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.

Government Contractor May Have RICO Liability for Human Trafficking

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

RICO claims predicated on forced labor and human trafficking could proceed against defense contractor Kellogg, Brown, and Root (KBR), the federal district court in Houston has ruled. The claims were filed by a Nepali man who allegedly was forced to work in Iraq and the family members of twelve Nepali men who were executed in Iraq by a group of terrorists.

Forced Transport, Labor

According to the plaintiffs, a Nepal-based company had recruited workers from Nepal and Sri Lanka to work in a luxury hotel in Amman, Jordan, and in other areas where their lives would not be in danger. When the workers arrived in Jordan, however, their passports were confiscated and another defendant—a Jordanian subcontractor—transported them to Iraq, against their will, to work under the supervision of KBR.

The subcontractor used an unprotected automobile caravan to transport the workers to an air base near Ramadi. The caravan was traveling on the “highly dangerous” Amman-to-Baghdad highway when terrorists stopped the lead cars and took twelve of the workers hostage. The terrorists videotaped hostage statements, sent a copy of the videotape to the Foreign Ministry of Nepal, and then executed the hostages.

The plaintiff, who survived the trip, worked at the air base as a warehouse laborer under the supervision of KBR. After hearing about the deaths of the twelve, the survivor “expressed his desire to return to Nepal,” but KBR told him that he could not leave until he had fulfilled his employment contract. The gravamen of the plaintiffs' complaint was that the defendants had formed a RICO enterprise to procure cheap foreign labor, and thus increase profits, through human trafficking and forced labor.

Jurisdiction

The court found that subject matter jurisdiction existed because the Military Extraterritoriality Jurisdiction Act had extended extraterritorial indictability to parties employed by the U.S. armed forces (including KBR). Nevertheless, the court applied the “conduct test” and the “effects test” to avoid resting jurisdiction on a “relatively murky” area of the law. Although the conduct test was not met, the effects test was.

The effects test asked whether conduct outside of the United States had a substantial adverse effect on U.S. investors or securities markets, the court noted. The plaintiffs alleged that KBR’s acquisition of “cheap labor” through human trafficking had benefited the defendants, disadvantaged their competitors, and adversely affected the U.S. labor market. They also alleged that U.S. taxpayers had funded KBR’s contracts and the racketeering enterprise had passed money through the U.S. banking system.

Because these allegations sufficiently identified “substantial” domestic effects, the court’s adjudication of the plaintiffs’ RICO claims was proper.

Standing

The plaintiffs' alleged injuries—lost wages, out-of-pocket fees, and the loss of alternative employment—were sufficient to establish RICO standing, in the court's view. Although the Fifth Circuit had not addressed the question of whether the family member of a deceased individual had standing to assert RICO claims, the Fourth Circuit’s determination that RICO claims survived the death of an injured party was persuasive.

Enterprise

The absence of a decision-making structure did not prevent the formation of an association-in-fact enterprise composed of KBR and the Jordanian subcontractor, the court determined. The plaintiffs sufficiently alleged that the defendants had worked cooperatively to accomplish an illegal purpose: the acquisition of cheap labor through trafficking and forced labor.

Pattern of Racketeering

Assertions that KBR “regularly” employed workers that were transported into Iraq against their will were sufficient to allege a threat of continued criminal activity. According to the plaintiffs, 92 laborers were brought into Iraq—against their will in 2003 and 2004—to work under the supervision of KBR.

These facts were sufficient to allege that the acquisition of cheap workers, against their will, was part of KBR’s modus operandi. The continuity element of a pattern of racketeering was therefore met, the court concluded.

Predicate Acts

The predicate acts of forced labor and human trafficking were sufficiently pled, according to the court. The fact that the complaint did not explicitly allege physical force was inconsequential because “conduct other than the use, or threatened use, of law or physical force may, under some circumstances, have the same effect as the more traditional forma of coercion—or may even be more coercive”

In this case, the plaintiffs’ complaint made the acts of forced labor and human trafficking plausible, which was all that was necessary to allege RICO predicate acts.

The decision is Adhikari v. Daoud & Partners, CCH RICO Business Disputes Guide ¶11,824