Bloomberg News

U.S. High Court Permits Suit on Investing Racketeering Profit

February 27, 2012

The U.S. Supreme Court allowed a New York City steel products retailer to proceed with a federal racketeering lawsuit claiming that a competitor gained an illegal advantage by investing criminal proceeds in a business.

The U.S. Chamber of Commerce, which has fought to restrict the use of a federal racketeering laws in corporate conflicts, had urged justices to block that sort of claim. Letting the case proceed “would enable competitors who do not succeed in the marketplace to harass their rivals” via the courtroom, the Washington-based business organization said in a brief.

Ideal Steel Supply Corp. filed suit under the Racketeer Influenced and Corrupt Organizations Act alleging that a rival company, National Steel Supply Inc., used money from a tax-fraud scheme to open a competing store that damaged its business. The justices today declined to hear an appeal by National seeking to block the lawsuit.

The racketeering law, known as RICO, permits lawsuits seeking triple damages associated with conspiracies involving a pattern of criminal activity. Originally targeted at organized crime, the law’s penalties have made it a weapon in more garden- variety business disputes.

The New York-based 2nd U.S. Circuit Court of Appeals said Ideal can proceed to trial with a claim that closely held National. illegally boosted its business and profit for years by failing to collect sales tax from customers who paid with cash at a store in Queens. National used the ill-gotten gains to start a store in the Bronx, where closely held Ideal previously had a local monopoly on its niche-market products, according to the lawsuit.

The Supreme Court, without comment, declined today to consider Nation’s appeal of that ruling.

Family Feud

The case continues a long-running family feud: the Brancato and Anza families who own Ideal and National are in-laws and cousins in addition to being business rivals.

The suit, filed in 2002, has already reached the nation’s highest court once before.

In 2006, the high court ruled that Ideal couldn’t sue on the grounds that it lost profits because National, by illegally failing to collect sales taxes, was able to attract customers by undercutting its competitor’s prices. The court said there are many reasons why customers may shop at one store over another and, in order to sue under RICO, a company must show a more direct, or “proximate,” connection between alleged fraud and damage to its business.

Return Trip

On its return trip, the case involved a different legal justification, using language in the statute allowing claims about investments made with racketeering proceeds.

Ideal says that, although the firms had competing stores in Queens, it was the only company selling its steel products in the Bronx until 2000, when National opened shop in that borough. Without illegal profit from untaxed cash sales in Queens, Ideal says National wouldn’t have been able to start the competing location.

“National used crime proceeds to create a new Bronx business siphoning sales from Ideal, its sole rival,” Ideal said in its high court brief.

National said the appeals court’s ruling “provides a road map” for harassment suits “by inefficient businesses against their more successful competitors” and misuses the RICO law as a weapon to discourage competition that benefits consumers.

The case is Anza v. Ideal Steel Supply Corp., 11-659.

To contact the reporter on this story: Bob Drummond in Washington at bdrummond@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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