Insurer States RICO Claim Against Personal Injury Scammers; Counterclaim Too Bare to Survive

This posting was written by E. Darius Sturmer, contributor to Antitrust Law Daily.

A physician and a pair of physical therapy clinics, along with their principals, could have violated the federal RICO Act by orchestrating an alleged scheme to defraud State Farm Mutual Automobile Insurance Co. through the filing of claims for physical therapy services that were medically unnecessary or not actually performed, the federal district court in Ann Arbor, Michigan has decided (State Farm Mutual Automobile Insurance Co. v. Physiomatrix, Inc., February 12, 2013, O’Meara, J.).

A motion to dismiss filed by the defendants was denied, while motions by State Farm and two of its employees to dismiss the defendants’ RICO counterclaims was granted. Michigan’s Commissioner of Insurance, Kevin Clinton, and Secretary of State Ruth Johnson were also entitled to dismissal of a declaratory judgment action filed by the defendants, seeking to force them to order State Farm to cease its allegedly illegal conduct and suspend, revoke, or limit the insurer’s authority to act in Michigan.

In the suit, State Farm alleged that the defendant physician provided fraudulent diagnoses and prescriptions to patients who had been involved in motor vehicle accidents and were eligible for Personal Injury Protection (PIP) benefits under State Farm policies. These allowed them to obtain unnecessary physical therapy treatment at the defending clinics. The defendants’ counterclaims asserted that State Farm and two of its employees had violated their civil rights and federal RICO by fraudulently issuing blanket denials of legitimate PIP claims.

McCarran-Ferguson Act Preemption

At the outset, the court rejected an argument by the defendants that State Farm’s RICO claims were reverse preempted by the McCarran-Ferguson Act. The Act provides that “[t]he business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” There was no need to undertake an analysis of whether the conduct constituted the business of insurance, the court said, because the application of RICO would not impair Michigan’s No-Fault Act.

There was no legal authority suggesting that the insurance code had abrogated a common law action for fraud. State Farm did not have an “exclusive remedy” under the Michigan Insurance Code for fraud that would conflict with the application of RICO, and there was no evidence that the application of RICO would impair the state’s regulatory scheme. To the contrary, RICO augmented Michigan’s regulatory scheme.

Adequacy of plaintiff’s RICO Claim. State Farm adequately pleaded a claim for violation of 18 U.S.C. §1962(c) of the RICO Act, the court ruled. The insurance company sufficiently alleged the existence of a RICO enterprise and the defendants’ participation in it. It described the purpose of the conspiracy, the relationships between those associated with the enterprise, and sufficient longevity (from 2007 to the present) to permit the enterprise’s purpose. Addressing the claims specifically in the context of the defending physician’s motion, the court noted State Farm’s further allegation that the physician’s role was essential to the success of the scheme, given state laws requiring prescriptions for physical therapy services.

In addition, the court rejected the defendants’ contention that State Farm failed to plead mail fraud with particularity. The insurer’s providing of attachments to the complaint listing the claims at issue, examples of the physicians’ allegedly fraudulent disability certificates, and his initial examination findings, together with its specification of the overall fraudulent scheme in the complaint, sufficed to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b).

Defendants’ RICO Counterclaim

The defendants’ RICO counterclaim against State Farm and its employees—which contended that the insurer, its employees, and purported “independent” medical examiners conspired to wrongfully issue automatic claim denials—could not similarly survive dismissal, in the court’s view. The claim, which was essentially that State Farm did not remit payment as required under its insurance policies sounded in contract, not fraud, the court noted.

The countercomplaint alleged that in 2011, the insurer and its co-conspirators commenced their predetermined pattern of activity to wrongfully deny each and every claim submitted through the two physical therapy clinics. This consisted of issuing, through the United States Mail, form ‘investigation letters’ at various stages of the claim process and then predetermined explanation-of-benefit letters, all of which contained false and misleading information and statements as to the propriety of the charges sought to be paid to the clinics.

The clinics alleged that the information contained in the investigation letters implying a basis to deny claims and the information denying such claims “was false, was false when made, and was known by the author of such letters to be false when made.” They did not specify, however, what “information” in the investigation letters or explanation of benefit letters was false. Nor did they specify the claims that State Farm had allegedly fraudulently denied. Such bare allegations of fraud did not satisfy Rule 9(b)’s particularity requirement and did not sufficiently allege predicate acts of racketeering to state a claim under RICO, the court concluded.

Further details will appear in RICO Business Disputes Guide. Further information regarding the Guide appears here.