United States: Remember When RICO Was About The Mafia?

Last Updated: March 7 2012
Article by Jessica F. Pardi

Insurance Reinsurance Managed Healthcare Review - Spring 2012

In 1970, Congress enacted the Organized Crime Control Act within which is the Racketeer Influenced and Corrupt Organizations Act better known as "RICO" (codified as amended at 18 U.S.C. §§ 1961-68 (2011)). The primary target of RICO was organized crime, but the statute was drafted without any such limitation to its applicability. Indeed, RICO has been compared to the Ku Klux Klan Act of 1871, which while aimed at the Klan in the south after the Civil War, could be applied to any person depriving another of his or her civil rights. (18 U.S.C. §§ 241-242 and 42 U.S.C. § 1981, et seq.).

Because RICO's civil sanctions include injunctions, treble damages, costs and attorneys' fees, it is a desirable vehicle to attack all types of business practices including those of insurers. In addition to the Federal RICO statute, 33 states have enacted their own racketeering legislation. Under the Federal RICO statute, plaintiffs must show both a criminal enterprise and a pattern of racketeering activities, though the term "enterprise" can be broadly defined and encompass almost anything. Indeed, the Eleventh Circuit held that a pick-up basketball game could be considered an "enterprise." U.S. v. Pipkins, 378 F.3d 1281 (11th Cir. 2004), citing U.S. v. Elliott, 571 F.2d 880 (5th Cir. 1978). Some state's statutes have lesser requirements. For example, in Georgia, there is no requirement that a plaintiff plead or establish an "enterprise."

In essence, plaintiffs now easily convert allegations of garden variety misdeeds or simple fraud into RICO claims and subject insurers to the threat of treble damages, attorneys' fees and costs. Class actions now routinely contain RICO claims because the class criteria such as numerosity and commonality lend themselves to the requisite pattern of racketeering activity. Insurers facing RICO allegations are not without defenses however. To take advantage of RICO's enhanced damages, plaintiffs must plead sufficiently each statutory component or have their RICO claim dismissed. Two recent examples of insurer victories in RICO claims are CIGNA's victory in North Cypress Medical Ctr. Operating Co. v. CIGNA Healthcare, U.S. Dist. Ct. S.D. Tex. Case No. 4:09-CV-2556 (order dated November 3, 2011), and Aetna's victory in Association of New Jersey Chiropractors v. Aetna, Inc., 2011 WL 2489954 (D.N.J.) (decided June 20, 2011).

North Cypress claimed CIGNA reimbursed amounts substantially less than what should have been paid under CIGNA's subscriber healthcare plans. To successfully plead a RICO claim under § 1962(a), North Cypress had to allege the following: (1) the existence of an enterprise; (2) that CIGNA derived income from a pattern of racketeering activity; and (3) that CIGNA used any part of that income in acquiring an interest in or operating the enterprise. Additionally, North Cypress was required to plead a nexus between the alleged violation and injury. CIGNA moved to dismiss on the following three grounds: (a) North Cypress failed to plead any distinction between or among the different CIGNA affiliates involved in the alleged scheme and therefore failed to plead the existence of both the requisite RICO "person" and RICO; (b) North Cypress's failure to plead that CIGNA used its income to acquire or operate the alleged enterprise; and (c) North Cypress failed to allege how CIGNA's use or investment of purported racketeering income injured North Cypress. Alleged injury flowing solely from the predicate acts themselves (and not from use or investment of racketeering income in the enterprise) is not sufficient to state a federal RICO claim. North Cypress alleged CIGNA's extortion caused it harm, but North Cypress failed to explain in the complaint how it was injured because CIGNA acquired or maintained an enterprise. Accordingly, the court dismissed the RICO claim against CIGNA.

Similarly, in Association of New Jersey Chiropractors v. Aetna, Inc., 2011 WL 2489954 (D.N.J.) (decided June 20, 2011), the court found that the Association of New Jersey Chiropractors failed to state a RICO claim against Aetna for three reasons. First, they failed to plead a RICO "enterprise." The court found that Aetna and its affiliates alleged to be part of the "enterprise" had nothing more than ordinary business relationships. Facts describing the ordinary operation of business relationships are not sufficient to state a RICO claim. Second, the RICO claim failed because the "enterprise" as alleged by the chiropractors was insufficiently distinct from Aetna itself. A RICO claim requires the existence of two distinct entities – a person or company charged with violating the RICO statute and an "enterprise." The "person" charged with violating the RICO statute cannot be the same entity as the "enterprise." Finally, the chiropractors did not plead adequately the requisite injury to business or property proximately caused by the alleged RICO violation. A plaintiff cannot bring a RICO claim unless he has suffered a concrete financial loss. Boilerplate allegations of an injury to business or property resulting from an alleged RICO violation are not sufficient.
While insurers face the potential of stiff penalties with the increasing commonality of RICO claims, carefully parsing the statutory requirements and comparing them to the allegations of the RICO claims may reveal winning RICO defenses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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