Potomac Electric Power Co. v. Electric Motor & Supply

Decision Date06 June 2001
Docket NumberNo. 00-2557,No. 00-2542,00-2542,00-2557
Parties(4th Cir. 2001) POTOMAC ELECTRIC POWER COMPANY, Plaintiff-Appellant, v. ELECTRIC MOTOR AND SUPPLY, INCORPORATED; RALPH FORCE; CHARLES M. RHODES, Defendants-Appellees, and DARRYL PRICE, Defendant. POTOMAC ELECTRIC POWER COMPANY, Plaintiff-Appellee, v. ELECTRIC MOTOR AND SUPPLY, INCORPORATED; RALPH FORCE; CHARLES M. RHODES, Defendants-Appellants, and DARRYL PRICE, Defendant. Argued:
CourtU.S. Court of Appeals — Fourth Circuit

Appeals from the United States District Court for the District of Maryland at Baltimore. Frederic N. Smalkin, District Judge.

(CA-98-2519-S)

[Copyrighted Material Omitted] COUNSEL ARGUED: James Patrick Gillece, Jr., MCGUIRE WOODS, L.L.P., Baltimore, Maryland, for Appellant. James Patrick Ulwick, KRAMON & GRAHAM, Baltimore, Maryland, for Appellees. ON BRIEF: Robert R. Niccolini, MCGUIRE WOODS, L.L.P., Baltimore, Maryland, for Appellant. Bruce L. Marcus, MARCUS & BONSIB, Greenbelt, Maryland, for Appellee Force; Paul F. Kemp, CATTERTON, KEMP & GREENBERG, Rockville, Maryland, for Appellee Electric Motor.

Before WILLIAMS, KING, and GREGORY, Circuit Judges.

Affirmed in part, reversed in part, and remanded by published opinion. Judge Williams wrote the opinion, in which Judge King and Judge Gregory joined.

OPINION

WILLIAMS, Circuit Judge:

Potomac Electric Power Co. (PEPCO) appeals the district court's grant of summary judgment to Electric Motor and Supply, Inc., Ralph Force, and Charles Rhodes (collectively EMS) on its claims arising under the private suit provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.A. S 1962, and EMS crossappeals from the district court's failure to grant summary judgment in EMS's favor on the alternate ground of lack of proof of fraud and its failure to dismiss the case on the ground of lack of "investment injury." For the reasons that follow, we affirm in part, reverse in part, and remand for additional proceedings.

I.
A.

PEPCO is an electric utility company serving the Washington, D.C. metropolitan area. EMS is a privately held corporation whose business is the repair of electric motors; its plant and office is in Altoona, Pennsylvania. Ralph Force is the owner of EMS, and Charles Rhodes is its Chief Engineer. From 1985 until 1996, EMS provided electric motor repair services for PEPCO as a result of EMS's successful bids for PEPCO's work. PEPCO generally sent its motors to EMS for repair only after they failed. With rare exceptions, EMS returned the motors to PEPCO in a repaired and working condition that passed PEPCO's internal inspection process. No evidence in the record indicates that any of the motors repaired by EMS had failed as of September, 1999.

In March of 1994, PEPCO received an anonymous tip suggesting that certain PEPCO employees had engaged in fraudulent bid-rigging in conjunction with EMS employees. As a result, PEPCO commenced an internal investigation that initially focused on bid-rigging but eventually broadened to include the issue of whether EMS had knowingly failed to repair PEPCO's motors pursuant to PEPCO's specifications. In August of 1994, PEPCO's internal investigation concluded that EMS had knowingly failed to perform PEPCO's repairs as specified.

PEPCO principally alleges that its specifications required its motors to be repaired using epoxy through a process called vacuum pressure impregnation (VPI), and that two separate VPI treatments were required. Evidence indicates that by at least 1992, PEPCO had reminded EMS that its bid specifications required this "double VPI" treatment. Richard Beegle, who was plant manager for EMS's facility in Altoona from May of 1991 until October of 1993, stated in an affidavit that after EMS received these specifications, it nonetheless performed only one VPI treatment, and used polyester instead of epoxy in repairing the motors. Beegle further testified that EMS occasionally applied an epoxy coating over the polyester to cover up noncompliance with PEPCO's specifications, sometimes prepared false documentation for PEPCO showing that work had been performed using epoxy and two VPI treatments, and falsified the results of tests designed to evaluate the attributes of the repaired motor.1 Tests performed for PEPCO by an outside company showed that at least two motors repaired by EMS were repaired using polyester instead of epoxy and then covered with epoxy in a manner that tended to conceal this fact.

B.

On July 29, 1998, PEPCO filed suit under RICO, 18 U.S.C.A. S 1962 (West 2000), alleging that EMS engaged in fraudulent activities in the repair of PEPCO electric motors over a period of several years. On January 20, 1999, EMS filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), which the district court granted in part and denied in part. The portion of the district court's ruling on the motion to dismiss that is under review here is the district court's denial of EMS's motion to dismiss Count I of PEPCO's complaint on the basis that PEPCO failed to allege that its injury derived from EMS's use of racketeering proceeds. Following discovery, EMS filed two separate motions for summary judgment, one for lack of proof of fraud and the other for lack of proof of damages. The district court granted the motion for summary judgment on the basis of lack of proof of damages and did not reach EMS's contention that summary judgment was also justified by lack of proof of fraud. PEPCO timely appealed from the grant of summary judgment, and EMS cross-appealed from the district court's failure to grant its motion for summary judgment for lack of proof of fraud, as well as from the partial denial of its motion to dismiss.

II.

A private RICO plaintiff only has standing to bring suit if he can show damage to "business or property" proximately caused by the defendant's RICO violation.2 See 18 U.S.C. S 1964(c) (providing that a plaintiff must show that it was "injured in[its] business or property by reason of a violation"); Caviness v. Derand Resources Corp., 983 F.2d 1295, 1305 (4th Cir. 1993) (stating that a plaintiff must show "damage proximately caused by the violation"). PEPCO argues that it adduced sufficient proof of the fact of injury to survive EMS's motion for summary judgment.

The district court, however, found that PEPCO presented no evidence that the motors repaired by EMS failed more frequently, had a shorter useful life, or were less valuable as a result of EMS's claimed failure to follow repair specifications. PEPCO claimed that the proper measure of damages was the entire repair price, and thus, it was simply entitled to the return of all funds paid to EMS for noncompliant repairs; the district court found this argument unpersuasive. As a result, the district court held that the amount of damages was "speculative and unprovable," precluding RICO liability. (J.A. at 645.)

The district court correctly found that PEPCO adduced no evidence that any motor repaired by EMS had failed or had not performed as well due to EMS's claimed fraud. Further, PEPCO's argument that the proper measure of its damages is the entire price paid for repairs founders because PEPCO must produce evidence of the actual value of the services that were rendered. See, e.g., Western Contracting Corp. v. Bechtel Corp., 885 F.2d 1196, 1203-04 (4th Cir. 1989) (stating that even using Maryland's "out-of-pocket" method for determining damages, plaintiff must produce evidence of the actual value of the services rendered). Granting PEPCO a refund of the entire amount paid for repairs would obviously confer on PEPCO a large windfall, because even if the motors were not repaired in conformity with each specification, it is undisputed that most of the work that PEPCO paid for was performed by EMS and that the motors were returned in repaired, working order.

PEPCO nevertheless argues that it need not show that the motors' performance was diminished or that the motors were less valuable as a result of EMS's failure to perform repairs as specified. We agree. If a party specifically bargains for a service, is told that the service has been performed, is charged for the service, and does not in fact receive the service, it is not appropriate for courts to inquire into whether the service "really" had value as a precondition to finding that injury to business or property has occurred. See Hellenic Lines, Ltd. v. O'Hearn, 523 F. Supp. 244, 248 (S.D.N.Y. 1981) (stating that RICO injury is proved where a company demonstrated that "padded" bills resulted in payment for services not rendered). If the evidence indicates that a party paid value for a good or service, this fact is a more reliable indicator that the service actually had value to the party than the post hoc intuition of a court as to the good or service's value. John Morykon, EMS's own witness, testified that PEPCO probably was charged more for the repairs because the specifications were higher than industry standards. Even if PEPCO's asserted idiosyncratic specifications -requiring "double VPI treatments," etc. -did absolutely nothing to improve the reliability of its motors, these specifications represented a service for which PEPCO bargained, paid, and allegedly did not receive despite EMS's representations to the contrary. PEPCO's analogy is apt: If a consumer bargains for and pays extra for an automotive transmission repair to be performed using original manufacturer parts, an auto repair shop commits fraud if it performs the repair using generic parts and tells the consumer that original manufacturer parts were used, regardless of whether the generic parts are actually less useful or reliable.

Our conclusion is buttressed by the language ofS 1964(c), which confers RICO standing on "any person injured in his business or property," not any person who can quantify the amount of the injury. The best...

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