Last week the U.S. Supreme Court issued its decision in Hemi Group v. City of New York,which is of interest because it represents the largest attempt by a government entity to use RICO to recover money damages.  New York City took the unusual step of filing a civil RICO complaint against several internet cigarette sellers, alleging they were carrying out a scheme to evade the City’s sales and use taxes.  The defendants advertised their cigarettes on the internet as being “tax free.”   This is technically correct, as the Commerce Clause of the U.S. Constitution has been interpreted as barring taxing authorities from imposing taxes on sales made outside their jurisdiction.  So the cigarette sellers, all situated out of the City and  New York State, are not required to collect New York City’s sales tax from City residents.   However, the City, like virtually all jurisdictions with a sales tax, also has a an accompanying “use tax” which applies to purchasers who use items in the jurisdiction which have been purchased elsewhere and not subject to the sales tax.  So the smokers who bought cigarettes on- line from these out-of-state sellers were obligated to report their sales to the City and pay the use tax on their purchases.  The City claimed that the only reason its residents were shopping online for cigarettes was to avoid the sales tax.  And given its argument that the base price of the cigarettes is the same, then this would seem to be a very plausible theory.

If the cigarette sellers had been mailing fraudulent sales tax returns directly to the City which understated the number of transactions to City residents, the City would probably have had a strong RICO case, predicated upon mail fraud.  But the facts were more complicated.  The cigarette sellers did not submit any sales tax reports to the City at all or to New York State, which imposes its own sales tax.  The City’s RICO case asserted that the sellers were supposed to file federally mandated reports with the State listing the names and addresses of state purchasers.  The City argued that not filing these reports was the RICO violation (which the Supreme Court did not analyze, but appears to be no violation at all since nothing was mailed).  The City also had to concede that each on- line purchaser made a decision not to comply with the City’s use tax, making them potential “intervening” acts in the City’s theory of causation.

The Court’s 5-3 opinion remarked several times that the City’s theory of RICO liability against the cigarette sellers was more “indirect” and “attenuated” than claims asserted in three prior cases it had decided on proximate causation in RICO.  But the dissent by Justice Breyer pointed out that viewed through the common law prism of “foreseeability,” the city’s case was not farfetched and made perfect sense.  Had it been brought in a state court as an ordinary tort, it probably would have survived a motion to dismiss.

We agree.  It seems unfair for the Supreme Court to apply a more exacting standard of proximate causation to RICO, a statutory tort, than to common law torts.  There is nothing in RICO’s language or legislative history to indicate Congress intended a stricter degree of causation than applied to the Clayton Antitrust Act, upon which RICO’s damages provision was modeled.  As Justice Breyer (an antitrust scholar) noted, there is no antitrust precedent to support the causation analysis used by the majority in this case.

Why is the Supreme Court so strict in civil RICO?  The transcript of the oral argument indicates Chief Justice John Roberts (who wrote the majority opinion) is very ambivalent about civil RICO and believes, absent re-writing by Congress, which has not occurreed, that it is the role of the Court to rein it in by defining the bounds of a “proximately caused” injury narrowly, that is very close in time to the RICO violation.  This means that RICO plaintiffs should have a theory of causation that is direct and makes eminent good sense.  One way to do this is by alleging an injury that is consistent with the rules of economics.  It is perfectly sensible, for example, to allege that a pattern of hiring illegal immigrants “causes” the wages of legal workers at the same company to be below the market rate because economists agree with that theory of causation.  It does not make economic sense to allege, as the Plaintiff did in Anza v. Ideal Steel (2006), that the Defendant, a steel producer wa sble to lowered its prices by not paying state sales taxes.  Absent some sort of showing that the Defendant had market power to lower its prices, that theory does not make economic sense and no mainstreeam economist would stand by it.  A single firm cannot raise or lower its prices in a competetive market and remain in business.  And if the steel market in which the two firms in the Anza case were participating was not competetive, the plaintiff should have said so and described the market failure with some detail.  The Court should have done a better job of saying this in its opinion.  But even without this discussion, the reason for finding the plaintiff’s theory of causation implausible makes sense.

In short, RICO cases need to make economic sense.  Plaintiffs should consider filing an expert report with their Complaints in cases alleging competetive injuries which are not plainly recognized as making economic sense, such as the power of a monopolist to raise or lower prices in a given market or the aforementioned wage depression by hiring illegal immigrants.

The Court was also supposed to answer the question as to whether New York City’s injury, lost tax revenues, was one to “business or property” as RICO requires.  The Court did not answer that but suggested the answer is ‘yes.’  It stated, “Suffice it to say that the State [of New York] would have concrete incentives to try [to bring a RICO case for its lost tax revenue].”  This is dicta. But the Supreme Court’s dicta are often taken as persuasive, if not binding, authority on lower courts. google earth . www.192-168.top