Summit Properties v. Hoechst Celanese Corp.

• Decision Date: 07 June 2000
• Docket Number: No. 99-20622,99-20622
• Citation: 214 F.3d 556
• Parties: (5th Cir. 2000) SUMMIT PROPERTIES INC.; SUMMIT PROPERTIES LP; SUMMIT PROPERTIES PARTNERSHIP LP; STONY POINT/SUMMIT LP; MCGREGOR/MCGUIRE LP; HENDERSON/MCGUIRE PARTNERS LP; OAK RIDGE/MCGUIRE PARTNERS LP; WAVERLY PLACE/SUMMIT PARTNERS LP,Plaintiffs - Appellants, v. HOECHST CELANESE CORP., formerly known as Celanese Corporation; HOECHST CORPORATION; E. I. DUPONT DE NEMOURS, AND CO.; SHELL OIL COMPANY, doing business as Shell Chemical Company; VANGUARD PLASTICS INC.; BOW INDUSTRIAL CORP.; HOUSEHOLD INTERNATIONAL INC., Defendants - Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

Page 556

214 F.3d 556 (5th Cir. 2000)

SUMMIT PROPERTIES INC.; SUMMIT PROPERTIES LP; SUMMIT PROPERTIES PARTNERSHIP LP; STONY POINT/SUMMIT LP; MCGREGOR/MCGUIRE LP; HENDERSON/MCGUIRE PARTNERS LP; OAK RIDGE/MCGUIRE PARTNERS LP; WAVERLY PLACE/SUMMIT PARTNERS LP,Plaintiffs - Appellants, v. HOECHST CELANESE CORP., formerly known as Celanese Corporation; HOECHST CORPORATION; E. I. DUPONT DE NEMOURS, AND CO.; SHELL OIL COMPANY, doing business as Shell Chemical Company; VANGUARD PLASTICS INC.; BOW INDUSTRIAL CORP.; HOUSEHOLD INTERNATIONAL INC., Defendants - Appellees.

No. 99-20622

IN THE UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

June 7, 2000

Rehearing and Rehearing En Banc

Denied June 27, 2000.

Appeal from the United States District Court For the Southern District of Texas

Before HIGGINBOTHAM and PARKER, Circuit Judges, and WARD,^* District Judge.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Today we are invited to read RICO as establishing a federal products liability scheme complete with treble damages and attorney fees for the benefit of end-users of defective products who never relied on manufacturers' alleged misrepresentations of product quality. We are unpersuaded that RICO can be extended so far by such a marriage of distinct duties and liability regimes. Consequently, we AFFIRM the dismissal of the plaintiffs' RICO claims against the defendant manufacturers of polybutylene plumbing systems and components.

I

The plaintiffs own properties in which polybutylene (PB) plumbing systems were installed. PB is a by-product of oil-refining. In the 1970s, Shell Oil Company purchased the exclusive right to sell PB in the U.S. for a 10-year period. Shell then sold PB resin pellets to pipe extruders, such as Vanguard and Bow, who made tubing from the pellets. The defendants in this suit are manufacturers who sold either PB plumbing systems or their components parts, including Shell, DuPont, Hoechst Celanese, Household International, Vanguard, and Bow.

The plaintiffs contend that the defendants manufactured and marketed these systems and components through a complex scheme to defraud. The claims revolve around core allegations that the defendants made knowingly false claims in marketing PB, including assertions that (1) it is suitable for use as a hot and cold potable water plumbing systems; (2) it will last 50 years; (3) it will not corrode; (4) it is easy, reliable, simple, proven and fast; and (5) it will not occasion serious service problems.

The truth, plaintiffs allege, is that PB plumbing is worse than worthless, that it not only fails to perform its intended function, but also that it causes severe property damage; that PB's inherent defects render it unsuitable for use as a water distribution system, including the fact that after installation, such systems degrade, crack, leak, and spray water.

The plaintiffs allege that the defendants engaged in a conspiracy to defraud by directing a massive, fraudulent marketing plan designed to make PB the "material of choice" in the plumbing market, so that by the end of Shell's ten-year period of exclusive rights, Shell would have a commanding market position. This marketing campaign was directed at building code approval officials, members of the building industry such as builders and plumbers, and other consumers.

II

The plaintiffs filed suit in district court alleging violations of civil RICO.¹ The district court granted the defendants' Rule 12(b)(6) motion to dismiss because the plaintiffs conceded that they did not detrimentally rely on any of the defendants' allegedly fraudulent misrepresentations that served as the basis for the RICO claims. The district court held that such reliance is a necessary predicate for establishing proximate cause under RICO. It denied a motion for reconsideration, and the plaintiffs appealed.

III

RICO provides that "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor . . . ."² The Supreme Court, in Holmes v. Securities Investor Protection Corp.,³ 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.⁴

The question before us is whether a plaintiff's reliance on the predicate mail or wire fraud is necessary in order to establish proximate causation. In Armco Industries Credit Corp. v. SLT Warehouse Co.,⁵ this court distinguished mail fraud under RICO from common law fraud and stated that "to find a violation of the federal mail fraud statute it is not necessary that the victim have detrimentally relied on the mailed misrepresentations."⁶ Ours is a different question.

It is true that the court in Armco found no error when the trial judge refused to instruct the jury that a showing of reliance was necessary in order to establish proximate causation under RICO.⁷ It is equally the case that the court observed that reliance is not an element of the underlying offense of mail fraud, and ignored the issue of whether such reliance would be necessary in order to prove proximate causation.⁸ Armco aside, these issues are distinct: the government can punish unsuccessful schemes to defraud because the underlying mail fraud violation does not require reliance, but a civil plaintiff "faces an additional hurdle" and must show an injury caused "by reason of" the violation.⁹

When Armco was decided, the Fifth Circuit had not yet interpreted the "by reason of" language of 18 U.S.C. § 1964(c) to impose a proximate causation requirement,¹⁰ and this circuit still allowed recovery for more indirect injuries.¹¹ Since that time, the Fifth Circuit in Zervas v. Faulkner¹² and the Supreme Court in Holmes have explicitly adopted a traditional proximate causation requirement.¹³ Armco does not then answer the question before us: whether reliance is necessary to establish proximate cause under RICO. To hold otherwise would imply that Armco silently imposed a proximate causation requirement that was not explicitly adopted until several years hence in Zervas and Holmes.¹⁴ To the extent it held that proximate cause was not required, it has been overturned by Holmes.

On appeal, the plaintiffs do not quarrel with the district court's acceptance of their concession that they "did not rely on anything Defendants said or published in purchasing their properties."¹⁵ Instead, the plaintiffs steadfastly maintain that individual acts of reliance are simply unnecessary in order to recover for damages resulting from civil RICO fraud. Most other circuits, however, require a showing of detrimental reliance by the plaintiff,¹⁶ 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.¹⁷

The rationale for requiring reliance in cases such as this one becomes clear in the light cast by the distinction between causation as an element of a claim for fraud and producing cause as an element of a claim for products liability.¹⁸ The linkage between design defect and injury is between the defect and the injury. With a claim for fraud, however, the linkage is between the defendants' fraud and the injury.

As a product travels in the stream of commerce, inherent defects are carried with it, but fraudulent statements are not. With the abolition of privity requirements, injuries produced by product defect may be actionable by all users including those remote in the distribution chain from a defendant manufacturer. The causal connection between a misrepresentation and a subsequent harm, however, vanishes once the product travels beyond the entity who actually relied on the representation when making the purchasing decision.

In other words, even if intermediary builders, plumbers, code officials, or prior owners relied on the defendants' alleged misrepresentations when choosing to use or approve PB plumbing, that does not tell us whether the defendants' fraud proximately caused the plaintiffs' injuries, for which the defect was a producing cause. At best, any fraud during the sale of those products proximately injured only those initial purchasers who relied on the alleged misrepresentations, since the fraud facilitated a sale that might not otherwise have been made.

Of course, if the sales would not have occurred absent the fraud, the fraud would have been a "but-for" cause of the plaintiffs' injuries.¹⁹ Nevertheless, the plaintiffs came into possession of PB systems without relying on the alleged fraud. Whether they received their systems from the manufacturers or from prior property owners, any past fraud was not a proximate cause of the plaintiffs' resulting injuries since fraud did not induce the purchase transactions.²⁰

This is only to recognize the distinct character of claims for fraud and claims for defective products resting on the law of products liability. In 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. The Fourth Circuit, recognizing the target wing of these twin limits of liability, held open 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.²¹ In the current case, for example, the defendants' competitors might recover for injuries to competitive position, but that circumstance is of no aid to these plaintiffs. Accepting as claimed that the defendants' strategy may have been to gain market share by fraud in the initial sale of PB components, it is not contended that these particular plaintiffs were the targets of a scheme to defraud accomplished by defrauding others.²²

Plaintiffs' able counsel has understandably fled to...