Introduction

The case of In re U.S. Foodservice Inc. Pricing Litigation adjudicated by the United States Court of Appeals for the Second Circuit on August 30, 2013, addresses significant allegations of fraudulent overbilling practices by U.S. Foodservice, Inc. ("USF"). USF, the nation's second-largest food distributor, stood accused of orchestrating a scheme to defraud approximately 75,000 of its "cost-plus" customers through the creation and manipulation of shell companies known as Value Added Service Providers ("VASPs"). This comprehensive commentary delves into the appellate court's affirmation of the district court's decision to certify a nationwide class action, exploring the legal principles, precedents cited, and the broader impact of this judgment on class action litigation under the Racketeer Influenced and Corrupt Organizations Act ("RICO").

Summary of the Judgment

USF faced allegations that it engaged in a fraudulent scheme beginning in the late 1990s, wherein it artificially inflated the cost components of its billing to cost-plus customers. The plaintiffs contended that USF established and controlled VASPs—shell entities—for the explicit purpose of inflating invoices and subsequently disguising these inflated costs as legitimate promotional allowances. The district court certified a nationwide class comprising approximately 75,000 USF customers, determining that the RICO and breach of contract claims were suitable for class action under Federal Rule of Civil Procedure 23(b)(3). USF appealed this certification, arguing that the district court had abused its discretion. The Second Circuit, upon review, affirmed the district court's decision, concluding that the class certification was appropriate as common issues predominated over individualized ones.

Analysis

Precedents Cited

The judgment extensively references pivotal cases that shape the standards for class certification under Rule 23:

• KLAY v. HUMANA, INC. (11th Cir. 2004): Upheld class certification in cases involving systemic misrepresentation by employers.
• Bridge v. Phoenix Bond & Indemnity Co. (U.S. Supreme Court 2008): Clarified elements of RICO claims, particularly concerning causation and reliance.
• Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co. (5th Cir. 2003): Highlighted circumstances where class certification might be inappropriate due to individualized issues.
• Comcast Corp. v. Behrend (U.S. Supreme Court 2013): Emphasized the importance of assessing the damages methodology at the class certification stage.
• ALLAPATTAH SERVICES, INC. v. EXXON CORP. (11th Cir. 2003): Supported class certification when contract terms were materially uniform.

These precedents collectively guided the appellate court in evaluating the appropriateness of class certification in this complex multi-jurisdictional RICO action.

Legal Reasoning

The court's decision hinged on the application of Federal Rule of Civil Procedure 23(b)(3), which permits class certification when:

• Predominance: Common questions of law or fact predominate over individual issues.
• Superiority: A class action is the superior method for fair and efficient adjudication.

The Second Circuit meticulously analyzed whether the plaintiffs in this case met these criteria for both their RICO and breach of contract claims.

Predominance

For the RICO claims, the court determined that the alleged fraud—USF's creation and control of VASPs to inflate costs—constituted a uniform misrepresentation applicable to all class members. The court reasoned that individual reliance did not override the commonality of the fraudulent scheme, as payment on inflated invoices served as circumstantial evidence of reliance by all plaintiffs.

Regarding breach of contract claims, the court found that the cost-plus contracts were materially similar across the diverse class of customers, governed uniformly by the Uniform Commercial Code (UCC). The variations cited by USF, such as minimum purchase requirements and differing state laws, were deemed immaterial due to the non-enforcement of these provisions and the overarching UCC framework, respectively.

Superiority

The court affirmed that a class action was superior to individual litigation in this scenario due to the substantial commonality of the legal and factual issues, the efficiency of handling similar claims collectively, and the potential economies of scale in adjudicating such a widespread fraudulent practice.

Impact

This judgment reinforces the viability of class actions in addressing large-scale fraud under RICO, particularly when a central scheme affects a vast number of similarly situated plaintiffs. It underscores the judiciary's recognition of the complexities and inefficiencies inherent in individual lawsuits, especially in multi-jurisdictional contexts. The affirmation sets a precedent that encourages collective redress mechanisms in cases where fraudulent practices are systematically orchestrated to benefit a singular entity at the expense of numerous stakeholders.

Complex Concepts Simplified

Racketeer Influenced and Corrupt Organizations Act (RICO)

RICO is a federal law designed to combat organized crime by enabling leaders of syndicates to be tried for the crimes they ordered others to do or assisted them in doing. In civil contexts, it allows plaintiffs to sue entities engaged in a pattern of racketeering activity that affects interstate commerce.

Cost-Plus Pricing

This pricing model involves charging customers the actual cost of goods plus an additional markup. The markup is intended to cover operational costs and profit margins. In this case, USF allegedly manipulated the "cost" component to inflate prices unfairly.

Class Certification under Rule 23(b)(3)

Rule 23(b)(3) of the Federal Rules of Civil Procedure permits the certification of a class action if the plaintiffs can demonstrate that common legal and factual issues predominate and that a class action is the most efficient way to handle the dispute. This rule is pivotal in cases involving numerous plaintiffs with similar claims.

Value Added Service Providers (VASPs)

In this litigation, VASPs were alleged to be shell companies created by USF to artificially inflate invoice costs. These entities were controlled by USF to mask the true cost structure from customers, thereby enabling fraudulent overbilling.

Conclusion

The Second Circuit's affirmation of the district court's class certification in In re U.S. Foodservice Inc. Pricing Litigation underscores the judiciary's commitment to enabling collective legal action in instances of systemic fraud. By recognizing the predominance of common issues and the superiority of a class action mechanism in efficiently addressing widespread deceptive practices, this judgment provides a robust framework for future RICO-related class actions. It highlights the balance courts must maintain between individual litigations and collective redress, particularly in complex, multi-jurisdictional fraud schemes.