Civil RICO: Unhealthy Applications in Health Care Litigation

Ricardo Solano Jr.
Bloomberg BNA
June 7, 2016

In the four decades since the Racketeer Influenced and Corrupt Organizations Act (“RICO”) was enacted, the private right of action it created has been more regularly used as a type of federal common law fraud claim than as originally intended – a tool to provide relief to legitimate businesses whose industries had been infiltrated by organized crime. In recent years, this trend has continued into the world of health care as more and more plaintiffs are using civil RICO to pursue racketeering allegations with varying degrees of success.

While there have been endless calls over the years to reform RICO's private right of action – including by members of the federal judiciary – thus far none have succeeded in convincing Congress to revisit the statute. As a result, pharmaceutical and biotech companies along with medical providers will continue to face the risk of civil RICO claims and treble damages.

Nevertheless, as discussed further below, defendants have several avenues for challenging civil RICO claims and demanding that courts strictly enforce the requirements for pleading, and ultimately proving, a meritorious civil RICO claim.

Original Purpose of RICO and the Private Right of Action

Notwithstanding its broad language, the federal RICO statute was created for the sole purpose of fighting organized crime. Congress wanted to provide new weapons for targeting and prosecuting organized criminals that had infiltrated legitimate businesses and organizations. Rusello v. United States, 464 U.S. 16, 26-27 (1983).

In its efforts to create a statute that would effectively target such criminal activity, Congress purposefully used broad language to define the elements of RICO. For example, confronted with the difficulty of defining organized crime – and wanting to avoid too narrow a definition that would not keep up with its ever-changing faces – Congress settled on a definition of a RICO enterprise that includes “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. §1961(4) (emphasis added). This definition left open “the outer limits” of its reach. Boyle v. United States, 556 U.S. 938, 944 (2001).

Similarly, in an effort to ensure that the statute would cover the continually changing faces of organized crime, Congress created a wide-ranging list of predicate acts to define “racketeering activity.” H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 248 (1989); 18 U.S.C. § 1961(1). The list of RICO predicate acts, therefore, includes not only crimes more traditionally associated with organized crime – such as murder, bribery, extortion, and drug trafficking – but also mail and wire fraud, immigration fraud, and criminal copyright infringement. Furthermore, Congress elected to define a “pattern of racketeering activity” as simply two or more predicate acts. 18 U.S.C. § 1961(5).

Along with its far-reaching criminal provisions, Congress also created a private right of action. RICO's civil provision allows “any person” injured in his or her business or person by reason of a RICO violation to sue for treble damages and to recover attorney fees. 18 U.S.C. § 1964(c).

Congress's hope was to create “private attorney generals” who would sue criminals infiltrating their businesses and, in so doing, help the government fight organized crime. Rotella v. Wood, 528 U.S. 549 (2000). The (lack of) legislative history on this provision, however, makes it clear that Congress did not fully consider the consequences of affording private litigants the opportunity to commence civil actions based upon the broad language of RICO.

Expansive Use of the Private Right of Action

The explosion of civil RICO claims in areas having nothing to do with organized crime, such as health care, is not surprising given the lack of any statutory limitation on the ability to file such claims and the incentive for doing so that was created by the availability of treble damages. Civil litigants are also not restrained by the same internal and external pressures that are placed on the government when deciding whether to pursue criminal RICO charges. For example, the United States Department of Justice (“DOJ”) has created guidelines that expressly prohibit “imaginative” RICO prosecutions U.S. Attorneys' Manual § 9-110.200. These guidelines further require that the RICO statute “be selectively and uniformly used” and they have centralized decision-making authority over RICO prosecutions in the DOJ to further those goals.

Beyond these internal controls, federal prosecutors are also sensitive to claims of overreaching, prosecutorial abuse, and the loss of credibility if the government were to prosecute every garden-variety criminal case as a RICO violation simply because it “fit” within the broad contours of the RICO statute. That said, there are valid concerns over the manner in which the government has expanded its own use of RICO over the years. But, despite disagreements over the appropriateness of using criminal RICO in certain cases, the fact remains that internal and external factors temper the government's use of the criminal statute.

Private litigants do not face the same restraints on their ability to pursue a RICO claim. That is not to suggest that every civil RICO claim is frivolous. There are, of course, both ethical and legal obligations that all attorneys must adhere to when filing any complaint. In addition, some civil RICO claims are never pursued for practical or strategic considerations despite the fact they may fit the ambit of RICO. But, these considerations do not change the reality that the breadth of the federal RICO statute affords private litigants the opportunity to pursue civil RICO claims in many cases where such claims are unnecessary and unwarranted. At the same time, the potential for obligatory treble damages and the recovery of attorney fees is a powerful incentive for recasting common civil claims into a federal RICO cause of action.

Furthermore, the ability to use the mail and wire fraud statutes as predicate acts has allowed litigants to turn most business disputes into racketeering schemes for several reasons. First, a “scheme to defraud” is, in itself, a broad and ambiguous element that is malleable to a number of factual circumstances. Second, it is difficult to imagine any business today that is not dependent on mail, telephones, or the internet. Third, because each mailing or use of interstate wires constitutes a separate incident of mail or wire fraud, a plaintiff can satisfy the statutory element of “pattern” by simply identifying two mailings, emails, or interstate telephone. Finally, under Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2009), a plaintiff need not show actual reliance on the alleged misrepresentations. The result is that the civil RICO statute, as it currently exists, has become “the remedy of choice whenever it appears that a defendant's transgressions can be recast as racketeering predicates.” Delrio-Mocci v. Connolly Props. Inc., 672 F.3d 241, 259 (3d Cir. 2012) (McKee, C.J., concurring).

Civil RICO in Healthcare Cases

In recent years, more and more plaintiffs are turning to civil RICO in health care cases and having success. For example, In re Neurontin Marketing & Sales Practices Litig., 712 F.3d 21 (1st Cir. 2013), several health plan providers and insurers successfully sued Pfizer and its affiliate under civil RICO alleging that it misrepresented the drug's effectiveness for off-label indications and suppressed negative information about the drug. The Court rejected Pfizer's argument that the link between the alleged injury – i.e., the payments by the third-party payors (“TPPs”) – and the defendant's alleged misrepresentations to the medical community was too attenuated to be actionable under RICO. Instead, the Court concluded that Pfizer was liable for the injury because it was “plainly foreseeable” that the TPPs would pay for the more expensive drugs being prescribed as a result of Pfizer's “fraudulent marketing plan.” Id. at 38-39.

Pfizer sought review by the Supreme Court on the principal ground that RICO's proximate causation requirement could not be satisfied by mere foreseeability. Relying on Hemi Group, LLC v. City of New York, 559 U.S. 1 (2010), Pfizer argued that there must be a direct relationship between the alleged racketeering conduct and the harm being claimed. The Supreme Court, however, declined to review the case.

Similarly, in In re Avandia Marketing, Sales Practices & Product Liability Litigation, 804 F.3d 633 (3d Cir. 2015), union health and welfare plans sued GlaxoSmithKline (“GSK”) under RICO alleging a scheme to defraud the TPPs by concealing significant safety risks associated with its drug and fraudulently promoting the drug as a safer treatment. GSK tried to dismiss the action on the basis that the TPPs did not have standing to assert a RICO claim. The Court, however, rejected GSK's argument that the injury was too speculative, finding instead that the alleged overpayment by TPPs for a drug a result of illegal or deceptive marketing practices was a sufficiently concrete injury to be actionable under RICO. Id. at 640-41. As in the Pfizer case, the Court also concluded that the alleged harm – i.e., the overpayment – was directly related to the alleged racketeering conduct– i.e., the misrepresentations regarding the risks with the drug. Relying on Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2008), the Court explained that GSK was aware that TPPs would cover the costs of its drugs and, thus, the alleged injury was a “foreseeable and nature consequence of [the] scheme.” Id. at 645.

GSK also sought review from the Supreme Court, arguing that there must be a direct link between the conduct and the harm even if the injury is otherwise foreseeable. In addition, GSK had also argued that a TPP cannot rely on a “fraud on the market theory” to show a valid injury – it must allege that the drug actually failed to work or that the TPP suffered injury from the risks that were misrepresented. On June 6, 2016, the Court declined to review the case.

In addition to these cases, civil RICO has also been used by TPPs in several cases against medical providers who allegedly fraudulently billed for their medical services. More recently, in Government Employees Ins. Co., et al. v. Bakst, et al., Docket No. 15-cv-537 (E.D.N.Y. 2015), several insurance carriers are alleging that a number of doctors and medical practices defrauded them out of millions of dollars in fees by submitting false claims for the treatment of injuries that were supposedly suffered in motor vehicle accidents. Although common law claims provide avenues to recover for the allegedly fraudulent conduct in this and similar cases, plaintiffs have used the mail fraud statute to assert civil RICO violations. Given the relative ease with which a false or fraudulent medical billing case can be presented as racketeering allegations (particularly where there is a medical practice group involved), such claims are sure to continue.

Strategies for RICO Defendants

Absent reform, defendants in the health care industry (as well as other industries) are sure to continue facing the risk of civil RICO claims whenever a business dispute or alleged fraud can be recast into racketeering predicate acts. And, with the ability to predicate a RICO claim on allegations of mail and wire fraud without having to show actual reliance on the misrepresentations, the universe of potential RICO plaintiffs will only continue to grow.

Nevertheless, there are a number of areas where courts will continue to play a critical role in safeguarding against RICO claims that lack merit. Depending upon the particular facts of any given case, there may be a number of other ways to challenge the validity of the RICO pleading or proofs.

First, RICO defendants should continue to press, and courts should enforce, the proximate cause requirement set forth in Hemi Group: a “direct relationship” between the defendant's alleged racketeering conduct and the injury being claimed. Until and unless the Supreme Court reviews the issues raised by the defendants in the Pfizer and GSK opinions discussed above, defendants will have to distinguish those cases or explain (in other jurisdictions) why they are not consistent with Hemi Group. Certainly, intent (on the part of the defendant) and foreseeability (of the harm to the plaintiff) may be relevant factors to consider. But they, alone, should not satisfy the element of proximate causation if the link between the conduct and the harm is simply too remote. And, where the lack of a direct link is evident on the pleadings, courts should not hesitate to dismiss the RICO claim at that stage.

Second, a RICO pattern requires a plaintiff to allege, and ultimately prove, that the predicate racketeering acts are sufficiently related and continuous. Furthermore, to satisfy “continuity,” a plaintiff must show either (1) “a series of related predicates extending over a substantial period of time,” or (2) a threat of continuing criminal activity beyond the period during which the predicate acts were performed. H.J., Inc., 492 242. A plaintiff is less likely to satisfy the element of “continuity” in cases involving a single alleged scheme (that simply has multiple mailings) that occurred over a brief period of time. Garden-variety business disputes, where there is no history of similar past conduct by the defendant, are more likely to fall into this category.

Finally, because most civil RICO claims are predicated upon the mail and wire fraud statutes, a plaintiff must plead those predicate acts with the particularity required by Federal Rule of Civil Procedure 9(b) in order to survive a motion to dismiss. This requires a plaintiff to plead with adequate specificity not only the scheme to defraud and the specific fraudulent statements (or omissions), but also that the RICO defendant participated in the alleged scheme to defraud; that the defendant knowingly used (or caused to be used) the mails or interstate wires in furtherance of that scheme; and that the defendant had the specific intent to defraud. Shortcomings in the fraud predicate acts are often more likely to arise in cases where there are multiple defendants and the plaintiff tries to group the defendants into generalized allegations of racketeering.

Despite the broad statutory language of the RICO statute, health care companies must recognize the critical role the courts can – and should – play in ensuring that RICO's civil claim provision is not exploited by plaintiffs hoping to obtain treble damages by turning common law fraud or other tort claims into a civil RICO action.

This article was originally published June 6th, 2016, in Bloomberg BNA's Pharmaceutical Law and Industry Report and can be found here.

Reproduced with permission from Copyright 2016 The Bureau of National Affairs, Inc. (800-372-1033)

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