Antitrust Law Daily Wrap Up, RICO—CDCal: RICO Claims Against Annuities Company Not “Reverse Preempted” by State Insurance Regulation, (Mar 5, 2013)

By Tobias J. Gillett, J.D., LLM.

The McCarran-Ferguson Act (MFA) does not require “reverse preemption” of annuity purchasers’ Racketeer Influenced and Corrupt Organizations (RICO) Act claims against Allianz Life Insurance Company of North America, even though relevant state insurance laws did not provide a comparable private right of action, the federal district court in Los Angeles has ruled (Negrete v. Allianz Life Insurance Co. of North America, March 4, 2013, Snyder, C.).

The RICO claims would further states’ interests in combating insurance fraud and deception because plaintiffs would have rights of action available under other state statutes and the common law and because the application of RICO in the present case would not frustrate state policies or interfere with state administrative regimes.

On September 19, 2005, the purchasers filed suit against Allianz, alleging that Allianz had violated the RICO Act, among other claims, during its sale of various annuity products, an action later consolidated with another case involving similar claims. Specifically, the purchasers alleged that Allianz had sold deferred annuities to elderly class members through the use of several misrepresentations, including that the annuities carried “no sales charges,” offered an “immediate bonus,” and would pay “full value” if certain deferral requirements were met.

The purchasers alleged that the annuities came with high sales charges, that the bonuses were “illusory” because Allianz recouped them by lowering the annuities’ yields, and that the annuities did not provide their stated “annuitization values” because Allianz reduced their value by an amount depending on when an individual annuitized.

On May 30, 2012, Allianz filed a motion to decertify the nationwide class, a third motion for summary judgment, and a motion for judgment on the pleadings. On December 27, 2012, the court denied Allianz’s motion to decertify the class.

Allianz’s principal argument in support of its motion for judgment on the pleadings involved MFA “reverse preemption” of federal claims that “impair” state statutes “regulating the business of insurance.” The court explained that the MFA permits state law to preempt a federal statute if “(1) the federal law does not specifically relate to insurance; (2) the purpose of the state enactment is to regulate the business of insurance; and (3) the application of federal law to the case might invalidate, impair, or supersede the state law.” However, federal law that aids or enhances state regulation, “and does not frustrate any declared state policy or disturb the state’s administrative regime,” will generally not be barred.

The court reviewed the Supreme Court’s 1999 decision in Humana Inc. v. Forsyth, 525 U.S. 299, which had held that a RICO lawsuit would not impair the Nevada Unfair Insurance Practices Act (NIUPA). The NIUPA provided for a private right of action, and the Court concluded that a RICO law suit would “advance the state’s interest in combating insurance fraud, and [would] not frustrate any articulated Nevada policy.” The Court noted statutory and common law remedies for insurance fraud and misrepresentation, private rights of action for breaches of common law duties, and a lack of any statement from Nevada that application of the RICO Act would frustrate its state policies or administrative regime.

The court in the present case noted a circuit split following Humana between courts that considered the lack of a private right of action to be dispositive evidence that the federal law should be preempted, and those that considered “the absence of a private right of action under state insurance law [to be] not dispositive as which there is reverse-preemption.” The court chose to follow those courts finding a lack of a private right of action to be “not dispositive,” observing that a federal law may “aid or enhance” state regulation even without a private right of action.

The court then proceeded to hold that the RICO claims of Florida class members would not be preempted under the MFA based on Florida law. Although the annuity purchasers did not base their RICO claims on a violation of the Florida Unfair Insurance Trade Practices Act (FUITPA), the court observed that the FUITPA and Florida Office of Insurance Regulation regulations issued pursuant to it prohibited the course of conduct challenged by the purchasers.

The FUITPA proscribed misrepresentation of benefits, terms, and conditions in the promotion of annuity contracts, and regulations governing the sale of annuities prohibited “omission or misrepresentation of material information in any advertising that has a tendency or effect to mislead or deceive potential purchasers.” The court concluded that RICO claims would “advance Florida’s interest in combating fraud and deception in the annuities market.”

Although the FUITPA did not provide a private right of action for the use of misleading or fraudulent advertising, the court observed that the absence of a private right of action was “but one factor in the Humana ‘impairment’ analysis.” Moreover, FUITPA contained a clause expressly preserving plaintiffs’ right to assert common law claims, such as fraud, bad faith, and negligent misrepresentation.

Furthermore, the court noted that, as in Humana, plaintiffs under Florida law could seek punitive damages. The court found that this provision “mirrors the treble damages that are available to prevailing plaintiffs under RICO,” thus complementing, rather than impairing, Florida’s insurance regulation. Allianz also could not identify any state of Florida pronouncement opposing the application of RICO to similar claims, a factor the court found “weighs against a finding of reverse-preemption.” The court concluded that the balance between “the important state policies supporting the imposition of RICO liability” and the important policies “supporting state regulation of the insurance industry contemplated by the McCarran-Ferguson Act” led it to conclude that the purchasers’ claims would not impair Florida’s regulatory scheme.

Having found that McCarran-Ferguson Act would not bar claims brought by Florida residents, the court concluded that substantially the same rationales meant that the claims brought by residents of the other states in the lawsuit would also not be barred. All of the states had laws banning unfair and deceptive practices in the insurance industry, and therefore the RICO claims would support the state interests “in combating fraud and deception in the annuities market.” Moreover, all of the states had common law claims available, including those for fraud, bad faith, and negligent misrepresentation.

Furthermore, most of the states included a preservation clause permitting “policyholders and insurance commissioners to pursue other remedies under statutory or common law.” The court observed that, whatever the precise language of these clauses, they reflected “a robust policy in favor of vindicating the rights of private plaintiffs damaged by an insurer’s unlawful conduct.” Although Wisconsin did not include one, that fact was not dispositive, and Allianz did not identify any manner in which the RICO claims would frustrate a Wisconsin policy or interfere with a Wisconsin administrative regime.

Minnesota and Nebraska residents would also be able to bring their claims, despite the Eighth Circuit’s 1999 decision in LaBarre v. Credit Acceptance Corp., 175 F.3d 640, which concluded that a car insurance policyholder’s RICO claim was reverse-preempted by the McCarran-Ferguson Act. Unlike in LaBarre, the plaintiff here would have a private right of action under the Minnesota Prevention of Consumer Fraud Act, and could bring common law fraud claims. Thus, the RICO claims here, unlike those in LaBarre, “would not ‘impair’ the Minnesota scheme for regulating insurance.” Similarly, Nebraska residents could bring a claim under the Nebraska Consumer Protection Act, as well as common law fraud claims. Therefore, the RICO claims of Minnesota and Nebraska residents were not barred.

The claims of Ohio residents were also not barred despite the Sixth Circuit’s 2010 decision in Riverview Health Inst. LLC v. Med. Mut. of Ohio, 601 F.3d 505, which concluded that the lack of a private right of action and the presence of an exclusive administrative remedy under Ohio’s Prompt Pay Act meant that allowing RICO claims to proceed would undermine “the fundamental requirement of administrative exhaustion.” Here, however, Ohio’s unfair practices law did not “purport to set forth an exclusive administrative remedy,” and common law claims were still available. The current case would also not present the same concerns with preserving the integrity of the state’s administrative process. Therefore, Ohio insurance law did not reverse-preempt the class members’ RICO claims.

In addition to denying Allianz’s motion for judgment on the pleadings as to the annuity purchasers’ RICO claims, the court also denied its motion as to claims under California’s Elder Abuse Act.

The case is Nos. CV-05-6838 CAS (MANx) and CV 05-8908 CAS (MANx).

Attorneys: Andrew S. Friedman (Bonnett Fairbourn Friedman and Balint PC) for Vida F. Negrete, as Conservator for Everett E. Ow. Arthur G. Boylan (Leonard Street and Deinard) for Allianz Life Insurance Company of North America.

Companies: Allianz Life Insurance Co. of North America

Cases: RICO CaliforniaNews