RICO — If Plaintiff Does Not Rely on Mail Fraud Predicate, Third Party Reliance May Be Essential to Prove Causation
From UFCW Local 1776 v. Eli Lilly & Co., 620 F.3d 121 (2d Cir. 2010) (class certification decision):
The putative class of TPPs [third-party payors] alleges that in the course of promoting off-label prescriptions of Zyprexa, Lilly engaged in mail and wire fraud by deliberately misrepresenting the drug's safety and efficacy. Plaintiffs claim that Lilly thereby conducted a racketeering enterprise, which they called "the Off-Label Promotion Enterprise," in violation of RICO. There is no real dispute that whether or not the substance of that claim is true, it is a unitary claim that is common to the putative class.
In order to recover damages under RICO, however, a plaintiff must show "(1) a substantive RICO violation under § 1962; (2) injury to the plaintiff's business or property, and (3) that such injury was by reason of the substantive RICO violation." City of New York v. Smokes-Spirits.com, Inc., 541 F.3d 425, 439 (2d Cir. 2008), overruled on other grounds by Hemi Group, LLC v. City of New York, 130 S. Ct. 983, 175 L. Ed. 2d 943 (2010) (internal quotation marks omitted) (holding that City's asserted injury — inability to collect taxes due to failure by out-of-state cigarette sellers to file records with state officials as required by federal law — did not give rise to RICO claim because injury was not caused by reason of allegedly fraudulent conduct). Plaintiffs argue that Lilly injured them because (1) they paid for Zyprexa prescriptions that would not have been written absent the fraud (the quantity effect theory) and (2) they paid too much for Zyprexa prescriptions because Lilly relied upon the fraud to set an excessively high price (the excess price theory). While there is no dispute that the existence of a RICO violation is a question common to all class members, Lilly disputes that the second and third elements required to recover damages — proof of an injury and proof that such injury was by reason of the RICO violation — are common to the proposed class.
In order to pursue their claims as a class rather than as individual plaintiffs, the putative class must be able to prove its theory of injury through generalized proof. Here, the district court found that the plaintiff class could appropriately use generalized proof to show that Zyprexa was overpriced as a result of Lilly's "excessive claims of utility as well as disavowal of adverse secondary effects" of Zyprexa.
To show injury by reason of a RICO violation, a plaintiff must demonstrate that the violation caused his injury in two senses. First, he must show that the RICO violation was the proximate cause of his injury, meaning "there was a direct relationship between the plaintiff's injury and the defendant's injurious conduct." *** Second, he must show that the RICO violation was the but-for (or transactional) cause of his injury, meaning that but for the RICO violation, he would not have been injured. ***
Until recently, this Court required a RICO plaintiff asserting predicate acts of fraud to show first-person reliance — "that he relied on the defendant's misrepresentation" — in order to demonstrate but-for causation. McLaughlin, 522 F.3d at 222. In Bridge v. Phoenix Bond & Indemnity Co., however, the Supreme Court held that a plaintiff alleging a RICO mail fraud is not required to show first-person reliance. 553 U.S. 639, 128 S. Ct. 2131, 2134, 170 L. Ed. 2d 1012 (2008). The Court rejected reliance as an element of the RICO fraud claim, either to show but-for causation or to establish a direct relationship between the defendant's conduct and the plaintiff's injury sufficient to demonstrate proximate causation. Id. at 2144. The Court explained further:
Of course, none of this is to say that a RICO plaintiff who alleges injury "by reason of" a pattern of mail fraud can prevail without showing that someone relied on the defendant's misrepresentations. In most cases, the plaintiff will not be able to establish even but-for causation if no one relied on the misrepresentation. . . .
Accordingly, it may well be that a RICO plaintiff alleging injury by reason of a pattern of mail fraud must establish at least third-party reliance in order to prove causation. "But the fact that proof of reliance is often used to prove an element of the plaintiff's cause of action, such as the element of causation, does not transform reliance itself into an element of the cause of action.". . . Proof that the plaintiff relied on the defendant's misrepresentations may in some cases be sufficient to establish proximate cause, but there is no sound reason to conclude that such proof is always necessary.
***Plaintiffs argue that there is therefore no reliance requirement under RICO. We recently addressed whether RICO requires a showing of reliance by any party:
[T]he Supreme Court noted that "it may well be that a RICO plaintiff alleging injury by reason of a pattern of mail fraud must establish at least third-party reliance in order to prove causation," and that there may be situations where the "complete absence of reliance may prevent the plaintiff from establishing proximate cause." Here, there is no question that the City has alleged third-party reliance . . . . Thus, as we find that the City has adequately alleged proximate cause and third-party reliance, we need not address the question of whether an allegation of proximate cause fails where there are absolutely no allegations of reliance.
Smokes-Spirits.com, 541 F.3d at 444 n.24, quoting Phoenix Bond & Indem. Co. , 128 S. Ct. at 2144-45 (internal citation omitted). We find ourselves in a similar position here: while reliance may not be an element of the cause of action, there is no question that in this case the plaintiffs allege, and must prove, third-party reliance as part of their chain of causation. Plaintiffs allege an injury that is caused by physicians relying on Lilly's misrepresentations and prescribing Zyprexa accordingly. Because reliance is a necessary part of the causation theory advanced by the plaintiffs, we must ask whether reliance can be shown by generalized proof.
A. Excess Price Theory
1. But-for Causation[T]he evidence in the record ** upports the conclusion that prescribing doctors do not generally consider the price of a medication when deciding what to prescribe for an individual patient. Any reliance by doctors on misrepresentations as to the efficacy and side effects of a drug, therefore, was not a but-for cause of the price that TPPs ultimately paid for each prescription.
2. Proximate Causation
Even assuming but-for causation, plaintiff's theory of liability does not permit proximate cause to be shown by generalized proof. The TPP plaintiffs, who unlike the doctors were in a position to negotiate the prices of drugs in their formularies, paid the full price set by Lilly. ***
Crucially, the TPPs do not allege that they relied on Lilly's misrepresentations — the misrepresentations at issue were "directed through mailings and otherwise at doctors." *** Because only the TPPs were in a position to negotiate the price paid for Zyprexa, however, the only reliance that might show proximate causation with respect to price is reliance by the TPPs, not reliance by the doctors.***
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