Commercial Litigation and Arbitration

RICO: Iqbal + Twombly + 9(b) = Dismissal of § 1962(c)-(d) Claims; Deception Mandatory for Mail/Wire Fraud; Allegations of Parallel Conduct Generally Insufficient to Show Conspiracy; 11th Circuit Declines to Decide If Conspiracy Claim Falls

From Am. Dental Ass’n v. Cigna Corp, 2010 U.S. App. LEXIS 9928 (11th Cir. May 14, 2010):

Plaintiffs contracted with Defendants to provide dental services to Defendants' members through dental service managed care plans. Plaintiffs *** allege, on behalf of themselves and a putative class of similarly-situated dentists, that Defendants "engaged in a systematic, fraudulent scheme to diminish payments to Class Plaintiffs through automatic downcoding, Current Dental Terminology ('CDT') code manipulation and improper bundling."***

Because Plaintiffs' section 1962(c) claim is based on an alleged pattern of racketeering consisting entirely of the predicate acts of mail and wire fraud, their substantive RICO allegations must comply not only with the plausibility criteria articulated in Twombly and Iqbal but also with Fed. R. Civ. P. 9(b)'s heightened pleading standard, which requires that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." *** We have held that pursuant to Rule 9(b), a plaintiff must allege: "(1) the precise statements, documents, or misrepresentations made; (2) the time, place, and person responsible for the statement; (3) the content and manner in which these statements misled the Plaintiffs; and (4) what the defendants gained by the alleged fraud." *** The plaintiff must allege facts with respect to each defendant's participation in the fraud.***

Plaintiffs' complaint alleges that "[d]efendants represented in their on-line advertising, in their provider agreements and in their fee schedules that their in-network providers would be compensated for covered procedures based on commonly accepted dental practice, standard coding practice and Defendants' fee schedules." *** Plaintiffs argue that these advertisements, agreements, and fee schedules were fraudulent because they indicated benefits payments lower than what Plaintiffs believed were due to them under their fee-for-service agreements with Defendants, which Plaintiffs argue had promised them timely specified payments "in accordance with standard dental coding procedures." *** In other words, Plaintiffs contend that they performed multiple procedures worthy of multiple or larger benefits payments, but that Defendants bundled and downcoded the procedures into fewer claims worthy of smaller payments. Additionally, Plaintiffs allege that the only way the alleged scheme of downcoding and bundling claims could work is if Defendants "agree[d]" to employ the "same" devices and tactics. *** Thus, Plaintiffs do not allege parallel schemes among competing dental insurers; they allege a single scheme consisting of identical conduct in which all Defendants agreed to participate. Therefore, not only did Plaintiffs need to plausibly and particularly allege facts showing related instances of mail and wire fraud, but also plausibly allege facts showing that a conspiracy created the alleged scheme.

Though the complaint sets out at least six examples of e-mail and letter communications between Defendants and Plaintiffs, including online advertisements, fee schedules, contracts, and Explanations of Benefits ("EOBs") documents, *** Plaintiffs do not point to a single specific misrepresentation by Defendants regarding how Plaintiffs would be compensated in any of these communications, nor do they allege the manner in which they were misled by the documents, as they are required to do under Rule 9(b). We have held that a plaintiff must allege that some kind of deceptive conduct occurred in order to plead a RICO violation predicated on mail fraud. *** Here, Plaintiffs' complaint provides a list of mailings and wires, without ever identifying any actual fraud. If the specific misrepresentations do not exist, it follows that the complaint has not alleged a right to relief that is "plausible on its face." See Twombly, 550 U.S. 570, 127 S. Ct. at 1974.

For example, Plaintiffs do not allege any misrepresentations in the EOBs because Plaintiffs allege in their complaint that the EOBs expressly informed Plaintiffs when their claims were going to be bundled or downcoded and gave the reasons for doing so. *** Plaintiffs have not shown how they were misled by the EOBs if the language in the EOBs notified them about any bundling or downcoding of particular procedures.

Nor does the complaint allege any misrepresentations in the online advertisements. There are no allegations anywhere that the quoted language of the advertisements is false. Read as a whole, they amount at most to puffery, not fraud. See Byrne v. Nezhat, 261 F.3d 1075, 1111 (11th Cir. 2001) (noting that claims of surgical success in medical journals "seem more akin to puffing than actionable misrepresentations," in dismissing a civil RICO complaint alleging violations of section 1962(c) predicated on acts of mail fraud). Additionally, Plaintiffs make no allegations as to who, if anyone, read the advertisements and was misled by them.

Further, the complaint does not connect the allegedly fraudulent communications to any particular acts of bundling or downcoding that Plaintiffs find unacceptable. Counsel for Plaintiffs stated at oral argument that this lack of particularity should be excused because they were at an "informational disadvantage" as to exactly how Defendants' software bundled and downcoded submitted procedures. To the contrary, we think it telling that the three named plaintiffs, Drs. Milgram, Trapp, and Desbordes, each received EOBs explaining the reimbursement of specific procedures they had performed, yet the complaint never offers any examples of which claims were bundled and downcoded. Perhaps the closest Plaintiffs come to alleging a specific instance of fraud is in paragraph 49 of the complaint, where they allege that "[d]efendants regularly sent EOBs [to Plaintiffs] that inappropriately and automatically bundled x-ray procedures with other procedures." *** However, Plaintiffs do not allege other procedures with which the x-ray codes were bundled. This is at most an allegation of possible parallel conduct without any allegation of an agreement as to how Defendants would process x-ray billing codes as part of a greater scheme. In fact, Plaintiffs do not allege how Defendants agreed to employ any of these procedures as part of a long-term criminal enterprise predicated on acts of mail and wire fraud. Simply specifying particular dates and contents of communications cannot automatically constitute a valid claim that a defendant violated 18 U.S.C. § 1962(c) without also plausibly alleging the existence of a long-term criminal enterprise.

In sum, the Second Amended Complaint does not plausibly, under Twombly, or particularly, under Rule 9(b), allege a pattern of racketeering activity predicated on a scheme to commit acts of mail and wire fraud. We find no specific misrepresentations in any of the communications Plaintiffs referenced, no connection between the alleged misrepresentations and any particular acts of downcoding or bundling, and no allegations as to how Defendants agreed to engage in an illegal scheme to defraud dental providers. Plaintiffs may have a difference of opinion from Defendants regarding the coding that was used in processing their claims, but we cannot infer a scheme-driven deception from a complaint that provides no details of fraud or conspiracy. Accordingly, we conclude that the district court did not err in dismissing the substantive RICO claim in the Second Amended Complaint for failure to state a claim. ***

C. Plaintiffs' Allegations of Conspiracy under 18 U.S.C. § 1962(d)

Section 1962(d) of the RICO statutes makes it illegal for anyone to conspire to violate one of the substantive provisions of RICO, including § 1962(c). 18 U.S.C. § 1962(d). "A plaintiff can establish a RICO conspiracy claim in one of two ways: (1) by showing that the defendant agreed to the overall objective of the conspiracy; or (2) by showing that the defendant agreed to commit two predicate acts." *** A plaintiff need not offer direct evidence of a RICO agreement; the existence of conspiracy "may be inferred from the conduct of the participants." ***

Here, the allegations in Plaintiffs' complaint do not support an inference of an agreement to the overall objective of the conspiracy or an agreement to commit two predicate acts. In analyzing the conspiracy claim under the plausibility standard, Iqbal instructs us that our first task is to eliminate any allegations in Plaintiffs' complaint that are merely legal conclusions. 129 S. Ct. at 1950. Plaintiffs offer conclusory statements such as "[d]efendants have not undertaken the above practices and activities in isolation, but instead have done so as part of a common scheme and conspiracy," *** and "[e]ach Defendant and member of the conspiracy, with knowledge and intent, agreed to the overall objective of the conspiracy, agreed to commit acts of fraud to relieve Class Plaintiffs of their rightful compensation, and actually committed such acts." *** These are the kinds of "formulaic recitations" of a conspiracy claim that the Court in Twombly and Iqbal said were insufficient. See Twombly, 550 U.S. at 557, 127 S. Ct. 1966 (noting that "a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality"); Iqbal, 129 S. Ct. at 1950-51 (holding that Iqbal's bare allegation that defendants Ashcroft and Mueller agreed to adopt a discriminatory policy was not entitled to the presumption of truth and should be ignored under Twombly). Plaintiffs also allege that "[i]n order for the fraudulent schemes described above to be successful, each Defendant and other members of the conspiracy had to agree to enact and utilize the same devices and fraudulent tactics against the Class Plaintiffs." *** We are "not required to admit as true this unwarranted deduction of fact." See Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1268 (11th Cir. 2009) (rejecting plaintiff's allegation that the alleged scheme necessarily required the cooperation of the alleged conspirators); Twombly, 550 U.S. at 566, 127 S. Ct. at 1971 (rejecting plaintiffs' argument that as soon as one defendant gave in, the conspiracy would not work, because there were logical reasons why defendants would independently engage in similar conduct).

After eliminating the wholly conclusory allegations of conspiracy, we turn to Plaintiffs' remaining factual allegations. Plaintiffs attempt to bolster their conspiracy allegations by describing the following "collective" or parallel actions taken by Defendants, from which they now argue the existence of an agreement may be inferred: the collective development and use of automated processes to manipulate CDT codes, i.e. downcoding and bundling; the use of the same claims procedures, including the data that dentists are required to provide in submitting claims, the forms on which dentists must submit their data, and the coding that dentists use to submit their data; and Defendants' participation in trade associations and private, jointly owned partnerships and corporations. *** Assuming for the sake of argument that parallel conduct has actually been alleged here, and accepting these factual allegations as true, as we are required to do under Iqbal, see 129 S. Ct. at 1950, we think that the Supreme Court's holding in Twombly forecloses any possibility that Plaintiffs' allegations of parallel conduct plausibly suggest a conspiracy. The Court stated in Twombly that "when allegations of parallel conduct are set out . . . they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action." 550 U.S. at 557, 127 S. Ct. at 1966. The Court held that allegations of parallel conduct, accompanied by nothing more than a bare assertion of a conspiracy, do not plausibly suggest a conspiracy, stating that "without that further circumstance pointing to a meeting of the minds, an account of a defendant's commercial efforts stays in neutral territory." ***

[Footnote 6] The Court acknowledged that certain examples of a parallel conduct might be sufficient to imply a conspiracy, such as "parallel behavior that would probably not result from chance, coincidence, independent responses to common stimuli, or mere interdependence unaided by an advance understanding among the parties." 550 U.S. at 557 n.4, 127 S. Ct. at 1966 n.4 (quoting 6 P. Areeda & H. Hovenkamp, Antitrust Law P 1425, pp. 167-85 (2d ed. 2003)). The conduct alleged here does not fall into any of these categories.

These conclusions are especially true where, as here, there is an "obvious alternative explanation" for each of the collective actions alleged that suggests lawful, independent conduct. See Twombly, 550 U.S. at 568, 127 S. Ct. at 1972 (finding that industry developments provided a "natural explanation" for defendants' alleged conduct that helped to foreclose plaintiffs' suggestion of conspiracy); Iqbal, 129 S. Ct. at 1951-52 (finding that though some of the plaintiff's allegations were "consistent with" purposeful discrimination, the complaint as a whole supported a plausible and legitimate motive by law enforcement officers to protect the nation from "suspected terrorists"). As for Plaintiffs' allegation that Defendants downcoded and bundled some submitted claims, insurance companies must use computers and software to efficiently process claims, and the use of downcoding and bundling may be proper in order to decrease physicians' costs and potentially increase profits. *** In fact, Plaintiffs' brief only decries the use of "improper" bundling, which implies that some bundling of claims is commonly acceptable. *** Additionally, the Department of Health and Human Services has taken the position that the inverse processes of "upcoding" and "unbundling" are fraudulent billing practices under Medicare, which supports the use of automated claims processing systems. See Medicare at Risk: Emerging Fraud in Medicare Programs: Hearing Before the Senate Committee on Governmental Affairs, Permanent Subcommittee on Investigations, 105th Cong. (1997) (statement of Michael F. Mangano, Principal Deputy Inspector General, U.S. Department of Health and Human Services), available at The use of automated systems that bundle and downcode may just as easily have developed from independent action in a competitive environment as it would from an illegal conspiracy, because each insurer would have an economic interest in decreasing physicians' costs and increasing profits. *** The complaint does not plausibly suggest that by using similar methods to downcode and bundle claims, Defendants have acted in any way inconsistent with the independent pursuit of their own economic self-interest. Accordingly, Defendants' parallel conduct is equally indicative of rational independent action as it is concerted, illegitimate conduct and thus "stays in neutral territory." See Twombly, 550 U.S. at 557, 127 S. Ct. at 1966.

As for Plaintiffs' allegation that a conspiracy may be inferred from Defendants' participation in trade associations and other professional groups, it was well-settled before Twombly that participation in trade organizations provides no indication of conspiracy. Twombly, 550 U.S. at 567 n.12, 127 S. Ct. 1971 n.12; see also Consol. Metal Prods., Inc. v. Am. Petroleum Inst., 846 F.2d 284, 293-94 (5th Cir. 1988) ("A trade association by its nature involves collective action by competitors. Nonetheless, a trade association is not by its nature a 'walking conspiracy' .... [T]he establishment and monitoring of trade standards is a legitimate and beneficial function of trade associations.").

Plaintiffs have not plausibly alleged sufficient facts regarding Defendants agreement with other entities or persons to engage in the ongoing criminal conduct of an enterprise. Plaintiffs' allegations of Defendants' parallel conduct, absent a plausibly-alleged "meeting of the minds," fail to "nudge [] their claims across the line from conceivable to plausible." See Twombly, 550 U.S. at 557, 570, 127 S. Ct. at 1966, 1974. Accordingly, we conclude that the district court did not err in dismissing the RICO conspiracy claim in the Second Amended Complaint.

[Footnote 7] We recognize that many of our sister circuits have held that if a plaintiff fails to state a claim of a primary RICO violation, then the plaintiff's civil RICO conspiracy claim necessarily fails. See GE Invest. Private Placement Partners II v. Parker, 247 F.3d 543, 551 n.2 (4th Cir. 2001); Efron v. Embassy Suites, P.R., Inc., 223 F.3d 12, 21 (1st Cir. 2000); Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996), vacated on other grounds, 525 U.S. 128, 119 S. Ct. 493 (1998); Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1191 (3rd Cir. 1993); Religious Tech. Ctr. v. Wollersheim, 971 F.2d 364, 367 n.8 (9th Cir. 1992); Danielsen v. Burnside-Ott Aviation Training Ctr., Inc., 941 F.2d 1220, 1232 (D.C. Cir. 1991); Craighead v. E.F. Hutton & Co., 899 F.2d 485, 495 (6th Cir. 1990); In re Edwards, 872 F.2d 347, 352 (10th Cir. 1989). *** [T]here appears to be no controlling authority in our circuit or in the Supreme Court instructing us to adopt the reasoning of our sister circuits and dismiss Plaintiffs' conspiracy claim because the substantive RICO claim was deficiently alleged. *** Because Plaintiffs' conspiracy count fails to state a claim under Twombly and Iqbal's plausibility standard, we find it unnecessary to decide in this case whether Plaintiffs' conspiracy claim must also fail because of the deficiencies in the substantive RICO count.

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