Must RICO Damages Be Clear and Definite? — Circuit Split — State Work Comp Statute Cannot Bar Federal RICO Remedy for Fraudulent Denial of Benefits — Rooker-Feldman Inapplicable

Jackson v. Segwick [Sedgwick] Claims Mgmt. Servs., 2012 U.S. App. LEXIS 22557 (6th Cir. Nov. 2, 2012) (note: highly divided 3-judge panel):

I. BACKGROUND

Clifton Jackson was employed by Coca-Cola when he allegedly injured his lumbosacral spine at work in September 2007. R. 2 (Am. Compl. ¶31A) (Page ID #39). Jackson was treated at the Henry Ford Hospital by Dr. Shlomo Mandel, a specialist in the lower back. Dr. Mandel determined that the work-related injury rendered Jackson disabled. In May 2008, Sedgwick requested a second opinion by Dr. Terry Weingarden, an expert paid for by the defendants. Dr. Weingarden also determined that Jackson was disabled from a work-related injury. Id. Sedgwick asked Dr. Weingarden to review Jackson for a second time, and Dr. Weingarden again determined that Jackson was disabled. Id.

After obtaining three reports confirming Jackson's disability, in January 2009, Sedgwick mailed a letter to Jackson requesting yet another examination, this time by Dr. Paul Drouillard. Id. (Page ID #40). Plaintiffs allege that Dr. Drouillard is not a back surgeon and was hired by Sedgwick as a "cut-off" doctor to provide false medical reports and participate in a scheme dishonestly to deprive Coca-Cola employees of their statutory benefits under the Michigan Worker's Disability Compensation Act ("WDCA"), Mich. Comp. Laws § 418.301. Id. at ¶¶ 12, 13, 15, 31. After Jackson met with Dr. Drouillard, Dr. Drouillard mailed a report to Sedgwick stating that Jackson was not disabled. Dr. Drouillard's report contains three statements by Jackson regarding the scope of his pain that Jackson claims he never made and several conclusions about the nature of Jackson's physical injury that Jackson claims are wholly unsupported by the medical evidence. Id. at¶31A. Sedgwick relied on this report to terminate Jackson's benefits.

Christopher Scharnitzke was employed as a truck driver when he allegedly injured his shoulder because of, he claims, extensive lifting at work. He ceased working from August 2007 to February 2008 due to the injury, but did not seek worker's compensation for that time. Id. at 31B (Page ID #41-42). From 2004 to 2007, on three separate occasions, he reported to his family doctor that he experienced left shoulder pain while doing heavy lifting at work. In August 2007, Dr. Marc Milia, an orthopedic surgeon, observed similar pain from the work Scharnitzke was performing. The doctor performed an MRI and diagnosed Scharnitzke with "acromioclavicular arthritis." Dr. Milia treated Scharnitzke and authorized him to return to work in February 2008.

Scharnitzke continued to work until March 4, 2008, when he experienced "instant pain" in his left shoulder while pulling a 300-pound two-wheeler cart of product up a flight of stairs. He was sent to the company's clinic, Concentra Medical Center, that same day. Id. (Page ID #42). On March 11, 2008, the Concentra doctor observed that Scharnitzke had a "minor work aggravation" and a "chronic shoulder problem." Id. (Page ID #43). The Concentra records concluded that Scharnitzke was disabled due to his shoulder condition and referred Scharnitzke back to his orthopedic surgeon. The records were sent to Sedgwick, which then mailed a notice of dispute claiming that his March treatment was not related to a work injury but was instead due to "acromioclavicular arthritis." Id. Scharnitzke alleges that Sedgwick had no information at that time to suggest his March injury was related to arthritis and not the "minor work aggravation" indicated in the Concentra records, which should have entitled him to worker's compensation. Id.

Sedgwick and Coca-Cola continued to deny Scharntizke benefits after receiving numerous updates from Dr. Milia about the nature of Scharnitzke's injuries. In April 2009, Sedgwick received a note from Dr. Milia, Scharnitzke's orthopedic surgeon, clarifying that "[h]is current shoulder disability . . . was caused by the 13 years of repetitive heavy lifting and pulling required by Mr. Scharnitzke's job at Coca-Cola, and was also caused by the injury at work on 3/3/08." Id. (Page ID #44). After receiving Dr. Milia's note, Sedgwick continued to deny Scharnitzke benefits.

Scharnitzke and Jackson both filed petitions for benefits with Michigan's Workers' Compensation Agency Board of Magistrates (the "Board"). We were informed at oral argument that Jackson settled his benefits claim shortly after the district court dismissed his RICO suit. On May 13, 2010, the Board awarded Scharnitzke benefits starting from the injury in March 2008 until July 2009, but found no evidence that his prior leave from July 30, 2007 to February 11, 2008, was work related. Scharnitzke v. Coca-Cola Enters., Inc. (May 13, 2010), available online at http://www.dleg.state.mi.us/WCA/PDFS/Opinions_051409/2010/scharnitzke.christop her.5.13.10.pdf. The Workers' Compensation Appellate Commission affirmed in part and reversed in part, agreeing that Scharnitzke was entitled to benefits starting in March 2008 but only through January 2009. ... Both parties sought leave to appeal the decision before the Michigan Court of Appeals, which was granted on March 1, 2012. Scharnitzke v. Coca-Cola Enters., No. 304515 (Mich. Ct. App.). As of the time of filing, briefing appears completed but no decision has been issued.

In April 2009, Jackson and Scharnitzke filed suit together in the U.S. District Court for the Eastern District of Michigan seeking equitable and monetary relief under RICO. Jackson brought his claim against Sedgwick, Coca-Cola, and Dr. Drouillard; Scharnitzke sued just Sedgwick and Coca-Cola. The plaintiffs amended their complaint once as of right to include a request for class certification. R. 2 (Am. Compl. at 22) (Page ID #45). They later sought leave to file a second amended complaint adding another plaintiff, Paul Lulek, who also wanted to sue Sedgwick and Dr. Drouillard, identifying additional predicate acts of mail fraud, and adding a claim of RICO conspiracy. See R. 44-1 (2d Am. Compl. ¶¶ 30A, 31, 31C). Meanwhile, the defendants filed a motion to dismiss.

The district court granted the defendants' motions to dismiss and denied leave to amend the complaint on the basis of futility. Jackson v. Sedgwick Claims Mgmt. Servs., Inc., No. 09-11529, 2010 WL 931864 (E.D. Mich. Mar. 11, 2010). The district court held that the plaintiffs' claims could be dismissed on the basis of three alternative grounds: (1) RICO does not provide a remedy that is functionally an "'end run' around the exclusive procedures and remedies" provided for under the WDCA; (2) the plaintiffs' claims were not ripe; and (3) the plaintiffs failed to state a cognizable RICO claim. Jackson, 2010 WL 931864, at *14. The district court also determined that if the plaintiffs had stated a valid RICO claim, the Burford-abstention and primary-jurisdiction doctrines would require staying the federal proceedings pending the outcome of the plaintiffs' claims before the state Board. Jackson and Scharnitzke timely appealed.

II. RICO CLAIM

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1. Relationship Between RICO and WDCA

The district court's holding that RICO cannot provide a remedy for mail fraud in the context of obtaining worker's compensation is untenable in light of our recent opinion in Brown II, 675 F.3d 946. In Brown II, we held that the Supremacy Clause preempts the Michigan legislature from eliminating a RICO remedy simply by declaring its worker's compensation scheme to be exclusive of federal remedies. "[T]he predicate offense for the RICO action is mail fraud, not the denial of worker's compensation." Id. at 954. It is therefore irrelevant whether the WDCA provides a state administrative remedy for addressing the fraudulent denial of worker's compensation benefits. Nor does the existence of a state administrative scheme that does not provide for such a right of action trump the availability of remedies under RICO as it might in the context of a parallel federal administrative scheme. "[T]he fact that a scheme may violate state laws does not exclude it from the proscriptions of the federal mail fraud statute." Id. at 954-55 (quoting Parr v. United States, 363 U.S. 370, 389 (1960)). This is because "enabling statutes for state agencies, passed by state legislatures, say nothing about Congress's intent with regard to RICO." Id. at 955. Simply put, "Michigan cannot limit the scope of a federal RICO cause of action." Id.

Some of the defendants' arguments are slightly different than the ones we addressed in Brown II. Coca-Cola and Dr. Drouillard point us to 28 U.S.C. § 1445(c), which prohibits removing to federal court civil suits "arising under the workmen's compensation laws" of any state. However, even if § 1445(c) changes the analysis, this case was not removed under § 1445(c); therefore, the statute simply does not apply. In the ripeness portion of its brief, Coca-Cola imports the clear-statement rule from criminal RICO cases. Coca-Cola contends that "Congress must speak with special clarity before a federal statute may be construed in a manner that displaces a policy choice made by a State." Appellee Coca-Cola Br. at 25 (internal quotation marks and alteration marks omitted). The cases that Coca-Cola cites, however, are concerned with the "sweeping expansion of federal criminal jurisdiction," not civil. Cleveland v. United States, 531 U.S. 12, 24 (2000) (emphasis added). Furthermore, Cleveland held that state licenses are not "property" of the state within the meaning of the mail-fraud statute because the state's interest is regulatory in nature. Id. at 22. As we discuss below, the state has created an entitlement to the property in question in the individual recipient. Any lack of clarity about the mail-fraud statute as applied in Cleveland is simply not present in this case.

2. The Plaintiffs' Injuries are Ripe

We held in Brown II that injured Michigan employees "acquire a property interest in worker's compensation when employers learn of their employees' physical injuries." Brown II, 675 F.3d at 963. The fraudulent denial of these benefits causes injury to this property interest, and the value of the lost property interest is readily ascertainable--it is the value of the worker's compensation that the plaintiff was entitled to receive under the WDCA's scheme for calculating benefits. See Fleischhauer v. Feltner, 879 F.2d 1290, 1299 (6th Cir. 1989) (RICO damages must be "established by competent proof, not based upon mere speculation and surmise"), cert. denied, 493 U.S. 1074 (1990); see also Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 265-68 (1992) (requiring RICO violation proximately cause plaintiff's injuries). Because the injury occurs at the time of the fraudulent denial of benefits, the plaintiffs' claims in this case were ripe at the time they filed their lawsuit. The district court therefore erred in determining that the plaintiffs' injury is "conjectural and hypothetical" until they have proven their entitlement in state proceedings. Jackson, 2010 WL 931864, at *21 & n.33, *22 & n.34.

That is not to say that the state proceedings will be irrelevant; however, they will affect the amount of damages the plaintiffs are entitled to receive rather than the existence of the damages in the first place. By the time we issued our opinion in Brown II, all of the plaintiffs there had settled their worker's compensation claims with their employer. In such cases, we stated that the primary damages would be the difference between the amount the plaintiffs received in settlement and the amount they would have received but for the fraud. 675 F.3d at 967. This calculus remains applicable in this case because Jackson has also settled his claims. Scharnitzke, on the other hand, has already received a ruling that he is entitled to some benefits, a ruling which is being appealed. The outcome of that appeal may certainly be relevant on the amount of damages that Scharnitzke may receive in this case, but the possibility of future mitigation of damages does not make the injury itself less ripe at the time it occurred (or the total value of the damages less ascertainable).

We acknowledge that one of our sister circuits currently disagrees with this approach. The Second Circuit has adopted a rule that RICO claims are not ripe "until the amount of damages becomes clear and definite." First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 768 (2d Cir. 1994), cert. denied, 513 U.S. 1079 (1995). But to the extent that this rule has been followed by other circuits, the focus has been on the speculative nature of the damages themselves and not their amount. See Evans v. City of Chicago, 434 F.3d 916, 932 (7th Cir. 2006) (adopting standard but focusing on indirect nature of injuries rather than their amount); Maio v. Aetna, Inc., 221 F.3d 472, 495 (3d Cir. 2000) (holding no RICO cause of action because factual predicate necessary for damages to be incurred at all too speculative); DeMauro v. DeMauro, 115 F.3d 94, 97-98 (1st Cir. 1997) (adopting "clear and definite" standard but focusing on existence of damages in the first place).

Other circuits have simply declined to adopt this rule as overly rigid. Potomac Elec. Power Co. v. Elec. Motor & Supply, Inc., 262 F.3d 260, 265 (4th Cir. 2001) ("The best reading of § 1964(c)'s injury to business or property requirement is that it refers to the fact of injury and not the amount."), cert. denied, 535 U.S. 927 (2002); Grimmett v. Brown, 75 F.3d 506, 516-17 (9th Cir. 1996) (holding "error to equate" a situation where "the injury is speculative because it is not known whether it will occur at all" to a situation where "the injury has occurred and is known, but it is speculative whether the damages might be reduced or even eliminated by alternative recovery efforts"), cert. dismissed, 519 U.S. 233 (1997); see also Liquidation Comm'n of Banco Intercontinental, S.A. v. Renta, 530 F.3d 1339, 1350-51 (11th Cir. 2008) (noting that even Second Circuit rule does not make a RICO injury unripe based solely on the "mere possibility" of recovery in a state proceeding); Paul A. Batista, Civil Rico Practice Manual § 4.22[D] (3d ed. 2008) ("[Gelt is] a case to which the Second Circuit rigidly adheres and which most other circuits tend to ignore or downplay.").

As the Ninth Circuit noted, the Second Circuit's "clear and definite" amount rule was taken from an earlier Second Circuit case that held that a plaintiff's claims were not ripe if the plaintiff might recover damages from a pending bankruptcy proceeding. Grimmett, 75 F.3d at 516 (citing Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1105 (2d Cir. 1988)). Like the Ninth Circuit, we also have similar precedent directly contradicting that rule. In Isaak v. Trumbull Savings & Loan Co., 169 F.3d 390 (6th Cir. 1999), we held that the plaintiffs' RICO claim accrued for statute of limitations purposes at the time the scheme was completed, because that was when the injuries became "ascertainable and definable." Id. at 396-97. Citing Grimmett, we held that "[t]he possibility that Plaintiffs might have been able to recover some of the damages during the course of the bankruptcy proceedings does not negate the existence of injury at the time of the bankruptcy filing." Id. at 397. We are not at liberty to depart from this precedent here today.

The plaintiffs' injuries were definite and ascertainable at the time of the allegedly fraudulent denial of their benefits. Any speculative future recovery in state proceedings may affect the amount of damages the plaintiffs can receive, but has no bearing on the accrual of a cause of action under RICO. The plaintiffs' claims are ripe.

3. Rooker-Feldman Doctrine

Dr. Drouillard argues that the Rooker-Feldman doctrine also justifies dismissing Jackson's RICO claim because Jackson in essence will be challenging an unfavorable ruling by the state's WDCA Board. Drouillard Appellee Br. at 44-47. This argument was raised, however, before Jackson settled his claims. Because there is no longer the potential of a state decision for Jackson to challenge, Rooker-Feldman has no potential applicability to Jackson. The remaining defendants have not raised the issue of Rooker-Feldman as a bar to Scharnitzke's claims. However, because the doctrine relates to subject-matter jurisdiction, we briefly explain why the doctrine does not bar our review.

Rooker-Feldman applies to "cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced." Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005). Put differently, "[t]he pertinent question . . . is whether the source of the injury upon which plaintiff bases his federal claim is the state court judgment." In re Squire, 617 F.3d 461, 465 (6th Cir. 2010) (internal quotation marks omitted). Here, however, the source of the injury was the initial fraudulent denial of benefits. As we have already discussed at length both in this opinion and in Brown II, the source of the injury here is that fraudulent denial of benefits, not any future state-court judgment.

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