Petitioners Brief — Klehr v. AO Smith Corp.
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Supreme Couct, U S.
FILE D
FEB 21 1997
y)
No. 96-663 CLERK
tu the '
Supreme Count of the United States
October Term, 1996
MARVIN KLEHR AND MARY KLEHR
Petitioners,
Vv.
A.O. SMITH CORPORATION AND
A.O. SMITH HARVESTORE PRODUCTS, INC.,
Respondents.
ON WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
PETITIONERS’ BRIEF ON THE MERITS
Charles A. Bird Mary R. Vasaly
Counsel of Record Michael C. McCarthy
Bird and Jacobsen Of Counsel
305 Ironwood Square Maslon Edelman Borman
300 Third Avenue SE & Brand,
Rochester, MN 55904 a Professional Limited
(507) 282-1503 Liability Partnership
3300 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
(612) 672-8200
Malcolm McCune
Maddin, Miller, and McCune
300 James Robertson Parkway
Nashville, Tennessee 37201
(615) 254-8756
Counsel for Petitioners
1997 — Bachman Legal Printing & (612) 339-9518 @ FAX (612) 337-8053
Petitioners, Marvin and Mary Klehr, are Minnesota dairy
farmers who appeal from a summary judgment, dismissing
their RICO claim on statute of limitations grounds. They raise
two issues on appeal:
Does the statute of limitations bar Petitioners’ civil RICO
claim where Respondents continued to commit predicate
and accumulating injuries to their business and property
within four years of commencing suit?
Did Respondents’ fraudulent, self-concealing conduct and
acts of fraudulent concealment suspend the statute of
limitations on Petitioners’ civil RICO claim?
TABLE OF CONTENTS
QUESTIONS PRESENTED FOR REVIEW ..........
po Eg, eeereere Prey rr eS
TABLE OF AUTHORITIES .............0000ee.
CITATION OF THE OFFICIAL
REPORT OF THE UNDERLYING OPINIONS .......
STATEMENT OF JURISDICTION ................
STATUTES ATISSUE ............... ach Fests
- STATEMENT OF THE CASE AND FACTS .........
I. A.O. Smith Begins to Manufacture the Harvestore . .
Il. Why Harvestores Don’t Work .................
A. AClosed System Must “Breathe.” ...........
B. Harvestore Research Demonstrates that
AOSHPI’s Claims are False. ...............
II] AOSHPI Concealsthe Fraud ..................
A. AOSHPI Told Farmers That Damaged Feed
Was “Good Harvestore Feed.”
B._ Harvestore Construction Made Detection of the
CC ou cok eee bee one tees
. e282 € 80 8 @.8-8 2
IV.
1. Farmers cannot examine the inside of the silo
FE RE ee Pe 6
2. The unloader grinds signs of mold into the
OS fs oc et cdccdc Mile Laie 7
C. AOSHPI Invited the Farmers’ Reliance ..._ 8
1. AOSHPI Claims Harvestores Are Backed By
Wa « phic uu cGucaewes seks &
| were “smart” and “happy” farmers... 4
| sodoo end tate pinnile
D. AOSHPI Suppressed Complaints and Prevented
the Dissemination of Research Information .__. |!
Marvin and Mary Klehr Purchase their Harvestore _ 12
V. Marvin Klehr Discovers That the Harvestore Has
Been Poisoning HisCattle ... =. ssiwi‘wsti‘(‘(‘(i‘ és; 16
Ve. Se Cee 6 Ss be Se ada Vawuereeas 17
A. The Distnct Court's Decision ...--.—s—s—sisi(‘(é‘aa 18
B. The Eighth Circuit’s Decision ... ......... 19
SUMMARY OF ARGUMENT................... 20
RE 54 0 Vawaantas canis. aes ee 22
Ill
THIS COURT REVIEWS THE ENTRY
OF SUMMARY JUDGMENT DE NOVO ....... 22
THE COURT APPLIED AN INCORRECT
ACCRUAL RULE: THE KLEHRS’ CLAIM IS
NOT BARRED BECAUSE AOSHPI CONTINUED
TO COMMIT PREDICATE ACTS WITHIN
THE LIMITATIONS PERIOD ............... 22
A. The Court Should Choose a Uniform Accrual
B. The Last Predicate Act Rule Promotes the
Purposes Underlying Civil RICO ............ 24
1. The last predicate act rule enhances civil
RICO’s role as a supplement to RICO’s
criminal enforcement provisions......... 24
2. The last predicate act rule offers RICO victims
full compensation... . MI Pr
C. The Last Predicate Act Rule Simplifies the
judicial Task and Reduces Litigation... ... 31
D. The Eighth Circuit's Injury and Pattern
Discovery Accrual Rule Fails to Promote the
Purposes Underlying RICO... -—s—s_i.. 32
THE EIGHTH CIRCUIT MISAPPLIED
THE PATTERN PLUS INJURY STANDARD ... 34
A. The Eighth Circuit Improperly Placed the
Burden of Proofonthe Klehrs............. 34
IV
B. The Klehrs’ Failure to Discover That the
Harvestore Caused Heat Damage to Their Feed
and That the Feed Damaged the Cattle Was
investigation of herd health problems ___. 38
prudent farmer standards ......-.—s.—s—si. 38
b. AOSHPI’s “puffery” is irrelevant... 39
IV. THE EIGHTH CIRCUIT ERRED WHEN
IT REJECTED THE KLEHRS’ RICO CL4™
FOR INJURIES OCCURRING WITHIN "OUR
YEARS OF COMMENCEMENT OF THE
ACTION ... errr errr i | 41
A. A New RICO Claim Accrues With Each
Injury _. | ors 4)
B. Because AOSHP! Committed Predicate Acts
Within the Limitations Pernod, the Klehrs Have
an Additional Basis For Recovery of their
Damages | 42
V. AOSHPI’S FRAUDULENT CONCEALMENT
PREVENTED THE RUNNING OF THE
FOUR-YEAR LIMITATIONS PERIOD ........ 45
EG 1. Lodsiclbbe cones coekeied vex 49
TABLE OF AUTHORITIES
FEDERAL CASES
Adickes v. S. H. Kress & Co., 398 U.S. 144 (1970) ... . 35
Agency Holding Corp. v. Malley-Duff & Associates,
Se ED eens ccndcaeuaun 23,24,25
27,30,32
33
Agristor Leasing v. A.O. Smith Harvestore Products,
Inc., 869 F.2d 264 (6th Cir. 1989) ........... 40
Agristor Leasing v. Saylor, 803 F.2d 1401
a 8 ae rennet 39
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) . 22
Augustine v. GAF Corp., 971 F.2d 129 (8th Cir. 1992) . 35
BMW of North America, Inc. v. Gore, 116 S. Ct.
SEE fu 6.0s bald Sekt Gere Bases s 44,47
Bieter v. Blomquist, 987 F.2d 1319 (8th Cir.) ...._ 44
Butler v. Local Union 823, 514 F.2d 442 (8th Cir.),
cert. denied, 423 U.S. 924(1975) .......... 33
Celotex Corp v. Catrett, 477 U.S. 317 (1986) ... 22,34,35
County of Cook v. Berger, 648 F. Supp. 433
8 8 Ree te ee eee dia
Davis v. Grusemeyer, 996 F.2d 617 (3d Cir. 1993) . 23,45
vi
Elder v. Holloway, 510 U.S. 510, 114 S. Ct. 1019
PPT VOTES TE ECT TL TET ETT 22
Emrich v. Touche Ross & Co., 846 F.2d 1190
(9th Cir. 1988) ..... a a ee 45
Granite Falls Bank v. Henrikson, 924 F.2d 150
EL, DEED n.66cccedGenoevyavees 25,30,42
Grimmett v. Brown, 75 F.3d 506 (9th Cir. 1996),
cert. dismissed, 117 S. Ct. 759(1997) ........ 23
Grunewald v. United States, 353 U.S. 391 (1957) .... 26
H.J., Inc. v. Northwestern Bell Tel. Co.,
492 U.S. 229 (1989) ....... 2... 4.5... 25,28,30
32
Hildebrandt v. Allied Corp., 839 F.2d 396
SS ee 39
Hines v. A.O. Smith Harvestore Products, Inc..,
880 F.2d 995 (8th Cir 1989) ............... 38
Holmberg v. Armbrecht, 327 U.S. 392 (1946) .... 21,45
Keystone Insurance Co. v. Houghton, 863 F.2d 1125
SS, Cid Seaeike ret seeyes 26,28,30
33
Klehr v. A. O. Smith Corp., 875 F. Supp. 1342
(D. Minn. 1995).................... 1, 18, 19
Klehr v. A. O. Smith Corp., 87 F.3d 231
CR, cciieonecdvecens 1, 19, 20,
. 23, 32, 36, 43
Estate of Korf v. A.O. Smith Harvestore Products, Inc.,
917 F.2d 480 (10th Cir. 1990) ............ 4,5,6
Linkstrom v. Golden T. Farms, 883 F.2d 269
oe re Pet. poe ee 38
Matsushita Electric Industrial Co. v. Zenith Radio Corp.,
Se ED onc ccc cucbbesovedecks 22
McCool v. Strata Oil Co., 972 F.2d 1452
IS EE Re ee 45
Poller v. Columbia Broadcasting System, Inc.
368 U.S. 464 (1962) ....................., 36
Reed v. United Transport Union, 488 U.S. 319
SUE wile no 625 be meaaceee wees wane 24,29
Riddell v. Riddell Washington Corp. , 866 F.2d 1480
(D.C. Cir. 1989)
Riverwoods Chappaqua Corp. v. Marine Midland
Bank, N.A., 30 F.2d 339 (2d Cir. 1994) __.. 23, 45
Robertson v. Seidman & Seidman, 609 F.2d $83
8 eee eee eee 46
Rodriguez v. Banco Central, 917 F.2d 664
GG UD kv ope dececccecscevcc 23,28,33
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479
SPUN 0 hARDs bv cs cudowdeu release. 24,25,27
29,31,33
43
Vili
Smith v. Duff & Phelps, Inc., 5 F.3d 488
REE) 220s. Sed deSn davis ba oes 21,36
Sperry v. Barggren, 523 F.2d 708 (7th Cir. 1975) ..... 46
State Farm Mutual Automobile Insurance Co. v.
Ammann, 828 F.2d 4 (9th Cir. 1987) .... 21,23,42
43
Tomera v. Galt, 511 F.2d 504 (7th Cir. 1975),
cert. denied, 502 U.S. 1250(1991) .......... 46
Toussie v. United States, 397 U.S. 112 (1970) ....... 26
United States v. Bethea, 672 F.2d 407 (Sth Cir. 1982) . 26
United States v. Darden, 70 F.3d 1507 (8th Cir. 1995),
cert. denied, 116 S. Ct. 1449(1996) ......... 26
United States v. Diebold, Inc., 369 U.S. 654 (1962) 21,35
United States v. Field, 432 F. Supp. 55
(S.D.N.Y. 1977), affd, 578 F.2d 1371 (2d Cir.),
cert. dismissed, 439 U.S. 801(1978) ........ 26
United States v. Persico, 832 F.2d 705 (2d Cir.),
cert. denied, 486 U.S. 1022 (1987) .......... 26
United States » Starrett, 55 F.3d 1525 (11th Cir. 1995),
cert. denied, 116 S. Ct. 1335 (1996), ..... 26, 31
United States v. Torres Lopez, 851 F.2d 520
(ist Cir. 1988), cert. denied,
GP PEED «og occ cscceveces 21, 23,26
United States v. Vogt, 910 F.2d 1184 (4th Cir.),
cert. denied, 498 U.S. 1083 (1990) .......... 26
Urland v. Merrell-Dow Pharmaceuticals, 822 F 2d
at 1268 (3d Cir. 1987) ................. 47,48
Volk v. D.A. Davidson & Co., 816 F.2d 1406
ee ene Doar 45
Wilson v. Garcia, 471 U.S. 261 (1985) ........ 24,30,32
Wolin v. Smith Barney, Inc., 83 F.3d 847
GY DOD: scab iu cules nck Ove 21,45,47
48
Zenith Radio Corp. v. Hazeltine Research, Inc.,
oe Be eer eee 29,41,42
STATE CASES
Chitwood v. A. O. Smith Harvestore Products, Inc..,
489 N.W.2d 697 (Wis. Ct. App. 1992) .... 37,40
DHuyvetter v. A.O. Smith Harvestore Products, Inc.,
475 N.W.2d 587 (Wis. Ct. App. 1991) ....... 40
First National Bank of Louisville v. Brooks Farms,
821 S.W.2d 925 (Tenn. 1991) .............. 39
Kronebusch v. MVBA Harvestore System,
488 N.W.2d 490 (Minn. Ct. App. 1992) ...... 16
Lollar v. A.O. Smith Harvestore Products, Inc.,
795 S.W.2d 441 (Mo. Ct. App. 1990) ..... 6,39
FEDERAL STATUTES
Bod. BR. Civ. B. Gla)... ccc ccc cece cece e cr eeenss 35
§ o> 3 2 errr erererer rere 22
Pub. L. 91-452, § 904(a), 84 Stat. 947 ............. 27
of tte | eeeeeererrererr Pree eer 25
18 U.S.C. SIGGICINB) .... 2... eee eee eee 1,2,17,29
ET rere er 1,22
PCTS | errr er eee eee 2,3,22
tl) Fal) ree l
MISCELLANEOUS
Beard, Glenn, et al., Racketeer Influenced
and Corrupt Organizations, 33 Am. Crim.
L. Rev. 929, 957 (1996) ............--505- 26
Bradley, Craig M., Racketeers, Congress and the Courts:
An Analysis of RICO, 65 lowa L. Rev. 837,
B3B-45 (1980) .. eee 25
Friedenthal, Jack H., Cases on Summary Judgment:
Has There Been a Material Change
in Standards? 63 Notre Dame
L. Rev. 770, 781 (1988) ......... creer eer 35
xi
Hackenberg, Edwin Scott, Comment,
All the Myriad Ways: Accrual of Civil RICO
Claims in the Wake of Agency Holding
Corp. v. Malley-Duff 48 La. L. Rev. 1411
er rate ee ee ee eee 23
Humes, Mary S., Note, R/CO and a Uniform Rule of
Accrual, 99 Yale L.J. 1399(1990) .......... 23
Risinger, D. Michael, Another Step in the
Counter-Revolution: a Summary Judgment on
the Supreme Courts New Approach to
Summary Judgment, 54 Brook.
Re I eo aed OO Ve seca als 35
Stempel, Jeffrey W., A Distorted Mirror: The Supreme
Court's Shimmering View of Summary
Judgment, Directed Verdict and the
Adjudicative Process, 49 Ohio St. L.J. 95,
159 (1988) jee Mee eee es Seeks 04's ea i 35
xii
CITATION OF THE OFFICIAL
REPORT OF THE UNDERLYING OPINIONS
The opinion of the United States Court of Appeals for the
Eighth Circuit is reported at 87 F.3d 231 (8th Cir. 1996). The
opinion of the United States District Court for the District of
Minnesota is reported at 875 F. Supp. 1342 (D. Minn. 1995).
STATEMENT OF JURISDICTION
The Court of Appeals entered its judgment by denying the
Petition for Rehearing on July 29, 1996. Petitioners filed their
Petition for Certiorari on October 24, 1996. This Court
granted the Petition on January 10, 1997. The jurisdiction of
the Supreme Court is invoked under 28 U.S.C. § 1254(1).
STATUTES AT ISSUE
18 U.S.C. §1962(c) provides:
It shall be 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 or
collection of unlawful debt.
“Racketeering activity” is defined in 18 USC. §
1961(1){B) to include “any act which is indictable under any
of the following provisions of title 18, United States Code:
_. . section 1341 (relating to mail fraud), section 1343
(relating to wire fraud)... .”
“Pattern of racketeering activity” is defined in 18 U.S.C.
§ 1961(5) as “requir[ing] at least two acts of racketeering
activity, . . . the last of which occurred within ten years
(excluding any period of imprisonment) after the commission
of a prior act of racketeering activity.”
18 U.S.C. § 1964(c) provides:
any person injured in his business or property by
reason of a violation of section 1962 of this chapter
may sue therefor in any appropriate United States
district court and shall recover threefold the damages
he sustains and the cost of the suit, including a
reasonable attorney’s fee.
STA NT OF T NDF
I. A.O. Smith Begins to Manufacture the Harvestore.
In 1949, A.O. Smith (“Smith”) began to manufacture and
sell a new “Harvestore” silo which, it claimed, combined
superior feed with labor saving hardware that automatically
unloaded and delivered the feed to livestock. See, e.g.,
Appendix/Lodging (“App.”) 714-16; 823-24; 719-20; 740-42.
Smith and its wholly-owned subsidiary, A.O. Smith
Harvestore Products, Inc (collectively, hereinafter
“AOSHPT’), marketed and manufactured this “revolutionary”
Harvestore silo through authorized dealer/agents.
AOSHPI claimed that the Harvestore minimized spoilage
by preventing oxygen from coming into contact with stored
feed. See, e.g., App. 715-16. Although it had not discovered
how to retard feed spoilage in silos, AOSHPI manufactured a
silo which appeared to “seal” stored feed from the outside air,
modeling the Harvestore after the glass canning jars with
which farmers were familiar. App. 668. In sales
2
presentations, AOSHPI highlighted the silo’s “marine-type”
doors and “hatches” with gaskets. App. 715; 772; 781; 668.
AOSHPI’s promotion of the “oxygen-limiting” idea did not
stop at mere appearances, however. In advertisements it
published for more than forty years, AOSHPI repeatedly told
farmers that the Harvestore would prevent air from coming
into contact with the feed. See App. 774; 749-75.
Il. Why Harvestores Don’t Work.
A. A Closed System Must “Breathe.”
AOSHPI’s “revolutionary” idea did not work in practice
because a silo cannot be sealed. First, a sealed container must
have a way to exchange gas or “breathe” in order to equalize
the pressure of the gas inside as it expands and contracts with
changes in air temperature. App. 823-24; 774; 659. Second,
farmers must open silos at the bottom several times every day
to remove feed for cattle and open them at the top,
periodically, to fill them. No one has solved the problem of
“sealing” a silo under these conditions. Cf App. 658-59. But
AOSHPI claimed it had. App. 781.
AOSHPI told farmers that it solved the first problem by
using a lung-like “breather” bag system. App. 686; 781. The
hreather bags hang at the top of the silo and, theoretically,
expand and contract to accommodate head space gas
expansion and contraction due to daily temperature changes.
Id AOSHPI claimed that any oxygen entering the silo would
be contained in the breather bags and would not contact the
feed. App. 780-81.
AOSHPI told farmers it had also solved the problem of
air leakage during periodic filling and daily feeding. It claimed
that air entering the silo during filling and feed-out would be
converted in the fermentation process to a harmless gas within
a short time. App. 812; 781.
B. Harvestore Research Demonstrates that
AOSHPI’s Claims are False.
AOSHPI knew from its own research studies that no
science stood behind its claims. Its research had not only
failed to prove that Harvestores actually worked, but
repeatedly demonstrated that AOSHPI’s claims were false.
AOSHPI’s scientists confirmed that when a farmer opened the
unloader door to remove feed for his livestock, the breather
bags in the silo collapsed, causing air to rush into the silo.
App. 916; 899-900; 890. Negative pressure and the pumping
action of the unloader then forced oxygen into the feed mass
itself instead of merely exposing the surface feed to air as in a
conventional silo. App. 916-18; 957-59. See Estate of Korf
v. A.O. Smith Harvestore Prods., Inc., 917 F.2d 480, 482
(10th Cir. 1990).
AOSHPI knew that exposure to oxygen levels greater
than 2% causes heat damage and spoilage to feed and reduces
its nutritional value App. 892. In a Harvestore, oxygen
contact with the feed exceeds 20% within minutes after the
silo is opened for feeding and never returns to less than 6%
during the daytime. App. 899-900. See also App. 907
(oxygen reaches feed at every feed-out),; App. 914 (oxygen
reaches feed 96% of days in last four months of storage).
Thus, AOSHPI’s scientists observed: “Filling and feed out
operations present a structure atmosphere control problem.”
App. 900.
Despite extensive testing over many years, AOSHPI
never solved its “structure atmosphere control problem”:
We in R&D do not have any good information on
what percentage of operating Harvestore systems
might be judged unsatisfactory with respect to
oxygen exposure.
App. 922. See also App. 875-77, 921; 926 (“There are great
information gaps in our knowledge.”). By 1982, AOSHPI’s
engineers still did not know how to make “the Harvestore
system” work. App. 958
Yet, during the forty years that AOSHPI conducted its
internal research, it continued to market the Harvestore silos
as oxygen-free/oxygen limiting without significant design
changes. Knowing that the oxygen which infiltrated at each
feedout could cause heat damage to silage, it told farmers that
its engineers had designed a system that “did not allow the
structure to fill with oxygen” during unloading. App. 820
AOSHPI also continued to tell farmers that the “Harvestore
system protects stored feeds from oxygen” and that “[t)he
Harvestore . . . system prevents oxygen from coming into
contact with the feed.” App. 774, 715, 780. See also App
488-92
Il. AOSHPI Conceals the Fraud.
In order to continue to sell Harvestores, AOSHPI needed
to prevent farmers from suspecting that their Harvestore
claims were false. Their concealment effort was a major
component of their overall marketing strategy
A. AOSHPI Told Farmers That Damaged Feed
Was “Good Harvestore Feed.”
The most ingenious idea that AOSHPI devised to avoid
detection of its nationwide fraud on farmers was an
advertising strategy which capitalized on the Harvestore’s
production of spoiled feed. As AOSHP!I knew from its years
of research, feed which is warm to the touch, dark in color and
smells of molasses is heat-damaged. App. 162, $2(A); 166-
67, 77. Heat damage occurs when feed is exposed to oxygen.
Id. Heating of feed destroys the nutritional value of the stored
5
undigestible and nutritionally unavailable to the cow. /d
When heat-bound protein is fed to a cow, the cow is unable to
digest the protein and receives a deficient diet. App. 162,
§2(A). It will experience weight loss, a drop in milk
production, a drop in reproductive performance and a
reduction in overall health, App. 158, 99. See also Loliar
A.O. Smith Harvestore Prods., Inc., 795 §.\W.2d 441, 444 ¢
Mo. Ct. App. 1990).
AOSHPI ran a series of “scratch and sniff’ advertisements
which employed a burnt molasses odor to characterize the
smell of “good” Harvestore feed. App. 804. This odor
actually describes feed damaged by excessive oxidation App
162, 2(A). See also App. 659. AOSHPI also ran ads which
advised farmers that they should expect warm feed and that
the warm feed was particularly good for cows. App. 172, 94
By telling farmers that they should expect warm, dark feed
that smelled of molasses, AOSHPI prevented farmers from
suspecting that there was anything wrong with the silo when
they observed these characteristics in their Harvestore feed.
B. Harvestore Construction Made Detection of the
Scheme Difficult.
l. Farmers cannot examine the inside of the
silo while it is in use.
The basic premise of a Harvestore is that it is a “sealed”
system. Except for a small opening at the top of the silo
where the farmer automatically blows in feed and a small
opening at the bottom where the chain unloader protrudes, it
contains no doors or windows. App. 772. If a farmer were to
climb the silo and look into the small opening at its top, it is
unlikely that he would detect any problem with the feed since
AOSHPI had taught him that heat damaged feed was “good
6
Harvestore feed.” App. 772; 177, 911. It would be equally
difficult for a farmer to detect any problem with the feed by
looking into the Harvestore at the bottom. The silo’s “access”
panel consists of a small plate bolted onto the Harvestore just
above the smal] opening for the unloader chain. AOSHP!I put
a sign over the plate which warns:
DANGER
DO NOT ENTER
NOT ENOUGH OXYGEN
TO SUPPORT LIFE
See App. 655 (Picture), 654. Even were a farmer to unbolt
the access door, all he would see is a solid three-four foot
deep wall of “good [heat-damaged] Harvestore feed.” App.
669. This silage is under tons of pressure and is “extremely
hard tc chop even with an ax.” App. 658. As described
below, any molds grew in the intenor feed dome deep within
the silo
2. The unloader grinds signs of mold into the
feed.
One of the “revolutionary” features of the Harvestore is
that the silo unloads from the bottom rather than the top like
a conventional silo See, e.g, App. 686, 720. Bottom
unloading of forage feeds is possible only because the
Harvestore is sold with a chain unloader similar to mining
machines used to “chew coal from veins deep beneath the
earth.” App. 720. This unloader can remove feed that is not
“free-flowing” and is under tremendous pressure from the feed
stack above. App. 824, 658. The chain unloader “chews”
through the feed, blending the layers as the feed comes out of
the silo. App. 824; 689.
Exposure to oxygen causes mold growth as well as heat
damage to feed. Vast amounts of mold grow primarily in the
“dome” in the bottom of the feed stack created by the action
of the chain unloader App. 669. The chain unloader
systematically chops this mold into the feed as the feed is
discharged so that it is not readily discernable to the farmer.
App. 177, 911.
C. AOSHPI Invited the Farmers’ Reliance.
AOSHPI provided Harvestore owners with a deluge of
post-sale advertising calculated to build the farmers’ trust in
the company and assure him that: (1) AOSHPI was an
established business and could be trusted, (2) years of
research, both internal and “independent,” confirmed
AOSHPI'’s claims; and (3) many, many “smart” and successful
farmers have put Harvestore principles into practice through
every day use of the silos. App. 808-809, 730-32.
AOSHPI’s entire “after sale” campaign was calculated to
prevent farmers from learning that the feed frorn their
Harvestores was no better than the feed from ordinary silos
and could actually harm the farmers’ cattle and business.
1. AOSHPI Claims Harvestores Are Backed
By Years of Research.
AOSHPI told farmers that the Harvestore was backed by
years of research and that the research would be disclosed to
the farmer. App. 657 (research findings are “passed along
to... dealer” who, in turn, makes them “available to you”),
App. 782 (results are “available”), App. 779 (Harvestore
based on “basic, proven principles”); App. 809 (continuing
research at more than 60 colleges and universities). In order
to add credibility to the research, they hired “independent”
experts, including Professor George Marx, to publish
gave live presentations regarding Harvestore storage to
dairymen. App. 477-81. AOSHPI never disclosed to Dr.
Marx, however, any of its own internal research which
demonstrated that it had been unable to seal the silo. App.
481-83. Thus, AOSHPI used its long history and years of
research to cultivate farmer trust and confidence, but rather
than making its research available to the farmers, selectively
published the good parts of the studies and buried the bad.
App. 492-93; 730, 705-706. Farmers were led to conclude
that there was no question that the silos performed as
represented.
2. AOSHPI claimed that Harvestore farmers
were “smart” and “happy” farmers.
Not only did Harvestore advertisements invite trust and
confidence in AOSHPI, they suggested that there were many
“smart” Harvestore farmers who were happy and satisfied
with their silos. App. 807 (“60,000 .__ _ structures in use
around the world”) Harvestore magazines contained
numerous success stories and testimonials. App. 812-13; 51-
60, 709-11. AOSHPI’s marketing materials created a general
belief in the dairy industry that Harvestores were the best
available feed storage system. App. 176, 99. As a result,
AOSHPI sold tens of thousands of Harvestores throughout
the country. App. 807. The fact that thousands of blue
Harvestore silos dotted the countryside suggested to farmers
that the basic design of the Harvestore was sound.
3. Harvestore “experts” provided farmers
with advice and help.
Emphasizing its superior knowledge of the scientific
aspects of farming and feed storage, AOSHP! “educated”
9
farmers about the principles which it asserted “proved” that
Harvestores worked. It provided farmers with countless
articles and seminars. See, e.g., App. 730; 676-77, 745; 467-
68. It counseled complete farmer reliance on its salesmen to
assist with all aspects of farm management. App. 690-91 (The
Harvestore dealer “doesn’t figure his job is done when a
Harvestore is sold—he realizes that a sale marks the start of
his real job. . . Counseling owners on proper farm
management practices is an important part of the Harvestore
sales representative's job”), App. 717; 657; 721; 745, 768-69
(your “Partner in Progress—Count on him”). Farmers were
told that Harvestore dealers would provide: “Counseling and
assistance in areas such as feedlot planning, feedroom layout
and ration formulation.” App. 745. Thus, Smith and AOSHPI
advised:
Your local Harvestore representative is more than a
salesman. __ He's been through an intensive training
program to learn the latest in crop management .._.
animal nutrition _. farmstead planning... agriculture
finance and other key farm management areas. Add
to all that his special knowledge of crop and
livestock conditions in your area and you can see
why he’s a good man to know... .Your Harvestore
man is no theoretical dreamer... the information
he'll give you is based on the experiences of
thousands of successful Harvestore farmers around
the world. And, backing him up is the world’s
largest manufacturer of feed processing and
automation equipment __ with more than a quarter
century of helping farmers boost profits.
App. 721 (“Meet your Agribusiness Answer Man”). See also
App. 792
10
AOSHPI’s “expert” representatives contacted farmers
periodically after the silo sale. If the farmer told the
Harvestore salesman about a farm problem, the salesman
would tell farmers that the problem was attributable to silo
maintenance or farm mismanagement. App. 461-64. The
salesmen were trained to advise farmers that any mold they
saw in feed was normal and would not harm the cows. App.
470-71.
After constant exposure to AOSHPI’s post-sale
messages, the farmer was highly unlikely to suspect that any
problems he was experiencing on his farm were caused by his
revolutionary Harvestore silo. It was far more likely that a
farmer would conclude that if there was a problem, its source
lay in his own practices. See, e.g., App. 484-85 (Harvestore
dealer describes how he blamed himself for his own farm
problems).
D. AOSHPI Suppressed Complaints and Prevented
the Dissemination of Research Information.
Despite AOSHPI’s concealment of the fraud, problems
with the silos surfaced in California and farmers began to sue.
App. 486-92. AOSHPI’s internal research studies figured
prominently in these suits App. 873-74. Rather than cease
manufacturing the silos, however, AOSHPI simply stopped
selling in California App. 492-94.
It then adopted internal procedures to prevent leakage of
internal research information to the public in future lawsuits.
As part of this scheme, James N. Johnson, Smith’s corporate
counsel and vice president, laid the groundwork to falsely
claim the attorney-client privilege:
In many respects, these memos formed every bit as
much damning evidence as did any of the
advertisements or promotional pieces upon which
Plaintiffs sought to rely.
***
. [A]nd when it appears that its mechanical problems
are yet far from solution, Lauggest thatthe writings wit
App. 873-74 (emphasis in original). As a result of AOSHPI’s
systematic concealment of documentary evidence, there is no
way of knowing what additional damaging research
information has been or still is in AOSHPI’s possession.
IV. Marvin and Mary Klehr Purchase their Harvestore.
Marvin and Mary Kiehr are Minnesceta farmers, who first
became ensnared in AOSHPI’s Harvestore scheme in 1974.
Marvin grew up on the family’s farm and attended school
through the 10th grade. App. 196. In 1974, the 29 year-old
Klehr had had full responsibility for the family farm for one
year.
That year, Richard Deutsch, an employee of MVBA
Harvestores Systems ("MVBA") an authorized AOSHPI
dealer, gave the Klehrs printed information about the purchase
12
of a Harvestore silo.' App. 219. Deutsch told Klehr, and the
written material and films Deutsch gave him confirmed, that
the silos were “oxygen free/oxygen limiting” because the
breather bag system kept oxygen from coming into contact
with feed. Klehr was told that good Harvestore feed would be
warm and dark and smell of molasses. App. 171-72; {ff 2, 3,
4, 420-21. Based on these oral representations and printed
material, the Klehrs bought a 25 foot x 80 foot Harvestore silo
for $64,000 on July 15, 1974. App. 171, 92; 455-57; 649.
Klehr began using the silo during the summer of 1975 to
store alfalfa haylage. App. 172, 94; 274. Each time he filled
it, the feed turned brown and warm and smelled like molasses.
App. 172, 94. Deutsch visited Klehr on his farm, examined
the feed and confirmed that it was “good” Harvestore feed.
App. 269-70.
Klehr fed the Harvestore feed to his cows without seeing
any problems until the summer of 1976. During that summer,
just after he had used all of the stored silage from 1975, Klehr
noticed a few small chunks of mold in the feed. App. 172-73,
4. When questioned about the mold, Deutsch explained that
'Klehr was also aware of Harvestores because his father bought a
smal] Harvestore in 1955, which he used pnmanily for grains. Klehr had not
expenenced problems with this small (17x40) silo because the smaller silos
do not always damage feed, having less head space air to accommodate
App. 165-67. In 1980, AOSHP! research concluded: “It has been indicated
in the past that unloader air intake to forage structures may be more of a
problem with the larger |greater than 20 foot] diameters.” App. 925. In
addiuion, some Harvestores, like Kiehrs’ smaller unit, use an auger to unload
free-flowing grains instead of a chain unloader which is used for forage
feeds. Grain silos do not form a dome in the feed like the forage silos,
making them less susceptible to oxygen degradation. Compare App. 669
with App. 670. As AOSHP! noted: “[T)here is a significant quantity of
oxygen input due to unloading with a chain unloader in alfalfa haylage ”
App. 923. The Kliehrs’ 1974 Harvestore was a 25 foot diameter structure
which used a chain unloader for alfalfa haylage.
13
Klehr should expect to see mold in the feed periodically due
to the air that was blown into the silo during fillings. Jd; App.
173, 9 4. Deutsch told him that this small amount of mold
would not harm the cattle. /d Kilehr accepted this
explanation because he had seen the same spoilage in other
storage systems. /d. He knew that the Harvestore would
keep spoilage to a “minimum,” but would not eliminate it
altogether. App. 802. After that, he was unconcerned when
he would see occasional mold in the feed because the silo
contained feed from several fillings. App. 276-77; 173, 94;
261-62.
In the spring of 1977, and every subsequent year, at the
time the silo was nearing empty, Klehr would be required to
discard a small amount of molded feed at the end of the feed
stack. App. 173, 94, 276-77. When he asked Deutsch about
this mold, Deutsch again explained that this was the top layer
of feed which had reached the bottom. App. 173; 94; 470-71.
Klehr believed the loss of this feed was insignificant given the
large size of the silo. App. 173, 94, 751; 308.
The existence of mold at these times did not lead Klehr to
suspect that his “good Harvestore feed” was heat-damaged
and would harm his cows. As noted above, Deutsch and
another MVBA representative, Ben Johannes, examined the
feed periodically. App. 474-75, 295. They sometimes
observed that it was chopped too dry or too coarse, too short
or too wet, but always told Klehr that it was generally
satisfactory Harvestore feed. App. 295-98. In fact, the
Harvestore salesmen told Klehr that Harvestores only generate
bad feed when there is a leak in the- silo or farm
mismanagement. App. 175-76, 98; 461-64.
From the time he purchased his silo, AOSHPI mailed
Klehr the Harvestore Farmer/Harvestore System Farming
magazine. App. 176, 9 9; 718-21. Every issue contained
testimonials from successful Harvestore farmers and numerous
advertisements and educational articles regarding Harvestore
14
use. Klehr also subscribed to Hoard’s Dairyman, a magazine
which regularly featured promotions and advertisements for
AOSHPI silos. App. 810. These materials confirmed Klehr’s
belief that he had purchased the “Cadillac” of silos and that
any problem on his farm must be due to his own farm
management or other causes.” Jd App. 722-45; 771.
Accordingly, he continued to use the silo on a daily basis.
In 1982, the Harvestore discharged a significant amount
of obviously spoiled feed at the end of the year. App. 290;
App. 173-74, 9 5. Deutsch inspected the feed and told Klehr
that whatever had caused the problem would be fixed. App.
292-93. MVBA repairmen came to the farm, inspected the
silo, replaced a broken breather bag and “resealed” the silo.
App. 173-74, 9 5. MVBA’s “repair” of the silo reinforced
Marvin Klehr’s belief that it was working properly. /d.
Sporadically, through the years, Klehr’s cows experienced
a number of apparently unrelated health problems. App. 174-
75, 4 6, 169,98. Although milk production increased for the
first two years after the Kiehrs’ purchase of the Harvestore,
these herd health problems negatively affected milk production
in later years. App. 174-75, 99 6, 7. Klehr attempted to
remedy what he believed were the various causes of these
problems. App. 168-70, 4 8
When Klehr asked experts, including veterinarians and
nutritionists, about the source of a particular problem, they
"Indeed, AOSHP! warned farmers not to relate their farm's success
or failure to the Harvestore “Buyer acknowledges that farming results are
very much the product of individual effort combined with vanous climatic,
growing and feeding conditions and therefore he recognizes thal any
adverusements, brochures, and other wnitten statements which he may have
read, including any farm profit plan with may have been shown to him, as
well as any oral statement which may have been made to him, concerning the
potenual of the Harvestore Structure and allied products, are not guarantees
and he has not relied upon them as such.” App. 650. °
15
recommended specific treatments. App. 174-75, | 6; 337-39.
None of the experts ever suggested that any or all of these
problems were caused by heat-damaged feed. All of the
problems the Klehrs’ herd experienced are common on dairy
farms and can be caused by numerous factors. App. 163,
2(E); 168-70, 98; 174-75, 9 6. Milk production, in particular,
can be affected by many different factors. App. 168, 8. The
Klehrs’ problems were not obviously related, either in
character or temporal proximity, to bad feed or to the Klehrs’
purchase of a Harvestore. App. 168-70, 9 8. Neither they nor
their advisors ever suspected that these diverse problems had
a single common cause or that the heat-damaged feed from the
Harvestore was slowly and insidiously poisoning their herd.
V. Marvin Klehr Discovers That the Harvestore Has
Been Poisoning His Cattle.
Klehr’s first suspicion that spoiled feed was injuring his
cows came when he read about a jury verdict against AOSHP1!
in a February 1991 newspaper article. See Kronebusch v.
MVBA Harvestore System, 488 N.W.2d 490 (Minn. Ct. App.
1992). He asked a veterinarian and nutritjonist from the
University of Minnesota, Dr. William Olson, to visit the farm
in the spring, at the time when the Harvestore feed was likely
to contain the occasional molds which Deutsch had told him
to expect at the end of the feed stack. App. 176-77, ¥ 10.
Before Olson arrived, Klehr unbolted the access panel
above the unloader and chopped through a 3% - 4 foot wall of
silage with a four-foot long ice chisel so he would be able to
see inside the 15 to 20-foot high feed dome. App. 315. After
14 - 2 hours of chopping he finally dug a hole large enough to
see inside. Jd What he saw astonished him: “There was mold
hanging all over the silage... . There was a spot up there
about the size of a good beach ball that was just solid gold.”
App. 316-17; 177,910. Although the feed was covered with
16
mold inside the silo, both Klehr and Dr. Olson noticed that the
“churning” action of the unloader caused the mold to
disappear when it emerged from the unloader door. App. 177,
{ 11. Upon seeing the extent of the mold inside the silo, Klehr
suddenly realized that the “good Harvestore feed” he had fed
his cattle for 15 years was actually damaged feed. App. 177-
78, 99 11, 12.
Each year, this heat-damaged feed caused the Klehrs new
injuries as their farming operation slowly deteriorated. App.
165-66, | 6. After he stopped feeding this spoiled feed to his
cattle, herd health and milk production improved dramatically.
App. 178, 9 12; 982.
VI. Statement Of The Case
Marvin and Mary Klehr commenced a Minnesota state
court action against Smith, AOSHPI and MVBA Harvestore
within a few months after Klehr discovered the Harvestore
fraud. During the course of that action, AOSHPI moved to
dismiss the case on statute of limitations grounds. The state
court judge denied the motion holding that “there were
genuine issues of material fact surrounding the timing and
reasonableness of the discovery of the fraud and the timing of
the discovery of causation and fraudulent concealment of the
grounds for the remaining claims.” Record ("R.") 129,
Affidavit and Exhibits of Charles A. Bird, Exhibit UU.
The Klehrs voluntarily dismissed their state court action
and commenced this action on August 27, 1993, asserting
claims against AOSHPI pursuant to the Racketeer Influenced
and Corrupt Organizations Act (“RICO” or “the Act”), 18
*Dr. Michael Behr compared the Klehr farm’s economic
performance with that of comparable operations and concluded that Klehr’s
damages for lost milk production between 1974 and 1993 totaled
$1,812,330. App. 960, 963.
17
U.S.C. §§ 1961-68. AOSHPI again moved for summary
judgment on statute of limitations grounds.
A. The District Court’s Decision
The district court found that the Klehrs did not know that
the Harvestore was damaging the feed until April 1991, citing
Marvin Klehr’s testimony regarding his inability to link the
damage to his farm operation to the Harvestore:
At the end of the year, I had an enterprise of hogs,
milk, crops, and who knows whatever else. It was
all thrown into one kitty, and I never once thought it
was because of my Harvestore not giving me the
profit or not doing what it was supposed to. Could
have been the bad hogs, or bad weather, bad crops .
_. I farmed long enough that you cannot project
ahead a whole year what you think you are going to
get, because it never comes out that way. You take
what the good Lord gives you.
875 F. Supp. at 1348. Yet, it held that the Klehrs “should
have discovered, through the exercise of reasonable diligence,
any fraud committed by Defendants long before 1987.” Jd. at
1350. It based its opinion on the fact that the connection
between the intermittent instances of mold in the feed and the
herd’s health problems “should have been apparent to Klehr
by the early 1980s.” /d. at 1349. It acknowledged that feed
and animal health experts had failed to link the herd’s health
problems to the Harvestore, but decided that K/ehr should
have made the connection. /d. at 1350. Thus, the court said
Klehr was negligent, first in failing to realize there was a
connection between the occasional mold in the feed and his
herd’s health problems and second, in failing to investigate
that connection to discover the fraud.‘ /d.
The court also rejected any tolling of the statute of
limitations based on fraudulent concealment on the grounds
that the Klehrs “had only to look at the feed coming from the
silo and observe the health of their herd” to discover the fraud.
Id. at 1351. The court also held that when AOSHP! told
Klehr that he should expect occasional mold in the feed; that
he should expect the feed to be warm, dark and smell of
molasses; that Klehr’s feed was “good Harvestore feed,” that
his silo had been “resealed”, and that research confirmed that
the silo worked; it was not engaged in any affirmative acts of
concealment. /d. at 1352, n.6.
B. The Eighth Circuit’s Decision
The Eighth Circuit affirmed the district court's summary
judgment against the Klehrs based on the following “injury
plus pattern discovery” accrual standard:
An action begins to accrue as soon as the plaintiff
discovers, or reasonably should have discovered,
both the existence and source of his injury and that
the injury is part of a pattern
87 F.3d at 238 (internal quotation marks and citation omitted)
Thus, the court held, “it is incumbent upon the Klehrs to show
that it would not have been reasonable to discover the
existence, source, and pattern of their injury by August 27,
1989.”
“Although the court discussed these facts in connection with the
Kiehrs’ common-law fraud claum, it appears to have applied that discussion
to the RICO claum. See id. at 1352
19
Noting that the Kiehrs “never asked [veterinary and
nutrition} consultants whether the Harvestore could have been
the source of the problems” (87 F.3d at 234), the court found
that they had not exercised due diligence. /d. at 239. Citing
its analysis of the common law fraud claims, the court agreed
mold in the feed (even if explained away by the Harvestore
representative) and the fact that the Klehrs had herd health
problems and decreased milk production (although Kilehr’s
advisors noted no connection between these problems and bad
feed), meant that “the Klehrs were on notice of a possible
cause of action for fraud and were required [as a matter of
law] to conduct a reasonably diligent investigation” of the silo
as a possible cause of the problems. /d. at 236.
The court rejected the Klehrs’ claim for continuing
damage under the separate accrual rule on the grounds that
later predicate acts must cause “independent” injuries to create
a separate claim. Here, the court held, “the injuries were the
same type, flow from the same source, and are part of one
cognizable patiern of conduct.” /d. at 239. Finally, the court
held that the Klehrs’ negligence “precluded” application of the
equitable tolling doctrine. /d at n.11.
This Court granted certiorari in order to address the
RICO claims. As shown below, the courts below erred in
both their construction of the law and their application of the
law to the facts Accordingly, the judgment should be
reversed and the case remanded for tral.
SUMMARY OF ARGUMENT
The Eighth Circuit applied an erroneous “injury plus
pattern discovery” accrual rule to determine whether the
statute of limitations had run on the Klehrs’ RICO claims.
This Court should reject that rule, and adopt the “last
predicate act” accrual rule used for RICO criminal
20
prosecutions, in order to further the policy objectives
embodied in RICO and simplify RICO litigation. Under that
rule, the Kilehrs’ claim did not accrue until AOSHPI
committed the last predicate act in the pattern. See, e.z.,
United States v. Torres Lopez, 851 F.2d 520, 525 (ist Cir.
1988), cert. denied, 489 U.S. 1021 (1989). Because the
Klehrs submitted evidence establishing a predicate act in the
barred.
Even if the Eighth Circuit’s “injury plus pattern
discovery” accrual rule applied, the courts below erred by (1)
placing the burden of proving that their claims were not time-
barred on the Klehrs and (2) resolving disputed issues of
material fact against them. AOSHPI failed to carry the burden
of establishing its statute of limitation defense. See Smith v.
Duff & Phelps, Inc., 5 F.3d 488, 492 n.9 (11th Cir. 1993). In
any event, because the Klehrs submitted evidence establishing
that they were not negligent in having failed to discover the
RICO injury and pattern within the limitations period,
AOSHPI was not entitled to judgment “as a matter of law” on
its statute of limitations affirmative defense. See United States
v. Diebold, Inc., 369 U.S. 654 (1962). At the very least, the
Klehrs are entitled to try their separately accrued RICO claims
for recovery of the damages caused by predicate acts
committed by AOSHPI during the four years preceding
commencement of the action See State Farm Mutual Auto.
Ins. Co. v. Ammann, 828 F.2d 4, 5 (9th Cir. 1987) (Kennedy,
J., concurring).
Finally, the Klehrs established that the accrual of their
RICO claim was tolled by AOSHPI’s acts of fraudulent
concealment. See Holmberg v. Armbrecht, 327 U.S. 392, 397
(1946), Wolin v. Smith Barney, Inc., 83 F.3d 847, 852 (7th
Cir. 1996). Accordingly, this Court should reverse and
remand for trial. ,
21
lL THIS COURT REVIEWS THE ENTRY OF
SUMMARY JUDGMENT DE NOVO.
Under Fed. R. Civ. P. 56(c), summary judgment may not
be granted unless “there is no genuine issue as to any material
fact and .. . the moving party is entitled to a judgment as a
matter of law.” See Anderson v. Liberty Lobby, Inc., 477
U.S. 242 (1986), Celotex Corp v. Catrett, 477 U.S. 317
(1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574 (1986). This Court reviews the lower court’s
determinations of law de novo. See Elder v. Holloway, 510
US.510,__, 114 S. Ct. 1019, 1023 (1994).
ll. THE COURT APPLIED AN INCORRECT
ACCRUAL RULE: THE KLEHRS’ CLAIM IS NOT
BARRED BECAUSE AOSHPI CONTINUED TO
COMMIT PREDICATE ACTS WITHIN THE
LIMITATIONS PERIOD.
In this case, the Klehrs seek to recover their damages
based on 18 U.S.C. § 1964(c):°
Any person injured in his business or property by
reason of a violation of section 1962 of this chapter
may sue therefore in any appropnate United States
distnct court and shall recover threefold the damages
he sustains and the cost of the suit, including a
reasonable attorney's fee.
*Klehrs’ § 1964(c) claim 1s based on AOSHPI's violations of 18
U.S.C. § 1962(a) and(c) To the extent § 1962(a) claums are governed by
a rule of accrual different from § 1962(c) claums, the Klehrs do not raise that
issue in Uus appeal
22
RICO contains no limitations period time-barring either civil
or criminal actions brought pursuant to the Act. Agency
Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 146,
155-56 (1987) (“Malley-Duff’). However, this Court held in
Malley-Duff that a four-year limitations period applies. /d. at
156. The Court expressly left open “the appropriate time of
accrual for a [civil] RICO claim.” /d. at 156-57.°
The Eighth Circuit dismissed the Kiehrs’ RICO claim
based on the “injury plus pattern discovery” accrual rule which
ties accrual to the date when plaintiff “discovers or should
have discovered, both the existence and source of his injury
and that the injury is part of a pattern.” 87 F.3d at 238.
Because this accrual rule is inconsistent with civil RICO’s
language and underlying purposes, this Court should instead
hold that the accrual rule currently applied to criminal RICO
cases also applies to civil RICO actions. Under criminal
RICO, the statute of limitations runs from the last predicate
act in the pattern See, e.g., Torres Lopez, 851 F.2d at 525
Under the last predicate act rule, the Klehrs’ claim is timely.
*in the decade since this Court decided Malley-Du/ff, the Courts of
Appeals have adopted a number of accrual rules See generally Mary S
Humes, Note, R/CO and a Limform Rule of Accrual, 99 Yale L.J 1399
(1990) (surveying the rules applied by the courts of appeals), Edwin Scott
Hackenberg, Comment, A// the Afvriad Ways: Accrual of Civil RICO
C’ ims in the Wake of Agency Holding Corp. v. Malley-Duff, 48 La. L. Rev
1411 (1988) (same), see also Grmmen v. Brown, 75 F.3d 506, 510-12 (9th
Cir. 1996) (same), cert. dismussed, 117 S Ct. 759 (1997). These courts also
apply sub-rules regarding “separate accrual” of actions (see, ¢.g., Ammann,
828 F.2d at 5 (Kennedy. J . concurnng)), and equitable tolling. See, ¢.g.,
Riverwoods Chappaqua Corp. v. Manne Midland Bank, N A., 30 F.2d 339,
347 (2d Cw. 1994), Davis v. Grusemeyer, 996 F.2d 617, 624 & n.12 (3d
Cur. 1993), see also Rodnguez v. Banco Central, 917 F.2d 664, 667-68 (ist
Cw. 1991)
23
A. The Court Should Choose a Uniform Accrual
Rule Which Promotes RICO’s Purposes and
Reduces Litigation.
This Court's choice of a uniform limitations period in
Malley-Duff reflected two important goals: (a) reduction of
“intolerable ‘uncertainty and time-consuming litigation,’”
(Malley-Duff, 483 U.S. at 149-50 (quoting Wilson v. Garcia,
471 U.S. 261 at 272)), and (b) furtherance of the “design [of
RICO’s civil damages provision] to fill prosecutorial gaps.”
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 493 (1985).
These two goals should likewise guide the Court's choice of
a civil RICO accrual rule. The accrual rule selected should
simplify RICO litigation, balancing the plaintiff's right to
recover and the practical difficulties of establishing a violation,
against the practical difficulties of hearing the claim. See
generally, Wilson, 471 U.S. at 268. The mule should also
promote the statutory goals embodied in the Act, rather than
“frustrate or significantly interfere with the federal policies”
underlying RICO. Reed v. United Transp. Union, 488 U.S.
319, 327 (1989). As shown below, the criminal “last predicate
act” accrual rule is an easily applied, uniform rule of accrual
which reflects RICO’s unique elements and furthers its
remedial purposes
B. The Last Predicate Act Rule Promotes the
Purposes Underlying Civil RICO.
1. The last predicate act rule enhances civil
RICO’s role as a supplement to RICO’s
criminal enforcement provisions.
Case law decided under criminal RICO provides an
appropnate source for selection of an accrual rule because it
24
employs RICO concepts.’ Moreover, reference to criminal
RICO analysis is consistent with RICO’s focus on criminal
conduct. See H.J., Inc., 492 U.S. at 245 (“[o}rganized crime
was without a doubt Congress’ major target” and is the focus
of the legislative history); id at 248 (“The occasion for
Congress’ action was the perceived need to combat organized
crime.”). Congress enacted RICO primarily to target criminal
behavior that was a “regular way of doing business.” H.//.,
Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 242 (1989),
see id. at 242 n.4, Craig M. Bradley, Racketeers, Congress
and the Courts: An Analysis of RICO, 65 lowa L. Rev. 837,
838-45 (1980) (reviewing legislative history). The “pattern”
and “enterprise” elements focus the Act on crime
“organizations” and criminal business enterprises that are able
to flourish as a result of prolonged patterns of integrated
criminal activity. See Sedima, 473 U.S. at 526 (Powell, J.,
dissenting)
Courts which have balanced the competing interests of
RICO criminal defendants with the policies underlying
enforcement of the act itself uniformly hold that the criminal
’This Court declined to “borrow” a statute of limitations penod
from criminal RICO because the criminal statute of lumitations, having not
been supplied by Congress in drafting the Act, did not “reflect any
congressional balancing of the competing equities unique to civil RICO
actions.” Mailley-Duff, 483 U.S. at 156 Since the Clayton Act statute ot!
lumitations could be said to reflect some measure of Congressional
balancing, this Court borrowed it for RICO Congress did not, however,
provide an accrual rule in the Clavton Act. Thus, the Clayton Act cannot
serve as a source for discovery of Congress's intentions regarding accrual of
RICO clams. See 15 U.S.C § 15b. No federal court of appeals has adopted
the Clayton Act accrual rule for RICO claums because RICO's unique multi-
act patiern requirement is not shared by the Clayton Act (which targets harm
to competiuon induced by force rather than fraud). See Granite Falls Bank
v. Henrikson, 924 F.2d 150, 153 (8th Cir. 1991). Accardingly, there is no
reasoned basis for adopting the Clayton Act accrual rule over the cnmuna!
RICO accrual rule
25
statute of limitations for violations of § 1962(c) begins to run
when the last illegal predicate act in the pattern is committed.
Glenn Beard, et al., Racketeer Influenced and Corrupt
Organizations, 33 Am. Crim. L. Rev. 929, 957 (1996); see,
e.g., United States v. Darden, 70 F.3d 1507, 1525 (8th Cir.
1995), cert. denied, 116 S. Ct. 1449 (1996); United States v.
Starrett, SS F.3d 1525, 1544-45 (11th Cir. 1995), cert.
denied, 116 S. Ct. 1335 (1996); Torres Lopez, 851 F.2d at
525; United States v. Persico, 832 F.2d 705, 714 (2d Cir.),
cert. denied, 486 U.S. 1022 (1987); United States v. Bethea,
672 F.2d 407, 419 (Sth Cir. 1982); see also United States v.
Vogt, 910 F.2d 1184, 1196 (4th Cir.) (dictum), cert. denied,
498 U.S. 1083 (1990). The court in United States v. Field,
432 F. Supp. 55 (S.D.N_Y. 1977), aff'd, 578 F.2d 1371 (2d
Cir.) (mem.), cert. dismissed, 439 U.S. 801 (1978), explained:
The Act provides an example of a continuing offense
for purposes of computing the time at which the
statute of limitations begins to run. The “nature of
the crime. _ is such that Congress must assuredly
have intended that it be treated as a continuing one.”
Toussie v. United States, 397 U.S. 112, 115 (1970).
The language of the Act, which makes a pattern of
conduct the essence of the crime, “clearly
contemplates a prolonged course of conduct.” /d. at
120. Like the statute of limitations for conspiracies,
which runs from the date of the last overt act,
Grunewald v. United States, 353 U.S. 391, 396-97
(1957), the statute of limitations for violations of the
Act runs from the date of the last alleged act of
racketeering activity
Id. at 59 (cited with approval by United States v. Walsh, 700
F.2d 846, 851 (2d Cir.), cert. denied, 464 U.S. 825 (1983)).
26
This reasoning apples with equal force to civil RICO. See
Keystone Ins. Co. v. Houghton, 863 F.2d 1125, 1131 (3d Cir.
1988); County of Cook v. Berger, 648 F. Supp. 433, 434-35
(N.D. Ill. 1986). RICO’s civil damages provision is an
integral part of Congress’ effort to combat organized criminal
activity. See Sedima, 473 U.S. at 493 (RICO is intended to
“fill prosecutorial gaps.”),; Malley-Duff, 483 U.S. at 149-50.
It was anticipated that civil actions would help bring an end to
the perpetrators’ pattern of conduct. See Sedima, 473 US. at
487 (“[T]hose who have been wronged . . . should at least be
given access to a legal remedy... . [T]he availability of such
a remedy would enhance the effectiveness of RICO’s
prohibitions.” (internal quotation marks and citation omitted)).
Basing accrual of a civil RICO claim on the end of an
integrated RICO pattern assures that civil RICO actions bring
the pressure of “private attorneys general” to bear on ongoing
criminal enterprises. Malley-Duff, 483 U.S. at 151. As noted
above, Congress intended courts to apply civil RICO broadly
to supplement criminal RICO and promote its “remedial
purposes’:
RICO is to be read broadly. This is the lesson not
only of Congress’ self-consciously expansive
language and overall approach, but also of its
express admonition that RICO is to “be liberally
construed to effectuate its remedial purposes,” Pub.
L. 91-452, § 904(a), 84 Stat 947. The statute’s
“remedial purposes” are nowhere more evident than
in the provision of a private action for those injured
by racketeering activity.
Sedima, 473 U.S. at 497-98 (citations omitted).
The last predicate act rule holds intact the claims of all
those injured by a single RICO pattern and thereby assures
that the enterprise is exposed to the full measure of civil and
27
criminal responsibility envisioned by Congréss. If it were
otherwise, civil RICO would do little more to root out
criminal enterprises than the relatively ineffective state
remedies for individual injuries RICO was intended to
supplant. Racketeering enterprises are frequently deeply
rooted in legitimate businesses which can absorb the impact of
state remedies and still continue their lucrative criminal
activities. For this reason, Congress aimed RICO, not at
isolated crimes and single injuries (see H.J/., Jnc., 492 U.S. at
242), but at a defendant’s entire “pattern” of crime, thereby
striking at the heart of the evil to be remedied.
The circumstances in this case demonstrate the
inadequacy of attempts to eradicate pattern conduct through
isolated litigation AOSHPI has been the subject of individual
state lawsuits for many years. When it was sued in California
in the 1960s, rather than cease its fraudulent activities, its
response was defiant: “No little California farmer can whip a
big corporation.” App. 487, “[I}f [the plaintiffs] do prevail,
_. . we can appeal this thing and drag it out for years and years
and years[.] Are you prepared to wait?” App. 490. Although
AOSHPI was ultimately forced to give up its California
market, it continued selling Harvestores elsewhere. RICO’s
objectives require that the victims of racketeers—private
“attomeys general” — be permitted to retain all of their claims
until the pattern of criminal activity has ended. See H.J., Inc.,
492 US. at 242 (“Congress was concerned in RICO with
long-term criminal conduct.”’), Keystone, 863 F.2d at 1131-
32°
*A form of the “last predicate act” rule adopted by the Third Circuit
has been cniticized because 1| may permut plaintiffs to bring civil RICO
actions long after the wrongdoing has ended. See, e.g., Rodriguez, 917 F.2d
at 667-68. This “open-cndedness” 1s not a concern if the Court adopts the
criminal “last predicate act” rule, which has no “discovery” component.
Because the KJehrs were unjured by a RICO scheme which has not yet ended,
28
2. The last predicate act rule offers RICO
victims full compensation.
Congress intended civil RICO to provide a legal remedy
to those wronged by violations of the Act. Sedima, 473 U.S.
at 487. Thus, consideration of full compensation is an
important factor in adopting a RICO accrual rule. Cf Zenith
Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 340
(1971) (federal law should “fully protect the victims of the
forbidden practices”). The last predicate act accrual rule
protects the nghts of all victims of continuing RICO patterns
to compensation for their injuries.
It is unlikely that Congress, in enacting RICO’s “broad
remedial” provisions, intended that an injured party’s statutory
nght to damages caused by pattern conduct would be lost
simply because it accrued at some arbitrary point in the midst
of the ongoing pattern.’ Yet, an “injury-based” accrual rule
has precisely that effect.
It would be inconsistent with [congress’s] breadth of
definition [of the Act] for us to state that we will
look to the past ten years to see if a civil RICO claim
exists but if we find ten years of racketeering
this Court may adopt the last predicate act rule in this case, without deciding
whether to use the “discovery” component
*The offenses which constitute “predicate acts” are, for the most
pari, very senous crimes committed by career criminals associated with
networks of co-conspirators with ample financial resources. See 18 U.S.C
§ 1961(1) (listng, inter alia, bribery, counterfeiting, obstruction of justice,
embezzlement). There are many reasons a victim of such a crime may not
be willing to sue until the end of the cnmunal association, when he has
learned of others with sumilar claims or when the scheme 1s at an end and a
crumunal prosecution has begun. An accrual rule must take into account the
difficulues facing vicums of crime organizauons. See Reed, 488 U.S. at 327.
29
activity, all related and all perpetrated by the same
defendants, we will provide a remedy only to those
who were victimized within the past four years. To
do so would encroach upon and limit a legislatively-
enacted scheme to provide recovery for racketeering
injuries.
Keystone, 863 F.2d at 1132.
Certainly, in selecting an accrual rule, this Court must
attempt to approximate “‘the point at which the interests
favoring protection of valid claims are outweighed by the
interests in prohibiting the prosecution of stale ones.’”
Wilson, 471 U.S. at 271 (quoting Johnson v. Railway Express
Agency, Inc., 421 U.S. 454, 463-64 (1975)). Here, however,
the structure and purpose of the Act require that the balance
tip in favor of protecting the rights of victims of ongoing
criminal enterprises. In selecting a term of ten years within
which predicate acts could establish the pattern requirement,
“Congress must have contemplated recovery for remote acts
and even for remote injuries.” Granite Falls Bank v.
Henrikson, 924 F.2d 150, 154 (8th Cir. 1991); see also H.J/.,
Inc., 492 U.S. at 242 (Congress intended to wipe out “long
term criminal conduct.”) Claims brought by victims of
ongoing pattern conduct are no more “stale” than a criminal
action commenced by the government.
A RICO defendant who is engaged in an ongoing criminal
pattern, on the other hand. has no legitimate interest in repose.
He should have no nght to be “free” of responsibility, whether
civil or criminal, for his actions By choosing to continue to
engage in activity violating the Act, he himself creates the
possibility of long term civil damages exposure. Such
exposure simply reflects that he has not “earned” the right to
avoid civil or criminal responsibility for his acts. He should
not be “entitled to assume that [his] sins may be forgotten.’”
30
Malley-Duff, 483 U.S. at 156 (quoting Wilson, 471 U.S. at
271).
The suggestion that despite a defendant’s continued
wrongdoing, his related past wrongdoing constitutes a “stale”
claim, ironically rewards the very racketeer whom RICO was
intended to stop and promotes no legitimate public policies.
Society, the courts, and Congress can have no interest in
permitting a continuing wrongdoer to escape liability for past,
related wrongdoing simply because a number of years has
passed during which the wrongdoing has continued. The last
predicate act accrual rule is the only rule which promotes
RICO’s purposes to provide compensation to all victims of
ongoing RICO patterns and to “extirpat[e]” long-term
criminal conduct. Sedima, 473 U.S. at 488.
C. The Last Predicate Act Rule Simplifies the
Judicial Task and Reduces Litigation.
The “last predicate act” rule not only promotes RICO’s
purposes, it is relatively simple to apply and reduces time-
consuming litigation over the timeliness of claims. Courts can
decide the timeliness of a plaintiff's civil RICO claim under the
rule simply by determining whether the defendant committed
at least one predicate act as part of the pattern of racketeering
during the four years preceding the commencement of the
action. See, e.g., United States v. Starrett, 55 F.3d 1525,
1544-45 (11th Cir. 1995) (“to bring the crime within the
statute of limitations under § 1962(c), the government need
only prove that at least one predicate act was committed
within five years of the date the defendant was charged in the
indictment”), cert. denied, 116 S. Ct. 1335 (1996). So long
as the defendant committed a predicate act within that four-
year period, and so long as that predicate act is part of the
pattern of racketeering that is the focus of the plaintiff's claim,
31
then the plaintiff's action—and the government’s
prosecution—is timely.
The benefit of focusing on the last predicate act in the
pattern of racketeering is that the court avoids, at the very
outset of the case, defining the point at which a particular
plaintiff first suffered a “RICO injury” or when he first should
have known that the defendant’s “racketeering predicates are
related, and that they amount to or pose a threat of continued
criminal activity.” H.J., Inc., 492 U.S. at 239. The history of
the lower courts’ adoption of differing versions of similar
injury accrual rules, “separate accrual” subrules and various
tolling doctrines suggests that the last predicate act accrual
rule is the only rule which will avoid drawing the parties and
the courts into protracted and expensive litigation over issues
collateral to the RICO claim itself. See Wilson, 471 U.S. 261
at 270 (1985) (recognizing federal interest in uniformity and
in application of “firmly defined, easily applied rules”).
D. The Eighth Circuit’s Injury and Pattern
Discovery Accrual Rule Fails to Promote the
Purposes Underlying RICO.
The Eighth Circuit, in this case, adopted an injury-based
accrual rule that provides that the statute of limitations begins
to run, “as soon as the plaintiff discovers, or reasonably should
have discovered, both the existence and source of his injury
and that the injury is part of a pattern.” 87 F.3d at 238.
Although admittedly superior to a straight “injury” rule,"® the
"Because “‘|c]oncepts such as RICO “enterpnse” and “pattern of
racketeering activity” were simply unknown to the common law,"” common-
law accrual pnnciples do not apply. Malley-Duff, 483 U.S. at 150 (quoting
A.J. Cunningham Packing Corp. v. Congress Financial Corp., 792 F.2d
330, 348 (3d Cir. 1986) (Sloviter, J., concurring in the judgment)). An
“injury” cannot constitute the sole determinant of the “accrual” of a RICO
32
“injury and pattern discovery” rule, like other injury -based
rules, operates to cut off valid claims such as the Klehrs’,
despite the existence of an ongoing RICO pattern. This Court
should not hesitate to reject this accrual rule and adopt the last
predicate act rule in order to promote RICO policies and ease
the judicial task “RICO was an aggressive initiative to
supplement old remedies and develop new methods for
fighting crime.” Sedima, 473 U.S. at 498 (emphasis added)
It is “in this spirit that all of the Act's provisions should be
read.” /d Consistent with this admonishment, this Court
should adopt the accrual rule tailored specifically to
accommodate the unique elements and purposes of a civil
RICO claim: the criminal RICO “last predicate act” rule
Applied to this case, the last predicate act rule renders the
Klehrs’ claim timely This action was commenced in August
1993. The Klehrs submitted evidence establishing predicate
acts through at least 1991 See, App 17. Thus, the four-year
lumitations period did not expire before the suit was brought
Accordingly, the Kiehrs ask this Court to reverse the decision
claum because a RICO plaintifY must show injury from acts in a pattern and
the predicate acts which form the pattern may occur after the injury See
Sedima, 473 US. at 496. Kevsione, 863 F.2d at 1130 (It would appear
fundamenta! that the statue of limitations may not begin until all elements
exust), Butler v. Local | mon 823,514 ¥ 2d 442, 450 (8th Cur ) (There is no
accrual unl all facts eust « plainuf) can allege a complete cause of action ).
cert. demed, 423 US 924 (1975) Nevertheless, some courts have adopted
“nyury” accrual rules which bar an action before it even exists. See, e.g.
Rodriguez, 917 F.2d664 This approach is not only nonsensical, but a rule
which would bar a claim before 1 accrues “would m effect elumunate
§ 1964(c) from the statute” for those plaintiffs Sedima, 473 US. at 498
Such a result 1s hardlv consistent with the purpose of “bringing to bear the
pressure of ‘private attornevs general’ on a senous national problem for
whuch public prosecutonal resources are deemed inadequate " Malley-Du/ff,
483 US ai5i
33
of the Eighth Circuit, and remand this action to the district
court for trial.
Il. THE EIGHTH CIRCUIT MISAPPLIED THE
PATTERN PLUS INJURY STANDARD.
Even under the erroneous “injury plus pattern discovery”
standard employed by the courts below, AOSHPI was not
entitled to summary judgment dismissing the Klehrs’ RICO
claim. As a threshold matter, the Eighth Circuit improperly
placed the burden of disproving the statute of limitations
affirmative defense on the Klehrs. It then resolved disputed
issues of fact regarding whether the Klehrs should have
discovered the connection between their injuries and the heat-
damaged feed prior to 1989. Accordingly, this Court should
reverse
A. The Eighth Circuit Improperly Placed the
Burden of Proof on the Klehrs.
In this case, the fact that AOSHPI, the moving party, bore
the burden of proof is significant. As the moving party,
AOSHPI bore the initial burden of establishing that summary
judgment was appropnate See Celotex Corp. v. Catrett, 477
U.S 317 (1986). A district court, in deciding whether the
moving party has met this burden, must determine which party
bears the ultimate burden of persuasion at trial. /d at 331
(Brennan, J., dissenting.) If the party moving for summary
judgment also bears the burden of proof on a claim, it must
support its motion with undisputed material evidence on each
element of its claim. /d.
Because AOSHPI bore the burden of establishing the
statute of limitations affirmative defense, it was not entitled to
summary judgment unless it produced sufficient evidence to
34
obtain the equivalent of a directed verdict on that defense.'’
See Celotex, 477 U.S. at 322-23; Adickes v. S. H. Kress &
Co., 398 U.S. 144 (1970). Not until this level of proof was
reached should the Klehrs have been required to put in arty
evidence to defeat the motion for summary judgment.
Augustine v. GAF Corp., 971 F.2d 129, 132 (8th Cir. 1992).
Once AOSHPI met the burden of production, the court was
required to examine the parties’ evidence in the light most
favorable to the Klehrs, giving them the benefit of every
inference and resolving all factual disputes in their favor. See
United States v. Diebold, Inc., 369 U.S. 654 (1962). Only if
no reasonable jury could find for the Klehrs, should AOSHP!
have been entitled to prevail without a full tnal.'”
Under Federal law, the statute of limitations is an
affirmative defense. See Fed. R. Civ. P. 8(c). Because the
party pleading an affirmative defense bears the burden of
"If the non-moving party bears the burden of persuasion on the
issues at tnal, summary judgment may be granted if the non-moving party
fails to offer proof creating a jury issue on every element of its clam. See
Celotex Corp. v. Catreu, 477 U.S. 317 (1986)
'? Summary judgment standards should be enforced so that
summary judgment 1s not used to avoid the necessity for proving one's case
or as a clever procedural gambit whereby a claumant can shift to an adversary
the burden of proof on one or more issues See Jack H. Fnedenthal, Cases
on Summary Judgment. Has There Been a Maternal Change in Standards?
63 Notre Dame L. Rev. 770, 781 (1988) One author describes the lower
courts’ reaction to Celotex as a backlash or “anti-plaintiff counter-
revolution.” See generally D Michael Risinger, Another Step in the
Counter-Revolution: a Summary Judgment on the Supreme Court's New
Approach to Summary Judgment, 54 Brook. L. Rev. 35 (1988), See also
Jeffrey W. Stempel, A Distorted Mirror: The Supreme Court's Shimmering
View of Summary Judgment, Directed Verdict and the Adjudicative
Process, 49 Ohio St. LJ. 95, 159 (1988) (By making summary judgment
easier to obtain, courts umplicitly bestowed a political favor (and greater
judicial power) . . . on society's “haves.”).
35
proof, (see Smith v. Duff & Phelps, Inc., 5 F.3d 488, 492 n.9
(11th Cir. 1993)), AOSHPI had the burden to prove that the
Klehrs’ RICO claims were barred. Contrary to these rules, the
Eighth Circuit held that “///t is incumbent upon the Klehrs to
show that it would not have been reasonable to discover the
existence, source, and pattern of their injury by August 27,
1989.” 87 F.3d at 238 (emphasis added)."’ In so holding, the
of proof. Accordingly, this Court should reverse.
B. The Kiehrs’ Failure to Discover That the
Harvestore Caused Heat Damage to Their Feed
and That the Feed Damaged the Cattle Was
Reasonable.
The first step in applying the “injury plus pattern
discovery” rule is to identify the RICO injury for which the
plaintiff seeks relief Here, the Klehrs seek to recover for the
damage caused to their farm as a result of their cattle’s
consumption of heat-damaged feed from the Harvestore. As
shown below, reversal is required because AOSHPI failed to
prove that the Klehrs knew or should have known that this
feed was heat damaged, as a matter of law. See Poller v.
Columbia Broadcasting Sys., Inc., 368 U.S. 464 (1962) (the
purpose of the rule is not to cut litigants off from their nght of
trial by jury)
"The Exghth Circuit not only put the burden of proof on the Kiehrs,
it aruculated an erroneous standard The issue 1s not whether it would have
been “reasonable” for a hypothcucal farmer to have discovered the fraud. In
determining whether the Kiehrs “should have discovered the fraud,” the
question 1s whether AOSHP! proved, as a matter of law, that the Kichrs
failed to act as reasonably prudent farmers given the circumstances, /.¢.,
whether they actions fell outside the bounds of reasonable conduct.
36
1. No evidence of bad feed existed.
The lower courts held, as a matter of law, that the Klehrs
should have known that their feed was defective because
Marvin Klehr saw pieces of mold in the feed sporadically
during the year and at the end of the year was required to
discard the remnants of the feed stack. See App. 172-73, ¥ 4.
The courts’ focus on occasions of moldy feed ignores the fact
that the feed which damaged the Klehrs’ cattle, and which is
the basis for this action, was not moldy feed, but warm, dark,
molasses-smelling, “good Harvestore feed.”
The evidence did not demonstrate that the existence of
mold in some of the feed, on some occasions, must lead, as a
matter of law, to discovery that the “good” feed was in fact
heat-damaged. Harvestore representatives examined the feed
and assured Kiehr that the feed was good. App. 172-73, 94.
AOSHPI’s representative explained that the mold resulted
from exposure of the top layer of feed to air at the time the
silo was filled. This spoilage was insignificant in proportion to
the “good” feed stored, and was consistent with Klehr’s
expectations for the silo’s performance based on his
experience with stave silos and the fact that he filled his silo
several times during the year See App. 172-73,9 4. See
Chitwood v. A. O. Smith Harvestore Prods., Inc., 489 N.W.2d
697, 705 (Wis. Ct. App. 1992) (it is not contradictory for the
farmer to know some oxygen gets into the silo and to also
believe that the Harvestore admits less oxygen than a standard
silo). There was absolutely nothing about this occasional
mold that required Klehr to know that air entered the silo after
it was “sealed” and damaged the “good” feed.
37
2. The Klehrs acted prudently in their
investigation of herd health problems.
The courts below said that the Klehrs should have known
that the “good” Harvestore feed was damaging their cows
because they had not realized all of the promised benefits of
Harvestore ownership and because herd health had generally
declined over the years. The flaw in this analysis is that, as
shown below, there is no evidence that the Klehrs were
negligent in failing to discover any connection between broken
sales promises or herd health problems and the existence of
heat-damaged feed. Himes v. A.O. Smith Harvestore
Products, Inc., 880 F.2d 995 (8th Cir. 1989).
a. Klehr’s conduct should be judged by
prudent farmer standards.
AOSHPI submitted no testimony from any competent
source proving that the Klehrs failed to act as prudent farmers
in addressing herd health problems or in failing to detect that
bad feed was their source. Farming is complex and involves
unique skills and experience. (See, e.g., App. 680 (plant tissue
analysis may help farmers determine whether “a subtle
deficiency or imbalance of some vital element . . . is throwing
off his crop productivity”); App. 815-16 (haylage making is an
“art”)). Accordingly, a farmer's due care should be judged by
an appropriate standard reflecting standard farm practices and
expertise. See Linkstrom v. Golden T. Farms, 883 F.2d 269,
271 (3d Cir. 1989). Yet AOSHPI submitted no evidence at ail
regarding the reasonableness of the Klehrs’ actions, judged by
farm standards. Given the burden of proof, AOSHPI’s failure
to submit such proof required the denial of summary
judgment.
38
Even if the Klehrs were required to bear the burden of
submitted a wealth of evidence establishing that their actions
fell within “prudent farmer” standards. Klehr testified that he
reasonably investigated his herd’s health problems and both he
and his consultants were unable to determine their cause
App. 174-75, 6. The Klehrs submitted the affidavit of an
expert veterinarian who opined that the Klehrs’ failure to
connect the herd health problems to bad feed was
reasonable.'* Indeed, not until the Harvestore had there been
a silo which caused illness in cows. Because the evidence in
the record does not establish lack of due diligence as a matter
of law, the courts’ entry of summary judgment was erroneous.
See Hildebrandt v. Allied Corp., 839 F.2d 396, 399 (8th Cir.
1987) (Where issues of limitation involve when a claim egins
to accrue, summary judgment cannot be granted unless the
evidence is so clear that there is no genuine factual issue.)
b. AOSHPI’s “puffery” is irrelevant.
The Eighth Circuit’s focus on the Harvestore’s failure to
live up to some of AOSHPI’s advertising promises, such as
the Harvestore’s production of better'* feed, as the “tip-off”
"The fact that many farmers have asserted claims against AOSHP!
in the last decade and these claims have reached junes notwithstanding the
defendants’ statute of lumitations defense, suggests thal it 1s reasonable for
a farmer to fail to make the connection between the silo and the damage to
the farming operation. See Lollar, 795 S.W.2d 441, First Nat'l Bank of
Louisville v. Brooks Farms, 821 S.\W.2d 925 (Tenn. 1991). Agristor
Leasing v. Saylor, 803 F.2d 1401 (6th Cir. 1986)
“Of course, the Klehrs had no idea that the “good Harvestore feed”
was not “better” feed. In any event, the Klehrs’ lawsuit is based, not on the
failure of the Harvestore to produce better feed but on its production of heat-
damaged feed.
39
that the silo was causing the herd’s health problems, was
misplaced. AOSHPI’s “puffery” is simply irrelevant because
there is no evidence that any of AOSHPI’s sales promises was
a “red flag” pointing to the bad feed injury that forms the basis
for the Klehrs’ claims. AOSHPI made numerous claims
touting the value of the silo, including the promise that the
Harvestore would “Keep sons on the farm.” App. 727.
Neither Klehr nor any other farmer would naively believe that
all such promises would come true. Indeed, Harvestore
specifically told farmers:
It’s mo magic, muracle-making device that
automatically brings wealth and success to its owner.
And, its certainly no cure-all for problems that arise
from poor management—.n fact, a Harvestore might
only intensify the trouble where poor management is
at fault!
App. 719. See also App., 815 (Harvestore is “no magician’s
box of tricks which can take poor quality feed and transform
it into high-quality haylage.”). Cf D'Huyvetter v. A.O. Smith
Harvestore Prods., Inc., 475 N.W.2d 587, 592 (Wis. Ct. App.
1991) (it is not necessary for a Harvestore purchaser to have
met “every positive statement with incredulity”); Chitwood,
489 N.W.2d at 705 (jury need not find reliance on every
misrepresentation in order for company to be liable.); Agristor
Leasing v. A.O. Smith Harvestore Prods., Inc., 869 F.2d 264,
268 (6th Cir. 1989) Even if a farmer did believe all of the
Harvestore sales talk, the failure of these benefits to
materialize would not require a reasonably prudent farmer to
suspect that the Harvestore feed was heat-damaged. AOSHP!I
provided the court no evidence establishing that a farmer
should, as a matter of law, recognize a link between the two.
Had the Eighth Circuit recognized that AOSHPI had the
burden of establishing its statute of limitations defense, it is
40
unlikely that it would have erroneously affirmed summary
judgment in AOSHPI’s favor. As it is, the evidence in the
record demonstrates that AOSHPI failed to carry its burden of
establishing that the Klehrs’ RICO claim is barred.
Accordingly, this Court should reverse.
IV. THE EIGHTH CIRCUIT ERRED WHEN IT
REJECTED THE KLEHRS’ RICO CLAIM FOR
INJURIES OCCURRING WITHIN FOUR YEARS
OF COMMENCEMENT OF THE ACTION.
A. A New RICO Claim Accrues With Each Injury.
If this Court adopts an “injury”-based accrual rule, the
Klehrs are entitled to recover the damages they suffered
during the four years preceding the commencement of the
action, whether or not their claim for earlier damages is barred
by the statute of limitations. In Zenith Radio Corp. v.
Hazeltine Research, Inc., 401 U.S. 321 (1971), this Court
determined the date of accrual of a plaintiff s damages where,
as here, the plaintiff has suffered continuing damage from a
violation of federal statute. The Court first noted that under
the Clayton Act,
each time a plaintiff is injured by an act of the
defendants a cause of action accrues to him to
recover the damages caused by that act and ___ , as
to those damages, the statute of limitations runs from
the commission of the act.
/d. at 338. The Court observed, however, that this rule
undercompensates a plaintiff who suffers additional damages
which, four years after the injurious act, are speculative or
unprovable. /d. at 339. Accordingly, the Court held that at
any particular point in time, “no cause of action has yet
4)
accrued for any but those damages already suffered.” Jd The
claim accrues for such damages “only on the date they are
suffered, thereafter the plaintiff may sue to recover them at
any time within four years from the date they were inflicted.”
Id. (emphasis added). Any other rule would be “contrary to
the congressional purpose that private actions serve ‘as a
bulwark of antitrust enforcement” (id. at 340 (quoting Perma
Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134,
139 (1968)) and would not “fully protect the victims of the
forbidden practices as well as the public.” /d.
Because the injury plus pattern discovery accrual rule
focuses on each new RICO injury rather than on the unitary
RICO pattern, Zenith's “separate accrual rule” creates a new
RICO cause of action each time a plaintiff suffers an injury
during the limitations period, so long as the damages are
caused by a predicate act in the pattern. Thus, if the Court
adopts an “injury-based” accrual rule, the Klehrs must be
permitted to recover the damages they suffered as a result of
AOSHPI’s RICO scheme during the four years preceding the
commencement of this action
B. Because AOSHPI Committed Predicate Acts
Within the Limitations Period, the Klehrs Have
an Additional Basis For Recovery of their
Damages.
Some courts, including the Eighth Circuit, have restricted
Zenith and permit recovery for injuries within the limitations
period only if they were caused by predicate acts which also
occur within the limitations period. Granite Falls Bank, 924
F.2d at 154. In State Farm Mutual Auto. Ins. Co. v. Ammann,
828 F.2d 4 (9th Cir. 1987), then-Judge Kennedy applied this
formulation of the “separate accrual” rule in the RICO
context:
42
The rule is that a cause of action accrues when new
overt acts occur within the limitations period, even if
a conspiracy was formed and other acts were
none ‘de the limitati ‘od
Id. at 5 (Kennedy, J., concurring). Although the Klehrs
believe that these courts have misread Zenith, they are entitled
to recover under this even more restrictive rule because
AOSHPI committed predicate acts within the limitations
period which caused damage.
The Eighth Circuit held in this case, however, that no
separate claim accrues unless new predicate acts cause injuries
which are “independent” from the original injury. Because the
Klehrs’ injuries were “all of the same type, flow from the same
source, and are part of ofié cognizable pattern of conduct,”
they were, the court held, “one single, continuous injury that
was sustained sometime in the 1970s.” 87 F.3d at 239.
Accordingly, the court held that their claims were barred.
There is no sound basis for the Eighth Circuit's
requirement that the Klehrs’ injuries be “independent from”
their past injuries or that they arise independently of
AOSHPI’s prior pattern conduct. This analysis would put a
plaintiff in the impossible position of having to prove both that
his injunes from two separate predicate acts are related—to
establish pattern—and that they are unrelated—to establish
separate accrual. Under the separate accrual rule, it is
irrelevant whether the damages are of a certain “type” or that
they arise from the same pattern. See Sedima, 473 U.S. at
495 (“If the defendant engages in a pattern of racketeering
activity... , and the racketeering activities injure the plaintiff
..., [he] has a claim under § 1964(c).”).
The Eighth Circuit’s decision creates an intolerable
incentive for a racketeer to continue to harm a victim of an
earlier time-barred violation so long as the injuries are of the
same type and “are part of one cognizable pattern of conduct.”
43
If anything, such a rule will encourage racketeers to victimize
those in society who are most credulous and who,
accordingly, fail to discover the fact that they have been
cheated. In effect, this rule elevates the interests of the
criminal wrongdoer, over the interests of a victim who “should
have” discovered the source and pattern of wrongdoing
earlier. See BMW of North America, Inc. v. Gore, 116 S. Ct.
1589, 1599 (1996) (deceit is more reprehensible than
negligence).
In this case, after AOSHPI sold the Klehrs their silo, it
continued to victimize them by encouraging them to use the
silo, by “repairing” it, by “resealing” it and by supplying them
with advertisements and “educational” material which
convinced them to continue feeding their cows feed which,
unknown to them, was heat-damaged. As a result, their
continued use of the Harvestore caused new injuries: the cattle
exhibited new illnesses requiring treatment and milk
production declined See Bieter v. Blomquist, 987 F.2d 1319,
1325-27 (8th Cir.) (refusing to apply unduly restrictive
understanding of proximate cause to civil RICO action, cert.
denied, 510 U.S. 823 (1993). Yet, accepting arguendo, the
Eighth Circuit’s factual determinations, the ,|Klehrs are left
without remedy despite no wrongdoing on their part and
absolute wrongdoing (including an ongoing pattern of
predicate acts and an ongoing “coverup” of those acts) on the
part of AOSHPI. Such a result is inconsistent with Congress’
stated intent to extirpate the wrongdoing that is the target of
RICO. This Court should reject the Eight Circuit’s
interpretation of the “separate accrual” rule and remand the
case for trial on the claims arising in connection with
AOSHPI’s predicate acts committed within four years of the
start of this action.
Vv. AOSHP?’S FRAUDULENT CONCEALMENT
PREVENTED THE RUNNING OF THE FOUR-
YEAR LIMITATIONS PERIOD.
If the Court both rejects the “last predicate act” rule and
finds Klehr’s action to be untimely as a matter of law under an
“injury discovery” or “injury plus pattern discovery” accrual
rule, then the Court should reverse because the statute is
tolled by AOSHPI’s fraudulent concealment of the claim. The
theory of fraudulent concealment, which is “read into every
federal statute of limitation,” (Holmberg v. Armbrecht, 327
U.S. 392, 397 (1946)), has two competing formulations. See
Wolin v. Smith Barney Inc., 83 F.3d 847, 852 (7th Cir.
1996).'° One formulation—which parallels equitable tolling
and the “discovery” rule—requires that “the plaintiff... use
due diligence to be allowed to toll the statute of limitations.”
Id. Under the other formulation, which focuses on “active
misconduct by the defendant, the plaintiff is not required to be
diligent.” Jd.'’
'*Since this Court's decision in Malley-Duff, there has been
unanimity m the courts of appeals that federal rather than state tolling
doctrines apply to civil RICO actions. See, e.g., Riverwoods Chappaqua
Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 347 (2d Cir. 1994),
Davis v. Grusemeyer, 996 F.2d 617,624 & n.12 (3d Cir. 1993); McCool v.
Strata Oil Co., 972 F.2d 1452, 1453 (7th Cir. 1991); Emrich v. Touche
Ross & Co., 846 F.2d 1190, 1199 (9th Cir. 1988).
"If the Court adopts a non-discovery rule, the Klehrs’ claim is
tolled under any formulation of the fraudulent concealment or equitable
tolling doctnnes. See Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1415-
16 (Mth Cir. 1987) (applying “discovery,” as opposed to “actual knowledge,”
version of fraudulent concealment doctrine to civil RICO action). Equitable
tolling doctrines apply because the lower courts’ determination that the
Klehrs should have discovered the fraud is erroneous for all of the reasons
discussed in part IIIB, above.
45
The latter rule should apply here. As the Second and
Seventh Circuits have acknowledged, the purpose behind the
fraudulent concealment rule is disserved by making its scope
coterminous with the “discovery” rule. See Robertson v.
Seidman & Seidman, 609 F.2d 583, 593 (2d Cir. 1979);
Sperry v. Barggren, 523 F:2d 708, 711 (7th Cir. 1975), see
also Riddell v. Riddell Washington Corp., 866 F.2d 1480,
1491 (D.C. Cir. 1989) (“a defense based on the plaintiff's lack
of due diligence must show something closer to actual notice
than the merest inquiry notice that would be sufficient to set
the statute of limitations running in a situation untainted by
fraudulent concealment’’).
Rather, the rule should punish a defendant who actively
conceals his original wrongdoing. See Riddell, 866 F.2d at
1491: Tomera v. Galt, 511 F.2d 504, 510 (7th Cir. 1975),
overruled on other grounds by Short v. Belleville Shoe Mfg.
Co., 908 F.2d 1385 (7th Cir. 1990), cert. denied, 502 US.
1250 (1991). The Zomera court explained: “‘[I}f the
wrongdoer adds to his original fraud affirmative efforts to
divert or mislead or prevent discovery, then he gives to his
original act a continuing character, by virtue of which he
deprives it of the protection of the statute until [actual]
discovery."” 511 F.2d at 510 (quoting Smith v. Blachley, 47
A. 985, 987 (Pa. 1901)). The Riddell court explained that a
defendant’s burden of establishing “something close[] to
actual notice” results from the fact that
fraudulent concealment by its nature makes
discovery of the true facts more difficult, in part
because it obscures the significance of such
information as comes to plaintiff's attention.
Furthermore, the concealing defendant lacks the
equity to command easier access to the defense,
especially in view of the inherent evidentiary
difficulty of determining whether particular but
46
isolated facts should have put the plaintiff on inquiry
notice of his claim.
866 F.2d at 1491. This rule makes sense because deceit is
more reprehensible than negligence, and should not be
rewarded. See BMW, 116 S. Ct. at 1599.
Judges Becker and Posner have each outlined the policy
rationales for applying a different rule of fraudulent
concealment to affirmative acts of misconduct. See Wolin, 83
F.3d at 852; Urland, 822 F.2d 1268, 1280-81 (3d Cir.
1987) (Becker, J., dissenting). In Uriand v. Merrell-Dow
Pharmaceuticals, Judge Becker explained that the perpetrator
of affirmative acts of concealment should not benefit from a
victim’s lack of diligence
The doctrine of fraudulent estoppel rests on a
rationale that is wholly distinct from that for the
discovery rule It concerns not the diligence of the
plaintiff but the misdeeds of the defendant. it
therefore addresses the situation where a cause of
action goes undiscovered because the defendant has
taken positive steps to conceal it.
_.. When a defendant fraudulently conceals its
misconduct, the injured person has a double
burden not only is there a burden of discovering the
basis of the claim, he or she must also discover the
defendant's fraud A “should have known” standard
is therefore inappropnate because it is also necessary
to account for the plaintiffs’ extra burden of
acquiring knowledge of the fraud, without which
they could not discover, or realize that prior to the
fraud they had discovered, the basis for the claim
822 F.2d at 1280-81 (citation and footnote omitted)
47
One way to “account[] for this extra burden is by insisting
on a higher threshold of knowledge on the part of the plaintiff
before the claim will be barred—the ‘actual knowledge’
standard...” Jd at 1281. Ifthe Court does not account for
the extra burden on the plaintiff that exists in cases of
affirmative concealment by a defendant, the Court may
unwittingly adopt{] a standard that .. . arguably
encourage{s] fraudulent concealment by defendants.
Because, through the discovery rule, the statute of
limitations does not begin to run until the plaintiff
should have known of defendant's liability,
application of the “should have known” standard in
fraudulent concealment cases creates no greater
burden; defendants face no penalty if they attempt to
conceal their wrongdoing but are later discovered.
Id “In contrast,” Judge Becker notes, “the actual knowledge
standard ‘serves as a punitive measure and perhaps as a
deterrent of future fraud” Jd (quoting Hohri v. United
States, 782 F.2d 227, 248 (D.C. Cir. 1986), vacated for want
of jurisdiction, 482 U.S. 64 (1987)).
Chief Judge Posner's analysis of the issue is equally
cogent
An analogy can be drawn to the distinction between
accidental and deliberate torts. There is no defense,
partial or complete, of contributory negligence to the
latter, but there is to the former. Deliberate
wrongdoing is not to be blamed on the victim, just as
the victim’s provocation or other fault is not a
defense to criminal liability.
Wolin, 83 F.3d at 852. The very same principle applies in the
case of affirmative acts of concealment by a defendant: there
48
can be no defense, partial or complete, of some failing on the
part of the victim.
AOSHPI should not be rewarded for
concealing its prior fraud. Scan uence ae
unbolted a panel on his silo and chopped through several feet
of “good Harvestore feed” to find mold cascading from the
feed dome that he actually knew what AOSHPI had done to
his dairy herd, his way of life, and their family ’s financial well-
being. This discovery should be the point at which the statute
of limitations should begin to run
CONCLUSION
. Bearing in mind that the rule of accrual the Court adopts
in this case will broadly impact all RICO cases including those
involving organized crime syndicates, the Klehrs ask this
Court to adopt the one rule which promotes the purposes of
RICO: the last predicate act rule. Accordingly, the Court
should reverse the judgment below and remand to the district
court for trial on the merits
Respectfully submitted,
Charles A. Bird
Counsel of Record
Bird and Jacobsen
305 Ironwood Square
300 Third Avenue SE
Rochester, Minnesota 55904
(507) 282-1503
49
(612) 672-8200
Malcolm McCune
Maddin, Miller & McCune
300 James Robertson Parkway
Sth Floor
Nashville, TN 37201
(615) 254-8756
COUNSEL FOR PETITIONERS
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