Summit Properties Inc. v. Hoechst Celanese Corp. , 214 F.3d 556 ( 2000 )


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  •                 IN THE UNITED STATES COURT OF APPEALS
    FOR THE FIFTH CIRCUIT
    No. 99-20622
    SUMMIT PROPERTIES INC.; SUMMIT PROPERTIES LP; SUMMIT PROPERTIES
    PARTNERSHIP LP; STONY POINT/SUMMIT LP; MCGREGOR/MCGUIRE LP;
    HENDERSON/MCGUIRE PARTNERS LP; OAK RIDGE/MCGUIRE PARTNERS LP;
    WAVERLY PLACE/SUMMIT PARTNERS LP,
    Plaintiffs - Appellants,
    versus
    HOECHST CELANESE CORP., formerly known as Celanese Corporation;
    HOECHST CORPORATION; E. I. DUPONT DE NEMOURS, AND CO.; SHELL OIL
    COMPANY, doing business as Shell Chemical Company; VANGUARD
    PLASTICS INC.; BOW INDUSTRIAL CORP.; HOUSEHOLD INTERNATIONAL INC.,
    Defendants - Appellees.
    Appeal from the United States District Court
    For the Southern District of Texas
    June 7, 2000
    Before HIGGINBOTHAM and PARKER, Circuit Judges, and WARD,* District
    Judge.
    PATRICK E. HIGGINBOTHAM, Circuit Judge:
    Today we are invited to read RICO as establishing a federal
    products liability scheme complete with treble damages and attorney
    fees for the benefit of end-users of defective products who never
    relied on manufacturers’ alleged misrepresentations of product
    quality.    We are unpersuaded that RICO can be extended so far by
    such   a   marriage   of   distinct   duties    and   liability    regimes.
    Consequently, we AFFIRM the dismissal of the plaintiffs’ RICO
    *
    District Judge of the Eastern District of Texas, sitting by designation.
    claims against the defendant manufacturers of polybutylene plumbing
    systems and components.
    I
    The plaintiffs own properties in which polybutylene (PB)
    plumbing systems were installed.                  PB is a by-product of oil-
    refining.    In the 1970s, Shell Oil Company purchased the exclusive
    right to sell PB in the U.S. for a 10-year period.                Shell then sold
    PB resin pellets to pipe extruders, such as Vanguard and Bow, who
    made tubing from the pellets.            The defendants in this suit are
    manufacturers    who     sold   either       PB   plumbing    systems     or   their
    components    parts,   including       Shell,       DuPont,   Hoechst     Celanese,
    Household International, Vanguard, and Bow.
    The plaintiffs contend that the defendants manufactured and
    marketed these systems and components through a complex scheme to
    defraud.     The claims revolve around core allegations that the
    defendants made knowingly false claims in marketing PB, including
    assertions that (1) it is suitable for use as a hot and cold
    potable water plumbing systems; (2) it will last 50 years; (3) it
    will not corrode; (4) it is easy, reliable, simple, proven and
    fast; and (5) it will not occasion serious service problems.
    The truth, plaintiffs allege, is that PB plumbing is worse
    than worthless, that it not only fails to perform its intended
    function, but also that it causes severe property damage; that PB’s
    inherent    defects    render    it    unsuitable       for   use    as   a    water
    distribution system, including the fact that after installation,
    such systems degrade, crack, leak, and spray water.
    The    plaintiffs    allege      that    the    defendants     engaged    in   a
    conspiracy to defraud by directing a massive, fraudulent marketing
    plan designed to make PB the “material of choice” in the plumbing
    2
    market, so that by the end of Shell’s ten-year period of exclusive
    rights,    Shell   would     have    a    commanding    market   position.    This
    marketing     campaign      was     directed     at   building   code    approval
    officials, members of the building industry such as builders and
    plumbers, and other consumers.
    II
    The     plaintiffs      filed       suit    in   district   court   alleging
    violations    of    civil    RICO.1        The   district   court   granted    the
    defendants’ Rule 12(b)(6) motion to dismiss because the plaintiffs
    conceded that they did not detrimentally rely on any of the
    defendants’ allegedly fraudulent misrepresentations that served as
    the basis for the RICO claims.             The district court held that such
    reliance is a necessary predicate for establishing proximate cause
    under RICO.        It denied a motion for reconsideration, and the
    plaintiffs appealed.
    III
    RICO provides that “[a]ny person injured in his business or
    property by reason of a violation of section 1962 of this chapter
    may sue therefor . . . .”2 The Supreme Court, in Holmes v.
    Securities Investor Protection Corp.,3 explicitly confirmed that
    the “by reason of” language in RICO requires a causal connection
    between the predicate mail or wire fraud and a plaintiff’s injury
    that includes “but for” and “proximate” causation.4
    1
    
    18 U.S.C. § 1961
     et seq.
    2
    
    18 U.S.C. § 1964
    (c) (emphasis added).
    3
    
    503 U.S. 258
     (1992).
    4
    See 
    id. at 265-68
    .
    3
    The question before us is whether a plaintiff’s reliance on
    the predicate mail or wire fraud is necessary in order to establish
    proximate causation.         In Armco Industries Credit Corp. v. SLT
    Warehouse Co.,5 this court distinguished mail fraud under RICO from
    common law fraud and stated that “to find a violation of the
    federal mail fraud statute it is not necessary that the victim have
    detrimentally relied on the mailed misrepresentations.”6               Ours is
    a different question.
    It is true that the court in Armco found no error when the
    trial judge refused to instruct the jury that a showing of reliance
    was necessary in order to establish proximate causation under
    RICO.7    It is equally the case that the court observed that
    reliance is not an element of the underlying offense of mail fraud,
    and ignored the issue of whether such reliance would be necessary
    in order to prove proximate causation.8          Armco aside, these issues
    are distinct: the government can punish unsuccessful schemes to
    defraud because the underlying mail fraud violation does not
    require reliance, but a civil plaintiff “faces an additional
    hurdle”   and   must    show   an    injury   caused   “by   reason    of”   the
    violation.9
    When     Armco    was   decided,   the   Fifth    Circuit   had   not yet
    interpreted the “by reason of” language of 
    18 U.S.C. § 1964
    (c) to
    5
    
    782 F.2d 475
     (5th Cir. 1986).
    6
    
    Id. at 482
     (emphasis added).
    7
    See 
    id.
    8
    See 
    id. at 481-82
    .
    9
    Pelletier v. Zweifel, 
    921 F.2d 1465
    , 1498, 1498-99 (11th Cir. 1991).
    4
    impose a proximate causation requirement,10 and this circuit still
    allowed recovery for more indirect injuries.11 Since that time, the
    Fifth Circuit in Zervas v. Faulkner12 and the Supreme Court in
    Holmes have explicitly adopted a traditional proximate causation
    requirement.13        Armco does not then answer the question before us:
    whether reliance is necessary to establish proximate cause under
    RICO.      To hold otherwise would imply that Armco silently imposed a
    proximate causation requirement that was not explicitly adopted
    until several years hence in Zervas and Holmes.14             To the extent it
    10
    See Zervas v. Faulkner, 
    861 F.2d 823
    , 834 (5th Cir. 1988) (adopting the
    proximate causation requirement and joining the Second, Fourth, and Seventh
    Circuits); see also 
    id.
     (noting that a similar approach was taken in National
    Enterprises, Inc. v. Mellon Financial Services Corp., 
    847 F.2d 251
     (5th Cir.
    1988), but that the term “proximate cause” was not employed).
    11
    See Ocean Energy II, Inc. v. Alexander & Alexander, 
    868 F.2d 740
    , 744
    (5th Cir. 1989) (“[W]e [have] rejected the position taken by the Seventh,
    Eleventh and possibly Third Circuits interpreting the language in [Sedima,
    S.P.R.L. v. Imrex Co., Inc., 
    473 U.S. 479
    , 496 (1985)] as allowing recovery only
    for direct injuries.”).
    12
    
    861 F.2d 823
     (5th Cir. Dec. 15, 1988).
    
    13 Holmes, 503
     U.S. at 265-68; Zervas, 
    861 F.2d at 834
    .
    14
    Since Holmes this circuit has stated that “reliance is not an element of
    mail fraud” for RICO liability. See Akin v. Q-L Investments, Inc., 
    959 F.2d 521
    ,
    533 (5th Cir. 1992). In Akin, however, this court noted only that reliance is
    not an element of an underlying mail or wire fraud violation. See 
    id.
     (citing
    Abell v. Potomac Ins. Co., 
    858 F.2d 1104
    , 1129 (5th Cir. Nov. 2, 1988)). Whether
    the plaintiff’s damages were proximately caused by reason of such violation was
    not at issue. See 
    id.
    Abell cited Armco for the proposition that reliance is not an element of
    the underlying mail or wire fraud. See Abell, 
    858 F.2d at 1129
    . Like Armco,
    Abell was decided before Zervas and did not discuss the issue of whether reliance
    is necessary for proximate causation. Instead of arguing proximate cause, the
    defendant claimed that “the evidence did not establish . . . any causal
    connection between the plaintiffs’       . . . injuries and [the defendant’s]
    misrepresentations.”      
    Id. at 1129
     (emphasis added).       The Supreme Court
    subsequently vacated Abell, see Fryar v. Abell, 
    492 U.S. 914
     (1989), and on
    remand this court remanded the case to the district court for reconsideration,
    see Abell v. Potomac Ins. Co., 
    884 F.2d 196
     (5th Cir. 1989). In the second
    appeal to this court, issues related to reliance did not arise. See Abell v.
    Potomac Ins. Co., 
    946 F.2d 1160
     (5th Cir. 1991).
    5
    held that proximate cause was not required, it has been overturned
    by Holmes.
    On appeal, the plaintiffs do not quarrel with the district
    court’s acceptance of their concession that they “did not rely on
    anything     Defendants      said   or       published       in   purchasing     their
    properties.”15     Instead, the plaintiffs steadfastly maintain that
    individual acts of reliance are simply unnecessary in order to
    recover for damages resulting from civil RICO fraud.                     Most other
    circuits, however, require a showing of detrimental reliance by the
    plaintiff,16    which   is    consistent        with   Holmes’      admonition     that
    federal courts employ traditional notions of proximate cause when
    assessing    the   nexus      between    a    plaintiff’s         injuries   and   the
    underlying RICO violation.17
    The rationale for requiring reliance in cases such as this one
    becomes    clear   in   the    light     cast    by    the    distinction      between
    causation as an element of a claim for fraud and producing cause as
    15
    Plaintiffs’ Memorandum of Law in Reply to Various Motions and Memoranda
    of Defendants, at 24 ¶ 43 [R. 1198], quoted in Memorandum Opinion and Order, at
    2 [R. 1241]; see also Brief of Appellants, at 6 (“Because it did not have to do
    so, Summit did not claim that it relied on [the defendants’] misrepresentations
    and omissions regarding [the] inherently defective and worthless plumbing
    system.”).
    The plaintiffs only remaining allegations of reliance involved the
    “technically accurate” representations by various entities who stated that the
    plaintiffs’ properties confirmed to the local building codes. See Plaintiffs’
    Second Amended Complaint, at 24 ¶ 73 [R. 892]; Plaintiffs’ Memorandum of Law in
    reply to Various Motions and Memoranda of Defendants, at 25 ¶ 45 [R. 1197].
    Reliance on technically accurate representations by entities other than the
    defendants is not reliance upon misrepresentations by the defendants.
    16
    See, e.g., Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 
    90 F.3d 737
    ,
    746-47 (3d Cir. 1996); Chisholm v. Transouth Fin. Corp., 
    95 F.3d 331
    , 337 (4th
    Cir. 1996); Appletree Square I v. W.R. Grace & Co., 
    29 F.3d 1283
    , 1286 (8th Cir.
    1994); Central Distribs. of Beer, Inc. v. Conn, 
    5 F.3d 181
    , 184 (6th Cir. 1993);
    Pelletier v. Zweifel, 
    921 F.2d 1465
    , 1499-500 (11th Cir. 1991); County of Suffolk
    v. Long Island Lighting Co., 
    907 F.2d 1295
    , 1311 (2d Cir. 1990); Reynolds v. East
    Dyer Dev. Co., 
    882 F.2d 1249
    , 1253 (7th Cir. 1989).
    17
    See Holmes, 
    503 U.S. at 268
    .
    6
    an element of a claim for products liability.18 The linkage between
    design defect and injury is between the defect and the injury.
    With a claim for fraud, however, the linkage is between the
    defendants’ fraud and the injury.
    As a product travels in the stream of commerce, inherent
    defects are carried with it, but fraudulent statements are not.
    With the abolition of privity requirements, injuries produced by
    product defect may be actionable by all users including those
    remote in the distribution chain from a defendant manufacturer. The
    causal connection between a misrepresentation and a subsequent
    harm, however, vanishes once the product travels beyond the entity
    who   actually     relied   on     the   representation      when   making      the
    purchasing decision.
    In other words, even if intermediary builders, plumbers, code
    officials, or prior owners relied on the defendants’ alleged
    misrepresentations when choosing to use or approve PB plumbing,
    that does not tell us whether the defendants’ fraud proximately
    caused the       plaintiffs’     injuries,   for    which   the   defect    was a
    producing cause.         At best, any fraud during the sale of those
    products proximately injured only those initial purchasers who
    relied     on    the   alleged    misrepresentations,       since    the    fraud
    facilitated a sale that might not otherwise have been made.
    Of course, if the sales would not have occurred absent the
    fraud,     the   fraud   would    have   been   a   “but-for”     cause    of   the
    18
    To recover under Texas products liability law, a design defect must be
    a "producing cause" of injury. See Tex.Civ.Prac. & Rem.Code Ann. § 82.005(a).
    A producing cause is “an efficient, exciting, or contributing cause, which in a
    natural sequence, produced injuries or damages complained of, if any.” Rourke
    v. Garza, 
    530 S.W.2d 794
    , 801 (Tex. 1975). Our reference to Texas law, however,
    is for purposes of illustration only.
    7
    plaintiffs’ injuries.19        Nevertheless, the plaintiffs came into
    possession of PB systems without relying on the alleged fraud.
    Whether they received their systems from the manufacturers or from
    prior property owners, any past fraud was not a proximate cause of
    the plaintiffs’ resulting injuries since fraud did not induce the
    purchase transactions.20
    This is only to recognize the distinct character of claims for
    fraud and claims for defective products resting on the law of
    products liability.      In general, fraud addresses liability between
    persons with direct relationships – assured by the requirement that
    a plaintiff has either been the target of a fraud or has relied
    upon the fraudulent conduct of the defendants. The Fourth Circuit,
    recognizing the target wing of these twin limits of liability, held
    open the possibility that a plaintiff company may not need to show
    reliance when a competitor lured the plaintiff’s customers away by
    fraud directed at the plaintiff’s customers.21 In the current case,
    for example, the defendants’ competitors might recover for injuries
    to competitive position, but that circumstance is of no aid to
    these plaintiffs.        Accepting as claimed that the defendants’
    strategy may have been to gain market share by fraud in the initial
    sale of PB components, it is not contended that these particular
    19
    If the relevant decisionmakers knew the limitations of the product but
    would have bought it anyway because of its low price, for example, the fraud
    would not have been a “but-for” cause of the plaintiffs’ damages.
    20
    See Johnson Enterprises of Jacksonville, Inc. v. FPL Group, Inc., 
    162 F.3d 1290
    , 1318 (11th Cir. 1998) (noting that a plaintiff’s injury is not
    proximately caused by a defendant’s misrepresentations when the injury results
    only from the detrimental reliance of a third party).
    21
    See Mid Atlantic Telecom, Inc. v. Long Distance Services., Inc.,
    18 F.3d 260
    , 263-64 (4th Cir. 1994).
    8
    plaintiffs were the targets of a scheme to defraud accomplished by
    defrauding others.22
    Plaintiffs’ able counsel has understandably fled to the “fraud
    on the market” theory of constructive reliance, a theory born in
    securities litigation.            It assumes that prices in an efficient
    market incorporate the relative importance of public information,
    whether that information is true or false.23            If publicly announced
    information       regarding   a    security   is    fraudulent,   a   subsequent
    purchaser    of    that   security    from    the   market   is   said   to   have
    constructively relied on the fraudulent statements because they
    were incorporated into the market price. The case proceeds despite
    the fact that the defendant and the purchaser had no direct
    relationship and reliance upon the false statements could not be
    shown.     This because under the theory, the market as an efficient
    translator of data to price acted as an intermediary, connecting
    plaintiff and defendant.
    22
    Similarly, we do not think the current situation is similar to one
    discussed in Holmes, where the Court left open the possibility that the customers
    of an insolvent brokerage might recover under RICO for losses stemming from a
    series of fraudulent brokerage transactions despite the fact that those customers
    did not in any sense “rely” on a misrepresentation. See 
    503 U.S. at
    272 n.19.
    In that situation, the fraudulent brokerage transactions imposed immediate
    risks on the brokerage’s customers by increasing the likelihood of the
    brokerage’s insolvency, even if the conspirators did not intend such risks to
    fall on those customers through their sham transactions.
    Nevertheless, when an action poses a high and foreseeable risk on a third
    party, we may view the resulting injury as deliberate for the purpose of
    liability. See, e.g., Matter of EDC, Inc., 
    930 F.2d 1275
    , 1279 (7th Cir. 1991)
    (Posner, J.). In that sense, the brokerage customers may be seen as direct and
    contemporaneous victims of the fraudulent scheme and within the scope of the
    already noted exception.
    In the present case, however, the plaintiffs’ risks of injuries did not
    arise as direct and contemporaneous results of any alleged fraud, but instead
    arose only later, through the purchases of allegedly defective plumbing by
    transactions which were not tainted with fraud.
    23
    See Basic Inc. v. Levinson, 
    485 U.S. 224
    , 244-47 (1988) (citing In re LTV
    Sec. Litig., 
    88 F.R.D. 134
    , 143 (ND Tex.1980)).
    9
    No court has accepted the use of this theory outside of the
    context of securities fraud, and one circuit has expressly rejected
    its use in the context of a similar civil RICO case.24             An efficient
    market is a critical element of a market’s role as an intermediary.
    There is no pretense of such a market here and the fraud on the
    market doctrine is not applicable.
    IV
    In sum, when civil RICO damages are sought for injuries
    resulting from fraud, a general requirement of reliance by the
    plaintiff is a commonsense liability limitation. To hold otherwise
    would allow the threat of treble damages and attorney fees to
    infiltrate       garden   variety    products     liability    cases    whenever
    marketing promotions touted the merits of the products, even if no
    plaintiff relied on those representations. This is not a statement
    of our policy choice.         We are not persuaded that by its “by reason
    of” phrase Congress intended such a federalization and escalation
    of the states’ laws of product liability – laws that have hardly
    been proved to be anemic in their common law use of economic
    incentives to achieve desired social goals. The threshold reliance
    requirement is determinative in this case.             We need not and do not
    reach other issues raised by the defendants.                Agreeing with the
    district court, we AFFIRM its dismissal of this suit.
    AFFIRMED.
    24
    See Appletree Square I v. W.R. Grace & Co., 
    29 F.3d 1283
    , 1287 (8th Cir.
    1994).
    10
    

Document Info

Docket Number: 99-20622

Citation Numbers: 214 F.3d 556, 2000 U.S. App. LEXIS 12326, 2000 WL 729397

Judges: Higginbotham, Parker, Ward

Filed Date: 6/7/2000

Precedential Status: Precedential

Modified Date: 10/19/2024

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Sedima, S. P. R. L. v. Imrex Co. , 105 S. Ct. 3275 ( 1985 )

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