September 12, 2008

On June 9, 2008, the U.S. Supreme Court unanimously settled a question the Court had twice attempted to resolve previously:  whether a plaintiff asserting a claim under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) based on mail fraud must prove that it relied on the alleged misrepresentations.  In Bridge v. Phoenix Bond & Indemnity Co., the court concluded that reliance on alleged misrepresentations is not an element of mail fraud.

RICO, which was enacted by Congress to assist organized crime prosecutions, criminalizes the engagement in a pattern of racketeering activity.  “Racketeering activity” is defined by statute and includes a long list of criminal activities (or “predicate acts”), including mail fraud and wire fraud.  If a RICO plaintiff prevails, the statute provides for the recovery of treble damages and attorneys’ fees.

Because RICO is broadly written and the potential damages available to plaintiffs are significant, many plaintiffs have relied upon the statute (successfully and unsuccessfully) to turn garden-variety breach of contract and business tort claims into RICO claims. The federal courts have been flooded with these “sheep in wolf’s clothing” cases and have created a large body of case law dismissing many of these claims. Whether a RICO claim ultimately has merit or not, these claims are complicated, potentially damaging to a defendant’s reputation, and expensive to litigate. 

In the Bridge case, the court considered the following scenario. Plaintiffs and defendants were competitors at public auctions for county tax liens.  The bidder willing to accept the lowest penalty would win the auction and obtain the right to purchase the lien in exchange for paying outstanding taxes on the property. Under the rules of the auction, each bidder had to place bids in its own name and could not use agents or proxies. Defendants allegedly violated this rule by arranging for other businesses to place bids and then transferring the acquired liens to defendants. In the course of executing the scheme, defendants used the mail in communication with the county in violation of the mail fraud statute.   

The plaintiffs alleged that they were deprived of their fair share of liens and financial benefits from acquiring those liens. Defendants argued that plaintiffs were not the recipients of the fraudulent statements (instead, the county was), and as a result, plaintiffs could not have relied on those statements. Without reliance on the alleged mail fraud, defendants argued, plaintiffs could not establish the reliance element required as part of every civil RICO claim predicated on mail fraud.

What reliance element? The Supreme Court explained that while reliance is an element of common law fraud, the predicate act at issue in this case was the federal mail fraud statute. And the court had previously held that reliance is not an element of the mail fraud statute. As strange as it might sound, a party can be indicted under the mail fraud statute for using the mail to send misrepresentations even if no one relies on those representations. 

The court explained that a person can be injured by reason of a pattern of mail fraud, which is what the statute requires, even if he does not rely on any misrepresentation.  By way of example, the court set forth the scenario in which an enterprise that wants to get rid of competitors could mail misrepresentations to customers and suppliers but not to the competitors themselves. If competitors were to lose money as a result of the misrepresentations, then they would be injured by reason of a pattern of mail fraud, even though they never received or relied on the fraudulent mailings.

In a last-ditch effort to convince the court that RICO should be interpreted to require first-party reliance for fraud-based claims, defendants argued that plaintiffs’ claims were essentially for tortious interference – a state law claim with no remedy for treble damages or fees – rather than RICO. The court soundly rejected this argument and concluded that if the statute was leading to too many RICO lawsuits, then it was Congress’s responsibility to revise it.

The Bridge case is significant for two reasons. First, it sends a clear message that businesses should be meticulous about the accuracy of information transmitted via wire or mail.  Second, the case may signal a changing tide in RICO analyses. Courts have generally been receptive to defense arguments that state law contract and tort claims should not be contorted into RICO claims. But the court in Bridge applied RICO as written, notwithstanding good policy rationales for the contrary approach. The court concluded that if the absence of a reliance requirement leads to the undue proliferation of RICO suits, then Congress must revise the statute. Hopefully Congress is listening.