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In recent years, the plaintiffs’ bar creatively has pursued class action claims under the federal RICO statutes. See generally 18 U.S.C. 1961-1968 (Racketeer Influenced and Corrupt Organization Act). RICO originally was intended to provide sanctions for criminal enterprise activities, but class counsel now imaginatively employ RICO statutes to create massive civil litigation against entire industries. Reviewing the advantages of pleading a RICO Pleading a RICO claim has many advantages. First, pleading a RICO claim provides federal subject-matter jurisdiction. Second, pleading a RICO claim provides supplemental jurisdiction over state-based claims. See 28 U.S.C. 1367(a). Third, pleading a RICO claim may provide a basis for asserting fraud claims otherwise not certifiable because of individualized reliance issues that defeat the predominance requirement for class certification. State-based fraud claims are extremely difficult to certify because of individualized reliance issues relating to each class member. To what extent does pleading a RICO claim provide a basis for certifying a class action that might not otherwise be certifiable if pursued solely under state-based fraud theories? Two recent circuit court decisions provide competing views concerning whether a RICO claim avoids the reliance problem by permitting classwide reliance to satisfy the predominance requirement. The 5th U.S. Circuit Court of Appeals has concluded that a RICO claim does not permit presumed reliance; the 11th Circuit recently has held the opposite. See Sandwich Chef of Texas Inc. v. Reliance Nat’l Indem. Ins. Co., 319 F.3d 205 (5th Cir. 2003); Klay v. Humana Inc., 382 F.3d 1241 (11th Cir. 2004). In Sandwich Chef, the plaintiffs were businesses in 44 states and the District of Columbia required to purchase employee workers’ compensation insurance. The plaintiffs sued 141 casualty insurance companies in a RICO fraud class action in the Southern District of Texas, on the theory that the casualty insurance companies overcharged premiums during a 14-year period. 319 F.3d at 211. The plaintiffs contended that the insurance companies were in cahoots with the National Council on Compensation Insurance, and used this organization as a racketeering enterprise to defraud the policyholders and state insurance regulators. The plaintiffs sought damages, alleging that this insurance racketeering enterprise was liable under RICO for mail and wire fraud, 18 U.S.C. 1962(c)-(d), for making false filings with regulators (the “fraud on the regulator” theory), and by sending policyholders inflated billing invoices (the “invoice” theory). Id. District Judge David Hittner certified the RICO class, relying on the 5th Circuit’s prior interpretation of RICO causation. Sandwich Chef of Texas Inc. v. Reliance Nat’l Indem. Ins. Co., 202 F.R.D. 484, 504 (S.D. Texas 2001), relying on Summit Properties Inc. v. Hoechst Celanese Corp., 214 F.3d 556, 558-61 (5th Cir. 2000). In Summit, the 5th Circuit held that a plaintiff could establish proximate cause in a RICO fraud case if a plaintiff was the target of the fraud, or had relied on the defendant’s fraudulent conduct. Summit, id. Hittner concluded that the Sandwich Chef plaintiffs could establish causation under both the Summit target wing, based on a fraud-on-the-regulator theory, as well as the Summit reliance wing, by means of the invoice theory. 319 F.3d at 214. Hittner held that Sandwich Chef could prove RICO proximate causation without requiring individual proof of reliance, and rejected the defendants’ contention that predominance could not be satisfied because the plaintiffs would have to demonstrate injury through individual proof. Id., 319 F.3d at 215. The 5th Circuit reversed, relying on Supreme Court and appellate cases construing RICO causation requirements. 319 F.3d 218, citing Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992); Summit; Bolin v. Sears, Roebuck and Co., 231 F.3d 970 (5th Cir. 2000); St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 439 (5th Cir. 2000). In the 5th Circuit’s view, RICO fraud cases demand that a misrepresentation be relied upon by each plaintiff, individually, and requires that each plaintiff show detrimental reliance. 319 F.3d at 219. Consequently, a RICO fraud class action cannot be certified when individualized reliance will be an issue. See Patterson v. Mobil Oil Corp., 241 F.3d 417 (5th Cir. 2001); see also Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996)(non-RICO mass tort class action reversed). The 5th Circuit rejected Hittner’s conclusion that the “invoice theory” permitted presumed reliance across the class. The court held that the invoice theory did not satisfy the reliance wing of Summit, nor eliminated individual issues of reliance and causation. 319 F.3d at 221. Instead, the plaintiffs would have to establish that each employer relied on the misrepresentations in the insurers’ invoices. 319 F.3d at 220-21. The 5th Circuit further held that the district court erred in applying the “target theory” to excuse proof of individual reliance on the fraudulent predicate acts, based on the fraud-on-the-regulator theory. The 5th Circuit said the target theory applied narrowly, in circumstances unlike those in Sandwich Chef. 319 F.3d at 221-24. See Procter & Gamble Co. v. Amway Corp., 242 F.3d 539, 564 (5th Cir. 2001). The 5th Circuit found no direct relationship between the alleged fraudulent acts directed against the state regulators and the harms the plaintiffs incurred. 319 F.3d at 224. Consequently, no plaintiff could have suffered a RICO injury without the claimant’s reliance on an inflated invoice. Therefore, the fraud-on-the-regulator theory did not constitute a common issue for all class members that could be proved at trial by a common set of facts. On Sept. 1, 2004, the 11th Circuit, in contrast, affirmed certification of a nationwide RICO class action against health maintenance organizations (HMOs). Klay v. Humana Inc., 382 F.3d 1241 (11th Cir. 2004). In so doing, the court reversed certification of the plaintiffs’ state-based claims for breach of contract, unjust enrichment and state “prompt pay” statutes. 382 F.3d at 1261-1268. As the 11th Circuit characterized the Klay class action: “This is a case of almost all doctors versus almost all major health maintenance organizations.” 382 F.3d at 1246. The doctors alleged that the HMOs conspired to program their computer systems to systematically underpay the physicians for their services. 382 F.3d at 1246-1249. The Judicial Panel on Multidistrict Litigation created a managed-care MDL in the Southern District of Florida. In re Humana Managed Care Litig., nos. 1334, 1366 & 1367, 2000 WL 1925080, 2000 U.S. Dist. Lexis 15927 (J.P.M.L. Oct. 23, 2000). The plaintiffs filed a class action complaint that pleaded three subclasses: (1) a Global RICO class alleging that the defendants conspired to violate RICO through a “Managed Care Enterprise” to defraud the plaintiffs, and aided and abetted each other through this enterprise; (2) a national subclass based on various state-law claims; and (3) a California subclass based on California Business and Profession Code � 17200. The district court certified all three classes. In re Managed Care Litig., 209 F.R.D. 678 (S.D. Fla. 2002). 11th Circuit upholds certification of RICO class The 11th Circuit upheld certification of the RICO class, rejecting the defendants’ contention that certification under Rule 23(b)(3) was improper because of a lack of predominance, superiority and individualized reliance issues. 382 F.3d at 1251-52. The 11th Circuit held that the existence of a conspiracy, and whether the defendant HMOs aided and abetted each other, were common issues that predominated to satisfy Rule 23(b)(3). 382 F.3d at 1255 (relying on Alabama v. Blue Bird Body Co., 573 F.2d 309 (5th Cir. 1978)). The 11th Circuit indicated that the type of conspiracy the Klay plaintiffs alleged was the type of nationwide conspiracy that the 5th Circuit in Blue Bird had indicated would probably be appropriate for nationwide class certification. Id. The 5th Circuit held: “In this case…all the defendants operate nationwide and allegedly conspired to underpay doctors across the nation, so the numerous factual issues relating to the conspiracy are common to all plaintiffs.” 382 F.3d at 1256. The 11th Circuit found the proposed Klay class to “stand in stark contrast to many others in which we found individualized issues to predominate.” Id. The 11th Circuit further rejected the notion that reliance issues presented an insuperable bar to class certification of a RICO claim. The court indicated that “Under well-established 11th Circuit precedent, the simple fact that reliance is an element in a cause of action is not an absolute bar to class certification (citing Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718, 720 (11th Cir. 1987)). The 11th Circuit articulated two reasons for following Kirkpatrick. First, the common issues concerning the existence of a national conspiracy, a pattern of racketeering activity, and of a Managed Care Enterprise were “quite substantial.” 382 F.3d at 1258. Second, the 11th Circuit held that based on the misrepresentations at issue, “the circumstantial evidence that can be used to show reliance is common to the whole class.” 382 F.3d at 1259. The court conceded that the “estimation of benefits” forms that the defendant sent to the physicians raised substantial individualized issues of reliance. Nonetheless, the court held that “the antecedent representations about the defendants’ reimbursement practices do not.” Consequently, the Klay class did not raise issues of “presumed reliance,” nor was the Klay class a case in which individualized issues of reliance predominated over common questions. 382 F.3d at 1259. Linda S. Mullenix holds the Morris and Rita Atlas Chair in Advocacy at the University of Texas School of Law. She can be reached at [email protected].

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