D&O Liability - District Court Dismisses All RICO Claims in Insurance Brokerage Antitrust Multi-District Litigation
On September 28, 2007, Chief Judge Garrett Brown of the United States District Court for the District of New Jersey issued an opinion (the “Opinion”) dismissing with prejudice all claims made under the Racketeering Influence
and Corrupt Organization Act (“RICO”) in both the Second Consolidated Amended Commercial Class Action Complaint (the “Commercial Complaint”) and the Second Consolidated Amended Employee Benefit Class Action
Complaint (the “Employee Benefit Complaint”) in the Insurance Brokerage Antitrust Multi-District Litigation (the “MDL”). The MDL involves class actions filed against various brokers and insurance companies
that have been divided into two groups – one involving commercial property insurance coverage and one involving employee benefits insurance plans. Because Judge Brown previously had dismissed all of the alleged antitrust violations
under Section 1 of the Sherman Act (see RDB D&O Alert dated September 4, 2007), the only claims remaining in the Commercial Complaint, following dismissal of the RICO claims, were based on state and common law. Judge
Brown declined to exercise supplemental jurisdiction over those claims and, therefore, dismissed with prejudice the Commercial Complaint in its entirety. Because the Employee Benefit Complaint contains claims under ERISA as well
as alleged violations of state and common law, the employee benefits litigation remains pending as to those claims.
Although the Opinion is 73 pages long, its rationale is quite straightforward. Judge Brown held that neither of plaintiffs’ two alternative types of alleged enterprises satisfies the requirements for an “enterprise”
for purposes of RICO. Relying on United States v. Turkette, 452 U.S. 576 (1981), Judge Brown identified the following three characteristics of an enterprise: (1) an ascertainable structure; (2) continuity; and (3) distinctiveness
from the alleged underlying pattern of racketeering activity.
The first type of enterprise that plaintiffs alleged is the “broker-centered” or “hub and spokes” enterprise, in which the broker constitutes the apex, which is surrounded by several insurance companies.
(Plaintiffs alleged six broker-centered “enterprises” in the commercial litigation and five such “enterprises” in the employee benefits litigation). In analyzing the “ascertainable structure”
characteristic of an “enterprise,” and with particular respect to bid-rigging allegations, Judge Brown acknowledged that there may be a series of independent transactions, each of which involves broker-defendant “X”
and two insurer-defendants – “Y” and “Z,” where Y provides the winning bid (the “A bid”) and Z provides an accommodating bid (the “B bid”). Neither the broker X nor insurance
company Z intends that the B bid will be accepted; the broker solicits it, however, in order to make the A bid appear more favorable to its client. Judge Brown explained that such an arrangement eliminates the unifying “rim”
over the structure, thus transforming each transaction into a triangulated “blade” of a “pinwheel” and preventing any inference of a “hub and spokes” enterprise. Judge Brown expressly rejected
plaintiffs’ argument that an ascertainable structure exists merely by virtue of the fact that each defendant knows the identities of the other defendants, noting that “[i]t would be indeed anomalous if Defendants did
not know each other’s identity, granted the fact that Defendants were the largest insurance carriers and brokers in the nation and had to deal – or compete – with each other on a regular basis.” Judge
Brown also concluded that plaintiffs had failed to allege sufficiently the “continuity” and “distinctiveness” criteria for a RICO enterprise.
The second type of enterprise that plaintiffs alleged (in the Commercial Complaint only) – and Judge Brown rejected – is a “global” one, centered around the Council of Insurance Agents and Brokers (“CIAB”).
In connection with this type of alleged enterprise, Judge Brown remarked, the notion “that Defendants, being the most notable insurance brokerage houses and insurance carriers in the nation and, jointly, constituting the bulk
of [the] national insurance industry, had to be unable to communicate with each other outside CIAB if they wanted to orchestrate the alleged numerous wrongful acts, appears to be mere conjecture unsupported by any facts alleged by
Plaintiffs.”
Even assuming that plaintiffs could allege an enterprise, Judge Brown held that the RICO claims would fail because plaintiffs did not allege that defendants participated in the operation or management of any such enterprise. Rather,
Judge Brown found, each entity acted solely for the purpose of furthering its own goals and merely utilized the other entities on an ad hoc basis.
Having concluded that plaintiffs had not alleged a violation of 18 U.S.C. Section 1962(c), the court “dismissed without evaluation” the claim that defendants conspired to violate RICO under 18 U.S.C. Section 1962(d).
As Judge Brown explained, “in the event all substantive RICO claims in the action are dismissed, a plaintiff cannot bring a [Section] 1962(d) claim based on a non-RICO claim.”
Finally, Judge Brown denied plaintiffs any further leave to amend their complaints. In so doing, he noted (1) that plaintiffs already had been given three opportunities to amend; (2) that, notwithstanding his having given plaintiffs
“a detailed roadmap” for curing the deficiencies in their claims, plaintiffs have been unable to do so; and (3) that, even after substantial discovery and three previous rounds of extremely voluminous pleadings, plaintiffs
had failed to meet their pleading burden. The only potential relief that Judge Brown afforded plaintiffs was to allow them 30 days in which to reopen the commercial action to the extent they could show, with respect to the state
and common law claims, complete diversity, an exception to the requirement of complete diversity or federal question jurisdiction.