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California Pharmacy Management, LLC v. Zenith Insurance Co.

November 5, 2009

CALIFORNIA PHARMACY MANAGEMENT, LLC
v.
ZENITH INSURANCE COMPANY; AND ZNAT INSURANCE COMPANY



The opinion of the court was delivered by: Honorable David O. Carter, Judge

CIVIL MINUTES - GENERAL

DOCKET ENTRY

[I hereby certify that this document was served by first class mail or Government messenger service, postage prepaid, to all counsel (or parties) at their respective most recent address of record in this action on this date.]

PROCEEDING (IN CHAMBERS): ORDER DENYING MOTION TO DISMISS

Before the Court is Defendants Zenith Insurance Company and ZNAT Insurance Company (collectively "Defendants" or "Zenith") Motion to Dismiss the Second Amended Complaint ("Motion"). The Court finds the matter appropriate for decision without oral argument. Fed R. Civ. P. 78; Local R. 7-15. After considering the moving, opposing, and replying papers, and for the reasons stated below, the Court hereby DENIES the Motion.

Background

A. Procedural History

On February 26, 2009 Plaintiff California Pharmacy Management, LLC ("CPM") filed its original complaint alleging a Racketeer Influenced and Corrupt Organizations Act ("RICO") cause of action against Defendants based on mail and wire fraud. On April 23, 2009, CPM filed its First Amended Complaint. Following the Court's grant of a Motion to Dismiss in a related action,*fn1 the parties entered into a stipulation to allow CPM to file a Second Amended Complaint ("SAC"). On August 18, 2009, CPM filed its SAC. Defendants argue that the SAC fails to cure the defects in either the Complaint or the First Amended Complaint and ask this Court to dismiss Plaintiff's action with

A separate action between the parties is presently pending before the Los Angeles County Superior Court. On February 2, 2009, Zenith filed a state court action against CPM, alleging causes of action for unlicensed and illegal operation and management of pharmacies and for unlawful referral and fee-splitting arrangements with physicians. See Mot. at 2.

B. Factual Allegations

By its SAC, CPM brings a RICO suit against Defendants, workers' compensation insurers and claims administrators, for undertaking a scheme to "defraud [CPM] through a collusive and systematic campaign of sham litigation, fraudulent objections and dilatory conduct carried out by mail fraud and wire fraud, to avoid payment of valid bills and liens for tens of thousands of needed medications prescribed and dispensed to injured workers in over 800 workers' compensation cases in the California Workers' Compensation Board ("WCAB"); to destroy CPM as a viable company; and to abuse the process of and defraud the WCAB." SAC ¶ 1. Both Defendants are wholly owned subsidiaries of Zenith National Insurance Corporation. See SAC ¶¶ 13-14. CPM's contracts obligate it to "bill and collect for medications dispensed to injured workers." Id. ¶ 2. Defendants have allegedly neglected to pay CPM because they do not "want to pay the prices legally submitted by CPM." Id.

The SAC alleges that Defendants strongly dislike the physician in-office medication programs, notwithstanding the legality of such programs. Id. ¶ 3. It further alleges that Defendants "conspired with other carriers and devised a scheme to put CPM out of business and to destroy the physician in-office medication dispensing program." Id. To effectuate their scheme, Defendants allegedly communicated to their "agents and representatives and the agents and representatives of other carriers the manner in which the scheme to defraud was to be implemented." Id. Pursuant to this scheme, Defendants: (1) ceased payment for all claims submitted by CPM; (2) delivered letters to CPM offering pretextual objections to CPM claims; and (3) consolidated all CPM lien claims before the WCAB. Id. ¶¶ 3-7. Plaintiff avers that Defendants' objection letters (and their subsequent litigation before the WCAB) were knowingly "baseless," "based on false assumptions," and "served as lulling activity that created a severe cash flow problem for CPM." Id. ¶¶ 5-7. Defendants allegedly "had no interest whatsoever in the actual outcome of any of its individual objections before the WCAB, but intended to use the WCAB process to stonewall CPM and shut off its cash flow." Id. ¶ 6. Plaintiff allegedly sustained "millions of dollars" of economic losses as a result of Defendants' scheme. Id. ¶ 9.

The SAC contends that Defendants' activity violates RICO, 18 U.S.C. § 1961, et seq. Specifically, CPM contends that Defendants have engaged in and are continuing to engage in mail fraud and wire fraud in violation of 18 U.S.C. § 1962(c) and have engaged in a conspiracy to commit such acts in violation of 18 U.S.C. § 1962(d).¶

Legal Standard

Under Federal Rule of Civil Procedure 12(b)(6), a complaint must be dismissed when a plaintiff's allegations fail to state a claim upon which relief can be granted. Once it has adequately stated a claim, a plaintiff may support the allegations in its complaint with any set of facts consistent with those allegations. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 562, 127 S. Ct. 1955 (2007). A plaintiff may not merely recite the elements of a cause of action in its complaint. Id. at 555. Instead, to survive a 12(b)(6) motion to dismiss, the complaint must contain factual allegations sufficient to "raise a right of relief above the speculative level. Id. Rule 12(b)(6) motions are viewed with disfavor. Broam v. Bogan, 320 F.2d 1023, 1028 (9th Cir. 2003). When evaluating a 12(b)(6) motion, the Court must accept as true all factual allegations in the complaint and must draw all reasonable inferences from those allegations, construing the complaint in the light most favorable to the plaintiff. Id.; Guerrero v. Gates, 442 F.3d 697, 703 (9th Cir. 2006).

Federal Rule of Civil Procedure 12(b)(1) provides that a complaint must be dismissed for lack of subject matter jurisdiction. Subject matter jurisdiction is absent where there is not justiciable case or controversy as required by Article III, Section 2, of the U.S. Constitution.

Discussion

Defendants advance a variety of arguments in support of dismissal. First, Defendants argue that the SAC's allegations are insufficient to sustain a RICO claim as they fail to allege fraud with sufficient particularity, fail to allege a pattern of racketeering activity, fail to allege an enterprise, and fail to allege a RICO conspiracy. Second, Defendants contend that CPM does not have standing as it is not the medical provider authorized to seek payment for services provided to injured workers. Third, Defendants contend that CPM's action is barred by the Noerr-Pennington doctrine. Finally, Defendants suggest that even if CPM's claims are not to be dismissed, they should be stayed pursuant Colorado River doctrine.

A. Claim for Relief Under RICO

Defendants argue that the SAC's allegations of fraud are insufficient, incapable of sustaining a cause of action under the applicable RICO statutes, and unspecific as to the financial injury allegedly suffered by Plaintiff. In keeping with the parties' briefing on this sub-set of issues, the Court will deal with each argument separately:

1. Particularity

Civil RICO fraud claims are subject to Rule 9(b)'s requirement that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Edwards v. Marin Park, Inc., 356 F.3d 1058, 1065-66 (9th Cir. 2004) (citing Alan Neuman Prods., Inc. , 862 F.2d 1388, 1392 (9th Cir. 1989)). To satisfy Rule 9(b), a RICO complaint must "state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation." Id. (internal citations and quotation marks omitted). In a case with multiple defendants, the plaintiff must "identify the role of each defendant in the alleged fraudulent scheme." Swartz v. KPMG LLP, 476 F.3d 756, 765 (9th Cir. 2007). However, RICO claims not predicated upon fraud need not be pleaded with particularity. Lauter v. Anoufrieva, No. CV 07-6811, 2009 WL 2192362, * 8 (C.D. Cal. July 14, 2009).

The SAC's RICO claim is predicated on alleged violations of federal statutes prohibiting mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), and conspiracy to violate 18 U.S.C. § 1962(c). All three acts are fraud predicates that must be pleaded with particularity. Id. To this end, Plaintiff alleges that Defendants violated 18 U.S.C. § 1341 and 18 U.S.C. § 1343 by delivering fraudulent objection letters and offering fraudulent explanations to CPM "[s]tarting approximately one year ago." See SAC ¶ 29-30. Defendants allegedly continue to send baseless objection letters to CPM and continue to perpetuate their fraudulent representations as to their intent to resolve CPM's bills and liens in good faith. See id. The SAC avers that Defendants gave the fraudulent impression that their objections to CPM's bills were "business-as-usual" when, in fact, "all of the initial objections were part of a preplanned scheme to defraud CPM." Id. ¶ 29. The SAC further alleges that Defendants falsely claimed that they had investigated CPM's claims in good faith, when in fact they had not. Id. ¶ 31. Finally, the SAC alleges that Defendants' petitions for consolidation before the WCAB are based on misrepresentations of fact about CPM's licensing and its business dealings with its contracting physicians. Id. ¶ 36.

The SAC alleges Defendants' systematic denial of claims and the not infrequent submission of letters that offered pretextual objections and false assurances of Defendants' intent to resolve CPM's bills and liens in good faith. Id. ¶¶ 28-36. Defendants nonetheless claim that the SAC's factual allegations are not sufficiently particular as to the "time, place, and specific content of the false representations." See Mot. at 8-9 (citing Edwards v. Marin Park, Inc., 356 F.3d 1058 (9th Cir. 2004); Lancaster Cmty. Hosp. V. Antelope Valley Hosp. Dist., 940 F.2d 397 (9th Cir. 1991); Moore v. Kayport Package Express, Inc., 885 F.2d 531 (9th Cir. 1989)). As an initial matter, the Court recognizes that the SAC's allegations are narrow as to the precipitating conduct but expansive as to the manner in which Defendants effectuated their alleged fraud. In relevant part, CPM alleges that Defendants, in conjunction with other insurers and claims administrators, devised a "preplanned scheme to defraud CPM and destroy it and its physicians in-office medication dispensing program." SAC ¶ 29. The SAC's allegations as to the "lulling" conduct that accompanied this preplanned scheme do not, in fact, provide the specific time and date of such acts of fraud. However, Defendants neglect to acknowledge that the SAC alleges fraudulent conduct in objecting to over 800 bills and liens for medications, as well as the numerous overlapping correspondence concerning such bills and liens. See id. The SAC does, in sufficient detail, provide the content of the "lulling" communications, including, but not limited to, Defendants' alleged representation that their objections were "business-as-usual" and that Defendants intended to "resolv[e] the objections in good faith." Id. Moreover, the Court reads the SAC as alleging that the misrepresentations were fraudulent both individually and in the aggregate and CPM specifies that the alleged fraudulent acts occurred within one year of the filing of the SAC. Id.

In addition, Defendants' apparent reliance upon Edwards, Lancaster, and Moore is Edwards disposed of plaintiff's RICO claim in part because she neglected to corroborate the content of two allegedly fraudulent eviction notices she received. 356 F.3d at 1060. Moreover, plaintiff failed to "explain ...


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