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.