Antitrust Law Daily Wrap Up, RICO NEWS: Supreme Court asked to review damages and fraud proof in RICO action against food distributor, (Jan 28, 2014)

By Linda O’Brien, J.D., LL.M.

A food distributor has asked the U.S. Supreme Court to review a decision of the U.S. Court of Appeals in New York City that allowed class members to seek contract-expectation damages against the food distributor rather than their out-of-pocket losses, and found that individual class members would not be required to show fraud by the food distributor was the cause-in-fact of their claimed injury under RICO. The petition for certiorari was filed on January 21, 2014 (U.S. Foods, Inc. v. Catholic Healthcare West, Dkt. 13-873).

Catholic Healthcare West, Cason, Inc., and Frankie’s Franchise Systems Inc. were customers of U.S. Foods, Inc. (formerly known as U.S. Foodservice, Inc.), the second-largest food distributor in the United States. The customers alleged that U.S. Foods artificially inflated a component of its cost-plus billing and disguised the proceeds through the use of purported promotional allowances. Six Value Added Service Providers (VASPs) were allegedly shell companies established and controlled by U.S. Foods for the purpose of fraudulently inflating its costs to customers in violation of the Racketeer Influenced Corrupt Organization Act (RICO). The Second Circuit affirmed the district court’s class certification with respect to all claims. The court also found that the class could pursue contract-expectation damages and no individual class member would be required to show the alleged fraud by U.S. Foods was the cause-in-fact of the claimed RICO injury.

The district court did not abuse its discretion in holding that RICO damages could be ascertained on a class-wide basis, according to the court. The proper measure of RICO damages would be the difference between the amount customers paid on fraudulently inflated cost-plus invoices and the amount they should have been billed. As such, the damages were not limited to out-of-pocket losses. The Second Circuit also held that the customers presented sufficient evidence to support their fraud allegations. Fraud claims based on uniform misrepresentations to all members of a class were appropriate for class certification because uniform misrepresentations did not require individualized hearings. There was sufficient evidence that the misrepresentations to customers by U.S. Foods were substantially similar.

The petitioner presented three questions: (1) Whether contract-expectation damages are a permissible remedy in a civil RICO action based on alleged fraud, and if so, whether such damages are available even where any expectation was created only by the alleged fraudulent conduct?; (2) Whether but-for causation in a civil RICO class action may be satisfied by a class-wide presumption of reliance on alleged fraudulent conduct in the absence of any individualized proof that any member of the class actually relied on that conduct?; and (3) Whether a nationwide class asserting state-law claims under multiple state laws may be certified under Rule 23(b)(3) of the Federal Rules of Civil Procedure in the absence of any showing that the state laws at issue are uniformly interpreted and applied?

Attorneys: Glenn M. Kurtz (White & Case LLP) and Kathleen M. Sullivan (Quinn Emanuel Urquhart & Sullivan LLP) for U.S. Foods, Inc.

Companies: U.S. Foods, Inc.; Catholic Healthcare West; Cason, Inc.; Frankie’s Franchise Systems Inc.

News: RICO