COA Rejects Civil Suit Arising From The Phipps State Fair Affair
Today the COA issued a decision in a civil case arising from the state-fair conspiracy that sent many folks to prison, including former Dep't of Agriculture Comm'r Meg Scott Phipps. The case is Strates Shows, Inc. v. Amusements of America, Inc. It's a case about collateral estoppel. But it's also about more than that.
For more than 50 years uninterrupted, the plaintiff, Strates, had performed the contract to operate the midway at the annual state fair in Raleigh (you know, the place with chocolate covered snickers bars). In 2002 the midway contract went to Amusements of America (AOA). After investigations, it was determined that the contract was the product of criminal acts (only bribery, money laundering, extortion, conspiracy, election law violations, mail/wire fraud, witness tampering, etc.). Agriculture Commissioner Phipps and many others pleaded guilty or were convicted of crimes.
There then ensued a civil action in federal court (EDNC) filed by Strates against AOA and the other criminal coconspirators, including Phipps. That action alleged a violation of the federal RICO statute, as well as state law claims. The district court (Judge Flanagan) dismissed the RICO claim and declined to exercise jurisdiction over the state law claims. She dismissed the RICO claim on the ground that Strates couldn't satisfy RICO's "proximate cause" element, i.e., couldn't prove any state of facts showing that the illegal activities proximately caused Strates's injury of not receiving the 2002 midway contract, even though Strates had operated the contract for 50 years uninterrupted before the criminal conspiracy. Judge Flanagan emphasized that the 2002 contract was open to bidding, other bidders weren't involved in the criminal conduct, the selection process for awarding the contract lacked definitive criteria, and the award of a contract entailed administrative discretion--i.e., Strates could only speculate that, but for the illegal conduct, it would've been awarded the 2002 midway contract. Thus, she dismissed the RICO claim.
Then came today's case: after the federal court declined to exercise jurisdiction over the state law claims, Strates filed this action against the defendants in Wake County, alleging state law claims, namely a violation of Chapter 75 and various torts. Defendants moved to dismiss, arguing that because Judge Flanagan concluded that Strates couldn't satisfy the RICO element of proximate causation, Strates should be collaterally estopped from relitigating proximate causation, and therefore should be estopped from bringing the state law claims, since they, too, required a showing of proximate causation. The superior court denied their motions to dismiss.
The COA heard the interlocutory appeal, even though it was an appeal from the denial of a motion to dismiss, on the basis that res judicata and collateral estoppel implicate a substantial right. The COA then reversed the trial court, holding that Strates was collaterally estopped from relitigating the proximate causation issue, and that therefore its state law claims had to be dismissed: "the state claims must fail based upon the federal court's prior ruling on the issue of causation," the COA held. A sensible result.
This case demonstrates the difficulty of establishing causation in the bidded-contract context. A plaintiff typically can only speculate that "but for" the challenged conduct, the plaintiff would've been awarded the contract. This case really drives home the point, because in this case causation was rejected (at the Rule 12(b)(6) stage, no less) even though the plaintiff had previously performed the contract for 50 years uninterrupted and argued that it could expected to be awarded the contract again. If a plaintiff can't get past Rule 12 on an inference that it would've been awarded the same contract it had performed for a half century, it's difficult to imagine any plaintiff surviving a motion to dismiss in the context of a bidded contract.
This case is also important for reinforcing the importance of proximate cause as an essential element of a Ch. 75 claim.
For more than 50 years uninterrupted, the plaintiff, Strates, had performed the contract to operate the midway at the annual state fair in Raleigh (you know, the place with chocolate covered snickers bars). In 2002 the midway contract went to Amusements of America (AOA). After investigations, it was determined that the contract was the product of criminal acts (only bribery, money laundering, extortion, conspiracy, election law violations, mail/wire fraud, witness tampering, etc.). Agriculture Commissioner Phipps and many others pleaded guilty or were convicted of crimes.
There then ensued a civil action in federal court (EDNC) filed by Strates against AOA and the other criminal coconspirators, including Phipps. That action alleged a violation of the federal RICO statute, as well as state law claims. The district court (Judge Flanagan) dismissed the RICO claim and declined to exercise jurisdiction over the state law claims. She dismissed the RICO claim on the ground that Strates couldn't satisfy RICO's "proximate cause" element, i.e., couldn't prove any state of facts showing that the illegal activities proximately caused Strates's injury of not receiving the 2002 midway contract, even though Strates had operated the contract for 50 years uninterrupted before the criminal conspiracy. Judge Flanagan emphasized that the 2002 contract was open to bidding, other bidders weren't involved in the criminal conduct, the selection process for awarding the contract lacked definitive criteria, and the award of a contract entailed administrative discretion--i.e., Strates could only speculate that, but for the illegal conduct, it would've been awarded the 2002 midway contract. Thus, she dismissed the RICO claim.
Then came today's case: after the federal court declined to exercise jurisdiction over the state law claims, Strates filed this action against the defendants in Wake County, alleging state law claims, namely a violation of Chapter 75 and various torts. Defendants moved to dismiss, arguing that because Judge Flanagan concluded that Strates couldn't satisfy the RICO element of proximate causation, Strates should be collaterally estopped from relitigating proximate causation, and therefore should be estopped from bringing the state law claims, since they, too, required a showing of proximate causation. The superior court denied their motions to dismiss.
The COA heard the interlocutory appeal, even though it was an appeal from the denial of a motion to dismiss, on the basis that res judicata and collateral estoppel implicate a substantial right. The COA then reversed the trial court, holding that Strates was collaterally estopped from relitigating the proximate causation issue, and that therefore its state law claims had to be dismissed: "the state claims must fail based upon the federal court's prior ruling on the issue of causation," the COA held. A sensible result.
This case demonstrates the difficulty of establishing causation in the bidded-contract context. A plaintiff typically can only speculate that "but for" the challenged conduct, the plaintiff would've been awarded the contract. This case really drives home the point, because in this case causation was rejected (at the Rule 12(b)(6) stage, no less) even though the plaintiff had previously performed the contract for 50 years uninterrupted and argued that it could expected to be awarded the contract again. If a plaintiff can't get past Rule 12 on an inference that it would've been awarded the same contract it had performed for a half century, it's difficult to imagine any plaintiff surviving a motion to dismiss in the context of a bidded contract.
This case is also important for reinforcing the importance of proximate cause as an essential element of a Ch. 75 claim.
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