pattern or acts proximately cause a plaintiff's injury if they are a substantial factor in the sequence of responsible causation, and if the injury is reasonably foreseeable or anticipated as a natural consequence").

The proximate cause requirement means that legal liability does not extend as far as factual causation - at some point, the causal link is too attenuated. See, e.g., Chisolm v. TranSouth Fin. Corp., 95 F.3d 331 (4th Cir. 1996) ("it is not enough that a civil RICO plaintiff prove that, but for the defendant's violation, he would not have been injured; he must also show that the violation proximately caused the harm"); In re American Express Co. Shareholder Litig., 39 F.3d 395 (2d Cir. 1994) ("By itself, factual causation (e.g., 'cause-in-fact' or 'but for' causation) is not sufficient") (quotation omitted).

The critical question is at what point to draw the line. The cases provide guidance by articulating factors for the court's consideration, and by applying them to certain recurring factual scenarios, but the inquiry remains inherently factual and case-specific. Holmes itself is instructive.

The plaintiffs in Holmes were customers of defunct brokerage houses (suit was brought on their behalf by a governmental agency). The brokerage firms had been driven to insolvency by a massive stock manipulation scheme. None of the customer-plaintiffs had purchased any of the manipulated stock - they were injured solely by virtue of the brokerage firms' consequent insolvency. In denying recovery under RICO, the Supreme Court looked to the antitrust laws for guidance and emphasized the indirect nature of the injury, articulating three rationales: (1) "the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the [RICO] violation, as distinct from other, independent factors;" (2) allowing recovery by indirectly-injured plaintiffs "would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury ... to obviate the risk of multiple recoveries;" and (3) "directly injured victims can generally be counted on to vindicate the law," rendering unnecessary recognition of a cause of action on the part of those only indirectly injured. Holmes, 503 U.S. at 269-270.

Since Holmes, the directness of injury to the RICO plaintiff has been the paramount consideration guiding proximate-cause determinations. Examining the nuances of this issue, courts consider whether, among other things:

  1. The plaintiff's injury was a direct result of the alleged RICO violation, as opposed to being derivative of injury to another.
  2. The plaintiff was the intended target of the RICO offense.
  3. Injury to the plaintiff was a reasonably foreseeable consequence of the RICO violation.
  4. Whether independent causes have, or may have, intervened between the RICO violation and the injury to the plaintiff.
  5. The risk of multiple recoveries.
  6. Whether the plaintiffs' injury was caused by the RICO offense itself or merely by public disclosure of the offense.

See, e.g., Khurana v. Innovative Health Care Sys., Inc., 130 F.3d 143, 149 (5th Cir. 1997), vacated as moot, 119 S. Ct. 442 (1998) ("The proximate cause determination for RICO standing is guided by indications of preconceived purpose, specifically intended consequence, necessary or natural result, reasonable foreseeability of result, the intervention of independent causes, whether the defendant's acts are a substantial factor in the sequence of responsible causation and the factual directness of the causal connection") (citations omitted); In re American Express Co. Shareholder Litig., 39 F.3d at 399-400 (no RICO recovery where plaintiffs "were 'neither the target of the racketeering enterprise nor the competitors nor the customers of the racketeer;'" where the harm was not a direct result of the offense but resulted "only because it was publicly exposed;" and where, as a result, "[t]he injuries ... were neither the 'preconceived purpose' nor the 'specifically-intended consequence' of the RICO defendants' acts") (citations omitted).

Chief Judge Ralph K. Winter of the Second Circuit has persuasively emphasized that the phrase "proximate cause" is not helpful, and can be pernicious, when invoked in the context of a statute like RICO, because it misleadingly connotes the common-law doctrine of the same name. The real issue, he observes, is twofold: "[W]as the plaintiff in the category of people meant by the statute to be safeguarded, and was the harm that which the act meant to avoid?" Abrahams v. Young & Rubicam, Inc., 79 F.3d 234, 237 n.3 (2d Cir. 1996). The answers to these questions may lead to different results than those dictated by the common law doctrine of proximate cause, which will govern any attendant common-law claims, as Abrahams observes.

In that vein, Chief Judge Edward R. Becker of the Third Circuit has stressed the significance of the Supreme Court's reliance in Holmes on the antitrust precedent in assessing proximate cause questions. Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912 (3d Cir. 1999) ("In Holmes ... the Supreme Court held that its discussion of proximate cause and remoteness in cases such as McCready [Blue Shield v. McCready, 457 U.S. 465 (1982)] and AGC [Associated Gen. Contractors, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983)] applied to the analysis of proximate cause RICO cases as well"). This observation serves as a reminder not only of the existence of a co-existing body of precedent that must be considered but also of why directness of injury is so important in deciding proximate cause questions.

While directness of injury has assumed paramount importance in proximate cause determinations, injuries characterized as "indirect" may be deemed proximately caused in unusual circumstances. See, e.g., Israel Travel Advisory Serv. v. Israel Identity Tours, Inc., 61 F.3d 1250 (7th Cir. 1995), cert. denied, 517 U.S. 1220 (1996) (Holmes "did not mean to preclude all possibility of recovery for injury that was transmitted indirectly;" held, business rivals' campaign of misinformation directed at plaintiffs' customers proximately harmed plaintiffs by influencing choices of customers who themselves suffered no harm (but see below)); accord Mid Atlantic Telecom, Inc. v. Long Distance Services, Inc., 18 F.3d 260 (4th Cir. 1994), cert. denied, 513 U.S. 931 (1995).

The salience of directness of injury - and of the plaintiff being the intended target of the RICO violation - are illustrated in two recurring factual scenarios.

Whistleblowing. The courts have consistently declined to accord standing under section 1962(c) to employees who have been discharged either for "whistleblowing" activities or for personally refusing to participate in the RICO violation. See, e.g., Shearin v. E.F. Hutton Group, 885 F.2d 1162 (3d Cir. 1989) (neither the plaintiff's being hired away from her previous job nor her firing "when she refused to play the good soldier . . . can fairly be said to have resulted from the violations of any of RICO's first three subsections or from the predicate acts necessary to establish these"); Hecht, 897 F.2d at 24 (neither loss of employment nor loss of commissions due to retaliatory firing was proximately caused by the RICO violation); Cullom v. Hibernia Nat'l Bank, 859 F.2d 1211 (5th Cir. 1988) (allegation of constructive discharge for refusal to participate in RICO violation fails to state an adequate "causal nexus between [the] injury and the predicate acts"); Kramer v. Bachan Aerospace Corp., 912 F.2d 151 (6th Cir. 1990) (whistleblower's discharge is an incidental consequence of the RICO violations, which were not directed at the whistleblower); Reddy v. Litton Indus., Inc., 912 F.2d 291 (9th Cir. 1990), cert. denied, 112 S. Ct. 332 (1991) ("All of the circuits that have considered this issue have held that an employee who was wrongfully discharged for refusing to participate in an alleged pattern of racketeering activity lacks standing to sue under § 1962(c)"); accord Camelio v. AFSCME, 137 F.3d 666 (1st Cir. 1998); Beck v. Prupis, 162 F.3d 1090 (11th Cir. 1998), cert. granted, 119 S. Ct. 2046 (1999); Tarr v. Credit Suisse Asset Mgmt., 1997 U.S.Dist.LEXIS 5000 at 35 n.13 (E.D.N.Y. Mar. 21, 1997). (Shearin permitted a whistleblower lawsuit to proceed on a conspiracy theory under § 1962(d), but the viability of that conclusion - which represents the minority view - is dependent on the Supreme Court's decision in Beck, which will presumably be decided during the upcoming 1999-2000 term.)

Mail Fraud. Two Circuits have held that a business competitor may not predicate a RICO claim against a rival on alleged mail frauds perpetrated on customers, on the ground that only the customers are the beneficiaries of the statutory protection. See Israel Travel Advisory Serv. v. Israel Identity Tours, Inc., 61 F.3d 1250 (7th Cir. 1995), cert. denied, 517 U.S. 1220 (1996); Lancaster Community Hosp. v. Antelope Valley Hosp. Dist., 940 F.2d 397 (9th Cir. 1991), cert. denied, 502 U.S. 1094 (1992). This is consistent with the general rule that that a civil RICO claim may not be predicated on a mail or wire fraud not directed at the RICO plaintiff but rather at third parties. (See the general discussion of mail and fraud as RICO predicates in Joseph, CIVIL RICO: A DEFINITIVE GUIDE § 11(C)(2)(a) (1991).) Generalizations in this area are difficult, however, because the analysis in each case is driven by the facts alleged or proved.

*Gregory P. Joseph Law Offices LLC, New York. Fellow, American College of Trial Lawyers. Former Chair, American Bar Association Section of Litigation (1997-98) and member, U.S. Judicial Conference Advisory Committee on the Federal Rules of Evidence (1993-99). Author, SANCTIONS: THE FEDERAL LAW OF LITIGATION ABUSE (3d ed. 2000); CIVIL RICO: A DEFINITIVE GUIDE (2d ed. 2000); MODERN VISUAL EVIDENCE (Supp. 2001). © 2000 Gregory P. Joseph.

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