Tuesday, August 24, 2010

Brokers, Insurers Did Not Constitute Hub-and-Spoke RICO Enterprises

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

Purchasers of commercial and employee-benefit insurance policies failed to sufficiently allege a series of “hub-and-spoke” RICO enterprises comprising brokers and insurers that allegedly conspired to participate in unlawful and deceptive “allocation” schemes to steer unwitting purchasers from the brokers to their insurance company partners, and thereby deny the purchasers the benefits of a competitive market, the U.S. Court of Appeals in Philadelphia has ruled.

The brokers and insurers allegedly used the federal mails and wires to knowingly and intentionally misrepresent that they would:

(1) Act in the best interest of their clients in providing unbiased advice and assistance in the selection of appropriate insurance products and services and

(2) Act as fiduciaries in placing insurance on the best possible terms and at the best available price, the court noted. According to the purchasers, the defendants acted to further their own financial interests at the expense of their clients.
Broker-Centered Enterprises

Although the plaintiffs adequately alleged bilateral agreements (regarding the steering of business and the payment of contingent commissions) between the brokers and each of their insurance company partners, they failed—with one exception—to adequately plead “broker-centered” hub-and-spoke enterprises that included a broker hub and all of the broker’s strategic insurance partners, the court concluded.

Because the plaintiffs failed to plead facts that plausibly suggested collaboration (rather than mere parallel conduct) among the insurers, their hub-and-spoke structures lacked a unifying “rim,” the court explained, and thus failed the basic requirement that members of an enterprise function as a unit.

Put another way, the plaintiffs’ allegations could not support the inference that the insurers had associated together for the common purpose of engaging in a course of conduct.

Bid-Rigging Allegations

Allegations of bid rigging by one of the brokers, however, sufficiently provided the missing “rim” for that broker’s hub-and-spoke configuration. The plaintiffs identified a hierarchical structure through which the broker, in accordance with its “broking plan,” decided which insurer would be asked to submit a sham bid.

The common purpose of this broker-centered enterprise was “to increase profits by deceiving insurance purchasers about the circumstances surrounding their purchase.” The allegations of bid rigging thus indicated that there was a relationship among the insurers in the enterprise. If proved, the bid rigging activities would plausibly show that the insurers had joined together in pursuit of a common purpose, according to the court.

Although the district court believed that the insurers’ participation in the alleged bid rigging transactions was done in an ad hoc manner, the appellate court disagreed. Even if the transactions were carried out ad hoc, a RICO enterprise did not require a systematic plan that “ordain[ed] in advance” who would provide a sham bid for a particular transaction, the court instructed.

Decisions could be made on an ad hoc basis—by any number of methods—without destroying the broker-centered enterprise. Members were not required to have to have fixed roles and participants did not have to maintain non-interchangeable and non-substitutable functions.

The district court also “appeared to believe” that the purchasers’ bid-rigging allegations did not go beyond the bilateral relationships that were established between the broker and the individual insurers. According to the district court, interrelationships among the insurers were not adequately pled. In the appellate court’s view, however, allegations that the insurers had agreed to provide the broker with sham bids “plausibly suggested” a broker-mediated interrelationship among the insurers.

Through this interrelationship, the insurers were allegedly able to advance their common interest in higher profits to a greater extent than would have been possible on the strength of the bilateral relationships alone.

Conducting the Enterprise’s Affairs

The district court expressed doubt that the defendants had conducted the affairs of this broker-centered enterprise and not simply their own affairs. The appellate court observed, however, that the interests of an enterprise would often coincide with those of its members. If defendants banded together to commit violations that they could not accomplish alone, then they were “cumulatively … conducting” the affairs of the association-in-fact enterprise.

In this case, allegations that the broker solicited rigged bids from its insurance partners and directed the placement of insurance contracts plausibly implied that the broker had participated in the operation or management of the enterprise, the court determined. In addition, allegations that the insurers had furnished sham bids to the broker sufficiently indicated the insurers’ involvement in the enterprise’s operation.

The Third Circuit’s August 16 opinion in Insurance Brokerage Antitrust Litigation will be reported at CCH RICO Business Disputes Guide ¶11,896.

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