Antitrust Law Daily Wrap Up, RICO—3d Cir.: Consumer gets second crack at class certification in fraudulent debit suit, (Sep 3, 2015)

By Greg Hammond, J.D.

In a Racketeer Influenced and Corrupt Organizations Act (RICO) class action involving an alleged fraudulent telemarketing scheme and unauthorized debits from consumers’ bank accounts, a federal district court’s order denying class certification was remanded. The U.S. Court of Appeals in Philadelphia determined that the lower court applied an improper standard for assessing predominance and commonality, and improperly reviewed the named plaintiff’s experts’ opinions and other evidence (Reyes v. Netdeposit, LLC, September 2, 2015, McKee, T.).

Consumer Reynaldo Reyes alleged that Zions First National Bank and its payment processor subsidiaries, Netdeposit, LLC and MP Technologies, conspired to conduct a fraudulent telemarketing scheme that caused unauthorized debits from bank accounts owned by him and members of the proposed class. Reyes relied heavily on high return rates—the frequency that a debit could not be completed—to prove the RICO enterprise was a complete sham. The federal district court in Philadelphia denied class certification, however, finding that there were no issues common to the class and that Reyes could not satisfy the commonality or predominance requirements of Federal Rule of Civil Procedure 23(a) and (23(b)(3).

On appeal, the appellate court was required to determine whether the lower court: (1) applied the proper standard for assessing predominance and commonality; (2) appropriately reviewed Reyes’ experts’ opinions and the other evidence on the record; and (3) properly determined that commonality and predominance were not established based on the evidence presented.

Burden of proof. In concluding that there was insufficient commonality, the lower court imposed a burden of absolute proof on Reyes, finding that Reyes’ experts had not testified that the return rates were absolute proof of fraud. However, this was an inappropriate standard to apply, the appellate court concluded, noting that Reyes must only establish that it is more likely than not that each of the telemarketers and the defendants operated a complete sham. On remand, the district court must conduct rigorous analysis and review all avenues of inquiry in which it may have doubts, even if it requires reviewing the merits, and make a definitive determination on the requirements of Rule 23 or require that a plaintiff demonstrate actual, not presumed, conformance with Rule 23 requirements. The appellate court stressed that the preponderance of the evidence standard governs.

Commonality. With regard to the Rule 23(a) commonality requirement, Reyes argued that the defendants operated in a common, fraudulent scheme that was a complete sham masquerading as a legitimate business undertaking. The court noted that when a plaintiff alleges a complete sham, the relevant inquiry is whether there was an ongoing scheme to defraud or deceive and whether the defendant failed to meet the most basic standard of its purported commercial undertaking. If so, a common harm will be presumed from the fact that class members were all similarly injured by the sham, and a court could then conclude that there are common issues and that those common issues will predominate over individual issues.

In this case, Reyes presented evidence that, if accepted, could demonstrate by a preponderance of the evidence that the payment processing transactions were fraudulent; the defendants sent emails communicating a sense of shock concerning the “staggering” return rates; Zions Bank was aware that its high return rates alarmed the National Automated Clearing House Association; Modern payments was “afraid of” a probe by the FTC concerning potential fraud; and Zions Bank received warnings from banks that they will dispute all charges generated by NHS Systems. On remand, the lower could was asked to consider whether this evidence, if accepted as credible, demonstrates commonality under a complete sham theory.

Predominance. Reyes also presented evidence, including testimony of three experts, of the structure of each of the schemes and FTC investigations. Reyes asserted that the evidence concerning the fraudulent companies applied to the class as a whole and that the jury’s consideration of the evidence would apply to each class member’s claim. The appellate court left it to the lower court to determine whether this evidence supports a finding that there was a single fraudulent RICO enterprise, that each defendant participated in that enterprise, and that all members of the proposed class were damaged in the amount of the funds debited from their bank accounts pursuant to the fraudulent scheme.

The appellate court additionally determined that the district court erred as a matter of law when it singled out the most significant evidence—the return rates—and then improperly applied a heightened standard to that evidence while ignoring all of the other testimony. Further, the lower court confused the fact witnesses with the expert witnesses, relying on a concession by the fact witnesses to justify limiting its analysis to evidence of high return rates and completely failing to mention or even scrutinize any of Reyes’ experts. The district court was therefore required, on remand, to consider all relevant evidence and arguments, including relevant expert testimony of the parties.

The case is No. 14-1228.

Attorneys: Howard I. Langer (Langer, Grogan & Diver, P.C.) for Reynaldo Reyes. Jason A. Snyderman (Blank Rome LLC) for Appellees.

Companies: Netdeposit, LLC; MP Technologies; Teledraft, Inc.; National Penn Bank; Wells Fargo Bank, N.A.; Wachovia Bank, N.A.; Zions First National Bank

Cases: RICO DelawareNews NewJerseyNews PennsylvaniaNews