UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL. Case No. SACV DOC (ANx) Date: July 29, 2009

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1 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 1 of 14 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No. SACV DOC (ANx) Date: July 29, 2009 Title: CALIFORNIA PHARMACY MANAGEMENT, LLC V. REDWOOD AND CASUALTY INSURANCE COMPANY, ET AL. DOCKET ENTRY [I hereby certify that this document was served by first class mail or Government messenger service, postage prepaid, to all counsel (or parties) at their respective most recent address of record in this action on this date.] Date: Deputy Clerk: PRESENT: THE HONORABLE DAVID O. CARTER, JUDGE Kristee Hopkins Courtroom Clerk Not Present Court Reporter ATTORNEYS PRESENT FOR PLAINTIFFS: ATTORNEYS PRESENT FOR DEFENDANTS: NONE PRESENT NONE PRESENT PROCEEDING (IN CHAMBERS): ORDER GRANTING DEFENDANTS MOTION TO DISMISS Before the Court is Defendants Redwood Fire and Casualty Insurance Company; Cypress Insurance Company; Oak River Insurance Company; American All Risk Insurance Services, Inc.; American Commercial Claims Administrators, Inc.; Applied Risk Services, Inc.; Applied Underwriters, Inc.; California Insurance Company; and National Liability and Fire Insurance Company (collectively, Defendants ) Motion to Dismiss the Second Amended Complaint (the Motion ). The Court finds the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; Local R After considering the moving, opposing and replying papers, and for the reasons stated below, the Court hereby GRANTS the Motion. I. Background a. Procedural History between the Parties On February 5, 2009, Plaintiff California Pharmacy Management, LLC ( CPM ) filed its original complaint alleging a Racketeer Influenced and Corrupt Organizations Act ( RICO ) cause of action against Defendants based on mail and wire fraud. On March 12, 2009, Defendants filed a CIVIL - GEN Page 1 of 14

2 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 2 of 14 motion to dismiss. In response, CPM filed its First Amended Complaint on March 23, On April 1, 2009, the parties entered into a stipulation to allow CPM to file a Second Amended Complaint ( SAC ). Despite the filing of the SAC and an informal meeting between the parties, Defendants contend that the SAC does not cure the defects identified in the original pleadings and ask this Court to dismiss the action with prejudice. b. Factual Allegations By its SAC, CPM avers that is has brought a RICO suit against Defendants, workers compensation insurers and claims administrators, for undertaking a scheme to defraud, through a systemic campaign of sham litigation, fraudulent objections and litigation misconduct carried out by mail fraud and wire fraud, to avoid payment of valid bills and liens for tens of thousands of needed medications prescribed and dispensed to injured workers in over 4000 workers compensation cases in the California Workers Compensation Appeals Board ( WCAB ). SAC, 1. CPM allegedly contracts with 164 physicians to aid the physicians with their in-office medication dispensing programs for injured workers in workers compensation cases. SAC, 2. Pursuant to its contracts, CPM has the responsibility to bill and collect for medications dispensed to injured workers. Id. CPM submits bills to insurers and claims administrators such as Defendants. If the bills go unpaid, CPM files a lien in the WCAB. Id. CPM avers that Defendants strongly dislike physician in-office medication programs, even though such programs are lawful. SAC, 3. CPM contends that a few months prior to the filing of its complaint, Defendants began stonewalling CPM by refusing to pay or negotiate or even discuss CPM bills and liens with CPM collectors. Id. CPM alleges that in response to submitted bills, Defendants began sending frivolous boilerplate objection letters that are objectively baseless and do not even state the true grounds for the objections. Id. Alternatively, Defendants allegedly sent objection letters that failed to state the reasons for the payment denials. CPM avers that Defendants have completely stopped paying on CPM liens in over 4000 cases currently pending before the WCAB, implicating an aggregate amount of over seven million dollars. Id. In addition, CPM contends that Defendants and other insurance carriers are attempting to consolidate and stay all liens in the WCAB in order to further delay the resolution of the WCAB cases. SAC, 4. CPM avers that the purpose behind Defendants conduct is to delay and avoid payments of CPM bills and liens, and to destroy CPM and the in-office medication dispensing programs of its contracting physicians, and the contractual relationships between CPM and its contracting physicians. Id. CPM contends that such activity violates RICO, 18 U.S.C. 1961, et seq. SAC, 5. Specifically, CPM contends that Defendants have engaged in and are continuing to engage in mail fraud and wire fraud in violation of 18 U.S.C. 1962(c) and have engaged in a conspiracy to commit such acts in violation of 18 U.S.C. 1962(d). II. Legal Standard Under Federal Rule of Civil Procedure 12(b)(6), a complaint must be dismissed when a CIVIL - GEN Page 2 of 14

3 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 3 of 14 plaintiff s allegations fail to state a claim upon which relief can be granted. Once it has adequately stated a claim, a plaintiff may support the allegations in its complaint with any set of facts consistent with those allegations. Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, 1969 (2007). Dismissal for failure to state a claim does not require the appearance, beyond a doubt, that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. Bell Atlantic, 127 S. Ct. at 1968 (abrogating Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99 (1957)). However, if the complaint lacks a cognizable legal theory or sufficient facts alleged under a cognizable legal theory, it must be dismissed. Balistreri v. Pacifica Police Dep t, 901 F.2d 696, 699 (9th Cir. 1990). Under a 12(b)(6) motion analysis, the Court must accept as true all factual allegations in the complaint and must draw all reasonable inferences from those allegations, construing the complaint in the light most favorable to the plaintiff. Guerrero v. Gates, 442 F.3d 697, 703 (9th Cir. 2006); Balistreri, 901 F.2d at 699. Dismissal without leave to amend is appropriate only when the Court is satisfied that the deficiencies in the complaint could not possibly be cured by amendment. Jackson v. Carey, 353 F.3d 750, 758 (9th Cir. 2003) (citing Chang v. Chen, 80 F.3d 1293, 1296 (9th Cir. 1996)); Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). 1 III. Discussion Defendants put forth a number of arguments regarding why this Court should dismiss the SAC. First, Defendants argue that the Noerr-Pennington doctrine applies to bar CPM s entire complaint because the SAC is allegedly based on the lawful exercise of the Defendants rights to contest bills and liens submitted by CPM in claims filed by injured workers before the WCAB. Defendants also assert that CPM does not have standing to bring this suit as it is not the service provider authorized to seek payment for services provided to injured workers under the California Workers Compensation Act. Third, Defendants assert that CPM should be required to join as necessary parties under Fed. R. Civ. P. 19 the physicians with which CPM contracts, or else the SAC must be dismissed for failure to join necessary parties under Fed. R. Civ. P. 12(b)(7). Fourth, Defendants assert that CPM has failed to plead mail fraud and wire fraud under 18 U.S.C. 1341, 1343, and 1962(c) with the requisite particularity under Fed. R. Civ. P. 9(b). Fifth, Defendants contend that CPM has not alleged facts sufficient to constitute mail or wire fraud under 18 U.S.C and 1343 because the conduct alleged is not fraudulent. Sixth, Defendants argue that CPM has not sufficiently alleged that it has suffered a concrete financial injury as required for an action under RICO. Finally, Defendants assert that because CPM s mail and wire fraud claims are insufficient, so too is its RICO conspiracy claim under 18 U.S.C. 1962(d). 1 As addressed in the Discussion section, the Court recognizes that Defendants raise a number of reasons why the SAC should be dismissed. However, because a failure to state a claim provides the primary bases for the Court s instant dismissal of the SAC, the Court only includes the Fed. R. Civ. P. 12(b)(6) standard here. CIVIL - GEN Page 3 of 14

4 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 4 of 14 A. The Noerr-Pennington Doctrine 1. General Application of Noerr-Pennington Defendants first argue that CPM s entire action is based on Defendants exercise of their rights to contest the amounts, if any, payable to CPM before the WCAB. California s Workers Compensation Act is a comprehensive statutory scheme governing compensation given to California employees for injuries incurred in the course and scope of their employment. Charles J. Vacanti, M.D., Inc. v. Sate Comp. Ins. Fund, 24 Cal. 4th 800, 810 (2001). Under this scheme, an insurer ordinarily must pay all medical or medical-legal bills of an injured employee within sixty days of receipt. Premier Med. Mgmt. Sys., Inc. v. California Ins. Guarantee Assn., 136 Cal. App. 4th 464, 468 (2006) (citing Cal. Labor Code (b) and 4622(a)). However, if an insurer disputes a bill, it must pay the bill only after it is ordered to due so by the WCAB. Id. Thus, because Plaintiff s SAC centers on Defendants exercise of their rights under this scheme, Defendants argue that the action must be dismissed based on the application of the Noerr-Pennington doctrine. Under the Noerr-Pennington doctrine, those who petition any department of the government for redress are generally immune from liability. Empress LLC v. City and County of S.F., 419 F.3d 1052, 1056 (9th Cir. 2005) (citing Manistee Town Ctr. v. City of Glendale, 227 F.3d 1090, 1092 (9th Cir. 2000)); see also, White v. Lee, 227 F.3d 1214, 1231 (9th Cir. 2000) ( The Noerr- Pennington doctrine ensures that those who petition the government for redress of grievances remain immune from liability for statutory violations, notwithstanding the fact that their activity might otherwise be proscribed by the statute involved. (emphasis added)). The doctrine immunize petitions directed at any branch of government, including the executive, legislative, judicial and administrative. Manistee, 227 F.3d at 1092 (citing California Motor. Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 510, 92 S. Ct. 609 (1972). In addition, the doctrine applies to both petitions before federal and state governments. See Kottle v. Northwest Kidney Ctr., 146 F.3d 1056, 1059 (9th Cir. 1998). The doctrine derives from the First Amendment s guarantee of the right of the people...to petition the Government for a redress of grievances. Sosa v. DIRECTV, Inc., 437 F.3d 923, 929 (9th Cir. 2006) (applying Noerr-Pennington immunity to a RICO lawsuit). Defendants primarily rely on Premier Meed. Mgmt. Sys. Inc. v. Californai Ins. Gaurantee Assn., supra, in arguing that this Court should find that the Noerr-Pennington doctrine applies to the facts of the instant case. In Premier, medical providers sued workers compensation insurers and employers alleging that after the medical providers submitted their physicians bills to defendants for payment, and filed liens in numerous workers compensation cases before the [Workers Compensation Appeals Board], defendants collectively conspired to contest, dely and avoid payment of these bills and liens. Premier, 136 Cal. App. 4th at 470. The Premier plaintiffs alleged numerous causes of action against the defendants for their conduct in contesting the bills, including a RICO claim for engag[ing] in racketeering activities including mailing and electronically wiring multiple wrongful and unlawful objections to billing and liens so that defendants could strong-arm plaintiffs to accept less on the CIVIL - GEN Page 4 of 14

5 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 5 of 14 claims. Id. at 471. The Premier Court held that the complaint was both subject to California s special motion to strike and that the action was barred by the Noerr-Pennington doctrine. Id. at 468. In ruling on the application of the Noerr-Pennington doctrine, the Premier Court acknowledged that the case was filed after [defendants] objected to and successfully petitioned for consolidation of the plaintiffs lien claims before the WCAB...[and that a]ll of the actions which form the basis for the complaint took place in anticipation of, or during proceedings before the WCAB. Id. at 479. While this Court recognizes that the Premier Court s reasoning is not binding authority, the Court finds such reasoning persuasive. Though Plaintiff CPM objects to Defendants contestation of CPM s bills, neither party disputes that under California s comprehensive workers compensation laws, Defendants have a right to dispute the bills and seek a determination from the WCAB of whether they need to pay such bills. Thus, this Court fails to see how the activity complained of does not implicate protected petitioning activity. CPM responds by arguing that Noerr-Pennington does not protect non-litigation, noncommunicative, non-petitioning conduct or speech between private parties, citing to a panoply of cases. However, the Court does not find Plaintiff s cited (and rather factually distinct) cases persuasive in the context of the instant lawsuit and refrains from explicitly addressing each case citation. But the Court points out that while CPM purports to allege underlying conduct by Defendants beyond the protection of Noerr-Pennington, the fact remains that Plaintiff is still suing Defendants in the instant lawsuit for contesting the bills in WCAB proceedings. In other words, by arguing against the application of Noerr- Pennington, CPM primarily puts forward why Defendants should not prevail on their objections to the bills at issue in cases pending before the WCAB (i.e. that the objections are baseless) and does not actually demonstrate that the SAC is primarily premised on non-petitioning activity. For example, CPM claims that Defendants objections are baseless because Defendants did not properly investigate the submitted claims. But Plaintiff is not suing Defendants for violations of California law requiring Defendants to investigate claims. Instead, as stated in the SAC, [t]his is a RICO case brought by [CPM] against [Defendants] for undertaking a scheme to defraud, through a systemic campaign of sham litigation, fraudulent objections and litigation misconduct carried out by mail fraud and wire fraud, to avoid payment of valid bills and liens. SAC, 1 (emphasis added). Thus, the SAC, in Plaintiff s own terms, is premised on Defendants attempt to litigate claims before the WCAB. As a more specific example of Plaintiff s faulty arguments, Plaintiff contends that Defendants non-communicative conduct - systemic, blanket failure to pay - cannot be immune under Noerr-Pennington simply because it bears some relationship to litigation. Pl. s Opp. at 17. However, as this Court sees it, Defendants sending of objection letters to CPM communicating Defendants refusal to pay bills amounted to conduct incidental to litigation which the Ninth Circuit has indicated falls within the gambit of Noerr-Pennington. For example, in Sosa v. DIRECTV, Inc., defendant DIRECTV, a satellite television broadcaster, sent prelitigation demand letters to thousands of individuals claiming that the individuals were illegally accessing defendant s satellite television signal and informed the individuals that they would be sued if they did not quickly settle the claims. Sosa, 437 F.3d at The individuals who ultimately settled then brought a class action against CIVIL - GEN Page 5 of 14

6 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 6 of 14 DIRECTV, claiming that DIRECTV violated RICO by mailing the letters. Id. The Ninth Circuit affirmed the district court s dismissal of the case based on Noerr-Pennington. In so doing, the Ninth Circuit emphasized that adequate breathing space must be recognized to protect First Amendment rights. Thus, in the litigation context, not only petitions sent directly to the court in the course of litigation, but also conduct incidental to the prosecution of the suit is protected by the Noerr- Pennington doctrine. Id. at (quoting Columbia Pictures Indus., Inc. v. Prof l Real Estate Investors, Inc., 944 F.2d 1525, (9th Cir. 1991)). As a result, the Court rejected plaintiffs contention that the presuit demands fell outside the protection of Noerr-Pennington just because no actual litigation had yet commenced and the communications were between private parties, as they clearly related to the initiation of litigation. Instead, to the extent meritless presuit demands placed unnecessary burdens on plaintiffs, they were adequately protected by the sham litigation exception to Noerr-Pennington. Id. at As in Sosa, Defendants conduct, rather than simply bearing some relationship to litigation, is incidental to and in anticipation of proceedings before the WCAB. As Defendants put it, the process of going before the WCAB to litigate claims first requires a denial of those payments. Def. s Reply at 8. Again, this case appears factually indistinguishable from Premier, which the Court finds persuasive. Thus, rather than conclude at the outset that the Noerr-Pennington doctrine does not apply to Defendants contestation of CPM s bills and liens, the Court concludes that the activity constitutes protected petitioning activity unless Plaintiff s have adequately alleged an exception to the doctrine. 2. The Sham Litigation Exception In addition, Defendants argue that the sham litigation exception to the Noerr-Pennington doctrine does not apply because Defendants have genuinely sought relief before the WCAB by contesting liens filed by CPM. The Noerr-Pennington doctrine does not protect petitioning conduct that, although ostensibly directed toward influencing governmental action, is a mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor. Sosa, 437 F.3d at 938 (quoting Easter R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 144, 81 S. Ct. 523 (1961). As the Supreme Court has put it, [t]he sham exception to Noerr encompasses situations in which persons use the governmental process - as opposed to the outcome of that process - as an anticompetitive weapon. City of Columbia v.omni Outdoor Adver., Inc., 499 U.S. 365, 380, 111 S. Ct (1991) (emphasis in original). The Supreme Court has outlined a two-tiered approach in finding litigation to be a sham that does not confer Noerr-Pennington immunity: First, the lawsuit must be objectively baseless in the sense that CIVIL - GEN Page 6 of 14

7 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 7 of 14 no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under Noerr, and an antitrust claim premised on the sham exception must fail. Only if challenged litigation is objectively meritless may a court examine the litigant's subjective motivation. Under this second part of our definition of sham, the court should focus on whether the baseless lawsuit conceals an attempt to interfere directly with the business relationships of a competitor, through the use of the governmental process-as opposed to the outcome of that process-as an anticompetitive weapon. Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, (1993) (citations removed) (emphasis in original). Relatedly, the Ninth Circuit has identified three situations in which the sham litigation exception might apply to disputes brought before adjudicatory bodies: [1] where the lawsuit is objectively baseless and the defendant s motive in bringing it was unlawful; [2] where the conduct involves a series of lawsuits brought pursuant to a policy of starting legal proceedings without regard to the merits and for an unlawful purpose; and [3] if the allegedly unlawful conduct consists of making intentional misrepresentations to the court, litigation can be deemed a sham if a party s knowing fraud upon, or its intentional misrepresentation to, the court deprive the litigation of its legitimacy. Sosa,, 437 F.3d at 938 (internal citation and quotations omitted). In addition, the Ninth Circuit has applied a heightened pleading standard to the sham litigation exception. Oregon Natural Resources Council v. Mohla, 944 F.2d 531, 533 (9th Cir. 1991); see also, Kottle, 146 F.3d at Such heightened protection is necessary in order to prevent a a chilling effect on the exercise of First Amendment rights. Id. at 533 (quoting Franchise Realty Interstate Corp. v. San Francisco Local Joint Executive Board, 542 F.2d 1076 (9th Cir. 1976)). Defendants primarily rely on Oregon Natural Resources Council to support their argument that Plaintiff has insufficiently alleged application of the sham litigation exception. In that case, the Ninth Circuit affirmed a dismissal of a counterclaim and third-party complaint for failure to sufficiently allege that a lawsuit was a sham. Oregon Natural Resources Council, 944 F.2d at 532. The counterclaimant alleged that plaintiff s suit against it fell within the sham litigation exception because it was part of a pattern of baseless, repetitive claims and because plaintiff had allegedly made knowing misrepresentations to the court. Id. at 534. More specifically, counterclaimant asserted that plaintiff meant to oppose the counterclaimant s sale of timber regardless of whether meritorious grounds for such opposition existed. Id. With respect to counterclaimant s first allegation that plaintiff s suit was part of a pattern of baseless claims, the Ninth Circuit rejected such an assertion on two grounds. First, despite counterclaimant s allegation that plaintiff only brought suit for the sole purpose of delaying and impeding counterclaimant s business, the Ninth Circuit reasoned that plaintiff actually needed the relief sought by its suit i.e. an injunction preventing the sale and cutting of old CIVIL - GEN Page 7 of 14

8 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 8 of 14 growth timber; as a result, plaintiff was genuinely seeking judicial relief rather than merely abusing judicial process. Id. at 535 ( Here, the mere filing of a lawsuit was insufficient to achieve ONRC s goal of preventing the sale and cutting of old growth timber...thus, ONRC was not merely exploiting the governmental process; it was genuinely seeking relief. ). In addition, counterclaimant had insufficiently alleged how the instant lawsuit was related to 216 previously filed administrative appeals, and as the court noted, more is required than a bare allegation of a history of failed appeals. Id. at 534. As to the misrepresentations to the court, the Ninth Circuit found that any alleged misrepresentations to the court were effectively a restatement of counterclaimant s position that plaintiff knew its suit was baseless, rather than a separate allegation. Id. at 536. Thus, this argument too failed to warrant application of the sham litigation exception. The instant Defendants argue that Plaintiff, likewise, has not sufficiently alleged that Defendants are not genuinely seeking relief from the WCAB and has also failed to allege that any misrepresentations have deprived the underlying proceedings of their legitimacy. In response, Plaintiff points to the following allegations in its SAC to argue for an application of the sham litigation exception. CPM avers that Defendants have adopted a policy and practice of baseless objections to bills before the WCAB for the improper purpose of delaying and avoiding payments in order to destroy CPM and the (allegedly) lawful in-office medication dispensing programs of its contracting physicians. SAC 1-5, 32-33, 37. CPM avers that all Defendants utilize computer-generated boilerplate objection letters which are frivolous and attempt to outline why such objections are frivolous. SAC CPM also avers that Defendants have no real interest in the outcome of the WCAB litigation but instead only mean to delay payment in order to choke of Plaintiff s cash flow and ultimately destroy Plaintiff s business. SAC In other words, Plaintiff contends that Defendants, especially in light of their alleged consolidation of the WCAB proceedings, mean to drag out and delay those proceedings to drive Plaintiff bankrupt. SAC In addition, CPM avers that Defendants have engaged in litigation misconduct that deprives the WCAB litigation of its legitimacy. SAC 29-32, 39-45, 47. The specific misconduct identified by Plaintiff includes that the Defendants improperly failed to investigate the claims, failed to negotiate the claims with Plaintiff in good faith, have not stated the true reasons for their objections, and have otherwise failed to discuss the reasons for their objections. SAC As a result, Plaintiff asserts that at this early motion to dismiss stage, it has met its burden to establish the sham litigation exception. Despite Plaintiff s averment, the Court finds that Plaintiff has not sufficiently alleged the sham litigation exception. The Court recognizes that this is a close issue, especially at the 12(b)(6) stage. But in order to provide the breathing space meant to be afforded by the Noerr-Pennington doctrine, the Court finds that the allegations are deficient in two respects, even when the facts are looked at in the light most favorable to Plaintiff. First, the Court finds Plaintiff s assertion that Defendants are using the process of the WCAB rather than the outcome of such proceedings to destroy Plaintiff rather conclusory. See SAC, 45. While the Court is obliged to draw all reasonable inferences in Plaintiff s favor, it is not required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences. Sprewell v. Golden State Warriors, 266 CIVIL - GEN Page 8 of 14

9 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 9 of 14 F.3d 979, 988 (9th Cir. 2001). For example, Plaintiff asserts that Defendants dislike in-office drug dispensing programs and thus want to destroy Plaintiff s business. However, as Defendants citation to Oregon Natural Resources Council makes clear, Defendants actually need the relief they seek in order to accomplish the improper goals attributed to them by Plaintiff (i.e. the destruction of Plaintiff s business). In other words, to drive Plaintiff bankrupt, Defendants actually need the WCAB to find that they do not have to pay the bills in question. True, Plaintiff speculates that Defendants can drive CPM bankrupt through delay in the WCAB even if the WCAB ultimately awards Plaintiff relief. However, this kind of speculation does not support a charge that Defendants are solely abusing the process of the WCAB and have no genuine interest in the outcome of those proceedings. Second, Plaintiff s allegation that Defendants have engaged in litigation misconduct that deprives the WCAB proceedings of their legitimacy is not an inference warranted by the facts as alleged in the SAC. For example, the alleged misconduct, as described above, includes stonewalling, failing to negotiate claims with CPM, failing to investigate claims, and raising baseless legal arguments as to why Defendants should not have to pay the bills. However, a connection between these activities and the legitimacy of the WCAB proceedings is missing. In other words, Plaintiff has not made it clear how Defendants have made misrepresentations to the WCAB that will render those proceeding illegitimate or will make it unlikely that the WCAB can provide adequate relief; if the Defendants assertions are legally baseless, the WCAB can seemingly adjudicate the pending claims adequately. As stated by the Ninth Circuit, such allegations are subject to a heightened pleading standard in order to protect the First Amendment and that standard would have no force if in order to satisfy it, a party could simply recast disputed issues from the underlying litigation as misrepresentations by the other party. Kottle, 146 F.3d at 1063 (quoting Mohla, 944 F.3d at 536)). Like in Oregon Natural Resources Council and Kottle, Plaintiff appears to be recasting its charges that the Defendants objections are baseless into its claim that Defendants have made misrepresentation in the WCAB proceedings that render those proceedings meaningless. As a result, Plaintiff s SAC is subject to dismissal by this Court due to the application of the Noerr-Pennington doctrine and Plaintiff s failure to adequately allege the sham litigation exception. B. The Alleged Fraudulent Conduct Plaintiff contends that Defendants violated 18 U.S.C. 1962(c). Such violation requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S. Ct (1985). In addition, to demonstrate a pattern of racketeering activity, Plaintiff must allege two predicate acts that are related and amount to, or threaten the likelihood, of continued criminal activity. H.J., Inc. v. Northwestern Bell. Tel. Co., 492 U.S. 229, , 109 S. Ct (1989). The two predicate acts in the instant lawsuit are mail fraud and wire fraud. To allege a CIVIL - GEN Page 9 of 14

10 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 10 of 14 violation of mail fraud under 18 U.S.C. 1341, Plaintiff must show that: (1) the defendants formed a scheme or artifice to defraud; (2) the defendants used the United States mails or caused a use of the United States mails in furtherance of the scheme; and (3) the defendants did so with the specific intent to deceive or defraud. Miller v. Yokohama Tire Corp., 358 F.3d 616, 620 (9th Cir. 2004) (quoting Schreiber Distrib. Co. v. Serv-Well Furniture Co., Inc., 806 F.2d 1393, 1400 (9th Cir. 1986). In addition, to allege a claim for wire fraud under 18 U.S.C. 1343, Plaintiffs must show (1) the formation of a scheme or artifice to defraud[;] (2) use of the United States wires or causing a use of the United States wires in furtherance of the scheme; and (3) specific intent to deceive or defraud. Schreiber, 806 F.2d at 1400 (citing United States v. Louderman, 576 F.2d 1383, & n.3 (9th Cir.), cert. denied, 439 U.S. 896, 99 S. Ct. 257 (1978). Defendants argue that their objections to the liens can in no way amount to fraud on the Plaintiff under the above statutes because an action for fraud cannot lie where the sender knows the recipient will not be deceived by the falsehoods. Sosa, 437 F.3d at 941 (citing United States v. Pendergraft, 297 F.3d 1198, 1209 (11th Cir. 2002)). In such circumstances, the sender cannot have the requisite intent to deceive as required by the statutes. In Sosa, the Ninth Circuit indicated that allegedly false assertions of fact made by the sender regarding the recipient s own conduct could not amount to fraud under the mail and wire fraud statutes. Id. The court reasoned that where the assertions concern the recipient s own conduct, the sender necessarily lacks the requisite intent to deceive because the recipient knows first-hand what his or her own conduct is. Id. The instant Defendants point out that they objected to CPM s bills as a result of CPM s conduct. For example, an example objection letter attached to the SAC as Exhibit B identifies certain conduct by CPM that Defendants allege violates California law: The billing appears to represent violations of the law prohibiting physician self-referral. [CPM] failed to obtain prior authorization from Utilization Review prior to providing services. Lastly, as these services appear to require licensing from the California Board of Pharmacy, please forward documentation verifying [CPM s] drug wholesaler and/or distributor licensing. SAC, Exh. B. Thus, Defendants assert that CPM cannot allege that Defendants had the intent to deceive CPM regarding CPM s own conduct, as Defendants would know that CPM could not be so fooled. In addition, Defendants argue that CPM s repeated assertions throughout the SAC that the objections were objectively baseless in order to plead around Noerr-Pennington immunity, necessarily demonstrates that it is impossible, as alleged by Plaintiff, for Defendants to have had the intent to deceive. Defendants correctly identify that the intent to deceive cannot possibly lie where the alleged factual misrepresentations made by Defendants speak to Plaintiff s own conduct. Here, Defendants, according to the SAC and attached Exhibits, seem to only misrepresent CPM s conduct. In CIVIL - GEN Page 10 of 14

11 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 11 of 14 addition and as identified by the Sosa Court, misrepresentations of the law are not actionable as fraud, including under the mail and wire fraud statutes, because statements of the law are considered merely opinions. Sosa, 437 F.3d at 940; see also Miller v. Yokohama Tire Corp., 358 F.3d 616, 621 (9th Cir. 2004) (holding that misrepresentations of law are not actionable as fraud (with limited exceptions) unless they also include misrepresentations of fact and affirming dismissal of RICO claim predicated on mail fraud allegation that employer misrepresented the law to employees by stating that employees were not entitled to overtime because they were salaried employees); Westways World Travel, Inc. v. AMR Corp., 264 Fed. Appx. 472, 474 (9th Cri. 2008) (affirming dismissal of travel agents RICO claim predicated on mail fraud because airline did not form scheme or artifice to defraud or have specific intent to defraud by directly communicating its allegedly faulty interpretation of the parties contract to travel agents and demanding payment under the contract pursuant to such interpretation). The alleged misrepresentations here appear to only deal with CPM s own conduct and Defendants interpretation of the requirements of California law with respect to CPM s conduct. However, Plaintiff responds that the Supreme Court s decision in Bridge v. Phoenix Bond & Indem. Co., 128 S. Ct (2008) controls and requires a different outcome. In that case, the Supreme Court held that a plaintiff asserting a RICO claim predicated on mail fraud, either as an element of its claim or in order to establish proximate causation, does not need to show that it has personally relied on defendant s alleged misrepresentations (i.e. first-party reliance need not be shown). Id. at In so holding, the Court recognized that the relevant mail fraud statutory provisions do not require first-party reliance and also reasoned that a party could be harmed by a scheme to defraud even where it has not relied on the misrepresentations at issue. Id. at However, while the instant Court understands the close relationship between reliance and intent, the Court fails to see exactly how Plaintiff s citation to Bridge rebuts Defendants argument that Plaintiff has failed to even allege an intent to deceive. While Bridge holds that first-party reliance need not be shown, it does not even speak of an intent to deceive or categorically state that common law elements of fraud have no place in a RICO claim predicated on mail or wire fraud. As the Bridge Court s citation to Neder v. United States makes clear, the fact that the mail fraud statute does not require reliance was a settled proposition. Neder v. United States, 527 U.S. 1, 24-25, 119 S. Ct (1999) (recognizing that [t]he common-law requirements of justifiable reliance...have no place in the [mail, wire, or bank] fraud statutes ). However, as discussed supra, the Ninth Circuit has repeatedly stated that an intent to deceive is a necessary element of a federal mail fraud or wire fraud claim, and has done so since Neder (thus eviscerating any argument that reliance is equivalent to intent). In addition, the Neder Court recognized that some, but not all, of the common-law elements of fraud have been incorporated into the federal fraud statutes. Id. at In other words, the instant Court cannot read Bridge as transforming mail fraud and wire fraud claims into strict liability offenses when pursued under RICO where the Supreme Court only specifically held that first-party reliance need not be alleged or proved under a RICO claim predicated on mail fraud. Whether the defendants in Bridge had an intent to deceive does not appear to have been an issue before the Court. Finally, Plaintiff does not provide the Court with any authority suggesting that the intent to deceive is no longer a required CIVIL - GEN Page 11 of 14

12 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 12 of 14 element of male or wire fraud. As Defendants identify in their reply, Plaintiffs have essentially pled a scheme to harm rather than a scheme to defraud. In other words, while Plaintiff has clearly raised in the SAC its position that Defendants are out to destroy CPM, any facts related to deception are strikingly absent. See Monteray Plaza Hotel Ltd. v. Local 483, 215 F,3d 923, 926 (9th Cir. 2000) (affirming dismissal of RICO claim predicated on mail fraud and wire fraud and recognizing that the statutes are designed to prevent deceptive communications...[and] explicitly require an intent to obtain money or property [from the one who is deceived] by means of false or fraudulent pretenses, representations, or promise (internal quotations and citations omitted)); U.S. v. Bohonos, 628 F.2d 1167, 1172 (9th Cir. 1980) (recognizing that [t]he specific intent requirement is an aspect of the scheme to defraud requirement and indicating that [t]he government proves specific intent if it proves that the scheme was reasonably calculated to deceive persons of ordinary prudence and comprehension (quoting Irwin v. United Stated, 338 F.2d 770, 773 (9th Cir. 1964, cert den., 381 U.S. 911, 85 S. Ct (1965))). Indeed, Plaintiff alleges a plethora of wrongful conduct, including avoiding payment, violating the duty of an insurer to investigate, sending objectively baseless and frivolous objection letters that raise boilerplate objections or do not even identify the basis for the objection, stonewalling, refusing to negotiate, refusing to speak with CPM, referring CPM to outside attorneys who claim not to have the references file and who never return calls, and acting in concert to provide blanket denials to valid bills and liens in an attempt to destroy CPM and the in-office medication dispensing program. SAC, While much of this alleged conduct might be wrongful, the Court has a hard time treating it as deceptive. And, as detailed above, the alleged misrepresentations in the objection letters do not appear to be actionable as fraud considering they speak to Plaintiff s own conduct or refer to Defendants interpretation of the law. Thus, at this point, the Court finds that the SAC fails to state a claim for mail fraud or wire fraud. As these two acts constitute the predicate acts for CPM s RICO claims, the entire SAC must be dismissed on this basis alone. C. Concrete Financial Injury under RICO Defendants also argue that Plaintiff has failed to demonstrate that it has yet sustained any concrete injury due to Defendants alleged racketeering activity. See 18 U.S.C. 1964(c) (allowing suit by anyone injured in his business or property ); see Holmes v. Sec. Investors Prot. Corp., 503 U.S. 258, 268, 112 S. Ct (1992) (holding that Section 1964(c) requires a showing that defendant s alleged RICO violation is the but-for and proximate cause of plaintiff s injury); Forsyth v. Humana, Inc., 114 F.3d 1467, 1481 (9th Cir. 1997) ( plaintiff must show a concrete financial loss ). Defendants contend that Plaintiff has not made a requisite showing of injury because, while CPM avers that Defendants are wrongfully withholding $7 million that should pay off bills and liens, CPM admits that those bills are currently being litigated before the WCAB. Thus, Plaintiff s injury is merely speculative because, if the WCAB orders Defendants to pay the bills, the contracting physicians (and, in turn, Plaintiff) will not be harmed. CIVIL - GEN Page 12 of 14

13 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 13 of 14 In addition, Defendants argument here is related to their position that Plaintiff does not have standing to pursue this suit. In other words, Defendants contend that the payments are not due Plaintiff CPM, who holds itself out as the mere bill collector, but instead are directly due to the medical providers. While CPM avers that by withholding its payments, Defendants are interfering with CPM s contractual relationship with its contracting physicians and choking of CPM s resulting cash flow, Defendants contend that such an argument is too speculative to allege a viable RICO claim; in other words, Plaintiff has not made it clear how or if the medical providers are refusing to pay CPM or are otherwise terminating their contracts as a result of Defendants contestation of the bills, as the SAC states that [t]he physicians pay CPM a management fee for its services. SAC, 8 (emphasis added). In addition, while CPM avers that some of its physicians have assigned their RICO claims to CPM, CPM has not come forward indicating that all RICO claims have been so assigned. For example, in alleging injury in its SAC, Plaintiff states the following: The financial effect of [Defendants ] fraudulent conduct is devastating to the cash flow of CPM and its contracting physicians...the inability to collect on bills and liens with [Defendant insurers] makes it more difficult to borrow for ongoing operations and reduces the value of the company. Success of the [Defendant insurers ] scheme to withhold payment on CPM bills and liens on false pretenses could severely damages the future of the company and destroy it. SAC, 46. The Court agrees that the alleged injury to CPM, as stated in the SAC, remains too speculative to support a viable RICO claim. While the Court agrees that Plaintiff need not actually identify the exact amount of its claimed damages, the Court remains unclear exactly how or if Plaintiff has yet suffered any monetary injury as a result of Defendants conduct or exactly how its relationship with its contracting physicians is being damaged. For example, Plaintiff does not indicate if its contracting physicians have stopped paying CPM its management fee or if the management fee is contingent upon the insurers paying bills. Instead, the language in the SAC states most of the damage as possible or likely to occur in the future, depending on the length of the WCAB proceedings. In addition, Plaintiff has not indicated how getting an assignment from some (but not all) of its contracting physicians of their RICO claims remedies such deficiencies. And CPM s reliance on Vacanti, supra, to argue that it has sufficiently alleged concrete injury for purposes of RICO is misplaced. The Vacanti Court did not expressly address the sufficiency of an injury to support a RICO claim but instead focused on whether the exclusivity requirements of California s workers compensation laws necessarily barred a RICO claim (the California Supreme Court found that it did not). Vacanti, 24 Cal. 4th at In addition, the Vacanti suit was pursued by the medical providers, rather than a billing company such as Plaintiff in the instant suit. Id. As a result, Vacanti does not clearly support Plaintiff s position. Thus, CPM s failure to allege the requisite injury under 18 U.S.C. 1964(c) also supports dismissal of the SAC. CIVIL - GEN Page 13 of 14

14 Case 8:09-cv DOC-AN Document 51 Filed 07/29/2009 Page 14 of 14 D. Judicial Notice and Sur-Reply Having identified three separate and significant reasons why the SAC fails to adequately state a claim, the Court declines to yet address the additional issues raised by the Defendants Motion. In addition, the Court recognizes that Defendants moved the Court to judicially notice certain matters, and the parties dispute the extent of the Court s ability to judicially notice said documents. However, because the Court did not need to rely on matters outside the pleadings to rule on the instant Motion, the Court renders the request moot at this time. In addition, the Court grants Defendants request to strike the Plaintiff s Sur-Reply. Local Rule 7-10 states provides that [a]bsent prior written order of the Court, the opposing party shall not file a response to the reply. Plaintiff filed its Sur-Reply on July 20, Plaintiff did not then and still has not requested permission from this Court to file its Sur-Reply. In addition and despite Plaintiff s seeming representation, the Court does not see how Defendants reply briefing raised any new argumentation warranting the filing of a Sur-Reply. Indeed, Defendants make no new legal arguments regarding why the SAC should be dismissed in their reply but merely reiterate the positions identified in their moving papers. As a result, the Court STRIKES Plaintiff s Sur-Reply due to Plaintiff s failure to comply with Local Rule IV. Disposition For the foregoing reasons, the Court hereby DISMISSES Plaintiff s SAC WITH LEAVE TO AMEND. Having only addressed a single motion to dismiss, the Court is not yet willing to take Defendants representation that Plaintiff cannot remedy the deficiencies identified by this Order. Plaintiff has twenty (20) days leave to amend while Defendants have twenty (20) days thereafter to respond. The Clerk shall serve this minute order on all parties to the action. CIVIL - GEN Page 14 of 14