900 F.2d 882 (6th Cir. 1990), 89-3442, Dana Corp. v. Blue Cross & Blue Shield Mut. of Northern Ohio

Docket Nº:89-3442, 89-3474.
Citation:900 F.2d 882
Party Name:RICO Bus.Disp.Guide 7439 DANA CORPORATION, Plaintiff-Appellant/Cross-Appellee, v. BLUE CROSS & BLUE SHIELD MUTUAL OF NORTHERN OHIO; Blue Cross of Northwest Ohio; Blue Cross & Blue Shield of Ohio; Blue Cross of Michigan; Blue Cross of Indiana, Defendants-Appellees/Cross-Appellants.
Case Date:March 28, 1990
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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900 F.2d 882 (6th Cir. 1990)

RICO Bus.Disp.Guide 7439

DANA CORPORATION, Plaintiff-Appellant/Cross-Appellee,



Cross of Northwest Ohio; Blue Cross & Blue Shield of Ohio;

Blue Cross of Michigan; Blue Cross of Indiana,


Nos. 89-3442, 89-3474.

United States Court of Appeals, Sixth Circuit

March 28, 1990

Argued Feb. 8, 1990.

Rehearing Denied April 26, 1990.

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Joseph P. Lavelle, John Briggs, Jerrold J. Ganzfried (argued), Elizabeth E. Kline, Howrey & Simon, Washington, D.C., Cary Rodman Cooper, Jacqueline M. Boney, Cooper, Straub, Walinski & Cramer, Toledo, Ohio, for plaintiff-appellant, cross-appellee.

Kenneth F. Seminatore, Allen J. Marabito (argued), Douglas A. Andrews, Climaco, Climaco, Seminatore, Lefkowitz & Garofoli, Cleveland, Ohio, David M. Schnorf, Troy L. Moore, Schnorf & Schnorf, Charles P. Baither, III (argued), John M. Curphey, Robison, Curphey & O'Connell, Thomas Manahan, Manahan, Pietrykowski, Bamman & Delaney, Toledo, Ohio, for defendants-appellees, cross-appellants.

Before JONES and MILBURN, Circuit Judges, and BELL, District Judge. [*]

NATHANIEL R. JONES, Circuit Judge.

Plaintiff-appellant/cross-appellee, Dana Corporation, appeals and defendants-appellees/cross-appellants,

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lue Cross & Blue Shield of Ohio (BCBSO--the successor by merger to Blue Cross & Blue Shield Mutual of Northern Ohio and to Blue Cross of Northwest Ohio), Blue Cross & Blue Shield of Michigan (BCM), and Blue Cross & Blue Shield of Indiana (BCI) (collectively referred to as "Blue Cross"), 1 cross-appeal the bench judgment granting Blue Cross's motion to dismiss in this civil RICO action. For the following reasons, we affirm in part and reverse in part.


Dana provides health care benefits, including hospitalization, to its employees and their dependents. In 1971, in an effort to reduce the cost of providing such benefits, Dana entered into an Administrative Services Only (ASO) Agreement with BCBSO, whereby BCBSO would administer Dana's benefits plan on a cost-plus basis. In addition, BCBSO provided services to Dana's beneficiaries located outside of Ohio through Participating Plans. BCM has entered into such a Plan. Blue Cross administered benefits for Dana from September 1971 through February 1988.

Under Blue Cross's contracts with hospitals, Blue Cross pays the claim for each of its customers at 97% of the hospital charges and then bills the customer that same amount. In addition to giving Blue Cross a discount on its payments, the hospital contract gives Blue Cross the right to conduct yearly cost containment audits. If the hospital exceeds the cost limitations set forth in the contract, it pays Blue Cross a settlement or refund. The ASO agreements with customers such as Dana do not explicitly incorporate the hospital contracts. Under Dana's contract, Blue Cross is to bill Dana at the "actual cost of incurred claims" plus a service and retention fee. The contract does require Blue Cross to send certain bills and financial papers to Dana. However, the contract is silent with respect to the year-end hospital settlements. Blue Cross never adjusted their charges to Dana to reflect these hospital settlements. Dana claims that it was unaware of the settlements until 1986, and that during the seventeen-year period when the contracts were in effect, Blue Cross received more than $4.5 million in the form of rebates from the hospitals. Dana alleges that Blue Cross represented at meetings that Dana was receiving the benefit of Blue Cross's cost reductions resulting from any hospital rebates. Some correspondence referred to "net payments," "discounts," and "contractual savings."

Dana filed a complaint in the United States District Court for the Northern District of Ohio, Judge John W. Potter presiding. This complaint, as amended, charged Blue Cross with violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1962 (1988), and a violation of a number of state laws. The RICO claim was predicated upon violations of the mail fraud statute, 18 U.S.C. Sec. 1341. Dana alleged that Blue Cross made false and misleading statements intentionally and knowingly "as a scheme to obtain money from Dana by means of false or fraudulent pretenses, representations, or promises." J.App. at 26. Blue Cross responded by moving for dismissal of the complaint.

The district court denied most of Blue Cross's reasons for dismissal--most notably for this appeal, the motion for disqualification of counsel and the motion for dismissal due to lack of subject matter jurisdiction. However, in a later order the court dismissed the complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6) on two grounds: (1) insufficient pleadings to show a scheme to defraud under the mail fraud statute; and (2) no pattern of racketeering activity under RICO. After the dismissal, Dana asked for leave to amend the complaint and moved to amend or alter the judgment pursuant to Fed.R.Civ.P. 59(e). The Proposed Second Amended Complaint is different from the first complaint in several respects: (1) it alleged specific instances of intentional false representations

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made by Blue Cross to Dana; (2) it alleged that Blue Cross similarly defrauded a number of other cost-plus clients; (3) it alleged that Blue Cross's conduct violated 18 U.S.C. Sec. 664 (conversion of funds related to an employee welfare benefit plan), an additional predicate for RICO; and (4) it alleged a RICO conspiracy between BCBSO and BCM, another predicate for RICO. The district court denied the motion based upon the futility of amendment: "[the] proposed second amended complaint fails to state a cause of action under RICO." J.App. at 356a.


Whether the district court correctly dismissed the claims pursuant to Fed.R.Civ.P. 12(b)(6) is a question of law subject to de novo review. Dugan v. Brooks, 818 F.2d 513, 516 (6th Cir.1987). This court must construe the complaint in the light most favorable to Dana, accept all of Dana's factual allegations as true, and determine whether Dana undoubtedly can prove no set of facts in support of its claims that would entitle it to relief. Id.


In order to show a violation of RICO, Dana must sufficiently plead a predicate act. In its first amended complaint, Dana alleged that Blue Cross committed mail fraud. Two elements are necessary to prove mail fraud: "a scheme or artifice to defraud and a mailing for the purpose of executing the scheme." Bender v. Southland Corp., 749 F.2d 1205, 1215-16 (6th Cir.1984).

A scheme to defraud must involve "[i]ntentional fraud, consisting in deception intentionally practiced to induce another to part with property or to surrender some legal right, and which accomplishes the designed end." Id. at 1216 (quoting Epstein v. United States, 174 F.2d 754, 765 (6th Cir.1949)) (emphasis in original). Though noting that the allegations were pled with sufficient particularity to put Blue Cross on notice as to the fraud claim (Fed.R.Civ.P. 9(b)), the district court decided that the pleadings were not sufficient (pursuant to Fed.R.Civ.P. 12(b)(6)) to show mail fraud because they were based upon a breach of contract claim:

If plaintiff should fail to establish a contractual right to the refunds and rebates, defendants could have no liability under RICO. The complaint states a claim for breach of contract which cannot be converted to a RICO action merely by alleging fraud. The complaint fails to plead facts from which a scheme or artifice to defraud could ultimately be determined to exist.

J.App. at 352. The district court relied heavily on Blount Financial Services, Inc. v. Walter E. Heller & Co., 819 F.2d 151, 152 (6th Cir.1987), where the contract provided that Heller would charge an interest rate on a loan equal to the prime rate charged by a large commercial bank, Continental Illinois. The plaintiff alleged that Heller charged an interest rate higher than the actual prime rate at Continental. The Blount court held that:

The fact that the parties take different positions under the contract as to the appropriate prime rate, or the fact that the defendant charged too high a 'prime rate' and thereby concealed or refused to disclose what the plaintiff considers the true prime rate called for under the contract, does not give rise to a valid claim for fraud.


We hold that Dana made sufficient allegations of intentional fraud by Blue Cross to withstand a Fed.R.Civ.P. 12(b)(6) motion to dismiss, for the focus is upon the pleadings, not any proof or evidence. Blount does not stand for a blanket prohibition of RICO claims related to contract disputes. Rather, the reason for dismissal in Blount was that the plaintiff failed to make sufficient allegations of "misrepresentations or omissions which were 'reasonably calculated to deceive persons of ordinary prudence and comprehension.' " 819 F.2d at 153 (citation omitted). In contrast, Dana has made such allegations of misrepresentations and omissions by Blue Cross. Moreover, in Blount the fact that was allegedly misrepresented was a single figure readily

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ascertainable from a third party; in the instant case, Dana had no way to find out about rebates known only to Blue Cross. We also note that Dana's allegations are partially based upon "information and belief." However, in the proposed second amended complaint, Dana made specific allegations of fraud, including the letters alleged to contain misrepresentations. Issues as to Dana's proof of its allegations can be decided at a later stage; Dana's present allegations of intent are sufficient to state a claim. See In re Long Distance Telecommunications Litigation, 831 F.2d 627, 634...

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