In a similar class action, a number of physicians and medical associations cited RICO in a lawsuit against various managed care companies for alleged insurance abuses. In that case, the U.S. District Court for the Southern District of Florida upheld the physicians’ RICO allegations against these defendants.¹

The physicians alleged that the defendants engaged in a pattern of failing to pay claims in full and in a timely manner in violation of federal and state laws, including RICO. In response to a motion to dismiss filed by the defendants, the court ordered the plaintiffs to amend their complaint with respect to particular RICO allegations. The plaintiffs filed an amended complaint, and the defendants once again filed a motion to dismiss, among other things, the RICO counts. The court, however, held that all of the plaintiffs’ RICO allegations were sufficient to withstand the motion to dismiss.

The court first discussed the elements of RICO, which provides that it is "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt."²

To state a RICO claim, a plaintiff must plead that the defendant, through the commission of two or more acts constituting a "pattern" of "racketeering activity," directly or indirectly invests in, or maintains an interest in, or participates in an "enterprise," the activities of which affect interstate or foreign commerce. The court stated that "racketeering activity" includes any act that is indictable under a lengthy list of criminal offenses.

The defendants first argued that the physicians’ amended complaint failed to define a sufficiently discrete enterprise for purposes of RICO liability. In the amended complaint, the physicians included the following entities within their definition of the Managed Care Enterprise: the defendants, a few named vendors, unidentified health insurance companies not named as defendants, and other third parties. While the court considered the scope of the enterprise to be quite large, the court stated that the physicians properly pleaded an "association-in-fact" enterprise.

The court first noted that an association-in-fact enterprise required the existence of an entity—specifically, an ongoing organization, formal or informal—and evidence that the various associates functioned as a continuing unit. The court noted, too, that this requirement ensured that all RICO enterprises had a structure and some mechanism for controlling and directing the affairs of the enterprise on an ongoing basis.

Based on the court’s conception of an association-in-fact enterprise, the court rejected the defendants’ position that the physicians’ allegations of enterprise were too open-ended. Specifically, the physicians alleged that every individual entity played a role in the enterprise, including each defendant and its subsidiaries throughout the country, other health insurance companies, third-party entities that developed claims-processing systems, third-party entities that promulgated patient-care guidelines, and third-party entities that the defendants hired to review and wrongfully deny claims.

The court also stated that the links among the various entities went beyond ordinary contractual bonds, such as the hiring of each other’s senior-level employees, the use of similar patient-care guidelines and computer-software packages, and the formation of and membership in trade associations that unify the industry voice. As such, the court determined that the physicians properly alleged a RICO enterprise.

The court also rejected the defendants’ argument that the physicians did not properly allege that the defendants conducted or participated in the conduct of the enterprise, as required by RICO. Pursuant to RICO, defendants must exercise some degree of direction over the enterprise, as well as an element of control. The court stated that the physicians sufficiently alleged such direction and control. Specifically, the physicians alleged that the defendants conducted the affairs of the enterprise by, among other things, developing guidelines and standards to use as criteria to deny claims, hiring others to develop automated systems for manipulating claims, and creating a database as a common entry point for physician data.

According to the court, nondisclosures were at the core of the relationship between the physicians and the defendants.

The court similarly rejected the defendants’ contention that the physicians’ mail- and wire-fraud allegations only constituted, at most, a breach of contact—and not criminal fraud, which is the basis of RICO predicate acts. In particular, the defendants had argued that most of the representations that the physicians alleged were merely communications that announced the disposition of a particular request for contractual reimbursement. The court noted, however, that contractual settings could provide the context for RICO mail fraud claims if a pattern of misrepresentation exists amounting to both a scheme to defraud and racketeering activity. In addition, concealment of critical data, even without a formal duty to disclose, may constitute mail or wire fraud.

The court observed that the physicians had alleged a fraudulent scheme based on the defendants’ failure to disclose many automated processing techniques to diminish, deny or delay payments. According to the court, these nondisclosures were at the core of the relationship between the physicians and the defendants, and such disclosure was necessary to prevent the defendants from misleading the physicians. The court stated further that these allegations constituted circumstances that may have triggered a duty to disclose. As a result, the court determined that the physicians’ fraud claims under RICO were viable.

The court also addressed the defendants’ argument that the physicians’ conspiracy allegations were insufficient. The court stated that to properly allege a RICO conspiracy claim, a plaintiff must allege that the conspirators agreed to participate directly or indirectly in the affairs of an enterprise through a pattern of racketeering activity. The plaintiff also must demonstrate that sufficient conduct existed among the participants to infer such an agreement. The court emphasized that the presence of an agreement to further illegal acts is the key, and stated that the physicians adequately pleaded such a RICO conspiracy.

The court next rejected the defendants’ assertion that RICO did not authorize the permanent injunctive and declaratory relief sought by the physicians. RICO grants district courts jurisdiction to prevent and restrain RICO violations by issuing various forms of injunctive relief, but does not expressly set forth a cause of action for any sort of relief. RICO also states that the attorney general may institute proceedings under the law, and that the court may enter appropriate interim restraining orders. RICO further provides that any person injured as a result of a RICO violation may recover triple damages.

The court conceded that no legal precedent governed this issue, and that various courts were split as to the proper outcome. However, the court relied on a case decided by the U. S. Court of Appeals for the Seventh Circuit, NOW v. Scheidler,³ which held that private plaintiffs may obtain injunctive and declaratory relief under RICO. According to the court, the Seventh Circuit in NOW relied solely on the plain meaning of the statutory text in reaching its decision. As such, the court similarly held that RICO authorized the injunctive and declaratory relief sought by the physicians.

The court’s decision upholding the physicians’ RICO claims demonstrates the breadth of RICO, specifically that RICO is not exclusively tied to criminal law, and that plaintiffs can rely on RICO in a wide range of different noncriminal settings so long as the plaintiffs properly allege the elements of a RICO claim.

As suggested in the physicians’ case, RICO is similarly a proper cause of action against insurance carriers that participate in the conduct of an enterprise’s affairs through a pattern of racketeering activity to defraud health care providers. Thus, RICO is a statute that can be applied in either a criminal or civil context. It was not designed to apply solely in a criminal racketeering case.

View larger version (134K): [in this window] [in a new window]   Mr. Sfikas is ADA chief counsel and an adjunct professor of law at Loyola University of Chicago School of Law. He has lectured and written on legal issues and is a fellow of the American College of Trial Lawyers. Address reprint requests to Mr. Sfikas at the ADA, 211 E. Chicago Ave., Chicago, Ill. 60611.