Divided Sixth Circuit Court Delivers Body Blow to Michigan’s Continuing Battle Regarding RICO Claims and Comp Exclusivity

by Thomas A. Robinson

A divided Sixth Circuit Court of Appeals, in Brown v. Cassens Transp. Co., 2012 U.S. App. LEXIS 6929 (6th Cir. Apr. 6, 2012), has again reversed the dismissal of plaintiff employees’ RICO action and remanded it to the United States District Court for the Eastern District of Michigan. The case, which has see-sawed between District Court Judge Paul D. Borman and the Sixth Circuit for the past seven years, involves the issue of whether Michigan’s Workers’ Disability Compensation Act [Mich. Comp. Laws § 418.301] (“WDCA”), through its exclusive remedy clause, bars plaintiffs’ recovery under the federal RICO statute. On multiple occasions, Judge Borman has ruled that the cause of action is barred. The recent decision of the majority of the Sixth Circuit panel, unless taken up by the Supreme Court, appears to settle the issue in favor of the plaintiffs. 

Background

Brown and several other employees of Cassens were injured allegedly while performing work-related tasks for their employer. Cassens was self-insured and had contracted with defendant Crawford, a claims adjudicator, to resolve workers’ compensation claims brought by Cassens’ employees. Dr. Saul Margules evaluated all but one of the plaintiffs. According to the complaint, Cassens and Crawford solicited fraudulent medical reports from Dr. Margules and other physicians. Plaintiffs contended in relevant part that Dr. Margules was biased because of the amount of money defendants paid him over the years to examine Cassens workers and to testify against them. The plaintiffs also asserted that Cassens and Crawford ignored other medical evidence that supported the plaintiffs’ claims, that the conspiracy was orchestrated by mail or by wire, and that the claims of each plaintiff except Brown were “resolved by settlement” before the Workers’ Compensation Appellate Commission (“WCAC”) rendered a final determination.

In June 2004, plaintiffs sued Cassens, Crawford, and Dr. Margules (one plaintiff did not sue the doctor) in federal court, alleging violations of RICO and intentional infliction of emotional distress. Each plaintiff sought “damages measured by the amount of benefits improperly withheld … , plus interest as provided by law, all tripled in accordance with RICO, together with attorney fees and costs as provided by law.”

The district court initially dismissed the case under Federal Rule of Civil Procedure 12(b)(6) for failure to allege reliance on the defendants’ fraudulent misrepresentations [Brown v. Cassens Transp. Co. (Brown I), 409 F. Supp. 2d 793 (E.D. Mich. 2005)]. A divided panel of the Sixth Circuit affirmed [Brown v. Cassens Transp. Co. (Brown II), 492 F.3d 640 (6th Cir. 2007)]. The Supreme Court vacated the 6th Circuit’s judgment and remanded the case in light of Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 128 S. Ct. 2131, 170 L. Ed. 2d 1012 (2008), which held that civil RICO plaintiffs did not need to demonstrate reliance on defendants’ fraudulent representations [Brown v. Cassens Transp. Co., 554 U.S. 901, 128 S. Ct. 2936, 171 L. Ed. 2d 862 (2008)]. On remand, the 6th Circuit held that the plaintiffs had pleaded a “pattern” of unlawful activity. The 6th Circuit also held that the McCarran-Ferguson Act, 15 U.S.C.S. § 1012, did not reverse preempt RICO claims because the WDCA was not enacted to regulate the business of insurance and, in any event, RICO would not “invalidate, impair, or supersede” the WDCA [Brown v. Cassens Transp. Co. (Brown III), 546 F.3d 347, 363 (6th Cir. 2008), cert. denied, 130 S. Ct. 795, 175 L. Ed. 2d 575 (2009)].

On remand, the district court denied the plaintiffs’ motion to amend their complaint and dismissed their claims under Rules 12(b)(6) and 12(c) [Brown v. Cassens Transp. Co. (Brown IV), 743 F. Supp. 2d 651 (E.D. Mich. 2010)]. The district court determined that the WDCA provided an exclusive state remedy via the WCAC that foreclosed federal RICO claims; that monetary losses stemming from lost benefits were personal injuries that were not injury to business or property; and that the damages were too speculative to support standing. Plaintiffs appealed.

Majority Opinion

Circuit Judge Karen Nelson Moore delivered the majority’s opinion, holding that the Federal Supremacy Clause prevents the Michigan legislature from preempting a RICO remedy by declaring its workers’ compensation scheme to be exclusive of federal remedies, that an expected entitlement to benefits under the WDCA qualifies as property, as does the claim for such benefits, and the injury to such property creates, under certain circumstances, a RICO violation. Based on that reasoning, the circuit court reversed the district court’s dismissal of plaintiffs’ RICO civil action.

Judge Moore observed that the parties argued at length about (a) whether the plaintiffs’ RICO claims fell within the ambit of the WDCA, triggering its exclusive-remedy clause, and (b) whether RICO would impair the WDCA’s regulatory scheme. The majority found the debates irrelevant, indicating that the plaintiffs brought a federal claim, not a WDCA claim. Although the majority specifically indicated that it was not holding that that RICO preempts the WDCA, the majority did find that “the relative importance to the State of its own law is not material” when “a valid federal law” provides a cause of action based on overlapping facts [Ridgway v. Ridgway, 454 U.S. 46, 54, 102 S. Ct. 49, 70 L. Ed. 2d 39 (1981)]. The majority held, therefore, that the district court erred in finding that the WDCA foreclosed the plaintiffs’ RICO claims.

Supremacy Clause

Judge Moore continued that under the Supremacy Clause, Michigan did not have the authority to declare a state remedy exclusive of federal remedies. State law could eliminate federal remedies only when authorized by reverse-preemption clauses, such as the one contained in the McCarran-Ferguson Act, which played a role in the 6th Circuit panel’s prior decision [Brown III, 546 F.3d at 357]. The majority noted that while the plaintiffs framed their argument in terms of preemption, the Supremacy Clause was relevant only to decide whether Michigan could foreclose federal RICO claims, as the district court held [Brown IV, 743 F. Supp. 2d at 668]. Regardless of whether RICO preempts the WDCA, the majority indicated RICO provides a distinct cause of action.

The majority noted that defendants relied on Connolly v. Maryland Casualty Co., 849 F.2d 525, 528 (11th Cir. 1988), cert. denied, 489 U.S. 1083, 109 S. Ct. 1539, 103 L. Ed. 2d 843 (1989), wherein the Eleventh Circuit held that a plaintiff could not bring suit for civil rights violations under 42 U.S.C.S. § 1985 for injuries that stemmed from delayed payments of workers’ compensation. There the court reasoned that, because the civil rights claims and constitutional claims were all based on the right provided by Florida Workers’ Compensation Law, the remedy for the wrongful conduct could not rise above the exclusive remedy provided by the Florida statutes. Extending that argument, defendants contended that the entitlement to workers’ compensation benefits was created by Michigan statutes. By analogy, specifying and limiting the remedy for violations of that entitlement arguably was Michigan’s prerogative.

The majority indicated that the flaw with the defendants’ argument was that the predicate offense for the RICO action was mail fraud, not the denial of workers’ compensation. Judge Moore continued that the gravamen of a RICO cause of action was not the violation of state law, but rather certain conduct, illegal under state law, which, when combined with an impact on commerce, constituted a violation of federal law.

Overlap in Sanctioned Conduct–Not a Dependency Relationship Between State and Federal Law

The majority continued that the district court had erred when it stated that this case did not involve a separate and independent tort (theft or conversion or some similar claim) because the plaintiffs could not “disentangle their RICO claim from their underlying claim for benefits.” Judge Moore admitted that the plaintiffs were entitled to damages for the alleged fraud only if they were actually entitled to workers’ compensation and were not properly compensated, which was a question of state law. But that fact showed “an overlap in sanctioned conduct, not a dependency relationship between state and federal law.”

The majority observed that courts had held RICO inapplicable to claims that should have been raised before federal agencies that had exclusive-remedy clauses in their enabling statutes [e.g., McCulloch v. PNC Bank Inc., 298 F.3d 1217, 1226-27 (11th Cir. 2002) (Higher Education Act); Ayres v. Gen. Motors Corp., 234 F.3d 514, 521-22 (11th Cir. 2000) (National Traffic and Motor Vehicle Safety Act); Bodimetric Health Servs., Inc. v. Aetna Life & Cas., 903 F.2d 480, 486-87 (7th Cir. 1990) (Social Security Act)], that the district court had extended this logic to state agencies, but that Michigan could not limit the scope of a federal RICO cause of action.

Injury to Property

The majority continued that the district court also rejected the plaintiffs’ claims because it held that they failed to allege an injury to property, as required by RICO. The majority disagreed, holding that the plaintiffs had alleged an injury to property because they alleged the devaluation of either their expectancy of or claim for workers’ compensation benefits. According to the majority, both Michigan law and federal law recognized that the recipient of a statutory entitlement had a “statutorily created property interest in the continued receipt of those benefits.” The majority specifically stated that injury to such statutory entitlements was an injury to property within the meaning of RICO.

The majority noted that the defendants, the district court, and the dissent all focused on language in cited cases rejecting pecuniary losses “flowing from” personal injuries to argue that any pecuniary losses downstream from a personal injury were categorically personal in nature and unrecoverable under RICO. In doing so, the majority said that they had skipped over the first and most fundamental question at issue—had any legal entitlement been harmed? The majority indicated they were correct that “but for” the personal injury, the plaintiffs would have had no interest in any benefits. There was nothing, however, in the text of RICO or the cases they pointed to that provided for ignoring damage to an intervening legal entitlement because it arose following a personal injury. Judge Moore allowed that the defendants had asked the 6th Circuit to be the first circuit to read RICO as preventing recovery for injuries to property “by reason of” a RICO violation solely because the property interest itself would not have existed but for an unrelated personal injury. The majority declined to take this approach for three reasons:

(a) A plain reading of the text of RICO provided no support for excluding certain categories of property interests based on how the interest itself originated.

(b) Focusing on the predicate injury that gave rise to the property interest ignored the Supreme Court’s instruction to interpret RICO broadly.

(c) Such an approach would yield inconsistent results.

Damages

The majority observed that because of the trebling of damages, courts did not permit RICO claims to proceed unless the measure of damages was “not based upon mere speculation and surmise” [Fleischhauer v. Feltner, 879 F.2d 1290, 1299-1300 (6th Cir. 1989)] and that the district court had held that the damages in this case would be too speculative to give the plaintiffs standing to pursue a RICO claim. The majority disagreed, observing that damages alleged were (1) either the denied benefits, or the amount by which the settlement reduced the award to which the plaintiff would have been entitled but for the inducement to settle; (2) costs incurred due to the “time delay in receipt of those benefits;” (3) attorney fees and litigation costs of litigating the claim in the state system; and (4) expenses from “mileage to and from medical care”. The majority held that the plaintiffs had alleged a specific, ascertainable injury to property within the meaning of RICO. They were entitled to pursue those damages.

Dissenting Opinion

Judge Julia Smith Gibbons dissented. Judge Gibbons indicated the plaintiffs had failed to state a claim for RICO relief because they neglected to plead an injury to business or property, and, thus, the district court’s dismissal of plaintiffs’ case should have been affirmed. Judge Gibbons also offered that it was necessary to examine what law determined whether an injury constituted a personal injury or an injury to business or property, that while federal law governed most issues under RICO, whether a particular interest amounted to property was “quintessentially a question of state law.”

In her dissent, Judge Gibbons observed that the majority had extensively discussed whether an expectation of workers’ compensation benefits constituted a property interest. That approach ignored, write the judge, the determinative fact that the damages sought in workers’ compensation cases derived from personal injuries and that under RICO, both personal injuries and pecuniary losses flowing from those personal injuries were insufficient to confer standing under 42 U.S.C.S. § 1964(c). According to the dissent, the injury to plaintiffs was not the loss of an opportunity to assert a claim, in which there might or might not be a property interest, but rather the personal injury for which success on the claim would compensate. According to Judge Gibbons, the majority opinion also departed from precedents of the court’s sister circuits regarding this issue of RICO’s application to property interests and not to personal injuries.

Implications

As pointed out by Judge Gibbons in her dissent, perhaps the weakest link in the majority’s argument is its determination that plaintiffs had sufficiently pled “an injury to business or property,” as required by RICO. As noted above, the district court held that because plaintiffs’ damages “unquestionably were incurred as a direct result of Plaintiffs’ on-the-job injuries,” their medical expenses, workers’ compensation benefits, medical mileage and attorneys fees were damages which were “indisputably wholly derivative of their personal injuries and as such [were] not injuries to ‘business or property’ under RICO.” In a number of decisions, even one from the Sixth Circuit itself [Drake v. B.F. Goodrich Co., 782 F.2d 638, 644 (6th Cir. 1986)], the phrase “business or property” has retained restrictive significance and accordingly excludes personal injuries suffered.

The majority takes great care to argue that the expectation of workers’ compensation benefits constitutes a property interest. As pointed out in the dissent, the approach ignores the determinative fact that the damages sought in workers’ compensation cases derive from personal injuries. Under RICO, both personal injuries and pecuniary losses flowing from those personal injuries are insufficient to confer standing under 42 U.S.C.S. § 1964(c) [see Evans v. City of Chicago, 434 F.3d 916, 926 (7th Cir. 2006)]. Many of the circuit court decisions cited by Judge Gibbons stress that RICO’s standing requirement—that allows plaintiffs to sue for injuries only to business or property losses—is a serious limitation; it should not be so broadly construed so as to read it out of the Act.

The majority’s decision appears to set up a nightmarish scenario for some employers. The majority has indicated that there is what amounts to concurrent jurisdiction for these sorts of claims, that they can be litigated in the usual workers’ compensation claims process at the state level and also in federal court. The majority stresses that the issues to be resolved in the different forums—the federal courts and the state agency administering the Workers’ Compensation Act—while connected, are not identical. Might it, therefore, be possible for a claimant to be successful in one forum and unsuccessful in the other?

The defendants have indicated they will appeal the Sixth Circuit’s decision. Will the issues be resolved by the Supreme Court? Your guess is as good as mine. It remains to be seen whether plaintiffs in other circuits will file suit using the Brown v. Cassens template. My bet is that they will, if they already haven’t done so. Pending any action by the United States Supreme Court, we’ll have to wait to see if other circuits follow suit and allow RICO actions to move forward.

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