Commercial Litigation and Arbitration

RICO — Filed-Rate Doctrine Does Not Preclude Action against Utility for Paying Unlawful Rebates to Large Customers in Return for Withdrawal of Objections to a Rate-Stabilization Plan for Which State Approval Was Being Sought

Williams v. Duke Energy Int’l, Inc., 681 F.3d 788 (6th Cir. 2012):

Plaintiffs appeal the dismissal of their case pursuant to Fed. R. Civ. P. 12(b)(1). The district court, following a hearing, found that the "filed-rate doctrine" denied the court federal question subject-matter jurisdiction. The district court also found that the Public Utilities Commission of Ohio ("PUCO") had exclusive jurisdiction over Defendants' state-law claims, depriving the court of diversity jurisdiction. The district court granted Defendants' motion to dismiss pursuant to 12(b)(1). ***

Plaintiffs Anthony Williams, BGR, Inc., Munafo, Inc., and Aikido of Cincinnati, individuals and businesses based in Ohio, brought suit against Defendants Duke Energy International, Inc. and Duke Energy Corporation, retail electricity service providers, alleging violation of the Robinson-Patman Act of 1936, 15 U.S.C. § 13, et seq., Ohio's Pattern of Corrupt Activity Act, Ohio Rev. Code § 2923.31, et seq., a civil RICO claim pursuant to 18 U.S.C. § 1962(c), and common-law claims of fraud and civil conspiracy. Defendant Duke Energy International, Inc. was dissolved in May of 2005, and was a subsidiary of Duke Energy Carolinas, LLC ("Duke"). Plaintiffs' case centers on a subsidiary of Duke Energy Carolinas, Duke Energy Ohio, Inc. ("DEO") and an affiliated company, Duke Energy Retail Sales4 ("DERS").

Plaintiffs allege that Duke, through subsidiaries and an affiliated company, paid unlawful and substantial rebates to certain large customers, including General Motors, in exchange for the withdrawal by said customers of objections to a rate-stabilization plan that Duke was attempting to have approved by the PUCO.***

II. Filed-Rate Doctrine ***

"The filed rate doctrine requires that common carriers and their customers adhere to tariffs filed and approved by the appropriate regulatory agencies." MCI Telecomms. Corp. v. Ohio Bell Tel. Co., 376 F.3d 539, 547 (6th Cir. 2004). An example of the doctrine is found in Louisville & Nashville R.R. Co. v. Maxwell, 237 U.S. 94, 35 S. Ct. 494, 59 L. Ed. 853 (1915), in which the Supreme Court held that a passenger who purchased a train ticket at an incorrectly low rate due to a misquote by a ticket agent did not have a defense against the subsequent collection of the higher rate by the railroad company. 237 U.S. at 97. In essence, the doctrine precludes a challenge to the reasonableness of the rates of common carriers if the rates have been approved by an appropriate regulatory agency.

We have described the two most important purposes of the filed-rate doctrine as "prevent[ing] carrier discrimination by committing the carriers to one set tariff and preserv[ing] the role of administrative agencies in approving and setting rates, a practice at which they are particularly adept." MCI, 376 F.3d at 547-48 (citing Fax Telecommunicaciones Inc. v. AT&T, 138 F.3d 479, 489 (2d Cir. 1998)).

In MCI *** this court distinguished between challenging the setting or reasonableness of a specific rate, which is barred by the filed-rate doctrine, and challenges that involve discussion of rates but do not challenge their reasonableness, which are permitted. This court found that a determination regarding whether one rate or the other applied to MCI would not intrude upon the fundamental purposes of the filed-rate doctrine, to prevent carrier discrimination and to preserve the administrative role of agencies in approving and setting rates.

The district court erred in its determination that the Plaintiffs' challenge involved an attack on filed rates. The district court devoted a paragraph to this determination:

The Plaintiffs contend that their claims involve only rebates and kickbacks which were neither filed with nor approved by the PUCO. The Court disagrees. Whether payments are rebates or kickbacks depends upon an analysis of the filed rate. A party claiming rate discrimination is contending that the effective rate charged one party is too low, while the charges to the plaintiffs are too high.

***The district court's determination that the filed-rate doctrine applies to this case is inconsistent with legal precedent. The district court held that any claim that requires "analysis of [a] filed rate" is barred by the filed-rate doctrine. This is not a correct statement of the filed-rate doctrine. The filed-rate doctrine bars challenges to the reasonableness of a filed rate.

Plaintiffs' challenge does not concern the particular rate set by the PUCO, but rather payments made outside of the rate scheme. Plaintiffs allege that Defendants paid substantial sums of money to certain large customers in exchange for the withdrawal by the large customers of their objections to Defendants' proposed RSP. Plaintiffs contend that this amount to an "indirect rebate" which had the effect of requiring Plaintiffs to pay a higher rate than certain companies which received a rebate. Plaintiffs are arguing that Defendants, in violation of the law, indirectly granted rebates to favored large customers.

Further, as noted by the United States Court of Appeals for the First Circuit, "[i]t is the filing of the tariffs, and not any affirmative approval or scrutiny by the agency, that triggers the filed rate doctrine." Town of Norwood, Mass. v. New England Power Co., 202 F.3d 408, 419 (1st Cir. 2000) (citing Square D Co. v. Niagara Frontier Tariff Bureau, Inc., et al., 476 U.S. 409, 417, 106 S. Ct. 1922, 90 L. Ed. 2d 413 (1986)) (emphasis in original). In Square D the rates were "duly submitted, lawful rates under the Interstate Commerce Act . . . ." 476 U.S. at 417. That is not the case here. This case does not involve the challenge by Plaintiffs of any filed rates. Rather, Plaintiffs challenge the lawfulness and purpose of payments made by Appellee Duke's affiliate DERS pursuant to various side agreements. Plaintiffs argue that these side agreements were not filed with any agency, including the PUCO, and are unlawful. Defendants have presented no evidence to suggest that the side agreements were filed with any agency, and in fact have made every effort to resist discovery of the agreements or public revelations regarding the specific contents of the side agreements.

Defendants argue that this is a case about "rate discrimination," and that Plaintiffs seeks to challenge "PUCO-approved rates." (Br. of Appellees at 35.) However, as noted by Plaintiffs, "the side agreements at issue and the kickbacks paid pursuant to those agreements were not approved by, filed with, or even supervised by the PUCO . . . ." (Reply Br. of App. at 3.) Nor do the alleged "rebates" or "kickbacks" actually involve a challenge to the reasonableness of any filed rate. Plaintiffs do not challenge whether the rates set by the PUCO were reasonable; rather, they contend that Defendants conspired to aid certain favored companies in avoiding paying the actual filed rate, and that this action on the part of Defendants harmed Plaintiffs by giving the favored companies competitive advantage over Plaintiffs. The allegation that certain large consumers, by receiving a rebate, effectively paid a lower rate than Plaintiffs does not transform this action into an attack on filed rates.

The district court's misreading of the filed-rate doctrine is inconsistent with this court's decision in MCI. If the standard for application of the doctrine was any case where "analysis of [a] filed rate" was required, then the doctrine would have barred Southern Bell's claim in MCI, which required this Court to examine different filed rates to determine which was the correct filed rate to apply. Indeed, were this Court to adopt Defendants' view of the filed rate doctrine, the railroad appellee in Louisville & Nashville R. Co. v. Maxwell, 237 U.S. 94, 35 S. Ct. 494, 59 L. Ed. 853 (1915), would have been unable to collect the full price of its ticket from the ticket-holder appellant in that case, as any court seeking to make the plaintiff pay the full price would have had to engage in "analysis of the filed rate" to determine the rate the plaintiff should have paid. That is not the law.

The district court incorrectly applied the filed-rate doctrine when it held that it lacked jurisdiction to hear Plaintiffs' claims. Because the filed-rate doctrine applies only in challenges to the underlying reasonableness or setting of filed rates, the doctrine is inapplicable in this case. As "[a] ruling by this court will have no effect on the filed tariff or rate," we follow our precedent in MCI and reverse the district court's holding that the filed-rate doctrine deprived it of jurisdiction over this case. MCI, 376 F.3d at 547. ***

B. Plaintiffs' RICO Claim

Plaintiffs bring a civil RICO claim pursuant to 18 U.S.C. § 1962(c), making it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which effect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . ." Plaintiffs allege that Defendant Duke, through its affiliated company DERS, transmitted unlawful rebates to certain favored companies. (First Am. Compl. at ¶¶ 15-21.) Plaintiffs allege that the racketeering activity is primarily mail and wire fraud, but also includes money laundering. (Id. ¶¶ 33-40.) Plaintiffs allege that the pattern of repeated acts of mail and wire fraud from 2005 to the present demonstrates a relationship between the predicate acts and continuous criminal activity. (Id. ¶¶ 35-39;) See H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239, 109 S. Ct. 2893, 106 L. Ed. 2d 195 (1989) (holding that in a civil or criminal RICO action, it must be shown that "racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity").

Defendants argue that Plaintiffs do not adequately allege mail or wire fraud as a predicate to racketeering. Defendants argue that bills sent to customers in the mail that stated that "certain electricity charges were mandatory and unavoidable" were "as a matter of indisputable state law . . . true: The various charges Plaintiffs identify must be paid, and Plaintiffs do not allege that any 'favored' customers were excused from this obligation." (Br. of Appellee at 49.)

Plaintiffs respond by noting that, while the fact that the electricity charges at issue had to paid was true, Defendants used these true statements to conceal the alleged fraud. By engaging in secret side agreements with favored customers, Defendants provided rebates to already-paid "mandatory" charges. Plaintiffs also allege that Defendants engaged in wire fraud by receiving and transferring moneys to and from DERS and favored customers in furtherance of a fraudulent scheme. (First Am. Compl. ¶¶ 33-40.)

Defendants argue that Duke had no "duty to disclose" the rebates at issue. (Br. of Appellee at 50.) Defendants cite Langford v. Rite Aid of Alabama, Inc., 231 F.3d 1308, 1314 (11th Cir. 2000), for the proposition that "differential pricing alone is not a fraudulent practice; plaintiffs must assert some particular reason why the relationship . . . was such that non-disclosure of the differential pricing structure constitutes a violation of the mail and wire fraud statutes." As Plaintiffs have pled, Duke's fraud was in asserting through the mail that all customers had to pay "mandatory and unavoidable" electricity charges, implying that all customers paid the same rate (which they were required to do under the RPA). Thus, Plaintiffs allege that Duke's non-disclosure of the side agreements constitutes fraud.

Defendants also cite McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 792 (1st Cir. 1990), for the proposition that an "illegal rebate and kickback scheme . . . did not amount to a scheme to defraud." Defendants omit the reason why, in McEvoy, the illegal scheme was not "a scheme to defraud": the United States Court of Appeals for the First Circuit found that the scheme was not intended to defraud the plaintiff who had brought the RICO action. McEvoy does not stand for the proposition that Defendants claim, that an "illegal rebate and kickback scheme" can never amount to a scheme to defraud.

Defendants also make brief claims that Plaintiffs fail to plead with particularity as required by Fed. R. Civ. P. 9(b), and that Plaintiffs fail to state a predicate claim for money laundering because money laundering requires money that is the proceed of "some form of unlawful activity." 18 U.S.C. § 1956(a)(1). Defendants argue that the payment of "PUCO-approved rates" to Duke was not unlawful.

With respect to Defendants' 9(b) argument, this court has held that "[i]t is a principle of basic fairness that a plaintiff should have an opportunity to flesh out her claim through evidence unturned in discovery. Rule 9(b) does not require omniscience; rather the Rule requires that the circumstances of the fraud be pled with enough specificity to put defendants on notice as to the nature of the claim." Michaels Bldg. Co. v. Ameritrust Co., N.A., 848 F.2d 674, 680 (6th Cir. 1988). "Especially in a case in which there has been no discovery, courts have been reluctant to dismiss the action where the facts underlying the claims are within the defendant's control." Id. We find that Plaintiffs have sufficiently set out the alleged fraudulent scheme in such a manner as to put Appellee on notice of the nature of Plaintiffs' claims.

With respect to Defendants' money-laundering argument, the alleged transfer of money from favored customers to Duke, and from Duke to DERS, and from DERS back to the favored customers as "rebates" tainted the funds, which became the "proceeds" of unlawful activities. Mail fraud constitutes an "unlawful activity" according to 18 U.S.C. §§ 1956(c)(7)(A) and 1961(1). Thus, taking as true the allegations that Appellee Duke collected money through its use of the mails and funneled the money to DERS and thereafter back to favored customers in a fraudulent scheme, we find that Plaintiffs have set out a cognizable claim of money laundering based upon the unlawful activity of mail fraud.

Defendants next argue that there is no proximate cause between the alleged racketeering and harm to Plaintiffs. Defendants argue that Plaintiffs' "theory of liability rests on the independent actions of third . . . parties," namely the PUCO, and argue that the remedy sought by Plaintiffs would require the PUCO to enforce the law. We do not agree. Defendants' argument confuses proximate cause between an alleged wrongful act and an injury with the relationship between an alleged wrongful act and the remedy for injury. The PUCO was not the cause of injury to Plaintiffs. Rather, it was Defendants' alleged fraudulent scheme that Plaintiffs contend caused them injury. The fact that Plaintiffs are required to bring a case before the PUCO or this court does not mean that there is a "third party" whose actions disrupt the proximate cause of Plaintiffs' injuries. Defendants' argument that proximate causation is "speculative" because the PUCO might not have found the rebates to be unlawful is similarly incorrect.

We find that Plaintiffs' alleged injuries, as set forth in the First Amended Complaint, are fairly traceable to Defendants, and that Plaintiffs' Civil RICO claim survives a motion to dismiss under 12(b)(6).

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