Supreme Court Reaffirms Important Limits on RICO Suits

In a mixed bag for the business community, the Supreme Court this week reaffirmed important limitations on civil RICO suits, but stopped short of imposing a broader restriction urged by businesses. The RICO statute—the Racketeer Influenced and Corrupt Organizations Act—allows any person to sue for treble damages when that person has been injured in his business or property by certain acts constituting “mail fraud.” Although this provision was originally intended for use against organized crime, it has frequently been invoked in treble-damage suits against legitimate businesses. In Bridge v. Phoenix Bond & Indemnity Co., the Supreme Court affirmed that a civil RICO plaintiff alleging mail fraud must prove that the fraudulent scheme was the proximate cause of the plaintiff’s injury, and that at least some person relied on the defendant’s fraudulent misrepresentation; but the Court stopped short of requiring the plaintiff to prove its own reliance on the defendant’s misrepresentation.

The case involved a dispute over the sale of tax liens in Cook County, Illinois.  According to the plaintiffs, the defendants fraudulently obtained a disproportionate share of tax liens by misrepresenting to the County that they were bidding separately when, in fact, they were bidding collusively. Although it was the County that received and relied on the defendants’ misrepresentations, the misrepresentations harmed the plaintiffs because the plaintiffs obtained fewer tax liens than they otherwise would have.

The defendants sought to dismiss the case on the ground that the plaintiffs neither received nor relied on the alleged misrepresentations and therefore were not covered by the statute. The Seventh Circuit, however, rejected this argument, concluding that the plaintiffs could recover as the direct victims of the alleged misrepresentations even though only the County had relied on them.

In a unanimous opinion written by Justice Thomas, the Supreme Court affirmed.  Although the defendants argued that Congress should be presumed to have incorporated the element of reliance from the common-law definition of fraud, the Court explained that RICO provides a cause of action not for fraud generally but for “mail fraud”—“a statutory offense unknown to the common law.” Thus, the Court held that a plaintiff asserting a RICO claim predicated on mail fraud need not prove that it relied on the defendant’s alleged misrepresentations.

At the urging of the defendants and the business community (including an amicus brief authored by Winston & Strawn on behalf of the U.S. Chamber of Commerce), the Court qualified this ruling in two important ways. First, the Court reaffirmed that a plaintiff asserting a RICO fraud claim must prove that the defendants’ misrepresentation was the proximate cause of the plaintiff’s injury.  Second, the Court noted that, in order to establish proximate cause, the plaintiff typically must show “that someone relied on the defendant’s misrepresentations.” Thus, for example, if the County had known the defendants’ representations were false but nonetheless permitted them to purchase the tax liens, the County’s actions arguably would break the required chain of causation.

These two qualifications make the Court’s opinion at least a partial victory for the business community. Although a requirement of first-party reliance would have been better for business defendants, as a practical matter, RICO plaintiffs who cannot establish their own reliance will usually find it difficult to establish reliance by a third party either. Thus, the requirement to show “that someone relied on the defendant’s misrepresentations” should weed out a significant number of frivolous RICO suits.