Sandwich Chef of TX v. Reliance Natl

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

________________________

NO. 01-20924
________________________

SANDWICH CHEF OF TEXAS, INC., doing business as Wall Street
Deli, Individually and for Others Similarly Situated,

Plaintiff-Appellee,

versus

RELIANCE NATIONAL INDEMNITY INSURANCE COMPANY, formerly known as Planet
Insurance Company; RELIANCE INSURANCE COMPANY; RELIANCE LLOYDS;
RELIANCE NATIONAL INSURANCE CO.; UNITED PACIFIC INSURANCE CO.; HOME
INSURANCE COMPANY, formerly known as City Insurance Co., formerly known as Home
Indemnity Company, formerly known as Home Insurance Company, formerly known as Home
Insurance Company of Indiana; LIBERTY MUTUAL INSURANCE COMPANY; LIBERTY
MUTUAL FIRE INSURANCE COMPANY; LIBERTY INSURANCE CORPORATION;
AMERICAN & FOREIGN INSURANCE COMPANY; GLOBE INDEMNITY CO.; ROYAL
INDEMNITY CO.; ROYAL INSURANCE COMPANY OF AMERICA; SAFEGUARD
INSURANCE CO.; BITUMINOUS CASUALTY CORPORATION; BITUMINOUS FIRE AND
MARINE INSURANCE CO.; GREAT WEST CASUALTY INSURANCE CO.;
INTERNATIONAL BUSINESS & MERCANTILE REASSURANCE CO.; OLD REPUBLIC
INSURANCE COMPANY; NORTH RIVER INSURANCE CO.; INTERNATIONAL
INSURANCE COMPANY; WESTCHESTER FIRE INSURANCE COMPANY; UNITED
STATES FIRE INSURANCE COMPANY; UNITED STATES FIDELITY AND GUARANTY
COMPANY; FIDELITY & GUARANTY INSURANCE UNDERWRITERS INC;
INDUSTRIAL INDEMNITY; CHUBB INDEMNITY INSURANCE CO.; CHUBB LLOYDS
INSURANCE CO. OF TEXAS; FEDERAL INSURANCE COMPANY; GREAT NORTHERN
INSURANCE CO.; NORTHWESTERN PACIFIC INDEMNITY CO.; PACIFIC INDEMNITY
COMPANY; SUN INSURANCE OFFICE OF AMERICA INC; TEXAS PACIFIC
INDEMNITY CO.; VIGILANT INSURANCE CO.; HIGHLANDS INSURANCE COMPANY;
HIGHLANDS UNDERWRITERS INSURANCE CO.; HIGHLANDS CASUALTY CO.;
ABERDEEN INSURANCE CO.; BANKERS STANDARD INSURANCE CO.; CENTURY
INDEMNITY CO.; INDEMNITY INSURANCE COMPANY OF NORTH AMERICA;
INSURANCE COMPANY OF NORTH AMERICA; PACIFIC EMPLOYERS INSURANCE
COMPANY; ATLANTIC INSURANCE CO.; AUTOMOBILE INSURANCE COMPANY OF
HARTFORD CONNECTICUT; CHARTER OAK FIRE INSURANCE COMPANY;
 FARMINGTON CASUALTY CO.; GULF GROUP LLOYDS; GULF INSURANCE CO.;
NIPPON FIRE/MARINE INSURANCE CO. LTD., U S Branch; PHOENIX INSURANCE
COMPANY; SELECT INSURANCE CO.; STANDARD FIRE INSURANCE CO.;
TRAVELERS CASUALTY & SURETY CO., formerly known as Aetna Casualty & Surety Co.;
TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA, formerly known as Aetna
Casualty and Surety Company of America; TRAVELERS CASUALTY & SURETY COMPANY
OF ILLINOIS, formerly known as Aetna Casualty & Surety Company of Illinois; TRAVELERS
INDEMNITY COMPANY; TRAVELERS INDEMNITY COMPANY OF AMERICA;
TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, THE, formerly known as
Travelers Indemnity Company of Rhode Island; TRAVELERS INDEMNITY CO. OF ILLINOIS;
TRAVELERS INSURANCE COMPANY; ARGONAUT INSURANCE COMPANY;
ARGONAUT MIDWEST INSURANCE COMPANY; ARGONAUT SOUTHWEST
INSURANCE COMPANY; AMERICAN HOME ASSURANCE COMPANY; BIRMINGHAM
FIRE INSURANCE COMPANY OF PENNSYLVANIA; COMMERCE AND INDUSTRY
INSURANCE CO.; GRANITE STATE INSURANCE COMPANY; ILLINOIS NATIONAL
INSURANCE COMPANY; THE INSURANCE COMPANY OF THE STATE OF
PENNSYLVANIA; NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,
PA; NEW HAMPSHIRE INSURANCE COMPANY; AMERICAN MANUFACTURING
MUTUAL INSURANCE CO.; AMERICAN MOTORISTS INSURANCE COMPANY;
AMERICAN PROTECTION INSURANCE CO.; LUMBERMENS MUTUAL CASUALTY
COMPANY; EMCASCO INSURANCE CO.; EMPLOYERS MUTUAL CASUALTY
COMPANY; FARMLAND MUTUAL INSURANCE CO.; NATIONWIDE AGRIBUSINESS
INSURANCE CO.; NATIONWIDE INDEMNITY INSURANCE CO.; NATIONWIDE
MUTUAL FIRE INSURANCE CO.; NATIONWIDE MUTUAL INSURANCE COMPANY;
NATIONWIDE PROPERTY AND CASUALTY INSURANCE CO.; SCOTTSDALE
INDEMNITY CO.; MIDDLESEX INSURANCE CO.; SENTRY INSURANCE, A Mutual
Company; EMPLOYERS INSURANCE OF WAUSAU, A Mutual Company; WAUSAU
BUSINESS INSURANCE CO.; WAUSAU UNDERWRITERS INSURANCE COMPANY;
AGRICULTURAL INSURANCE CO.; AMERICAN ALLIANCE INSURANCE COMPANY;
AMERICAN NATIONAL FIRE INSURANCE COMPANY; GREAT AMERICAN
INSURANCE CO.; MID-CONTINENT CASUALTY COMPANY; AMERICAN CASUALTY
COMPANY OF READING, PENNSYLVANIA; CONTINENTAL CASUALTY COMPANY;
NATIONAL FIRE INSURANCE COMPANY OF HARTFORD; TRANSCONTINENTAL
INSURANCE COMPANY; TRANSPORTATION INSURANCE COMPANY; VALLEY
FORGE INSURANCE COMPANY; BOSTON OLD COLONY INSURANCE COMPANY;
CASUALTY INSURANCE COMPANY OF TEXAS; COMMERCIAL INSURANCE
COMPANY OF NEWARK, NEW JERSEY; THE CONTINENTAL INSURANCE COMPANY;
THE FIDELITY AND CASUALTY INSURANCE COMPANY NEW YORK; FIREMEN’S
INSURANCE COMPANY OF NEWARK, NEW JERSEY; GLENS FALLS INSURANCE
COMPANY; KANSAS CITY FIRE & MARINE INSURANCE CO.; NIAGARA FIRE
INSURANCE CO.; AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY;
ZURICH INSURANCE COMPANY; REPUBLIC-FRANKLIN INSURANCE CO.; UTICA
MUTUAL INSURANCE CO.; UTICA NATIONAL INSURANCE COMPANY OF TEXAS;

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 FAIRMONT INSURANCE CO.; TIG INSURANCE COMPANY OF TEXAS, formerly known
as Transamerican Insurance Company of Texas; TIG PREMIER INSURANCE CO., formerly
known as Transamerica Premier Insurance Company; ASSURANCE COMPANY OF
AMERICA; MARYLAND CASUALTY CO.; MARYLAND INSURANCE CO., formerly
known as American General Fire and Casualty Company; NORTHERN INSURANCE
COMPANY OF NEW YORK; VALIANT INSURANCE CO.; AMERICAN AUTOMOBILE
INSURANCE CO.; AMERICAN INS CO.; ASSOCIATED INDEMNITY CORP; FIREMAN’S
FUND INSURANCE COMPANY; FIREMAN’S FUND INSURANCE COMPANY OF
TEXAS; FIREMAN’S FUND INSURANCE COMPANY OF WISCONSIN; NATIONAL
SURETY CORP; THE CONNECTICUT INDEMNITY COMPANY; FIRE & CASUALTY
INSURANCE COMPANY OF CONNECTICUT; SECURITY INSURANCE COMPANY OF
HARTFORD; ACE FIRE UNDERWRITERS INSURANCE COMPANY, formerly known as
Cigna Fire Underwriters Insurance Company; ACE AMERICAN INSURANCE COMPANY,
formerly known as CIGNA Insurance Company; ACE PROPERTY AND CASUALTY
INSURANCE COMPANY, formerly known as CIGNA Property & Casualty Insurance Co.; TIG
AMERICAN SPECIALTY INSURANCE CO., formerly known as Chilton Insurance Co.; TIG
INSURANCE CO., formerly known as Transamerica Insurance Company; ACE INSURANCE
COMPANY OF TEXAS, formerly known as Cigna Insurance Company of Texas; and
AMERICAN ZURICH INSURANCE COMPANY,

Defendants-Appellants.

______________________________________________

Appeal from the United States District Court
for the Southern District of Texas
______________________________________________

January 21, 2003

Before SMITH and BENAVIDES, Circuit Judges, and FITZWATER, District Judge.*

FITZWATER, District Judge:

Fraud actions that require proof of individual reliance cannot be certified as Fed. R. Civ. P.

23(b)(3) class actions because individual, rather than common, issues will predominate. The district

court certified a nationwide Rule 23(b)(3) class in this RICO1 fraud action based on alleged

*
District Judge of the Northern District of Texas, sitting by designation.
1
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968.

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overcharging of workers’ compensation insurance premiums. It did so by eliminating, on substantive

grounds, plaintiff-specific issues of reliance and causation. We hold that the district court erred as

a matter of law in doing so and thus abused its discretion in certifying this case as a class action, and

we reverse.

I

A

Plaintiff Sandwich Chef of Texas, Inc., d/b/a Wall Street Deli (“Wall Street”),2 a company that

operates delicatessens in several states, brought this putative class action individually and on behalf

of others similarly situated. Wall Street contends that defendants--141 casualty insurance companies-

-are liable under RICO for committing mail and wire fraud, in violation of 18 U.S.C. § 1962(c)-(d),

by charging excessive premiums on retrospectively-rated workers’ compensation insurance policies

during a 14-year period. Wall Street alleges that defendants corrupted the National Council on

Compensation Insurance, Inc. (“NCCI”) and used it as a racketeering enterprise to defraud

policyholders and state regulators. It maintains that defendants charged excessive premiums to

thousands of employers in 44 states and the District of Columbia. Wall Street seeks damages caused

by allegedly false filings that defendants and NCCI made with regulators (fraud-on-the-regulator

theory) and by inflated invoices sent to policyholders (invoice theory).

Premiums for retrospectively-rated workers’ compensation insurance are based on expense

factors and loss experience calculated as of the end of the policy period. Policyholders pay an initial

premium, subject to a negotiated minimum and maximum range, and receive refunds or credits or pay

additional premiums based on losses.

2
Wall Street states in its brief that it is now known as Wall Street Deli, Inc.

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 Most employers purchase workers’ compensation coverage in the voluntary market. Those

who cannot may obtain insurance through legislatively-established involuntary markets, sometimes

called “residual markets,” “assigned risk markets,” or “assigned risk pools.” Some states require

workers’ compensation insurance carriers to reinsure that state’s “residual markets,” which often

results in additional costs to them when operating deficits occur. When residual market assessments

dramatically increased, insurers responded by factoring residual market expenses in the price of their

voluntary market insurance. Insurance program documents identified these expenses as “residual

market charges” (also known as “residual market loads” or “RMLs”).

Option V is a rating plan for retrospectively rated workers’ compensation insurance policies.

NCCI’s WC 00 05 endorsement is the approved form in all 45 pertinent jurisdictions for Option V

pricing. States set rates for workers’ compensation insurance and require that insurers use only

approved rates, rating plans, and policy forms. Insurers who sell Option V policies cannot deviate

from these rates without regulatory approval. Wall Street purchased four workers’ compensation

insurance policies from defendant Reliance Insurance Company (“Reliance”)3 during the years 1991

to 1994. Each policy was made subject to retrospective rating by a WC 00 05 endorsement.

Wall Street maintains that insurers sought to pass on RML expenses to their Option V

policyholders in the voluntary market, contrary to the terms of the approved rating plan. Defendants

instructed NCCI to ask state regulators to amend the Option V rating plan to allow them to pass

through their RMLs as an element of the tax multiplier. The tax multiplier is a compo
nent of the

3
During the pendency of this appeal, five defendants, including Reliance, which is currently
in liquidation, moved to sever and stay their appeals. A panel of this court granted the motion. The
motion panel denied without prejudice to reconsideration by this panel defendants’ alternative motion
to sever and remand the appeal fo r immediate dismissal. Because we are reversing the class
certification order, we need not reconsider the motion panel’s order.

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premium that includes taxes and other assessments that carriers pay. Defendants also began including

unfiled and unapproved RML surcharges in tax multipliers for Option V coverage. All defendants

overcharged, and they prevented competition through collusion, such as by sharing information about

RML charges.

Wall Street also alleges that defendants used NCCI to deceive state regulators. NCCI filed

R-1244, in which it requested that regulators authorize a residual market subsidy to be added to the

Option V tax multiplier. R-1244 falsely represented that defendants were not presently including

RMLs in their rates and intended only to pass through part of the residual market burden to

policyholders. Some regulators accepted R-1244; others granted only part of the request or denied

it. Defendants nevertheless passed through their full RML expenses. They used NCCI to make other

Option V tax multiplier filings after R-1244, which falsely reflected only partial RML subsidies rather

than defendants’ actual practice of charging full RML expense.

Wall Street avers that regulators required NCCI to review defendants’ Option V applications

for compliance with lawful rates and to approve only applications that contained authorized rates.

Defendants’ applications falsely represented that they were charging approved rates for Option V

coverage. In turn, state regulators received NCCI-approved applications that concealed defendants’

overcharges. NCCI knew of these overcharges but never disclosed them to the regulators.

Defendants routinely provided unapproved forms, rating plans, and rates to policyholders that they

did not give regulators. In these forms, defendants characterized their unapproved charges as state

assessments or taxes. Defendants also failed to disclose their unlawful RML charges in financial

statements filed with regulators.

Defendants have a different view of the pertinent facts. They assert that when Wall Street

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requested that Reliance make a proposal for commercial insurance, Wall Street offered to pay the

RML expenses that are the subject of its complaint. Wall Street and Reliance negotiated all pricing

and payment terms, including RML expenses, and Reliance disclosed to Wall Street that the residual

market charges differed from its rate filings. Wall Street bargained for other terms that reduced its

insurance costs and that also varied from Reliance’s rate filings. Other large employers in the certified

class negotiated customized insurance packages that were designed to meet their specified needs at

the lowest cost; the policyholders did not want insurance programs that were constricted by filed

rating plans; they bargained for programs that departed from filed rates; and, although the programs

included residual market charges, they had other features that reduced net costs to below what could

have been charged under filed rates. Defendants argue that “each negotiation among a policyholder,

its broker, and its insurer created a unique record of oral and written communications directly relevant

to the RICO fraud claim.” Appellants Br. at 5.

Defendants contend that, due to their complexity, retrospectively rated workers’

compensation insurance policies are almost always written for large employers who pay annual

premiums that can amount to millions of dollars. Policyholders usually operate in several states and

require multiple lines of insurance coverage. Consequently, they frequently request that brokers seek

proposals from several carriers. The brokers, in turn, solicit proposals that include requested

coverage, services, and payment terms for many types of insurance, including workers’ compensation,

general liability, and commercial automobile liability, to insure the policyholder in multiple states.

Quoted premiums often specify one formula for all such coverage. Negotiations can include face-to-

face meetings, telephone conversations, and correspondence that vary in form depending on the deal.

Brokers and others, such as professional risk managers, insurance consultants, and lawyers, frequently

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participate. Employers and their representatives negotiate customized retrospectively-rated programs

that reflect their different operations, risk tolerances, coverage needs, and cash-flow preferences.

They also bargain for premium formulas and payment terms that vary according to program.

Defendants also posit that policyholders sought ways to reduce their costs below those set

by filed rating plans. Carriers and policyholders negotiated rates that were not as provided in filed

rating plans or state regulations, thereby reducing overall program prices below levels that could be

charged under the plans. The total cost of the negotiated program depended on many individually-

negotiated terms, and the fact that one premium factor, such as the tax multiplier, was higher than

that prescribed in a filed plan did not necessarily cause the net cost to exceed what the filed plan

allowed. Policyholders usually focused on lowest net cost, not on a single component of cost.

B

Wall Street moved for class certification. Defendants opposed the motion, contending that

Wall Street had failed to meet its burden of establishing the adequacy and typicality requirements of

Rule 23(a) and the predominance, manageability, and superiority requirements of Rule 23(b)(3).

They argued, inter alia, that proof concerning the fraud-based RICO claims would necessarily focus

on the knowledge of the thousands of employers, brokers, agents, and other insurance personnel who

participated in negotiating the insurance programs, and that a trial would consist of evidence

concerning thousands of oral and written communications that formed essential parts of these

negotiations. Defendants contended that individual issues concerning these communications and the

knowledge o f each transaction’s participants would vastly predominate over any common issues.

Following an evidentiary hearing, the district court certified the following class:

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 All purchasers (excluding policyholders with a captive insurance
company that ultimately reinsure their workers’ compensation risk, the
defendants and co-conspirators) of workers’ compensation insurance
policies, effective on or after January 1, 1987, endorsed with a
Retrospective Premium Endorsement (NCCI form WC 00 05 series)
and not closed by a final premium calculation on or before May 6,
1994, excluding purchasers of policies endorsed as a Large Risk
Alternative Rating Option[.]

Sandwich Chef of Tex., Inc. v. Reliance Nat’l Indem. Ins. Co., 202 F.R.D. 484, 504 (S.D. Tex. 2001)

(“Sandwich Chef II”).

In the context of analyzing Rule 23(b)(3) predominance, the district court rejected defendants’

argument that a trial of class claims was impossible due to the predominance of individual issues. Id.

at 497. The court noted that RICO required both “but for” and “proximate” causation. Id. It held

that, under our decision in Summit Properties Inc. v. Hoechst Celanese Corp., 214 F.3d 556, 558-61

(5th Cir. 2000), proximate cause in a RICO fraud case could be established if the plaintiff had either

been the target of fraud--the target wing--or had relied on the fraudulent conduct of the defendants--

the reliance wing. It concluded that Wall Street had stated a claim under both. Id.

The court reasoned that Wall Street could establish causation under the target wing of

Summit--where individual reliance by class members would not be an issue--based on a

fraud-on-the-regulator theory. Id. Applying a conclusion it had reached in its earlier summary

judgment ruling in Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co., 111

F.Supp.2d 867 (S.D. Tex. 2000) (“Sandwich Chef I”), the court held that Wall Street could meet the

requirement of proximate cause by establishing that class members had been injured by regulators’

reliance on defendants’ misrepresentations and omissions. Id. at 497-98 (citing Sandwich Chef I, 111

F.Supp.2d at 876, in which it held that “Wall Street’s fraud-on-the-regulator [theory] is cognizable

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as a RICO claim after Summit because Wall Street has established through the summary judgment

evidence that the defendants engaged in a scheme to collect phantom premiums through

misrepresentations made to insurance regulators.”). Wall Street argued that, when NCCI made its

R-1244 filing seeking authority for residual market subsidies in filed rates, it concealed that many

defendants were already charging t hese costs to policyholders. It asserted that the filing

misrepresented that defendants intended only a “partial pass-through” of these costs when they in fact

charged policyholders a full pass-through. Id. at 498. Wall Street also contended that individual

defendants made similar deceitful representations directly to regulators that were intended to lead

them to believe that defendants were charging filed, rather than inflated, rates. Id.

The district court rejected defendants’ contention that members of the plaintiff class would

be required to demonstrate injury through individual proof. It concluded that Wall Street could first

show that regulators relied upon the filings and would have enforced the filed rates. Defendants’

conduct, if proved, would demonstrate they understood the necessity of concealing their actual

charges by making deceitful filings in violation of state laws, and the impact of their alleged scheme

affected all class members the same. Id. Wall Street had established predominance and superiority

for its target wing claim because its fraud-on-the-regulator theory was a common issue faced by all

class members that could be proved or disproved at trial from a common set of facts under a single

federal law. Id. at 498-99.

The district court also held that Wall Street could meet its obligation to prove proximate

cause, without requiring individual proof of reliance, through the reliance wing of Summit by means

of its invoice theory. Id. at 499. The court recognized that, in Patterson v. Mobil Oil Corp., 241

F.3d 417 (5th Cir. 2001), Bolin v. Sears, Roebuck & Co., 231 F.3d 970 (5th Cir. 2000), and Castano

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v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996), we had overruled Rule 23(b)(3) certifications

because the facts required individual proof of reliance. It distinguished these cases, holding that Wall

Street’s invoice theory claim was simple in contrast to the ones pursued in Patterson, Bolin, and

Castano, and stating that Wall Street’s claim had not been directly addressed by this court. Id.

According to the district court’s reasoning, under Wall Street’s theory of the case, each class

member sustained the same injury: an overcharge caused by an inflated invoice. This was classic mail

fraud because defendants knowingly sent policyholders invoices that they knew were higher than the

filed rates. Since defendants’ records provided all information needed to measure the injury for the

class and each class member, the invoice theory did not raise complicating factors that would defeat

Rule 23(b)(3) certification. The invoice theory also alleged that defendants made but one type of

direct misrepresentation to their policyholders: the written invoices. Id. at 499-500.

The district court also held that class certification was particularly appropriate when

purchasers sought redress for widespread commercial abuses, and that individual proof of reliance

did not preclude class certification, because the act of paying an invoice could establish circumstantial

evidence of reliance. Id. at 500. It concluded that, in a RICO fraud case alleging overcharges,

proximate cause (reliance and injury) can be proved by circumstantial evidence of the transaction that

results in the overcharge. Id. at 500-01. Wall Street sought to prove reliance by circumstantial

evidence that the invoices contained inflated premiums that constituted material misrepresentations,

omissions, or both, and that the class members paid overcharges as a result. Wall Street and the class

were allowed to use the invoices and payment of the invoices as circumstantial evidence of

detrimental reliance. They could also present expert witness testimony that businesses customarily

and reasonably rely on the accuracy of invoices, especially invoices sent by regulated entities, and that

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commercial transactions between businesses occur based on an ethic of honesty and fair dealing. Id.

at 501.

C

After the district court certified a class, defendants petitioned and obtained leave to appeal

under Rule 23(f). They maintain, inter alia, that the district court abused its discretion in certifying

a class because individual issues of reliance and causation defeat Rule 23(b)(3) predominance.4

II

Before we turn to the merits of this appeal, we must address a threshold matter.

Wall Street contends that defendants have improperly cited materials that are outside the

evidentiary record and must be stricken.5 It argues vigorously in its brief, and emphasized during oral

argument, that defendants cannot defeat class certification based on a supposed need for individual

proof of reliance, because they failed to introduce in the district court evidence that class members

had any information relevant to their defense, that any class member paid premiums without relying

on an invoice, that a defendant disclosed the fraud to a class member, or that a class member learned

about overcharging on its own. Wall Street also maintains that defendants introduced no proof that

demonstrated a need to involve individual class members in the trial, that entitled defendants to

question individual plaintiffs about reliance or other issues, or t hat showed that any class member

4
Defendants also argue that proving injury presents significant individual issues of fact and
variations in state law; that conspiracy allegations do not eliminate the predominance of individual
issues that defeat class certification; and that a class action is not superior to other available methods
of adjudication. In view of our disposition of defendants’ first argument, we need not address these
contentions.
5
Wall Street also moved to strike defendants’ brief and reply brief and to vacate our order
granting them leave to appeal. A panel of this court denied the motion.

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knew about the illegality of the overcharges or paid a bill without relying on an invoice.

We disagree with Wall Street’s argument to the extent it is addressed to evidence we have

considered on appeal.6 In concluding that individual issues predominate in this case, we have relied

on evidence that defendants maintain shows that Wall Street and other potential class members,

directly or through others, negotiated premiums that varied from filed rates, and that they were aware

that carriers were charging them more than the filed rate.7 Defendants have established that they

included this evidence in the certification record by submitting it as prehearing filings or proffering

it during the hearing. The district court did not restrict the record to what was admitted in evidence

during the hearing. In its class certification ruling, it explicitly considered “the motion, submissions,

and applicable law, together with the evidence and arguments of counsel presented at a class

certification hearing[.]” Sandwich Chef II, 202 F.R.D. at 487. On several occasions during the

hearing, the district court confirmed this more expansive intent concerning the scope of the decisional

record. See R. 42:458 (“Yo u can get whatever you want in the record. Okay? I’m letting you

because of the scope of this thing.”); R. 44:170 (“I’m just going to leave it to both sides to determine

if it was in [the record] or not. Let’s not get bogged down on that. If there is any question at all,

once the record is prepared, look in there; and if anything needs to be withdrawn or added, you do

6
Wall Street objects to 140 citations that defendants make to materials that it contends are
outside the class certification record. We have neither relied on any evidence that the district court
explicitly excluded nor on factual recitations contained in state court cases that defendants maintain
are similar to the instant action.
7
We reject Wall Street’s assertions in its brief and at oral argument that defendants did not
adduce evidence in the district court to support their allegations of individual negotiations and
knowledge and lack of reliance on alleged misrepresentations.
8
Citations are to the volume and page of the record on appeal.

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it.”). For example, when defendants offered in evidence an expert report that they had submitted as

an exhibit to their memorandum in opposition to class certification, the district court stated that this

was unnecessary because the document was already part of the record. R. 43:132 (“It’s already part

of the file. I needn’t rule on it. Let’s leave it not in evidence, but it’s part of the record in this

case.”).

Citing Jones v. Diamond, 519 F.2d 1090 (5th Cir. 1975), and Ezell v. Mobile Housing Board,

709 F.2d 1376 (11th Cir. 1983), Wall Street argues that, once the hearing is complete, only the

evidentiary record determines certification, and that materials not in the record, such as exhibits to

prehearing briefs, are not considered. Jones and Ezell are distinguishable. In Jones we held that the

district court was not legally compelled to consider facts included in interrogatory answers that the

plaintiff had not formally introduced in evidence. Jones, 519 F.2d at 1098. We did not hold that such

evidence is inadmissible per se, nor were we deciding a case like this one, in which the district court

clearly opted to consider submissions that were not admitted in evidence during the hearing.9 In Ezell

the Eleventh Circuit rejected appellants’ reliance on appeal on statistical exhibits and allegations that

they had not introduced during the evidentiary hearing but that were merely part of their motions for

partial summary judgment and for class certification. Ezell, 709 F.2d at 1380. It held that the district

court could not consider the exhibits and allegations because they had not been presented as evidence

on the certification issue. Id. There is no indication in Ezell that, as in this case, the district court

9
Another holding in Jones supports defendants’ position. We concluded that “[i]f the court
finds . . . that an evidentiary hearing on the class is appropriate or essential, it should inform the
parties that a full hearing will precede the decision on certification, and that any facts on which they
intend to rely to support the motion must be introduced in evidence at that time.” Id. at 1099. In the
present case, the district court did not advise the parties that the facts would be limited to those
introduced during the hearing; it did the opposite.

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advised the parties that it would consider, and did in fact base its decision on, submissions that were

not introduced during the evidentiary hearing.

The evidence on which defendants rely to contend there are individual issues of reliance and

causation is properly part of the record below and on appeal.

III

We turn now to the merits. Defendants contend the district court abused its discretion in

certifying this case as a class action because, inter alia, individual issues of reliance and causation

defeat Rule 23(b)(3) predominance.10

A

We review the district court’s class certification decision for abuse of discretion. Stirman v.

Exxon Corp., 280 F.3d 554, 561 (5th Cir. 2002). “If the court’s certification was ‘erroneous as a

matter of law,’ however, the court necessarily abused its discretion and the class should be

decertified.” Sikes v. Teleline, Inc., 281 F.3d 1350, 1359 (11th Cir. 2002) (quoting Jackson v. Motel

6 Multipurpose, Inc., 130 F.3d 999, 1006 (11th Cir. 1997)). “A district court by definition abuses

its discretion when it makes an error of law.” Koon v. United States, 518 U.S. 81, 100 (1996) (citing

Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990)). We review the district court’s legal

10
Defendants also argue that the district court abused its discretion in its application of the
filed rate doctrine and the parol evidence rule. We need not address these contentions. Wall Street
acknowledged during oral argument that the filed rate doctrine and parol evidence rule “cannot
eliminate materials that would be exculpatory” and asserted that the district court did not exclude
evidence on this basis. See Tr. Oral Arg. at 22-23. We agree that neither the filed rate doctrine nor
the parol evidence rule prevents a carrier from defending against a fraud claim based on evidence that
a policyholder knew of, or agreed to, the rate being charged. And the district court’s certification
opinion indicates that its discussion of this doctrine and rule related mostly to its assessment of
typicality and did not affect its analysis of the predominance component of Rule 23(b)(3), on which
this appeal turns.

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conclusions de novo. See Stirman, 280 F.3d at 562.

To obtain class certification,

Rule 23(a) requires the plaintiff to show that the class is too numerous
to allow simple joinder; there are common questions of law or fact;
the claims or defenses of the class representatives are typical of those
of the class; and the class representatives will adequately protect the
interests of the class. To receive (b)(3) certification, a plaintiff must
also show that the common issues predominate, and that class
treatment is the superior way of resolving the dispute.

Patterson, 241 F.3d at 418-19 (footnotes omitted). The party seeking certification bears the burden

of proof. Stirman, 280 F.3d at 562. To decide whether co mmon issues predominate, the district

court must consider how a trial on the merits would be conducted if a class were certified. Castano,

84 F.3d at 740.

Causation is one issue to be tried in the present case. “RICO creates a civil cause of action

for ‘“[a]ny person “injured in his business or property by reason of a violation of section 1962.”’”

St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 439 (5th Cir. 2000) (quoting Beck v. Prupis,

529 U.S. 494, 496 (2000) (quoting 18 U.S.C. § 1964(c))).11 The “by reason of” language of RICO

has been interpreted by the Supreme Court, Holmes v. Securities Investor Protection Corp., 503 U.S.

258 (1992), and by this court, Summit, 214 F.3d at 558, to require a showing that the fraud was the

“but for” cause and “pro ximate” cause of the injury. “[Holmes] explicitly confirmed that the ‘by

reason of’ language in RICO requires a causal connection between the predicate mail or wire fraud

and a plaintiff’s injury that includes ‘but for’ and ‘proximate’ causation.” Summit, 214 F.3d at 558.

11
“All RICO violations under 18 U.S.C. § 1962 entail ‘(1) a person who engages in (2) a
pattern of racketeering activity, (3) connected to the acquisition, establishment, conduct, or control
of an enterprise.’” In re MasterCard Int’l Inc., 313 F.3d 257, 261 (5th Cir. 2002) (quoting Crowe
v. Henry, 43 F.3d 198, 204 (5th Cir. 1995)).

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In common law fraud cases, proof of reliance satisfies the “but for” cause, or cause-in-fact,

requirement. See Restatement (Second) of Torts § 546 (1977) (“The maker of a fraudulent

misrepresentation is subject to liability for pecuniary loss suffered by one who justifiably relies upon

the truth of the matter misrepresented, if his reliance is a substantial factor in determining the course

of conduct that results in his loss.”). For a misrepresentation to cause an injury, there must be

reliance. Knowledge of the truth defeats a claim of fraud because it eliminates the deceit as the “but

for” cause of the damages. See Summit, 214 F.3d at 560 n.19 (“If the relevant decisionmakers knew

the limitations of the product but would have bought it anyway because of its low price, for example,

the fraud would not have been a ‘but-for’ cause of the plaintiffs’ damages.”); Ideal Dairy Farms, Inc.

v. John Labatt, Ltd., 90 F.3d 737, 746-47 (3d Cir. 1996) (affirming dismissal of RICO fraud claim

because plaintiff knew true facts and could not have relied on misrepresentation) (cited in Summit,

214 F.3d at 560 n.16).

Proximate cause generally demands that a misrepresentation be relied upon by the plaintiff,

individually. See Summit, 214 F.3d at 562 (“[W]hen civil RICO damages are sought for injuries

resulting from fraud, a general requirement of reliance by the plaintiff is a commonsense liability

limitation.” (emphasis added)). RICO fraud cases “require a showing of detrimental reliance by the

plaintiff, which is consistent with Holmes’ admonition that federal courts employ traditional notions

of proximate cause when assessing the nexus between a plaintiff’s injuries and the underlying RICO

violation.” Id. at 560 (footnote omitted) (emphasis added); see Bolin, 231 F.3d at 978 (“[A] finding

of RICO fraud liability requires a showing of reliance by each plaintiff.” (emphasis added)).

“[I]ndividual findings of reliance necessary to establish RICO liability and damages preclude

. . . (b)(3) certification[.]” Bolin, 231 F.3d at 978. “Claims for money damages in which individual

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reliance is an element are poor candidates for class treatment, at best. We have made that plain.”

Patterson, 241 F.3d at 419. “According to both the advisory committee’s notes to rule 23(b)(3) and

this court’s decision in Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880 (5th Cir.

1973), a fraud class action cannot be certified when individualized reliance will be an issue.”

Castano, 84 F.3d at 745. This is so because cases that involve individual reliance fail the

predominance test.

While there may be an issue of fact common to all class members . .
. that question does not predominate over the question of whether or
not each member of the class suffered a RICO injury. . . . To
determine reliance for each individual class member would defeat the
economies ordinarily associated with the class action device.

Patterson, 241 F.3d at 419. When a district court certifies a case as a class action, despite the fact

that the predominance requirement cannot be met, it errs as a matter of law. See id.

The pervasive issues of individual reliance that generally exist in RICO fraud actions create

a working presumption against class certification. The district court avoided individual issues of

reliance by concluding on substantive grounds that these issues would not predominate. If the court

erred in these holdings, its class certification decision was necessarily an abuse of discretion and must

be reversed. See Sikes, 281 F.3d at 1359.

B

Relying on our decision in Summit, the district court held for two reasons that Wall Street

could circumvent individual issues of reliance and causation that usually preclude a finding of

predominance. We ruled in Summit that, “[i]n general, fraud addresses liability between persons with

direct relationships--assured by the requirement that a plaintiff has either been the target of a fraud

or has relied upon the fraudulent conduct of the defendants.” Summit, 214 F.3d at 561. The district

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court concluded that Wall Street could establish proximate cause as to all class members through

common circumstantial evidence, either by the target wing or the reliance wing.

We turn first to the reliance wing, which the district court found Wall Street had met through

its invoice theory. The district court viewed Wall Street’s invoice theory as a relatively simple one.

Sandwich Chef II, 202 F.R.D. at 499. Each class member was overcharged by means of an inflated

invoice that affirmatively misrepresented that the premium charged was the amount lawfully due. See

id. Individual proof of reliance was not an obstacle to class certification because the act of payment

of invoices could establish circumstantial evidence of reliance. Id. at 500. This circumstantial

evidence consisted of proof that the invoices contained material misrepresentations--inflated

premiums--and that the class members had paid overcharges in reliance on the invoices. Id. The

plaintiff class could “present expert witness testimony that businesses customarily and reasonably rely

on the accuracy of invoices, especially invoices sent by regulated entities, and that commercial

transactions between businesses occur based on an ethic of honesty and fair dealing.” Id. at 501.

We conclude that this reasoning is legally flawed. Certification of a class under Rule 23(b)(3)

requires that the district court consider how the plaintiffs’ claims would be tried. See Castano, 84

F.3d at 744. “A district court certainly may look past the pleadings to determine whether the

requirements of rule 23 have been met. Going beyond the pleadings is necessary, as a court must

understand the claims, defenses, relevant facts, and applicable substantive law in order to make a

meaningful determination of the certification issues.” Id. (footnote omitted) (emphasis added).

“Absent knowledge of how [the] . . . cases [will] actually be tried, however, [makes it] impossible for

the court to know whether the common issues would be a ‘significant’ portion of the individual

trials.” Id. at 745. Although the district court recognized the need to address how a trial on the

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merits would be conducted, see Sandwich Chef II, 202 F.R.D. at 494, it did not adequately account

for individual issues of reliance that will be components of defendants’ defense against RICO fraud.

Defendants maintain that Wall Street and other potential class members, directly or through

others (e.g., brokers), negotiated premiums that varied from filed rates for retrospectively rated

workers’ compensation insurance. They contend that plaintiffs were aware that carriers were

charging them more than the filed rates. Knowledge that invoices charged unlawful rates, but did so

according to a prior agreement between the insurer and the policyholder, would eliminate reliance

and break the chain of causation. See Summit, 214 F.3d at 560 n.19; Ideal Dairy Farms, 90 F.3d at

746-47. Defendants have introduced evidence that Wall Street and other class members individually

negotiated with insurers regarding workers’ compensation insurance premiums. A class cannot be

certified when evidence of individual reliance will be necessary. See, e.g., Patterson, 241 F.3d at 419

(“Claims for money damages in which individual reliance is an element are poor candidates for class

treatment, at best.”).

Wall Street and the other plaintiffs must establish at trial that they detrimentally relied on the

misrepresentations in the invoices the insurers sent them. Defendants are entitled to attempt to

undercut this proof with evidence that might persuade the trier of fact that policyholders knew the

amounts being charged varied from rates filed with regulators and that they had agreed to pay such

premiums. Although expert testimony about business practices regarding invoices and commercial

transactions might convince the trier of fact to find in a policyholder’s favor, such opinion evidence

would not justify excluding proof demonstrating a lack of reliance by individual plaintiffs. The trier

of fact must ultimately decide whether a specific policyholder thought an invoice complied with the

approved rate and paid an inflated premium in reliance on that belief.

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 Accordingly, we hold that the invoice theory does not satisfy the reliance wing of Summit and

eliminate individual issues of reliance and causation that preclude a finding of predominance of

common issues of law or fact. See id. (holding that facts of case required individual proof of reliance

that would “defeat the economics ordinarily associated with the class action device”).12

C

The district court also concluded that Wall Street could avoid individual issues of reliance

under Summit’s target wing, based on a theory of fraud-on-the-regulator. The court reasoned that,

under the target wing, individual reliance by class members was not an issue because reliance upon

a fraudulent representation or omission by a third person was sufficient if the plaintiff was injured as

a result. Wall Street could establish proximate cause by demonstrating that the class members were

injured by the regulators’ reliance on defendants’ misrepresentations and omissions. Sandwich Chef

II, 202 F.R.D. at 497. The court rejected defendants’ contention that individual proof of injury was

necessary. It concluded that Wall Street could show that regulators relied upon carrier filings and

would have enforced the filed rates; defendants’ conduct, if proved, would show that they understood

it was necessary to conceal their actual charges by making deceitful filings in violation of state laws;

and the impact of defendants’ alleged scheme affected all class members the same. Id. at 498.

Therefore, Wall Street’s target wing claim based on a fraud-on-the-regulator theory was a common

issue faced by all class members that could be proved or disproved at trial from a common set of facts

under a single federal law. Id. at 498-99.

12
In a post-argument brief, Wall Street maintains that a holding in the Third Circuit’s recent
decision in In re Linerboard Antitrust Litigation, 305 F.3d 145 (3d Cir. 2002), rejects defendants’
position concerning the necessity for individual proof concerning policyholders’ knowledge under the
reliance wing. The holding and reasoning of Linerboard that plaintiffs cite does not affect our
analysis, and we need not address their argument.

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 We hold that the district court erred in concluding that the target theory could be invoked

to excuse proof of individual reliance on fraudulent predicate acts. We have applied the target theory

narrowly. See Procter & Gamble Co. v. Amway Corp., 242 F.3d 539, 564 (5th Cir. 2001) (referring

to target theory set out in Summit as narrow exception to rule that in civil RICO claims in which fraud

is alleged as predicate act, reliance on fraud must be shown). In Summit we cited Mid Atlantic

Telecom, Inc. v. Long Distance Services, Inc., 18 F.3d 260, 263-64 (4th Cir. 1994), as holding open,

under the target wing, “the possibility that a plaintiff company may not need to show reliance when

a competitor lured the plaintiff’s customers away by fraud directed at the plaintiff’s customers.”

Summit, 214 F.3d at 561. But we declined to apply the theory because the plaintiffs did not contend

they were the targets of a scheme to defraud accomplished by defrauding others. Id.

Mid Atlantic involved RICO fraud and conspiracy claims by Mid Atlantic Telecom, Inc.

(“Mid Atlantic”), a reseller o f long distance telecommunications services, against Long Distance

Services, Inc. (“LDS”), its competitor, and LDS’s president. Mid Atlantic alleged that it had been

injured by LDS’s fraudulent conduct directed toward some of LDS’s own customers. By improperly

inflating the customers’ bills, LDS was able to offer Mid Atlantic’s customers artificially low rates

and force Mid Atlantic to match the rates in order to keep its customers. Mid Atlantic, 18 F.3d at

261. The Fourth Circuit rejected defendants’ argument that Mid Atlantic could not establish

proximate cause because their alleged conduct had been directed toward customers of Mid Atlantic

and LDS rather than toward Mid Atlantic. Id. at 263. The court held that, with discovery, Mid

Atlantic might be able to prove that, although defendants initially aimed the scheme only at LDS’s

customers, the company president broadened the scheme to include Mid Atlantic as a direct target,

and discovery might reveal that the artificially low billings to Mid Atlantic customers were purposely

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devised to injure Mid Atlantic. Id. This was so because Mid Atlantic did not seek derivative injuries;

it claimed distinct and independent injuries caused by the necessity of offering lower rates to match

LDS’s fraudulent ones. Id. at 264.

In Procter & Gamble we applied the target theory to hold that Procter & Gamble had stated

a RICO claim sufficient to survive Rule 12(b)(6) dismissal where its competitor had allegedly spread

a rumor that caused consumers to stop purchasing Procter & Gamble’s products. Procter & Gamble,

242 F.3d at 565. We concluded that, even though Procter & Gamble had not relied on the fraud, if

its cust omers had done so in deciding to boycott its products, this reliance could fall within the

narrow exception carved out in Summit and would suffice to show proximate cause. Id.

The reasons for our narrow application of the target theory, and for its inapplicability in the

present case, can be derived from foundational principles of RICO causation jurisprudence. Before

the Supreme Court decided Holmes, “[t]he Courts of Appeals ha[d] overwhelmingly held that not

mere factual, but proximate, causation is required.” Holmes, 503 U.S. at 266 n.11. Holmes agreed

with the lower courts’ conclusion--“[p]roximate cause is thus required,” id. at 268--and it gave

meaning to the concept of proximate cause in the context of civil RICO:

Here we use “proximate cause” to label generically the judicial tools
used to limit a person’s responsibility for the consequences of that
person’s own acts. At bottom, the notion of proximate cause reflects
“ideas of what justice demands, or of what is administratively possible
and convenient.” Accordingly, among the many shapes this concept
took at common law was a demand for some direct relation between
the injury asserted and the injurious conduct alleged. Thus, a
plaintiff who complained of harm flowing merely from the misfortunes
visited upon a third person by the defendant’s acts was generally said
to stand at too remote a distance to recover.

Id. at 268-69 (emphasis added) (quoting W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and

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Keeton on Law of Torts § 41, at 264 (5th ed. 1984)) (other citations omitted).

In enacting RICO, Congress obviously adopted “the Clayton Act direct-injury limitation

among the requirements of § 1964(c).” Id. at 272. Holmes relied on three reasons for concluding

that such directness o f relationship has been one of the central elements of causation. Id. at 269

(addressing requirements of Clayton Act, but stating infra at 270 “that the facts of the instant case

show how these reasons apply with equal force to suits under § 1964(c).”). “First, the less direct an

injury is, the more difficult it becomes to ascertain the amount of a plaintiff’s damages attributable

to the violation, as distinct from other, independent, factors.” Id. (citation omitted). “Second, quite

apart from problems of proving factual causation, recognizing claims of the indirectly injured would

force courts to adopt complicated rules apportioning damages among plaintiffs removed at different

levels of injury from the violative acts, to obviate the risk of multiple recoveries.” Id. (citations

omitted). Third, “the need to grapple with these problems is simply unjustified by the general interest

in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate

the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs

injured more remotely.” Id. at 269-70 (citation omitted).

Holmes therefore teaches that a RICO plaintiff must show a “direct relation between the injury

asserted and injurious conduct alleged[,]” and that a RICO predicate act “visited upon a third person”

is generally too remote to permit a recovery from a person who complains of injury flowing from that

act. Id. at 268. Consistent with this understanding of Holmes, we held in Summit that the plaintiffs

could not establish reliance on defendants’ fraud because their “risks of injuries did not arise as direct

and contemporaneous results of any alleged fraud, but instead arose only later, through the purchases

of allegedly defective plumbing by transactions which were not tai nted with fraud.” Summit, 214

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F.3d at 561 n.22 (citations omitted).

Thus under the target wing recognized in Summit and applied in Procter & Gamble, there is

a narrow except ion to the requirement that the plaintiff prove direct reliance on the defendant’s

fraudulent predicate act. This exception only comes into play when the plaintiff can demonstrate

injury as a direct and contemporaneous result of fraud committed against a third party, because in this

limited context there is a sufficient “direct relation between the injury asserted and the injurious

conduct alleged” to comport with the RICO requirement of proximate cause. This understanding of

Holmes and our jurisprudence clearly explains how the narrow exception was correctly applied in Mid

Atlantic and Procter & Gamble. The facts of these cases illuminate the guiding principle of Summit’s

narrow exception and the critical distinction between cases that properly apply it and those that do

not.13

In Mid Atlantic and Procter & Gamble there were direct and contemporaneous relationships

between the acts of fraud directed against the third parties and the harm the plaintiffs incurred. When

Mid Atlantic’s customers relied on fraudulent communications about rates, it had to lower its charges

to avoid losing them as customers. When Procter & Gamble’s competitor spread false rumors, it lost

sales due to a customer boycott. The risks of injuries arose in both Mid Atlantic and Procter &

Gamble as direct and contemporaneous results of the allegedly fraudulent predicate acts.

But the exception adopted in Summit has clear and constricted parameters that Wall Street

13
We have no occasion to address in all its dimensions what constitutes proximate cause in
a RICO fraud case. Consistent with Holmes, 503 U.S. at 272 n.20, we disavow any intent to adopt
a bright-line rule for establishing proximate cause in all or even most contexts. Nor do we foreclose
the possibility that fraud upon a third party can constitute proof of reliance by a plaintiff under
circumstances not present in today’s case. We simply conclude that Wall Street’s specific
fraud-on-the-regulator theory is legally inadequate to avoid the necessity of proving individual
reliance by policyholders.

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cannot satisfy in this case. Under Wall Street’s target theory, there is no similar direct and

contemporaneous relationship between the fraudulent acts directed against regulators and the harm

Wall Street and the other plaintiffs incurred. Assuming that defendants and NCCI misrepresented in

regulatory filings that they were charging lawful rates, the injury to plaintiffs could have arisen only

after defendants attempted to charge plaintiffs inflated premiums, and the regulators--because they

had been deceived--did not intercede to prevent the fraud. When Wall Street’s theory is analyzed

properly, it is apparent that no injury could have been incurred without a plaintiff’s subsequent

reliance on an inflated invoice. The fact that a regulator was completely in the dark about a carrier’s

true premium charges would not of itself have injured a policyholder. We do not reject the possibility

that defrauding a regulator could, in the proper case, proximately cause injury. But we hold that

fraud on the regulator, as Wall Street contemplates it, does not constitute a direct and

contemporaneous RICO injury to a policyholder because it would always be necessary for the

regulator to be deceived and for the policyholder to pay an unlawfully-inflated premium. Although

disclosure of the true premiums to a regulator could prevent injury to policyholders by prompting the

regulator to interdict the carrier’s attempt to bill at an inflated rate, concealment of inflated premiums

would not result in direct and contemporaneous injury to the policyholder without the additional act

of billing. The regulator’s reliance on the fraudulent act would not alone be enough to result in a

direct and contemporaneous injury to a policyholder that satisfies RICO’s proximate cause

requirement.

We therefore disagree with the district court that the fraud-on-the-regulator theory is a

common issue faced by all class members that may be proved or disproved at trial from a common

set of facts. Because Wall Street cannot rely on Summit’s target wing, plaintiffs must demonstrate

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causation on an individual basis, which defeats predominance and cert ification of a Rule 23(b)(3)

class.

* * *

The district court relied in error on certain legal principles to eliminate individual issues that

predominate in this RICO fraud case and that preclude certification of a Rule 23(b)(3) class. These

RICO fraud cases must be tried individually. Wall Street and other plaintiffs are entitled to prove at

trial that the insurers with whom they contracted to provide workers’ compensation insurance

defrauded them, in violation of 18 U.S.C. § 1962, by charging premiums that exceeded approved

rates. But defendants are equally entitled to defend themselves by offering, for example, evidence

that an individual plaintiff, directly or through a broker, negotiated a premium that varied from the

filed rate, was aware that the insurer was charging more than what regulators had approved, and

therefore was not a victim of fraud. Accordingly, the class certification order is

REVERSED.

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