Antitrust Law Daily Wrap Up, RICO—6thCir: Dismissal of RICO Claims Based on Denial of Worker’s Compensation Claims Reversed, (Nov 5, 2012)

By Peter Reap, J.D., LLM

Two injured employees of Coca-Cola Enterprises, Inc.—Clifton Jackson and Christopher Scharnitzke—adequately alleged a RICO claim against Coca-Cola, Coca-Cola’s third-party administrator for worker’s compensation claims (Sedgwick Claims Management Service)—and in the case of Jackson, a doctor (Dr. Drouillard)—by charging that the defendants engaged in a fraudulent scheme to avoid paying worker’s compensation benefits, the U.S. Court of Appeals in Cincinnati has decided (Clifton Jackson v. Sedgwick Claims Management Services, Inc., November 2, 2012, Moore, K.). Therefore, a judgment of a district court dismissing the claims was reversed, and the case remanded for further proceedings.

Threshold Issues

In addition to incorrectly determining that the plaintiffs failed to sate a cognizable RICO claim, the district court’s holding that RICO could not provide a remedy for mail fraud in the context of obtaining worker’s compensation was untenable in light of the Sixth Circuit’s recent opinion in Brown v. Cassens Transp. Co., 675 F.3d 946 (6th Cir. 2012) (“Brown II”). In Brown II, the Sixth Circuit held that the Supremacy Clause preempted the Michigan legislature from eliminating a RICO remedy simply by declaring its worker’s compensation scheme to be exclusive of federal remedies

Moreover, contrary to the finding of the lower court, the plaintiffs’ injuries were ripe for determination. In Brown II the court ruled that injured Michigan employees “acquire a property interest in worker’s compensation when employers learn of their employees’ physical injuries.” Brown II, 675 F.3d at 963. The fraudulent denial of these benefits caused injury to this property interest, and the value of the lost property interest was readily ascertainable—it was the value of the worker’s compensation that the plaintiff was entitled to receive under the WDCA’s scheme for calculating benefits. Thus, the district court erred in determining that the plaintiffs’ injury was “conjectural and hypothetical” until they have proven their entitlement in state proceedings.

RICO Claim

Existence of an enterprise. The plaintiffs’ complaint identified five potential RICO enterprises, each involving different combinations of the defendants, according to the court. The primary enterprise consisted of “[t]he workers compensation personnel at the workers compensation claims departments at Sedgwick and Coke, handling Michigan workers compensation claims and associating in fact.”

The district court assumed that the pleadings adequately established an enterprise, although it deemed such a determination highly questionable in part due to the plaintiffs’ choice to plead six enterprises in the alternative. However, equivocation about the constitution of the enterprise did not undermine the plausibility of the pleadings, the appellate court noted.

Participation in the enterprise. The district court erred by concluding that the plaintiffs had failed adequately to plead that either Coca-Cola or Dr. Drouillard sufficiently participated in the enterprise, the appellate court ruled. Dr. Drouillard allegedly did more than just conduct his own affairs, as the district court held. His evaluations were not objective medical reports and he allegedly fraudulently slanted his medical evaluations to serve the purposes of the enterprise.

Coca-Cola also participated in the enterprise. The plaintiffs alleged that personnel in Coca-Cola’s worker’s compensation department worked with Sedgwick falsely to administer the claims by Coca-Cola employees. Coca-Cola also routinely used and relied on the false medical reports of cut-off doctors such as Dr. Drouillard fraudulently to terminate benefits and regularly communicated with Sedgwick “concerning the desire of Coke and Sedgwick to obtain a [cut-off] report.”

As with Dr. Drouillard, Coca-Cola need not have handled the administration of the plaintiffs’ claims in order to be involved in the operational or management affairs of the enterprise.

Pattern of racketeering. To establish “a pattern of racketeering activity” under 18 U.S.C. §1962(c), the plaintiffs were required to show at least two acts of racketeering activity within ten years of each other. They also needed to show that the predicate acts were related, and that they amounted to or posed a threat of continued criminal activity.

The district court considered both the Amended Complaint and the Proposed Second Amended Complaint and held that the plaintiffs alleged with sufficient particularity nine predicate acts of mail fraud. The alleged acts were pled with sufficient particularity to constitute mail fraud under RICO, the appellate court agreed.

As for relatedness, the list of nine predicate acts identified by the district court were sufficiently related. At a minimum, the acts had the same purpose: to reduce Coca-Cola’s payment obligations by fraudulently denying worker’s compensation benefits to which the employees were lawfully entitled.

The district court erred by concluding that despite the number of predicate acts, the plaintiffs had failed adequately to plead a pattern of racketeering because of a lack of continuity, according to the appellate court. Continuity could be based on an open-ended or closed-ended theory and the plaintiffs adequately alleged both.

The allegations established closed-ended continuity because, although each plaintiff was denied benefits individually, the denials were part of a long-term scheme to deny benefits generally during the nineteen-month period in which the predicate acts considered by the district court were committed.

Open-ended continuity was established if the related predicates themselves involved a distinct threat of long-term racketeering activity, either implicit or explicit. Here, the allegations suggested that the defendants’ scheme would continue on well past the denial of any individual plaintiff’s benefits.

RICO Conspiracy Claim

In their Proposed Second Amended Complaint, the plaintiffs attempted to add a count of RICO conspiracy under 18 U.S.C. §1962(d). The district court determined that the plaintiffs did not unduly delay the filing of the amendments and the defendants would suffer from no prejudice if the amendments were permitted. However, the district court refused to permit amendment on the basis of futility for the same reasons it dismissed the pending claims. Because the district court erred in its analysis of the substantive elements of a RICO claim as discussed above, on remand the district court should decide in the first instance whether to permit the RICO conspiracy claim to go forward, the appellate court held.

The case is No. 10-1453.

Marshall Lasser (Marshall Lasser, P.C.) for Clifton Jackson. Kathleen H. Klaus (Maddin Hauser Wartell, Roth & Heller, P.C.) for Sedgwick Claims Management Services, Inc.

Cases: RICO KentuckyNews MichiganNews OhioNews TennesseeNews