Monday, November 17, 2008

Employees Can Proceed with RICO Claims for Denial of Worker's Comp Benefits

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Six current and former employees of a freight carrier adequately alleged a pattern of racketeering activity against the carrier, a doctor, and an insurance services firm—entities that allegedly committed mail and wire fraud in a scheme to deny worker's compensation benefits to the employees, the U.S. Court of Appeals in Cincinnati has ruled.

Although two of the employees had their RICO claims dismissed by the district court for sufficiently alleging only one racketeering act each, RICO did not require each plaintiff to be a victim of multiple racketeering acts. Rather, it required that a pattern of racketeering activity be directed against the plaintiffs as a group. Accordingly, the district court erred by focusing on the number of predicate acts that were alleged by each plaintiff.

Pattern of Racketeering

The district court also erred in assuming that the existence of two predicate acts was sufficient to constitute a pattern, the appeals court held. Although a minimum of two predicate acts was indeed necessary to establish a pattern, relationship and continuity were also required.

A relationship existed if the alleged predicate acts had the same or similar purposes, results, participants, victims, or methods of commission, or were interrelated by distinguishing characteristics and thus were not isolated events. Continuity existed when a closed period of repeated racketeering acts extended over a substantial period of time ("closed-ended" continuity) or when the racketeering acts included a distinct threat of repetition that extended indefinitely into the future ("open-ended" continuity).

In this case, the predicate acts of mail and wire fraud had the same purpose, result, participants, and victims. They also had similar methods of commission. Therefore, the relationship element was established.

The continuity element also was established. Because the plaintiffs alleged a series of related predicate acts that occurred over a period of more than three years, they sufficiently alleged closed-ended continuity. They alleged open-ended continuity by asserting that part or all of each defendant's legitimate business was regularly conducted by fraudulently denying the employees their legitimate benefits via fraudulent mail and wire communications.

Because the plaintiffs sufficiently alleged a pattern of racketeering activity—and because each plaintiff sufficiently alleged an injury that resulted from that pattern—the employees could proceed with their RICO claims.


The employees failed to allege reliance on defendants' allegedly fraudulent acts, the court held. The employees complained that the defendants had engaged in mail and wire fraud in furtherance of a scheme to deny them worker's compensation benefits. More specifically, they alleged that the carrier and the insurance services firm deliberately selected and paid unqualified doctors, including the doctor defendant, to render fraudulent medical opinions that supported the denial of worker's compensation benefits.

After a district court's dismissal of the employees' RICO claims was affirmed by the appellate court—on the ground that the employees failed to plead that they had relied on the defendants' alleged misrepresentations—the U.S. Supreme Court vacated the appellate court's judgment and remanded the case for reconsideration in light of Bridge v. Phoenix Bond & Indemnity Company (CCH RICO Business Disputes Guide ¶11,500).

In Bridge, the Supreme Court decided that first-party reliance was not an essential element of a civil RICO claim predicated on mail fraud. On remand, the district court's dismissal of the employees' claims was reversed because, among other things, the employees sufficiently alleged that the defendants had engaged in a fraudulent scheme that proximately caused their injuries: deprivation of worker's compensation benefits.


The employees' claims were not preempted by Michigan's Worker's Disability Compensation Act (WDCA). The district court erroneously held that the RICO claims were subject to reverse preemption under the McCarran-Ferguson Act, a federal law that precluded the application of a federal statute that: (1) did not specifically relate to the business of insurance, and (2) invalidated, impaired, or superseded a state law that was enacted for the purpose of regulating the business of insurance. Because the district court concluded that the federal RICO statute did not relate to the business of insurance, that RICO would impair the WDCA, and that the WDCA was enacted to regulate the business of insurance, it dismissed the RICO claims.

The WDCA, however, was not enacted for the purpose of regulating the business of insurance. It was enacted to require employers to compensate workers for injuries suffered in the course of employment. Moreover, worker compensation benefits could not be characterized as insurance. Finally, RICO did not invalidate, impair, or supersede the WDCA.

Although the two statutes provided different remedies, the U.S. Supreme Court determined—in Humana v. Forsyth (RICO Business Disputes Guide ¶9631)—that a federal law proscribing the same conduct as a state law, but providing materially different remedies, did not impair the state law under the McCarran-Ferguson Act.

The October 23 decision is Brown v. Cassens Transport Co., CCH RICO Business Disputes Guide ¶11,575.

Further information regarding CCH RICO Business Disputes Guide is available here at the CCH Online Store.

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