Antitrust Law Daily Wrap Up, RICO—11th Cir.: Claims against drug rehab facility not stated with specificity, (Jan 28, 2015)

By Dan Selcke, J.D.

The U.S. Court of Appeals in Atlanta affirmed the dismissal of several fraud claims, including civil RICO claims, filed against a group of organizations that ran a drug and alcohol rehabilitation program, since the plaintiffs did not sufficiently allege which organizations made the fraudulent misrepresentations, the nature of those misrepresentations, or the date, time, and place at which they occurred (Burgess v. Religious Technology Center, Inc., January 26, 2015, per curiam).

The plaintiffs paid money to receive treatment for drug and alcohol addiction. They alleged that the organizations that ran the treatment programs misrepresented their effectiveness, hid their connection to Scientology, and failed to comply with state licensing requirements, among other things. They filed a class action suit and brought claims for fraudulent misrepresentation, breach of contract, unjust enrichment, detrimental reliance, and negligence per se. They also brought civil RICO claims of theft by deception, mail and wire fraud, false statements to a government agency, credit card fraud, and identity theft.

Procedural history. Several of the defendant organizations moved to dismiss the case for failure to state a claim under FRCP 12(b)(6) and to plead fraud with specificity under FRCP 9(b). One of the organizations, the Religious Technology Center (RTC) moved to dismiss for lack of personal jurisdiction under Rule 12(b)(2). The district court granted all of the motions, and the plaintiffs appealed.

Personal jurisdiction. First, the appellate court considered whether the district court had personal jurisdiction over RTC. The plaintiffs argued that Georgia’s long-arm statute applied to RTC because it had an agency relationship with the other organizations. However, RTC’s president had submitted an affidavit, stating that RTC did not have a contract with the other organizations, was not their parent company, and had not received any money from them. Based on this evidence, the court concluded that there was no agency relationship—whether created expressly, by implication, or by ratification—between the companies, and the plaintiffs did not submit any evidence that called for a different conclusion. Even if the plaintiffs had produced some indication that the organizations were intermingled, an agency relationship was not created just because one company exercised some level of control over another.

Discovery denial. The appellate court held that the district court did not abuse its discretion by denying discovery on the jurisdiction issue, since the plaintiffs had not diligently pursued their opportunities to conduct any discovery. They had not served any discovery on RTC, filed a motion for leave to conduct discovery, or put forth a proposal for discovery.

Fraud claims. Next, the appellate court affirmed the district court’s decision to dismiss the fraudulent representation and RICO claims, since the plaintiffs did not state these claims with the specificity required by FRCP 9(b). The plaintiffs listed 11 different misrepresentations, but did not indicate the date, time, or place for any of them. Also, the plaintiffs did not identify which of the many defendants were responsible for which statements.

For example, the plaintiffs claimed that two of their number contacted Narconon of Georgia (NNGA), one of the defendant organizations, through an Internet search. They spoke with one or more employees working for NNGA and/or Narconon International (NI), another defendant, and/or received marketing materials. These allegations did not identify what employee the plaintiffs spoke with and for whom the employee worked, when they conducted the Internet search, where the misrepresentation appeared, and whether and what marketing materials they received. They did not, in short, meet the heightened pleading requirements of FRCP 9(b), and the other allegations fared no better.

Relaxed fraud standard. In situations where the fraud is part of a prolonged scheme, the specificity requirement can be relaxed. In that situation, plaintiffs can plead the overall nature of the fraud and allege one or more illustrative examples, but the plaintiffs here failed to meet even this reduced standard. They lumped all of the defendants together as the sources of the misrepresentations and pleaded the who, what, and when elements of their fraud in the alternative claim.

RICO claims fail. The plaintiffs’ RICO claims also were based on fraud and therefore were held to the same standard of specificity under FRCP 9(b). The RICO claims were based on the same misrepresentations as the fraudulent misrepresentation claim, and they failed for the same reasons.

Breach of contract. The district court properly dismissed the plaintiffs’ breach of contract claims against NNGA because they did not identify an express breach. In their complaint, the plaintiffs made vague references to a breach, but never identified the provision that formed the basis of their claims. Also, there were actually multiple contracts involved, and the plaintiffs’ failure to identify which one was at issue made it impossible to set forth a breach of contract claim.

Unjust enrichment. The appellate court also affirmed the dismissal of the plaintiffs’ unjust enrichment claims. The plaintiffs could not bring such a claim against NNGA because they had entered into a contract with that organization. As to the other defendants, the plaintiffs failed to allege that they had received any benefits.

Detrimental reliance. As for their claim of detrimental reliance, the plaintiffs conceded that no such cause of action existed under Georgia law and asked that it be considered a claim for promissory estoppel. The district court did not abuse its discretion in denying the plaintiffs leave to amend their complaint because they asked to do so in response to the defendants’ motion to dismiss, rather than in a motion to amend as was proper.

Negligence per se. Finally, the appellate court addressed the plaintiffs’ negligence per se claim. The plaintiffs argued that NNGA’s failure to comply with certain state licensing regulations caused the very harm that the regulations were designed to prevent. However, the regulations the plaintiffs pointed to could not form the basis of a negligence per se claim, since one only contained definitions of terms applicable to the regulation of drug treatment programs while the other explicitly stated that it did not create a standard of conduct to protect individuals. The district court had properly granted the defendants’ motion to dismiss this claim, as it had granted all of their various motions to dismiss.

The case number is: 1:13-cv-02217

Attorneys: Jeffrey Robert Harris (Harris Penn Lowry, LLP) for Benjamin Burgess. John H. Fleming (Sutherland Asbill & Brennan, LLP) for Religious Technology Center, Inc. Thomas M. Barton (Coles Barton, LLP), and Cari Katrice Dawson (Alston & Bird, LLP) for Association for Better Living and Education International., and Narconon International. John K. Larkins, Jr. (Chilivis Cochran Larkins & Bever, LLP) for Narconon of Georgia, Inc. John K. Larkins, Jr. (Chilivis Cochran Larkins & Bever, LLP) for Narconon of Georgia, Inc.

Companies: Religious Technology Center, Inc.; Association for Better Living and Education International; Narconon International; Narconon of Georgia, Inc.

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