Systems Management, Inc. v. Loiselle

United States Court of Appeals
For the First Circuit

No. 01-1538
No. 01-1570
No. 01-2325

SYSTEMS MANAGEMENT, INC.; VICTOR LABOY; JUAN AYALA;
JUAN ORTEGA; FORGET ME NOT SERVICES, INC.;
MARTIN RESTREPO; CESTLIO RODAS;
JOSE MIGUEL CRUZ; LUCIO ARDON,

Plaintiffs, Appellees/Cross-Appellants,

v.

KENNETH LOISELLE,

Defendant, Appellant/Cross-Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]

Before

Boudin, Chief Judge,

Selya and Lipez, Circuit Judges.

Matthew T. Oliverio with whom Christine M. Curley was on
brief for defendant.
Gabriel O. Dumont, Jr. with whom Dumont, Morris and Burke
was on brief for plaintiffs Jose Miguel Cruz, Lucio Ardon and
Systems Management, Inc.

September 10, 2002
 BOUDIN, Chief Judge. In this case, the district court

awarded damages and attorney’s fees under the RICO statute against

Kenneth Loiselle, sole owner and head of Aid Maintenance Co., Inc.
("Aid Maintenance").1 The damages represented underpayments of

wages due to two employees. Loiselle now appeals from the

judgment; a competitor of the company, Systems Management, Inc.,
cross-appeals from the dismissal of its own RICO claim against

Loiselle.

The raw facts are undisputed. In 1968 Loiselle founded

Aid Maintenance, which provides janitorial services primarily in

Rhode Island. In October 1994, the company won a contract to

provide cleaning services at Massachusetts Bay Community College

("the college"), a unit of the Massachusetts State College System
with campuses in Wellesley and Framingham. Neither the bidding

invitation from the college nor the contract mentioned that the

contractors had to pay no less than special minimum wages set under
a Massachusetts statute that governed wages for the cleaning of

public buildings.2

1
RICO is the Racketeer Influenced and Corrupt Organizations
Act, 18 U.S.C. §§ 1961-1968 (2000). Primarily designed as a
criminal statute, see Selima, SPRL v. Imex Co., 473 U.S. 478, 498
(1985), RICO also provides civil remedies--including treble damages
and attorney’s fees--to anyone injured in his business or property
by a prohibited act. 18 U.S.C § 1964(c).
2
The Massachusetts Prevailing Wage Statute provides that
locality wages be paid according to a formula. Mass Gen. Laws ch.
149, § 27H (supp. 1999). The statute also permits employees to sue
in the event of a violation and recover treble damages and
attorney’s fees. Id.

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 In January 1995, Local 254 of the Service Employees

International Union began to complain to the college about Aid

Maintenance, which was not unionized. Initially, Local 254 asked
that the contract be re-bid because it omitted, contrary to state

law, a stipulation that the statutory prevailing wages would be

paid. In May 1995, the college solicited new bids. In the
meantime, Loiselle (by a written contract amendment dated February

1, 1995), agreed to pay the statutory prevailing wages. The rate

was then $9.20 per hour in Wellesley and $8.60 in Framingham but

the college initially told Loiselle that the lower Framingham rate

could be paid for work on both campuses because the college

business office was in Framingham.

According to the district court’s later findings at
trial, at the start of the amendment period Loiselle intended to

pay the prevailing wages, hoping to make up the difference through

efficiencies. However, the hoped for cost savings were not
realized and, as part of the rebidding process, Loiselle learned

that the higher $9.20 wage rather than the lower $8.60 one would

have to be paid in regard to the Wellesley campus. In consequence,

from June 1, 1995, onward, Loiselle knowingly used devices to

underpay some of his workers at the college.

In particular, Loiselle paid wages below the required

level to some cleaners assigned to extra college projects or to

those who filled in for absent regular employees. In addition,

after learning of the higher wages required at the Wellesley

campus, Loiselle began reporting and paying his regular workers at

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Wellesley nominally at the proper per hour rate but only for 5.75

hours a session even though they continued to work for 6 hours. On

June 29, 1995, Aid Maintenance was awarded the re-bid contract and
continued to provide service and to underpay workers, principally

at the Wellesley campus.

Local 254 continued to complain that underpayments were
occurring and, in June 1996, the college again re-bid the contract.

Aid Maintenance again submitted the lowest bid, followed by a

unionized company--Systems Management--which later became a

plaintiff in this case. The college deferred the bid award while

the underpayment charges against Aid Maintenance were investigated

by the state. In January 1997, the college asked for new bids on

the ground that the June 1996 bids were stale. Aid Maintenance
declined to bid and the contract was won by a unionized company

called AM/PM, which took over on March 1, 1997.

On April 7, 1999, the present RICO action was brought
against Loiselle by individual employees claiming to represent a

class of underpaid workers. The predicate criminal offenses

alleged to trigger liability under RICO were acts of mail fraud by

Loiselle, primarily furnishing false information to the college to

the effect that the prevailing wages were being paid. Also named

as a plaintiff was Systems Management, the disappointed bidder on

the June 1995 contract. It claimed that absent Loiselle’s false

statements of compliance with the prevailing wage statute, Systems

Management would have won the contract.

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 Thereafter, the district court rejected the request for

class status and pared down the number of workers with potentially

valid claims. Systems Management v. Loiselle, 138 F. Supp. 2d 78,
81 (D. Mass. 2001). In June 2000, the court held a six-day bench

trial on the RICO claims of five workers and Systems Management.

At the close of plaintiffs’ evidence the court dismissed Systems
Management's claim, saying that it could not show that "but for"

the violations, it would have been the successful bidder. Id. at

90.

On March 19, 2001, the court issued its principal

decision. Systems Management v. Loiselle, 138 F. Supp. 2d 78 (D.

Mass. 2001). It found that from June 1, 1995, onward, Loiselle had

committed acts of fraud by misrepresenting to the college that his
company was paying workers the statutory prevailing wage; that

documents containing such misrepresentations had been sent through

the mails; and that these acts of mail fraud constituted "a pattern
of racketeering activity" within the meaning of RICO, id. at 94.

The court also found that RICO’s other conditions for civil

liability had been satisfied.

The court then ruled that two of the worker plaintiffs

had in total suffered underpayments in the amount of $339.52 as a

result of the fraud and, under the multiple damages provision,

awarded them $1,018.56; thereafter attorney's fees of $184,231.75

were awarded. Incident to its liability determination, the court

rejected Loiselle’s argument that civil liability for mail fraud

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under RICO required detrimental reliance by the injured persons.

Id. at 95. Cross-appeals followed.

On Loiselle’s appeal, he urges two colorable grounds as
the basis for reversal of the judgment against him: that an

injured plaintiff, seeking to recover under RICO for fraud, must

demonstrate reliance on the fraudulent statements (which the
plaintiffs here cannot do) and that RICO’s "pattern of

racketeering" requirement has not been satisfied. Loiselle also

attacks the award of attorney's fees against him but this claim is

mooted by our decision on liability.

We begin with the issue of reliance. The RICO statute

itself says nothing about reliance as a requirement either for

civil liability or for proof of damages. Civil damages, trebled
and including attorney’s fees, are provided to "any person injured

in his business or property by a violation of section 1962." 18

U.S.C. § 1964(c). Section 1962(c) makes it unlawful "for any
person employed by or associated with any enterprise engaged in, or

the activities of which affect, interstate or foreign commerce, to

conduct or participate, directly or indirectly, in the conduct of

such enterprise’s affairs through a pattern of racketeering

activity . . . ." 18 U.S.C. § 1962(c).

On appeal, Loiselle concedes that he is a person with the

required relationship to an enterprise--namely, his cleaning

business carried on through Aid Maintenance and another company--

and that the interstate commerce requirement is met. The critical

dispute concerns the phrase: pattern of racketeering activity."

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"Racketeering activity" means any act violating one of many

specified criminal statutes, including the federal mail fraud

statute, 18 U.S.C. § 1341. See 18 U.S.C. § 1961(1). A "pattern of
racketeering activity" "requires at least two acts of racketeering

activity" occurring within ten years of each other. Id. § 1961(5).

Loiselle does not deny that more than one of his mailings
violated the federal mail fraud statute. That statute condemns

inter alia obtaining money by false representations. 18 U.S.C. §

1341 (2000). Here, the college continued its cleaning contract,

and paid Loiselle’s company for its services, based on his invoices

and explicit representations that falsely indicated that Loiselle

was complying with the prevailing wage statute. Accordingly, the

requirement that there be "at least two acts of racketeering"
(known in the jargon as "predicate acts") is satisfied.

Arguably, this fraud was the "but for" cause of injury to

the workers. Loiselle is content to assume that, but for his false
representations, the college would have insisted on compliance with

the prevailing wage laws, so certain workers of his would have been

paid for at least some of their work at a slightly higher rate.

But, says Loiselle, and this is his first argument on appeal, the

essence of civil fraud is reliance on deception, and there is no

proof here that Loiselle ever made false statements to his workers

or that they relied on his false statements to the college.

It is true that at common law a civil action for fraud

ordinarily requires proof that the defrauded plaintiff relied upon

the deception, and some courts have imported this requirement into

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RICO actions where the predicate acts comprise mail or wire fraud.3
But RICO bases its own brand of civil liability simply on the

commission of specified criminal acts--here, criminal fraud--so
long as they comprise a "pattern of racketeering activity"; and

criminal fraud under the federal statute does not require

"reliance" by anyone: it is enough that the defendant sought to
deceive, whether or not he succeeded. See Neder v. United States,

527 U.S. 1, 24 (1999) ("The common-law requirement[] of

'justifiable reliance' [has] no place in the federal fraud

statutes.").4

Perhaps there is some surface incongruity in allowing a

civil RICO plaintiff to recover for fraudulent acts even though the

same plaintiff could not (for lack of reliance) recover for fraud
at common law. But Congress structured its civil remedy to allow

recovery for harm caused by defined criminal acts, including

3
See Chisolm v. TranSouth Financial Corp., 95 F.3d 331, 337
(4th Cir. 1996); Pelletier v. Zweifel, 921 F.2d 1465, 1499 (11th
Cir. 1991); County of Suffolk v. Long Island Lighting Co., 907 F.2d
1295, 1311 (2d Cir. 1990); Brandenburg v. Seidel, 859 F.2d 1179,
1188 n.10 (4th Cir. 1988); Blount Financial Services, Inc. v.
Walter E. Heller and Co., 819 F.2d 151, 152 (6th Cir. 1987). But
see Tabas v. Tabas, 47 F.3d 1280, 1294 n.18 (3rd Cir. 1995);
Proctor & Gamble Co. v. Amway Corp., 242 F.3d 539, 564 (5th Cir.
2001).
4
Whether criminal fraud at common law required reliance varied
with the particular form of fraud. See 2 LaFave & Scott,
Substantive Criminal Law §§ 8.6-8.7 (1986) (discussing requirements
for various forms of common law criminal fraud). The crime of
false pretenses might well be considered the "classical" criminal
fraud at common law, see, e.g., William J. Stuntz, The Pathological
Politics of Criminal Law, 100 Mich. L. Rev. 505, 547 & n.161
(2001), and that crime contains a reliance requirement, 2 LaFave &
Scott, supra,(c).

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violation of section 1341; and, as noted, the federal mail fraud

statute does not require reliance. Thus, under a literal reading

of RICO--the presumptive choice in interpretation--nothing more
than the criminal violation and resulting harm is required.

This is not a conclusive argument; common law (and other)

concepts can often be imported to flesh out a federal statute.
Indeed, we assume here that Congress intended to require not only

"but for" but also "proximate cause" to link the criminal act with

the harm to the plaintiff, even though the statute says nothing

specific on this point. But proximate cause--largely a proxy for

foreseeability--is not only a general condition of civil liability

at common law but is almost essential to shape and delimit a

rational remedy: otherwise the chain of causation could be
endless.

By contrast, reliance is a specialized condition that

happens to have grown up with common law fraud. Reliance is
doubtless the most obvious way in which fraud can cause harm, but

it is not the only way: Loiselle does not deny that a reasonably

predictable consequence of his mailings was, by deceiving the

college, to enable him to continue to underpay his workers.

There is no good reason here to depart from RICO’s literal language

by importing a reliance requirement into RICO.

This brings us to Loiselle’s second claim on appeal,

which presents a problem far more difficult than the reliance

issue. From its phrasing (e.g., racketeering, enterprise, unlawful

debt collection), as well as legislative history, we know that

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Congress had organized crime in mind as its main RICO target. But

Congress did not in its terms limit the statute to organized crime,

adopting instead its "pattern" concept.5 And despite early lower
court cases urging a narrow construction, the Supreme Court has now

twice flatly rejected such a limitation, stressing instead the

flexibility and reach of the statute. See Sedima, S.P.R.L. v.

Imrex Co., 473 U.S. 479 (1985); H.J. Inc. v. Northwestern Bell

Tel. Co., 492 U.S. 229 (1989).

Taking RICO’s language literally, it could apply wherever

an enterprise (which may well be a legitimate business) engages in

two similar criminal acts within ten years of one another; the term

"pattern" in other contexts means little more than a succession of

similar or identical acts. Cf. Fed. R. Evid. 404(b). But the
Supreme Court has recoiled at the idea of a federal civil remedy,

with treble damages and attorney’s fees, for every pair of similar

acts within ten years of each other that might technically
constitute a crime (e.g., isolated acts of "puffing" by a salesman)

but often of a kind that would never be pursued criminally by a

competent prosecutor, let alone through a criminal RICO

prosecution.

5
The Senate bill, which was the basis for the statute,
included no civil liability provision and, if this had remained
true, the disposition of most prosecutors to focus on serious crime
would have avoided the problems now presented. But the House added
the civil liability provision without any further precautions,
possibly without realizing the degree to which civil litigants have
different incentives from prosecutors. See generally, 1 Arthur F.
Matthews, et al., Civil Rico Litigation, §§ 2.06-07 (2d ed. 1992).

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 In limiting the pattern concept, the Supreme Court says

first that, to comprise a pattern, the two or more predicate acts

must be "related," the criteria for relatedness being vague,6 H.J.

Inc., 492 U.S. at 240, but, in addition, the acts must constitute

or implicate a continuing threat of criminal behavior. Id. at 242.

As any pair of similar criminal acts could be so described, see id.
at 253 (Scalia, J., concurring), the Court was doubtless concerned

with matters of degree (e.g., harm, duration). But a complete list

of criteria, and certainly any precise formula as to the degree of

threat, remain elusive.

Still, the case law provides a few useful guidelines on

the pattern requirement, and one is directly in point in this case:

RICO is not aimed at a single narrow criminal episode, "even if
that single episode involves behavior that amounts to several

crimes (for example, several unlawful mailings). Apparel Art

Int'l., Inc. v. Jacobson 967 F.2d 720, 723 (1st Cir. 1992) (Breyer,
C.J.); see also Fujisawa Pharmaceutical Co., Ltd. v. Kapoor, 115

F.3d 1332, 1338 (7th Cir. 1997) (Posner, C.J.) (noting that if

successive frauds "were installments in the sale of [a] company,

the requirement of a pattern would probably not have been satisfied

because the reality would have been that there was only a single

6
The Court based its conception of relatedness on the
definition provided in the Dangerous Special Offender Sentencing
Act. 18 U.S.C. § 3575 et seq. See H.J. Inc., 492 U.S. at 240
("[C]riminal conduct forms a pattern [and is thus related] if it
embraces criminal acts that have the same or similar purposes,
results, participants, victims, or methods of commission, or
otherwise are interrelated by distinguishing characteristics and
are not isolated events.") (quoting § 3575(e)).

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fraud"). A single "scheme" may be reached by RICO, see H.J. Inc.,

492 U.S. at 240-41, but only if it is reasonably broad and far

reaching.
In our case, Loiselle's fraudulent effort to maintain his

contract with the college, by comparatively trivial chiseling, is

no worse than the efforts of the prime contractor in Apparel Art

Int'l, Inc. to secure and maintain a single, albeit large ($96

million), Defense Department contract. Although to do so, the

contractor committed numerous criminal acts (bribes, false

statements)--some more serious than anything in this case-then-

Chief Judge Breyer said that these efforts were all addressed to

one contract and did not comprise or threaten "the kind of

'continued' criminal activity at which the RICO statute was aimed."
967 F.2d at 724. Other cases are to the same effect. See id.

Here, the district court said that "Loiselle's ongoing

business procedures document a clear pattern of racketeering
activity, and one that posed a real threat of continuing

indefinitely with each successful contract bid." 138 F. Supp. 2d
at 94. If Loiselle had concrete plans to bid on contracts on other

jobs and to carry them out through acts of mail fraud, the

"continuing threat" label would be supported, and the case would

fit within what the Supreme Court has viewed as an "open ended"

pattern of racketeering sufficient under RICO. See H.J. Inc., 492

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U.S. at 242-43. But neither the district court nor the plaintiffs

have pointed to any such evidence of continuing threat.7

Rather, Loiselle took on the original contract without
warning as to the prevailing wage requirement. When apprised, he

first sought to abandon the contract and then chose to continue it

as amended; by doing the same job in fewer hours, Loiselle hoped to
meet the prevailing wage requirement. Then, in June 1995, after he

won a new contract to continue providing services, his efforts at

economy failed and he slid into acts of deliberate dishonesty to

maintain this contract, offered a new (later mooted) bid partway

through and then refused to bid again. The resemblance of this

episode to the larger and more aggravated scheme held inadequate

for a RICO violation in Apparel Art Int'l, Inc. controls this

case.8

This might be a different case if the prevailing wage

statute were one of those listed in RICO; in that event, the
numerous individual underpayments themselves would have been

separate predicate acts directed at a multitude of different

workers. Cf. H.J. Inc., 492 U.S. at 242-43 (considering a

protection racket with multiple victims). But it is no accident

7
Plaintiffs seek to broaden the range of pertinent conduct by
pointing to Loiselle's use of a second company to pay the reduced
wages, But even assuming the use of the second company was
improper, there is no direct connection between that contrivance
and the misconduct at issue in this case.
8
All of the fraudulent activity took place with respect to
1995-1996 contract. Prior to June 1, 1995, the district court
found that Loiselle had not committed any fraudulent acts. 138 F.
Supp. 2d. at 92-93. Loiselle did not obtain a new contract after
June 1, 1995, and was replaced as the contractor by March 1997.

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that the violations of state law that can be predicate acts under

RICO are of a more serious character. See 18 U.S.C. § 1961(1)

(e.g., murder, robbery, extortion). And, of course, the state
statute at issue here already provides for treble damages and

attorney’s fees.

Our decision that there was no violation moots the
attorney’s fees issue raised by Loiselle. By the same token, it

requires that we deny the cross-appeal by Systems Management

challenging the lower court's dismissal of its claim on causation

grounds. The judgment of the district court is reversed and the

matter remanded for dismissal of the complaint. Each side will

bear its own costs on these appeals.

It is so ordered.

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