HEMI GROUP LLC v. CITY OF NEW YORK

Transcript: 

ORAL ARGUMENT OF RANDOLPH H. BARNHOUSE ON BEHALF OF THE PETITIONERS

Chief Justice John G. Roberts: We'll hear argument this afternoon in Case 08-969, Hemi Group v. The City of New York.

Mr. Barnhouse.

Mr. Barnhouse: Thank you, Mr. Chief Justice, and may it please the Court:

Possessory and use taxes are extremely difficult to collect, even under the best of circumstances.

Indeed, here the city alleges in its second amended complaint that it only collected 40 cents on the dollar, and its response claims a collection rate of 55 cents on the dollar.

Yet it wants to collect 300 cents on the dollar from my clients, who never owed these taxes in the first place.

The Respondent City of New York alleged two RICO claims and pendent State law violations that the city said resulted in a lost sovereign opportunity to collect cigarette possessory taxes from its city residents.

The alleged lost opportunity to tax was based on claims that my clients and 50 other defendants in four consolidated cases did not send names of customers to the State of New York and had statements on their website saying sales were tax-free and no tobacco taxes applied.

The Federal district court dismissed all claims.

The Second Circuit Court of Appeals reinstated one of the city's RICO claims against the Petitioners, the Hemi Group and its sole owner, Kai Gachupin, and affirmed dismissal of the city's other RICO and its common law fraud claims.

Yet reinstating the one RICO claim was improper because the city does not have standing to sue, based on the injuries that it has alleged.

It does not have standing because the city's claim that it lost the sovereign opportunity to tax is not an injury to -- to business, and it's not an injury to property.

Chief Justice John G. Roberts: Why -- why isn't the money property?

Mr. Barnhouse: Money in the bank would be property, Mr. Chief Justice Roberts, but an opportunity to collect money is an inchoate interest, and so it would not be property at that point.

It would be the opportunity to collect it.

Chief Justice John G. Roberts: Well, isn't a lawsuit with a potential recovery regarded as property of an individual?

Mr. Barnhouse: The lawsuit would be -- the lawsuit itself would be property, but the -- but any recovery would not be property until it became choate, until there was an amount of money assigned to it.

Justice Antonin Scalia: There is no such adjective -- I know we have used it, but there is no such adjective as "choate".

There is "inchoate", but the opposite of "inchoate" is not "choate".

Mr. Barnhouse: All right.

Justice Antonin Scalia: Any more than the -- I don't know.

[Laughter]

Mr. Barnhouse: Well, I'm wrong on the -- on the--

Justice Antonin Scalia: Exactly.

Yes.

It's like "gruntled".

Mr. Barnhouse: --But I think I am right on the law, Your Honor.

Justice Antonin Scalia: Exactly.

"Disgruntled" and the opposite of "disgruntled" is "gruntled".

Mr. Barnhouse: Is "gruntled".

[Laughter]

Well, it would -- it would be inchoate at the time the -- the city was just exercising its opportunity to tax, but had not -- or exercising its sovereign right to tax, but had not yet assessed the tax--

Justice Ruth Bader Ginsburg: I thought the status of taxes owing for wire fraud purposes was settled in Pasquantino.

There it was a question of alcohol taxes owed to Canada.

There were taxes due, but not paid.

So why doesn't Pasquantino settle at least the property question that taxes owed to a sovereign qualify as property?

Mr. Barnhouse: --Justice Ginsburg, Pasquantino, the holding there was -- it was a criminal prosecution by the U.S. Government, and it dealt with the term 1964(c) requirement of injury to business or property.

Moreover, it was the taxpayer who was being prosecuted, the person who actually had taken the liquor into Canada, not some third party that said, let me sell you the liquor.

Justice Ruth Bader Ginsburg: Well, there are certainly differences from this case, and it wasn't a RICO case, either.

But why would the determination of what -- whether an amount owed to a government qualifies as property, why wouldn't -- why would that answer differ?

Mr. Barnhouse: Justice Ginsburg, once the amount owed is assessed, once there's a determination of the amount owed--

Justice Ruth Bader Ginsburg: There was no assessment by Canada in the Pasquantino case.

Mr. Barnhouse: --There was--

Justice Ruth Bader Ginsburg: They said the -- the defendant was smuggling liquor into Canada and getting it there without paying the Canadians' exorbitant taxes.

Mr. Barnhouse: --The prosecution on the mail and wire fraud criminal -- well, criminal standing was not an issue there.

It was the U.S. Government--

Justice Ruth Bader Ginsburg: But we're talking about -- only about property, not standing or anything else.

And in Pasquantino, the Court said that a scheme aimed -- aimed at depriving Canada of money to which it was entitled by law qualifies as property for wire fraud purposes.

Mr. Barnhouse: --Yes, Your Honor, for wire fraud purposes.

and the Court took a very expansive view of property in Pasquantino.

Justice Antonin Scalia: So why is this different?

I mean, it's clear that "property" can mean that.

You acknowledge that it can mean the government's entitlement to money from taxes?

Mr. Barnhouse: For purposes of the -- of the Mail and Wire Fraud Statute, this Court has held that property can be for purposes of--

Justice Antonin Scalia: So it can mean that.

Now why -- why should we say it doesn't mean that here?

Mr. Barnhouse: --At the time, because of the overlying standing requirement Congress placed in RICO of injury to a person's business or property, and because of Congress's reliance at that time on the antitrust laws and the general understanding at that time that business or property did not include the type of sovereign interest in an opportunity to collect tax, as confirmed by the Ninth Circuit and this Court in Hawaii v. Standard Oil of California that this Court affirmed, where the sovereign opportunity to tax is much difference -- different from the actual collection of a -- of a set amount of tax that the government knows it has coming.

Justice Antonin Scalia: Is the word "property" used in the antitrust laws?

Mr. Barnhouse: Yes, Your Honor.

In fact, the -- I'm sorry.

Justice Antonin Scalia: What does it say?

Mr. Barnhouse: The standing for purposes of the antitrust laws is injury.

A person has standing who has been injured in his business or property.

It's exactly the same as in RICO.

In fact, Congress took the language from the antitrust laws, Justice Scalia, and placed it into RICO unchanged.

Justice Antonin Scalia: And it -- and it's clear that for purposes of the antitrust laws, property does not include the government's entitlement to income from taxes?

Mr. Barnhouse: Yes, Your Honor.

In Hawaii, this Court made it clear that--

Justice John Paul Stevens: The Hawaii case didn't involve a claim to taxes.

Mr. Barnhouse: --Justice Stevens, it was a claim of injury to the general economy, which included--

Justice John Paul Stevens: Right, and parens patriae for the community at large.

Mr. Barnhouse: --Yes, Your Honor.

The State of Hawaii brought three claims.

One was its injury to itself; one was the potential class action; and then the parens patriae claim.

Justice John Paul Stevens: But none of them involved a claim to taxes.

Mr. Barnhouse: It was my understanding that the injury to the general economy, the underlying claim was that by losing that economic engine, that the State itself would be injured because of the loss to the economy and in its governmental functions.

The actual--

Justice Antonin Scalia: Yes, but that -- that's something different.

This isn't just the general, you know, you hurt the economy and therefore you hurt the State.

Here, what they're saying is: You caused people who owed me taxes not to pay taxes, an identified sum of money.

Mr. Barnhouse: --Justice Scalia, it's not an identified sum of money.

They don't know -- they can't tell who owed the taxes, in what amount, whether any of those people were eligible for the exemption under the law.

It was inchoate.

It was not known.

It was not known who owed it or--

Justice Antonin Scalia: Well, it might have been inchoate but still -- they would have to be prove that, I assume, in the litigation here, wouldn't they?

I mean, let's assume we let the litigation go forward.

Wouldn't they have to prove what taxes were not paid?

Mr. Barnhouse: --They would have to -- they would absolutely have to prove that for purposes of damages.

Justice Antonin Scalia: So worry about that later.

I mean, just because some of them might be difficult to prove or not provable doesn't mean that the rest that are very clear do not constitute property.

Mr. Barnhouse: The -- the -- what they've alleged here is not that they've lost the taxes, but that they've lost the opportunity to tax.

Moreover, they should not be able to reach that point because the allegations themselves are that the injury is not proximate.

It is the city itself--

Justice Antonin Scalia: That's a different issue.

Mr. Barnhouse: --It is a different issue.

Justice Antonin Scalia: You're going to talk about that one, aren't you?

Mr. Barnhouse: I was hoping for a smooth transition, Justice Scalia.

Justice Antonin Scalia: You've got it.

Mr. Barnhouse: The -- the injury to the city is much like the injury in Holmes, where the city claims to be at the tail end of the chain of causation.

They allege two injuries, sources of their injury.

One was that statements made on an Internet website somehow caused people who purchased cigarettes in New York City not to pay.

The district court described that source of injury as farfetched.

Those were Judge Batts' words.

The second source of injury they claim is that by not reporting to the State of New York, the city then did not receive information about which city residents purchased cigarettes, and the city could then not go to those residents who had not self-assessed, and--

Justice Samuel Alito: Putting aside the fact that the Jenkins Act information would be sent to the State rather than the city, why -- how can you -- how can it be said that at this stage of the litigation that it's farfetched that having a statement on the website "No taxes due" is -- doesn't cause people to purchase those cigarettes for the very purpose of avoiding the taxes?

Mr. Barnhouse: --Well, Justice Alito, the allegations here are not that there were no taxes due.

There wasn't someone waving a tea bag and saying, "Don't pay your taxes".

What the website's allegations are is that the sales are tax-free, and the sales were tax-free.

As the city points out, they -- it was beyond the power of the city to impose any sales tax on these transactions which occurred on the Jemez Pueblo in New Mexico.

Justice Antonin Scalia: What is it, a user tax once it gets into the city?

Mr. Barnhouse: Exactly, Justice Scalia.

It's a possessory tax--

Justice Antonin Scalia: Like automobiles.

Mr. Barnhouse: --Pardon me?

Justice Antonin Scalia: Just like automobiles.

If you buy a car out of the State, you haven't paid the State sales tax, but if you bring it into the State, you have to pay a use tax.

Mr. Barnhouse: That's right.

That's right, Justice Scalia, and the obligation to pay that tax is on the person who brings the car into the State.

The obligation to pay the possessory use tax is on the citizens of the city of New York.

Justice Antonin Scalia: And that's all it was alleged that these websites said, "tax-free"?

They said "tax-free"?

Mr. Barnhouse: "Sales are tax-free".

Justice Antonin Scalia: "Sales are tax-free".

That's very clever.

Mr. Barnhouse: And "no tobacco tax".

Those are the two allegations.

Justice Antonin Scalia: No -- "no tobacco tax"?

Mr. Barnhouse: Yes, Your Honor.

Justice Antonin Scalia: But there is a tobacco tax, isn't there?

Don't you -- wouldn't you call that use tax a tax on tobacco?

Mr. Barnhouse: No, Your Honor, it's specifically not a tax on tobacco.

It's a tax on the possession of cigarettes and there are exemptions to it.

Justice Samuel Alito: Why isn't that just a question -- a substantive fraud question, rather than a proximate cause question?

Mr. Barnhouse: The--

Justice Samuel Alito: Is it -- is it fraudulent to say "sales are tax-free" as opposed to, you know, saying no taxes are due?

Mr. Barnhouse: --Well, it has to do with the intervening, Justice Alito, with -- with intervening causes of the city's failure to collect these taxes.

The -- RICO requires someone who has been injured in their business or property by reason of the alleged proximate act, and the fact is the city here was injured in its -- was injured, if at all, by reason of its citizens' failure to self-assess and pay their taxes.

Justice Ruth Bader Ginsburg: It was injured because it couldn't find its citizens because it didn't know who they were.

And that was the whole idea of the Jenkins Act, was to help States find the people who were evading the payment of the use tax on the cigarettes.

Mr. Barnhouse: Yes, Justice Ginsburg.

The Jenkins Act was -- was focused on allowing States to help find those, and the city is therefore outside the zone of interest.

Justice Anthony Kennedy: Well, suppose -- suppose you had a case in which an individual that lives in New York goes to a person with a supply of cigarettes outside the State and says: I want to buy a lot of cigarettes and I don't want to pay taxes; can you help me?

And they agree on an arrangement to ship, to ship the cigarettes.

Is there proximate cause?

Is it there if the city sues for injury in that hypothetical case?

Would you say there's no proximate cause?

Mr. Barnhouse: I would say that there is no proximate cause for a lawsuit under RICO against the seller who the person went to and said: My goal here is not to pay taxes; can you help me figure out a way to get them into the city in a way that I don't have to?

Justice Anthony Kennedy: And you think the city -- and you think the city cannot show proximate cause in a suit for its injury against the seller of the cigarettes?

You think there's no proximate cause in that hypothetical case?

Mr. Barnhouse: Yes, Your Honor, I would say that there would be an intervening, Justice Kennedy, there would be the intervening cause of the person's decision.

It's -- it's beyond the first step.

Justice Anthony Kennedy: Even though those are the only two people that have made the arrangement, and that was the whole purpose and intent of the arrangement?

And you still say there's no proximate cause?

Mr. Barnhouse: Your Honor, the intent to injure, even if specific, as the Court held in Associated General Contractors, is not itself sufficient to change -- to give someone standing under RICO.

Chief Justice John G. Roberts: Does your answer to Justice Kennedy depend upon a notion that the causation standard as -- in RICO is different than general proximate cause standards in tort law?

Mr. Barnhouse: No, Your Honor, because I believe that the proximate cause standard that the Court has adopted rests at its core in proximate cause analysis in tort law.

When the Court first started applying proximate cause requirements in the antitrust law and in RICO, it was looking at, as I understand it, the -- the common law analysis of proximate cause, and -- and it really discussed the elements of that quite clearly in the Associated General Contractors case where it talks about five or six factors that the Court has to look at, those factors being the nature of the plaintiff's alleged injury, is it -- whether it was the type that the antitrust laws were intended to forestall, or here the RICO laws.

We would submit that it is not.

It's an injury to a sovereign interest.

The directness of the injury.

Here the injury is indirect.

It either comes -- flows through the citizens who didn't pay their taxes or through the State that didn't get the reports of customers in the city.

Justice Ruth Bader Ginsburg: Can you go back to the question I had asked you and was not finished getting your position on.

Jenkins requires report to the State.

You say the city was not within the zone of interest.

But from the point of view of the sellers, the out-of-state sellers of cigarettes, my goodness, would they really want not only to have the burden of sending a list of names to the State, but to every county and municipality?

Isn't it the -- just as it is in New York, there is a working relationship.

The State gets all the names, and then it sends the names to the cities.

You -- you -- I -- you're suggesting that it would be okay if the Jenkins Act had made it even more burdensome to the cigarette sellers by saying not only do you have to disclose to the State but also to any municipality that independently taxes cigarettes?

Mr. Barnhouse: Justice Ginsburg, Congress could have given the States power to share those lists, but it did not under the Jenkins Act.

And it's not clear that -- that -- even the agreement--

Justice Ruth Bader Ginsburg: Is it -- we're told that New York City and New York State have a tax informationsharing agreement pursuant to which the State does share this information with the city.

Mr. Barnhouse: --The -- the agreement, and it's quoted on page 6 of the response -- and I want to get this right -- says, Justice Ginsburg in paragraph 1 of the quote, in footnote 6:

"Provided, that the disclosure of that information is permissible under existing laws and agreements. "

And this is proprietary information.

These are customer lists.

Justice Anthony Kennedy: Well, what do you do with -- what do you do with Justice Ginsburg's hypothetical?

I mean, she can pursue her own question, but I'm interested in the answer.

Her question is, suppose the statute were amended so that the information had to be given to the city as well as to the State; would the case then be different, hypothetical case?

Mr. Barnhouse: Yes, it would be different, because in that instance the city would be the -- would -- would as -- would -- would be the direct victim, would be within the zone of interest of the statute.

Justice Antonin Scalia: Are there any sanctions for failing to comply with the Jenkins Act, just on its own, without having to go through RICO?

Mr. Barnhouse: Justice Scalia, it's a misdemeanor violation and it has to be prosecuted by the U.S. Government.

Those -- that's the extent of the Jenkins Act.

And -- and the -- and what the city has done here, as Judge Winter noted in his dissent, is take the misdemeanor Federal criminal law and bootstrap it into RICO, seeking 300 cents on the dollar through mail and wire fraud.

These sales occurred on the Jemez Pueblo in New Mexico.

And it's my client's position, and it's no secret, he says on his websites that he doesn't -- that the Jenkins Act, the scope of the Jenkins Act does not include his sales.

There -- there's a dispute with the city on that, but it's not even clear that the State had a right to get these names, much less the city.

Yet the city is claiming because it didn't get the names -- and if it had the names it claims a recovery rate between 40 cents and 55 cents on the dollar -- it should be able to collect 300 cents on the dollar from a business that didn't owe them in the first place.

Because the civil RICO has a separate standing requirement separate from mail and wire fraud, as Justice O'Connor discussed in Holmes that it's not just the predicate act's standing requirement, but -- but the person injured in his business or property by reason of -- because Congress took this "business or property" language right out of the antitrust laws unchanged, the court in Hawaii interpreted that language.

The court drew a bright line.

It was a pragmatic line, a workable line, an important line, that that business or property did not include injury to a sovereign interest.

The opportunity to collect taxes is a sovereign interest.

The taxes themselves, once collected or assessed, could be property, but not the opportunity.

The injury flows either through the States or consumers and, therefore, is not proximate.

These websites were not State-specific, much less city-specific.

Chief Justice John G. Roberts: But you don't -- you don't think that proximate cause is satisfied only with respect to the person who is supposed to be paying the taxes?

If there's some way in which someone else contributes or makes it feasible or makes it more likely that the person is not going to pay his taxes, that's not automatically outside the scope of proximate cause, is it?

Mr. Barnhouse: It wouldn't automatically be outside the scope of proximate cause, but if -- if it was action that made it more or less feasible.

But it would be unreasonable under this Court's decision in U.S. v. Boyle, where you -- where the Court held that you cannot rely even on an agent for purposes of not filing taxes -- it would be unreasonable for anyone to rely on language on a vendor's Internet -- commercial language on a vendor's Internet website to -- to -- to decide that for some reason they didn't have an obligation to pay.

And these websites had language that said -- the city attached the -- the pages from the websites themselves to the -- they were part of the record, the RICO record.

I had those just a second ago and I can't seem to find them.

But the -- the website pages for my client specifically had languages noted in the briefs that said these are not city-specific or State-specific, that -- that you need to contact -- you should contact your State officials for purposes of determining what your individual obligations are regarding possession and tax.

Justice Ruth Bader Ginsburg: How many people who buy cigarettes out of State come back to their home State and voluntarily pay the use tax?

Mr. Barnhouse: In the response to the petition, the city said it's a fraction, I believe, of the people.

They've also--

Justice Antonin Scalia: Isn't there some exemption, anyway, for a couple of cartons?

Mr. Barnhouse: --There is an exemption, yes, Justice Scalia.

Justice Antonin Scalia: For what, two cartons?

Mr. Barnhouse: Two cartons of cigarettes.

And -- but -- but it's clear that possessory and use taxes are a bear to collect for any government.

And the city here, as I -- as stated in the record, says even under the best of circumstances, Justice Ginsburg, it collects only 40 cents on the dollar, perhaps as much as 55--

Justice Ruth Bader Ginsburg: But it needs the names so it can collect anything.

Otherwise, how is it -- how -- how would it ever know?

Mr. Barnhouse: --It would rely on its citizens to step forward and pay it.

Justice Ruth Bader Ginsburg: And they don't.

Mr. Barnhouse: And they don't.

And that's the intervening cause of the -- that's--

Justice Antonin Scalia: It would probably cost them more to collect than -- than it's worth the money, don't you think, to sue individual citizens after they get the names?

Mr. Barnhouse: --It's a very expensive process, Your Honor, Justice Scalia, and it -- it's tedious.

You get the names.

You have to go through the names and write.

There's a cost involved in all that.

There's a lot of friction in that entire process.

There -- there are lots of reasons that, even when the city gets the names and even under its allegations of collection rates, Justice Ginsburg, very small, 40 cents to 55 cents on the dollar.

Justice Ruth Bader Ginsburg: Do we know if these Jenkins Act lists -- are they in fact maintained by the State?

Mr. Barnhouse: It -- it's my understanding, Justice Ginsburg, that the State would receive Jenkins Act reports from some vendors.

Those can come in all sorts of different formats, some of it just stacks of paper perhaps.

And it would be the State's responsibility then to go through those, select which ones were residents of the city of New York, and then decide whether under existing laws it was even permitted to share this proprietary information with the city, before giving those to the city.

It would then be the city's responsibility to take the list given to it by the State and decide who hasn't paid.

Then there's the exemption issue that comes on top of that.

And then go out and try to collect these amounts, which they allege to have done in at least two instances.

Finally, the policy -- I'm sorry.

The policy that this Court adopted in Hawaii makes a -- makes very much sense, as recognized by courts who have looked at issues such as additional fire protection, payment of -- of public benefits, other instances where governments have come forward and under RICO tried to bring a claim to recover actual out-of-pocket expenses, overtime that was paid to police that had to monitor protests against abortion clinics, public benefits paid to people who were not legally in the country and working in agriculture.

Governments have brought those and the circuit courts of appeals in both of those instances said those are injury to sovereign interests, citing Hawaii, and not the kind of injury to business or property that Congress intended when it adopted RICO.

If there are no further questions, I'll reserve the rest of my time for rebuttal.

Chief Justice John G. Roberts: Thank you, counsel.

Mr. Koerner.

ORAL ARGUMENT OF LEONARD J. KOERNER ON BEHALF OF THE RESPONDENT

Mr. Koerner: Mr. Chief Justice, and may it please the Court:

With respect to the definition of property, this goes back to Wyoming v. Oklahoma, where in an original jurisdiction case Wyoming sued the State of Oklahoma on the ground that the State's regulation which attempted to require Oklahoma coal-fired generation plants to use 10 percent of Oklahoma coal, and prior to the legislation all of Wyoming coal was used in the generation plant.

Wyoming sued in this Court and the defense was that Wyoming didn't have an interest because it lost the opportunity to collect taxes.

This Court found standing and allowed them to sue and successfully challenge under the interstate commerce rule.

That was before we get to Pasquantino.

Justice Ginsburg is quite right--

Justice Antonin Scalia: Excuse me.

Did -- was there some statute at issue in that case which required not just an interest, but an interest in property?

Mr. Koerner: --No.

Justice Antonin Scalia: Well--

Mr. Koerner: The -- it was just -- I was just going to -- yes, it was just a discussion of what was the nature of Wyoming's interest.

Was it substantial enough to allow them to sue, challenging the Oklahoma statute.

In Pasquantino, though, the issue was foreclosed.

In that particular case the issue of definition of property was the exact same issue that you have in the RICO case.

Indeed, mail and wire fraud is a predicate for RICO.

In that case there was, as Justice Ginsburg noted, a criminal prosecution based on the importation of alcohol into Canada from Maryland.

The charge was wire fraud.

And first, there were two issues: One, the revenue rule, which is not relevant here.

But the first issue was whether or not the opportunity to collect taxes which Canada lost, whether that was an injury to property.

And there was a long discussion by this Court equating the lost opportunity with embezzlement from the Canadian treasury and pointing out in the definition of Black's and the Webster's definition that property includes not only that which you actually have, but that which you were denied the opportunity.

In this particular case, the reason we don't have the taxes is because of the act of fraud as we allege of the defendant.

It's a little tough--

Chief Justice John G. Roberts: I'm sorry, because of -- because of what?

Mr. Koerner: --The fraud of the defendant.

It's a little hard to argue when you've created the situation so we can't collect that an inability to collect then becomes no property.

After Pasquantino this Court decided the Anza case, which I'll discuss for both issues.

Justice Stephen G. Breyer: Before you get to Anza, this might be a good time to ask because I don't think we focused on this in Pasquantino.

But if in fact the failure of a State to collect a tax is property, then why isn't every corporation that files an income tax return and makes two false statements automatically liable for RICO?

I mean--

Mr. Koerner: As long as they meet the definition of--

Justice Stephen G. Breyer: --Well, that would mean the States have a new method, which I don't think they use, a new method of collecting treble taxes from anyone who makes two false statements or a false statement in two income tax returns, and it would seem to me that would have vast repercussions.

I mean, it might be very beneficial; the States are having a deficit crisis; but--

Mr. Koerner: --If people--

Justice Stephen G. Breyer: --How, how -- why would it not be--

Mr. Koerner: --Why would--

Justice Stephen G. Breyer: --But they left -- they don't have the RICO predicate, not paying your State taxes.

But in effect you would read into the RICO predicate protecting States.

Mr. Koerner: --This is precisely what happened in Anza.

Justice Stephen G. Breyer: That may be, but nobody focused on this issue.

So -- so that's what's bothering me.

What is the -- what is the stopping place?

Mr. Koerner: If you're--

Justice Stephen G. Breyer: Or is there one?

And if there is none, how do we reconcile this view of -- they're suggesting a stopping place, Anza and Pasquantino to the contrary.

Right.

But they're suggesting a stopping place on a matter that hasn't come up.

Mr. Koerner: --But they're suggesting--

Justice Stephen G. Breyer: Or focused on.

It's come up but not focused on.

Mr. Koerner: --But they're suggesting a stopping place which is inconsistent with the actual language of the RICO--

Justice Stephen G. Breyer: So in your view California--

Mr. Koerner: --Well, may I--

Justice Stephen G. Breyer: --which has a $10 billion deficit, could go through, find every instance where a corporation made two false statements in two tax returns, one in each, and collect treble what they're owed.

Mr. Koerner: --If there is a systematic understatement under the statute, that's exactly--

Justice Stephen G. Breyer: It doesn't say systematic understatement.

Mr. Koerner: --It says--

Justice Stephen G. Breyer: It says two--

Mr. Koerner: --Correct.

Justice Stephen G. Breyer: --predicate acts.

Mr. Koerner: And in these--

Justice Stephen G. Breyer: And the predicate acts are a deliberate false statement.

Mr. Koerner: --And indeed that -- that is what Congress intended.

If you look--

Justice Stephen G. Breyer: If they did, then why didn't they put in not paying your State tax returns as a predicate act?

Mr. Koerner: --Well, in fact what they put in in 1978 was the Contraband Cigarette Trafficking--

Justice Stephen G. Breyer: Oh, well, that cuts against you.

Mr. Koerner: --No.

Justice Stephen G. Breyer: Because if they put in one, your theory -- they don't even need, whether they need that or not.

Your theory applies to every tax, every tax.

Mr. Koerner: Well, the reason they put it in was to increase the criminal penalties as well as recognize the civil penalties.

Justice Stephen G. Breyer: No, but go back to my question.

Mr. Koerner: The importation -- yes.

Justice Stephen G. Breyer: My question is, forget the cigarette taxes.

If I accept your argument, am I then saying that California, New York, and every other State that's owed money by corporations in their taxes can go through, look for two tax returns that have a false statement in them that were mailed in, and thereby collect RICO damages?

Mr. Koerner: Yes, that's correct.

Justice Stephen G. Breyer: Well, that's a pretty far-reaching--

Mr. Koerner: Well--

Justice Stephen G. Breyer: --Do you know anybody, any court that has ever said that?

Mr. Koerner: --Well, the issue hasn't been raised.

But the -- but the -- RICO has been consistently interpreted by this Court in an expansionist mode, and despite that Congress has not truncated it except in the one area of securities violation and only because they found that there were ample remedies in securities law, and because they thought it was inappropriate to use exclusively mail and wire fraud.

Justice Stephen G. Breyer: Why would--

Justice Antonin Scalia: --Why should that help?

Justice Stephen G. Breyer: --If Congress wanted that result, why didn't they put in as a predicate act not paying your income tax or not paying your State tax?

Mr. Koerner: Because they had a more general definition, and they wanted the broadest possible interpretation.

But the Cigarette Contraband Trafficking Act was put into RICO as a predicate crime.

The sole economic injury in that act is lost taxes to the State and the city.

It's the only economic injury.

It's hard to say that Congress didn't contemplate this when, in addition to the general definition, they put this in.

In addition, the Jenkins Act was passed in 1949 precisely for this problem, so it was on congressional minds.

Justice Ruth Bader Ginsburg: Yes, but Congress said -- we were just told by counsel for the Petitioner, Congress said you can only -- only the Federal prosecutor can sue for violations of Jenkins--

Mr. Koerner: Correct.

Justice Ruth Bader Ginsburg: --not New York City, not New York State--

Mr. Koerner: Correct.

Justice Ruth Bader Ginsburg: --and it's a misdemeanor.

Mr. Koerner: Correct.

Justice Ruth Bader Ginsburg: And now you -- you are saying the Jenkins Act gives you a basis to go after what are basically aiders and abettors of use tax violations?

Mr. Koerner: No.

What we're saying is the Jenkins Act is some evidence of the state of mind of the defendant when he commits this fraud.

What we are saying is he is aware that he has an obligation to file reports with the State indicating both the identity of the seller and the identity of the purchaser.

Our predicate act is not Jenkins.

Our predicate act is wire and mail fraud.

Even if Jenkins did not exist, we would still have a wire and mail fraud cause of action based on the representations of the seller, which is that all the sales are tax-free.

What Jenkins does through the cooperation agreement is it gives us the mechanism to collect these taxes when they're complied with.

If the defendant by active intervention does not file and instead advertises no sales tax required, he is preventing us from--

Justice Ruth Bader Ginsburg: But do you know -- do we know that?

Do we know whether the Petitioner has in fact filed the Jenkins Act report with New York State?

Mr. Koerner: --No.

We have -- we have alleged that he has not -- not filed one report with New York State.

Indeed, he has actively represented in the website that he has no obligation to file the report, and that any information that he obtains from the purchaser is confidential.

Justice Stephen G. Breyer: All right.

So I think that their response to the mail and fraud is, you're right, it is all mail -- it is all mail fraud.

All these tax violations, in fact every one, you mail in your tax return normally.

Mr. Koerner: Correct.

Justice Stephen G. Breyer: So all of these would be mail fraud.

But mail fraud is not a treble damages statute.

And therefore the question is who will prosecute, State or Federal?

So normally it's State if it's a State tax.

But it's one thing to say Congress didn't care about that and quite another thing to say that Congress didn't care if the States were going to use this in order to collect three times what the taxes are owed.

And so they're looking for a way to cut off this tax liability for ordinary, simpleminded tax -- failure to pay your State taxes.

And that's why they've hit on this idea of the antitrust.

I don't know if that's a satisfactory idea.

I don't see the solution.

I think I see the problem.

Mr. Koerner: But in the antitrust case in the State of Hawaii, the reason there that the State was not allowed to sue was not because of the injury.

It was not -- it was the directness of the injury.

This Court pointed out the fact that there was the possibility of duplicative recoveries, and the State of Hawaii was acting on behalf of the consumers.

Here, we have a direct injury.

The city was the only one injured as a--

Chief Justice John G. Roberts: But it was injured by the consumer's failure -- it was injured by the consumer's failure to pay the taxes.

That is an intervening cause.

Mr. Koerner: --Correct.

Chief Justice John G. Roberts: Now, why shouldn't that be the end of the causation chain?

Mr. Koerner: Because it's -- while the consumer has failed, we are suing the seller because he set up the ambiance, the environment for the consumer not to pay.

It is his--

Chief Justice John G. Roberts: You're suing him for setting up the ambiance?

Mr. Koerner: --Yes.

He is the one who created the fraud, by leading the consumer to believe they didn't have an obligation to pay.

We are suing based on impedence with the opportunity to collect taxes, where there are three parties to this transaction--

Justice Samuel Alito: In order to -- in order to -- to prevail on that theory, would you have to prove that these -- these alleged misrepresentations in fact caused people not to pay taxes?

Mr. Koerner: --Yes.

Justice Samuel Alito: You would have -- you would have to prove that?

Mr. Koerner: Yes, and that's something we could establish at trial, Your Honor.

Justice Samuel Alito: And you think you could prove that?

Mr. Koerner: Absolutely, because the response rate of individuals on their own when the Jenkins report is not filed is extremely low.

Yet when the Jenkins report is filed they do--

Justice Samuel Alito: What -- what percentage of the -- of the residents of New York State or New York City voluntarily pay a use tax on their income tax returns for items that they purchase on the Internet?

Mr. Koerner: --I don't know the answer to that.

I know with respect to--

Justice Samuel Alito: Would you make a guess?

Mr. Koerner: --Probably very low.

But in this particular--

Justice Antonin Scalia: So how can you call it -- I mean, part of the problem with calling it property is there -- there is such a low chance of recovery of the amount owed here.

Even if the Jenkins Act filing had been made, you still have to -- have to assume that this -- number one, you have to assume that the State would turn the list over to the city, which the State isn't required to do.

Mr. Koerner: --But we do have a cooperation agreement.

Justice Antonin Scalia: Well, that may be, but the State isn't required to, and the State can terminate that agreement whenever it likes.

But, secondly, after you get the information we have to assume that you're going to move against these people.

Mr. Koerner: If you look in footnote 8 of our brief, we point out, even in this case, when we've settled with parties and they've turned over the information we have been able to recover significant amounts of the taxes owed.

Chief Justice John G. Roberts: Does it -- does it affect your ambiance theory that the website has the language that your friend told us is on it, that you have to -- you know, this is -- viability varies from State to State or whatever the exact language is?

Mr. Koerner: No.

No.

Chief Justice John G. Roberts: That still creates the ambiance?

Mr. Koerner: When you look at the website and you have flashing lights that say "No taxes required", indeed we allege in the complaint that the entire business model is predicated on the fact that they don't have to pay State and city taxes.

The wide difference allows for the profit for the seller and a savings for the buyer.

That is what we allege and, given the opportunity, we can prove that.

Chief Justice John G. Roberts: Yes.

Justice Anthony Kennedy: Could you satisfy Justice Breyer's concern -- and maybe the answer is not -- by saying that if there were a corporation that went around to California taxpayers and said, we have a way to avoid taxes, that then there would be a RICO violation, and that would be closer to your case?

Mr. Koerner: It would be -- it would be easier to prove, but I can't dispute Justice Breyer's fact pattern, that if you had an underpayment through a fraudulent return that it may be a predicate for RICO, and indeed--

Justice Anthony Kennedy: Well -- well, you're certainly consistent and persistent on that point.

Mr. Koerner: --Yes.

That would be a better factor--

Justice Anthony Kennedy: But it -- it would seem to me -- it would seem to me that I gave you a way to differentiate this case.

And isn't that consistent with RICO because we have a very specific enterprise here?

Mr. Koerner: --Well, I do want to reiterate the fact that, apart from the general language in this case, we do have this Contraband Cigarette Trafficking Act, which I alluded to earlier.

That -- that Act precisely deals with the problem of underpayment of taxes for cigarettes.

It was passed in 1978 and then amended in 2006 to include localities.

It has very severe penalties under RICO criminally.

It allows for fines and forfeitures.

But more important, you can use RICO civilly, and the only economic injury in that entire legislation is the lost opportunity to collect taxes.

So it's difficult to say that Congress was not aware of this problem, aware of its potential scope.

And while I understand this Court's frustration, it seems to me, as this Court has said in many cases, including the last one, Boyle, it resides with Congress to change it.

If they feel there is a misuse of this legislation and suits are exploding out of context in terms of what they contemplated, then they should change it.

Yet--

Chief Justice John G. Roberts: Well, but the definition and giving scope and meaning to the concept of proximate cause is one that's in our bailiwick.

Mr. Koerner: --It is, but if you look at -- Chief Judge, if you look at how you've applied proximate cause in the past in Anza, in Holmes, what you said is that there are other factors that are not associated with the unlawful act, and therefore you didn't want courts or juries to have to parse -- parse out legitimate business problems and illegitimate business problems because they become too complex.

You don't have that here.

Here, you have direct injury to the city, and it's an easy calculation.

Justice Ruth Bader Ginsburg: Do we know -- you gave an instance in your brief or two instances of successful attempts to recoup from the taxpayer, that is the cigarette buyer.

Did those come about because the city received the Jenkins Act list from the State?

How did the city get--

Mr. Koerner: In the particular cases that we mentioned in footnote 8, they were parts of settlements for the people who had, similar to this particular defendant, had advertised as tax-free, and we had settled with those people to get the reports, and then, based on the reports, we were able to track them down.

Where we get the Jenkins -- where people voluntarily disclose the Jenkins Act reports, we do follow up aggressively, but the--

Justice Antonin Scalia: Well, you follow up by writing them a letter and what your footnote 8 says is, when you wrote them a letter, about half of them coughed -- coughed up the tax.

Mr. Koerner: --Correct.

Justice Antonin Scalia: They may have been the foolish half.

Did--

[Laughter]

Mr. Koerner: No.

Justice Antonin Scalia: Were the other -- were the other half pursued by the city?

Mr. Koerner: Not yet, no.

Justice Antonin Scalia: Not yet.

I don't--

Mr. Koerner: But that -- but--

Justice Antonin Scalia: --It can't be worth it.

It can't possibly be worth it.

Mr. Koerner: --Here's what would be worth it: If we can stop the fraudulent practices that these sellers represent through the treble damages.

The only benefit that these Internet sellers have is the cost saving as a consequence of the tax saving.

Justice Ruth Bader Ginsburg: --Why is what they're doing any different from what out-of-State mail order houses have done in -- they set -- they set up in States without a sales tax, they ship into a State that has a compensating use tax, that, apart from automobiles, I don't know is ever collected.

Mr. Koerner: Well, I would like to think that those out-of-State sales entities don't exist solely to try to deprive receiving States of tax.

The difference here is the entire business plan is based on not paying tax.

Now, RICO has been in business since 1970.

Your decisions have expanded its use.

As I indicated, there has been no attempt to restrict it in any way, and, indeed, despite--

Chief Justice John G. Roberts: Well, but that's because in every one of those cases, or at least in many of them, we kind of wring our hands and say, well, we don't have any choice, this is what Congress did, and we're faithful to that intent.

But I guess, as I tried to point out earlier, this is a different question.

This is the usual judicial application of concepts of proximate cause, and I would have thought concern about how broad RICO was written and how broadly it has been interpreted would cause us to look very carefully to the proximate cause question.

Mr. Koerner: --But in the proximate cause equation, as you yourself have defined it, meaning the Court, you've talked about unlawful issues and lawful issues.

And as I indicated, where there's a combination you don't want a Court to weigh what's lawful and unlawful.

But here our injury -- injury is solely the result of an unlawful use.

There are no intervening factors.

Chief Justice John G. Roberts: No -- I don't understand that.

The injury is directly caused by the consumers who don't pay the taxes.

Mr. Koerner: And I -- that's -- that's the way you frame it, I understand, but it can be equally framed by saying the injury is caused by the seller's misrepresentation, which encourages the purchasers not to pay taxes.

And if you look at the websites, there is no doubt about what this--

Justice Anthony Kennedy: So do you say then that proximate cause is in part established because of the specific intent?

Is that--

Mr. Koerner: --No.

I'm saying--

Justice Anthony Kennedy: --Well, I'm glad -- I'm glad you said that, because the Associated Contractors said specific intent is not--

Mr. Koerner: --I know.

What I am saying is that, given the opportunity to prove this, we can show that the entire business model was intended never to have any taxes paid on these transactions.

Justice Anthony Kennedy: --But in -- in the world and in the lexicon of proximate cause, why is there proximate cause because this was the business model?

How do I explain that in terms of proximate cause?

There's not specific intent.

Mr. Koerner: There are no other intervening causes between the fraud and the injury to the city.

It is -- we lost an opportunity.

Look--

Justice Anthony Kennedy: I know.

But there is no other -- take a case which was put to you as the seller who has many reasons for selling from out of State.

They have a good catalog business, it's a well-established name, and so it's not just to avoid taxes.

How is that different from what happened here?

Mr. Koerner: --Because in this case, they don't have any other reason--

Justice Anthony Kennedy: Okay, and in terms of proximate -- the universe of the law that we call proximate cause, how do you explain that?

It's not specific intent.

Mr. Koerner: --The law of proximate cause in the case you described, you would have to consider all of the issues, some related to the transaction that you're suing on, some not.

If the mail order catalog could show there were other reasons for their sales, not attributable to the unlawful RICO definition, then it's the type of injury you don't want to make an inquiry to.

But if you have--

Justice Antonin Scalia: Reason on whose part?

Some reason on whose part?

On the seller's part or on the New York buyers' part?

They will be -- the New York buyer is doing it because it's cheaper because he is not going to pay taxes on it.

But it seems to me the seller couldn't care less whether the buyer pays taxes on it or not.

So long as he pays the money for the cigarettes, the seller has gotten what the seller wanted.

Mr. Koerner: --Except that the buyer -- the seller is advertising it as tax-free.

He's not--

Chief Justice John G. Roberts: So it's a mail order house and they put a little line on it, says: By the way, if you live out of State, no taxes, no sales taxes.

Then they're also subject to RICO prosecution?

Mr. Koerner: --As I said, it's a harder case because there may be other reasons why that mail order house is -- is successful, just like you said in Anza, just like you said in Holmes.

But in this case there's only -- it's the whole model.

There's only one reason why they're successful.

Justice John Paul Stevens: Well, maybe that isn't completely true.

Maybe it's a matter of convenience, at least theoretically.

You buy stuff over the Internet, you buy these advertised cigarettes, the price seems all right, and you don't -- whether you pay the tax or not is your decision.

Mr. Koerner: Except that the seller -- that's not the facts in this case.

The seller affirmatively represented that there are no taxes.

He told the consumer, and then kept the consumer's identity unknown--

Justice John Paul Stevens: Well, we were--

Mr. Koerner: --by deliberately not filing as required by Federal statute, and places us in a -- in the position in the circle of having no knowledge of who the buyer is, having affirmative misrepresentation, and we are the only one in this transaction who are directly injured.

Chief Justice John G. Roberts: To whom was the affirmative misrepresentation made?

Mr. Koerner: The customers.

Justice Antonin Scalia: Usually you're not liable for misrepresentation unless it causes -- it's relied on.

You really think that the -- that a large percentage of the people who were getting this stuff really, really were gulled into believing that New York State was somehow being done out of taxes?

Mr. Koerner: Yes, because of the representation that--

Justice Antonin Scalia: Really?

Mr. Koerner: --they would never contact the State with any information concerning the transaction.

That's exactly what they did.

Everybody understands in the nature of these purchasing exactly what it's about.

Justice Antonin Scalia: No, I am sure the purchaser knows: I'm not going to pay taxes, even though I should pay taxes.

But you're -- you're telling me that the only reason the purchaser doesn't pay taxes is because of this misrepresentation that you don't have to purchase -- you don't have to pay taxes.

I've known a lot of New Yorkers, and not many of them are that gullible.

Mr. Koerner: What I'm telling you, that it's probably easier to go to the corner store and obtain a package of cigarettes than order it over the Internet.

What I'm saying, you have to look at the context of the facts.

The facts were affirmative misstatements by the seller.

Justice John Paul Stevens: --But what if the seller didn't make those misstatements but just says -- the whole operation is set up exactly as this one is, but they don't have that statement in there; they just say: Get advice from your lawyer about whether you need to pay taxes or not.

And what if that was the -- that was exactly the -- and then they all got the advice, and the lawyer says: They'll never catch you if you don't pay it.

Mr. Koerner: I think it's a question of proof, and if we're able to show that these individuals thought it was tax-free, then we should be able to pursue -- let me just say, forget the Jenkins Act.

You have the Cigarette Trafficking Act.

That is within RICO.

That sole economic injury is loss of revenue to the State and the city.

So if we allege the Cigarette Trafficking Act -- it was not applicable at the time of this case; it was amended to apply to localities slightly after, but if we predicated the case on that, would you still say there's a proximate cause issue when you have Congress's express intent to allow that to be a predicate to the RICO count?

Chief Justice John G. Roberts: I don't want silence to be interpreted as acquiescence, but--

Mr. Koerner: No, no, no.

It was rhetorical.

I wasn't--

Chief Justice John G. Roberts: --Yes.

Mr. Koerner: --I'm just trying to--

Chief Justice John G. Roberts: Just to get back at maybe the same point Justice Kennedy was raising, which is you're focusing on -- you keep saying: The whole purpose of this, look at their website.

But the issue is proximate cause, and if you've got to go through the individual consumer, it's either proximate cause or not.

And if the -- if the indirect nature of what they're doing because the direct cause is the consumer's failure to pay, it doesn't seem to me that their intent is pertinent.

Mr. Koerner: --But we're seeking -- the injury is the opportunity to collect, which we've been denied, which is the Cigarette Traffic Act contemplates.

Indeed, if you look at the legislative history of that Act, the sole purpose was to make it a very, very serious felony, and with civil undertones, in order to discourage the act as a disincentive, so that this trafficking, which is a major problem, started to be reduced.

Justice Antonin Scalia: Well, I'm -- I'm not sure.

Let's talk about the contraband cigarette trafficking.

I'm not sure that these people would be in violation of it.

It makes it unlawful for any person knowingly to ship or transport, also receive, possess, sell, distribute, or purchase, cigarettes which bear no evidence of payment of applicable State or local cigarette taxes.

Mr. Koerner: Yes.

Justice Antonin Scalia: But there is no applicable State or local cigarette tax upon the shipment of these cigarettes.

Mr. Koerner: But if the shipment is done with the intent of avoiding taxes, which was contemplated by this statute--

Justice Antonin Scalia: That's not what it says.

It makes it unlawful to knowingly ship it when they bear no evidence of payment of applicable taxes, and--

Mr. Koerner: --That's correct.

There's a question of proof.

Justice Antonin Scalia: --there is no applicable taxes at the time that they ship it.

Mr. Koerner: But if you look at the legislative history, it was directly--

Justice Antonin Scalia: Oh, I don't look at legislative history.

[Laughter]

Mr. Koerner: --May I address the rest of you?

Justice Stephen G. Breyer: Well, why is it that you haven't argued -- why haven't you--

Justice Samuel Alito: I don't see a difference -- would appreciate if you would tell me the difference between your argument as to this situation and the typical Internet site where I think a lot of people buy goods on the Internet, because they're convenient and also because they know that they're not going to have to pay State sales tax when they make those purchases.

Mr. Koerner: In those cases, you have established companies and you may have to look behind to see what is the reason; why are they at -- I assume they have other businesses that are legitimate.

This particular enterprise has no legitimate aspect.

Justice Stephen G. Breyer: --Why is that relevant as far as cause is concerned?

Justice Samuel Alito: You have a company that is selling cameras, televisions, whatever over the Internet and they -- you know, you put your -- you put in your credit card information or whatever, and then it tells you, "sales tax due", and if they have no outlet in the State, it says "sales taxes due: Zero".

What is the difference between that situation and this situation?

Mr. Koerner: Well, first of all, in time, the Internet has raised many issues.

It's unclear how Congress feels about this.

We have legitimate enterprise.

But cigarettes have been a particular focus, and I think, in effect, you cannot use the general argument as to the Internet, when you have congressional legislation which, one, under the Jenkins Act, was specifically passed in 1949 because of transactions like this, where States were -- were being deprived of the revenues through the interstate shipments.

And you have the traffic -- the Cigarette Trafficking Act which is, again, an expression by Congress that they want these individuals to be put out of business.

That's exactly what RICO is about.

Justice Ruth Bader Ginsburg: Judge Winter in the Second Circuit said the State appears uninterested in enforcing the Jenkins Act and may not collate or maintain accurate records of reports from out-of-State vendors.

What -- what was the basis for his statement that the State appears uninterested?

Mr. Koerner: The State has records, but they -- they've been uninterested in this issue for political reasons.

Chief Justice John G. Roberts: Thank you, counsel.

Mr. Barnhouse, you have four minutes remaining.

REBUTTAL ARGUMENT OF RANDOLPH H. BARNHOUSE ON BEHALF OF THE PETITIONERS

Mr. Barnhouse: Thank you, Mr. Chief Justice.

Justice Stevens, the city brought exactly that case, where one of the 50 defendants here was a defendant that didn't say sales are tax-free, and that case was similarly dismissed by the district court, and that dismissal was affirmed by the Second Circuit.

Justice Breyer, in Illinois v. Fawaz, the States was going after $14,500 in back sales and gasoline taxes.

After having prosecuted the individual, they were seeking civil RICO damages, in that Seventh Circuit case, when the Seventh Circuit became the first circuit to say, we -- we hesitantly believe that the case could go forward beyond a motion to dismiss.

Justice Stephen G. Breyer: On cause, why isn't it a causal connection for them to say, look, your clients don't tell them who's bought it.

They're supposed to, but they don't.

And if we got the information, we go write a letter to the people, and half of them would pay.

Mr. Barnhouse: That would be but for; But for your failure to give us the names--

Justice Stephen G. Breyer: Yeah.

Mr. Barnhouse: --we would have collected.

Justice Stephen G. Breyer: But why isn't that a direct applicant action, but for foreseeable?

Mr. Barnhouse: This Court said, in Holmes, that but for is insufficient.

Justice Stephen G. Breyer: Yeah.

I know, but there is more here.

It is also foreseeable proximate cause.

I mean, it is absolutely foreseeable, not just but for.

Mr. Barnhouse: This was an Internet website, Justice Breyer, that--

Justice Stephen G. Breyer: Forget the website.

What if there had been no website?

Mr. Barnhouse: --Was it foreseeable--

Justice Stephen G. Breyer: Is it foreseeable that, when they don't know who owes the money, that the people won't pay, but when they know who owes the money, they can write them a letter, and half pay?

Mr. Barnhouse: --And is it foreseeable that no one will pay or that some will pay?

Some will pay.

Justice Stephen G. Breyer: Some pay.

Some don't.

They have the numbers there.

They get more than half.

Mr. Barnhouse: It's -- it's foreseeable that some won't pay.

That's foreseeable, but--

Justice Antonin Scalia: So you get half-treble damages.

What is that?

One-and-a-half damages.

Mr. Barnhouse: --But, at that point, it becomes speculative, Justice Scalia, and it's -- it's foreseeable that some won't pay, but it's also foreseeable that some people won't pay--

Justice Stephen G. Breyer: And, if you put people in front of railroad trains and half survive, then it's speculative?

Mr. Barnhouse: --I'm sorry?

I didn't--

Justice Stephen G. Breyer: I mean, if you put somebody in front of a railroad train and half survive because they jumped, does that make it a speculative cause?

Mr. Barnhouse: --No, Your Honor, but, in that instance, I would be the one pushing the person, and not the one -- I would be the person, as in Pasquantino, who did not--

Justice Stephen G. Breyer: And you say it's foreseeable that they won't get a lot of money.

And that's what they're arguing?

Mr. Barnhouse: --Yes.

Justice Stephen G. Breyer: Now, what's the answer to that?

Mr. Barnhouse: That it's foreseeable that they won't get a lot of money?

Justice Stephen G. Breyer: The reason is because of what your clients did, so it's but for and foreseeable.

Mr. Barnhouse: It's but for, and it is foreseeable that some -- some taxpayers in New York will not pay.

Yes, Your Honor.

Justice Stephen G. Breyer: End of case.

Now, we go to the damage section.

Justice Antonin Scalia: But for -- no, no, your response is, but for, plus foreseeable, is not a definition of proximate cause.

Mr. Barnhouse: But it's not a definition of proximate cause.

Justice Antonin Scalia: You need more than that.

Mr. Barnhouse: That, itself is not--

Justice Stephen G. Breyer: I took torts a long time ago.

I thought that was part of it.

Mr. Barnhouse: --What -- what the Court said in Associated General Contractors is, even if it's not only foreseeable, but that's your intent, but that--

Justice Stephen G. Breyer: No, no.

There can be other things that cut it off.

Proximate cause.

Foreseeable.

No kind of an event that would cut the causal chain, like some odd fluke or something.

Mr. Barnhouse: --But--

Justice Stephen G. Breyer: No policy reason or others for cutting the chain.

I mean, it's Torts 1 in 1962, okay?

Chief Justice John G. Roberts: Isn't it -- well, I don't know, maybe it's more -- but isn't it a proposition that you don't rely on illegal conduct, that the -- the assumption of illegal conduct cuts the chain?

In other words, there's only proximate cause if you assume people are going to not pay taxes that they're due, contrary to law, and that that breaks the proximate cause chain?

Mr. Barnhouse: --It -- if we assume that -- that the assumption that they will pay their taxes breaks the proximate cause?

I'm not -- I'm sorry--

Chief Justice John G. Roberts: No, that you have to -- in order to maintain -- this is a helpful question.

In order--

Mr. Barnhouse: --Yes, sir.

That's why -- that's why I'm trying to understand.

[Laughter]

Chief Justice John G. Roberts: --In order to maintain the chain of connection, I thought you cannot rely, for one of those links in the chain, that a party is going to commit illegal action.

Mr. Barnhouse: Yes, Your Honor.

Justice Antonin Scalia: Well, that's wrong.

I mean, at least for civil torts, you can -- there are a lot of cases where the landlord leaves out the bulb in the -- in the stairway and one of the residents gets mugged and he sues the landlord and wins, even though there is an intervening criminal act.

Now, maybe what you want to argue is that that -- that has never been applied, to my knowledge, to either criminal liability or -- or penal provisions, and that maybe the -- an intervening criminal act does cut off causality, for purposes of penal statute, such as -- such as RICO.

That would be a reasonable argument.

Mr. Barnhouse: That's a great argument, Justice Scalia.

[Laughter]

Chief Justice John G. Roberts: And a good place to end.

Thank you, counsel.

The case is submitted.

Transcript: 

Chief Justice John G. Roberts Jr.: I have an opinion this morning in case number 08-969, Hemi Group versus the City of New York.

The City of New York taxes the possession of cigarettes.

If you sell cigarettes in New York City you have to charge, collect and remit the tax to the city.

Hemi Group, however, is based in New Mexico and it sells cigarettes online to residents of the city.

Neither state nor city law requires Hemi to charge, collect or remit the tax and the purchasers seldom pay it on their own, but a federal law called the Jenkins Act requires out-of-state vendors like Hemi to turnover customer information to the states where they ship the cigarettes.

When New York State gets this customer information from Hemi, it can pass it on to the city.

When the city has the customer information, it can pursue payment from customers who do not pay the tax on their own.

In this case the city alleges that Hemi he did not turn over the Jenkins Act information to the state.

Without that information the city could not recover cigarette taxes.

The city sued Hemi, alleging that Hemi's actions amounted to a violation of the Racketeer Influenced and Corrupt Organizations Act known as RICO.

Now, to recover under RICO, the city must show that it lost the tax revenue By reason of" Hemi's failure to file Jenkins Acts reports with the state.

The Second Circuit Court of Appeals which sits in New York City held that the city met that requirement.

We disagree.

To establish that it suffered an injury by reason of the alleged RICO violation, the city must show that the alleged fraud, the failure to file the Jenkins Act reports with the state not only was a cause of the injury but that it was the proximate cause.

Proximate cause is a legal concept that captures the same notion as the old proverb for want of a nail, you know how it goes, for want of a nail the shoe was lost, for one of the shoe the horse was lost and so on to the loss of the kingdom.

The concept of proximate cause in the law means that forgetting the nail doesn't make you liable for the loss of the kingdom.

As Justice Oliver Wendell Holmes put it nearly a century ago, the general tendency of the law in regard to damages at least is not to go beyond the first step.

Now in the RICO context, we have made clear that proximate cause focuses on whether there is a direct relationship between the injury asserted and the harmful conduct.

The city's causal theory here cannot satisfy RICO's direct relationship requirement.

According to the city, Hemi committed fraud by selling cigarettes to city residents and failing to submit the required customer information to the state.

Without the reports from Hemi the state could not pass on the information to the city.

Some of the customers legally obligated to pay their taxes failed to do so, because the city did not have the, did not receive the customer information it could not determine which customers had failed to pay the tax.

The city thus could not pursue those customers for payment and the city was thereby injured in the amount of the portion of back taxes that were never collected.

Because the city's theory of causation requires us to move well beyond the first step, that theory cannot meet RICO's direct relationship requirement.

The city's theory requires that we extend RICO liability to situations where the defendants fraud on a third-party, the state here, has made it easier for a fourth party, the taxpayer to cause harm to the plaintiff, the city.

Put simply, Hemi's obligation was to file the Jenkins Act reports with the state, not the city and the city's harm was directly caused by the customers not by Hemi.

We have never before stretched the causal chain of the RICO violations so far and we would decline to do so today.

Now at the end of the day it bears remembering what this case is about.

It is about the RICO liability of a company for lost taxes it had no obligation to collect, remit or pay, which harmed a party to whom it owed no duty.

It is about imposing such liability to substitute or complement the governing body's uncertain ability or desire to collect taxes directly from those who owe them and it is about the fact that liability under RICO comes with treble damages and attorney's fees attached.

Now this Court has interpreted RICO broadly consistent with its terms, but we have also held that its reach is limited by the requirement of a direct causal connection between the predicate harm and the wrong.

The city's injuries here were not caused directly by the alleged fraud and thus were not caused by reason of" it.

The city therefore has no RICO claim.

The judgment of the Court of Appeals for the Second Circuit is reversed and the case is remanded for further proceedings consistent with this opinion.

Justices Scalia, Thomas and Alito join this opinion.

Justice Ginsburg has filed an opinion concurring in part and concurring in the judgment.

Justice Breyer has filed a dissenting opinion in which Justices Stevens and Kennedy have joined.

Justice Satomoyor took no part in the consideration or decision of the case.

Now in case number 07-11191, Briscoe versus Virginia we have filed with the clerk this morning a brief per curiam opinion.

It is so brief that I will read the entire thing.

We vacate the judgment of the Supreme Court of Virginia and remand the case for further proceedings not inconsistent with the opinion in Melendez Diaz versus Massachusetts.