In a comprehensive and thoughtful opinion, a federal district court has dismissed, with prejudice, a RICO action contending that a self-insured, its third party administrator and a physician schemed to fraudulently deny workers’ compensation benefits allegedly owed to a number of claimants under the Michigan Workers’ Disability Compensation Act (the “WDCA”), Mich. Comp. Laws § 418.101 et. seq. Brown v. Cassens Transport Co., 2010 U.S. Dist. LEXIS 101660 (E.D. Mich. September 27, 2010). Among other grounds, the court found that the WDCA creates an exclusive administrative scheme for the recovery of workers’ compensation benefits, and the administrative scheme cannot be evaded by allegations of fraud or bad faith in the claim adjustment process. This opinion comes after two Sixth Circuit Court of Appeals opinions addressing an earlier dismissal of the case, but creates some tension with the latter of the appellate opinions.

The Plaintiffs’ Claims

The six plaintiffs – all workers’ compensation claimants – alleged that the defendants “deliberately selected unqualified doctors . . . to give erroneous medical opinions that would support fraudulent denials of workers’ compensation benefits.” Plaintiffs sought to recover the benefits that allegedly were improperly withheld, plus interest, to be trebled under RICO. Plaintiffs contended that the employer and the third party administrator constituted a RICO “enterprise” and that the benefits were denied through various acts of mail and wire fraud, including the “notices of dispute” of the claims sent by the third party administrator and opinion letters prepared by physicians retained to examine the claimants.

The Court’s Exclusive Jurisdiction Analysis

The court found that “the gravamen of Plaintiffs’ Complaint is that Defendants failed to abide by their statutory duty under the WDCA to provide benefits for claimed work place injuries.” Consequently, the central question was whether a workers’ compensation claimant can, by making allegations of fraud, avoid the WDCA administrative procedures by pursuing a RICO claim in federal court. The court held that he cannot.

The court focused on the essential purposes of the WDCA, finding the exclusive remedy provisions to be a key element of the efficient administration of the Act. The court examined the procedures established by the Michigan legislature to make administrative factual findings and claim determinations, as well as review of those decisions, including the availability of judicial review. To allow this system to be evaded through allegations of fraud “would subvert the clear intent of the legislature to vest these factual determinations in the workers compensation boards created to decide them and would create an intolerable potential for inconsistent results.” This view is supported by Michigan decisions that “routinely” reject attempts to evade the administrative scheme through allegations that workers’ compensation benefits were denied by tortious conduct. Further support is found in several analogous cases, outside the workers’ compensation context, holding RICO claims foreclosed by the existence of a comprehensive statutory scheme. Given the extensive administrative scheme specifically enacted to address the provision of workers’ compensation benefits, the possibility that allowing workers’ compensation claims to be decided outside that framework could frustrate the process envisioned by the Michigan legislature and support in analogous case law, the court concluded that a workers’ compensation clamant cannot use RICO as an “end run” around the WDCA.

The court distinguished its holding from a line of Michigan cases allowing claims for intentional infliction of emotional distress from the denial of workers’ compensation benefits to proceed, finding that those cases to present a narrow exception to the exclusive jurisdiction of the WDCA. Jurisdiction outside the WDCA scheme is reserved for “extreme” cases where the damages sought compensate for emotional distress caused by the wrongful denial of benefits, and not the lost benefits themselves. According to the court, neither of these elements was alleged by plaintiffs in the Brown case.

The Court’s RICO Analysis

Alternatively, the court found that the plaintiffs lacked standing under RICO. RICO does not permit recovery for personal injuries, and plaintiff’s damages were caused by personal injuries allegedly sustained in the workplace. Relying on several cases, the court found that this rule reaches broadly and extends to pecuniary losses that flow directly from a personal injury. In addition, the court held that the plaintiffs’ damages claims, all of which were based on the notion that they were entitled to workers’ compensation benefits, were too speculative to be recovered under RICO. Plaintiffs would have to establish that they were legally entitled to workers’ compensation benefits. The court characterized this proposition as “pure speculation.”

The Court’s Prior Dismissal and Resulting Appeals

The district court’s recent opinion is likely not the last word in the matter. The district court had previously dismissed the case in 2005, finding (among other things) that the claimants had failed to properly allege detrimental reliance on the alleged fraudulent acts (which the court viewed as essential to establishing standing to bring a RICO), had failed to allege a RICO “pattern of racketeering activity,” and that the WDCA “reverse preempted” the plaintiffs’ claims under the terms of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b). The Sixth Circuit Court of Appeals, over a vigorous partial dissent, affirmed the dismissal for failure to plead reliance, not addressing the alternative grounds. The Supreme Court accepted certiorari, vacated the Sixth Circuit’s judgment and directed the Sixth Circuit to reconsider in light of a new Supreme Court opinion (Bridge v. Phoenix Bond & Indemnity, 553 U.S. 639 (2008)), holding that reliance is not a necessary element of a civil RICO claim.

On remand, in an opinion drafted by the appellate judge who had dissented from the 2007 Sixth Circuit opinion, the Sixth Circuit reversed the District Court’s 2005 dismissal. In that opinion, the appellate court found that plaintiffs sufficiently pled a RICO pattern of racketeering activity, that reliance on the supposed fraud is not an element of a RICO claim and that the WDCA did not “reverse preempt” RICO under the McCarran-Ferguson Act.

The Sixth Circuit’s “Reverse Preemption” Analysis

In the course of the McCarran-Ferguson analysis, the Sixth Circuit examined, as required by the McCarran-Ferguson Act, whether the application of RICO would “invalidate, impair or supersede” the WDCA. The court focused on the “impair” element, concluding that application of RICO would not “directly conflict” with the WDCA, “frustrate any declared state policy,” or “interfere” with Michigan’s administrative regime, given that both the WDCA and RICO punish the unlawful denial of workers’ compensation benefits. The Sixth Circuit specifically stated that “[t]he district court’s assertion that a RICO suit would impair the WDCA’s policy of limited liability for employers relies on the faulty premise that the state has a policy of limited liability for employers even when they fraudulently deny workers’ compensation benefits. No authority supports this proposition.”

The Apparent Inconsistency Between the Sixth Circuit’s McCarran Analysis and the District Court’s Recent Exclusive Jurisdiction Ruling

There is some tension between the district court’s recent ruling and the Sixth Circuit’s 2009 opinion. The district court has held that the WDCA creates an exclusive administrative scheme that cannot be supplanted by allegations of fraud under RICO because such an approach would interfere with the WDCA administrative process. Conversely, the Sixth Circuit found that reverse preemption is inapplicable because application of RICO law would not conflict with, frustrate or impair Michigan’s administrative regime under the WDCA. The district court recognized the tension, stating that the Sixth Circuit’s ruling on this point is dicta, fails to consider the Michigan opinions finding the WDCA to be an exclusive administrative remedy even in the face of allegations of tortious misconduct and fails to consider cases outside the workers’ compensation context rejecting RICO claims where the conduct alleged falls within a comprehensive administrative scheme. Nevertheless, the apparent inconsistency between the opinions could create a significant issue on any appeal of the recent dismissal.

We will continue to monitor this important case and its implications for the exclusive remedy provisions of state workers’ compensation laws.