James Cape & Sons Co v. Streu Construction

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-3894
JAMES CAPE & SONS COMPANY,
Plaintiff-Appellant,
v.
PCC CONSTRUCTION COMPANY
(f/k/a STREU CONSTRUCTION COMPANY),
VINTON CONSTRUCTION COMPANY,
JOHN STREU, ERNEST J. STREU,
JAMES J. MAPLES, MICHAEL J. MAPLES
and DANIEL BEAUDOIN,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 05-CV-00269—William C. Griesbach, Judge.
____________
ARGUED JUNE 1, 2006—DECIDED JUNE 28, 2006
____________
Before FLAUM, Chief Judge, and MANION and WILLIAMS,
Circuit Judges.
FLAUM, Chief Judge. Defendants pleaded guilty to
rigging bids for State of Wisconsin Department of Transpor-
tation construction projects. One of the defendants, Daniel
Beaudoin, is a former employee of James Cape & Sons
(“Cape”), the plaintiff construction company. Plaintiff
alleges that with Beaudoin’s help, the defendant construc-
tion companies learned of Cape’s bids for various construc-
2 No. 05-3894
tion projects, which is forbidden in Wisconsin’s blind
bidding process. This knowledge allegedly allowed them to
unfairly manipulate the bidding process by underbidding
Cape by small increments. Cape filed an antitrust and a
civil RICO suit against the defendants. The district court
dismissed the case on the pleadings. Cape appeals. For the
following reasons, we now affirm.
I. Background
PCC Construction Co., f/k/a Streu Construction Co.
(“Streu”), Vinton Construction Co. (“Vinton”), the owners of
those companies, and Daniel Beaudoin are the defendants
in this action. They have plead guilty to collaborating to rig
bids for construction projects for, among others, the State of
Wisconsin Department of Transportation (“WisDOT”).
WisDOT allocates construction projects through a closed
bidding system. WisDOT is required by law to accept the
lowest bid from a “competent and eligible bidder.” In order
to be “eligible,” a bidder must submit a sworn statement
that the bidder did not collude with competitors or other-
wise restrain free bidding.
Beginning in approximately 1997 and continuing until
2004, the defendants began to unfairly rig the WisDOT
bidding process. The owners of Streu and Vinton would
meet to discuss projects that would soon be up for bid. They
would share their companies’ bid information, discuss
potential competitors, and set bids amongst themselves in
an attempt to allocate projects between them.
In late 1996, John Streu of Streu Construction Co.
approached defendant Beaudoin and asked him to become
part of the bid-rigging scheme. At that time, Beaudoin was
an area manager for Cape, and as part of his job, he worked
on Cape’s bids before they were submitted to WisDOT.
Through a series of in-person and telephonic meetings,
Beaudoin shared Cape’s confidential information with the
No. 05-3894 3
other defendants, sometimes mere minutes before the
companies submitted their bids. This allowed the conspira-
tors to lower or raise their bids to just under the amount
that Cape was going to bid.
In 2003, another Cape employee began to suspect that
Beaudoin might be revealing confidential bid information to
competitors. In March 2003, Plaintiff reported its suspicions
about Beaudoin to the United State’s Attorney’s Office for
the Eastern District of Wisconsin. Beaudoin eventually
cooperated with the government in its investigation of the
bid-rigging scheme.
Cape alleges that because Streu and Vinton were able to
inflate their bids on contracts that they were sure they
would receive, WisDOT was overcharged by almost two
million dollars over the life of the scheme. Cape also alleges
that it lost millions of dollars of business because its share
of the market was reduced and it was awarded fewer
contracts than it otherwise would have been.
Defendants Ernest Streu, John Streu, James Maples, and
Michael Maples all pleaded guilty to antitrust violations,
and admitted that they met in person and “allocate[d]
upcoming construction projects among themselves and []
arrange[d] for each other to submit complementary bids for
or refrain from bidding on particular projects.” Beaudoin
also pleaded guilty, stating that he and his co-conspirators
“would cause rigged bids to be submitted from the offices of
Vinton and Streu . . . and from Cape’s offices in Racine
County to WisDOT and other entities,” and that, “[d]uring
[his] participation in these activities, his employer received
contracts totaling in excess of $17.1 million for projects
which had been the subject of the conspiracy.”
Cape filed a civil antitrust action under 15 U.S.C. § 15, a
civil RICO action under 18 U.S.C. § 1964(c), and various
state claims against the defendants. The district court
granted the defendants’ motion to dismiss, finding that
Cape had failed to state a claim upon which relief could be
4 No. 05-3894
granted. The court dismissed the federal counts with
prejudice, and the pendant state law claims without
prejudice. Cape now appeals that ruling.
II. Discussion
A. Antitrust Claim
The district court dismissed Cape’s antitrust claim
because it found that Cape had not properly alleged an
antitrust injury. The court noted that for a civil litigant to
show antitrust injury, it must show injuries that reflect the
anticompetitive effect of either the violation or the
anticompetitive acts made possible by the violation. Bruns-
wick Corp. v. Pueblo Bowl-o-Mat, Inc., 429 U.S. 477, 489
(1977). The court further elaborated that such injury must
involve “loss [that] comes from acts that reduce output or
raise prices to consumers.” Chi. Prof’l Sports Ltd. P’ship v.
Nat’l Basketball Ass’n, 961 F.2d 667, 670 (7th Cir. 1992).
The court believed that Cape had not shown such injury,
because “by undercutting James Cape & Sons[, Defendants]
actually provided lower bids to the consumer. That is, their
bid-rigging activities actually increased, rather than
restricted, competition, albeit in an illegal manner.” The
court noted that Cape’s damages resulted only because its
bids were higher than Defendants’ bids.
We agree with the district court that consumer injury
is not necessarily related to Cape’s injury. While Cape
may have been injured because, absent a conspiracy, the
defendants might have inflated their prices in hopes of
receiving more profit from the project and therefore not
received the bid, the conspiracy still would have resulted in
the consumer paying a price below Cape’s bid. Such a loss
would not “come[ ] from acts that reduce output or raise
prices to consumers.” Chi. Prof’l Sports, 961 F.2d at 670.
On appeal, Cape argues that the district court overlooked
one form of antitrust injury mentioned in the complaint.
No. 05-3894 5
Cape claims that it properly alleged that Beaudoin, as a
member of the conspiracy, not only shared Cape’s bids with
the rest of the defendants, but also falsely inflated Cape’s
bids to allow Streu and Vinton to win the project. Thus, the
other defendants’ “undercutting” did not necessarily result
in lower prices for the state, Cape claims. Defendants
respond that Cape did not raise any such allegation in the
pleadings that were before the district court.
Cape believes that it did raise this theory in its pleadings
below. First, Cape alleged that Beaudoin had the authority
to prepare cost estimates that the company would use to
prepare its bids.1 The rest of the theory, Cape submits, can
be inferred from Cape’s allegations that “Defendants”
“rigged” bids. Cape argues that “rigged,” since it is used in
reference to “Defendants” (which would include Beaudoin),
should encompass the inflated estimate scheme alleged on
appeal. The language in the complaint that best supports
this theory is found in paragraph 85, wherein Cape alleges,
“[D]efendants [presumedly including Beaudoin] took various
actions, including . . . designating which coconspirator [sic]
would submit the low bid for the project and which of the
co-conspirators [again, presumedly including Beaudoin]
would submit higher, complementary bids for the project.”
After reading the complaint, we conclude that the issue
was not adequately plead to the district court. Most of the
complaint alleges that Streu and Vinton unfairly under-
bid Cape, and mentions Beaudoin only in the context of
accusing him of sharing information with the other defen-
dants so as to allow them to adjust their bids.
Plaintiff’s argument that it properly plead its theory that
Beaudoin inflated Cape’s bids merely by alleging that the
1
This contention was not made as articulately in the pleadings,
which alleged instead that Beaudoin “as part of his job worked
on estimates for some bids submitted to WisDOT.”
6 No. 05-3894
“defendants” “rigged” bids is weakened by the way in which
Cape uses the word “defendants” throughout its complaint.
For example, almost immediately following paragraph 85 is
an accusation that “defendants” “[a]ccept[ed] payment from
the State of Wisconsin.” Including Beaudoin in this group
of “defendants” is arguably inconsistent with Cape’s own
claim for damages. Throughout the complaint, Cape
repeatedly refers to “defendants” allocating contracts
amongst “themselves,” with the clear implication that only
Streu and Vinton received the contracts and Cape was
excluded. We believe it unfair to expect Defendants to
completely ignore the context of the complaint and read the
term “defendants” to mean “defendants [including
Beaudoin],” as Cape encourages us to do in its brief, when
throughout most of the complaint, the allegations make
sense only if “defendants” is read to mean “defendants
[excluding Beaudoin].”
Therefore, we hold that the district court had no basis
from which to reasonably find that the claim that Beaudoin
artificially raised Cape’s bids was included in the complaint,
and was justified in not considering it.
Cape argues that even if it did not properly allege its
claim, the district court should have allowed it to amend its
complaint before dismissing it with prejudice. Defendants
counter that Cape never requested leave to amend its
complaint. Cape arguably states its desire to amend its
complaint, if necessary, in the next-to-last paragraph in its
response to the defendants’ motion to dismiss;2 however,
2
That paragraph reads, “If there is any question as to the
sufficiency of the allegations as to the federal and state claims
(which Cape contends there is not), the claims certainly should not
be dismissed with prejudice as defendants request. Cape should
be afforded the opportunity to amend its complaint so as to
describe in even greater detail the damages it suffered as a result
(continued...)
No. 05-3894 7
neither the caption nor the conclusion of the motion for-
mally requests leave to amend.
Under Federal Rule of Civil Procedure 15, leave to amend
“shall be freely given when justice so requires.” Cape seems
to argue that, even though it did not properly request leave
to amend its complaint, the district court was required by
Rule 15 to dismiss without prejudice and/or sua sponte
grant leave to amend the complaint. It does not cite any
case law to support this proposition. In Coates v. Illinois
State Board of Education, 559 F.2d 445 (7th Cir. 1977), the
plaintiff made a Rule 15-based argument similar to the one
Cape presses here. We ruled, “We agree that [the district
judge] correctly held the complaint insufficient. He did not
abuse his discretion in denying leave to amend the com-
plaint, because such leave was never sought. Under these
circumstances, we can find no basis for disturbing his
judgment in any way.” Coates, 559 F.2d at 451 (citing
Froman v. Davis, 371 U.S. 178, 182 (1962)) (footnote
omitted).
Furthermore, the only time Cape even arguably requested
leave to amend, in the penultimate paragraph of its re-
sponse to defendants’ motion to dismiss, it expressed its
intention to “describe in even greater detail the damages it
suffered.” The district court could have quite reasonably
believed that an amended complaint would suffer the same
fatal flaws as the one before it, and that the “interests of
justice” did not require permission to amend. See FED. R.
CIV. P. 15. District judges are not mind readers, and should
not be required to explain to parties whether or how their
complaints could be drafted to survive a motion to dismiss.
2
(...continued)
of defendants’ Sherman Act violations and how another enterprise
. . . existed and was utilized by defendants to perpetrate their
scheme.”
8 No. 05-3894
Even assuming that Cape properly moved to amend, the
district court did not abuse its discretion in dismissing with
prejudice, since it had no way of knowing what the proposed
amendment entailed.
Cape’s final argument against dismissal of its antitrust
claim is that it has stated a claim under our precedent
in Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774,
783 (7th Cir. 1994). That case holds that antitrust damages
may result if a cartel inflicts damage on one of its own
members in retaliation for that member’s attempt to
undercut the cartel’s prices and therefore lower consumer
prices. Id. The heart of Cape’s claim, however, is that it was
never a member of the cartel in the first place, which is
what allowed it to be underbid by the members of the
conspiracy. The Hammes case is therefore inapplicable here.
For these reasons, we affirm the district court’s dismissal
of Cape’s antitrust claim.
B. RICO Claim
Cape also protests the district court’s dismissal of its civil
RICO claim. The district court found that Cape had failed
to allege that the defendants had managed or controlled
WisDOT, thus creating an incomplete civil RICO claim
under 18 U.S.C. § 1964(c). In Reves v. Ernst & Young, 507
U.S. 170, 178-79 (1993), the Court clarified that in order to
“participate in the conduct” of a criminal enterprise for the
purposes of RICO liability, a defendant must exercise some
role in the direction of the enterprise. See also Goren v. New
Vision Int’l, Inc., 156 F.3d 721, 727 (7th Cir. 1998) (“[M]ere
participation in the activities of the enterprise is insuffi-
cient; the defendant must participate in the operation or
management of the enterprise.”).
Cape argues that it has alleged the requisite control
because WisDOT awarded the projects by a computer
No. 05-3894 9
program designed to accept the lowest bid; therefore the
bid-rigging scheme effectively controlled a “core function” of
WisDOT, selecting who would receive construction projects.
Cape argues that this meets the control element of a civil
RICO claim.
Cape relies principally on a recent case from the Middle
District of Florida, Lockheed Martin Corp. v. Boeing Co.,
357 F. Supp. 2d 1350 (M.D. Fla. 2005), in which the district
court ruled that by creating its bid estimates based on
Lockheed Martin’s confidential information, which was
stolen from an ex-Lockheed employee, Boeing had “con-
trolled” the government’s bid process within the meaning of
the civil RICO statute.
The Lockheed Martin court relied in part on United States
v. Castro, 89 F.3d 1443 (11th Cir. 1996). In Castro, a group
of lawyers paid a judge to assign them contract public
defender cases. The Eleventh Circuit ruled that although
the lawyers had no actual control over who received the
public defender appointments, their kickbacks to the judge
gave them sufficient “control” over the court that they could
be held liable for RICO violations. The Lockheed Martin
court analogized Boeing’s scheme to Castro, stating:
[I]n this case, the Boeing defendants were not primarily
responsible for determining which companies received
. . . contracts. Yet, like the defendants in Castro, they
are alleged to have engaged in illegal activity which
substantially impacted the decisions of those who did
have principal decision-making authority. The only
difference in this case is that the decision-makers were
neither aware of, nor complicit in, the alleged scheme.
This is a distinction, however, that is irrelevant to the
question of whether the Boeing Defendants controlled
the alleged legitimate enterprise through their illegal
conduct.
Lockheed Martin, 357 F. Supp. 2d at 1359-60.
10 No. 05-3894
The district court rejected Cape’s analogy to Lockheed
Martin. Judge Griesbach wrote that he believed that the
Lockheed Martin court had confused controlling the outcome
of a given situation with controlling the enterprise itself.
The court believed that the only affairs controlled here were
the defendants’ own. The district court stated that the
defendants were basically cheaters, who had no more
“control” over WisDOT than an illegal steroid user has over
Major League Baseball. Although the district court ac-
knowledged that an outsider can “direct” an organization
through, for example, bribery, the district court found these
situations distinguishable from the instant case—in bribery
situations, the outsider directs the enterprise by proxy.
Cape attempts to refute this logic by relying on this
court’s analysis in United States v. Cummings, 395 F.3d 392(7th Cir. 2005). In that case, a “skip tracer,” or person
employed by a credit agency to find debtors who can no
longer be located, was accused of paying certain employees
of the State of Illinois for confidential personal informa-
tion available in a state database. We ruled that this
bribery did not constitute the requisite control of the agency
to maintain a RICO conviction, because the skip tracer “did
not pay bribes in order to exert control over [the agency’s]
core functions[.]” Cummings, 395 F.3d at 399. Cape argues
that the logical extension of this case is that Defendants
exercised sufficient control over WisDOT to create a valid
civil RICO claim, since they exercised control over the
allocation of construction contracts, a “core function” of the
agency.
This argument presents a classic logical fallacy.
Cummings stands for the proposition that control over an
agency requires control over one of the agency’s “core
functions.” In other words, control over an agency’s core
functions is necessary, but potentially insufficient, to create
the appropriate level of control required for a RICO claim.
In this case, Defendants controlled the outcome of WisDOT’s
No. 05-3894 11
bidding process, but not the manner in which the depart-
ment went about awarding the contract. That is not enough
for civil RICO purposes. If the defendants had bribed a
WisDOT employee to override the computer’s recommenda-
tion, or enter a false bid into the computer, they would have
controlled the enterprise. That is not the case here. Cape
has failed to demonstrate that the defendants controlled
WisDOT for civil RICO purposes.
Even assuming that Cape had shown that defendants
“managed or controlled” WisDOT, its claim would still fail
because it has not properly alleged that the RICO violation
was the proximate cause of its damages. The Supreme
Court recently made clear that a civil RICO claim cannot
survive unless the plaintiff properly alleges that the RICO
violation was the proximate cause of his or her damages.
Anza v. Ideal Steel Supply Corp., 126 S. Ct. 1991, 2006
WL 1519365 (2006). In Anza, the plaintiff, Ideal Steel
Supply Corp., alleged that the defendants’ company,
National, had not paid New York sales tax, which allowed
National to unfairly undercut Ideal’s prices. Anza, 126
S. Ct. at 1994. Plaintiff alleged that defendants committed
mail fraud and wire fraud when they submitted false tax
returns to the New York State Department of Taxation and
Finance. Id. at 1995. The Second Circuit ruled that “even
where the [racketeering] scheme depended on fraudulent
communications directed to and relied on by a third party
rather than the plaintiff,” the plaintiff has adequately plead
proximate cause if the complaint alleges a pattern of
racketeering activity “that was intended to and did give the
defendant a competitive advantage over the plaintiff. Id.(citing Ideal Supply Corp. v. Anza, 373 F.3d 251 (2d Cir.
2004).
The Supreme Court disagreed, holding that the relevant
inquiry to determine proximate cause is “whether the
alleged violation led directly to the plaintiff’s injuries.”
Anza, 126 S. Ct. at 1998. The Court wrote, “The RICO
12 No. 05-3894
violation alleged by Ideal is that the Anzas conducted
National’s affairs through a pattern of mail fraud and wire
fraud. The direct victim of the conduct was the State of New
York, not Ideal. It was the state that was being defrauded
and the State that lost tax revenue as a result.” Id. at 1997.
The Court explained that civil RICO plaintiffs must show
that the alleged fraud directly harmed them, lest damages
become too difficult to ascertain.
The injury Ideal alleges is its own loss of sales resulting
from National’s decreased prices for cash-paying
customers. National, however, could have lowered its
prices for any number of reasons unconnected to the
asserted pattern of fraud. It may have received a cash
inflow from some other source or concluded that the
additional sales would justify a smaller profit margin.
Its lowering of prices in no sense required it to defraud
the state tax authority. Likewise, the fact that a com-
pany commits tax fraud does not mean the company
will lower its prices; the additional cash could go
anywhere from asset acquisition to research and
development to dividend payouts.
Id.This case poses similar concerns. A court could never be
certain whether Cape would have won any of the contracts
that were the subject of the conspiracy “for any number of
reasons unconnected to the asserted pattern of fraud.” See
Anza, 126 S. Ct. at 1997. It is entirely possible that Defen-
dants would have won some bids absent the bid-rigging
scheme, even if making less profits in the meantime.
Furthermore, Cape cannot show what portion of its “lost
market share” is attributable to the bids lost to the bid-
rigging scheme. As the Court stated in Anza, “Businesses
lose and gain customers for many reasons, and it would
require a complex assessment to establish what portion of
Ideal’s lost sales were the product of National’s decreased
No. 05-3894 13
prices. . . . A RICO plaintiff cannot circumvent the
proximate-cause requirement simply by claiming that the
defendant’s aim was to increase market share at a com-
petitor’s expense.” Anza, 126 S. Ct. at 1997-98.
Also compelling is the Court’s holding that a direct causal
connection is “especially warranted where the immediate
victims of an alleged RICO violation can be expected to
vindicate the laws by pursuing their own claims.” Id. at
1998. Here, WisDOT is fully capable of pursuing appropri-
ate remedies, much like the State of New York in Anza.
Therefore, both because Cape has not shown that Defen-
dants “managed or controlled” WisDOT, and because it has
not shown that its injuries were proximately caused by the
bid-rigging scheme, we affirm the district court’s dismissal
of the civil RICO claim.
III. Conclusion
For the foregoing reasons, the judgment of the district court
is AFFIRMED.
14 No. 05-3894
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-28-06