Second Circuit Ruling Potentially Expands RICO Proximate Cause Element | Troutman pepper

The Second Circuit Court of Appeals recently issued an opinion that potentially expands the proximate cause element of claims filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act. RICO’s proximate cause element requires a plaintiff to allege facts that plausibly establish a “direct relationship” between the alleged harm and the defendant’s conduct in violation of RICO. By suggesting a perhaps broader interpretation of this element, the Second Circuit may have made it easier for future plaintiffs to bring and litigate RICO civil actions, particularly against their business competitors.

The case, Alix v Mckinsey & Co., related to a complaint filed by Alix Partners against McKinsey & Co., Alix’s main competitor in the high-end corporate bankruptcy advisory market (bankruptcy case involving assets over $1 billion). McKinsey is the dominant player in the market, but Alix has historically received 24% of engagements not attributed to McKinsey. In the lawsuit, Alix alleged that McKinsey violated RICO and wrongfully received bankruptcy undertakings by (1) submitting false claims to the U.S. bankruptcy court that omitted conflicts of interest that should have led to McKinsey’s disqualification , and (2) by engaging in a “pay-to-play” scheme in which McKinsey introduced its clients to bankruptcy attorneys in exchange for lucrative referrals of bankruptcy assignments by the attorneys. Alix claimed that these illegal activities by McKinsey deprived her of commitments in bankruptcy court that she would otherwise have obtained in the absence of McKinsey’s misconduct.

The district court granted McKinsey’s motion to dismiss, finding that Alix had not pleaded RICO’s proximate cause element. The court ruled that there were independent decisions by the U.S. bankruptcy trustee and the bankruptcy court regarding the use of consultants that made the causal connection between McKinsey’s actions and Alix’s failure to earn more than bankruptcy assignments “too remote, contingent and indirect” to support a RICO claim. In other words, the court found that the direct cause of Alix’s harm stemmed from independent decisions by various debtors’ trustees not to hire Alix, rather than McKinsey’s alleged misconduct of inappropriate commitments.

The Second Circuit quashed and remanded the case. While acknowledging that the district court rendered a “cautious opinion navigating a body of case law that, to put it charitably, is far from clear,” the Second Circuit criticized the district court’s decision because the conduct alleged in Alix’s complaint directly undermined the integrity of the federal courts: “[W]We believe the district court failed to give sufficient consideration to the fact that McKinsey’s alleged misconduct is aimed at the federal justice system. Accordingly, this case requires us to focus on the responsibilities that Article III courts must assume to ensure the integrity of the bankruptcy court and its proceedings.” In this context, the Second Circuit opted for a more flexible application of the immediate causation requirement.

For example, the court singled out an important United States Supreme Court precedent on RICO causation – Anza vs. Ideal Steel Supply Corp. [1] – stating “Anza would be…more like this case if the defendants had allegedly defrauded one of the courts we oversee.” The court ignored other precedents because “none of these prior cases involved allegations of fraud against a court whose operations we oversee.” And more generally, the court closed the causation gap by concluding that “bankruptcy court fraud committed in the manner alleged by Alix causes direct harm to litigants who are entitled to a level playing field and engages our unique oversight responsibilities”.

One of the more curious aspects of the court’s opinion was the determination that causation was satisfied because Alix was “better placed” to remedy the alleged misconduct than the US trustee or the bankruptcy court would have him. -even, despite the courts’ inherent power to investigate and remedy fraud in court. The Second Circuit’s rationale – that neither the US trustee nor the bankruptcy court (or, for that matter, the US attorney) would be in a superior position to find out what McKinsey did and impose a remedy – was simply stated as a ipse sayswithout reference to precedents or supporting data.

It is clear that the Second Circuit’s interpretation of RICO causation in this decision is broader than that applied by other courts. And it remains to be seen what impact this decision has on all of the RICO jurisprudence in the Second Circuit and elsewhere. Nonetheless, there are several key takeaways from this case that RICO companies and practitioners should be aware of.

1. The scope of this decision may not be as narrow as the court intends.

There is no doubt that the Second Circuit felt that this particular RICO case deserved special attention because it involved potential fraud in a court, even going so far as to say that its decision was sui generis and of “little, if any, application to “ordinary” RICO cases where these [supervisory] responsibilities are not in the foreground. However, the tribunal did not use its usual tools to limit the precedent value of a decision – for example, mark it “not for publication”, or issue a summary order or explicitly limiting its disposition to the particular facts of the case. Therefore, it would not be surprising to see future plaintiffs proposing similar theories of causation based on this decision. The court’s focus on potential fraud on the court can also serve as a distinct means to encourage RICO lawsuits by creative plaintiffs who can plausibly connect suspected fraudulent activity to the legal system or, by analogy, to other other public or governmental entities.

2. The decision opens the door for plaintiffs to claim causation based on market share.

To assert immediate causation, Alix relied heavily (if not exclusively) on an analysis of its historical market share of high-end corporate bankruptcies, namely its claim which received 24% of the commitments that are not not been to McKinsey. The Second Circuit explicitly reversed the District Court’s rejection of this argument, noting that “it is also reasonable to infer that … [Bankruptcy Courts] probably would have awarded missions to eligible companies in about the same ratio they had used in the past. have been awarded to other companies in the same proportion of their historical market share. This type of causation analysis will likely encourage companies to bring RICO lawsuits against competitors for theft of business through allegedly fraudulent behavior by giving reliance on the use of historical market share data to satisfy causation, at least at the argument stage.

3. RICO’s proximate cause element remains flexible enough to encourage more RICO lawsuits.

Although other courts limit the application of this ruling to RICO cases that allege fraud in court (as noted above), the Second Circuit opinion at the very least underscores the flexible nature of proximate cause in a RICO case, and encourages case-specific analysis of even the most creative causal arguments. This concept, which is embedded in RICO case law, was clearly the driving force behind the Second Circuit’s decision: “As the Supreme Court explained, proximate cause is a ‘flexible concept’ which ‘does not generally lend itself not to the clear line rules”. The more flexible approach courts are willing to take to assess immediate causation, the more likely RICO plaintiffs are to advance new claims and unique theories of causation (as Alix has put it). done here), and the more likely RICO attorneys are to handle such cases, particularly where the plaintiff is a business that may indicate a significant loss of revenue. in dismissal, the effectiveness of these arguments will diminish if more courts either adopt the Second Circuit’s decision in Alex or even his deference to the “flexibility” of immediate causality.

[1] 547 U.S. 451, 126 S.Ct. 1001, 164 L.Ed.2d 720 (2006). In Anza, the plaintiff alleged that it lost sales because its competitor did not pay sales taxes and was able to sell the product at lower prices. The court ruled that causation was not invoked because there were many possible reasons for lowering prices that would be intermediate events.

Terri S. Tomasini