US Supreme Court Requires “Direct Causal Relationship” in Proving RICO Damages

In Hemi Group, LLC v. City of New York the United States Supreme Court majority rejected RICO damages causation based on traditional “foreseeability analysis” and held that the plaintiff’s RICO damages must “directly” come about “by reason of the RICO violation.”

The test for this seems to be that if the RICO conduct caused a more direct injury to someone else, then the plaintiff cannot show a “direct causal relationship” between its damages and the conspiracy, even if the injury was otherwise a foreseeable consequence of the RICO defendant’s conduct.

In this narrow definition of proximate causation, the majority opinion (authored by Chief Justice Roberts) offered examples of faulty causation arguments in recent Court cases:

• In Holmes v. Securities Investor Protection Corporation, the federal agency SIPC sued defendants who allegedly manipulated stock prices. As a result of the manipulation the SIPC was required to pay claims to several customers of broker dealers victimized by the manipulation. Nevertheless, the case was dismissed for lack of relationship causation because the SIPC had indirectly reimbursed the fraud victims, but was not, itself, the direct victim of the fraud.
• In Anza v. Ideal Steel Supply Corp., a steel supply company sued its competitor for unfair competition and RICO conspiracy. An injury alleged was the failure to pay New York state taxes, which allowed the defendant company to undercut the prices of its competitors. However, the direct victim of the conduct was the State of New York, not the plaintiff. Therefore the case was dismissed for lack of relationship causation.

In the instant case, the City of New York alleged that Hemi Group, LLC, a Mexico company selling cigarettes online, caused New York residents to fail to pay proper sales tax on cigarette purchases, causing the City to lose tax revenue. The case was rejected by the Supreme Court for lack of relationship causation, because the parties causing the direct injury were, technically, the New York taxpayers (who failed to pay taxes) and the entity suffering the direct injury was, technically, the State of New York. The fact that Hemi Group, LLC may have foreseeably caused a chain of events causing the City of New York to lose tax revenue was held too attenuated to support RICO damages.

This notion of “relationship damages” is quite different from the causation lessons learned by every law student who read Judge Cardozo’s famous case, Palsgraf v. Long Island Railroad–that proximate cause is determined by foreseeability. Indeed, the Supreme Court’s dissenting opinion in the instant case (authored by Justice Breyer) would use this more traditional test for determining damages causation in RICO cases. 

Lawyers considering a RICO case must be extremely careful to show damages causation based on a direct relationship between plaintiff, the harm caused, and the RICO defendant, as explained by Justice Roberts in the majority opinion.

If some other entity was the more direct object of the RICO conspiracy, there will likely be no damages causation to support a RICO claim and the claim may be dismissed under Rule 12(b)(6).

The “foreseeability” test for causation continues to dominate other areas of law.  However, creative defense lawyers will almost certainly try to extend this more narrow “direct relationship” test into other areas of federal law.

Joining Chief Justice Roberts in the majority opinion were Justice Thomas, Justice Alito and Justice Scalia. Justice Ginsburg concurred in the result. Justice Breyer filed a dissenting opinion, which was joined by Justice Stevens and Justice Kennedy. Justice Sotomayor did not participate in the decision.