Amicus Curiae Brief — Klehr v. AO Smith Corp.

_____ [BEST AVAILABLE COP)

L. THE COURT SHOULD ADOPT AN ACCRUAL

RULE THAT PREVENTS STALE CLAIMS AND

PERMITS CONTINGENT LIABILITIES TO LIE IN

REPOSE

I. A BOUNDLESS ACCRUAL RULE WILL IMPOSE

SUBSTANTIAL ECONOMIC COSTS ON

AMERICAN BUSINESSES .................005.

CONCLUSION

TABLE OF AUTHORITIES

FEDERAL CASES

Agency Holding Corp. v. Malley-Duff &

Associates, Inc., 483 U.S. 143 (1987) .....

H.J. Inc. v. Northwestern Bell Telephone Co.,

492 U.S. 229 (1989) ......cccecccsceeee

Keystone Insurance Co. v. Houghton,

863 F.2d 1125 (3d Cir. 1988) ............

National Organization of Women, Inc.

v. Schleider, 510 U.S. 249 (1994) ........

Reves v. Ernst & Young, 507 U.S. 170 (1993)

Sedima, S.P.R.L. v. Imrex Co., Inc.,

473 U.S. 479 (19BS) ..... cc cecccceseees

Shearson/American Express Inc.

v. McMahon, 482 U.S. 220 (1987) ........

Wilson v. Garcia, 471 U.S. 261 (1985) ......

FEDERAL STATUTES

COMPREHENSIVE ENVIRONMENTAL RESPONSE

COMPENSATION AND LIABILITY ACT OF 1980

("CERCLA"), 42 U.S.C. §§ 9601-9675 ....

eeeeesens??®

RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS

AcT ("RICO"), 18 U.S.C. §§ 1961-1968 ..

MISCELLANEOUS

ANNUAL REPORT OF THE DIRECTOR,

ADMINISTRATIVE OFFICE OF THE

UNITED STATES COuRTS (1996) .............

The Center for Environmental Management,

Tufts University, MULTINATIONAL CORPORATIONS

AND THE ENVIRONMENT: A SURVEY OF GLOBAL

PRACTICES (April 1991) .................05.

William A. Hancock (ed.), GUIDE To RECORDS

Ee

Peter W. Huber, LIABILITY: THE LEGAL

REVOLUTION AND ITS CONSEQUENCES

GE WOES Sab 66 ée i wesc bbsccdccccce:

William H. Kaiser, Extortion in the Workplace:

Using Civil RICO to Combat Sexual Harassment

in Employment, 61 BROOKLYN L. REV. 965

Ee

Moody's Special Comment, Environmental

Risks and Corporate Credit Quality (April 1991)

ili

The National Association of Manufacturers (“NAM”)

respectfully submits this amicus curiae brief in support of

respondents A.O. Smith Corporation and A.O. Smith

Harvestore Products, Inc.'

INTEREST OF AMICUS CURIAE

The NAM is the nation’s oldest and largest broad-based

industrial trade association. It has more than 14,000 member

companies and subsidiaries, including approximately 10,000

small manufacturers. These firms are located in every state,

produce about 85 percent of U.S. manufactured goods, and

employ more than 18 million persons. Through its member

companies and affiliated associations, the NAM represents

every industrial sector.

The NAM’s members are legitimate businesses, who often

find themselves accused of “racketeering” conduct in treble-

damage civil suits brought under the Racketeer Influenced and

Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968.

These claims typically involve “garden-variety” commercial

disputes, involving matters such as false-advertising claims or

contract disputes.

In determining when civil RICO claims accrue, for statute

of limitations purposes, the Court should adopt a rule which (1)

protects defendants against stale claims and (2) provides

were stressed by the Court in Agency Holding Corp. v. Malley-

Duff & Associates, Inc., 483 U.S. 143 (1987), in adopting a

‘Counsel for both the Petitioners and the Respondents have

consented to the filing of this brief. Their consents are on file with the

Clerk.

four-year limitations period for civil RICO claims, and should

likewise guide selection of the proper limitations-accrual rule.

The “last predicate act” accrual rule urged by petitioners

should be rejected because it would allow recoveries on stale

claims and would frustrate the goal of repose. That rule, if

adopted, would permit claims to be brought seeking recoveries

for readily-apparent injuries incurred decades earlier, as long as

a single predicate act occurred in the four years prior to the

filing of the civil RICO suit. Actions asserting such hoary

RICO claims pose the risk of crippling treble damages despite

the severe prejudice to defendants in their ability to marshall

exculpatory evidence due to the passage of time, the departure

of employees, the inevitable fading of memories, and other

factors. The enduring cloud of long-lived RICO liability based

on events occurring decades earlier would also create a severe

drag on the ability of business to raise capital, borrow money,

enter into corporate transactions, and generally run their

businesses.

The Court should therefore avoid any accrual rule that

operates, in effect, to extend the four-year limitations period for

civil RICO claims to span many additional years in those cases

where the alleged injuries and legal violations are readily

apparent and there have been no affirmative acts of fraudulent

concealment.

I. THE COURT SHOULD ADOPT AN ACCRUAL

RULE THAT PREVENTS STALE CLAIMS AND

PERMITS CONTINGENT LIABILITIES TO LIE IN

When this Court adopted a uniform statute of limitations

for civil RICO claims in Agency Holding Corp. v. Malley-Duff

& Associates, Inc., 483 U.S. 143 (1987), it was guided by the

fundamental principle that it is “‘utterly repugnant’” to allow

federal suits to be brought ““‘at any distance of time.’” Malley-

Duff, 483 U.S. at 156 (quoting from Wilson v. Garcia, 471 U.S.

261, 271 (1985)).

This “repugnance” stems from two concerns. As the Court

elaborated:

[1] Just determinations of fact cannot be made when,

because of the passage of time, the memories of witnesses

have faded or evidence is lost. [2] In compelling

circumstances, even wrongdoers are entitled to assume that

their sins may be forgotten.

Malley-Duff, 483 U.S. at 156 (quoting from Wilson v. Garcia,

471 U.S. at 271). The Court also noted that limitations

principles should not apply in such a way that “‘[dJjefendants

cannot calculate their contingent liabilities, not knowing with

confidence when their delicts lie in repose.’” Jd. (quoting from

Wilson v. Garcia, 471 U.S. at 275 n. 34).

The “last predicate act” accrual rule advanced by

petitioners, and the similar rule used at one time by the Third

Circuit in Keystone Ins. Co. v. Houghton, 863 F.2d 1125 (3d

Cir. 1988), badly fails both principles. Under those rules, a

3

RICO plaintiff can incur injuries in year 1, continue to incur

injuries in years 2 through year 20 which are readily apparent

to a reasonably diligent person, and then sue in year 20 for

injuries incurred during the entire 20 years.

The staggering implications of such a rule are apparent

from the present case. To begin, a “garden-variety” false-

advertising claim,’ involving a sale of a silo by a legitimate

business to farmers, can easily be pled as a RICO

“racketeering” violation although no criminal conviction has

occurred and the defendant is a respected business. See H.J.

Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 249

(1989). This demonstrates that any manufacturer in America

can be put to the substantial expense of defending RICO claims

-- many of which are unfounded and brought to coerce higher

settlements -- for the sale of any of its products, and based on

as little as any two advertising claims, made to any of the

manufacturer’s thousands, millions, or even tens of millions of

customers.

That exposure is bad enough, but one that manufacturers

must presently face as the cost of doing business.’ However,

? In Malley-Duff, the Court noted that civil RICO claims can

address “‘garden variety’ business disputes” including “breach of

misappropriation of trade secrets, unfair competition, usury,

disparagement, etc.” 483 U.S. at 143 (quoting court of appeals opinion).

> The Court has construed RICO to apply to legitimate,

“respected” businesses that have not been convicted of any predicate

criminal offense. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 493,

499 (1985). The Court observed that, “in its private civil version, RICO

is evolving into something quite different from the original conception of

its enactors.” 473 U.S. at 500. There is no cause to adopt an accrual rule

that exacerbates this trend when the statute itself is silent on the issue of

(continued...)

the associated number of potential claims, and their magnitude,

would be increased vastly under the petitioner’s proposed

accrual rule. If that rule were adopted, claims could be brought

for injuries incurred decades ago if a product is still offered for

sale today, even where the plantiff’s injuries were at all times

readily apparent. No precedent has been cited by petitioners

for such a result from any other civil cause of action.‘

At the same time, the ability of manufacturers effectively

to defend such claims would be limited due to the staleness of

the evidence. With the passage of time, employees leave,

memories fade, ownership of manufacturing firms may change

hands one or more times, and exculpatory evidence may be

discarded inadvertently or in the ordinary course of business.

As a practical matter, most manufacturing firms will lack ready

and complete evidence of the multitudinous transactions in

which they have been engaged over the course of many years.

Potential plaintiffs will be at a marked advantage, since their

own accounts of their individual interactions with the

defendant will be difficult to impeach with specific evidence.

| Petitioners suggest (at 31) that an open-ended accrual rule

is appropriate to vindicate the public-interest purpose of civil

RICO claims. This contention should be given no weight in

view of the Court’s ruling in Shearson/American Express Inc.

*(...continued)

accrual.

* While product-liability claims are often permitted to be filed

many years after an injury-causing act occurred, that may be permitted

because the injury may manifest itself only after a lengthy delay of years

or decades. In this case, however, petitioners’ “last predicate act” rule

would permit claims to be pursued for all damages incurred at any time,

even if the injury was readily apparent at all times, so long as a final

unlawful act occurs within the final four-year period prior to suit.

5

v. McMahon, 482 U.S. 220, 242 (1987), that “[t}he private

attorney general role for the typical RICO plaintiff is simply

less plausible than it is for the typical antitrust plaintiff.” The

Court further explained that the “policing function” of the

RICO damages remedy “was a secondary concern.” 482 U.S.

at 240-41. Accordingly, petitioners cannot justifiably cloak

their plea for an open-ended accrual rule in “public interest”

garments.

Likewise, the Court should not adopt a virtually boundless

accrual rule by dint of Congress’ direction that RICO’s

provisions be “liberally construed,” because the Court has

noted that this was “not an invitation to apply RICO to new

purposes that Congress never intended.” Reves v. Ernst &

Young, 507 U.S. 170, 183 (1993). The Court has determined

in Malley-Duff that the policies favoring repose, and avoidance

of stale claims, apply to civil RICO claims. The accrual rule

adopted by the Court should not serve to frustrate those

policies.

In short, an open-ended accrual rule for civil RICO claims

would be a disaster for American business. Some of the

adverse affects are described further below.

Il. A BOUNDLESS ACCRUAL RULE WILL IMPOSE

SUBSTANTIAL ECONOMIC COSTS ON

AMERICAN BUSINESSES

The burdens presented by an open-ended RICO accrual

rule will not fall infrequently or on isolated occasions, because

civil RICO claims are filed by the hundreds each year. The

Administrative Office of the United States Courts reported that

849 civil RICO cases were filed in the federal district courts in

the 12-month period ending September 30, 1996, and 900 were

filed in the prior year. ANNUAL REPORT OF THE DIRECTOR,

6

ADMINISTRATIVE OFFICE OF THE UNITED STATES COURTS,

SUPPLEMENTAL TABLES, Table C-2 (1996). Apart from their

sheer numbers, civil RICO claims are brought against all sorts

of businesses, and are rooted in “garden-variety” disputes

involving matters as diverse as false advertising (such as this

case), insurance disputes, and contract disputes. See note 2,

supra. Increasingly novel applications are being urged for civil

RICO claims, extending even into the realm of sexual

harassment.’ As this Court held in National Organization of

Women, Inc. v. Schleider, 510 U.S. 249, 259 (1994), an entity

can be subject to civil RICO liability even if it does not engage

in unlawful activity for an “economic motive.”

The economic costs associated with the defense of stale

claims, and uncertain contingent liabilities for prior periods, are

borne by manufacturers and other firms across the nation.

Enormous direct and indirect costs would be imposed on

American businesses by petitioners’ proposed accrual rule,

which would permit recoveries for RICO violations going back

19 years in this case, and potentially longer in others.

For example, businesses that seek to purchase insurance in

order to protect themselves against crushing RICO liabilities

would find it difficult and more costly to obtain such insurance

against the greater number and magnitude of claims that could

result from the longer period of liability exposure. Insurers

have “reacted sharply to the disappearance of litigation time

limits” by shifting from “occurrence” to “claims-made”

policies, and ceasing to write coverage at all when “[p]ricing a

policy to cover the risk intelligently [is] impossible.” Peter W.

Huber, LIABILITY: THE LEGAL REVOLUTION AND ITS

* See William H. Kaiser, Extortion in the Workplace: Using

Civil RICO to Combat Sexual Harassment in Employment, 61

BROOKLYN L. REV. 965 (Fall 1995).

7

CONSEQUENCES 139 (1988). The cost of insurance, when

available, is necessarily increased by the greater period of

potential risk. /d. at 141. If insurance is not available, prudent

firms must instead take reserves against potential claims. In

either case, funds that could be used in productive enterprises --

to create jobs, invest in capital equipment, or in entrepreneurial

ventures -- are diverted to higher insurance premiums or to

unproductive liability reserves.

Businesses facing possible civil] RICO suits from stale

claims may also be limited in their ability to raise capital, or

borrow money, in public or private markets. Investors and

lenders will avoid businesses that face false-advertising or other

similar claims if the exposure for past damages is unlimited in

time. These effects can be substantial, as evidenced by the

difficulties that the Superfund law® has created in Capital-

formation and borrowing for firms that face potential liabilities

for industrial pollution occurring thirty, forty, or more years

ago. One leading bond-rating agency has concluded that the

exposure of entire industries to environmental liabilities dating

back decades affects those industries’ overall credit risk and

may pose concerns about “corporate solvency.” ’ The same

problems may also impair corporate combinations or mergers

with firms that have potential RICO exposure dating back

decades, even though such combinations or mergers may

otherwise offer benefits to shareholders or the public generally

* The Superfund law is more formally known as the

Comprehensive Environmental Response Compensation and Liability Act

of 1980 (“CERCLA”), 42 U.S.C. §§ 9601-9675.

’ “Moody’s believes that environmental liabilities may pose

significant credit risks because of their potential for creating sudden and

possibly large financial obligations on past generators of waste

materials.” Moody’s Special Comment, Environmental Risks and

Corporate Credit Quality (April 1991).

8

through synergies or other means. This experience may parallel

that in the environmental field, where one study reported that

“91% of firms surveyed evaluate the environmental

performance of potential [acquisition] partners.” The Center

for Environmental Management, Tufts University,

MULTINATIONAL CORPORATIONS AND THE ENVIRONMENT: A

SURVEY OF GLOBAL PRACTICES, at 9 (April 1991).

Potential business defendants facing the risk of stale claims

will also incur greater records retention expenses, because it

will be prudent for businesses to retain records for longer

periods. For example, this case illustrates the potential need for

the manufacturer of a product to retain records of its dealings

with each and every customer for twenty years or more. It is

well recognized by corporate records managers that “[tJhe

various statutes of limitations are part of the legal framework

on which a good records policy is structured.” 1 William A.

Hancock (ed.), GUIDE TO RECORDS RETENTION 109 (1995).

These requirements “are imposing an increasing burden on

- business to maintain records for extremely long periods of

time.” Id. at 103 (emphasis in original). The cost of doing so

could be staggering for large manufacturing firms, which sell

products by the millions, or even tens of millions, to the general

public. Indeed, because employees often move from one

employer to another with some frequency, firms that prudently

anticipate potentially stale claims would need to incur the

expense of routinely obtaining written statements from

departing employees about numerous subjects, or alternatively

track their whereabouts.

None of these costs are inevitable, or unavoidable, if the

accrual rule adopted by this Court sets reasonable bounds on

the temporal scope of civil RICO liability. The Court should

not allow “real or imagined malefactors [to be] chased eternally

down the corridors of time.” Huber, LIABILITY, supra, at 97.

9

Instead, the Court should adopt a rule that allows “ancient

controversies to rest in peace so that once-fresh wounds would

have a chance to heal.” Jd.

CONCLUSION

For the foregoing reasons, the Court should reject the

accrual rule proposed by petitioners and affirm the judgment

below.

Jan S. Amundson

Quentin Riegel

National Association of

Manufacturers

1331 Pennsylvania Ave., N.W.

Washington, D.C. 20004-1790

(202) 637-3055

Dated: March 21, 1997

10

Respectfully submitted,

Alfred W. Cortese, Jr.*

Daniel I. Prywes

Michael F. Wasserman

Pepper, Hamilton &

Scheetz LLP

1300 19th Street, N.W.

Washington, D.C. 20036

(202) 828-1200

Attorneys for

Amicus Curiae

National Association of

Manufacturers

*Counsel of Record