Opinion ID: 2758262
Heading Depth: 4
Heading Rank: 3

Heading: The Predominance Element in RICO Class Actions

Text: Next, we must determine whether reliance in this case is susceptible to general and classwide proof. Reliance, as a means of establishing RICO causation and beyond, takes on uncommon gravity when it arises in the context of establishing predominance under Rule 23. In practice, efforts to certify classes based on causes of action that require an element of causation, including RICO, often turn on whether the class can demonstrate that reliance is susceptible to generalized proof. Compare In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d 108, 119 (2d Cir. 2013), cert. denied 134 S. Ct. 1938 (2014) (certifying RICO class based on a classwide inference of reliance); Klay v. Humana, 382 F.3d 1241 (11th Cir. 2004) (same), -24- abrogated on other grounds by Bridge, 553 U.S. 639; with Poulos v. Caesars World, Inc., 379 F.3d 654 (9th Cir. 2004) (declining to certify class because individualized issues of reliance would dominate); Sandwich Chef of Tex., Inc. v. Reliance Nat. Indem. Ins. Co., 319 F.3d 205, 219 (5th Cir. 2003) (“The pervasive issues of individual reliance that generally exist in RICO fraud actions create a working presumption against class certification.”); Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 434 (4th Cir. 2003) (finding reliance not easily proven by common evidence). The status of reliance as a focal point at the class certification stage is primarily a forward-looking evidentiary concern. Since reliance is often a highly idiosyncratic issue that might require unique evidence from individual plaintiffs, it may present an impediment to the economies of time and scale that encourage class actions as an alternative to traditional litigation. In terms of Rule 23 doctrine, individualized issues of reliance often preclude a finding of predominance. But that is not always the case. Sometimes issues of reliance can be disposed of on a classwide basis without individualized attention at trial. For example, where circumstantial evidence of reliance can be found through generalized, classwide proof, then common questions will predominate and class treatment is valuable in order to take advantage of the efficiencies essential to class actions. In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d at 119; Klay, -25- 382 F.3d at 1258–59. Under certain circumstances, therefore, it is beneficial to permit a commonsense inference of reliance applicable to the entire class to answer a predominating question as required by Rule 23. In the RICO context, class certification is proper when “causation can be established through an inference of reliance where the behavior of plaintiffs and the members of the class cannot be explained in any way other than reliance upon the defendant’s conduct.” In re Countrywide Fin. Corp. Mortg. Mktg. & Sales Practices Litig., 277 F.R.D. 586, 603 (S.D. Cal. 2011). Cases involving financial transactions, such as this one, are the paradigmatic examples of how the inference operates as an evidentiary matter. On this point, the Second Circuit’s recent decision in In re U.S. Foodservice Inc. Pricing Litigation is instructive. 729 F.3d 108. In that case, defendants challenged the certification of a nationwide RICO class action against a food distributor for fraudulent overbilling under a “cost-plus” payment plan. Defendants appealed the district court’s class certification decision on several grounds, including that the district court ignored particularized issues of reliance that were bound to predominate. See id. at 119. The Second Circuit disagreed, finding circumstantial proof of classwide reliance in the fact that class members made payments pursuant to the agreements: In cases involving fraudulent overbilling, payment may constitute circumstantial proof of reliance based on the reasonable inference that customers who pay the amount -26- specified in an inflated invoice would not have done so absent reliance on the invoice’s implicit representation that the invoiced amount was honestly owed. Fraud claims of this type may thus be appropriate candidates for class certification because “while each plaintiff must prove reliance, he or she may do so through common evidence (that is, through legitimate inferences based on the nature of the alleged misrepresentations at issue).” Id. at 120 (quoting Klay, 382 F.3d at 1258). Likewise, the Eleventh Circuit in Klay v. Humana found that an inference of reliance was appropriate where “circumstantial evidence that can be used to show reliance is common to the whole class. That is, the same considerations could lead a reasonable factfinder to conclude beyond a preponderance of the evidence that each individual plaintiff relied on the defendants’ representations.” Klay, 382 F.3d at 1259. Klay involved class claims brought by doctors against health maintenance organizations (HMOs), alleging a conspiracy to systematically underpay physicians on reimbursements for their services. Id. at 1246. To rebut the HMOs’ claims that this inference was inappropriate, the court commented that “[i]t does not strain credulity to conclude that each plaintiff, in entering into contracts with the defendants, relied upon the defendants’ representations and assumed they would be paid the amounts they were due.” Id. at 1259. In re U.S. Foodservice Inc. Pricing Litigation and Klay are persuasive and they are hardly alone in reasoning that circumstantial evidence of reliance is sufficient to allege RICO causation for purposes of Rule 23. Indeed, numerous -27- district court decisions, in the process of certifying classes, have accentuated facts similar to those in this case—primarily, the alleged legitimacy of the counterparty to an agreement, 6 or the fact that all plaintiffs paid fees in exchange for a promise 7—as proper grounds to infer reliance on a classwide basis. 8 Moreover, 6 See Minter v. Wells Fargo Bank, N.A., 274 F.R.D. 525, 546 (D. Md. 2011) (“[T]he common inference involved in most such cases, as well as in the case at bar, is that members of the plaintiff class relied upon the purported legitimacy of the defendant with which they transacted.”); Robinson v. Fountainhead Title Grp. Corp., 257 F.R.D. 92, 95 (D. Md. 2009) (“[I]t would be a reasonable inference to assume that a class member who purchased services from Assurance Title relied on the legitimacy of that organization in paying the rate charged.”). 7 See Huyer v. Wells Fargo & Co., 295 F.R.D. 332, 348 (S.D. Iowa 2013) (“[T]he civil RICO claim’s reliance element may be established by circumstantial evidence applicable to the class as a whole—the payment of the amounts shown in class members’ mortgage statements, which amounts included property inspection fees.”); Kennedy v. Jackson Nat’l Life Ins. Co., No. C 07-0371CW, 2010 WL 2524360, at  (N.D. Cal. June 23, 2010) (finding that an inference of reliance can arise where class members would not have purchased the product had they been fully informed of the facts); Cullen v. Whitman Med. Corp., 188 F.R.D. 226, 235 (E.D. Pa. 1999) (“It need not involve time consuming proof of individual causation or reliance. If the plaintiffs can prove that UDS was a complete sham, then a fact finder can infer from the evidence that anyone who paid tuition and attended the school suffered damage.”); Peterson v. H & R Block Tax Servs., Inc., 174 F.R.D. 78, 84–85 (N.D. Ill. 1997) (“It is inconceivable that the class members would rationally choose to pay a fee for a service they knew was unavailable.”). 8 Still other cases have generally supported the application of this inference under the right circumstances. See McLaughlin, 522 F.3d at 225 (stating that “proof of reliance by circumstantial evidence may be sufficient under certain conditions”); Jenson v. Fiserv Trust Co., 256 F. App’x 924, 926 (9th Cir. 2007) (finding that it was “not unreasonable . . . to infer reliance by all [class]members” when a trust company made similar fraudulent promises about the nature of financial returns in an alleged Ponzi scheme); Torres v. SGE Mgmt. (continued...) -28- outside the context of class certification, the inference of reliance has also been deemed appropriate in RICO and similar fraud cases. See In re Neurontin Mktg. & Sales Practices Litig., 712 F.3d 51, 58 (1st Cir. 2013), cert. denied, 134 S. Ct. 786 (2013) (granting an inference of reliance in a non-class-action RICO case); In re Park W. Galleries, Inc., Mktg. & Sales Practices Litig., No. 09-2076RSL, 2010 WL 2640256, at  (W.D. Wash. June 25, 2010) (same); Smith v. MCI Telecommunications Corp., 124 F.R.D. 665, 679 (D. Kan. 1989) (finding that with respect to a common law fraud claim, “[i]t is implausible that, in initiating or continuing their employment with MCI, the salespersons did not rely on the commissions plans which they were required to sign. Further, whether their reliance was reasonable is an objective inquiry common to the entire proposed class.”). The logic of these cases applies here. Under the facts of this case, evidence of payment for the loan commitment—more specifically, the inference that arises from it—is sufficient to present a predominating question related to class member reliance that can resolve a central issue of this litigation in one swoop. Resorting 8 (...continued) LLC, No. 4:09-CV-2056, 2014 WL 129793, at  (S.D. Tex. Jan. 13, 2014) (“Because both logical inference and circumstantial evidence allow the class members to establish proximate cause on a classwide basis, the Court finds that common, rather than individual issues, predominate.”); Negrete v. Allianz Life Ins. Co. of N. Am., 287 F.R.D. 590, 612 (C.D. Cal. 2012) (“The Court agrees—resort to the ‘common sense’ inference for proving class-wide reliance remains appropriate in this case.”). -29- to this generalized inference of reliance addresses a critical classwide piece of evidence and will not require individualized consideration that would belie class treatment. 9 More specifically the fact that a class member paid the nonrefundable up-front fee in exchange for the loan commitment constitutes circumstantial proof of reliance on the misrepresentations and omissions regarding Hutchens’s past and the defendant entities’ ability or intent to actually fund the promised loan. Were we deciding the merits of an individual plaintiff’s RICO fraud claim, we would surely accept the introduction of such an inference—the factfinder’s ultimate acceptance or rejection notwithstanding—with little analysis. For the purposes of class certification, we see no reason why a putative class containing plaintiffs, who all paid substantial up-front fees in return for financial promises, should not be entitled to posit the same inference to a factfinder on a classwide basis. When plaintiffs are given the opportunity to present that inference as their theory of causation, reliance, an issue often wrought with individualized inquiries, becomes solvable with a uniform piece of circumstantial evidence. Furthermore, the circumstantial fact of payment of the up-front fee is common to 9 We note that the inference of reliance here is limited to transactional situations—almost always financial transactions—where it is sensible to assume that rational economic actors would not make a payment unless they assumed that they were receiving some form of the promised benefit in return. This inference would not be appropriate in most RICO class actions. And even in financial transaction cases, there may be individual questions, including components of class member reliance, that supplant this inference as the predominating concern for purposes of Rule 23. -30- the entire class: all class members paid up-front fees without receiving the promised loan. This element is subsumed in the definition of the class itself. And as a result, the putative class is not stymied, for the purposes of class certification, under Rule 23(b)’s predominance element. The defendants point to cases from other circuits that have resisted class certification in financial transaction cases where reliance cannot be shown through generalized evidence. But those cases, rather than categorically rejecting the inference, simply do not permit its application on a classwide basis due to unique facts surrounding the class claims. In particular, those cases involve significant individualized or idiosyncratic elements that reasonably preclude the predomination of common questions. For example, Poulos v. Caesers World, Inc., 379 F.3d 654 (9th Cir. 2004), is unpersuasive because the court found that a given putative class member’s decision to partake in slot-machine and video-poker gambling was not necessarily done in reliance on the game machine’s maker’s representations about the odds of winning. Unlike entering into a serious financial transaction, many people gamble without any consideration, let alone reliance, on the representations about the likelihood of striking it rich. Nor does every slot player spend any serious money expecting something (other than a good time, perhaps) in return. A similar, albeit less direct, conclusion derives from Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co., 319 F.3d 205, 219 (5th -31- Cir. 2003). In Sandwich Chef, the class alleged that several insurance companies defrauded policyholders in violation of RICO by charging excessive premiums on workers’ compensation plans. 10 Plaintiffs asserted that their theory of reliance was based on a simple financial transaction; namely, that each class member relied on the accuracy of an inflated invoice when it made payments in satisfaction of their debt. This act of payment, said the class, was sufficient to establish circumstantial evidence of reliance on a classwide basis. The Fifth Circuit disagreed, finding that individualized issues of reliance would take center stage at trial. According to the court, the uniquely negotiated premiums, among other bespoke elements of the insurance policies, would require personalized evidence to establish whether a given plaintiff was aware of the method for calculating premiums, whether individual policyholders were aware that their rates deviated from rates filed with regulators, and, most importantly, whether “a specific policyholder thought an invoice complied with the approved rate and paid an inflated premium in reliance on that belief.” Id. at 221. Particularly in the context of insurance negotiations, where myriad factors are considered during the fact-specific bargaining process, no set of universal facts could predominate over 10 We also note that Sandwich Chef, like Poulos, was decided before the Supreme Court’s decision in Bridge. Accordingly, it focused on the plaintiffs’ inability to demonstrate individual reliance by common evidence. The necessity of individual reliance is no longer an aspect of a civil RICO claim predicated on fraud. While we doubt that the slight shift in the law would have completely changed the Fifth Circuit’s mind, it may have made it a closer case. -32- the comprehensive sui generis evidence that would arise at trial with respect to each putative class member. Under those circumstances, Rule 23(b)’s predominance requirement cannot be met. At bottom, the sort of quid pro quo that is present in this case did not exist in Sandwich Chef. The putative class members in Sandwich Chef received the insurance they coveted—even if it was a slightly watered-down or less appealing version. Moreover, the insurance coverage itself was legitimate, and the companies offering it were in the business of providing insurance. In this case, the victims of Hutchens’s fraud were completely deprived of any benefit from their transaction because Hutchens allegedly did not intend to or have the ability to fund any of the loans. This fact, if proved at trial, will resolve a central, predominating issue that is common to all class members. Not so in Sandwich Chef where common proof simply would not suffice to dispose of any principal issue in that case. Before moving on, a few observations about the limited effect of this inference on the litigation of the class claims. As we have explained, the sole result of this inference is that the class members are exempted from demonstrating causation on a class-member-by-class-member basis. The inference thus manifests primarily as an evidentiary matter: class members will not be required to testify as to their reliance on the lenders’ misrepresentations and omissions. Instead, the putative class members are permitted to use the -33- common fact that they all forfeited advanced fees as evidence that the class’s damages were caused “by reason of” defendants’ alleged RICO violations. But this inference does not shift the burden of proof at trial on the element of RICO causation (or any other elements of the claim)—plaintiffs will still have to prove RICO causation by a preponderance of the evidence to win on the merits. See, e.g., Sikes v. Teleline, Inc., 281 F.3d 1350, 1362 n.3 (11th Cir. 2002) (distinguishing between presumed reliance and an inference of reliance), abrogated on other grounds by Bridge, 553 U.S. 639. Similarly, the trier of fact is not required to accept the inference; it is merely permitted to utilize it as common evidence to establish the class’s prima facie claims under RICO. Given the significance that RICO’s causation element will play at trial, combined with lenders’ common misrepresentations and omissions regarding Hutchens’s ability or intent to fund the promised loans (which are not challenged here), it is clear that the class’s claims will “prevail or fail in unison.” Amgen Inc., 133 S. Ct. at 1191. That is enough to satisfy the predominance prong of Rule 23. 11 11 Apart from the issues of RICO causation, it bears mentioning that another central, generalized element is at the crux of plaintiffs’ theory of liability: whether Hutchens and his alleged coconspirators actually misrepresented their ability or intent to satisfy the loan commitments. See In re Linerboard Antitrust Litig., 305 F.3d 145, 163 (3d Cir. 2002) (finding that common issues involving the defendants’ conduct rather than the plaintiffs actions can satisfy the predominance prong of Rule 23). The parties do not focus on this issue as it relates to predominance, but we think it deserves attention. In effect, a predominating question at trial will concern the legitimacy of Hutchens’s operation, which can be shown with evidence common to the entire class. (continued...) -34-