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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