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.