Hemi Group LLC v. City of New York

PETITIONER: Hemi Group, LLC and Kai Gachupin
RESPONDENT: City of New York

DOCKET NO.: 08-969
DECIDED BY: Roberts Court (2009-2010)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 558 US 1 (2010)
GRANTED: May 04, 2009
ARGUED: Nov 03, 2009
DECIDED: Jan 25, 2010

Leonard J. Koerner - for the respondent
Randolph H. Barnhouse - for the petitioners

Facts of the case

The City of New York sued several out-of-state cigarette vendors under the Racketeer Influenced and Corrupt Organizations Act (RICO) for failing to report sales made to individuals over the Internet as required by the federal Jenkins Act. The State of New York and City of New York rely on this information to collect taxes imposed on cigarettes sold in the state and city. The U.S. District Court for the Southern District of New York dismissed the City of New York's suit, holding that its claim did not meet the "causation" requirements set forth under RICO. On appeal, the U.S. Court of Appeals for the Second Circuit reversed, holding that the City of New York met the RICO "causation" requirements and thus maintained a cause of action. The court reasoned that the defendants' conduct prevented the City from collecting taxes and thus directly injured it. Moreover, the court reasoned that the loss of taxes injured the City's "business or property."


Does the City of New York meet the RICO "causation" requirements in its suit against out-of-state cigarette vendors that the plaintiff be directly injured in its "business or property" when the City merely alleges an injury from the nonpayment of taxes by non-litigant third-parties?

Media for Hemi Group LLC v. City of New York

Audio Transcription for Oral Argument - November 03, 2009 in Hemi Group LLC v. City of New York

Audio Transcription for Opinion Announcement - January 25, 2010 in Hemi Group LLC v. City of New York

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.