Friday, January 29, 2010

High Court Further Delineates RICO’s Causation Requirement

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

The City of New York was not directly injured by an out-of-state vendor’s failure to file Jenkins Act reports with the tobacco tax administrator of New York State, the U.S. Supreme Court has ruled. Absent a showing that the vendor proximately caused the City’s injury (loss of excise tax revenue), the City had no RICO claims against the vendor.

In a plurality (4-3) opinion written by Chief Justice Roberts, the court concluded that proximate cause was absent because “multiple steps” separated the alleged fraud from the asserted injury.

The decision of the Second Circuit (CCH RICO Business Disputes Guide ¶11,547), which found a direct connection between the vendor’s conduct and the City’s loss, was therefore reversed. The case was remanded for further proceedings.

Jenkins Act

The federal Jenkins Act required cigarette vendors to file monthly reports with out-of-state tobacco tax administrators if consumers from the state had purchased cigarettes from the vendor. In each report, the vendors were required to identify: (1) the name and address of every state resident who had purchased cigarettes from the vendor and (2) the brands and quantities of cigarettes that each resident had purchased.

According to the City of New York, the vendor’s failure to report Jenkins Act information to the State of New York prevented the City from acquiring the information it needed to collect “tens if not hundreds of millions of dollars a year” in tobacco tax revenue from City residents who had failed to pay the tax.

Proximate Cause

In Holmes v. Securities Investor Protection Corp. (RICO Business Disputes Guide ¶7968), the Court “reiterated” that “the general tendency of the law, with regard to damages at least, is not to go beyond the first step” of the causation chain. The Court’s decisions confirmed that this general tendency applied “with full force” to proximate cause inquiries under RICO.

Because the City’s theory of causation required the Court to move “well beyond” the first step, its theory did not meet RICO’s direct relationship requirement.

More specifically, the conduct directly responsible for the City’s harm was the resident cigarette purchasers’ failure to pay municipal tobacco taxes, and the conduct constituting the alleged fraud was the vendor’s failure to file Jenkins Act reports. Therefore, the Court reasoned, the conduct that directly caused the City’s injury was distinct from the conduct that the City identified as fraudulent. The relationship between fraud and injury was too attenuated.

Link Between Fraud and Injury

The City’s claim suffered from the same defect that plagued the plaintiff’s claim in Anza v. Ideal Steel Supply Corp. (RICO Business Disputes Guide ¶11,076). In Anza, the Court determined that a steel company’s alleged fraud (the failure to charge and remit sales tax to the State of New York) did not proximately cause a competitor’s injury (the inability to compete based on price) because the link between the two was “attenuated.”

In fact, the disconnect in this case between the vendor’s alleged fraud and the City’s asserted injury was even sharper than it was in Anza. In this case, the City’s theory of liability rested on separate actions (failing to file Jenkins Act reports and failing to pay cigarette taxes) that were carried out by separate parties (the vendor and the vendor’s customers who resided in New York City). In Anza, the steel company’s theory of liability rested on separate actions that were carried out by the same party (the defendant steel company).

Put simply, the vendor had an obligation to file the Jenkins Act reports with New York State, not with New York City, and the City’s harm was directly caused by the cigarette purchasers, not by the vendor.

Incentive to Sue

One consideration that the Court has used to analyze RICO’s “direct relationship” requirement was “whether better situated plaintiffs would have an incentive to sue.” In this case, the State of New York was better situated than the City to seek recovery from the vendor. Further, the State had an incentive to sue because it imposed a tax on cigarettes ($2.75 per pack) that was nearly double the City’s tax ($1.50 per pack).


Foreseeability was not used to evaluate proximate cause. Significantly, proximate cause did not turn on foreseeability in Anza, and no party asked the court to revisit that decision. The Court’s precedents were clear: the focus of a proximate cause inquiry in the context of RICO was the directness of the relationship between the conduct and the harm. Foreseeability was not part of the inquiry.

Systematic Scheme

The City could not escape the attenuated relationship that existed between the alleged fraud and the alleged injury by arguing that the vendor had engaged in a “systematic scheme” to defraud the City of tax revenue and by asserting that this scheme had “embraced all those indirectly harmed” by the vendor’s conduct.

If the City could do that, the Court’s proximate cause precedent for RICO actions would become a “mere pleading rule.” Because the only fraudulent conduct alleged was a Jenkins Act violation, the City had to show that the vendor’s failure to file Jenkins Acts reports with the State of New York had led directly to the City’s injuries. This it could not do.


The dissenting Justices concluded that the vendor’s failure to provide Jenkins Act reports to the State of New York had proximately caused New York City to lose tobacco tax revenue. In addition to characterizing the State as a “conduit” that was “roughly analogous to a postal employee,” the dissenting Justices incorporated intent and foreseeability into their proximate cause analysis.

According to the dissent, finding common-law cases that denied liability for a wrongdoer’s intended consequences was difficult, particularly where, as here, the consequences were foreseeable.

The dissenting Justices also opined that the concept of directness in tort law was used to “expand liability (for direct consequences) beyond what was foreseeable, not to eliminate liability for what was foreseeable.”

Finally, the Justices noted that Congress had modeled RICO §1964(c) on the civil action provision of the federal antitrust laws. They found no antitrust analogy, however, that suggested a lack of causation given the circumstances of this case.

The January 25 decision, Hemi Group LLC v. City of New York, is available here on the U.S. Supreme Court web site. It will appear in the February edition of CCH RICO Business Disputes Guide.

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