Kentucky Employment Law Blog

RICO Claims Can Arise from Wage Theft Scheme, Sixth Circuit Rules

Employees at Vitale's Italian Restaurants kept two timecards, "one reflecting the first forty hours of work, and the other, reflecting overtime hours. The employees were paid via check for the first card and via cash for the second. The pay was at a straight time rate on the second card, although it reflected hours worked in excess of forty hours in a week." As a result, "employees were deprived of overtime pay, and Vitale's did not pay taxes on the cash payments." This was the context for the Sixth Circuit's decision in Torres v. Vitale, which held that the plaintiff-employees could pursue a civil RICO claim regarding the employer's failure to pay social security and other taxes for the work time for which cash was paid.

The Sixth Circuit, in an opinion authored by Judge John K. Bush and joined by Judges Raymond Kethledge and Julia Gibbons, reversed a dismissal order by Western District of Michigan Judge Paul Maloney. The employees had sought recovery of their unpaid overtime by way of suit under the Fair Labor Standards Act (FLSA). The Sixth Circuit ruled that FLSA precludes RICO claims "to the extent that the damages sought are for unpaid minimum or overtime wages." This preclusion, however, does not extend to damages distinct from unpaid wages or overtime:

when a RICO claim ... is based on a dispute between an employer and an employee alleges damages that are distinct from unpaid wages, even if the RICO-predicate act arises from conduct that also violates the FLSA, then the RICO remedies do not fall within the ambit of the FLSA's remedial scheme and are therefore not precluded.

Based on this analysis, the Sixth Circuit affirmed dismissal of RICO claims premised on the employers' "wage theft scheme." Dismissal of a RICO claim alleging a "workers compensation insurance scheme" by the employer "benefitted by falsely reporting payroll to its insurance company, thus lowering its premiums" was also affirmed because the insurance company, not the plaintiffs, was the victim of that scheme. However, a RICO claim arising from "a tax evasion scheme through which [plaintiff] and other similarly-situated Vitale's employees were deprived of the employer's half of social security payments, and were then subjected to tax liabilities" was reinstated and remanded to determine whether the plaintiff had "pleaded cognizable damages separate from lost wages so as to state a viable RICO claim." 

This case was well-lawyered for the plaintiff by Robert Alvarez of Wyoming, Michigan.

Robert L. Abell
www.RobertAbellLaw.com

Damages Recoverable under RICO for Fraudulent Deprivation of Workers Compensation Benefits

The Sixth Circuit's recent decision in Brown v. Cassens Transport, No. 10-2334 (April 6, 2012), recognized both that a claim for workers compensation benefits as well as the expectation of a fair process for a workers compensation claim were "property" under RICO. This is the second time that the Sixth Circuit has reversed a district court's dismissal of the case. It has been the subject of to prior post on the Kentucky Employment Law Blog: A Claim for Workers Compensation Benefits Is Property Under RICO, Sixth Circuit Rules and Injured Workers May Sue Under Racketeering Law Based On Scheme To Deny Them Workers Compensation Benefits.

The court also explained the determination of damages that could be recovered under RICO for the fraudulent deprivation of workers compensation benefits:

... a person is injured and "property" under RICO when the value of the statutory benefits that she receives is artificially decreased by reason of the fraud complained of. "The compensable injury necessarily is the harm caused by predicate acts sufficiently related to constitute a pattern." Calculating such differences is rarely an exact science, but the plaintiffs should be able to put on proof of how much compensation they would have received under the [Michigan workers compensation law's] rigid schedule of compensation but for the defendants' allegedly fraudulent medical testimony. The difference between that amount and the amount they received in settlement is neither speculative nor too difficult to surmise.

Robert L. Abell
www.RobertAbellLaw.com

A Claim for Workers Compensation Benefits Is Property Under RICO, Sixth Circuit Rules

A claim for workers compensation benefits is property under RICO, and injury to that property is properly sued for under the statute. This ruling by the Sixth Circuit in Brown v. Cassens Transport, No 10-2334 (April 6, 2012), is the latest development in a very interesting suit claiming that an employer and a doctor it recruited systematically diminished the value of injured workers claims for workers compensation by means of fraud. The Sixth Circuit's prior ruling, Brown v. Cassens Transport, No 05-2089 (Oct. 23, 2008), was previously discussed on the Kentucky Employment Law Blog: Injured Workers May Sue Under Racketeering Law Based On Scheme To Deny Them Workers Compensation Benefits.

The plaintiffs claim they were injured on the job for Cassens. Cassens self-insures its workers compensation and contracts with Crawford & Company for claims administration. The plaintiffs claim that Cassens and Crawford solicited "fraudulent medical reports" from a third defendant, Dr. Saul Margules and used them as a fraudulent means to diminish the value of the plaintiffs' claims for workers compensation benefits. Interestingly, all of the plaintiffs but one had settled their workers compensation claims with Cassens; the other was subject of an undisclosed adjudication in the Michigan workers compensation scheme.

Reversing a dismissal by the district court for the second time the Sixth Circuit held "that the plaintiffs have alleged an injury to property because they allege the devaluation of either their expectancy of or claim for workers' compensation benefits." First, the court ruled that "applicants for workers' compensation benefits have a property interest in those benefits at the time that their employer becomes aware of the injury." This holding rests on language in the Michigan workers compensation law stating that "employees injured in the course of employment 'shall be paid compensation,' which is calculated according to a rigid schedule." The court rejected the argument that a property interest in the benefits did not accrue until the injured worker had proved their entitlement noting that "Michigan state law does not require injured employees to make such an initial showing before they receive benefits."

Second, the court further held that even if the expectation of workers compensation benefits is not a property interest, "the plaintiffs in this case may proceed by alleging injury to property in that their claim to benefits under the workers compensation scheme was damaged by the defendants' actions." Citing a prior Michigan decision, Williams v. Hofley Mfg. Co., 424 N.W.2d 278 (Mich. 1988), the court observed "the plaintiffs' claim is not necessarily about particular payments themselves, but also about the defendants' deception ... that deprived the plaintiffs of the ability to assert their claim for benefits under the statute in a fair forum."

Finally, the Sixth Circuit rejected the argument that an unfavorable adjudication or settlement by plaintiffs precluded their loss of a property interest, explaining as follows:

... losing or settling a case due to fraudulent medical reports does not extinguish the plaintiffs' property interest in bringing a claim free of fraud. ... plaintiffs should be allowed to proceed on their RICO claim and put on evidence that they would have received a better result in the underlying state agency proceedings had the defendants not submitted the fraudulent medical reports. The fact that the plaintiffs lost or settled in tainted proceedings is not evidence that the plaintiffs would have lost or settled if the proceedings had been fair.

Robert L. Abell
www.RobertAbellLaw.com

RICO Claims Arise From Retaliation Against Corporate Whistleblower, Seventh Circuit Rules

A tax employee, who claimed that he was fired in retaliation for his whistleblowing reports of tax fraud, may pursue claims and remedies under the Racketeering and Corrupt Organizations Act (RICO), 18 U.S.C. secs. 1962(c), (d), the Seventh Circuit ruled recently in DeGuelle v. Camilli, No. 10-2172 (7th Cir., December 15, 2011).  The ruling reversed a district court's dismissal of the case.

Michael DeGuelle was employed in the tax department of S.C. Johnson & Son, Inc., a company with over 120,000 employees world-wide. He learned that the company had received $5 million plus in improper foreign tax credits due to an IRS auditing error. He reported the discovery to his supervisor, Wenzel, who told him to destroy records to keep the IRS from finding out the truth and to alter some relevant returns.  This was the first instance, according to the court's opinion, where records were altered or destroyed and falsified returns mailed to the IRS. The court's opinion recites a number of disturbing instances and transactions that followed in the next few years.

DeGuelle, according to the court's opinion, met with much grief for bringing to light the company's wrongdoing.  His supervisor, Wenzel, became highly antagonistic toward him and, at times, physically aggressive.  DeGuelle received a procedurally irregular and highly negative mid-year performance review that followed only a few months his receipt of an award for outstanding job performance, had the company's human resources department acknowledge that his negative review was in retaliation for his whistleblowing activities, and received an offer to have his attorney's fees paid in exchange for signing a release of claims and confidentiality agreement the same day that he said that he would file a Sarbanes-Oxley whistleblower complaint with the Department of Labor.  DeGuelle did file a complaint with the DOL and attached financial statements, tax documents and internal emails to his complaint.  Subsequently, he was offered one year salary in exchange for his resignation, release of all claims and signing of a confidentiality agreement.  Subsequently and after DeGuelle declined the resignation etc. offer, he was fired for wrongfully taking and disclosing company documents and for being untruthful during the company's investigation of his reports.  

DeGuelle filed suit following his termination and pleaded various claims including two under RICO, 18 U.S.C. 1962(c) and (d). The district court dismissed his claims on the grounds that the retaliation against DeGuelle was unrelated to his reports of alleged tax fraud by his employer. This remarkably erroneous ruling was met with strong criticism by the Seventh Circuit:

When an employer retaliates against an employee, there is always an underlying motivation. In this case, for example, the motivation was to retaliate against DeGuelle for disclosing the tax scheme. Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower. Although there may not be the same victims or results, in most cases retaliatory acts and the underlying scheme "are interrelated by distinguishing characteristics and are not isolated events."  

Accordingly, the Seventh Circuit reinstated DeGuelle's RICO claims and rejected decisions by other courts that have not permitted RICO claims in similar circumstances.  

Although the court's opinion is not clear exactly what company documents the employer claimed that DeGuelle wrongfully possessed and/or disclosed, if those documents are the ones that DeGuelle tendered with his whistleblower complaint to the Department of Labor, the company's reliance on that disclosure may raise some of the issues discussed in an earlier post on this blog, Can A Policy Violation Also Be Protected Activity?

Robert L. Abell
www.RobertAbellLaw.com 

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Injured Workers May Sue Under Racketeering Law Based On Scheme To Deny Them Workers Compensation Benefits

Injured workers may pursue civil claims for damages under the federal racketeering law known as RICO (Racketeer Influenced Corrupt Organizations) based on a scheme to wrongfully deny them workers compensation benefits the Sixth Circuit ruled today in Brown v. Cassens Transport Co., No. 05-2089. The plaintiffs, a group of six injured workers, claimed that their employer, Cassens Transport Company, the company that administered Cassens's workers compensation claims, Crawford & Company, and a doctor, Saul Margules, "employed mail and wire fraud in a scheme to deny them worker's compensation benefits."  More specifically, the injured workers alleged that "Cassens and Crawford deliberately selected and paid unqualified doctors, including Margules, to give fraudulent medical opinions that would support the denial of worker's compensation benefits, and that defendants ignored other medical evidence in denying them benefits."  A copy of the workers' complaint can be read here. 

The court, in reversing a district court decision dismissing the case, ruled that the workers had pleaded a pattern of racketeering activity based on the following commonalities of the defendants' acts: (1) the common purpose of reducing "Cassens's payment obligations towards worker's compensation benefits by fraudulently denying worker's compensation benefits to which the employees are lawfully entitled"; (2) the common result of denying "worker's compensation benefits to certain Cassen's employees who are entitled to such benefits under Michigan law"; (3) common participants including worker's compensation officials at Cassens and Crawford and "Margules, a doctor who the plaintiffs allege, with regard to some of the predicate acts, fraudulently recommended ineligibility of benefits at the request of Cassens and Crawford"; (4) common victims in the injured employees eligible for but wrongfully denied worker's compensation benefits; and (5) similar methods of commission, the fraudulent application of legal standards to wrongfully deny worker's compensation benefits to eligible employees.  The court further held that the defendants' predicate acts were continuous under both closed- or open-ended theories because they had gone on for a time span "well over three years" and were alleged to have been defendants' standard way of doing business: "fraudulently denying benefits to which the employees are entitled through the use of fraudulent communications by mail and wire." 

The court also addressed two other RICO issues.  First, that reliance by the injured workers on defendants' fraudulent misrepresentations was not an element of a civil RICO claim based on a Supreme Court ruling in Bridge v. Phoenix Bond & Indem. Co., No. 07-210 (June 9, 2008).  Second, the workers pleaded a compensable RICO injury because "the defendants' fraudulent acts were a 'substantial and foreseeable cause' of the injuried alleged by the plaintiffs: the deprivation of their workers' compensation benefits and expenses for attorney fees and medical care." 

This case outlines a path by which injured workers may obtain relief from schemes by employers, insurance companies and doctors aimed not at dealing with the true and real facts but at wrongfully denying benefits to truly and legitimately injured workers.  It should also raise a flag of caution for those insurance companies and doctors that reflexively oppose and deny the claims of truly and legitimately injured workers.

The Kentucky Justice Association published an article authored by Robert L. Abell on this case in its January/February 2009 issue of its publication, The Advocate, "Injured Workers May Pursue Civil RICO Claim Based on Enterprise To Deny Them Workers' Compensation Benefits.

A federal judge in Colorado recently certified a class action by injured Wal-Mart workers in that state regarding that company's handling of workers compensation claims, see Workers Comp Suit Against Wal-Mart Certified As Class Action.

Robert L. Abell
www.RobertAbellLaw.com