Antitrust Law Daily Wrap Up, RICO—2d Cir.: Food purchaser class properly certified in suit against food distributor, (Sep 5, 2013)

By Jody Coultas, J.D.

A nationwide Racketeer Influenced and Corrupt Organizations Act (RICO) class action filed by customers of US Foodservice, Inc. (USF) against the food distributor was properly certified, according to the U.S. Court of Appeals in New York City (In re: US Foodservice Inc. Pricing Litigation, August 30, 2013, Livingston, D.).

Under USF’s cost-plus pricing model, the final cost to the customer is computed based on the price at which USF purchases the goods from its supplier, and the additional surcharge that USF charges on top of the cost. Promotional allowances, or discounts provided to distributors from suppliers in exchange for fulfilling certain conditions, are central to cost-plus pricing.

The consumers alleged that USF artificially inflated the cost component of its cost-plus billing and disguised the proceeds of its own inflated billing through the use of purported promotional allowances. Six Value Added Service Providers were allegedly shell companies established and controlled by USF for the purpose of fraudulently inflating USF’s cost to its customers.

A district court certified a class of any person in the United States who purchased products from USF pursuant to an arrangement that defined a sale price in terms of a cost component plus a markup, and for which USF used a VASP transaction to calculate the cost component. The court also found that the customers presented evidence that supported their fraud allegations, including: (1) that USF placed orders directly with the suppliers for “delivery” to the VASPs; (2) that USF “intentionally concealed the VASPs from its cost-plus customers”; and (3) that USF controlled the VASPs’ finances, guaranteeing their obligations, dictating to whom and when they made payments, and funding many of the VASPs through short-term, interest-free loans. USF appealed the certification.

To obtain certification, a party must meet the Federal Rule of Civil Procedure 23(a) requirements of numerosity, commonality, typicality, and adequacy of representation, as well as the Rule 23(b)(3) requirements of predominance and superiority.

The district court did not abuse its discretion in determining that USF’s alleged misrepresentation was uniform and susceptible to generalized proof, according to the court. USF argued that a misrepresentation necessary to prove mail or wire fraud could not be established through common evidence because the court would have to look at the underlying contractual arrangement to determine whether there were misrepresentations on each customers’ invoice. Fraud claims based on uniform misrepresentations to all members of a class are appropriate for class certification because uniform misrepresentations do not require individualized hearings. The VASP-related invoices mailed from USF to its cost-plus customers included the same fraudulent misrepresentation. There was sufficient evidence that the misrepresentations were substantially similar.

There was also sufficient common evidence of individual customer knowledge as to its allegedly fraudulent billing scheme, according to the court. USF argued that individualized hearings would be required to determine whether each customer relied on the inflated invoices. Certification is inappropriate where reliance is too individualized to find common proof. However, in cases involving fraudulent overbilling, payment may constitute circumstantial proof of reliance based on the reasonable inference that customers who pay would not have done so absent reliance upon the invoice’s implicit representation that the invoiced amount was honestly owed. The district court correctly held that “there is evidence that USF actually took steps to conceal the VASP system from its customers” and “the record lacks evidence that any of USF’s customers had knowledge of USF fraudulently inflating the cost component of its products through the operation of the VASPs.”

Damages could be ascertained on a class-wide basis, according to the court. Under RICO, damages for injury to property must place the injured party in the same position it would have been in but for the illegal conduct. The issue in this case was the amount of customers paid USF as a result of its deception, rather than what price each customer could have procured elsewhere at the point of purchase. Therefore, individualized proof was unnecessary. The court would measure damages based on the difference between the amount customers paid on fraudulently inflated cost-plus invoices and the amount they should have been billed.

A class action was the superior method of adjudication of the claims, according to the court. USF argued that no economies would be achieved over individual litigation because absent this action individual customers would not bring suit. However, substituting a single class action for numerous trials in a matter involving substantial common legal issues and factual issues susceptible to generalized proof would promote uniformity of decision and save time and money.

The case is No. 12-1311-cv.

Attorneys: Ryan Phair (Hunton & Williams LLP) for Catholic Healthcare West. Glenn M. Kurtz (White & Case LLP) for US Foodservice Inc.

Companies: US Foodservice Inc.

Cases: RICO ConnecticutNews NewYorkNews VermontNews