                IN THE UNITED STATES COURT OF APPEALS

                           FOR THE FIFTH CIRCUIT



                               No. 99-20622



SUMMIT PROPERTIES INC.; SUMMIT PROPERTIES LP; SUMMIT PROPERTIES
PARTNERSHIP LP; STONY POINT/SUMMIT LP; MCGREGOR/MCGUIRE LP;
HENDERSON/MCGUIRE PARTNERS LP; OAK RIDGE/MCGUIRE PARTNERS LP;
WAVERLY PLACE/SUMMIT PARTNERS LP,

                                                Plaintiffs - Appellants,

                                  versus

HOECHST CELANESE CORP., formerly known as Celanese Corporation;
HOECHST CORPORATION; E. I. DUPONT DE NEMOURS, AND CO.; SHELL OIL
COMPANY, doing business as Shell Chemical Company; VANGUARD
PLASTICS INC.; BOW INDUSTRIAL CORP.; HOUSEHOLD INTERNATIONAL INC.,

                                                 Defendants - Appellees.



            Appeal from the United States District Court
                 For the Southern District of Texas

                               June 7, 2000

Before HIGGINBOTHAM and PARKER, Circuit Judges, and WARD,* District
Judge.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

       Today we are invited to read RICO as establishing a federal
products liability scheme complete with treble damages and attorney
fees for the benefit of end-users of defective products who never
relied on manufacturers’ alleged misrepresentations of product
quality.    We are unpersuaded that RICO can be extended so far by
such   a   marriage   of   distinct   duties    and   liability    regimes.
Consequently, we AFFIRM the dismissal of the plaintiffs’ RICO



  *
   District Judge of the Eastern District of Texas, sitting by designation.
claims against the defendant manufacturers of polybutylene plumbing
systems and components.
                                         I
     The plaintiffs own properties in which polybutylene (PB)
plumbing systems were installed.                  PB is a by-product of oil-
refining.    In the 1970s, Shell Oil Company purchased the exclusive
right to sell PB in the U.S. for a 10-year period.                Shell then sold
PB resin pellets to pipe extruders, such as Vanguard and Bow, who
made tubing from the pellets.            The defendants in this suit are
manufacturers    who     sold   either       PB   plumbing    systems     or   their
components    parts,   including       Shell,       DuPont,   Hoechst     Celanese,
Household International, Vanguard, and Bow.
     The plaintiffs contend that the defendants manufactured and
marketed these systems and components through a complex scheme to
defraud.     The claims revolve around core allegations that the
defendants made knowingly false claims in marketing PB, including
assertions that (1) it is suitable for use as a hot and cold
potable water plumbing systems; (2) it will last 50 years; (3) it
will not corrode; (4) it is easy, reliable, simple, proven and
fast; and (5) it will not occasion serious service problems.
     The truth, plaintiffs allege, is that PB plumbing is worse
than worthless, that it not only fails to perform its intended
function, but also that it causes severe property damage; that PB’s
inherent    defects    render    it    unsuitable       for   use    as   a    water
distribution system, including the fact that after installation,
such systems degrade, crack, leak, and spray water.
     The    plaintiffs    allege      that    the    defendants     engaged    in   a
conspiracy to defraud by directing a massive, fraudulent marketing
plan designed to make PB the “material of choice” in the plumbing

                                         2
market, so that by the end of Shell’s ten-year period of exclusive
rights,    Shell   would     have    a    commanding    market   position.    This
marketing     campaign      was     directed     at   building   code    approval
officials, members of the building industry such as builders and
plumbers, and other consumers.
                                           II
     The     plaintiffs      filed       suit    in   district   court   alleging
violations    of    civil    RICO.1        The   district   court   granted    the
defendants’ Rule 12(b)(6) motion to dismiss because the plaintiffs
conceded that they did not detrimentally rely on any of the
defendants’ allegedly fraudulent misrepresentations that served as
the basis for the RICO claims.             The district court held that such
reliance is a necessary predicate for establishing proximate cause
under RICO.        It denied a motion for reconsideration, and the
plaintiffs appealed.
                                          III
     RICO provides that “[a]ny person injured in his business or
property by reason of a violation of section 1962 of this chapter
may sue therefor . . . .”2 The Supreme Court, in Holmes v.
Securities Investor Protection Corp.,3 explicitly confirmed that
the “by reason of” language in RICO requires a causal connection
between the predicate mail or wire fraud and a plaintiff’s injury
that includes “but for” and “proximate” causation.4



     1
      18 U.S.C. § 1961 et seq.
     2
      18 U.S.C. § 1964(c) (emphasis added).
     3
      503 U.S. 258 (1992).
     4
      See id. at 265-68.


                                           3
     The question before us is whether a plaintiff’s reliance on
the predicate mail or wire fraud is necessary in order to establish
proximate causation.         In Armco Industries Credit Corp. v. SLT
Warehouse Co.,5 this court distinguished mail fraud under RICO from
common law fraud and stated that “to find a violation of the
federal mail fraud statute it is not necessary that the victim have
detrimentally relied on the mailed misrepresentations.”6               Ours is
a different question.
     It is true that the court in Armco found no error when the
trial judge refused to instruct the jury that a showing of reliance
was necessary in order to establish proximate causation under
RICO.7    It is equally the case that the court observed that
reliance is not an element of the underlying offense of mail fraud,
and ignored the issue of whether such reliance would be necessary
in order to prove proximate causation.8          Armco aside, these issues
are distinct: the government can punish unsuccessful schemes to
defraud because the underlying mail fraud violation does not
require reliance, but a civil plaintiff “faces an additional
hurdle”   and   must    show   an    injury   caused   “by   reason    of”   the
violation.9
     When     Armco    was   decided,   the   Fifth    Circuit   had   not yet
interpreted the “by reason of” language of 18 U.S.C. § 1964(c) to




     5
      782 F.2d 475 (5th Cir. 1986).

     6
      Id. at 482 (emphasis added).

     7
      See id.
     8
      See id. at 481-82.
     9
      Pelletier v. Zweifel, 921 F.2d 1465, 1498, 1498-99 (11th Cir. 1991).

                                        4
impose a proximate causation requirement,10 and this circuit still
allowed recovery for more indirect injuries.11 Since that time, the
Fifth Circuit in Zervas v. Faulkner12 and the Supreme Court in
Holmes have explicitly adopted a traditional proximate causation
requirement.13        Armco does not then answer the question before us:
whether reliance is necessary to establish proximate cause under
RICO.      To hold otherwise would imply that Armco silently imposed a
proximate causation requirement that was not explicitly adopted
until several years hence in Zervas and Holmes.14             To the extent it




      10
         See Zervas v. Faulkner, 861 F.2d 823, 834 (5th Cir. 1988) (adopting the
proximate causation requirement and joining the Second, Fourth, and Seventh
Circuits); see also id. (noting that a similar approach was taken in National
Enterprises, Inc. v. Mellon Financial Services Corp., 847 F.2d 251 (5th Cir.
1988), but that the term “proximate cause” was not employed).
      11
       See Ocean Energy II, Inc. v. Alexander & Alexander, 868 F.2d 740, 744
(5th Cir. 1989) (“[W]e [have] rejected the position taken by the Seventh,
Eleventh and possibly Third Circuits interpreting the language in [Sedima,
S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985)] as allowing recovery only
for direct injuries.”).

      12
           861 F.2d 823 (5th Cir. Dec. 15, 1988).

      13
           Holmes, 503 U.S. at 265-68; Zervas, 861 F.2d at 834.
      14
         Since Holmes this circuit has stated that “reliance is not an element of
mail fraud” for RICO liability. See Akin v. Q-L Investments, Inc., 959 F.2d 521,
533 (5th Cir. 1992). In Akin, however, this court noted only that reliance is
not an element of an underlying mail or wire fraud violation. See id. (citing
Abell v. Potomac Ins. Co., 858 F.2d 1104, 1129 (5th Cir. Nov. 2, 1988)). Whether
the plaintiff’s damages were proximately caused by reason of such violation was
not at issue. See id.
      Abell cited Armco for the proposition that reliance is not an element of
the underlying mail or wire fraud. See Abell, 858 F.2d at 1129. Like Armco,
Abell was decided before Zervas and did not discuss the issue of whether reliance
is necessary for proximate causation. Instead of arguing proximate cause, the
defendant claimed that “the evidence did not establish . . . any causal
connection between the plaintiffs’       . . . injuries and [the defendant’s]
misrepresentations.”      Id. at 1129 (emphasis added).       The Supreme Court
subsequently vacated Abell, see Fryar v. Abell, 492 U.S. 914 (1989), and on
remand this court remanded the case to the district court for reconsideration,
see Abell v. Potomac Ins. Co., 884 F.2d 196 (5th Cir. 1989). In the second
appeal to this court, issues related to reliance did not arise. See Abell v.
Potomac Ins. Co., 946 F.2d 1160 (5th Cir. 1991).


                                          5
held that proximate cause was not required, it has been overturned
by Holmes.
      On appeal, the plaintiffs do not quarrel with the district
court’s acceptance of their concession that they “did not rely on
anything     Defendants      said   or       published       in   purchasing     their
properties.”15     Instead, the plaintiffs steadfastly maintain that
individual acts of reliance are simply unnecessary in order to
recover for damages resulting from civil RICO fraud.                     Most other
circuits, however, require a showing of detrimental reliance by the
plaintiff,16    which   is    consistent        with   Holmes’      admonition     that
federal courts employ traditional notions of proximate cause when
assessing    the   nexus      between    a    plaintiff’s         injuries   and   the
underlying RICO violation.17
      The rationale for requiring reliance in cases such as this one
becomes    clear   in   the    light     cast    by    the    distinction      between
causation as an element of a claim for fraud and producing cause as



      15
         Plaintiffs’ Memorandum of Law in Reply to Various Motions and Memoranda
of Defendants, at 24 ¶ 43 [R. 1198], quoted in Memorandum Opinion and Order, at
2 [R. 1241]; see also Brief of Appellants, at 6 (“Because it did not have to do
so, Summit did not claim that it relied on [the defendants’] misrepresentations
and omissions regarding [the] inherently defective and worthless plumbing
system.”).
      The plaintiffs only remaining allegations of reliance involved the
“technically accurate” representations by various entities who stated that the
plaintiffs’ properties confirmed to the local building codes. See Plaintiffs’
Second Amended Complaint, at 24 ¶ 73 [R. 892]; Plaintiffs’ Memorandum of Law in
reply to Various Motions and Memoranda of Defendants, at 25 ¶ 45 [R. 1197].
Reliance on technically accurate representations by entities other than the
defendants is not reliance upon misrepresentations by the defendants.
      16
         See, e.g., Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737,
746-47 (3d Cir. 1996); Chisholm v. Transouth Fin. Corp., 95 F.3d 331, 337 (4th
Cir. 1996); Appletree Square I v. W.R. Grace & Co., 29 F.3d 1283, 1286 (8th Cir.
1994); Central Distribs. of Beer, Inc. v. Conn, 5 F.3d 181, 184 (6th Cir. 1993);
Pelletier v. Zweifel, 921 F.2d 1465, 1499-500 (11th Cir. 1991); County of Suffolk
v. Long Island Lighting Co., 907 F.2d 1295, 1311 (2d Cir. 1990); Reynolds v. East
Dyer Dev. Co., 882 F.2d 1249, 1253 (7th Cir. 1989).
      17
         See Holmes, 503 U.S. at 268.


                                          6
an element of a claim for products liability.18 The linkage between
design defect and injury is between the defect and the injury.
With a claim for fraud, however, the linkage is between the
defendants’ fraud and the injury.
      As a product travels in the stream of commerce, inherent
defects are carried with it, but fraudulent statements are not.
With the abolition of privity requirements, injuries produced by
product defect may be actionable by all users including those
remote in the distribution chain from a defendant manufacturer. The
causal connection between a misrepresentation and a subsequent
harm, however, vanishes once the product travels beyond the entity
who   actually     relied   on     the   representation      when   making      the
purchasing decision.
      In other words, even if intermediary builders, plumbers, code
officials, or prior owners relied on the defendants’ alleged
misrepresentations when choosing to use or approve PB plumbing,
that does not tell us whether the defendants’ fraud proximately
caused the       plaintiffs’     injuries,   for    which   the   defect    was a
producing cause.         At best, any fraud during the sale of those
products proximately injured only those initial purchasers who
relied     on    the   alleged    misrepresentations,       since    the    fraud
facilitated a sale that might not otherwise have been made.
      Of course, if the sales would not have occurred absent the
fraud,     the   fraud   would    have   been   a   “but-for”     cause    of   the




      18
       To recover under Texas products liability law, a design defect must be
a "producing cause" of injury. See Tex.Civ.Prac. & Rem.Code Ann. § 82.005(a).
A producing cause is “an efficient, exciting, or contributing cause, which in a
natural sequence, produced injuries or damages complained of, if any.” Rourke
v. Garza, 530 S.W.2d 794, 801 (Tex. 1975). Our reference to Texas law, however,
is for purposes of illustration only.

                                         7
plaintiffs’ injuries.19        Nevertheless, the plaintiffs came into
possession of PB systems without relying on the alleged fraud.
Whether they received their systems from the manufacturers or from
prior property owners, any past fraud was not a proximate cause of
the plaintiffs’ resulting injuries since fraud did not induce the
purchase transactions.20
      This is only to recognize the distinct character of claims for
fraud and claims for defective products resting on the law of
products liability.      In general, fraud addresses liability between
persons with direct relationships – assured by the requirement that
a plaintiff has either been the target of a fraud or has relied
upon the fraudulent conduct of the defendants. The Fourth Circuit,
recognizing the target wing of these twin limits of liability, held
open the possibility that a plaintiff company may not need to show
reliance when a competitor lured the plaintiff’s customers away by
fraud directed at the plaintiff’s customers.21 In the current case,
for example, the defendants’ competitors might recover for injuries
to competitive position, but that circumstance is of no aid to
these plaintiffs.        Accepting as claimed that the defendants’
strategy may have been to gain market share by fraud in the initial
sale of PB components, it is not contended that these particular




      19
       If the relevant decisionmakers knew the limitations of the product but
would have bought it anyway because of its low price, for example, the fraud
would not have been a “but-for” cause of the plaintiffs’ damages.
      20
         See Johnson Enterprises of Jacksonville, Inc. v. FPL Group, Inc., 162
F.3d 1290, 1318 (11th Cir. 1998) (noting that a plaintiff’s injury is not
proximately caused by a defendant’s misrepresentations when the injury results
only from the detrimental reliance of a third party).
      21
         See Mid Atlantic Telecom, Inc. v. Long Distance Services., Inc.,18 F.3d
260, 263-64 (4th Cir. 1994).


                                       8
plaintiffs were the targets of a scheme to defraud accomplished by
defrauding others.22
      Plaintiffs’ able counsel has understandably fled to the “fraud
on the market” theory of constructive reliance, a theory born in
securities litigation.            It assumes that prices in an efficient
market incorporate the relative importance of public information,
whether that information is true or false.23            If publicly announced
information       regarding   a    security   is    fraudulent,   a   subsequent
purchaser    of    that   security    from    the   market   is   said   to   have
constructively relied on the fraudulent statements because they
were incorporated into the market price. The case proceeds despite
the fact that the defendant and the purchaser had no direct
relationship and reliance upon the false statements could not be
shown.     This because under the theory, the market as an efficient
translator of data to price acted as an intermediary, connecting
plaintiff and defendant.




      22
         Similarly, we do not think the current situation is similar to one
discussed in Holmes, where the Court left open the possibility that the customers
of an insolvent brokerage might recover under RICO for losses stemming from a
series of fraudulent brokerage transactions despite the fact that those customers
did not in any sense “rely” on a misrepresentation. See 503 U.S. at 272 n.19.
      In that situation, the fraudulent brokerage transactions imposed immediate
risks on the brokerage’s customers by increasing the likelihood of the
brokerage’s insolvency, even if the conspirators did not intend such risks to
fall on those customers through their sham transactions.
      Nevertheless, when an action poses a high and foreseeable risk on a third
party, we may view the resulting injury as deliberate for the purpose of
liability. See, e.g., Matter of EDC, Inc., 930 F.2d 1275, 1279 (7th Cir. 1991)
(Posner, J.). In that sense, the brokerage customers may be seen as direct and
contemporaneous victims of the fraudulent scheme and within the scope of the
already noted exception.
      In the present case, however, the plaintiffs’ risks of injuries did not
arise as direct and contemporaneous results of any alleged fraud, but instead
arose only later, through the purchases of allegedly defective plumbing by
transactions which were not tainted with fraud.
      23
       See Basic Inc. v. Levinson, 485 U.S. 224, 244-47 (1988) (citing In re LTV
Sec. Litig., 88 F.R.D. 134, 143 (ND Tex.1980)).


                                        9
     No court has accepted the use of this theory outside of the
context of securities fraud, and one circuit has expressly rejected
its use in the context of a similar civil RICO case.24             An efficient
market is a critical element of a market’s role as an intermediary.
There is no pretense of such a market here and the fraud on the
market doctrine is not applicable.
                                        IV
     In sum, when civil RICO damages are sought for injuries
resulting from fraud, a general requirement of reliance by the
plaintiff is a commonsense liability limitation. To hold otherwise
would allow the threat of treble damages and attorney fees to
infiltrate       garden   variety    products     liability    cases    whenever
marketing promotions touted the merits of the products, even if no
plaintiff relied on those representations. This is not a statement
of our policy choice.         We are not persuaded that by its “by reason
of” phrase Congress intended such a federalization and escalation
of the states’ laws of product liability – laws that have hardly
been proved to be anemic in their common law use of economic
incentives to achieve desired social goals. The threshold reliance
requirement is determinative in this case.             We need not and do not
reach other issues raised by the defendants.                Agreeing with the
district court, we AFFIRM its dismissal of this suit.
     AFFIRMED.




     24
          See Appletree Square I v. W.R. Grace & Co., 29 F.3d 1283, 1287 (8th Cir.
1994).


                                        10
