In 2008, the United States Supreme Court made an otherwise simple pronouncement on the requisite elements of fraud claims made pursuant to the Racketeering Influenced and Corrupt Organizations Act¹(RICO): “first-party reliance” (i.e., reliance by the plaintiff) was not an essential element. The plaintiffs’ bar heralded this innocuous holding as an end to the general prohibition on RICO fraud class actions, concluding that because individualized reliance had been the bar to establishing predominance and superiority under Fed. R. Civ. P. 23(b)(3), the elimination of first-party reliance would open the flood gates for new consumer RICO fraud class actions. A slew of putative class actions were filed against pharmaceutical manufacturers alleging that consumers and third-party payors had been induced to purchase new name-brand pharmaceuticals under allegedly fraudulent promises of increased efficacy or safety.

Despite these suits and the enthusiasm of the plaintiffs’ bar, in the more than four years since the United States Supreme Court decided Bridge v. Phoenix Bond,² the practical fallout from the decision has been underwhelming at best. Pre-Bridge, certification of a RICO fraud-based class action was a near impossibility because the courts held that questions of individualized first-party reliance predominated over whatever common questions of law or fact existed. Post-Bridge, the plaintiffs’ bar has attempted to usher in a new era of RICO consumer fraud class actions, arguing that the removal of “first-party” reliance as an element of RICO allows the common issues to predominate. However, individual issues of reliance — be it by the patient or the prescribing physician — remain a bar to such aggregate litigation.

A Review of Fed. R. Civ. P. 23

The prerequisites for certification of a class are enumerated in Fed. R. Civ. P. 23(a) and are usually referred to as the prerequisites of “numerosity, commonality, typicality, and adequate representation.”³ If a plaintiff’s claim for certification of a class survives the required “rigorous analysis”⁴> of the Rule 23(a) prerequisites, the district court then must proceed to examine Rule 23(b). In addition to satisfying the prerequisites, the proposed class must also satisfy one of the three class definitions: the limited fund Rule 23(b)(1) class; the injunctive relief Rule 23(b)(2) class; or the opt-out, monetary damages Rule 23(b)(3) class. Typically, a proposed class action seeking to recover for alleged consumer fraud will proceed under Rule 23(b)(3).

A class for monetary damages will only be certified if “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”⁵ “Predominance” and “superiority” are the keystones of a Rule 23(b)(3) class.

“Determining whether the plaintiffs can clear the predominance hurdle set […] requires district courts to consider ‘how a trial on the merits would be conducted if a class were certified.’”⁶ Accordingly, on the predominance inquiry, the district court must identify the substantive issues that will control the outcome of the litigation.⁷ That is, the district court must turn to the elements of the claims and defenses and look to see how the plaintiffs will prove the elements of their claims on a class-wide basis. When questions requiring individualized proof predominate over the common questions, certification is not warranted.

A Primer on RICO

At its heart, RICO is a criminal statute originally designed to combat the American mafia. Without delving too deeply into the inner working of the statute, RICO essentially provides four bases for finding a violation of its provision:

(a) when a person earns an income from a pattern of racketeering and uses that income to acquire an interest in an enterprise;⁸

(b) when a person acquires or maintains an interest in or control of an enterprise through a pattern of racketeering;⁹

(c) when a person participates through a pattern of racketeering in an enterprise;¹⁰ and

(d) when a person conspires to violate any of the other three provisions.¹¹

The statute defines “racketeering activity” as including (among numerous other specific conduct) “any act which is indictable under any of the following provisions of title 18, United States Code: […] section 1341 (relating to mail fraud), section 1343 (relating to wire fraud).”¹² RICO consumer fraud claims will typically arise under the mail fraud/wire fraud sections, alleging that the defendant sent fraudulent information through the mail or via the internet.

From a criminal justice perspective, violating RICO subjects the violators to enhanced sentences. In addition to the heightened penal remedies of RICO, Congress created an avenue whereby private litigants also were given avenue for individual redress within the civil justice context. If a plaintiff is successful in proving a violation of RICO, he is entitled to recover treble damages plus attorneys’ fees.¹³ It is the allure of treble damages and attorneys’ fees on a class-wide basis that fuels the heightened desire for the plaintiffs’ bar to bring consumer fraud claims under RICO, as opposed to other common law and statutory schemes.

A Brief History of RICO’s Proximate Cause Requirement

To bring suit, the plaintiff must satisfy RICO’s statutorily imposed standing requirements: The plaintiff must be (1) a person (2) who suffered injury (3) to his business or property (4) “by reason of” the defendant’s violation of § 1962.¹⁴ The statute’s “by reason of” phrase injects the concept of proximate cause into the standing requirement.

Historically, the courts have required RICO plaintiffs to demonstrate that the defendants’ violative conduct was both a “but-for” and a proximate cause of the plaintiff’s injury.¹⁵ Within the context of a RICO fraud claim, this showing required a “direct relation between the injury asserted and the injurious conduct alleged. Thus, a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant’s acts was generally said to stand at too remote a distance to recover.”¹⁶

The Supreme Court’s Anza v. Ideal Steel Supply Corp.¹⁷ provides a concrete example of the types of attenuated injuries that are not cognizable under RICO. There, the plaintiff alleged that the defendant (a competitor of the plaintiff) was not collecting and remitting sales tax to the state on products that the defendant sold, that the defendant was using this scheme to undercut the plaintiff’s price for similar goods, and that this scheme allowed the defendant to increase its market share.¹⁸ The Anza Court held that the plaintiff could not satisfy the proximate cause requirement of RICO because the plaintiff could not establish the “directness” requirement — the alleged fraud was directed at the state (failing to pay sales tax), but the purported injury was allegedly sustained by the plaintiff-competitor (loss of market share). This argument was too attenuated.¹⁹

In discussing the failure to establish proximate cause, the Anza Court noted that “[o]ne motivating principle [behind the directness requirement] is the difficulty that can arise when a court attempts to ascertain the damages caused by some remote action.”²⁰ The Court recognized the reality that there are numerous reasons that the defendant may have lowered its prices; the alleged fraud was not the only basis for the price decrease.²¹ Additionally, the plaintiff’s alleged injuries — lost sales — may have been the result of any number of factors other than the alleged fraud.²²> For example, “A RICO plaintiff cannot circumvent the proximate cause requirement simply by claiming that the defendant’s aim was to increase market share at a competitor’s expense. […] When a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff’s injuries.”²³

The Pre-Bridge Prohibition on RICO Fraud Claims

Based on the “directness” requirement announced by the Supreme Court, several circuit courts required that a plaintiff alleging a violation of RICO based on mail fraud or wire fraud must show first-party reliance (i.e., reliance by the plaintiff) to have standing.²⁴

The interrelationship of RICO and Rule 23(b)(3) created a broad prohibition against RICO fraud class actions. It was generally held that because first-party reliance was required and individualized proof would be required to establish each absent class member’s claim, the common issues of fact did not predominate over the individualized issues.²⁵ As noted in Sandwich Chef of Texas, Inc., “‘A fraud class action cannot be certified when individualized reliance will be an issue’ […] because cases that involve individual reliance fail the predominance test.”²⁶ Then came Bridge.²⁷

Bridge: First-party Reliance Not Required, But Probably Necessary

The peculiar facts of Bridge were a perfect storm that required the Court to confront directly the issue of whether first-party reliance was a required element of a fraud claim under RICO. Cook County, Illinois, annually holds an auction at which it sells the tax liens it holds on real property within its boundaries. Bidders do not bid in dollar amounts but instead bid in terms of a percentage penalty that would attach to the property. A property owner wanting to redeem the property must pay the winning bidder the percentage penalty. The bidder willing to accept the lowest percentage penalty wins the auction. If the property owner chooses not to redeem the property within the applicable time period, the winning bidder can obtain the deed to the property and is then free to sell the property. Such sale is often at a price significantly greater than what was paid to obtain the deed.²⁸

Because the sale of the property is a highly lucrative business, bidders would often bid for a 0% penalty. If a bidder agreed to accept a 0% penalty, there could be no lower bidder. Confronted with the situation where there would often be multiple 0% bidders, the county developed a rotational system. All bidders would register with the county. When a parcel was up for auction, the county would work through the rotation until it found a 0% bidder. If no 0% bidder was identified, then the property continued to a traditional auction. However, there was a distinct opportunity to game the system. If a bidder registered multiple strawmen with the county, then its opportunity to make a 0% bid would arise more often in the rotation than bidders with only one name. To avoid this problem, the county required all bidders to submit an affidavit stating that they were not acting as a strawman and were bidding in their individual capacity.²⁹

The plaintiff in Bridge was an aggrieved bidder who alleged a competitor had violated RICO by registering multiple strawmen and mailing fraudulent affidavits to the county clerk.³⁰ The Bridge Court recognized that a scheme to concentrate bids favoring one party disproportionately would injure competitor bidders even though the fraud was perpetrated not directly against the other bidders but against the county. That is, the injury was attached to one party (the legitimate com­petitor) while the fraud was committed on a third-party (the county). The Bridge Court determined that such a claim was viable and that first-party reliance (i.e., that the injured party relied on the fraudulent misrepresentation) was not a required element of the RICO claim.³¹ Furthermore, the defendant could not bar the RICO claim by recasting first-party reliance as a dispositive element of a proximate causation analysis.³²

The plaintiffs’ bar latched on to the specific holding of Bridge — that reliance is not an element of a RICO fraud claim — to argue that plaintiffs never need to show reliance (first-party or third-party) to establish their fraud claim. Bridge, however, was not so expansive. It did not overturn the longstanding proximate cause requirement from Holmes. Instead, Bridge simply clarified that first-party reliance was not a bright-line test for satisfying the directness requirement. In fact, the Court expressly stated in Bridge itself that, in many cases, first-party reliance will be required to prove proximate cause and that in almost all cases at least third-party reliance would be required:

[N]one of this is to say that a RICO plaintiff who alleges injury ‘by reason of’ a pattern of mail fraud can prevail without showing that someone relied on the defendant’s misrepresentations. […] In most cases, the plaintiff will not be able to establish even but-for causation if no one relied on the misrepresentation. […] In addition, the complete absence of reliance may prevent the plaintiff from establishing proximate cause. […] Accordingly, it may well be that a RICO plaintiff alleging injury by reason of a pattern of mail fraud must establish at least third-party reliance in order to prove causation.³³

To the extent that any confusion existed in the wake of Bridge regarding RICO’s proximate cause requirement, it was alleviated by the subsequent Hemi Group, LLC v. City of New York, NY.³⁴ There, the Court reinforced its long-held positions regarding proximate cause on RICO fraud claims: proximate cause is a necessary element of RICO and “[a] link that is ‘too remote,’ ‘purely contingent,’ or ‘indirec[t]’ is insufficient.”³⁵

Post-Bridge Consumer Class Actions

Following Bridge, the plaintiffs’ bar jumped in head first, attempting to have certified consumer fraud class actions under RICO (and, thus, taking advantage of the treble damages and attorneys’ fees remedies on a class-wide basis). Their exuberance, however, has gone largely unrewarded.

As an initial matter, where a plaintiff attempts to establish RICO’s proximate cause requirement through the use of first-party reliance, the pre-Bridge prohibition on such class actions appears to remain in full effect. In a non-pharmaceutical putative Rule 23 class action, the United States District Court for the Northern District of Texas held that where a plaintiff pleads first-party reliance as the basis for proximate cause, the case cannot be certified.³⁶ “While first-person reliance may not be an essential element of the RICO claims, it remains a central focus of the allegations and claims in this case (including the common-law and RICO claims). Accordingly, reliance continues to be a predominant issue in this case and the holding in Bridge does not constitute a change in controlling law […].”³⁷

The bigger question after Bridge is what happens when a plaintiff alleges a RICO violation but argues proximate cause is satisfied through the third-party reliance of multiple individuals. The first major pharmaceutical manufacturer defense victory following Bridge answered this question. In UFCW Local 1776 v. Eli Lilly & Co.,³⁸ a group of third-party payors filed a putative class action complaint against Eli Lilly & Co., arguing that the Eli Lilly had violated RICO by making fraudulent statements regarding its schizophrenia medication, Zyprexa. Zyprexa was a second-generation antipsychotic medication. The plaintiffs allege that Eli Lilly had made fraudulent statements regarding the drug’s efficacy. Specifically, they alleged that Zyprexa had been touted as being more effective than the older, cheaper first-generation antipsychotic medications. The plaintiffs also alleged that Eli Lilly promoted off-label uses for the drug, thus causing more prescriptions of Zyprexa to be dispensed than otherwise would have been. The plaintiffs proceeded under two theories of injury: (1) that they had paid for too many prescriptions due to the off-label promotions; and (2) that they overpaid for all prescriptions because Zyprexa was not more effective than the first-generation antipsychotic medications. The plaintiffs alleged that damages under these theories ranged between $4 billion and $7.7 billion. At the district court level, the class was certified. The Second Circuit Court of Appeals reversed.

The Second Circuit quickly disposed of the argument that Bridge opened the door for the underlying class to be certified: “[W]hile reliance may not be an element of the cause of action, there is no question that in this case the plaintiffs allege, and must prove, third-party reliance as part of their chain of causation. Plaintiffs allege an injury that is caused by physicians relying on Lilly’s misrepresentations and prescribing Zyprexa accordingly. Because reliance is a necessary part of the causation theory advanced by the plaintiffs, we must ask whether reliance can be shown by generalized proof.”³⁹

The Second Circuit then turned to the plaintiffs’ specific claims: “[U]nder the ‘loss-of-value’ or ‘excess price’ theory, the claimed harm was the monetary difference between what the plaintiff class was allegedly led to believe Zyprexa was worth and the actual economic value of Zyprexa, taking into account the lesser efficacy and greater harmful side effects allegedly hidden or misrepresented by [defendant].”⁴⁰ The court rejected the payors’ argument that proximate cause could be established by common proof.⁴¹ The Second Circuit held that it could not be presumed that the defendant’s marketing campaign led to the plaintiffs’ alleged injuries and, thus, that the claim was not subject to general proof.⁴² While Bridge permits plaintiffs to prove proximate cause through third-party reliance, it did nothing to cure the predominance issues that exist where multiple third parties are the alleged target of the fraud.⁴³

Conclusion

The post-Bridge world is not so different from pre-Bridge. Plaintiffs must still prove proximate cause to establish a fraud claim under RICO. Attempting to establish proximate cause through individualized proof still defeats class certification under Rule 23. While Bridge eliminated a bright-line test, it did nothing more.

When a RICO fraud case class action is filed, a well-crafted motion to dismiss and/or motion for a more definite statement may force the putative class representatives to articulate at an early stage how they intend to prove proximate cause on a class-wide basis. If plaintiffs disclose that their plan involves proving proximate causation based on the reliance of either consumers or their physicians, then individualized proof will be required to establish proximate cause. Plaintiffs will have then defeated their own action because class certification should be denied due to the failure to meet the basic Rule 23(b)(3) requirements of predominance and superiority.

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[1] 18 U.S.C. §§ 1961 – 1968.

[2] 553 U.S. 639 (2008).

[3] Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550 (2011).

[4] Id. at 2551.

[5] Fed. R. Civ. P. 23(b)(3).

[6] Madison v. Chalmette Refining, L.L.C., 637 F.3d 551, 555 (5th Cir. 2011). Quoting Sandwich Chef of Texas, Inc. v. Reliance Nat’l Indem. Ins. Co., 319 F.3d 205, 218 (5th Cir. 2003).

[7] Id. Quoting O’Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 738 (5th Cir. 2003).

[8] See 18 U.S.C. § 1962(a).

[9] See id. § 1962(b).

[10] See id. § 1962(c).

[11] See id. § 1962(d).

[12] 18 U.S.C. § 1961(a).

[13] See id.

[14] See id. § 1964(c).

[15] Holmes v. Secs. Investor Protection Corp., 503 U.S. 258, 265-68 (1992). The Supreme Court has held that the “by reason of” language is not so expansive as to allow claims where only factual — or “but for” — causation is shown. Id. at 266-68. Rather, “[p]roximate cause is required.” Id. at 268.

[16] Id. at 268-69.

[17] 547 U.S. 451 (2006).

[18] See id. at 457-58.

[19] See id. at 459.

[20] Id. at 458.

[21] See id. at 458-59.

[22] See id. at 459. “Businesses lose and gain customers for many reasons, and it would require a complex assessment to establish what portion of [plaintiff’s] lost sales were the product of [defendant’s] decreased prices.”

[23] Id. at 460-61.

[24] VanDenBroeck v. CommonPoint Mortg. Co., 210 F.3d 696, 701 (6th Cir. 2000); Sikes v. Teleline, Inc., 281 F.3d 1350, 1360-61 (11th Cir. 2002).

[25] Sandwich Chef of Texas, Inc., 319 F.3d at 224. “[P]laintiffs must demonstrate causation on an individual basis, which defeats predominance and certification of a Rule 23(b)(3) class.”

[26] Id. at 219.Quoting Castano v. Am. Tobacco Co., 84 F.3d 734, 745 (5th Cir. 1996).

[27] 553 U.S. 639.

[28] Id. at 642.

[29] Id. at 642-43.

[30] Id. at 644.

[31] Id. at 649-50.

[32] Id. at 655.

[33] Id. at 657-59 (italics in original; internal citations omitted).

[34] 130 S. Ct. 983, 989 (2010). See Hope For Families & Cmty. Serv., Inc. v. Warren, 721 F. Supp. 2d 1079, 1130 (M.D. Ala. 2010) — “Bridge, however, did not disturb Anza’s and Holmes’s holdings that the alleged violation must be both the ‘but for’ and the proximate cause of the injury to demonstrate that the injury was ‘by reason of’ a RICO violation. […] Hence, Anza’s and Holmes’s principles still must be satisfied in that a plaintiff must demonstrate that the alleged violation led directly to the plaintiff’s injuries” (internal quotation marks omitted); see also UFCW Local 1776 v. Eli Lilly & Co., 620 F.3d 121, 132 (2d Cir. 2010); District 1199P Health & Welfare Plan v. Janssen, L.P., 784 F. Supp. 2d 508, 524-25 (D.N.J. 2011); Bridgewater v. Double Diamond-Delaware, Inc., Civ. A. No. 3:09–CV–1758–B, 2011 WL 1671021, at *10-11 (N.D. Tex. Apr. 29, 2011); Warnock v. State Farm Mut. Auto. Ins. Co., Civ. A. No. 5:08-cv-001-DCB-JMR, 2011 WL 1113475, at *5 (S.D. Miss. Mar. 24, 2011); In re Actimmune Marketing Litig., 614 F. Supp. 2d 1037, 1050 (N.D. Cal. 2009); Southeast Laborers Health & Welfare Fund v. Bayer Corp., 655 F. Supp. 2d 1270, 1280 (S.D. Fla. 2009).

[35] Id. at 989. “[T]o state a claim under civil RICO, the plaintiff is required to show that a RICO predicate offense ‘not only was a “but for” cause of his injury, but was the proximate cause as well.’ Proximate cause for RICO purposes […] should be evaluated in light of its common-law foundations; proximate cause thus requires ‘some direct relation between the injury asserted and the injurious conduct alleged.’” (Citing Holmes, 503 U.S. at 268, 271, 274).

[36] See Bridgewater, 2011 WL 1671021, at *10 (holding post-Bridge that plaintiffs needed to prove individual reliance because “Plaintiffs do not claim third-party reliance and it is not clear how they may show causation without first-party reliance.”); Dungan v. Academy At Ivy Ridge, Civ. A. No. 06-CV-0908, 2008 WL 2827713, at *3 (N.D.N.Y. July 21, 2008).

[37] Dungan, 2008 WL 2827713, at *3.

[38] 620 F.3d 121 (2d Cir. 2010).

[39] 620 F.3d at 133.

[40] Id.

[41] See id. at 133.

[42] UFCW Local 1776, 620 F.3d at 133.

[43] See also District 1199P Health & Welfare Plan, L.P., 784 F. Supp. 2d at 524 — “Plaintiffs may not aver ‘causation by way of generalized allegations and aggregate proof,’ […] because there are numerous factors that could influence a physician when deciding to prescribe a certain drug” (quoting In re Schering–Plough I, No. 2:06-cv-5774 (SRC), 2009 WL 2043604, at *25 (D.N.J. July 10, 2009).

Finis