Allstate Insurance Company et al v. Total Toxicology Labs, LLC et al
ORDER denying Defendants' 18 Motion to Dismiss, granting Plaintiffs' 24 Motion to Strike, and denying Defendants' 25 Motion for Extension of Time to File Reply. Signed by District Judge Denise Page Hood. (JOwe)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
ALLSTATE PROPERY AND
CASE NO. 16-12220
HON. DENISE PAGE HOOD
TOTAL TOXICOLOGY LABS,
MARTIN BLUTH, M.D.,
SCOTT P. ZACK, D.C.,
COREY J. MANN,
ORDER DENYING DEFENDANTS’ MOTION TO DISMISS [#18],
GRANTING PLAINTIFFS’ MOTION TO STRIKE REPLY [#24], AND
DENYING DEFENDANTS’ MOTION FOR EXTENSION OF TIME TO
FILE REPLY [#25]
On June 16, 2016, Plaintiffs Allstate Insurance Company and Allstate
Property and Casualty Insurance Company (collectively “Allstate”) filed a
Complaint against Defendants Total Toxicology Labs, LLC (“Total Toxicology”),
Martin Bluth (“Bluth”), Scott P. Zack (“Zack”), and Corey J. Mann (“Mann”)
alleging that they conspired to defraud and defrauded Allstate by perpetrating a
healthcare billing fraud scheme. (Doc # 1) The Complaint includes the following
seven counts: Violation of the Racketeer Influenced and Corrupt Organizations
Act (“RICO”), 18 U.S.C. § 1962(c) against Bluth, Zack, and Mann (Count I);
Violation of RICO, 18 U.S.C. § 1962(d) against Bluth, Zack, and Mann (Count II);
Common Law Fraud against all Defendants (Count III); Civil Conspiracy against
all Defendants (Count IV); Payment Under Mistake of Fact against Total
Toxicology (Count V); Unjust Enrichment against Total Toxicology (Count VI);
and Declaratory Relief Pursuant to 28 U.S.C. § 2201 against Total Toxicology
On October 27, 2016, Defendants filed a Motion to Dismiss. (Doc # 18) On
November 14, 2016, Allstate filed a Response. (Doc # 21) Defendants filed a
Reply on December 5, 2016. (Doc # 23) Allstate filed a Motion to Strike Reply
on December 6, 2016. (Doc # 24) Defendants filed a Motion for Extension of
Time to File Reply as well as a Response to Allstate’s Motion to Strike also on
December 6 2016. (Doc # 25; Doc # 26) Allstate then filed a Response to
Defendants’ Motion for Extension of Time to File Reply also on December 6,
2016. (Doc # 27) The Court held a hearing on January 18, 2017. Allstate filed a
Notice of Supplemental Authority on March 8, 2017. (Doc # 30)
The facts as alleged in the 88-page Complaint, with an additional 520 pages
of attached exhibits, are as follows. Total Toxicology is a clinical urine drug
testing laboratory servicing referring providers. (Doc # 1, Pg ID 1-2) Bluth is
Total Toxicology’s Chief Medical Officer. Id. at 2. Zack is Total Toxicology’s
President and Chief Financial Officer. Id. Mann manages Total Toxicology. Id.
at 3. According to the Complaint, Total Toxicology purports to provide urine drug
testing services to doctors who treat patients with chronic pain in order to ensure
that patients are complying with their medication regimes, and/or to ensure that
patients are not abusing prescription medications and/or illicit drugs. Id. at 2.
Allstate alleges that Total Toxicology and its managers, Bluth, Zack, and Mann,
conspired to and engaged in a healthcare billing fraud scheme to provide
unnecessary urine drug testing and to submit false and fraudulent documentation to
Allstate for payment of No-Fault benefits for patients who were involved in motor
vehicle accidents and were eligible to obtain Personal Insurance Protection (“PIP”)
Benefits under Michigan’s No-Fault Act, M.C.L. §§ 500.3105, 500.3107(1)(a).
Allstate claims to have paid over $15,802.00 to Total Toxicology for allegedly
fraudulent urine drug testing on specimens collected from patients insured under
Allstate policies. Id. at 7-8.
The Complaint describes a scheme involving hundreds of acts of mail fraud
containing fraudulent claims that occurred in 2015 and 2016. Id. at 70. Attached
to the Complaint is a chart highlighting representative examples of the mail fraud,
detailing 121 acts of alleged mail fraud from February 4, 2015 to March 21, 2016.
(Doc # 1-35) The chart includes claim numbers, patient initials, dates, senders, and
contents of the mailings. Id. Also attached to the Complaint is another chart
listing each Current Procedural Terminology (“CPT”) Code billed for each claim at
issue. (Doc # 1-7) This chart includes claim numbers, patient initials, dates of
service, CPT codes billed, CPT code descriptions, and amount billed for each CPT
code. Id. The Defendants allegedly continue to submit misrepresentation-laden
bills and medical records to Allstate through the U.S. Mail, and Allstate’s damages
continue to accrue. (Doc # 1, Pg ID 72)
According to Total Toxicology’s website, “liquid chromatography tandem
mass-spectronomy (LC-MS/MS), is a more specific method [than in-office,
qualitative urine drug testing], and returns a quantitative analytical result. These
results provide precise identification of all drugs and metabolites present or
absent.” (Doc # 1-8, Pg ID 387) The Complaint alleges that Total Toxicology’s
most prevalent urine drug testing methodology, LC-MS/MS, consists of a single
test that identifies all of the drugs present. (Doc # 1, Pg ID 13) The cost of
performing this single test is the same regardless of how many drugs the referring
provider requests that Total Toxicology test for. Id. at 15. According to the
Complaint, Defendants push referring providers to refer for testing of as many
drugs as possible per specimen regardless of need, since each subsequent drug test
ordered after the first drug generates purely additional profits for Defendants. Id.
Reimbursement claims submitted to Allstate contain CPT codes that are
published annually by the American Medical Association to facilitate the efficient
processing of healthcare charges by insurance carriers. Id. The CPT Code Book
details which urine drug testing CPT codes are applicable for different types of
urine testing. Id. at 17. The Complaint alleges that Total Toxicology billed
Allstate for services not rendered every time that it sought reimbursement for CPT
code 83789 because (1) its LC-MS/MS methodology does not meet the criteria for
the testing methodology encompassed by that CPT code, and (2) that CPT code
can only be billed once per specimen. Id. at 18-20. Allstate further alleges that
Total Toxicology almost always billed Allstate for multiple units of CPT code
83789 related to a single urine specimen, falsely indicating that multiple tests were
performed when in fact no testing was performed that warranted billing that CPT
code. Id. at 20.
According to the Complaint, Bluth, Zack, and Mann maintained improper
referral relationships with physicians at Mendelson Orthopedics (“Mendelson”), an
orthopedic clinic surgery practice, in order to generate baseless and unnecessary
referrals to Total Toxicology. Id. at 21. Physicians associated with Mendelson
were responsible for the referral of 77% of Total Toxicology’s patients who were
insured by Allstate. Id. Zack and Mann allegedly have several connections with
Mendelson and its physicians. Id. Mendelson owns an MRI clinic which Zack and
Mann manage, sharing in the profits.
Zack, Mann, and the owners of
Mendelson also share interests in an ambulatory surgical center.
Id. at 22.
Physicians at Mendelson allegedly submit urine specimens to Total Toxicology as
a matter of course, and without regard for necessity. Id. Defendants are allegedly
aware of the baseless and unnecessary nature of these referrals.
Total Toxicology allegedly billed Allstate for unnecessary confirmatory
urine drug testing of expected, negative point-of-care screening results, in
contravention of the standard of care for clinical laboratories, for almost every
claim at issue. Id. at 23-24, 27. According to the Complaint, confirmatory testing
of a negative screening result is only appropriate if the referring provider
determines that it is necessary after taking into consideration all known clinical
facts for the specific patient at the time that the sample is collected.
Complaint alleges that no provider can make a blanket determination across all
patients and all dates of service as to what constitutes reasonable confirmatory
urine drug testing. Id. at 26. The Complaint acknowledges that referring providers
ordered the confirmatory urine drug testing. However, Allstate claims that Zack
and Mann knowingly used their relationship with Mendelson to generate these
unnecessary referrals, and that Bluth falsely attested to the necessity of the urine
drug testing. Id. at 28.
The Complaint details several exemplar claims in support of these
allegations, and Allstate attaches supporting documentation for each exemplar
claim. For example, W.R., a patient of Mendelson, gave a urine sample to a
Mendelson physician. Id. at 28. W.R.’s medical record indicates that there were
no medications currently prescribed to W.R. and that his urine was appropriate. Id.
Mendelson billed Allstate for point of care urine drug screening, the results of
which indicated that the urine sample tested negative for each drug tested. Id. at
29. Mendelson nevertheless submitted a requisition form to Total Toxicology
requesting a comprehensive panel of urine drug testing, also indicating on the
requisition form that each medication or drug was tested via point of care screening
and reported as negative, and that W.R. was not on any prescribed medication. Id.
Total Toxicology then performed unnecessary confirmatory testing of the expected
negative screening results, and billed Allstate through the U.S. Mail, indicating
eleven CPT billing codes for drugs that had already been tested for by the referring
provider and found to be negative. Id. at 29-30. Allstate was billed $995.85
relative to those eleven CPT codes. Id. at 30. Allstate was also billed for several
other CPT codes corresponding to allegedly unnecessary testing pursuant to a
predetermined comprehensive panel in contravention of the standard of care for
clinical laboratories. Id. Bluth submitted and signed a medical necessity letter to
Allstate to falsely support the charges for W.R.’s urine drug testing. Id. at 31.
Allstate further claims that Total Toxicology performed quantitative testing
in hundreds of instances in which referring providers did not perform point of care
screening before sending specimens to Total Toxicology. According to Allstate,
Total Toxicology should have performed presumptive/qualitative testing instead,
pursuant to the standard of care for clinical laboratories. The Defendants’ decision
to perform quantitative testing in the first instance resulted in unnecessary testing.
presumptive/qualitative testing, which is reimbursed at a lower rate than
quantitative testing, before March 2016 despite having the capacity to do so. Id. at
Allstate also alleges that Defendants’ procedures and forms promote
unnecessary urine drug testing. According to the Complaint, Total Toxicology’s
requisition form allowed providers to select a predetermined custom profile or
panel preference that mandated that the full slate of drugs would be tested every
time the provider referred a urine sample to Total Toxicology—without any
patient-specific consideration. Id. at 45. Total Toxicology’s requisition form did
not allow referring providers to remove specific drugs from the selection of panel
preferences, but rather only to choose additional tests. Id. Further, the referring
provider’s custom profile on file with Total Toxicology, and on which Total
Toxicology has based testing, is necessarily not patient-specific because the
custom profile is decided before the patient is known to the referring provider, at
the beginning of the provider’s relationship with Total Toxicology.
Toxicology billed Allstate for urine drug testing that was ordered pursuant to a
previously-filled custom profile or panel preference for 90% of the patients at issue
in the Complaint. Id. at 47.
The Complaint cites a U.S. Department of Health and Human Services
compliance publication, attached as Exhibit 23.
compliance program guidance is intended to assist clinical laboratories in
developing effective internal controls that promote adherence to applicable Federal
and State law, and the program requirements of Federal, State, and private health
plans.” 63 Fed. Reg. 163 (Aug. 24, 1998) (Doc # 1-26, Pg ID 536). According to
the guidance, a laboratory “should construct the requisition form to ensure that the
physician or other authorized individual has made an independent medical
necessity decision with regard to each test the laboratory will bill.” Id. at 538.
According to Allstate, instead of following this guidance and other guidelines,
Total Toxicology’s requisition form is designed to increase the number of tests
performed and ignores considerations of medical necessity. (Doc # 1, Pg ID 44)
Nevertheless, Bluth submitted letters to Allstate attesting to the medical necessity
of the urine drug testing. Id. at 46; Doc # 1-4.
Allstate further alleges that Defendants added diagnosis codes to falsely
support their bills for urine drug testing. Almost every patient at issue in the
Complaint was diagnosed by the referring provider with “chronic pain due to
trauma” or another pain diagnosis, identified by the standard diagnosis codes ICD9 or ICD-10. However, Total Toxicology submitted bills to Allstate that included
v58.69, a diagnosis code that indicates a patient was diagnosed with long-term
(current) use of other medications, and Z79.899, a diagnosis code that indicates a
patient was diagnosed with other long-term (current) drug therapy. (Doc # 1, Pg
ID 48) Although a diagnosis can only be determined by a patient’s treating
physician, Defendants allegedly added false diagnoses for patients they never
treated, solely because they believed the additional diagnoses would increase the
likelihood that Allstate would pay their claims. Id. at 49. Exhibit 25 attached to
the Complaint lists over 70 instances when Total Toxicology allegedly submitted
bills to Allstate containing false v58.69 or Z79.899 diagnoses. (Doc # 1-28) The
Complaint also details several exemplar claims, and Allstate attaches supporting
documentation for each exemplar claim.
Allstate alleges that Defendants engaged in two additional fraudulent billing
practices. According to the Complaint, Defendants knowingly, intentionally, and
routinely added billing codes that were encompassed by other more inclusive codes
already billed (specifically adding CPT codes 83986 and 84311 for the same date
of service as CPT code 81003, an inclusive code that already covered codes 83986
and 84311). Id. at 58-59. In addition, although Defendants perform only one
procedure on each specimen they receive, Defendants knowingly and intentionally
billed for multiple units of code G6056 per procedure, which by definition can
only be billed once per procedure. Id. at 60. The Complaint lists 6 instances of
billing multiple units of this code. Id. at 61.
A. Standard of Review
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for a motion
to dismiss for failure to state a claim upon which relief can be granted. Fed. R.
Civ. P. 12(b)(6). This type of motion tests the legal sufficiency of the plaintiff's
complaint. Davey v. Tomlinson, 627 F. Supp. 1458, 1463 (E.D. Mich. 1986).
When reviewing a motion to dismiss under Rule 12(b)(6), a court must “construe
the complaint in the light most favorable to the plaintiff, accept its allegations as
true, and draw all reasonable inferences in favor of the plaintiff.” Directv Inc. v.
Treesh, 487 F.3d 471, 476 (6th Cir. 2007). A court, however, need not accept as
true legal conclusions or unwarranted factual inferences.” Id. (quoting Gregory v.
Shelby Cnty., 220 F.3d 443, 446 (6th Cir. 2000)).
masquerading as factual allegations will not suffice.” Edison v. State of Tenn.
Dep’t of Children’s Servs., 510 F.3d 631, 634 (6th Cir. 2007). As the Supreme
Court has explained, “a plaintiff’s obligation to provide the ‘grounds’ of his
‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do. Factual allegations must
be enough to raise a right to relief above the speculative level… .” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations omitted); see LULAC v.
Bresdesen, 500 F.3d 523, 527 (6th Cir. 2007). To survive dismissal, the plaintiff
must offer sufficient factual allegations to make the asserted claim plausible on its
face. Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). “A claim has facial plausibility
when the pleaded factual content allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.” Id. The court primarily
considers the allegations in the complaint, although matters of public record,
orders, items appearing in the record of the case, and exhibits attached to the
complaint may also be taken into account. Amini v. Oberlin Coll., 259 F.3d 493,
502 (6th Cir. 2001).
B. RICO Claims
Allstate alleges violations under RICO, 18 U.S.C. §§ 1962(c) and (d). These
sections provide as follows.
(c) It shall be unlawful for any person employed by or associated with
any enterprise engaged in, or the activities of which affect, 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 or collection of unlawful debt.
(d) It shall be unlawful for any person to conspire to violate any of the
provisions of subsection (a), (b), or (c) of this section.
18 U.S.C. §§ 1962(c), (d). To establish a RICO violation, a plaintiff must establish
(1) conduct, (2) of an enterprise, (3) through a pattern, and (4) of racketeering
activity. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985). “Racketeering
activity consists of acts which are indictable under a number of federal statutes
listed in 18 U.S.C. § 1961(1)(B).” Heinrich v. Waiting Angels Adoption Servs.,
668 F.3d 393, 404 (6th Cir. 2012). One such indictable offense is mail fraud under
18 U.S.C. § 1341, which Allstate alleges is the racketeering activity in this case.
Defendants move to dismiss Allstate’s RICO claims (Count I and Count II)
for failure to state a claim arguing that: (a) Allstate fails to allege a false statement
or fraudulent intent on the part of any of the Defendants, and therefore, cannot
establish mail fraud or racketeering activity; (b) Allstate fails to plausibly plead
proximate causation; and (c) Allstate fails to plausibly plead that RICO “persons”
distinct from the RICO “enterprise” engaged in unlawful activity.
a. Mail Fraud
To state a mail fraud claim, a plaintiff must establish that the defendant (1)
devised or intended to devise a scheme to defraud (or to perform specified
fraudulent acts); (2) involving a use of the mails; and (3) for the purpose of
executing the scheme or attempting to do so. United States v. Kennedy, 714 F.3d
951, 958 (6th Cir. 2013) (quoting United States v. Frost, 125 F.3d 346, 354 (6th
Cir. 1997)). To establish a scheme to defraud, a plaintiff must establish “that the
defendant made a material false statement or omission, i.e., a statement or
omission ‘that would have affected a reasonable person’s actions in the situation.’”
United States v. Lombardo, 582 F. App’x 601, 622 (6th Cir. 2014) (quoting United
States v. Daniel, 329 F.3d 480, 487 (6th Cir. 2003)).
Federal Rule of Civil Procedure 9(b) applies to Allstate’s fraud claims and
provides: “In alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake. Malice, intent, knowledge, and other
conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).
“When pleading predicate acts of mail or wire fraud, in order to satisfy the
heightened pleading requirements of Rule 9(b), a plaintiff must ‘(1) specify the
statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3)
state where and when the statements were made, and (4) explain why the
statements were fraudulent.’” Heinrich, 668 F.3d at 404 (quoting Frank v. Dana
Corp., 547 F.3d 564, 570 (6th Cir. 2008)).
“Although Rule 9(b) heightens the pleading standard, it always must be read
‘against the backdrop’ of Fed. R. Civ. P. 8, which aims simply to put a defendant
on notice of the claims against him so that he may reasonably respond [to] the
allegations in the complaint.” State Farm Mut. Auto. Ins. Co. v. Pointe Physical
Therapy, LLC, 107 F. Supp. 3d 772, 788 (E.D. Mich. 2015).
In complex civil RICO actions involving multiple defendants, Rule
9(b) does not to require that the temporal or geographic particulars of
each mailing made in furtherance of the fraudulent scheme be stated
with particularity, but only that the plaintiff delineate, with adequate
particularity in the body of the complaint, the specific circumstances
constituting the overall fraudulent scheme.
State Farm Mut. Auto. Ins. Co. v. Physiomatrix, Inc., No. 12-11500, 2013 WL
509284, at *5 (E.D. Mich. Feb. 12, 2013) (quoting Aiu Ins. Co. v. Olmecs Med.
Supply, Inc., No. CV-042934ERK, 2005 WL 3710370, at *11 (E.D.N.Y. Feb. 22,
2005)) (internal quotations omitted).
First, Defendants argue that the Complaint does not allege false statements
by any of the Defendants with the requisite particularity because it does not state
who made fraudulent statements, and does not state when or where fraudulent
statements were made. Defendants assert that Allstate has not identified a single
bill that was actually false, or a particular instance where Allstate paid for services
that were not performed.
Defendants note that Allstate fails to allege that
Defendants billed it for any tests that were not part of the pre-select testing panels
independently ordered by treating physicians, or that Defendants conspired with
doctors to order unnecessary tests. Defendants further assert that Allstate fails to
allege any facts regarding the testing services actually provided that were
inconsistent with the codes used in the bills submitted to Allstate.
The Court rejects these arguments in light of Allstate’s specific allegations
discussed above. Allstate has provided an 88-page description of how Defendants’
alleged mail fraud works, along with charts demonstrating the types of claims
submitted as a part of this allegedly fraudulent enterprise. The Complaint includes
allegations that Defendants charged for services that were not provided;
maintained improper referral relationships with physicians at Mendelson and were
aware of the unnecessary nature of many Mendelson referrals; billed Allstate and
attested to the medical necessity of unnecessary confirmatory testing of expected,
negative point-of-care screening results (in contravention of the standard of care
for clinical laboratories); performed quantitative testing in many cases in which
they should have performed presumptive/qualitative testing instead, pursuant to the
standard of care for clinical laboratories; added false diagnoses to insurance
claims; created standardized protocols and forms that encouraged unnecessary
testing and ignored medical necessity in individual cases; and billed treatment
knowingly and intentionally using improper coding. Allstate has attached several
charts to its Complaint detailing the purportedly fraudulent claims and fraudulent
mailings by the Defendants.
Allstate has also detailed several examples of
purportedly fraudulent claims and provided documentation for these exemplar
Courts in this district have concluded that such documentation and
explanation of the fraudulent scheme satisfies Rule 9(b) because it sufficiently puts
the defendants on notice of the claims against which they will have to defend. See,
e.g., State Farm Mut. Auto. Ins. Co. v. Warren Chiropractic & Rehab Clinic P.C.,
No. 4:14-CV-11521, 2015 WL 4724829, at *8 (E.D. Mich. Aug. 10, 2015); State
Farm Mut. Auto. Ins. Co. v. Universal Health Grp., Inc., No. 14-CV-10266, 2014
WL 5427170, at *3 (E.D. Mich. Oct. 24, 2014); State Farm Mut. Auto. Ins. Co. v.
Radden, No. 14-13299, 2015 WL 631965, at *1 (E.D. Mich. Feb. 13, 2015); Pointe
Physical Therapy, 107 F. Supp. 3d at 789.
The Court concludes that the
allegations in the Complaint, read in conjunction with the exhibits, contain
sufficient factual content to put Defendants on notice of the fraud that they are
alleged to have committed.
Regarding Defendants’ argument that the Complaint does not state when and
where fraudulent statements were made or identify the speaker, the Sixth Circuit
has explained that a defendant may be liable for mail fraud, even if the defendant
did not do the mailing himself if the defendant is a willful participant in a scheme
to defraud and the use of the mail by other participants was foreseeable and in
furtherance of the scheme. Kennedy, 714 F.3d at 959; see also Warren, 2015 WL
4724829, at *9.
The Court finds that Allstate has sufficiently alleged how
Defendants helped implement and further the fraudulent billing scheme that
foreseeably resulted in the alleged fraudulent mailings.
Regarding Defendants’ argument that the Complaint fails to state a claim
because Total Toxicology was bound by the orders of referring physicians to
perform all of the urine drug testing at issue, the Court finds that this is not an issue
appropriate for resolution at the motion to dismiss stage. See State Farm Mut.
Auto. Ins. Co. v. Kalika, No. 04 CV 4631 (CBA), 2006 WL 6176152, at *12
(E.D.N.Y. Mar. 16, 2006), adopted No. 04 CV 4631 (CBA) at Doc # 105 (Mar. 31,
2006). Defendants’ argument disputes the factual allegations in the Complaint, but
at this stage, the Court must accept those allegations as true.
Bolstering Allstate’s argument that the Complaint does allege false
statements by the Defendants is the fact that Michigan’s No-Fault Act provides
that personal protection insurance benefits are payable only for reasonable charges
incurred for reasonably necessary services.
See M.C.L. § 500.3107(1)(a)
According to the Complaint, each time Defendants billed
Allstate invoking Michigan’s No-Fault Act and demanding payment thereunder,
they falsely represented that their claims were for reasonably necessary services.
As discussed above, the Court finds that Allstate has sufficiently alleged that
Defendants’ urine drug testing was not reasonably necessary and was fraudulently
Defendants next argue that the Complaint does not allege fraudulent intent
by any of the Defendants with the requisite particularity. Defendants assert that
Allstate alleges no facts from which the individual Defendants’ intent could be
inferred, other than generally alleging that they benefited from Total Toxicology’s
receipt of the proceeds from Allstate. Allstate responds that it has alleged specific
facts that make it reasonable to believe the Defendants knew the fraudulent nature
of their representations.
Allegations of fraudulent misrepresentations must be made “with a sufficient
factual basis to support an inference that they were knowingly made.” Coffey v.
Foamex L.P., 2 F.3d 157, 162 (6th Cir. 1993). A complaint must set forth specific
facts that make it reasonable to believe that the defendant knew that the statement
was materially false or misleading. Heinrich, 668 F.3d at 406.
According to the Complaint, the exemplar claims and supporting
documentation, and charts included in the Exhibits, Defendants billed Allstate for
tests that were not performed; added false diagnoses that were not identified by the
patients’ treating physicians; mailed false letters of medical necessity while
maintaining an improper referral relationship with Mendelson, which accounted
for 77% of Total Toxicology’s patients who were insured by Allstate, and which
Defendants knew resulted in many unnecessary referrals; and billed Allstate
demanding payment under Michigan’s No-Fault Act for testing they knew was
medically unnecessary and in contravention of the standard of care for clinical
laboratories. According to the Complaint, Defendants’ use of the U.S. Mail to
submit these fraudulent claims to Allstate was essential to their ability to exploit
benefits available under Michigan’s No-Fault Act by generating as many referrals
as possible without regard to medical necessity, and by testing urine for as many
drugs as possible at no extra cost to Total Toxicology. The Court finds that
Allstate has alleged specific facts that make it reasonable to believe that
Defendants knowingly made the alleged fraudulent misrepresentations.
For the reasons set forth above, the Court finds that Allstate’s allegations of
mail fraud comply with the requirements of Rule 9(b), pleading false statements
and fraudulent intent on the part of Defendants with sufficient particularity.
b. Proximate Causation
Defendants next argue that the Court should dismiss Allstate’s RICO claims
for failure to state a claim because Allstate’s theory of RICO liability depends on
the independent professional acts of licensed doctors who ordered the urine drug
testing, and therefore, Allstate fails to allege that Defendants proximately caused
Allstate’s purported RICO injury. Allstate responds that it properly alleged that
the predicate act of mail fraud committed by Defendants directly caused the RICO
RICO’s private right of action provides that “[a]ny person injured in his
business or property by reason of a violation of section 1962 of this chapter may
sue therefor in any appropriate United States district court and shall recover
threefold the damages he sustains and the cost of the suit, including a reasonable
attorney's fee . . . .”
18 U.S.C. § 1964(c).
Section 1962 contains RICO’s
prohibited activities, which makes it “unlawful for any person employed by or
associated with any enterprise engaged in, or the activities of which affect,
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 or
collection of unlawful debt.” Id. at § 1962(c). “Racketeering activity,” in turn, is
defined to include many indictable acts, including under “section 1341 (relating to
mail fraud.” Id. at § 1961(1)(B). “The upshot is that RICO provides a private right
of action for treble damages to any person injured in his business or property by
reason of the conduct of a qualifying enterprise’s affairs through a pattern of acts
indictable as mail fraud.” Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639,
Section 1964(c) requires a plaintiff to establish proximate cause in order to
show injury “by reason of a RICO violation.” Holmes v. Secs. Investor Prot.
Corp., 503 U.S. 258, 268 (1992). “When a court evaluates a RICO claim for
proximate causation, the central question it must ask is whether the alleged
violation led directly to the plaintiff’s injuries.” Anza v. Ideal Steel Supply Corp.,
547 U.S. 451, 461 (2006).
The Supreme Court’s analysis in Bridge, a case
involving competing bidders at county-run auctions of tax liens acquired on the
properties of delinquent taxpayers, is instructive here. 553 U.S. at 642. In that
case, the respondents brought a civil RICO claim predicated on mail fraud,
alleging that the petitioners had fraudulently obtained a disproportionate share of
liens by arranging for related firms to bid on the petitioners’ behalf, in violation of
a “Single, Simultaneous Bidder” county rule. Id. at 644. The respondents further
alleged that the petitioners mailed or caused to be mailed hundreds of mailings in
furtherance of the scheme when they sent property owners various notices required
by Illinois law. Id. at 644-45. The respondents claimed that, as a result, they lost
the opportunity to acquire valuable liens. Id. at 648. The Supreme Court found
proximate causation satisfied, reasoning as follows.
Respondents’ alleged injury—the loss of valuable liens—is the direct
result of petitioners’ fraud. It was a foreseeable and natural
consequence of petitioners’ scheme to obtain more liens for
themselves that other bidders would obtain fewer liens. And here, . . .
there are no independent factors that account for respondents’ injury,
there is no risk of duplicative recoveries by plaintiffs removed at
different levels of injury from the violation, and no more immediate
victim is better situated to sue. Indeed, both the District Court and the
Court of Appeals concluded that respondents and other losing bidders
were the only parties injured by petitioners’ misrepresentations.
Id. at 658 (emphasis in original).
In this case, Allstate has alleged a direct relationship between Defendants’
conduct, the mail fraud directed at Allstate, and the injury suffered—Allstate’s
payment to Defendants of thousands of dollars in No-Fault benefits that Allstate
alleges were not reasonably necessary and therefore not compensable. Allstate’s
alleged injury is the direct result of Defendants’ alleged fraud.
Michigan’s No-Fault Act required Allstate to tender No-Fault benefit payments
within thirty days, M.C.L. § 500.3142(2), the alleged injury was a foreseeable and
natural consequence of Defendants’ healthcare billing fraud scheme and acts of
mailing fraudulent bills and records.
According to the allegations in the
Complaint, Bluth, Total Toxicology’s Chief Medical Officer, falsely attested to the
medical necessity of unnecessary urine drug testing. Defendants billed for tests
that were not performed; were aware of the unnecessary nature of many referrals;
added false diagnoses to insurance claims; created standardized protocols and
forms that encouraged unnecessary testing and ignored medical necessity in
individual cases; and used fraudulent billing practices and inappropriate billing
codes. As Allstate notes in its Response, no referring doctor billed Allstate for
Total Toxicology’s urine drug testing. In light of the allegations, the Court finds
that there are no independent factors that account for Allstate’s injury.
Defendants’ fraudulent mailings were directed solely at Allstate, and there is no
risk of duplicative recoveries by other plaintiffs, and no more immediate victim is
better situated to sue. Allstate is the only party injured by Defendants’ alleged
misrepresentations at issue in this case.
The Court concludes that Allstate has
sufficiently alleged that Defendants proximately caused the alleged RICO injury.
Defendants also argue that the Court should dismiss Allstate’s RICO claims
for failure to state a claim because Allstate fails to adequately allege that the RICO
persons are distinct from the RICO enterprise.
Allstate responds that it has
properly alleged that Total Toxicology, a formal legal entity, constitutes the
enterprise through which the natural person Defendants conducted their RICOprohibited behavior. Allstate notes that it has not alleged an association-in-fact
Liability under 18 U.S.C. § 1962(c) requires a plaintiff to “allege and prove
the existence of two distinct entities: “(1) a ‘person’ and (2) an ‘enterprise’ that is
not simply the same ‘person’ referred to by a different name.” Cedric Kushner
Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). The distinctness requirement
is easily satisfied where the enterprise has a separate legal existence, such as a
corporation or partnership. See id. at 163. “[I]ndividual defendants are always
distinct from corporate enterprises because they are legally distinct entities, even
when those individuals own the corporations or act only on their behalf.” In re
ClassicStar Mare Lease Litig., 727 F.3d 473, 492 (6th Cir. 2013).
In this case, Allstate has alleged a single corporate enterprise, Total
Allstate’s RICO claims, Count I and Count II, are against the
individual natural person Defendants only:
Bluth, Zack, and Mann.
Complaint adequately sets forth how Bluth, Zack, and Mann were the persons who
conducted the affairs of Total Toxicology, the RICO enterprise, through their mail
fraud, the RICO-prohibited behavior.
The Court concludes that Allstate has
satisfied the distinctness requirement.
For reasons set forth above, the Court denies Defendants’ Motion to Dismiss
Count I and Count II. At this stage of the litigation, Allstate sufficiently states
substantive RICO claims.
C. State Law Claims
Defendants argue that, because the civil RICO claims must be dismissed, the
Court should decline to exercise supplemental jurisdiction over the state law
Because the Court finds that the civil RICO claims do not fail
substantively at this pleading stage, the Court continues to exercise supplemental
jurisdiction over the state law claims which are inextricably intertwined with the
Defendants also argue that Allstate’s state law fraud allegations are
inadequate for the same reasons as their predicate mail fraud allegations.
Defendants again argue that Allstate has failed to allege a false statement or intent
to defraud. For the reasons discussed at length above, the Court finds that Allstate
has sufficiently alleged false statements and fraudulent intent on the part of
Defendants next argue that Allstate has failed to adequately plead an unjust
enrichment claim because it relies on the same deficient factual predicate as the
RICO claims. The civil RICO claims do not fail substantively at this pleading
stage, and the Court rejects this argument.
For reasons set forth above, the Court denies Defendants’ Motion to Dismiss
Count III, Count IV, Count V, and Count VI.
D. Declaratory Relief Claim
Defendants argue that the declaratory judgment claim fails because the
underlying claims for substantive relief must fail. The Court concludes that the
underlying claims do not fail substantively at this pleading stage, and the Court
denies Defendants’ Motion to Dismiss the declaratory judgment claim, Count VII.
E. Allstate’s Motion to Strike Reply and Defendants’ Motion for Extension
of Time to File Reply
Allstate has filed a Motion to Strike Defendants’ Reply to Allstate’s
Response to Defendants’ Motion to Dismiss. (Doc # 24) Allstate argues that
Defendants’ Reply was untimely and meritless. Defendants respond that the Court
should deny Allstate’s Motion to Strike because Defendants filed a Motion to
Extend Time to File Reply.
In their Motion to Extend Time to File Reply, Defendants argue that the
Court should extend the time to allow Defendants to reply, offering only that they
did not file their Reply in a timely manner “[d]ue to the fact the undersigned had
multiple briefs he was working on.” Allstate responds that the Court should deny
Defendants’ Motion to Extend Time to File Reply because it is untimely,
especially in light of the fact that Allstate went through the time and expense to
properly file its Motion to Strike. Allstate also argues that Defendants offer no
legitimate explanation for why they disregarded their obligation to follow this
Local Rule 7.1 provides that “[i]f filed, a reply brief supporting a dispositive
motion must be filed within 14 days after service of the response, but not less than
3 days before oral argument.” E.D. Mich. LR 7.1(e)(1)(C). Local Rule 11.1
provides as follows.
If, after notice and a reasonable opportunity to respond, the Court
determines that a provision of these Local Rules has been knowingly
violated, the Court may impose an appropriate sanction upon the
attorneys, law firms, or parties that have violated the Local Rule or are
responsible for the violation. The procedures for imposing sanctions
and the nature of sanctions shall be as set out in Fed. R. Civ. P. 11(c).
E.D. Mich. LR 7.1. Rule 11(c) of the Federal Rules of Civil Procedure provides
that “[a] sanction imposed under this rule must be limited to what suffices to deter
repetition of the conduct or comparable conduct by others similarly situated.” Fed.
R. Civ. P. 11(c)(4).
Defendants filed their Reply on December 5, 2016, more than 14 days after
the service of Allstate’s Response, which had been filed on November 14, 2016.
The Court finds that Defendants’ Reply is untimely.
Despite having the
opportunity to do so, Defendants’ did not file a Motion to Extend Time to File
Reply before filing their untimely reply. Instead, Defendants waited to file their
Motion until after filing their untimely reply and after Allstate filed its Motion to
Strike. The only explanation for failing to file a timely reply and adhere to this
Court’s rules, as well as for failing to file a timely motion to extend, is that
Defense Counsel was working on multiple briefs. Without more, the Court finds
this explanation unsatisfactory. Accordingly, the Court grants Allstate’s Motion to
Strike, and denies Defendants’ untimely Motion to Extend Time to File Reply. 1
For the reasons set forth above,
IT IS HEREBY ORDERED that Defendants’ Motion to Dismiss (Doc # 18)
IT IS FURTHER ORDERED that Plaintiffs’ Motion to Strike Reply (Doc #
24) is GRANTED.
In any event, the Court notes that Defendants do not raise new arguments in their Reply (Doc #
IT IS FURTHER ORDERED that Defendants’ Motion for Extension of
Time to File Reply (Doc # 25) is DENIED.
Dated: August 23, 2017
s/Denise Page Hood
Chief, U.S. District Court
I hereby certify that a copy of the foregoing document was served upon counsel of
record on August 23, 2017, by electronic and/or ordinary mail.
Acting in the absence of LaShawn Saulsberry
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