# United Stat es Court of Appeals For the First C ircuit

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, 20021 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 andattorney’s fees--to anyone injuredin 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. -2-

BOUDIN, Chief Judge . In this ca se, th e district court awardeddamages and attorney’s fees under the RICO statute against Kenneth Loiselle, sole owner and head of Aid Maintenance Co., Inc. ("AidMaintenance"). 1 The damages represented unde rpayments of wages due to two employees. Loiselle now appeals from the judgment; a competitor of the comp any, Systems Management, Inc., cross-appeals from the dismissal of its own RICO claim against Loiselle. The raw facts are undisputed. In 1968 Loiselle founded Ai dMa intenance, which provides janitorial services primarily in Rhode Island. In October 1994, the compa ny won a contract to provide cleaning s ervi ces at Massachusetts Bay Community College ("the college"), a unit of the Massachusetts State College System with campuses in Wellesley and Fra mingham. Neither the bidding invitation from the college nor the contra ct mentioned that the contractors had to pay no less than special minimum wages set under

a Ma ssachusetts statute that governed wages for the cleaning of public buildings. 2-3- 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 wou ld be paid. In May 1995, the college solicited new bids. In the meantime, Loiselle (bya 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 Framingh am bu t the college initially told Loiselle that the lower Framingham rate couldbe paid for work on both campuses because the college business office was in Framingham.

Ac co rding to the district court’s later findings at trial, at the start of the amendment period Loiselle intended to paythe prevailing wages, hoping to make up the difference through efficiencies. However, the hoped for cost savings were not

r ealizedand, as part of the rebidding process, Loiselle l earne d th at th e higher $9.20 wage rather than the lower $8.60 one would have to be paid in regard to the Wellesley campus. In consequence, fromJune 1 , 1995 , onward, Loiselle knowingly used devices to underpay some of his workers at the college.

In particular, L oiselle 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-4-

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. AidMaintenance again submitted the lowest bid, fol lowed by a unionizedcompany--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 declinedto bid and the contrac t was won by a unionized company called AM/PM, which took over on March 1, 1997.

On April 7, 1999, the present RICO ac tion was brought against Loiselle by individual employees claiming to repre sent a class of underpaid workers. The predicate criminal of fens es allegedto 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.-5- Thereafter, the district court rejected the request for class status and pared down the number of workers with potentially validclaims. 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’ eviden ce 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 committedacts of fraud by misrepresenting to the college that his companywas paying workers the sta tutory prevailing wage; that documents containing such misrepresentations hadbeen 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 rejectedLoiselle’s argument that civil liability for mail fra ud-6-

under RICO required detrimental reliance by the injured pe rson s. Id. at 95. Cross-appeals followed.

On Loiselle’s appeal, he urges two colorable grounds as the basis for rev ersal of the judgment against him: that an injuredplaintiff, seeking to re cover under RICO for fraud, must d emonstrate reliance on the fraudulent statements (whi ch th e plaintiffs here cannot do) and that RICO’s " patt ern of racketeering" requirement has not been satisfied. Loi selle 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 andincluding 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

suc h 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 requiredrelationship to an enterprise--namely, his cleaning business carried on through Aid Maintenance and another company-- andthat the interstate commerce requirement is met. The critical dispute concerns the phrase: pattern o f racketeering activity."-7-

"Racketeering activity" means any act violating one of many specified cr iminal 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 violatedthe fede ral mail fraud statute. That statute condemns inter alia obtaining money by false representations. 18 U.S.C. § 1 341 (2000). Here, the college continued its cleaning con tract , andpaid 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 th at the re 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 wouldhave been paidfor 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 relia nce 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 acti on fo r fraud ordinarilyrequires proof that the defrauded plaintiff relied upon the deception, and some courts have imported this requirement into3 See Chisol mv . TranSouth Financial Corp. , 95 F.3d 331, 337

(4th Cir. 1996); Pelletier v. Zweifel , 921 F.2d 1465, 1499 (11th Cir. 1991); Countyof Suffolk v. Long Island Lighting Co. , 907 F.2d 1295, 1311 (2d Cir. 1990); Brandenburg v. Seidel , 859 F.2d 1179, 1188 n.10 (4t h 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. 199 5); 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 pa rticula r 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 fraudat 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). -8- RICO actions where the predicate acts comprise mail or wire fraud. 3 But RICO b ases 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 racketeerin g a ctivity"; 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. UnitedStates , 527 U.S. 1, 24 (1999) ("The common-law requirement[] of 'justifiable reliance' [has] no plac e 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, inc ludi ng-9-

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 onlya general condition of civil liability at common law but is almost essential to shape and del imi t a rational remedy: otherwise the chain of causation could be endless. Bycontrast, reliance is a specialized conditi o n that happens to hav e g rown 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 h im 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 b ring s us to Loiselle’s second claim on appeal, which presents a p roblemfar more difficult than the reliance issue. From its phrasing ( e.g. , racketeering, enterprise, unlawful debt collection), as well as legislative history, we know that5 The Senat e bill, which was the basis for the statute,

includedno civil liability provision and , i f this had remained true, the disposition of most prosecutors to focus on serious crime wouldhave avoided the problems now presented. But the House added the civil liability provision without any further precaution s , 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). -10- Congress had organized crime in mind as its main RICO target. But Congress did not in its terms limit the statute to organizedcrime, adopting instead its "pattern" concept. 5 And des pite e arly lower court cases urging a narrow construction, the Supreme Court has now twice flatly rejected such a lim itation, stressing instead the flexibilityand reach of the statute. See Sedima, S.P.R.L. v. Imrex Co. , 473 U. S. 479 (19 85); H.J. Inc. v. Northwestern Bell Tel. Co. , 492 U.S. 229 (1989).

Taking RICO’s language literally, it couldapply 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 th rough a criminal RICO prosecution.6 Th e Co urt based its conception of relatedness on the

definition pro vide d in the Dangerous Special Offender Sentencing Act. 18 U.S.C. § 3575 et seq . See H.J. Inc. , 492 U.S. a t 240 ("[C]riminal conduct forms a pattern [and is thus related] if it embraces criminal acts that have the same or similar purposes, r esults, participants, victims, or methods of commissi on, o r otherwise are interrelated by distinguishing characteristics and are not isolated events.") (quoting § 3575(e)). -11- 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 (1 st Cir. 1992) (Breyer, C .J.); see also Fujisawa Pharmaceutical Co., Ltd. v. Kapoo r , 11 5 F.3d1332, 1338 (7 th Cir . 1997) (Posner, C.J.) (noting that if successive fraud s "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-12-

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 p rime 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 th i s case-thenChief 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 sai d that "Loiselle's ongoing business proce dures 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. , 4927 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 be twee n 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 foundthat Loiselle hadnot 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. -13- U.S. at 242-43. But neither the district court nor the plaintiffs have pointed to any such evidence of continuing threat. 7

Rath er, Loiselle took on the original contract without warning as to the prevailing wage requirement. When apprised, he first sought to abandon the contract andthen 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 economyfailed and he slid into acts of deliberate dishonesty to

ma intain this contract, offered a new (later mooted) bid partway through a nd then refused to bid again. The resemblance of th i s episode to the lar ger an d 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 prevaili ng wage statute were o ne of those listed in RICO; in that event, the

numerous individual underpayments themselves would have been separate predicate acts directed at a multitude of dif fere nt workers. Cf . H.J. Inc. , 492 U.S. at 242-43 (considering a protection racket with multiple vi cti ms). But it is no accident-14-

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 t reble damages and attorney’s fees.

Our decision that there was no violation moots the attorney’s fees issue raised by Loiselle. By t he same token, it requires that we deny the cross-ap peal by Systems Management challenging the lower court's dismissal of its claim on causation gr ounds . 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 .