April 3rd, 2014

Pleading causation in a Complaint used to be an afterthought.  A lawyer would say that the defendant committed acts which violated some statutory or common law and the plaintiff was injured by them.  No elaboration of causation was needed.  Defendants could not move to dismiss a complaint because the allegation of causation was too vague or unsupported.  There were some exceptions to this in RICO cases, such as where the complaint describes a party that was more “directly” injured by the violation than the plaintiff.  In Holmes v. S.I.P.C. (1992) the plaintiff, the Securities Investor Protection Corp. (SIPC) , the federal agency that reimburses brokerage account holders when a broker goes bankrupt and accounts are lost, sued Robert Holmes for securities fraud (then a RICO violation).  SIPC’s theory of causation was that the fraud was exposed, Holmes’ company’s stock plunged in value and several brokerage firms heavily invested in the stock went bankrupt.  Then SIPC had to make good on its insurance policies to the account holders.  It did so, and then sued Mr. Holmes for reimbursement.

The Supreme Court held that SIPC’s RICO complaint did not describe a “direct” injury caused by Holmes.  Holmes may have committed securities fraud, but that only directly injured the the purchasers of the manipulated securities and the account holders who were wiped out, both of whom had already filed suits against him.  SIPC’s injury was “derivative” of the injury to those people and therefore not compensable under RICO.  This would have been true in ordinary tort law under long-established principles.  So the Court did nothing dramatic.  It simply applied those principles, which had already been applied in antitrust law, to RICO.

But what followed was years of confusion.  Many defendants cite Holmes in motions to dismiss in cases where the complaint does not describe an injury where there is a more “directly” injured party.  They have tried to apply the directness requirement to all sorts of cases, like ordinary fraud, where the supposedly directly injured party is the U.S. government or a state.  The government has only been injured in the theoretical sense that its laws against fraud have been violated.  But if that is really a direct injury that defeats the plaintiff’s right to sue, then what fraud case could ever be brought?

In Anza v. Ideal Steel Co. (2006) the Court held New York State was directly injured when a taxpayer made false tax filings.  New York had a monetary claim against the tax cheat.  So the tax cheat’s business competitor, another steel retailer, did not.  That sounds like Holmes, and one can see why the Court did’t wan to open the courthouse doors so that businesses can sue rivals for unfair competition based on tax cheating.

Now the Supreme Court has given us more guidance on how much a plaintiff needs to say to allege causation.  In Lexmark Int’l., Inc. v. Static Control Components (March 25, 2014) , a rare unanimous decision,  it said this in footnote 6: “But like any other element of a cause of action, it [causation] must be adequately alleged at the pleading stage in order for the case to proceed.  Ashcroft v. Iqbal.”  Ashcroft v. Iqbal, as all litigators know, is a famous case that requires the allegations of a complaint to be facially plausible.  But in that case it was the allegations of illegal conduct that were the problem, not causation.  Now the Court has told us the causation allegations must be “plausible” too.

That may not sound terribly significant, but it is.  If, for example, you are a plaintiff trying to bring a claim involving illegal pricing, the bare allegation that the price you paid was fixed, might not be plausible.  Can a firm with a tiny market share plausibly “fix” the price for anything at a supracompetetiive level?  Economics tells us no.  A firm that does so will lose all of its sales.  At least in a normally functioning market such as is described in economic textbooks.

I predict Lexmark’s footnote 6 will soon become famous.  RICO plaintiffs must take note.


Posted in General RICO Information
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March 5th, 2014

After years of pre-trial decisions and appeals from a preliminary injunction Judge Lewis Kaplan of the Southern District of New York  entered a final judgment in favor of Chevron Corp. and against Steven Donziger, a Harvard law school graduate yesterday in the nation’s most high-profile RICO case.  The 500 page opinion goes into painstaking detail about the evidence Chevron produced in its long-running effort to stop Donziger from enforcing the $9 billion judgment he obtained from an Ecuadoran court against Chevron for polluting the environment in a region of that Central American nation known as Lago Agrio during many years of oil drilling.  Mr. Donziger began representing Ecuadorans with grievances against Chevron and its subsidiary Texaco shortly after he graduated from law school in 1991 with incredible tenacity.

The case began as a class action in New York, was transferred to Ecuador at Chevron’s request, attracted hundreds of millions of dollars in investor financing and resulted in one of the largest judgments against an American corporation in history- $14 billion.  The Ecuadoran Supreme Court later reduced it to $9 billion, and conceivably it could have been enforced against Chevron’s assets all over the world.  Now it cannot be.  Judge Kaplan has found that Donziger procured the judgment from various illegal schemes including bribing the Ecuadoran judge, ghostwriting an expert report and extortionate tactics tactics designed to coerce Chevron to pay a vast amount of money, far in excess of any actual damages suffered by his Ecuadoran clients.

From a RICO perspective, the case was a stretch.  It seemed like most of the illegal conduct occurred in Ecuador making the claim extraterritorial.  But Judge Kaplan thinks otherwise, and his analysis of this important issue focuses on the place where the illegal schemes were “hatched” (the U.S.) rather than where they were carried out.  This is an important development in the extraterritoriality issue, which is confusing judges across the country.  Another problem was that the major RICO violations, trying to extort money from Chevron, were not accomplished.  Chevron did not settle the case or actually lose any money from efforts to enforce the judgment (all unsuccessful to date).  Rather, the damages it suffered were in the tremendous attorneys’ fees it had to expend in defending the suit.  This was attempted extortion, and it was upheld as a pattern of racketeering activity (along with the false mailings and wires that were also used to execute it) to support a RICO claim.  The implications for this judgment are significant in RICO.  Many corporations are subjected to long-running schemes to coerce settlements or the recognition of a labor union.  They have to pay millions in attorneys’ fees to fend off these efforts.  Now, there is a RICO precedent for turning the tables on the plaintiffs’ lawyers.  (Another such case is now progressing in the District of Columbia against the lawyers who filed and then lost  a massive high-profile suit against the corporation that runs the Barnum and Bailey Circus which I have blogged about).

Another significant aspect of this RICO case is the remedy sought, an injunction against Donziger from taking any steps to enforce the $9 billion judgment against Chevron in this country.  There has always been doubt as to whether RICO’s civil remedies include the power to enter an injunction against the loser.  Judge Kaplan decided it does, and that was the primary relief Chevron was seeking.  It did not seek or get a money judgment against Donziger.  Presumably it realized Donziger does not have anywhere near the amount of money it was seeking in damages, and so it dropped any money damages claims.  But the relief it obtained, a permanent injunction against him from taking steps to enforce the judgment means Chevron will never have to pay the $9 billion.  Technically, the injunction cannot stop Donziger’s affiliates from taking steps to enforce it in other countries where Chevron does business, but Chevron is fighting it in those nations too. This decision will likely help Chevron persuade judges everywhere that the judgment was ilegally procured and should not be enforced.

Donziger will certainly appeal to the Second Circuit.  He will probably lose on all issues.  Although the RICO claim was a stretch, a respected district judge has used RICO liberally, which is his prerogative.  Congress specifically intended the law to be “liberally construed.”  Most district judges construe it strictly and grudgingly.  But the appellate courts have been more generous, and I find nothing here that is so out of line as to be reversible.  Donziger’s conduct was so appalling that he invited the Judge to push RICO to its limits.  It is decisions like this that create new paths for future RICO cases.

Posted in General RICO Information, RICO Law Developments
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February 3rd, 2014

There is a common misconception that all RICO cases involve “organized crime.”  The very name of the law, “racketeer influenced and corrupt organizations” implies something like Tony Soprano and the members of his crime family hanging out in a New Jersey bar or strip club planning their next caper.  That is often what federal prosecutors allege in criminal RICO cases.  The defendants/racketeers are street criminals, and the RICO “enterprise” is nothing more than their gang, almost the same thing.  The only difference is that Justice Department prosecutors will not charge every member of the gang with RICO violations.  The leaders get charged; their underlings typically get charged with lesser crimes not involving RICO in exchange for lesser sentences or sometimes not at all.  A drug courier who does not commit murder or extortion may not be the target of the prosecutors.  The leaders of the gangs always are.

The concept of the “association enterprise” has always been a problem in civil RICO cases.  If the association is a group of legitimate businesses, and the RICO person is a corporation committing a long-term fraud through its agents or subsidiaries, the federal courts have held there is no valid enterprise.  This is so even though the same provision of RICO applies to both types of cases.  There is no statutory reason why a group of corporations cannot be a single enterprise when a group of street criminals can.  Federal courts say the former grouping is too far removed from the evil Congress was trying to combat in enacting the law.  But the Supreme Court has held three times that RICO should be interpreted “broadly” and so is not limited to organized crime.  Originalists and textualists will side with the Supreme Court.  The Chamber of Commerce and judicial realists will side with the lower courts.

Many judges are now dismissing civil RICO cases for the reason that the RICO enterprise plays no role in the racketeering activity.  Under this view, the RICO defendant must commit the violations, and the enterprise must be sort of an accomplice.  But nothing in RICO  requires the enterprise actively do anything.  It’s just exploited by the racketeer in one of three basic ways.   Under 18 U.S.C. 1962(a) the enterprise launders the racketeer’s illicit gains, under 1962(b) it is taken over by a racketeer (thus is a victim), and under 1962(c) it gives an aura of legitimacy to the racketeer.  So in civil cases the enterprise is likely a legitimate business, a corporation or partnership, which the racketeer(s) has established to limit his legal liability and tell potential customers they are dealing with a legitimate business entity.  Perhaps the racketeer cheats here and there, like using the mail or wires to mislead customers or hires illegal immigrants to cut costs. Strictly speaking, the enterprise does nothing illegal.  The racketeer decides to cheat his customers by saying something is of a certain quality on the internet when it is actually not or has an HR director hire the alien workers.  Corporations do not commit illegal acts; people do.  Corporation law can attribute the acts of its owners and employees to the corporation, but that is a fiction designed to deter corporations from violating legal norms.  It makes no realistic difference as to who the perpetrator was.  The enterprise has no role in the illegal acts.

In the high-profile RICO case against lawyer Steven Donziger now pending in New York, Judge Lewis Kaplan was correct in allowing the plaintiff, Chevron corp., to allege that Donziger’s enterprise need not have committed the many crimes at issue.  He held: “One must bear in mind that the RICO enterprise in a 1962(c) case, like this one, is not and may not be a defendant and need not be charged with any wrongdoing.”  Chevron v. Donziger, 871 F. Supp. 2d 229, 243 (S.D.N.Y. 2012).  The Supreme Court has decided four RICO enterprise cases and has never required the enterprise to commit a RICO violation.  Rather, the enterprise must be a distinct entity in which the racketeer basically controls from its “operation or management” when it is a legitimate business.

RICO plaintiffs need to point this out in response to motions to dismiss.  The precise argument about the “role” of the enteprise might not be made, but district court judges on the look out to short circuit cases will find this a useful escape hatch.


Posted in General RICO Information
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January 2nd, 2014

Immigration reform is the story that will not die.  It might be on life support, as I recently wrote, but today the New York Times reports Speaker John Boehner is letting it be known he favors some “reforms” and will bring them to a vote in 2014.  They are the usual amnesty-inducing garbage we are accustomed to hearing about: more uneducated/unskilled workers to alleviate the non-existent “labor shortage” in agriculture,  and of course, clemency for Dreamers, the children of illegal immigrants.  It does not appear Speaker Boehner will support the Senate bill in toto, but these reforms, if passed, will end up in a caucus with the Senate where the Senate’s leaders may prevail.  It’s a very pessimistic scenario.  Let’s pray for gridlock.

Sensible House members may want to consider four reforms of our immigration laws that are desperately needed.

1. End birthright citizenship.  The Fourteenth Amendment to the Constitution was enacted just after the Civil War to enfranchise the freed slaves and make them “citizens” of their states and the U.S. over the objections of the Southern states.  Nobody at the time thought they were enfranchising the children of illegal immigrants, a non-existent phenomenon.  Congress should try to end birthright citizenship for children born of illegal immigrants, few of whom would be here if we had a sensible policy.  It will be challenged and likely end up in the Supreme Court.  If the Court holds the Fourteenth Amendment is a suicide pact, then we’ll need to amend it  Such an amendment will be very popular.

2. Tie Immigration to Unemployment.  There is no justification for admitting new people into the labor market to compete for scarce jobs against American citizens.  We still have persistently high unemployment, well above 5%.  Immigration should only be allowed If unemployment is low and the immigrants have the requisite skills to help our economy.  The need for more unskilled and uneducated immigrants is long over.  Our economy has been evolving from from that kind of labor for decades.  Let’s bring the immigration system in line with economics.  We’ve already made life very hard for Americans with low (high school) education.  The most compassionate thing we can do for them is to cut off more immigration into their labor markets.

3. Immigrants Must Have Sponsors.  All  immigrants should have U.S. citizen financial sponsors who sign surety bonds.  If an immigrant becomes unemployed or otherwise becomes a public charge, then the government can sue the sponsor for reimbursement.  This was required until the giant wave of immigration in the 1880′s.  We should demand it now more than ever when immigrants are net burden on public finance.  The effect of such a law would be to dramatically reduce the supply of low- skilled immigrants, exactly what we need.  Those with substantial skills and good job prospects will be able to obtain sponsors because the likelihood of them needing entitlements is so low.

4. Immigrants Cannot Go Home.  Immigration is supposed to benefit the U.S. as well as the immigrant.  This happens when immigrants assimilate culturally and become Americans.  We do not really benefit from a multilingual and multicultural society.   The best way to change the nature of immigration is to prevent lawful permanent resident aliens, those that are one step from citizenship, from returning to their home countries more than once a year for a short period.  Immigrants are required by law to abjure their loyalties to their native lands.  They can’t do this if they return for long periods to reconnect with families and run businesses there.  That foot in both countries mentality is incompatible with the notion of being a naturalized American citizen.  If people have a habit of spending substantial time abroad while being LPR’s, they should be disqualified from obtaining citizenship.  Once they become citizens, we have no control over their travel or language.  But we can do a lot more while they’re in line.

I haven’t heard any member of Congress propose these immigration “reforms.”  If I do I’ll write about them.


Posted in "Immigration Reform"
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December 3rd, 2013

Fruit is rotting on the trees.  Tech workers are “unavailable.”  Such stories proliferate in coverage of immigration, as if the laws of supply and demand simply don’t work.  Nobody doubts that unemployment persists at historically high levels, at least 7%.  And the lower down you go in education and skills, the higher the rate is.  Unemployment for high school graduates is more like 12%.  And in the more sluggishly growing states in the Northeast and Midwest the rates are 3-5 points higher than that.  So why do farmers say they can’t find workers to pick their fruit?  Economics tells us the wage they offer must be below the market price.  In my experience prosecuting RICO cases against employers of illegal workers I have run up against this attitude of entitlement to quasi-slave labor many times.  Farmers interpret the non-enforcement of our immigration laws as an implicit acknowledgement that they should go right ahead and hire illegal workers at the minimum wage to do these jobs.  Why do I say quasi-slave labor?  Because illegal workers are second class members of society.  They don’t  ”live in the shadows,” like fugitives, as is often reported, because the federal government has announced they will not be deported.  But their wages are too low to be even working class.  They are effectively modern day serfs, indentured workers tethered to their employer and unable to move.

Any employer paying the minimum wage for hard and demanding labor is violating the laws of economics.  Hard and demanding jobs are harder to fill than pleasant ones such as working in a retail store.  Any argument to the contrary, as is made by farmers, is economic nonsense.  Those tough jobs should be paying a significant premium above minimum.  If they did, there would be no labor shortage.  The unemployed would line up to take them.  Americans are not adverse to working  nasty jobs.  Sewers are operated by American citizens at market wages.  We won’t tolerate anything less than functioning sewer systems staffed by English-speaking high school graduates.  But we will tolerate foreigners picking our fruit trees.

If the price of labor is high, it will force employers to automate.  Many sewer jobs have been replaced by machines.  In the Midwest combines, giant machines, pick corn and soybeans.  Yet the fruit farmers still prefer Mexicans, quasi-slaves, because they are cheaper than the research and development of machines to pick the trees.  So immigration stifles innovation.

Many technology companies, from the ubiquitous Microsoft and Google to small programmers located in every major city also want more immigrants.  Yet there are upwards of a million unemployed tech workers in the country.  Why won’t they hire them?  Their excuse is that they want the best and the brightest, as if to say the unemployed are not.  This is a hard argument to sustain if you are offering a sub market wage.  Why would a tech worker   interview for a job paying below what other firms are paying for the same work?  The federal government has extended unemployment and health benefits indefinitely, and we are told the picture is brightening.  Yet the unemployment rate just lingers month after month.

The recent visa fraud scandals involving Indian consulting giant Infosys show why it is so easy to bring in foreign tech workers on H-1B visas.  An employer goes to Infosys or one of its competitors, claims it cannot find “qualified” workers at the prevailing wage, and hires the Indian technology consulting company to “solve” its labor problem.  As long as the U.S. increases the number of such visas, the “problem” of paying the market wage for labor can be addressed.  It’s no surprise that the Senate-passed immigration bill nearly doubles the number of such visas.  Doing so during a time of high unemployment is a choice to side with employers and not the unemployed.  If the Senate cared about reducing unemployment it would cut the visas to zero.

If I’m wrong, I’d like to be shown a firm which claims it cannot find workers to fill its labor needs.   Does anyone know of an agricultural or tech employer that can’t find workers?  Would someone please send me the details.  What is the name of the employer, which jobs are going unfilled and what wages are offered for the jobs?  Let’s see how those numbers stack up against the market data.



Posted in "Immigration Reform", Business
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November 4th, 2013

When does an ordinary tort case become a RICO case?  If there were a simple answer to this question, the federal courts would have enunciated a black letter rule many years ago and reduced their workloads significantly.  Since there is no such rule, a plaintiff with a potential RICO case needs to consider several factors.  The most difficult of these is the requirement of a pattern of racketeering activity.  The law was enacted to redress long-term illegal behavior.  A person or business that has been harmed by a single episode of fraud, regardless of how much money is involved, needs to show that the defendant is a serial violator.  One way of doing this is to conduct a simple litigation search of the defendant and see if it has been sued before for similar misconduct.  If so, then there may be a pattern.  But the prior illegal conduct needs to be related to the current misconduct and have occurred within the last decade.

The other important element is the use of an “enterprise” in carrying out the racketeering activity.  The enterprise must be a separate entity through which the alleged racketeer does its misdeeds, such as crime family or a legitimate corporation. A person acting alone, as many criminals do, does not violate RICO regardless of how much carnage he leaves in his wake.  There has to be an enterprise, and it needs to be used or victimized (infiltrated) for the requisite involvement to be shown.

RICO is both over and under-utilized.  Many lawyers file RICO cases not understanding these basic principles.  Their cases usually get dismissed right away and we end up with scores of decisions pointing out the same rules about pattern, enterprise and causation( addressed in prior posts).  And then there are plaintiffs with legitimate grievances, usually involving fraud or extortion, where RICO could be used effectively if their lawyers thought more strategically, but do not.  They have no experience with the RICO,  or more commonly, are state court practitioners and are afraid of the federal rules and federal judges.  Plaintiffs’ lawyers tend to practice in state courts and one good reason is that according to many studies state judges and juries are more liberal with other people’s money.  Yet, today, since only 1% of non-personal injury civil cases go to trial, one wonders if jury considerations should even matter in evaluating a RICO case.

For the same reason, plaintiffs should not salivate at the prospect of triple damages and attorney’s fees, which RICO requires be awarded to a successful plaintiff.  (Winning defendants don’t get their attorney’s fees.)  Very few civil RICO cases will go to trial no matter how strong they are.  The cost of federal litigation, damage experts, and competent counsel are a significant factor in settlement decisions.  Triple damages and attorney’s fees are a strong incentive for defendants to settle, and settle earlier rather than right before trial, but nobody should expect to get them at the outset of a case.

The bottom line is that anyone victimized by fraud or other purported RICO violations should evaluate their case with a lawyer who knows RICO.


Posted in General RICO Information
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October 2nd, 2013

For the second time in a decade the Senate has passed a huge immigration “reform” (liberalization) bill at the behest of employers and Hispanic activist groups.  This happened in 2006, and then as details of the bill became known to the country at large, opposition grew so intense that the Capitol internet crashed.   The House refused to go along and reform died.  Proponents vowed to exact revenge on the House in that fall’s midterm elections.   The Republicans lost control but the proximate cause was the unpopular Iraq war not the failure to enact the immigration bill.  Anyone doubting that conclusion would have a hard time explaining what transpired in the next Congress.  In 2007 the new more liberal and Democratic Senate failed to stop a filibuster of the “Dream Act” and never took up immigration again during its two-year life.

This was supposed to be immigration summer in Washington, and to some extent it was.  The Senate passed the immigration bill in June.  Its supporters demanded the House follow.  But once again the country learned what was in the bill, or at least realized it would increase the levels of legal immigration and give illegal immigrants a path to citizenship, and then Republican House members decided to do nothing.  Senator Marco Rubio notwithstanding, there is a significant difference between the two parties on immigration.  Republicans are rhetorically opposed to illegal immigration realizing it’s anathema to everything the party represents.  And beyond opposing illegal entry, Republicans seem unenthusiastic about  legalizing those who are here illegally.  Perhaps this also means they tacitly agree with the concept of self-deportation, the idea that if we make it impossible to work here, illegal immigrants will leave.  I say tacit because few Republicans will say this openly.  While there is no support for legalization, there is no fervent demand for active deportation either.

Republicans also like the concept of making employers use E-verify to check the status of new hires online.  Yet, there is a basic disconnect in putting the onus of immigration enforcement on employers, the beneficiaries of illegal labor.    We cannot expect them to resist the urge to hire cheap illegal workers who will never file workers’ comp or Title VII claims, join a union or seek a raise.  The Reagan  administration introduced the concept of employer sanctions- and then made the fateful decision not to enforce it.  That and the bad Mexican economy brought on the biggest wave of illegals since Texas was  independent and being colonized.   The Clinton administration had no more of an interest in enforcing the new law than did its Republican predecessors.  The wave continued to flow until the 2008 recession.

The House Judiciary Committee, with jurisdiction over immigration, has approved bills to employ more border agents and require employers to use E-Verify, which most employers oppose.   These enforcement bills, and possibly one allowing some of the “Dreamers,” illegals who entered the country with their parents as minors, will come to a vote in the House.  But that’s it.  If the House votes on immigration, this would be the extent f it.

But there is a strong minority of republicans led by Steve King of Iowa who oppose any immigration bills.  They fear that even a modest bill will end up in a conference with the Senate bill and be inflated into a vast “reform” pushed through both Houses under intense media pressure to “get something done.”

But the clock is running down.  It will soon be 2014, an election year, meaning Congress is very unlikely to pass anything controversial.  If the unemployment rate remains stubbornly high the argument for legalization of millions of new job seekers appeals only to employers and Hispanic activists .  This will turn out much like it did in 2006.  Proponents of reform will try to whip up the public about the callousness of “doing nothing” on immigration but most people will not care.   That may be the best thing we can hope for in this Congress.



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September 3rd, 2013

Federal courts have been making it harder to certify class actions for years.  To get certified as a class a case needs to meet the criteria of Federal Rule of Civil Procedure 23, which was written in 1966, at the dawn of the class action era and used vague concepts that seemed to make sense in a theoretical sort of way, but in reality are utterly opaque.  The Rule requires a class action to have “common questions” and those “questions” need to “predominate” in the litigation.  What is a common question?  Does every RICO case involve “common questions” because an enterprise and pattern of racketeering activity are required to be proven?  And does that mean those common questions “predominate?”  If it were that easy, every RICO case would get the approval sought by the plaintiff’s lawyer.  But it is not.

Class actions allow cases with large numbers of plaintiffs seeking the same relief, either an injunction to stop illegal discrimination or a small sum of money as damages,  to have their cases heard in a single action.  But as with many other laws, Congress wrote the Rule without defining its terms.  Federal judges have differed as to what they mean with more “liberal” judges usually favoring certification, and “conservatives” usually opposing it.  Adding to the problem was the prohibition on appealing class certification orders because they are “interlocutory,” i.e., do not finally dispose of the case, until 1999 when Congress allowed them to be appealed if the appellate court chooses to hear them.  Since then we have generally seen Rule 23′s criteria imposed much more stringently.  In the recently completed Supreme Court term the Court agreed to hear three class actions, and it affirmed the refusal to certify two of them.  In Wal Mart v. Dukes (2011) the Supreme Court decertified a nationwide class action alleging gender discrimination at the nation’s largest retailer because, in the majority’s view, there were no common questions.  The four- justice minority vehemently disagreed and would have allowed the case to proceed to trial.

A key stumbling block is persuading a court that the “common questions” in a case “predominate” over individual questions.  As I’ve said, this is vague and is often in the eye of the beholder.  But we generally know claims for fraud, the making of a false statement to induce the victim to part with his or her property, is quite difficult to certify as a class action.  Fraudulent statements may vary from victim to victim, and unless the district court can nail down one particular statement that was used on all members of the class, such as, “this car only has $10,000 miles on it,” the case can’t be decided in one efficient trial.  If each class member has to testify as to what was said to him or her that was fraudulent, and how it induced reliance on the false statement, then there is no efficiency in creating a single class action.

Last week the Second Circuit Court of Appeals, one of the most influential of the twelve federal circuits, has affirmed the certification of a RICO class action involving fraudulent statements made to 75,000 customers of U.S. Foodservice Inc., the second largest food distribution firm in the country.  In re Foodservice Inc. Pricing Litigation, _ F. 3d.__, (2d Cir. August 28, 2013).  The plaintiffs are restaurants, schools and other large institutions which by wholesale food for resale.  They were billed on a supposed “cost-plus” basis by U.S. Foodservice.  That means they were relying on the wholesaler to accurately represent its true cost for the food and then add a small percentage markup, its profit.  According to the Complaint, the company  falsely inflated its costs, thereby inflating its profit as well, above what was represented in its invoices.  It mailed or  emailed the invoices to its customers each month.  (The use of the US Postal Service or interstate email to perpetrate fraud is a federal crime and a RICO predicate offense.)

The Second Circuit concluded that everytiime a class member paid a fraudulent invoice it had relied on the false statements contained in the invoices was sufficiently common across the huge class so that fraud could be proven efficiently at a single trial, i.e., a common question “predominated.”  Thus, a single nationwide class of 75,000 purchasers from all over the country was properly certified by the district court in Connecticut.  It does not matter that the laws of each state may vary as to what constitutes fraud because the RICO claim depends on proving fraud pursuant to federal law, mail and wire fraud, which is uniform.  The Court also rejected US Foodservice’s argument that these customers were sophisticated and knew they were paying a markup thus vitiating the element of reliance on a false statement.  The Court believed they were unaware of the precise nature of the fraud, which necessitated the use of shell companies which allegedly “sold” the food to US Foodservice but were really owned by it, thus were used to mask the markups

The Second Circuit also upheld the certification of a class under state contract law because those laws were uniform, governed by a single provision of the Uniform Commercial Code, which is basically the law in every state, supplementing contract law, with only minor differences.

As far as I k now, this is the first appellate decision upholding a nationwide class under RICO.  And having been issued by the Second Circuit, it should be followed by other courts.  (I have succeeded in getting RICO wage depression cases certified in several district courts, but those orders were not appealed.)  Plaintiffs with good fraud cases that are predicated on uniform written commercial contracts can make a strong argument for certifying them as class actions, if of course, they also satisfy all of the other elements of a RICO claim.  While the federal courts have made it more difficult to certify class actions, this decision and a few recent antitrust cases from the Seventh Circuit here in Chicago, make it clear that they can go forward.  Class actions are alive.


Posted in RICO Law Developments
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August 9th, 2013

A federal judge in Dallas has dismissed a lawsuit brought by an Immigration and Customs Enforcement (I.C.E.) agent challenging the constitutionality of the administration’s directive forbidding the agency from removing (deporting) young illegal immigrants (known by their preferred designation “DREAMERS”).  Agent Christopher Crane alleged the directive put him in an untenable situation.  He is under oath to enforce the Immigration and Nationality Act (INA) as written, which requires officers to remove any alien they encounter not “clearly and beyond  a doubt entitled to be admitted.”  8 U.S.C. 1225(b)(2)(A).  The President and the head of the Department of Homeland Security (D.H.S.), Janet Napolitano, directed I.C.E. agents to use discretion (theirs) in enforcing this mandate.  But where does this discretion come from?  After all, if Congress wanted to exempt DREAMERS from the INA, it would have said so.  But it wrote the law more broadly and did not see fit to allow D.H.S. (or I.C.E., a part of it) to write a different law.  A President who gets to use his “discretion” not to enforce laws he dislikes or dislikes in part is not carrying out his constitutional oath to enforce the laws, the job of the Executive.   If I.C.E. doesn’t have enough resources to remove illegal immigrants it should ask Congress for more money, not arrogate to itself the selection of which ones to remove.

Agent Crane believed his bosses were exceeding their authority to tell him what to do as an I.C.E. agent and sued.  He sought an injunction barring I.C.E. from enforcing the new discretionary rules.  The district judge agreed that he was likely to win his case,as the new policy was not authorized by the Act.  But  it also found that he is required to pursue his claim pursuant to the Civil Service Reform Act, which has its own remedies and cannot be pursued in a federal court.  He will need to go before a  hearing officer in Washington, and it is not clear that the officer has the power to enjoin the D.H.S. and the President from enforcing the directive.  So if this decision is affirmed on appeal, the rule of law will have been stymied.

We are always being told this is a country of “laws not men” when the men are conservatives (think of Watergate and Iran-Contra).  The sanctimonious law professors and columnists are silent now, perfectly happy to see Agent Crane not get his day in court.  Even the judge believed his hands were tied and justice was not being served in this case.  It should prompt congressional debate and hearings about executive power.  After all, this is immigration summer in Washington.  Congress is fixated on the topic.  It should care about the question of who gets to enforce the Act that it passed.  But it is not.  The decision is nothing but a footnote in law-oriented websites and has not made it into the mainstream media.  Suppose the case were the inverse, and an agent was arresting DREAMERS in defiance of the Directive.  The administration would fire the overzealous employee and I can imagine the firestorm of media coverage about I.C.E. vigilantes taking the law into their own hands.

The only good aspect of this decision is that it is unprecedented.  The opinion does not cite any authority in support of its holding that Agent Crane’s only remedy is through the the Civil Service.  Other federal judges may reach the opposite conclusion.  I hope there will be more cases like this one elsewhere around the country.

Posted in "Immigration Reform"
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July 1st, 2013

The Senate has passed an “immigration reform” bill which does not reform our immigration system.  It makes the problems caused by our immigration “system,”  de facto amnesty for millions of  uneducated and unskilled workers at a time of high unemployment, worse.  It does so in two ways: 1)the border will not be enforced, and 2)illegal immigrants will stay in the labor force and consume more public benefits than they pay in taxes.

The proponents of the bill succeeded in pushing through the Corker-Hoeven amendment, which supposedly adds 40,000 new border guards and other tools to secure the Mexican border.  This sounds good, but will it happen?  The history of border enforcement suggests no.  To cite but one recent example, in 2006 Congress enacted the Secure Fence Act which mandated construction of “at least two layers of reinforced fencing” along 650 designated miles.  Only 40 miles have been built.  And in 1986 the Immigration Reform and Control Act, very much along the lines of what the Senate has passed, gave amnesty to all illegal immigrants then in the country in exchange for workplace enforcement.  Employers would be required, for the first time, to verify that their new hires were legally authorized for employment.  Theoretically, this concept would have “dried up” the insatiable demand for cheap labor.  But the I.N.S. (now D.H.S.) barely enforced the law, and soon the major employers of illegals were back hiring whom they pleased with impunity.  Then Congressman Charles Schumer even tried to repeal the employer sanctions after they were enacted.  Now he is the chief sponsor of the Senate bill.  Does he really want enforcement?  Or is he counting on 8 million new Democratic voters once they obtain citizenship?  (Hispanics voted 71% for President Obama last year and constituted a record 10% of the voters.  Romney won 59% of the white vote.  Therefore, in 13 years, when the illegals will obtain citizenship under the Senate bill, something like 8-9 million new Democrats will be enfranchised making it impossible for a Republican to ever win a presidential election.)

Private citizens cannot sue DHS for violating the Secure Fence Act.  Contrast that with an act of the executive branch which actually injures private citizens, such as by conducting a warrantless arrest or snooping of one’s email.  Those acts can be instantly redressed by a civil rights 1983 suit against the federal official who committed the unconstitutional act.  But nobody has standing to challenge the failure to build a border fence in federal court.

Will the DHS be more aggressive about building the fence now than in 2006 when it was controlled by a Republican?  Or to put the question in pragmatic terms, does the Obama administration really favor a secure border?  Reflecting popular sentiment, the President and his DHS Director say they they do and favor whatever measures are deemed necessary to enact the bill.  But in practice they have done nothing to comply with the Secure Fence Act.  No fence has been built since Obama came to office.  And the DHS has granted extra-legal work permits to young illegal immigrants who entered the country as minors as well as decreeing that the agency would not deport illegals unless they committed a violent crime.  Can an administration proclaim to be against illegal immigration while legalizing illegal immigrants?  The question is Orwellian and we skeptics who judge by actions rather than words should not feel appeased by all of the tough talk.

The most obvious way to pass a law which tries to execute conflicting objectives (securing the border and giving illegals legal status) would be to do part one first and only implement part two when that is done.  But this has been rejected in favor of a mere certification from DHS that the border is basically secure.  Then, legalization is implemented.  Again, DHS has every incentive to wiggle out of a sincere certification so that part two gets underway as quickly as possible.

The second issue is the economic effects of allowing the illegal immigrants here to obtain legal status.  They are overwhelmingly poorly educated, unskilled and come from Mexico (Pew Hispanic Center).  As I’ve written last month, admitting millions of low-skill workers into the labor market means they compete with Americans with high school educations for jobs resulting in lower wages and higher unemployment.  Why do we want this?  If we are to have immigrants, they should contribute skills to our economy and not become public charges.  The Congressional Budget Office’s study, which has been cited by proponents of the bill, concludes it will depress wages for lower skilled workers and  raise unemployment until 2020.  The good news is that the Bill’s increased level of legal immigration for high skilled workers will “generate additional technological advancements” thereby raising productivity.  But to reiterate, there is no upside to increased low-skilled immigration.

Proponents of the Senate bill have nothing to say about this except nostalgia.  Senator Lindsay Graham stated: “One of the critics of this bill…said the average illegal immigrant has a tenth grade education.  Well, all I can tell you is you’ve got a United States Senator who came from parents that didn’t have a tenth grade education.”  Senator Graham is ignoring the demographic data indicating that uneducated immigrants are a net drain on the treasury, costing the federal government billions more each year than they pay in taxes.  How does he think they will fit into the information age economy, which is not the one his parents faced as high school drop outs?   He cited no empirical data for his optimism.

Senator Flake of Arizona, who’s arguments for the bill were also steeped in nostalgia, offers a reminder that the demand for illegal labor will continue.  Recalling his youth in Arizona, he stated: “we worked alongside migrant labor, undocumented migrant labor, largely from Mexico, who worked harder than we did under conditions much more difficult than we endured.”  As long as this remains true, American employers will crave illegal Mexican labor.  Senator McCain pointed out that the Senate bill eventually requires all employers to use the E-Verify system to check the employment authorization of new hires.  But that requirement is phased in over five years.  Why?  (Could it be that employers don’t want to raise their labor costs?  When was the last time any employer voluntarily agreed to unionize its employees?)  But McCain simply overlooks reality.  The current law also requires all employers to check the documents of new hires.  If that isn’t working, why will E-Verify?  He simply elides the real problem: does the nation have the political will to punish employers who cheat?  Nothing we’ve leaned in this debate indicates they do or we are any more serious now than in 1986 and 2006 about enforcement.




Posted in "Immigration Reform"
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