Shasta Linen Supply, Inc. v. Applied Underwriters, Inc.
| Decision Date | 17 October 2017 |
| Docket Number | CIV. NO. 2:16-00158 WBS AC,CIV. NO. 2:16-01211 WBS AC |
| Court | U.S. District Court — Eastern District of California |
| Parties | SHASTA LINEN SUPPLY, INC., on behalf of themselves and all others similarly situated, Plaintiffs, v. APPLIED UNDERWRITERS, INC.; APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC.; CALIFORNIA INSURANCE COMPANY; and APPLIED RISK SERVICES, INC., Defendants. PET FOOD EXPRESS LTD., and ALPHA POLISHING, INC. d/b/a GENERAL PLATING CO., on behalf of themselves and all others similarly situated, Plaintiffs, v. APPLIED UNDERWRITERS, INC.; APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC.; CALIFORNIA INSURANCE COMPANY; and APPLIED RISK SERVICES, INC., Defendants. |
Plaintiffs Shasta Linen Supply, ("Shasta"); Pet Food Express, Ltd. ("Pet Food"); and Alpha Polishing1 (collectively "plaintiffs") initiated these actions2 against Applied Underwriters Inc. ("AU"); Applied Underwriters Captive Risk Assurance Company, Inc. ("AUCRA"); Applied Risk Services, Inc. ("ARS"); and California Insurance Company, Inc. ("CIC") (collectively "defendants")3 alleging that defendants fraudulently marketed and sold a workers' compensation insurance program to them and other employers in violation of California and federal law. Before the court is defendants' Motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). (Defs.' Mot. to Dismiss (Docket No. 62).)
California requires that all employers purchase workers' compensation insurance coverage for employees thatsuffer injury or death due to an occupational accident. (Shasta Second Amended Compl. ("SSAC") ¶ 3 (Shasta Docket No. 56); Pet Food Amended Compl. ("PFAC") ¶ 3 (Pet Food Docket No. 54).) The California Insurance Code also requires that all workers' compensation insurance policy forms, rates, and rating plans be filed for approval with the California Workers Compensation Insurance Rating Bureau ("the Bureau") and approved by the California Department of Insurance. (SSAC ¶ 22; PFAC ¶ 23; see also California Insurance Code §§ 11658, 11735.)
Defendants allegedly marketed and sold a workers' compensation insurance program under the names EquityComp and SolutionOne (collectively "the program") to plaintiffs and other California employers. (SSAC ¶ 29; PFAC ¶ 30.) Defendants filed this policy with the Bureau and got approval from the Department of Insurance. (SSAC ¶ 30; PFAC ¶ 31.) After the program's policies took effect for the plaintiffs, defendants allegedly required plaintiffs to sign a Reinsurance Participation Agreement ("RPA"). (SSAC ¶¶ 28, 43; PFAC ¶¶ 29, 44.)
Plaintiffs allege that the RPA modified the terms of the existing insurance policies, including the rates, causing plaintiffs to incur significantly higher costs for the insurance program than defendants had marketed. (SSAC ¶ 70; PFAC ¶ 74.) Plaintiffs claim that defendants used the RPA to charge excessive rates and additional fees to plaintiffs and other program participants. Plaintiffs also allege that defendants deliberately misrepresented the costs of the program in their marketing materials to induce plaintiffs to rely on those costs and enter the program. (SSAC ¶¶ 2, 5, 7; PFAC ¶¶ 2, 5, 7.)
Additionally, plaintiffs claim that the RPA's rates are void because, among other things, defendants did not file the rates with the Commissioner of the California Department of Insurance ("the Commissioner") as required by California Insurance Code § 11735.4 (SSAC ¶ 38; PFAC ¶ 39.) Defendants concede the RPA was not filed or approved by the Department of Insurance prior to its use. (SSAC ¶¶ 28, 34; PFAC ¶¶ 29, 35.)
On August 29, 2014, Shasta filed an administrative appeal with the California Department of Insurance, challenging, among other things, the legality of the RPA. Shasta argued that the RPA was void as a matter of law because defendants did not file the RPA with the Commissioner thirty days prior to when it was to take effect, as required by § 11735. (Id. at 2.)
On January 26, 2016, Shasta brought an action in this court alleging fraud and unfair competition against defendants for their marketing and sale of the insurance program and RPA. With respect to the RPA, Shasta again argued that the RPA was void because defendants did not file it with the Commissioner prior to it taking effect, thereby violating § 11735. (Id. ¶ 3.) Shasta argued that billing plaintiff under the void RPA constituted fraud and was an unfair business practice. (Id. ¶ 4.) Defendants moved to dismiss the complaint to the extent it relied on § 11735, arguing that a rate is legal unless and until the Commissioner holds a hearing and disapproves the rate, pursuant to § 11737. (Defs.'June 13, 2016 Mot. to Dismiss at 6 (Shasta Docket No. 17).)
On June 20, 2016, the court granted defendants' motion to dismiss to the extent Shasta relied on § 11735, stating that "a rate that has not been filed as required by § 11735 is not an unlawful rate unless and until the Commissioner conducts a hearing and disapproves the rate." (June 20, 2016 Order ("June 20 Order") at 4 (Shasta Docket No. 30).) Because Shasta had not alleged that the Commissioner had held a hearing and disapproved the RPA, the court concluded that plaintiff did not plausibly allege that the RPA was void. (Id.)
On the same day as the court's order of dismissal, the Commissioner issued a Decision and Order in Shasta's administrative case, holding that the RPA must be filed and approved by the Commissioner pursuant to § 11735 before use. Because defendants did not file the RPA before it took effect, the Commissioner stated, the "RPA is void as a matter of law." (Id.) Based on the Commissioner's Order, Shasta filed a motion for reconsideration of the June 20 Order granting the motion to dismiss. (Shasta Docket No. 33.) The court denied Shasta's motion for reconsideration, holding that the Commissioner's Order did not control this court and that the court's previous June 20 Order was not clearly erroneous.
Pet Food filed a separate class action against defendants in state court asserting claims for unfair competition, rescission, declaratory relief, and fraud. The action was removed to federal court on March 29, 2016. (Pet FoodDocket No. 1.) Defendants, as they had in the Shasta case, moved to dismiss the Pet Food complaint to the extent it sought to invalidate the RPA on the ground that it is an unfiled rate or rating plan in violation of § 11735. (Pet Food Docket No. 15.) The court denied defendants' motion to dismiss as moot because Pet Foot's complaint did not rely on § 11735. (Order Re: Mot. to Dismiss (Pet Food Docket No. 35).)
On June 21, 2017, the plaintiffs in both actions filed amended complaints that are nearly identical. The complaints assert claims under the federal Racketeer Influence Corrupt Organizations ("RICO") statue, 18 U.S.C. § 1962; under the California Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200; and for unjust enrichment.
On a Rule 12(b)(6) motion, the inquiry before the court is whether, accepting the allegations in the complaint as true and drawing all reasonable inferences in the plaintiff's favor, the plaintiff has stated a claim to relief that is plausible on its face. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. Under this standard, "a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007).
A. Racketeer Influenced and Corrupt Organizations Claim
To state a RICO claim, plaintiffs must allege (1) the conduct of (2) an enterprise that affects interstate commerce (3) through a pattern (4) of racketeering activity or collection of unlawful debt. 18 U.S.C. § 1962(c). In addition, the conduct must be the proximate cause of harm to the victim. Holmes v. Sec. Inv'r Prot. Corp., 503 U.S. 258, 268 (1992). Defendants' motion only challenges whether the complaints (1) sufficiently plead an enterprise and (2) allege a specific intent to defraud as required to plead mail and wire fraud as "racketeering activity."
Pursuant to RICO, it is "unlawful for any person employed by or associated with any enterprise engaged in. . . interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c). An "enterprise" is defined as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). It may include "a group of persons associated together for a common purpose of engaging in a course of conduct." United States v. Turkette, 452 U.S. 576, 583 (1981).
To establish liability under § 1962(c), the plaintiff "must allege and prove the existence of two distinct entities: (1) a 'person'; and (2) an 'enterprise' that is not simply thesame 'person' referred to by a different name." Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). Plaintiffs define their enterprise, known as the AU RPA Enterprise, as an "association-in-fact." Defendants do not challenge whether the AU RPA Enterprise, as pled, satisfies the elements of an associated-in-fact enterprise, but instead question whether plaintiffs have been able to...
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