Opposition Brief — Rogers v. Liquid Air Corp.

No. 87-1262

In The

Supreme Court of the Unite

@ctober Germ, 1987

JACK R. ROGERS, GEORGE MICHLIK and

D & R WELDING SUPPLY COMPANY, an

Illinois Corporation, and RAYMOND E.

BRIDGES and BRIDGES WELDING SUPPLY

& THERAPY, INC.,

Petitioners,

Vv.

LIQUID AIR CORPORATION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF IN OPPOSITION TO PETITION

FOR CERTIORARI

WILLIAM G. Scuopr, JR.”

PAULA E. LITT

ScHopr & WEIss

304 West Randolph Street

Chicago, Dlinois 60606

(312) 701-9300

Attorneys for Respondent

Liquid Air Corporation

*Counsel of Record

Pandick Technologies, Inc., Chicago @ (312) 236-0200

i

PARTIES

The caption of the case in this Court contains the

names of all parties. Excluding wholly-owned subsidiaries,

the following are subsidiaries of respondent Liquid Air

Corporation: Kent Oxygen Company, Inc.; National Com-

pressed Gases, Inc.; Nuclear Cryogenics, Inc.; South-

land Welding Supply, Inc.; Argonal Inc.; Hydrogenal Inc.;

Hydrogenal II Inc.; Miller Welders Canada Ltd.; Canadian

Helium Ltd; Oxygene St.-Maurice (1983) Ltee.; and 118639

Canada Inc. The following are affiliates of respondent Ligq-

uid Air Corporation: Temple Welding Supply & Equipment

Inc.; Oxychem U.S.A.; U.S. Divers Corp.; Lipha Chemicals

Inc.; Lipha Pharmaceuticals Inc.; Dey Laboratories Inc.;

Oxychem Canada Inc.; Lincoln Big Three, Inc.; and Big

Three Lincoln U.K.

il

TABLE OF CONTENTS

Page

PRIUS ...44 cia 6 eee i

Tabie of Authorities .........5. 40455 so iii

Statement of the Case. .......:5241 0560 bee 1

1. The Facts’. . sic: ..+553 ee 1

The Relationship of the Parties......... 1

D & R’s “Returns” and the Scheme’s

Incepugh. o. 344 a eee 2

How the Scheme Worked.............. 3

Uncovering the Scheme............... 4

Proof of the: Fram. «04334 eee 5

2. Proceedings Below... ....6..% 45% ss4s ea 7

Argument ......5 5405s pe ee 8

I. The Seventh Circuit Correctly Held That

Petitioners’ Conduct Constituted a Pattern of

Racketeering Activity as Defined Under RICO .. 8

If. Petitioners’ Other Arguments Do Not Present

Issues Worthy of Review by This Court ...... 10

Conelusgion ... 60. 3450 12

ill

TABLE OF AUTHORITIES

Cases: Page

Aetna Life Insurance Co. v. Lavoie, 475 U.S. 813

ELE ay) RS soot ee en 11

Armco Industrial Credit Corp. v. SLT Warehouse

Ce., vem Fame 470 Gt Cir. 1066)... nee eine. 10

Berkey Photo, Inc. v. Eastman Kodak Co., 457

F. Supp. 404 (S.D.N.Y. 1978), revs’d in part on

other grounds, 603 F.2d 263 (2d Cir. 1979) ....... 11

Cullen v. Margiotta, 811 F.2d 698 (2d Cir. 1987),

cert. denied, 107 S.Ct. 3266 (1987) ............. 10

H.J. Inc. v. Northwestern Bell Telephone Co., 829

CM ROG. SMUG) iis cence ses eawe uae als 10

Herman & MacLean v. Huddleston, 459 U.S. 375 ;

ER inca k ann uicle ses ure ek ekis ook ee 10

Morgan v. Bank of Waukegan, 804 F.2d 970

Saag 4 aes ahs 6 ee dad 4 ae awe 8-9

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

Ae La ie Ee ge ac ig vere ae re a 8, 11

Superior Oil Co. v. Fulmer, 785 F.2d 252

NS ig Sy asia a @ bole eae 6 ee D 9-10

United States v. Local 560 of the Int'l Brotherhood of

Teamsters, 780 F.2d 267 (3d Cir. 1985) ......... 10

Wilcox v. First Interstate Bank of Oregon, 815 F.2d

ono nay 6s 6 be ed a eee 10

Statutes:

I EOD eae icc eee ee he ce ae ees 8

Iu The

Supreme Court of the Hnited States

@ctober Term, 1987

JACK R. ROGERS, GEORGE MICHLIK and

D & R WELDING SUPPLY COMPANY, an

Illinois Corporation, and RAYMOND E.

BRIDGES and BRIDGES WELDING SUPPLY

& THERAPY,INC., _

Petitioners,

v.

LIQUID AIR CORPORATION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

BRIEF IN OPPOSITION TO PETITION

FOR CERTIORARI

STATEMENT OF THE CASE

1. The Facts

The Relationship of the Parties

Respondent Liquid Air Corporation (“Liquid Air”)

produces and distributes industrial gas and industrial

2

gas products. These products are supplied to customers

by distributors who lease cylinders from Liquid Air.

Distributors pick up full cylinders of industrial gas from

their designated Liquid Air distribution center and return

empty cylinders there. Pet. App. 2a.’

Petitioner D & R Welding Supply Co., Inc. (“D & R”),

was a Liquid Air distributor for over 30 years. D & R,

which is operated by its principal shareholders, petitioners

Jack R. Rogers (“Rogers”) and George Michlik (“Michlik”),

has branches in Decatur, Streater, and Urbana, Illinois

and is engaged in interstate commerce. Pet. App. 2a.

In August 1980 D &R notified Liquid Air that it

wished to terminate its distributorship effective in Septem-

ber 1981. Under its Distributor Cylinder Lease Agreement

with Liquid Air, upon termination D & R was required to

return all leased cylinders to Liquid Air, pay rent on all

cylinders until they were returned or accounted for, and

pay Liquid Air the replacement value for cylinders not

returned or accounted for. The rental price in effect at the

time D & R terminated its contract was $2.25 per cylinder

per month and the average replacement value per cylinder

was #150. When it terminated the agreement, D & R had

over 5,000 cylinders outstanding on its lease. Pet. App. 2a.

D & R’s “Returns” and the Scheme’s Inception

Although D & R was to begin returning cylinders to

Liquid Air in September 1981, it did not begin making sig-

nificant cylinder returns until April 1982 — and then only

after Lauren “Bud” Sage (“Sage), Liquid Air’s Midwest

Regional Manager of Sales and Distribution, requested

that D & R do so. Returns were steady for a while, but

then began to taper off in the fall of 1982. By August 1982,

‘The Appellate Court’s opinion is reproduced in the Appendix

to the Petition for Writ of Certiorari, and shall be cited herein

by appendix page as, e.g., “Pet. App. 10a-lla.” The Petition for

Writ of Certiorari shall be cited herein by page as e.g., “Pet. 4.”

3

D & R had returned only 1,570 cylinders. To expedite the

sluggish returns, Liquid Air increased the cylinder rental

rate it was charging D & R for outstanding cylinders. Pet.

App. 2a.

The rent increase in the fall of 1982 created a business

problem for Rogers, Michlik and D & R, since it put pres-

sure on D & R to reduce its lease balance quickly. D & R

solved this problem with the aid of Liquid Air employee

Raymond E. Bridges (“Bridges”), then Distribution Super-

visor for the Peoria Distribution Center. As distribution

supervisor, Bridges was responsible for the total opera-

tion of the Peoria facility. Rather than return the remain-

ing cylinders owed, D & R would have Bridges falsify Liq-

uid Air records. Bridges was able to execute the scheme

because he had complete control of the paperwork at the

Peoria Distribution Center. Pet. App. 2a-3a.

How the Scheme Worked

In early November 1982, the plan in place, D& R

stopped returning cylinders. Instead, Rogers and Michlik

supplied Bridges with phony quantities of supposedly “re-

turned” cylinders. Bridges entered these numbers on Liq-

uid Air shipping orders, signed for Liquid Air, gota D & R

signature or signed for D & R himself, and then mailed

the shipping orders to Liquid Air’s administrative office in

Willowbrook, Illinois, for processing. Willowbrook person-

nel entered the return information shown on the falsified

shipping orders at Liquid Air’s remote terminal there. The

information was then transmitted by telephone line to

Liquid Air’s mainframe computer in California. D & R's

monthly lease statements showing a reduced cylinder bal-

ance were issued in California and mailed to D & R from

there. On paper, D & R was relieved of the financial! obli-

gation to account for or pay rental on those cylinders. Pet

App. 2a-3a, lla.

Thus, the actual reductions in D&R’s lease

statements were made thousands of miles from Peoria,

4

solely on the basis of falsified figures shown on the D & R

shipping orders which Bridges prepared. Each false return

resulted in two uses of the mails and one use of the wires.

Each time a false shipping order was submitted, Liquid

Air was deprived of rent and replacement value on the

cylinders. This process was repeated nineteen separate

times over seven months.’ Through Bridges’ falsifications,

D & R was able to reduce its lease balance to almost zero

by June 1983. Pet. App. 3a, 11a.

In return for Bridges’ falsification of shipping orders

to show D & R cylinder returns that were never made,

Rogers and Michlik agreed to set him up in his own weld-

ing business in Peoria. They would supply personnel,

capital and welding products. By setting up Bridges in

business, Rogers and Michlik were able to expand their

business into Peoria. They were prevented from doing

so directly by a noncompetition agreement with a Peoria

welding supply company, A.W. Moore Welding. Rogers and

Michlik could thus circumvent the noncompetition agree-

ment with Moore Welding while simultaneously eliminat-

ing their cylinder return problem and saving themselves

hundreds of thousands of dollars in additional cylinder

rental and replacement costs. Pet. App. 3a.

Uncovering the Scheme

On August 3 and 4, 1983, Sage visited the Peoria Dis-

tribution Center. Sage became suspicious after another

Liquid Air employee reported seeing Bridges removing

cylinders from the Peoria Distribution Center. Bridges’

claimed to have permission from Sage to do so, but Sage

had given Bridges no such permission. Sage began to

? Petitioners attempt to relitigate the settled facts and mislead

this Court by stating that there were sixteen falsified shipping

orders. Pet. 4-5. The Appellate Court found, as Liquid Air proved

to the jury, that there were nineteen separate falsified returns.

Pet. App. 10a-11a.

5

question the cylinder supply in Peoria, and realized that

had D & R actually made its returns he should have seen

many thousands more cylinders piled up in Peoria than he

did. Sage returned to the regional office and enlisted Gil

McCaw (“McCaw”), Liquid Air’s Administration Manager,

to determine whether cylinders were missing from Peoria.

Pet. App. 3a.

McCaw projected the number of cylinders that should

have been in Peoria at that time, assuming that D & R had

returned all of the cylinders it claimed to have returned.

McCaw then compared this projected inventory to the

actual physical inventory taken in Peoria for July 1983,

and discovered that, on paper, D & R appeared to have

returned many more cylinders to Peoria than actually were

there. McCaw confirmed this analysis by conducting a

physical inventory of the cylinders in Peoria. McCaw’s

analysis showed that 3,307 cylinders were missing. The

difference between the number of cylinders that should

have been in Peoria in July 1983 and the number actually~

there (3,307) is almost exactly the same as the number of

cylinders allegedly returned by D & R during the period

when the scheme operated, i.e., from November 1982 to

June 1983. Pet. App. 3a.

McCaw’s analysis also revealed that just before the

falsified returns began, Bridges stopped completing the

required monthiy inventories of cylinders located at the

Peoria Distribution Center. Bridges thus eliminated the

only means by which Liquid Air personnel outside of Peoria

could know how many cylinders were actually present in

Peoria. Inventory was not taken again until July 1983,

immediately after Bridges left Liquid Air to go into the

business set up by Rogers and Michlik.

Proof of the Fraud

Notwithstanding D & R’s claim throughout the litiga-

tion that it had returned all but 12 cylinders to Liquid

Air by June 1, 1983, over a year after the suit was

6

filed, D & R’s dockman revealed during his deposition that

D & Rat that time had 220 Liquid Air cylinders in its pos-

session. At trial, the dockman testified that the number

had grown to 290. Only after the trial did D & R disclose

that it actually had 530 Liquid Air cylinders in its posses-

sion — cylinders which it ultimately returned to Liquid Air

to reduce the judgment. Pet. App. 22a, 32a-33a.

Liquid Air also discovered numerous irregularities

in the falsified returns and in petitioners’ explanation

of how those “returns” were made. All of the falsified

shipping orders were signed by Rogers and Michlik,

and their assistant Oliver Pennypacker, while those

few legitimate returns were filled out by D & R's reg-

ular drivers. Notwithstanding Rogers, Michlik and

Pennypacker’s claims to have returned cylinders, none of

Liquid Air’s employees had seen them at the Peoria Dis-

tribution Center. Even D & R employees testified that

they had not seen Rogers, Michlik or Pennypacker drive

a truck during the relevant period. Pet. App. 12a.

In answer to this, petitioners claimed that they

returned cylinders at times when there were no Liquid Air

employees around other than Bridges. This was contra-

dicted by Liquid Air employee time records, which showed

that Liquid Air’s dockmen were routinely working on the

dates refiected on the falsified shipping orders. Petitioners

could offer no explanation for this inconsistency. Indeed, at

trial petitioners could not even agree on who was respon-

sible for counting the cylinders reflected on the falsified

shipping orders. Pet. App. 12a-13a.

Notwithstanding defendants’ persistent denial of

D & R’s involvement with Bridges Welding, the evidence

to the contrary included the following: Jack Rogers had

asked his former business partner to go into business in

Bridges Welding with him; Bridges Welding was incor-

porated and held its first organizational meeting while

Bridges was still a Liquid Air employee; D & R supplied

7

personnel and over $100,000 in welding supplies to Bridges

Welding without charge; Michlik cosigned a loan thus

enabling his nephew to buy stock in Bridges Welding;

Bridges Welding leased all its cylinders from Rogers’ son

Butch, who purchased them through D & R. Pet. App. 16a.

As a direct result of Bridges Welding’s presence in

Peoria, Moore Welding lost customers. Moore Welding was

thus injured when D & R set Bridges up in business to

circumvent its noncompetition agreement. Pet. App. 11a.

2. Proceedings Below

This cause was tried to a jury in Peoria over two

and one half weeks in July 1987. The jury found against

all petitioners on all of the counts under the Racke-

teer Influenced and Corrupt Organizations (RICO) Act,

18 U.S.C. §§ 1961-1968, and on the conversion count. In

addition, the jury returned a verdict against Bridges for

breach of fiduciary duty, and against the D & R defendants

(D & R, Rogers and Michlik) for inducement to breach of

fiduciary duty.° Pet. App. 4a.

The jury awarded Liquid Air actual damages of

$750,000 (before trebling) on each RICO count and on

the count for inducement to breach of fiduciary duty. On

the conversion count, the jury awarded actual damages of

$350,000 and punitive damages of $25,000 against D & R;

$15,000 against Bridges Welding; $10,000 each against

Rogers and Michlik, and $5,000 against Bridges. In addi-

tion, the jury assessed actual damages of $4,000 and puni-

tive damages of $1,000 against Bridges for breach of fidu-

ciary duty. Pet. App. 4a. Liquid Air’s recovery was limited

to the greatest single recovery under any one count. Pet.

App. 4a n. 1.

3 The jury returned verdicts for Bridges on two counts concern-

ing misappropriation of miscellaneous property and welding sup-

plies unrelated to the 3,307 cylinders.

8

Petitioners raised 30 separate issues on appeal. All

were rejected by a unanimous panel of the Seventh Cir-

cuit, which affirmed the judgment below in an opinion writ-

ten by Chief Judge Bauer. Pet. App. la-23a. Petitioners’

motion for reconsideration or hearing en banc was denied.

Pet. App. 26a-27a.

ARGUMENT

I. The Seventh Circuit Correctly Held That

Petitioners’ Conduct Constituted a Pattern

of Racketeering Activity as Defined Under

RICO.

The RICO Act defines a pattern of racketeering activ-

ity as at least two acts of racketeering activity committed

within a ten-year period. 18 U.S.C. § 1961(5). In Sedima,

S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479 (1985), this Court

commented that a pattern requires continuity plus rela-

tionship among those predicate acts. Jd. at 496 n. 14.

Consistent with RICO and Sedima, the Seventh Cir-

cuit has adopted a fact-based test for deciding whether

a plaintiff has demonstrated the existence of a pattern

of racketeering activity. Under this test, in determining

whether the acts are sufficiently continuous and related to

form a pattern, a court must examine the following factors:

the number and variety of predicate acts and the length of

time over which they were committed, the number of vic-

tims, the presence of separate schemes and the occurrence

of distinct injuries. Morgan v. Bank of Waukegan, 804 F.

2d 970, 975 (7th Cir. 1986).

Applying that test here, the Seventh Circuit correctly

found that petitioners had engaged in a pattern of racket-

eering activity. As the Court noted, petitioners defrauded

Liquid Air through the execution of nineteen separate

fraudulent shipping orders falsely reflecting the return of

cylinders that, in fact, were never returned. Pet. App.

115. Each fraudulent return resulted in two acts of mail

fraud and one act of wire fraud. Each fraudulent return

9

resulted in a separate and distinct injury to Liquid Air, and

a benefit toD & R. Petitioners could have terminated their

scheme at any time. Instead, week after week, for seven

months, they renewed their efforts to defraud Liquid Air.

The Seventh Circuit held that such “repeated infliction of

economic injury upon a single victim of a single scheme is

sufficient to establish a pattern of racketeering activity for

purposes of civil RICO.” Pet. App. 11a.

Contrary to petitioners’ assertion (Pet. 13-15), the Sev-

enth Circuit’s opinion here does not conflict with its ear-

lier opinion in Morgan. The Court’s conclusion here that

there was repeated infliction of economic injury is merely

the result of applying the factual criteria first identified in

Morgan. As the Court stated in the instant case, “Morgan

envisioned a fact-specific inquiry, in which no single fac-

tor would be determinative.” Pet. App. lla. The Seventh

Circuit saw no inconsistency here, and Petitioners mislead

this Court by suggesting that any exists.

Similarly, there is no clear conflict between the Sev-

enth Circuit’s holding in the instant case and that of the

Eighth Circuit in Superior Oil Co. v. Fulmer, 785 F.2d 252

(8th Cir. 1986). In Superior Oil, the Eighth Circuit, like

the Seventh after it, stressed that a pattern of racketeering

activity required “continuity plus relationship.” Jd. at 257.

Although the precise nature of the predicate acts is not dis-

closed, the opinion in Superior Oil suggests that the Eighth

Circuit could not find continuity in defendant’s scheme to

convert natural gas from plaintiff. Jd. at 257. The Court

stated that multiple schemes were required, but made clear

that the determination of pattern would be intensely fac-

tual. Both circuits agree that such continuity must exist

for a pattern of racketeering activity to be found. Thus, in

the instant case, the Eighth Circuit’s stated requirement of

multiple schemes could have been satisfied by the repeated

infliction of economic injury to Liquid Air that the Seventh

Circuit found, or by the separate but additional injury to

Moore Welding in Peoria, that resulted from the scheme.

10

Even assuming, arguendo, that the Eighth Circuit’s

holding in Superior Oil concerning RICO’s pattern require-

ment conflicts with that of other circuits, certiorari should

still be denied here. There is evidence that the Eighth Cir-

cuit’s position is still evolving. In separate concurrences to

an opinion issued in late 1987, two Eighth Circuit judges

expressly requested that the Circuit reevaluate its ruling

in Superior Oil, stating that the “multiple scheme require-

ment that we have grafted onto the pattern element strays

from the statutory language of RICO.” H.J. Inc. v. North-

western Bell Telephone Co., 829 F. 2d 648, 650-651 (8th

Cir. 1987) Accordingly, there is no reason for the Court to

review the correct decision of the Seventh Circuit.

II. Petitioners’ Other Arguments Do Not Present

Issues Worthy of Review by This Court.

Petitioners’ other arguments for review are frivolous.

Every court that has decided the question of the standard of

proof under RICO has applied the preponderance of the evi-

dence standard. Wilcox v. First Interstate Bank of Oregon,

815 F. 2d 522, 531 (9th Cir. 1987); Cullen v. Margnotta,

811 F. 2d 698, 731 (2d Cir. 1987), cert. denied, 107 S.Ct.

3266 (1987); Armco Industrial Credit Corp. v. SLT Ware-

house Co., 782 F. 2d 475, 480-481 (5th Cir. 1986); United

States v. Local 560 of the Int’l Brotherhood of Teamsters,

780 F. 2d 267, 279 n.12 (8d Cir. 1985). As the Seventh

Circuit held, this result is consistent with the holding in

Herman & MacLean v. Huddleston, 459 U.S. 375 (1983),

where this Court approved a preponderance standard in

securities fraud actions. Pet. App. 7a-8a.

Neither law nor logic supports petitioners’ argument

that criminal procedural protections should apply in civil

RICO actions between private litigants. This argument

relies on petitioners’ characterization of the statute as

quasi-criminal. Pet. 16. Petitioner cites no case involving

a private civil damages action in which this Court, or any

court, has accorded a defendant the procedural protections

11

he would receive in a criminal prosecution by the govern-

ment. The Seventh Circuit summarily dismissed this argu-

ment. Pet. App. 7a n. 2.

Petitioners’ argument that treble damages constitute

an excessive fine under the Eighth Amendment is equally

baseless. As the Seventh Circuit noted, this argument

has been flatly rejected in antitrust cases by lower courts.

Berkey Photo, Inc. v. Eastman Kodak Co., 457 F. Supp.

404 (S.D.N.Y. 1978), revs’d in part on other grounds, 603 F.

2d 263 (2d Cir. 1979). Moreover, petitioners’ reliance for

this argument on Aetna Life Insurance Co. v. Lavoie, 475

U.S. 813 (1986) is misguided. There, this Court in dicta

addressed solely the issue of punitive damages, which,

unlike statutory treble damages, are subject to complete

jury discretion and are not necessarily tied to any measure

of actual damages.

Finally, petitioners’ arguments concerning both the

measure cf damages and the imposition of vicarious liabil-

ity under RICO present questions intimately tied to the

particular facts of this case, not recurring questions of law

that have application in other cases or that require resolu-

tion or even comment by this Court. In affirming the dam-

ages awards here, the Appellate Court found, consistent

with Sedima, 473 U.S. at 497, that the measure of dam-

ages under civil RICO is the harm occasioned as a result of

the predicate acts. Pet. App. 21a. Here, Liquid Air’s dam-

ages were equal to what it was entitled to receive under its

contract, i.e., the replacement value of the cylinders plus

lost rent. In concluding that Bridges Welding was vicari-

ously liable, the Seventh Circuit merely applied textbook

corporation law to the plain language of RICO.

12

CONCLUSION

In sum, petitioners have presented no valid reason

for this Court to review the Seventh Circuit’s unanimous

affirmance of the jury’s verdicts for plaintiff Liquid Air.

Accordingly, the Petition for Writ of Certiorari should be

denied.

Respectfully submitted,

WILuiaM G. Scuopr, JR.”

PAULA E. LITT

ScHopr & WEISS

304 West Randolph Street

Chicago, Illinois 60606

(312) 701-9300

Attorneys for Respondent

Liquid Air Corporation

*Counsel of Record

Date: March 2, 1988