Busby v. Crown Supply, Inc.

Decision Date20 February 1990
Docket NumberNo. 88-2521,88-2521
Citation896 F.2d 833
Parties, 114 Lab.Cas. P 12,032, RICO Bus.Disp.Guide 7424 John BUSBY, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. CROWN SUPPLY, INC.; Hammermill Paper Co.; Omer Fortier; Kevin McClamroch; Bruce Lang; Michael Almeida; Linda Ambrus; Richard D. Childers; Richard Reeves, Defendants-Appellees.
CourtU.S. Court of Appeals — Fourth Circuit

William Francis Krebs (B.G. Stephenson, Stephenson & Balthrop, Ltd., Fairfax, Va., on brief), for plaintiff-appellant.

Howard Adler, Jr. (Timothy M. Tymkovich, Davis, Graham & Stubbs, Washington, D.C., Thomas F. Farrell, II, McGuire, Woods, Battle & Boothe, McLean, Va., on brief), for defendants-appellees.

Before PHILLIPS and SPROUSE, Circuit Judges, and WINTER, Senior Circuit Judge. 1

HARRISON L. WINTER, Senior Circuit Judge:

The district court granted a motion to dismiss made under Rule 12(b)(6), Fed.R.Civ.P., in plaintiff's private civil RICO action against his employer, Crown Supply, Inc. (Crown), its parent corporation, Hammermill Paper Company (Hammermill), and certain of their officers, and dismissed plaintiff's complaint against all defendants. Plaintiff appeals and we reverse and remand for further proceedings.

I.

Plaintiff, John Busby, sues in his own behalf and on behalf of all current and former sales representatives of Crown. He alleges that for over twenty years he was a sales representative of Crown and like other sales representatives--numbering approximately one hundred--he was paid on a commission basis, i.e., a percentage of the difference between the retail price of goods he sold and the cost of the goods to Crown. At least monthly, he and the other commissioned sales representatives were provided with "price books" that purported to set forth the cost of various goods to Crown, certain adjustments to reflect administrative and overhead costs, and a suggested retail price.

Plaintiff alleges that at some time over ten years ago, certain officers and executives of Crown formulated a scheme to represent falsely to the sales force that the cost to Crown of certain items was higher than actual cost. By this device, Crown was able to reduce the apparent difference between the cost of goods and the sales price and thereby decrease the amount of commission paid to members of the sales force in violation of the agreement with them.

Plaintiff further alleges that in 1980 the principal stockholder of Crown sold his stock to Hammermill, which has operated Crown as part of its nationwide business. After acquiring Crown, Hammermill not only continued the false price book scheme, but it solicited "rebates" from Crown suppliers. Those rebates were based upon the amount of purchases Crown made from those suppliers. The suppliers were directed to send the rebates directly to Hammermill in Erie, Pennsylvania in order to conceal the existence of the program from the Crown salesmen. The effect of the rebate program was to pass savings directly to Hammermill and to avoid the payment of commissions to salesmen based upon true profit.

Plaintiff sued under 18 U.S.C. Secs. 1962(a), 1962(c) and 1964(c) of the Racketeer Influenced and Corrupt Organizations Act (RICO), and he also alleged two pendent state law claims. Briefly stated, Sec. 1962(a) makes it unlawful for a person who has received income from a "pattern of racketeering activity" to "use or invest" such income in an enterprise engaged in or affecting interstate or foreign commerce. Section 1962(c) prohibits any person "employed by or associated with" such an enterprise from conducting its affairs through "a pattern of racketeering activity," and Sec. 1964(c) provides that any person "injured ... by reason of a violation of section 1962" may sue therefor in federal court and recover triple damages, attorney's fees and costs.

The district court granted defendants' Rule 12(b)(6) motion for several reasons. First, it ruled that plaintiff's allegations of a RICO violation failed to establish a pattern of racketeering activity. The court held that the alleged acts constituted a single fraudulent scheme and therefore failed to establish the requisite pattern. With the RICO counts dismissed, the district court also dismissed the pendent state law claims because they lacked an independent basis for federal jurisdiction.

As alternative grounds for its dismissal of the RICO claims, the district court suggested that dismissal might be required by United States v. Computer Sciences Corp., 689 F.2d 1181 (4 Cir.1982), cert. denied, 459 U.S. 1105, 103 S.Ct. 729, 74 L.Ed.2d 953 (1983), because the complaint named Crown and Hammermill as defendants and a division of Hammermill and Crown as the enterprise. The district court read Computer Sciences to hold that the "person" charged with a violation of Sec. 1962(a) must be separate and distinct from the RICO "enterprise." However, because conflicting affidavits had been filed on whether Crown or a division of Hammermill was an incorporated division of Hammermill, the district court perceived an issue of fact regarding the exact corporate structure of Hammermill and so made no definite ruling as to whether suit was barred by Computer Sciences. The district court did rule, however, that the RICO claims should be dismissed because plaintiff suffered no injury arising from a Sec. 1962(a) violation, and adopted the reasoning of Gilbert v. Prudential-Bache Securities, Inc., 643 F.Supp. 107 (E.D.Pa.1986).

After the appeal was argued, the panel stayed its decision pending decision by the Supreme Court in H.J. Inc. v. Northwestern Bell Telephone Co., --- U.S. ----, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989). After Northwestern Bell was decided, the parties filed supplemental briefs as to the effect of that decision on the instant case. We then concluded to reconsider Computer Sciences in banc, and the parties were requested to file and did file supplemental briefs as to it. The appeal is therefore now ready for decision.

II.

The first issue that we address is whether the district court's ruling on the pattern of racketeering activity issue can stand when viewed in light of the holding and discussion in Northwestern Bell. Plaintiff argues that under Northwestern Bell, its allegations of a pattern were sufficient to allege a case upon which relief could be granted. We agree, 2 and there is no necessity for any real discussion of the issue because defendants in their supplemental brief concede the point. 3 Defendants seek to avoid the issue, however, by seeking to have us declare RICO unconstitutional. They perceive in the concurring opinion in Northwestern Bell an invitation to mount a constitutional challenge with respect to RICO, and they press us to hear and decide the issue now. See Northwestern Bell, 109 S.Ct. at 2909 (Scalia, J., concurring in the judgment) ("That the highest Court in the land has been unable to derive from [RICO] anything more than today's meager guidance bodes ill for the day when [a constitutional] challenge is presented.").

We decline to consider the constitutionality of RICO in this appeal. The question of its validity was not litigated in the district court. More significantly, the issue is raised before us only after argument of the appeal. In our view the case must be returned to the district court on the basis of what it decided. On remand there will be ample opportunity to raise any question about the constitutionality of RICO and to litigate the issue in the normal course of events. Cf. Newmeyer v. Philatelic Leasing, Ltd., 888 F.2d 385, 399 (6 Cir.1989) ("no injustice would result from allowing the issue [of RICO's constitutionality] to be addressed in the first instance by the district court in the context of a properly developed record").

III.

We next consider the district court's ruling that the complaint should be dismissed because "plaintiff has suffered no injury arising from a Sec. 1962(a) violation." In its oral ruling, the district court stated that under Sec. 1962(a), the alleged injury must flow from the defendant's investment or use of the income, and not from the harm suffered by the commission of the predicate racketeering acts.

The question of whether Sec. 1962(a) provides a cause of action under Sec. 1964(c) only for those injured through the investment and use of the racketeering income (the "investment use" rule) has caused a significant split in the courts. Two of our sister circuits and numerous district courts have taken the same view as the district court in this case, concluding that injuries caused by only the alleged racketeering activity are insufficient to support an action under Sec. 1962(a). See, e.g., Rose v. Bartle, 871 F.2d 331, 357-58 (3 Cir.1989); Grider v. Texas Oil & Gas Corp., 868 F.2d 1147, 1149-50 (10 Cir.), cert. denied, --- U.S. ----, 110 S.Ct. 76, 107 L.Ed.2d 43 (1989); P.M.F. Services, Inc. v. Grady, 681 F.Supp. 549, 555 (N.D.Ill.1988); Leonard v. Shearson Lehman/American Express, Inc., 687 F.Supp. 177, 181 (E.D.Pa.1988); In re Rexplore, Inc. Sec. Litig., 685 F.Supp. 1132, 1141 (N.D.Cal.1988); Omega Constr. Co. v. Altman, 667 F.Supp. 453, 464 (W.D.Mich.1987); In re Gas Reclamation, Inc. Sec. Litig., 659 F.Supp. 493, 511 (S.D.N.Y.1987). 4 Conversely, several courts have held that injury caused by the predicate racketeering acts is sufficient to state a Sec. 1962(a) violation. See, e.g., Avirgan v. Hull, 691 F.Supp. 1357, 1362 (S.D.Fla.1988); Mid-State Fertilizer Co. v. Exchange Nat'l Bank of Chicago, 693 F.Supp. 666, 671 (N.D.Ill.1988), aff'd on other grounds, 877 F.2d 1333 (7 Cir.1989); In re Nat'l Mortgage Equity Corp. Certificates Litig., 682 F.Supp. 1073, 1081 (C.D.Cal.), appeal dismissed on other grounds, 821 F.2d 1422 (9 Cir.1987); King v. E.F. Hutton & Co., RICO Bus.Disp.Guide (CCH) p 6578, 1987 WL 8733 (D.D.C.1987); Smith v. MCI Telecommunications Corp., 678 F.Supp. 823, 828 (D.Kan.198...

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