$140 Million Jury Verdict in Favor of Kaiser in Neurontin Off-Label Marketing Case Upheld

This posting was written by Jody Coultas, Contributor to Wolters Kluwer Antitrust Law Daily.

The U.S. Court of Appeals in Boston affirmed verdicts of over $140 million, reached by both a jury and trial court, in favor of Kaiser Foundation Health Plan, Inc. for injuries suffered as a result of Pfizer, Inc.’s fraudulent scheme to market its epilepsy drug Neurontin for off-label uses (Kaiser Foundation Health Plan, Inc. v. Pfizer, Inc., April 3, 2013, Lynch, S.).

Neurontin was approved by the FDA as an adjunctive therapy in the treatment of partial seizures in adults with epilepsy, with a maximum dose at 1800 mg/day. Pfizer’s marketing of Neurontin for off-label uses resulted in over $2 billion in sales, with only about ten percent of Neurontin prescriptions filled for on-label uses.

Kaiser alleged that Pfizer and its subdivision Warner-Lambert Company, LLC violated the federal RICO law and the California Unfair Competition Law (UCL) by fraudulent marketing Neurontin for off-label uses. Pfizer was found to have misrepresented Neurontin's effectiveness for off-label uses directly to doctors, sponsored misleading informational supplements and continuing medical education programs, suppressed negative information about Neurontin, and published articles in medical journals that reported positive information about Neurontin's off-label effectiveness.

RICO Violation

The court found that Kaiser presented sufficient evidence of causation to support a RICO claim. Pfizer argued that Kaiser failed to show proximate causation because there were too many steps in the causal chain connecting its misrepresentations to the injury to Kaiser because the injury was based on the actions of independent actors -- the prescribing doctors.

Courts look at three factors to determine whether proximate cause exists under RICO: the less direct an injury is, the more difficult it becomes to ascertain the amount of damages attributable to the violation; claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury to avoid the risk of multiple recoveries; and the societal interest in deterring illegal conduct and whether that interest would be served in a particular case.

In cases where the plaintiffs did not receive the misrepresentations at issue, courts may still find proximate causation. Pfizer’s argument that Kaiser could not show causation because its misrepresentations went to prescribing doctors was, therefore, dismissed. Kaiser was a foreseeable victim of Pfizer's scheme to defraud, and Kaiser’s injury was a natural consequence of the scheme. Pfizer was obviously aware that doctors would not be the ones paying for the drugs they prescribed, and that its revenues stemmed from payments by insurance and health care plans such as Kaiser.

But-For Causation

Kaiser submitted sufficient evidence to demonstrate but-for causation between Pfizer’s conduct and its injury, according to the court. Pfizer argued that its evidence at trial rendered Kaiser's theories of causation false. Kaiser presented evidence that its employees directly relied on Pfizer's misrepresentations in preparing monographs and formularies, which, in turn, influenced doctors' prescribing decisions, and Pfizer's fraudulent off-label marketing directed to physicians caused PMG doctors to issue more Neurontin prescriptions than they would have absent such marketing. Pfizer's evidence did not, as a matter of law or of evidence, "falsify" Kaiser's theory of reliance upon Pfizer's misrepresentations. The testimony of some doctors who did not view Pfizer’s statements that prescribed Neurontin for off-label uses did not defeat the inference that this misinformation had a significant influence on prescribing decisions which injured Kaiser.

The statistical evidence submitted by Kaiser’s expert was sufficient and admissible, according to the court. Pfizer argued that some of the evidence Kaiser presented to prove but-for causation was inadmissible based on the methodology used. However, regression analysis, used by Kaiser’s expert, is a recognized and scientifically valid approach to understanding statistical data. Pfizer also argued that the expert failed to account for other factors that may have led doctors to prescribe Neurontin for off-label use. The court found that the district court was well within its discretion to admit Kaiser’s evidence.

Kaiser presented sufficient evidence for the jury and district court to find that Neurontin was not effective for the four off-label conditions, according to the court. Pfizer argued that the court applied an erroneous burden of proof and an erroneous medical standard in making its findings as to Neurontin's effectiveness. However, the court did not but the burden on Pfizer of proving Neurontin’s effectiveness. Kaiser presented sufficient evidence on the topic, and Pfizer was unable to overcome it.

The court also dismissed Pfizer’s challenges to the amount of damages awarded by the jury and court. The district court did not err in accepting Kaiser’s methodology for calculating damages.

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.

Tobacco Firms’ Obligatory Corrective Statements for Cigarette Harm, Addiction Claims Approved

This posting was written by E. Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The federal district court in Washington D.C. yesterday finalized the text of corrective messages that most of the major domestic tobacco firms must publish on each of five topics on which the tobacco firms made false and deceptive statements about the health effects and addictive properties of their cigarettes. (U.S. v. Philip Morris USA, Inc., November 27, 2012, Kessler, G.)

The companies were required to publish the comments as part of a series of injunctive measures imposed by the court in 2006, upon a ruling that they had participated in a long-running RICO conspiracy to conceal the true hazards of smoking.

In association with this finding, the court determined that the tobacco firms had engaged in the scheme by making false and fraudulent statements, representations, and promises in advertising to consumers. These statements concerned: (1) the adverse health effects of smoking; (2) the addictiveness of smoking and nicotine; (3) the lack of any significant health benefit from smoking low tar, light, mild, or natural cigarettes; (4) the firms’ manipulation of cigarette design and composition to ensure optimum nicotine delivery; and (5) the adverse health effects of exposure to secondhand smoke.

The tobacco firms continue to engage in conduct “materially indistinguishable” from their previous unlawful actions “to this day,” the court noted.

The corrective statements are “necessary to prevent and restrain the defendants from continuing to disseminate fraudulent public statements and marketing messages,” according to the court. The court noted a decision by the U.S. Court of Appeals for the District of Columbia Circuit upholding its earlier determination that corrective statements targeted at revealing the previously hidden truth about cigarettes would prevent and restrain future RICO violations. The approved statements read as follows:

A. Adverse Health Effects of Smoking

A Federal Court has ruled that the Defendant tobacco companies deliberately deceived the American public about the health effects of smoking, and has ordered those companies to make this statement. Here is the truth:

• Smoking kills, on average, 1200 Americans. Every day.

• More people die every year from smoking than from murder, AIDS, suicide, drugs, car crashes, and alcohol, combined.

• Smoking causes heart disease, emphysema, acute myeloid leukemia, and cancer of the mouth, esophagus, larynx, lung, stomach, kidney, bladder, and pancreas.

• Smoking also causes reduced fertility, low birth weight in newborns, and cancer of the cervix and uterus.

B. Addictiveness of Smoking and Nicotine

A Federal Court has ruled that the Defendant tobacco companies deliberately deceived the American public about the addictiveness of smoking and nicotine, and has ordered those companies to make this statement. Here is the truth:

• Smoking is highly addictive. Nicotine is the addictive drug in tobacco.

• Cigarette companies intentionally designed cigarettes with enough nicotine to create and sustain addiction.

• It's not easy to quit.

• When you smoke, the nicotine actually changes the brain—that's why quitting is so hard.

C. Lack of Significant Health Benefit from Smoking “Low Tar,” “Light,” “Ultra Light,” “Mild,” and “Natural” Cigarettes

A Federal Court has ruled that the Defendant tobacco companies deliberately deceived the American public by falsely selling and advertising low tar and light cigarettes as less harmful than regular cigarettes, and has ordered those companies to make this statement. Here is the truth:

• Many smokers switch to low tar and light cigarettes rather than quitting because they think low tar and light cigarettes are less harmful. They are not.

• “Low tar” and filtered cigarette smokers inhale essentially the same amount of tar and nicotine as they would from regular cigarettes.

• All cigarettes cause cancer, lung disease, heart attacks, and premature death—lights, low tar, ultra lights, and naturals. There is no safe cigarette.

D. Manipulation of Cigarette Design and Composition to Ensure Optimum Nicotine Delivery

A Federal Court has ruled that the Defendant tobacco companies deliberately deceived the American public about designing cigarettes to enhance the delivery of nicotine, and has ordered those companies to make this statement. Here is the truth:

• Defendant tobacco companies intentionally designed cigarettes to make them more addictive.

• Cigarette companies control the impact and delivery of nicotine in many ways, including designing filters and selecting cigarette paper to maximize the ingestion of nicotine, adding ammonia to make the cigarette taste less harsh, and controlling the physical and chemical make-up of the tobacco blend.

• When you smoke, the nicotine actually changes the brain—that's why quitting is so hard.

E. Adverse Health Effects of Exposure to Secondhand Smoke

A Federal Court has ruled that the Defendant tobacco companies deliberately deceived the American public about the health effects of secondhand smoke, and has ordered those companies to make this statement. Here is the truth:

• Secondhand smoke kills over 3,000 Americans each year.

• Secondhand smoke causes lung cancer and coronary heart disease in adults who do not smoke.

• Children exposed to secondhand smoke are at an increased risk for sudden infant death syndrome (SIDS), acute respiratory infections, ear problems, severe asthma, and reduced lung function.

• There is no safe level of exposure to secondhand smoke.

In selecting from among the parties’ submissions of proposed corrective statements, the District Judge Gladys Kessler stated that the court had “broad discretion to formulate corrective statements.” After reviewing the Supreme Court’s development of the commercial speech doctrine and in light of more recent precedent, the court concluded that the statements passed Constitutional muster.

The statements were “purely factual and uncontroversial,” in the court’s view, and were therefore subject to the standard of review established by the Supreme Court in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985). Under Zauderer, challenged disclosures survive constitutional scrutiny if they are reasonably related to the government interest in preventing consumer deception and not otherwise unjust or unduly burdensome, the court explained.

Citing the massive “scope of the consumer fraud at issue here,” the court found that the preamble language provided important and necessary context for the consumer, and was therefore reasonably related to correcting and preventing future consumer deception. Furthermore, the court observed, the defending tobacco firms’ failure to point to any “burden” or “chill” that the statements would have on their speech precluded their argument that the statements imposed “far greater burdens” on their speech than “necessary to further the Government’s anti-fraud interest.”

The court added that even if the Zauderer requirements had not been met, the statements still would satisfy First Amendment scrutiny under another, lower standard of acceptable commercial speech.

The case is Civil Action No. 99-2496 (GK).

Artist May Pursue State, Not Federal, Copyright-Based RICO Claims

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

An artist could not pursue federal RICO claims against a sports art company and its owner, who allegedly (1) reproduced one of the artist’s drawings without permission; (2) deleted the artist’s numbering system and original signature; and (3) sold at least 349 unauthorized copies of the work, the federal district court in Atlanta has ruled. The artist could, however, pursue racketeering claims under Georgia’s RICO statute.

Enterprise

The company did not constitute a RICO enterprise because it was not distinct from its owner, in the court’s view. Although a corporation and its owner were generally distinct from the corporation itself (Cedric Kushner Promotions, Ltd. v. King,  CCH RICO Business Disputes Guide ¶10,085), the artist attempted to pierce the corporate veil of the sports art company, and thus contradicted his assertion that the company was distinct from its owner. Because the plaintiff failed to distinguish between the company and its owner, his RICO claim could not proceed.

Continuity

The artist failed to allege acts involving open-ended or closed-ended continuity. The alleged racketeering activity involved a single scheme with a discrete goal, which precluded closed-ended activity. Open-ended continuity was absent because the plaintiff failed to allege that the defendants had regularly conducted business by impermissibly selling copyrighted works. In addition, evidence failed to show that:

(1) The defendants’ scheme involved more than one victim (the plaintiff) or more than one copyrighted work or

(2) The defendants had engaged in other similar schemes.

The plaintiff argued that a threat of future racketeering activity existed because the defendants’ acts “could have continued indefinitely.” Continued criminal activity was almost always theoretically possible, but the type of speculation that the artist advocated would undermine: (1) the purpose of limiting RICO claims to “non-sporadic racketeering activity” and (2) the purpose of requiring a heightened pleading standard for RICO claims. Because the artist failed to sufficiently plead a pattern of racketeering activity, his federal RICO claim was dismissed.

State RICO Claim

The artist’s Georgia RICO claim survived the defendants’ motion to dismiss, despite the artist’s failure to adequately plead open-ended or closed-ended continuity, because the Georgia RICO statute did not include a continuity requirement. Instead, Georgia RICO required that the alleged predicate acts share “the same or similar intents, results, accomplices, victims, or methods of commission.” The predicate acts alleged by the artist were very similar in each of these respects. In addition, the predicate activity included criminal copyright infringement, which qualified as a predicate act under Georgia RICO because criminal copyright infringement was a predicate act under the federal RICO statute.

The decision is Burchett v. Lagi, CCH RICO Business Disputes Guide ¶12,250.

Rebates to Large Utility Customers May Have Violated Federal, Ohio RICO Laws

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

An individual and three Ohio businesses could proceed with federal RICO and Ohio Corrupt Practices Act claims against an electric utility and its subsidiary (Duke Energy Corp. and Duke Energy International, Inc.), the U.S. Court of Appeals in Cincinnati has ruled.


The utilities allegedly made “side agreements” to pay substantial and unlawful rebates to large customers, including General Motors, in exchange for withdrawing their objections to a rate-stabilization plan that the utilities had proposed as part of a move to market-based rates. The plaintiffs sufficiently alleged: (1) money laundering and mail fraud; (2) proximate cause; and (3) obstruction of justice.

Money Laundering

According to the court, the alleged transfer of money—from large customers to the utility, from the utility to one of its affiliates, and from the affiliate back to the large customers—tainted the money, which became the proceeds of mail fraud. The plaintiffs thus alleged a cognizable claim of money laundering based on mail fraud.

Mail Fraud

The defendants argued that they were not required to disclose any rebates because differential pricing was not, by itself, a fraudulent practice. The plaintiffs, however, alleged that the utilities had engaged in mail fraud by using the mails to inform their customers that everyone had to pay “mandatory and unavoidable” electricity charges.

Because these mailings implied that all customers paid the same rate, the plaintiffs adequately alleged that the utilities had engaged fraud by failing to disclose their side agreement with large customers.

Proximate Cause

The utilities argued that: (1) the plaintiffs’ theory of liability rested on the independent actions of the Public Utilities Commission of Ohio (PUCO) and (2) the remedy sought by the plaintiffs would require the PUCO to enforce the law. The argument was flawed because the utilities confused the relationship between an allegedly wrongful act and a proximately caused injury with the relationship between an allegedly wrongful act and a remedy for a proximately-caused injury.

The PUCO did not the cause the plaintiffs’ alleged injury; the defendants did, through an allegedly fraudulent scheme. The fact that the plaintiffs had to bring their case before the PUCO or the court did not mean that a third party had disrupted the chain of causation. The defendants’ argument that a finding of proximate cause would be speculative—because the PUCO might not have found the rebates to be unlawful—was also unavailing.

Obstruction of Justice

The plaintiffs sufficiently alleged obstruction of justice as a predicate act for their Ohio Corrupt Practices Act claim against the utilities. The plaintiffs alleged that the utilities’ legal counsel “consciously and deceptively denied,” in on-the-record proceedings before the Ohio Supreme Court, the existence of side agreements between the utilities and some of their customers.

Obstruction of justice under Ohio law involved the communication of false information to any person for the purpose of hindering the discovery of a crime. The selective payment of rebates, the court noted, was a felony in Ohio. Therefore, the communication of false information to any person—for the purpose of hindering the discovery of the selective payment of rebates—constituted obstruction of justice.

The defendants argued that the alleged communication of false information had occurred in civil proceedings, but that fact was irrelevant. Ohio’s obstruction of justice law contained no requirement that a false statement had to be made in a criminal proceeding. The defendants’ contention that the alleged obstruction was made in defense of the corporation did not shield the defendants’ counsel from liability.

Even if corporations were not considered “persons,” corporate counsel was not permitted to freely make false statements before a court and evade liability for obstruction of justice.

The decision is Williams v. Duke Energy International, Inc., CCH RICO Business Disputes Guide ¶12,222.

CSX Transportation Can Pursue RICO Claims Alleging Phony Asbestosis Suits

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

A provider of rail-based transportation services (CSX Transportation, Inc.) sufficiently alleged RICO violations by three lawyers and a doctor, all of whom allegedly orchestrated a scheme to inundate CSX with thousands of asbestos-related occupational illness claims throughout the state of West Virginia, the federal district court in Wheeling, West Virginia, has ruled.

The complaint asserted more than abuse of process or malicious prosecution because the pleadings described a complex scheme involving activities that went beyond the filing of eleven fraudulent claims.

Mail and Wire Fraud

The predicate acts alleged by CSX involved mail and wire fraud, including the filing and service of mass lawsuits and all of the actions taken by the lawyer defendants to generate medical evidence in support of their fraudulent asbestosis claims. The lawyer defendants’ characterization of these filings and mailings as “routine litigation activity” was contrary to CSX’s allegations.

CSX alleged that the three lawyers: (1) gained access to potential clients through unlawful means; (2) retained clients and procured medical diagnoses for them through intentionally unreliable mass screenings; (3) prosecuted clients’ claims using dishonest, fraudulent, and deceptive tactics; and (4) fabricated and prosecuted asbestosis claims with no basis in fact, and did so using mass lawsuits in overburdened courts in an effort to deprive CSX of access to meaningful discovery, which in turn concealed the fraudulent claims and leveraged higher settlements based on the threat of mass trials.

The court concluded that these allegations were sufficient to support the inference that each of the lawyer defendants knew that the mails were being used to further their scheme.

Heightened Pleading Standard for Fraud

The predicate acts of mail and wire fraud were alleged with sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure, which required fraud plaintiffs to identify the time, place, and contents of false representations, as well as the identity of the persons who made the misrepresentations and what they obtained thereby.

According to the court, CSX adequately identified: (1) the date when each fraudulent claim was filed and the court in which it was filed; (2) the person who signed each complaint and caused it to be filed; (3) the circumstances surrounding the service of each complaint on CSX; and (4) the relevant portions of each complaint that was fraudulently filed.

Injury

CSX sufficiently pled an injury to its business or property by reason of the defendants’ alleged racketeering activities, the court determined. The company alleged that it was forced to expend substantial sums of money and resources in order to process, defend, and settle “deliberately fabricated claims” that never should have been filed. Its complaint described a direct relationship between the lawyer defendants’ fraudulent claims and CSX’s need to “expend resources” to respond to those claims.

Accordingly, CSX properly alleged an injury as the direct result of the defendants’ fraudulent claims.

Pattern of Racketeering: Relatedness

For predicate acts to be related, they must have the same or similar purposes, results, participants, victims, or methods of commission, or must otherwise be interrelated by distinguishing characteristics. In this case, the predicate acts of mail and wire fraud involved the same participants (the lawyer and doctor defendants); the same victim (CSX); the same alleged purpose (to defraud CSX through the manufacturing, filing, and prosecution of fraudulent asbestosis claims); and similar methods of commission (the addition of fraudulent claims to mass lawsuits that were filed in the same overburdened court system and filed motions to compel the mandatory mass mediation of those claims).

The relatedness analysis in this case depended on whether the predicate acts were defined as the eleven fraudulent asbestosis claims that the lawyer defendants filed, or whether the mass suits themselves were considered predicate acts. Eleven fraudulent claims was a small percentage of the total number of claims that composed the mass lawsuits alleged in CSX’s complaint. The lawyer defendants argued that this isolated conduct—a mere 0.2% of the asbestosis claims filed by their law firm against CSX—did not create a pattern of racketeering activity.

The predicate acts alleged in CSX’s complaint, however, arguably encompassed more than just the eleven fraudulent claims. CSX asserted that the lawyer defendants “deliberately filed … mass lawsuits in overburdened courts to deprive CSX[] of access to meaningful discovery, which in turn concealed fraudulent claims and leveraged higher settlements based on the threat of mass trials.” The fact that only some of the lawsuits filed against CSX were fraudulent did not negate the argument that the mass lawsuits were filed as part of a larger plan to conceal the fraudulent claims, the court explained.

Pattern of Racketeering: Continuity

CSX alleged that “the predicate acts were continuous in that they occurred on a regular basis.” It also alleged facts indicating that the lawyer defendants continued to prosecute their fraudulent claims even after CSX had filed its original amended complaint in this case. The calculated and deliberate strategy of the lawyer defendants to participate in and conduct the affairs of the lawyers’ firm through a pattern and practice of unlawful conduct, as described in the complaint, indicated that the filing of fraudulent lawsuits was a part of the firm’s regular business practice, according to the court. Taken together, these facts, if proven, established a threat of continuing racketeering activity, and therefore open-ended continuity.

The decision is CSX Transportation, Inc. v. Gilkison, CCH RICO Business Disputes Guide ¶12,207.

Further information regarding CCH RICO Business Disputes Guide appears here

CFO Violated RICO; Plaintiff Awarded $3.5 Million in Damages

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

The bookkeeper and chief financial officer (CFO) of an industrial machinery supplier violated RICO by participating in a fraudulent scheme to sell overpriced equipment to a flooring company, the federal district court in Abingdon, Virginia, has ruled. More than $3.5 million in damages, after trebling under RICO, were awarded to the flooring company.

Participation in Enterprise

The bookkeeper-CFO participated in the conduct of an association-in-fact enterprise—which consisted of the plaintiff, her husband, the supplier, and a company that appeared to be used for the sole purpose of carrying out the fraudulent scheme—by manipulating the supplier’s books and records, creating false invoices, signing kickback checks, and obstructing access to accurate data and documents, the court explained.

These actions were integral to the operation of the enterprise. Without the manipulation of the supplier’s accounting records, the issuance of false invoices, and the cutting of the kickback checks, the enterprise would have not been able to achieve its goal of defrauding a flooring company.

Pattern of Racketeering

The defendant and her co-conspirators engaged in a pattern of racketeering activity that consisted of mail fraud, wire fraud, commercial bribery, and obstruction of justice, even though those acts were perpetrated in furtherance of a single scheme to defraud a single customer (the flooring company), the court determined. Under RICO, a pattern of racketeering was present if a series of related predicate acts were committed over a substantial period of time.

In this case, the racketeering acts were related because they all were perpetrated to defraud the flooring company. The acts were sufficiently continuous, as well, because they were committed between September 2005 and 2008, which represented a substantial period of time for the purpose of RICO’s continuity requirement.

Punitive Damages; Attorney Fees

The court denied the plaintiff’s request for punitive damages because the plaintiff’s state law claims arose from the same set of facts, and were based on the same duties and injuries, as its RICO claims. A punitive damage award would thus be duplicative. The plaintiff’s request for nearly $713,000 in attorney fees was also denied.

Although the hourly rate charged by the plaintiff’s counsel was reasonable, the overall fee was not, according to the court. Therefore, the plaintiff’s fee request was reduced by 50 percent. The court awarded slightly more than $356,000 in attorney fees.

The decision is VFI Associates, LLC v. Lobo Machinery Corp., CCH RICO Business Disputes Guide ¶12,204.

Further information regarding CCH RICO Business Disputes Guide appears here.

Employees’ Civil RICO Claim Did Not Allege Wage Fraud by Healthcare Providers

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

RICO claims predicated on wire fraud and forced labor could not proceed against a health care consortium that allegedly engaged in a scheme to obtain free labor and services from employees by cheating them out of their wages and overtime pay, the federal district court in Central Islip, New York, has ruled. The employees failed to sufficiently allege the predicate acts of mail and wire fraud.

Wire Fraud

Employees of the consortium’s health care facilities alleged that their paychecks were wired to them and that the wirings included false representations stating that they were properly compensated for all of the time they worked. According to the employees, the wire payments “actually represented an amount less than the full amount of wages” they earned. Nevertheless, the employees were fully aware of the number of hours they had worked. The wire payments thus would not have furthered the consortium’s scheme, the court concluded. Rather, the payments would have put the employees on notice of the scheme by revealing their employers’ failure to fully compensate them for the hours they had worked. The employees’ wire fraud claim was therefore unavailing.

Forced Labor

The employees alleged that their employers threatened “serious financial harm” by telling them that their employment would be in jeopardy if they failed to complete all of their assigned tasks. They further alleged that they were forced to work, “out of fear of losing their jobs,” during meal breaks, before and after scheduled shifts, and during training sessions. Finally, the employees alleged that they feared “reputational harm” for failing to perform the required labor and services.

To the extent that their forced labor claims were premised on coercive conduct that forced the employees to work overtime without pay, the claims were clearly subsumed within their Fair Labor Standards Act claim and thus were preempted. To the extent that the claims were predicated on conclusory allegations that the employers had procured their labor by threatening to fire them, or by berating them in public for not finishing their work, the allegations did not state a claim under the forced labor statute, according to the court.

The employees failed to cite a single case that supported the novel theory that threatening to fire an at-will employee or berating an employee in public constituted “forced labor.”

The decision is DeSilva v. North Shore-Long Island Jewish Health System, Inc., CCH RICO Business Disputes Guide ¶12,183.

Civil RICO Claims Against Adoption Agency Reinstated on Appeal

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

A federal district court improperly dismissed RICO claims that seven couples brought against an adoption agency and its principals, the U.S. Court of Appeals in Cincinnati has ruled.

The defendants allegedly defrauded the couples while they were trying to adopt children from Guatemala. Although the lower court correctly held that the plaintiffs failed to properly allege extortion, it incorrectly held that four well-pled predicate acts of mail and wire fraud over a two-month period were insufficient to establish a pattern of racketeering.

Pattern of Racketeering

In order to establish a pattern of racketeering, plaintiffs had to show that the alleged racketeering acts were “related.” They also had to show that the acts amounted to, or posed a threat of, “continued criminal activity.” Together, these requirements constituted RICO’s “relationship plus continuity” test.

The relationship prong was met in this case, the court explained, because the predicate acts of mail and wire fraud were committed by the same parties (the principals), using similar methods (email correspondence, telephone conversations, and a website presence), in an attempt to ensnare similar victims (couples seeking to adopt Guatemalan children), for a similar purpose (to defraud the victims out of adoption-related fees).

Continuity

To establish continuity, plaintiffs had to show either a “close ended” pattern of racketeering (a series of related predicate acts extending over a substantial period of time) or an “open-ended” pattern (a set of predicate acts that posed a threat of continuing criminal conduct that extended beyond the period in which the predicate acts were performed).

The plaintiffs in this case could not establish a close-ended pattern because the predicate acts at issue were not spread across a “substantial” period of time, the court explained. Significantly, the Sixth Circuit had previously ruled that seventeen months of racketeering activity was insufficient to establish a close-ended pattern. In this case, the predicate acts of racketeering spanned less than two months.

Nevertheless, the plaintiffs’ established the existence of open-ended continuity, in the court’s view. At the time that the defendants had allegedly committed the predicate acts of mail and wire fraud, “there was no indication that their pattern of behavior would not continue indefinitely into the future.”

The defendants argued that a threat of continued criminal activity was absent because the adoption agency had been shut down as the result of a criminal prosecution. Subsequent events, however, were irrelevant to an analysis of open-ended continuity. According to the court, the threat of continuity must be viewed at the time the racketeering activity occurred. Moreover, the absence of a threat of continued criminal activity could not be asserted merely by showing that a “fortuitous interruption” of that activity had occurred.

Because the plaintiffs adequately alleged an open-ended pattern of racketeering activity, the dismissal of their RICO claims was reversed and the matter was remanded for further proceedings.

Intent

Rule 9(b) of the Federal Rules of Civil Procedure required RICO plaintiffs to plead facts that would establish a basis for inferring fraudulent intent, the court observed. Significantly, courts have “uniformly held” that a plaintiff’s general averment of a defendant's knowledge of a material falsity was inadequate to establish scienter “unless the complaint also sets forth specific facts that make it reasonable to believe that defendant knew that a statement was materially false or misleading.”

The plaintiffs in this case alleged, in a general and conclusory fashion, that the defendants knew they were making materially false statements regarding the availability of adoptive children. More specifically, the plaintiffs alleged that the defendants “frequently advertised children on their website who they knew, or should have known, were unavailable for adoption.”

The plaintiffs failed, however, to set forth specific facts that would support of a reasonable inference that: (1) the children were actually unavailable and (2) the defendants knew they were unavailable. These allegations, which were not part of the “four well-pled predicate acts of mail and wire fraud,” were insufficient to establish a basis for inferring intent, the court concluded.

The decision is Heinrich v. Waiting Angels Adoption Services, Inc., CCH RICO Business Disputes Guide ¶12,165.

Computer Fraud and Abuse Should Be RICO Predicate Act: Department of Justice

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

In a statement before a House Judiciary subcommittee on November 15, a U.S. Department of Justice official proposed amending the federal RICO statute to make violations of the Computer Fraud and Abuse Act (CFAA) a RICO predicate act.

Richard Downing, Deputy Section Chief for Computer Crime and Intellectual Property, testified before the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security. In his prepared statement, Downing emphasized the importance of addressing more targeted, sophisticated, and serious cyber crime and cyber intrusions.

According to Downing, computer technology has become a key tool of organized crime, which now:

(1) Hacks into public and private computer systems, including systems key to national security and defense;

(2) Hijacks computers for the purpose of stealing identity and financial information;

(3) Extorts lawful businesses with threats to disrupt computers; and

(4) Commits a range of other cyber crimes.

The Obama administration has taken significant steps to ensure that the American people, businesses, and governments build better protections against cyber threats, he said.

“Through this ongoing work, it has become clear that our Nation cannot improve its ability to defend against cyber threats unless certain laws that govern cybersecurity activities are updated, including the Computer Fraud and Abuse Act.”

RICO Predicate Act

Among the changes proposed by the Department of Justice is making CFAA offenses subject to the Racketeering Influenced and Corrupt Organizations Act.
Downing urged Congress to update the RICO statute because RICO could be an effective tool to fight criminal organizations that use the Internet to commit their crimes.

“The Administration’s proposal would simply make clear that malicious activities directed at the confidentiality, integrity and availability of computers should be considered criminal activities under the RICO statute,” the official noted.

Downing’s statements were issued as part of a broader proposal to update the CFAA, including amendments to ramp up sentencing and other penalties, furnish better tools for investigators and prosecutors, and provide enhanced deterrence for malicious activity directed at critical infrastructure.

The full text of Downing’s statements is available here on the Department of Justice website.

Attorney, Wife Liable for RICO Fraudulent Insurance Claims

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

Two insurance companies succeeded—and three failed—in their RICO claims against an attorney who had participated in a scheme to defraud the insurers by submitting false claims for automobile insurance, the federal district court in San Juan, Puerto Rico, has ruled. Because the attorney’s RICO violations enriched both him and his spouse, their conjugal partnership was jointly liable for nearly a million dollars in damages that the attorney had caused.

Insurance Fraud Paradigm

Aetna Casualty Surety Co. v. P & B Autobody (43 F.3d 1546), a 1994 decision by the U.S. Court of Appeals for the First Circuit, provided a paradigm for analyzing RICO claims involving insurance fraud, the court observed. In accordance with Aetna, the insurers had to prove that: (1) each was an enterprise; (2) their business activities affected interstate or foreign commerce; (3) the defendant associated with each of them; (4) the defendant participated in the operation or management of each enterprise; and (5) the defendant’s participation in each enterprise was effected through a pattern of racketeering activity.

Enterprise, Interstate Commerce

The insurers were legitimate corporations authorized to engage in the business of insurance in Puerto Rico. Therefore, each insurer constituted a distinct enterprise. Moreover, to the extent that the insurers provided coverage to policyholders in the continental United States, their activities affected interstate commerce. The first and second Aetna criteria were therefore met, according to the court.

Association, Participation

As a policyholder or claimant under the plaintiffs’ insurance policies, the attorney associated with each of the insurers, the court reasoned. In addition, he participated in the conduct of the enterprises’ affairs by filing false claims that were paid by the insurers. RICO made it unlawful for any person who was employed by or associated with an interstate enterprise to “conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” In Reves v. Ernst & Young (CCH RICO Business Disputes Guide ¶8227), the U.S. Supreme Court construed the words “conduct or participate” to mean a defendant’s participation in the “operation or management” of the enterprise.

In this case, the attorney argued that he could not have participated in the operation or management of the insurance company enterprises because insurance company employees had not been involved in the scheme. Although some courts in the Second Circuit have adopted this “more restrictive” approach to the operation and management requirement (where participation required employee involvement in the fraudulent scheme), the attorney failed to fully develop his argument with respect to this approach. Alleging that insurance company insiders were not involved in the attorney’s fraud was insufficient to distinguish the holding in the Aetna case, which included insurance company employees as defendants. In light of the First Circuit’s liberal application of the RICO Act, and considering the role that insurance company employees had played in the Aetna scheme, the attorney’s argument was unavailing, the court concluded.

Accordingly, the third and fourth Aetna criteria were met, as well.

Pattern of Racketeering

The attorney contended that the insurers had to prove that two or more predicate acts were committed in connection with each enterprise. In the absence of any attempt to rebut this contention, and in light of the fact that case law appeared to be silent on the issue, the attorney’s “straightforward” interpretation of the fifth criterion was adopted. The undisputed facts showed that the attorney had committed a single act of racketeering in connection with each of three insurers. Accordingly, a pattern of racketeering was absent as to those insurers and their RICO claims failed. The claims asserted by the remaining two insurers, however, were successful. The attorney had committed multiple acts of racketeering in connection with each of them. Moreover, the acts were sufficiently related (they shared the same purpose, results, victims, and methods of commission) and they posed a threat of continued criminal activity, in the court’s view. The two insurers thus met all five Aetna criteria and prevailed on their RICO claims against the attorney.

Damages

The successful insurance companies were awarded a total of $955,703 in treble damages. The facts showed that the insurers had sustained losses of $112,500 and 206,068, respectively. After trebling, those damages increased to $337,500 and $618,203, respectively.

The September 30, 2011 case in Puerto Rico American Ins. Co. v. Burgos can be found at CCH RICO Business Disputes Guide ¶12,117.

Alleged Horse-Breeding Scheme May Have Violated Federal RICO Law

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

Investors could proceed with civil RICO claims against defendants that allegedly engaged in a fraudulent investment scheme that involved the leasing of thoroughbred mares for a single breeding season, the federal district court in Lexington, Kentucky, has ruled.

The defendants unsuccessfully argued that the plaintiffs were required to allege that each defendant had personally made misrepresentations or had used the mails or wires in order state a claim. They were unsuccessful, as well, in their argument that the plaintiffs did not allege a valid “investment” claim under RICO §1962(a).

Mail, Wire Fraud

Although the U.S. Court of Appeals for the Sixth Circuit required plaintiffs to identify with specificity the actions that each defendant had taken in furtherance of an alleged fraud, the mail and wire fraud statutes did not require a showing that each defendant had personally made a misrepresentation, the court explained.

To plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff had to allege only that each RICO defendant had participated in a scheme to defraud “knowing or having reason to anticipate [that] the use of the mail or wires would occur and that each such use would further the fraudulent scheme.”

Investment of Racketeering Income

The defendants unsuccessfully argued that the plaintiffs failed to plead a valid “investment” claim under RICO §1962(a).

According to the defendants, the plaintiffs failed to allege that specified defendants had used or invested income from a pattern of racketeering activity to acquire an interest in, or to operate an enterprise engaged in, interstate commerce.

The plaintiffs, however, “clearly alleged” that the specified defendants had invested income from their racketeering activity (the proceeds they received from the mare leases) into a business that was used to facilitate the cover up of the alleged fraud, according to the court.

The decision in ClassicStar Mare Lease Litigation will appear at CCH RICO Business Disputes Guide ¶12,106.

Further information regarding CCH RICO Business Disputes Guide is available here.

Drug Wholesaler Must Defend RICO Claims of Conspiracy to Artificially Inflate Prices

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

The State of Utah could pursue civil RICO claims against a prescription drug wholesaler that allegedly conspired to artificially inflate the average wholesale price (AWP) of hundreds of prescription drugs, the federal district court in San Francisco has ruled.

The wholesaler allegedly conspired with a publisher of AWPs to raise the wholesale markup on over 400 brand-name drugs from 20 percent above the wholesale acquisition cost (WAC) to 25 percent above the WAC.

Pattern of Racketeering

The wholesaler’s argument that the RICO claim was deficient—because it involved a single scheme, with a single purpose, based on a single core falsehood—was rejected. Utah successfully argued that a multi-year pattern of racketeering was present because the wholesaler had engaged in a separate but related predicate act each time it increased, under false pretenses, the markup on a prescription drug.

The fact that the alleged activities could be described as having a single overarching goal, and as being fraudulent for a single overarching reason, did not warrant the dismissal of the State’s claims.

Causation

Utah sufficiently alleged that the wholesaler’s conspiracy to inflate the AWP of more than four hundred brand-name drugs had proximately caused an injury to the State’s Medicaid program.

The complaint included assertions that:

(1) The reimbursement rates for prescription drugs covered under Utah’s Medicaid program were directly tied to the drugs’ AWPs;

(2) The wholesaler had committed fraud in order to increase those reimbursement rates;

(3) The wholesaler’s fraudulent activity actually caused the AWPs (and thus the reimbursement rates) to increase; and

(4) Based on the wholesaler’s fraud, the State of Utah continued to tie its prescription drug reimbursement rates to the AWP of each drug.

The wholesaler argued that Utah’s allegations of proximate cause were deficient because the State failed to proffer an alternate course of conduct that it would have taken had it known the true reason for the cost increases. The State was not, however, required to allege what measures it would have taken had the wholesaler disclosed the true basis for its “unilateral” actions.

Utah alleged that the wholesaler’s fraud, rather than any other factor, had caused its reimbursement rates to increase, and that was sufficient.
The decision is State of Utah v. McKesson Corp., CCH RICO Business Disputes Guide ¶12,088.

Further information about CCH RICO Business Disputes Guide appears here.

No Exception to PSLRA Bar for Aiding and Abetting Claims in RICO Case

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

The Private Securities Litigation Reform Act (PSLRA) barred a RICO conspiracy claim against two financial services companies that allegedly aided and abetted a Ponzi scheme that was perpetrated by former hedge fund manager Bernie Madoff, the U.S. Court of Appeals in New York City ruled earlier this month. The ruling settled a conflict among district courts in the Second Circuit regarding the scope of the PSLRA’s bar on civil RICO claims.

Exceptions

The PSLRA prohibited private plaintiffs from pursuing RICO claims that were predicated on conduct that was actionable as fraud in the purchase or sale of securities. The issue in this case was whether an exception to the bar existed when an injured plaintiff lacked a cause of action sounding in securities fraud (in this case, because the plaintiff alleged only an aiding and abetting claim, which could not serve as the basis for a private right of action). When Congress stated that “no person” could bring a civil RICO action for conduct that would have been actionable as securities fraud, it did not mean “no person except one who has no other actionable securities fraud claim,” the court explained. Moreover, the legislative history of the PSLRA supported this reading.

Legislative History

The Conference Committee Report for the relevant PSLRA provision stated that Congress intended the provision to “eliminate securities fraud as a predicate offense in a civil RICO action,” and bar a plaintiff from “plead[ing] other specified offenses, such as mail or wire fraud, as predicate acts under civil RICO if such offenses are based on conduct that would have been actionable as securities fraud.” Congress was aware that the RICO amendment would place some claims—such as those for aiding and abetting securities laws violations—outside the reach of private civil RICO suits. It appeared, however, that the Senate was satisfied that the securities laws would “generally provide adequate remedies for those injured by securities fraud,” according to the court.

Finally, the Third, Fifth, Ninth, and Tenth Circuits each came to a similar conclusion, even though those courts were not presented with the same circumstances (aiding and abetting) that existed in this case.

The July 7, 2011, decision in MLSMK Invest. Co. v. JP Morgan Chase & Co. (2nd Cir.) will appear at CCH RICO Business Disputes Guide ¶12,069.

Domestic  Enterprise Was Within  Ambit of RICO Law, Despite Foreign  Racketeering Acts

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

A civil RICO claim alleging a domestic enterprise was not barred by the U.S. Supreme Court’s finding in Morrison v. Nat'l Australian Bank Ltd. (RICO Business Disputes Guide ¶11,932), even though the alleged predicate acts purportedly constituted foreign conduct, the federal district court in Pittsburgh has ruled.

In Morrison, the Supreme Court concluded that “when a statute gives no clear indication of an extraterritorial application, it has none.” In this case, the defendants unsuccessfully argued that RICO could not apply to foreign conduct merely because the enterprise was domestic.

Significantly, RICO did not prohibit racketeering activity per se (its predicate acts were independently criminalized by statute); it prohibited racketeering acts that were related, in specific ways, to an enterprise. RICO thus focused, in the context of territorial analysis, on domestic rather than foreign enterprise, according to the court. As a result, a claim involving a domestic enterprise fell within the ambit of RICO.

The underlying purposes of RICO supported this conclusion, the court explained. A major purpose of the RICO statute, for example, was to protect legitimate enterprises by attacking and removing persons that had infiltrated them for unlawful purposes.

The decision is In Re: Le-Nature’s, Inc., W.D. Pa., RICO Business Disputes Guide ¶12,056.

Tax Lien Bidders May Proceed with RICO Claims Against Competitors

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

A civil RICO claim alleging that tax lien bidders had conspired to violate a county’s “single simultaneous bidder rule” (SSBR), in an effort to win a greater share of the tax liens that the county sold at its annual tax auction, should not have been summarily dismissed on the ground that competing bidders could not prove proximate cause, the U.S. Court of Appeals in Chicago has ruled.

The district court’s grant of summary judgment to competing bidders (CCH RICO Business Disputes Guide ¶11,932) was therefore reversed.

The plaintiffs alleged that they suffered RICO damages from the defendants’ scheme to violate the SSBR, which was created to insure fair tax-lien auctions in Cook County, Illinois. The rule prohibited tax lien buyers from having more than one bidding agent at the auctions.

Because property tax liens were awarded to the lowest bidder (i.e., the person who agreed to impose the lowest penalty on a property owner who redeemed the encumbered property by paying the overdue taxes in full), as many as 85 percent of the auctions ended with multiple identical winning bids of “zero percent” of the unpaid taxes.

Without the SSBR, tax lien buyers could unfairly increase their likelihood of winning an inordinate amount of the tax liens by packing the auction room with multiple agents.

Causation

Although the defendants in this case had allegedly conspired, over a six-year period, to send multiple bidding agents to the county's tax auctions, the district court found that the plaintiffs (two bidders who did not have multiple agents at the auctions) failed to produce any evidence to show that the defendants' scheme had proximately caused the plaintiffs’ loss of any tax lien sale.

This finding was in error, the court of appeals explained, because the district court had improperly required the plaintiffs to prove that “potential” superseding causes did not actually exist. Because the burden of proof regarding superseding causes was properly placed on the defendant, the district court should have required the defendants to submit evidence in support of their conjectures concerning potential superseding causes.

A plaintiff has done enough to withstand summary judgment for lack of causation when the plaintiff has proffered evidence in support of an injury that would be expected to result from the defendant's wrongful conduct.

Moreover, the causal relationship between a defendant's alleged act and a plaintiff's alleged injury need only be probable, the appellate court noted. If a trier of fact found proximate cause under a standard that placed the burden of establishing the existence of a superseding cause on the defendant, and did so while requiring only a probability of harm attributable to the defendant's wrongful acts, the only remaining issue would be the amount of damages to award the plaintiff.

Damages

The defendants argued—and the district court appears to have been persuaded—that a trier of fact could not confidently conclude that the plaintiffs would have obtained a proportionately equal share of the auctioned tax liens (absent a system of awarding liens on a strict rotational basis when identical bids were submitted) had the defendants not packed the auction room. This reasoning, however, reflected a misunderstanding of statistical theory, in the appellate court’s view.

In a large sample, selections based on random choice would produce, with a high degree of confidence (high enough, certainly, for a damages award in a fraud case), the same results, proportionally, as selections based on a strict rotation.

The March 24 decision in BCS Services, Inc. v. Heartwood 88, LLC, appears at CCH RICO Business Disputes Guide ¶12,024.

Further information about CCH RICO Business Disputes Guideis available here.

EC’s RICO Claims Against Tobacco Companies Fail

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

The European Community and 26 European countries could not pursue RICO claims against several tobacco companies that allegedly engaged in an elaborate money laundering scheme involving the sale of illegal drugs by criminal organizations and the sale of cigarettes by the defendants, the federal district court in Brooklyn has ruled.

Because the RICO claims were extra-territorial in nature, they did not state a legally cognizable right of action, and thus were dismissed.

Allegations

According to the plaintiffs, criminal organizations originating in Colombia and Russia smuggled into Europe drugs (cocaine and heroin, respectively) that were sold for Euros. The organizations then used European black-market money brokers to exchange the Euros for Colombian pesos and Russian rubles.

Subsequently, illicit cigarette importers purchased the dirty Euros from the money broker, at a discount, and used them to buy cigarettes from U.S. and European wholesalers, who would ship the cigarettes to the illicit importers after purchasing them from the defendant tobacco companies.

The plaintiffs further alleged that the defendant tobacco companies used other companies to handle their illicit transactions, including the management of special handling instructions for shipments that were sent to customers that the defendants knew were involved in criminal activities.

Finally, the plaintiffs alleged that the tobacco companies traveled around the world to negotiate business agreements with individuals who the defendants knew, or should have known, were involved in the laundering of narcotics proceeds.

Territoriality

Because the focus of RICO is the enterprise, a RICO enterprise must be a domestic enterprise, according to the court. Moreover, an analysis of the territoriality of an enterprise in a RICO complaint should “focus on the decisions effectuating the relationships and common interest of its members, and how those decisions are made.”

In this case, the RICO enterprise comprised the tobacco company defendants and associated distributors, shippers, currency dealers, wholesalers, money brokers, and other participants. The plaintiffs alleged that the tobacco companies had participated in the management of the enterprise through a pattern of racketeering activity.

Involvement in Scheme

Nothing in the plaintiffs’ complaint, however, indicated that the tobacco companies were involved in the planning, decision-making, or overall “corporate policy” of the drug smuggling, currency exchange, or currency purchase parts of the alleged scheme. Indeed, the complaint clearly and repeatedly stated that the overall corporate policy regarding those elements originated with European and South American criminal organizations.

In addition, the plaintiffs failed to allege how the defendants’ involvement in the purchase and shipment of cigarettes to wholesalers demonstrated that the defendants had organized, orchestrated, planned, or even participated in the other parts of the scheme.

When read as a whole, the complaint strongly suggested that the money laundering cycle was directed by Colombian and Russian criminal organizations, not the tobacco companies. Defendants thus appeared to be nothing more than sellers of fungible goods in a complex series of transactions that were directed by foreign gangs.

The decision is European Community v. RJR Nabisco, Inc, CCH RICO Business Disputes Guide ¶12,016.

Pfizer, Warner-Lambert Must Defend RICO Claims for Off-Label Marketing of Neurontin

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

Two consumers who suffered from bipolar disorder could proceed with RICO claims against Pfizer, Inc., and Warner-Lambert Co.—manufacturers of the prescription drug Neurontin—because the consumers were able to show that their treating physicians had prescribed Neurontin in reliance on allegedly fraudulent “off-label” marketing statements by the manufacturers, the federal district court in Boston has ruled.

More specifically, medical information letters that the treating physicians had received from the manufacturers created a triable issue of fact on the issue of proximate cause.

Clinical Trials

The letters showed that the manufacturers had discussed a clinical trial that purportedly revealed favorable results when Neurontin was used for mood disorders. The manufacturers failed, however, to mention the negative results of three other trials that studied the use of Neurontin for the treatment of bipolar disorder. Moreover, Pfizer failed to produce (for a previous bellwether trial) reliable scientific evidence that Neurontin was effective in treating bipolar disorder.

According to the court, the consumers had to show that this conduct caused the treating physicians to prescribe Neurontin when the physicians would otherwise have used alternative treatments. Because a finder of fact could reasonably infer that a treating physician would not prescribe a drug if aware of “overwhelmingly and uniformly negative evidence” about the drug’s efficacy, the manufacturers’ motion for summary judgment against the two consumers was denied.

Failed Claims

The court determined that four other consumers could not proceed with RICO claims against the manufacturers because their treating physicians testified that they had prescribed Neurontin to their patients based on their independent medical judgment. Indeed, the treating physicians denied having received any unsolicited, off-label “detailing” by the manufacturers’ sales representatives.

Moreover, they stated that their knowledge about the efficacy of Neurontin for off-label indications was informed by their clinical experiences with the drug and by information they received from trusted colleagues.

Because no admissible, non-hearsay evidence showed that the treating physicians had received or read any misleading or fraudulent publications about Neurontin’s use for off-label indications, the manufacturers’ motion for summary judgment against the four consumers was granted.

Third-Party Payors' Claims

Similarly, third-party payors (TPPs) could not proceed with their RICO claims, the court decided. Because the TPPs did not rely on the manufacturers’ alleged misrepresentations directly, the TPPs were unable to show that their injuries were proximately caused by manufacturer misrepresentations regarding the efficacy of Neurontin.

The TPPs did not proffer any evidence regarding the number and identity of prescribing physicians that had purportedly relied on the alleged fraud. Because proximate cause could not be established, the TPPs’ RICO claims did not withstand summary judgment.

The decision is Neurontin Marketing and Sales Practices Litigation, CCH RICO Business Disputes Guide ¶11,970.

Securities Litigation Reform Act Barred RICO Claims Against Tax Shelter Scheme

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

The Private Securities Litigation Reform Act (PSLRA) barred RICO claims against a law firm that allegedly participated in a scheme to promote an illegitimate tax shelter, the U.S. Court of Appeals in New Orleans has ruled.

The scheme required investors to purchase and sell offsetting digital options contracts through limited liability companies (LLCs) that were created solely for that purpose. Each taxpayer would claim a tax basis (in an LLC) that was increased by the cost of the options purchased but was not decreased by the price of the options sold.

The plaintiffs (investors) argued that the PSLRA was inapplicable because the options contracts were not securities; nor were their ownership interests in the LLCs.

Investment Contracts

Ownership interests in the LLCs were “investment contracts” that constituted securities within the meaning of the securities laws, the court concluded. In SEC v. W.J. Howey Co. (328 U.S. 293), the U.S. Supreme Court defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party . . . “

The investors argued that their profits were not derived “solely” from the efforts of others because they had retained control of the LLCs. However, economic reality governed over form, and the investors’ control was merely theoretical.

The investors, for example, did not allege that they had exercised any managerial authority over the LLCs. Rather, the LLCs—according to the terms of the investment contracts—were directed and managed by various consulting and brokerage entities for the purpose of implementing the tax scheme.

“Passive” Investors

In addition, the investors had expressly alleged that they did not know that the digital options transactions had little or no true economic substance. The investors thus portrayed themselves as “passive” investors who depended—both in reality and according to their investment contracts—upon the efforts of others for their profits.

Their ownership interests in the LLCs were therefore investment contracts that constituted securities, according to the court.

The decision, Affco Investments 2001 LLC v. Proskauer Rose, L.L.P., will appear at CCH RICO Business Disputes Guide ¶11,941.

Certification of RICO Class of Prescription Drug Purchasers Reversed

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

A district court abused its discretion by certifying a class of labor unions and insurance companies that allegedly paid too much for the prescription drug Zyprexa, the U.S. Court of Appeals in New York City has ruled.

According to the plaintiffs, drug manufacturer Eli Lilly misrepresented the safety and efficacy of Zyprexa, which resulted in a greater demand and a higher price for the drug.

The plaintiffs’ RICO claims were inappropriate for class treatment, however, because common issues of reliance and causation did not predominate over individual issues.

Predominance

Common issues predominated when the resolution of common legal or factual questions, such as injury and proximate cause, could be achieved through generalized proof, and when those issues were more substantial than the issues that were subject to individualized proof, the court noted. In this case, a generalized proof of proximate cause was not possible under the plaintiffs’ “excess price” theory of injury.

The plaintiffs described a chain of causation in which the manufacturer distributed misinformation about Zyprexa, doctors relied on that misinformation and prescribed the drug for their patients, and then plaintiffs, as third-party payors (TPPs), paid an excessive price for the patients’ prescriptions.

Link Between Misrepresentations, Overpayment

This narrative, the court observed, skipped over several steps and obscured the attenuated link that existed between the alleged misrepresentations that were made to doctors and the overpayment injuries that were incurred by the plaintiffs.

Before the TPPs made any payments, for example, they: (1) relied on the advice of pharmacy benefit managers and their own Pharmacy and Therapeutics Committees in placing the drug on their formularies and (2) failed to negotiate a lower price for the drug.

The plaintiffs’ theory of liability thus rested on the independent actions of third and even fourth parties, the court explained. Moreover, the TPPs alone were in a position to negotiate a lower price for Zyprexa.

Therefore, proximate cause with respect to price could have been shown through reliance by the TPPs alone; it could not have been shown through reliance by the doctors, according to the court.

Causation

Doctors did not generally take price into consideration when they made decisions regarding prescriptions. Therefore, even if proximate cause with respect to price could have been shown through doctor reliance, that reliance did not constitute a but-for cause of the excessive price that the plaintiffs had paid for each prescription, in the court’s view.

The decision is UFCW Local 1776 v. Eli Lily and Co., CCH RICO Business Disputes Guide ¶11,936.

Further information about CCH RICO Business Disputes Guide appears here.