Systems Management, Inc. v. Loiselle

• Decision Date: 10 September 2002
• Docket Number: No. 01-1538.,No. 01-2325.,No. 01-1570.,01-1538.,01-1570.,01-2325.
• Citation: 303 F.3d 100
• Parties: 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.
• Court: U.S. Court of Appeals — First Circuit

303 F.3d 100

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.

No. 01-1538.

No. 01-1570.

No. 01-2325.

United States Court of Appeals, First Circuit.

Heard May 8, 2002.

Decided September 10, 2002.

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.

Before BOUDIN, Chief Judge, SELYA and LIPEZ, Circuit Judges.

BOUDIN, Chief Judge.

In this case, the district court awarded damages and attorney's fees under the RICO statute against Kenneth Loiselle, sole owner and head of Aid Maintenance Co., Inc. ("Aid Maintenance").¹ The damages represented underpayments of wages due to two employees. Loiselle now appeals from the judgment; a competitor of the company, Systems Management, Inc., cross-appeals from the dismissal of its own RICO claim against Loiselle.

The raw facts are undisputed. In 1968 Loiselle founded Aid Maintenance, which provides janitorial services primarily in Rhode Island. In October 1994, the company won a contract to provide cleaning services at Massachusetts Bay Community College ("the college"), a unit of the Massachusetts State College System with campuses in Wellesley and Framingham. Neither the bidding invitation from the college nor the contract mentioned that the contractors had to pay no less than special minimum wages set under a Massachusetts statute that governed wages for the cleaning of public buildings.²

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 would be paid. In May 1995, the college solicited new bids. In the meantime, Loiselle (by a 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 Framingham but the college initially told Loiselle that the lower Framingham rate could be paid for work on both campuses because the college business office was in Framingham.

According to the district court's later findings at trial, at the start of the amendment period Loiselle intended to pay the prevailing wages, hoping to make up the difference through efficiencies. However, the hoped for cost savings were not realized and, as part of the rebidding process, Loiselle learned that the higher $9.20 wage rather than the lower $8.60 one would have to be paid in regard to the Wellesley campus. In consequence, from June 1, 1995, onward, Loiselle knowingly used devices to underpay some of his workers at the college.

In particular, Loiselle 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 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. Aid Maintenance again submitted the lowest bid, followed by a unionized company — 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 declined to bid and the contract was won by a unionized company called AM/PM, which took over on March 1, 1997.

On April 7, 1999, the present RICO action was brought against Loiselle by individual employees claiming to represent a class of underpaid workers. The predicate criminal offenses alleged to 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.

Thereafter, the district court rejected the request for class status and pared down the number of workers with potentially valid claims. System 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' evidence 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. System Management v. Loiselle, 138 F.Supp.2d 78 (D.Mass. 2001). It found that from June 1, 1995, onward, Loiselle had committed acts of fraud by misrepresenting to the college that his company was paying workers the statutory prevailing wage; that documents containing such misrepresentations had been 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 rejected Loiselle's argument that civil liability for mail fraud under RICO required detrimental reliance by the injured persons. Id. at 95. Cross-appeals followed.

On Loiselle's appeal, he urges two colorable grounds as the basis for reversal of the judgment against him: that an injured plaintiff, seeking to recover under RICO for fraud, must demonstrate reliance on the fraudulent statements (which the plaintiffs here cannot do) and that RICO's "pattern of racketeering" requirement has not been satisfied. Loiselle 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 and including 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 such 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 required relationship to an enterprise — namely, his cleaning business carried on through Aid Maintenance and another company — and that the interstate commerce requirement is met. The critical dispute concerns the phrase: "pattern of racketeering activity." "Racketeering activity" means any act violating one of many specified criminal 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 violated the federal mail fraud statute. That statute condemns inter alia obtaining money by false representations. 18 U.S.C. § 1341 (2000). Here, the college continued its cleaning contract, and paid 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 that there 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 would have been paid for 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 reliance 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 action for fraud ordinarily requires proof that the defrauded plaintiff relied upon the deception, and some courts have imported this requirement into RICO actions where the predicate acts comprise mail or wire fraud.³ But RICO bases 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 racketeering activity"; 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....