In Anza v. Ideal Steel Corp., (Slip Op.) No. 04-433 (Jun. 5, 2006), the Supreme Court reversed a Second Circuit holding that could have opened the floodgates on the use of civil RICO claims as an ad hoc business tort between market competitors. This case involved a local business dispute between Ideal Steel (“Ideal”) and National Steel Supply (“Anza”), both of which sold steel mill products and services as primary competitors in the Bronx and Queens. Ideal alleged that Anza engaged in a scheme to wrongfully deprive Ideal of market share by not charging sales tax to cash customers, thereby reducing prices but not profit. Plaintiff claimed that this resulted in a pattern of racketeering activity by filing false tax returns via mail and wire fraud.

Ideal stated claims under §§ 1962 (c) (prohibiting conducting interstate commerce via racketeering activity) and (a) (prohibiting investing racketeering income in interstate commerce).

Judge J. Berman of The Southern District dismissed the complaint holding that proximate cause could not be shown because: (1) RICO violations based on fraudulent statements require reliance; and (2) Ideal could not show reliance on the statements made to the state. A Second Circuit panel reversed, holding that where the pattern of racketeering activity was intended to, and did, aid the competitor, proximate cause under § 1962(c) is met even if the fraudulent statements were made to a third party. Likewise, § 1962(a) required only that funds used in interstate commerce that were “traceable” to the predicate acts.

On appeal, the Court agreed that Ideal’s theory failed to show proximate cause and vacated the opinion under § 1962(c) only, noting that § 1962(a) arguments had not been fully developed on appeal. Relying on Holmes v. SIPC, 503 U.S. 258 (1992), where the Court held that civil RICO claims require the violation to be both the “but for” and “proximate cause” of the injury, the Court effectively held that when based on fraud only a direct victim could bring a RICO claim. In Anza, the direct injury was New York’s loss of tax revenue, not Ideal’s loss of market share: “The cause of Ideal’s asserted harms . . . is a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the state).” The Court explained that there was no “required” link between the price reductions and the fraud. Just as a company that lowers its prices will not necessarily defraud the state, a company that commits tax fraud will not necessarily lower its prices.

Finally, we note that until Anza the Second Circuit had rather successfully adhered to First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994), which requires private RICO plaintiffs asserting fraud to show “transaction causation” and “loss causation.” “Loss causation” is both the “but for” and “proximate cause,” examined in Anza. “Transaction causation” is simply that but for the fraud, the plaintiff would not have entered into the transaction. As perhaps Judge Berman noted, it is impossible to show either reliance or “transaction causation” where the fraudulent statements were made to a third-party. Nevertheless, the Court declined to reach reliance. While this difference may be academic, it’s clear that Anza significantly heightens the requirements to state a claim under § 1962(c) based on fraud. How this affects the Second Circuit’s interpretation of § 1962(a) remains to be seen.

Contact the author for assistance or to discuss this issue at (212) 699-4538 or Matthew Bryant.