Does RICO Confer Standing Upon State and Local Governments? (Hemi Group, LLC v. City of New York Argument Preview)

By Anna Christensen
on Oct 28, 2009 at 8:22 am

Below, Brian Goldman of Stanford Law School previews Hemi Group, LLC v. City of New York, one of three cases to be heard by the Supreme Court on Tuesday, November 3. Check the Hemi Group, LLC v. City of New York (08-969) SCOTUSwiki page for additional updates.

On Tuesday, November 3, the Court will hear oral argument in Hemi Group, LLC v. City of New York, No. 08-969.  The case presents the Court with an issue being watched closely by state and local governments nationwide: whether such governments may bring civil suits to recover non-commercial losses – such as uncollected taxes – under the Racketeer Influenced and Corrupt Organizations Act (RICO), which confers standing upon “any person injured in his business or property by reason of a violation of” RICO’s criminal prohibitions.

Petitioner Hemi Group operates websites offering cigarettes for sale “tax-free.”  The company ships cigarettes from low-tax jurisdictions (such as tribal lands in New Mexico) to customers nationwide, including many in high-tax jurisdictions.  New York City is one such high-tax jurisdiction; it (as well as New York State) imposes a tax on all cigarettes used or sold in the City.  Taxes on cigarettes sold in the City are collected at the point of sale by vendors.  By contrast, out-of-state vendors such as Hemi Group are not responsible for collecting local taxes; rather, customers who consume out-of-state purchases in the City are required to report and pay the taxes themselves.  Because collecting such taxes is extremely difficult, and because different state tax rates have long been arbitraged through interstate sales, Congress passed the Jenkins Act in 1949 to facilitate tax collection by requiring out-of-state vendors to report purchases to each customer’s state.

This case began as one of four suits brought by the City in federal court seeking treble damages under RICO’s civil provision from online tobacco retailers – who, the City alleged, had schemed to defraud the City of tax revenues by failing to file the required Jenkins Act reports with the State.  The City claimed, among other allegations, that the retailers committed predicate acts of mail and wire fraud by advertising to customers that their products were “tax-free” and falsely stating that the companies were not required to report sales to authorities in customers’ states.  The retailers’ failure to submit the required reports, the City complained, caused it to suffer an injury in the form of millions of dollars in uncollected tax revenue.

The retailers countered that the City had not alleged an injury to “business or property,” as required by RICO; moreover, because it was their customers, not they, who were responsible for the taxes, any injury to the City was not proximately caused by their actions.  The district court dismissed the suits on unrelated grounds, and the City appealed.

The Second Circuit consolidated the cases, vacated the judgments, and reinstated the RICO claims.  It held both that lost taxes are a cognizable injury under RICO and that the injury flowed directly from the retailers’ actions.  (Because she was a member of the Second Circuit panel that issued the decision below, Justice Sotomayor has presumably recused herself from the case; she did not participate in the Court’s recent decision granting a motion for leave to file an amicus brief in the case.  This raises the possibility of an evenly divided vote at the Court, which would leave the decision below undisturbed.)

After many of its co-defendants had settled the City’s claims, Hemi Group petitioned the Court for review.  It argued that certiorari was warranted because two circuits had held that losses suffered by a government in its sovereign (as opposed to commercial) capacity can be injuries to “business or property,” while two others had held that local governments could not bring suit under RICO for redress for such losses.  The Court granted cert. on May 4 – three weeks prior to Justice Sotomayor’s nomination to the Court.

On the merits, Hemi Group advances two broad arguments.  First, it argues that recognizing the City’s standing to sue under RICO would contravene the text and history of the statute.  According to Hemi Group, “the sovereign interest in collecting taxes” is neither a “property right” nor a “business.”  Hemi Group explains that a “sovereign interest” is not something that can be “owned or possessed” by the injured party, which is RICO’s definition of “property.”  Because an out-of-state vendor does not itself owe any taxes, the City is merely alleging injury to its opportunity to collect taxes and thus lacks standing.  Hemi Group supports this argument with case law interpreting the Clayton Antitrust Act, which served as a model for RICO when Congress wrote it in 1970 and contains the same standing requirement as RICO.  By 1970, courts had held that governments lacked standing under the Clayton Act to bring claims for damage to “sovereign interests,” as opposed to governmental commercial interests.  Hemi Group argues that this same restrictive interpretation should apply here, especially given the Court’s frequent reference to antitrust precedents in construing RICO.

Second, Hemi Group contends that even if the City’s injury were cognizable, it is an indirect injury, because Jenkins Act reports were due to the State only (not the City), and taxes would have been collected from customers (rather than the company).  Had the State not shared the reports with the City, or had the City failed to collect from customers it assessed, the City would have been “injured” notwithstanding Hemi Group’s actions.  More generally, Hemi Group argues, injuries suffered by governments in their sovereign capacity are always indirect.  The City’s claim thus fails to satisfy the proximate-cause requirement developed in RICO case law.

In its brief, the City counters that its “right to its lost cigarette excise tax revenues is ‘property’ and a valuable legal entitlement under” RICO, just as excise taxes have been found to be under the federal wire fraud statute.  The City distinguishes between sovereign interests such as regulation enforcement, which may not be “property,” and “proprietary interests” such as tax revenue and the ability to collect it, which are.  The City also dismisses Clayton Act interpretations as inapposite, arguing that the antitrust laws concerned a much narrower swath of market activity affecting competition, whereas RICO’s broader scope encompasses many more types of injury.  Moreover, in enacting RICO Congress included a mandate that it be liberally construed precisely to ensure that new and complex criminal enterprises such as Hemi Group’s could be redressed.  Counting tax revenue as “property” would further RICO’s purposes, and allowing the City to prosecute Hemi Group would serve the interests of the Jenkins Act and later enactments designed to combat cigarette tax evasion.

As to causation, the City argues that Hemi Group’s failure to comply with its Jenkins Act obligations directly deprived the City of the opportunity to collect taxes from customers.  It is of no consequence that the required reports would have been given to the State (and thus the State, not the City, was being defrauded):  because the State would have shared that information with the City pursuant to a longstanding joint agreement, the City’s injury flows directly from Hemi Group’s fraud.  And it is similarly irrelevant that the State would also have a claim of direct injury to its own ability to collect taxes, as that would be an independent claim rather than a claim from which the City’s would derive.  Finally, although customers themselves shared partial blame for failing to report their purchases, Hemi Group’s fraudulent misrepresentations to both the State (in failing to report) and customers (in advertising “tax-free,” unreported sales) made the company a sufficiently “substantial factor in the sequence of events that caused the loss” to meet RICO’s causation requirements.

Hemi Group uses its reply brief to assail the City’s “ad hominem” attacks against the company and largely to rehash the arguments presented in its opening brief.  It discounts the City’s reliance on RICO’s liberal construction mandate; in its view, that reliance cannot overcome the weight of the statutory text and history, which cut the other way.  And although the company acknowledges that tax revenues themselves are undoubtedly property, the “‘opportunity’ to collect taxes” is something quite distinct.  While a tax assessment might be a cognizable property interest, no assessment was made here.  And “[u]ntil assessment, the sovereign interest is inchoate,” and therefore cannot be injured for purposes of RICO.  Finally, Hemi Group pushes harder on its indirect-injury argument, noting that the City’s poor record of use-tax collection seriously undermines its argument that it could have collected all of the taxes it now claims as damages.

Twenty states joined an amicus brief in support of the City, arguing that state and local governments depend on civil RICO suits as a critical, albeit limited, tool to remedy tax evasion and fight public corruption.  Additionally, the Campaign for Tobacco-Free Kids filed a brief that sheds further light on Congress’s efforts to penalize “large-scale cigarette bootlegging,” including a 1978 tobacco-specific enactment that amended RICO – an amendment, the organization joins the City in arguing, which suggests that Congress intended suits such as the City’s to proceed under RICO.