Opelousas General Hosp. Authority v. Fairpay Solutions, Inc., No. 11–30610,2011 WL 3902996 (5th Cir. La. Sept. 6, 2011).

While reversing a district court’s remand order under the local controversy exception, the Fifth Circuit held that the mere fact that relief might be sought against the local defendant for the conduct of others (via joint liability) does not convert the conduct of others into the conduct of the local defendant so as to satisfy the ‘significant basis’ requirement.

The plaintiff, Opelousas General Hospital, sued three defendants — FairPay Solutions, Inc., LEMIC Insurance Company and Zurich American Insurance Company — in Louisiana state court for violations of the Louisiana Racketeering Act.

The plaintiff alleged that FairPay, a Texas bill review company, reviews the bills from Louisiana hospitals (the plaintiff class) and calculates a recommended payment below the rate required by the Louisiana Workers’ Compensation Act. Zurich and LEMIC, insurance companies based in Illinois and Louisiana respectively, apply FairPay’s recommended payment when reimbursing the plaintiff hospitals. The plaintiff alleged an enterprise between all three defendants to misappropriate funds using FairPay’s under-calculation, arguing that the Louisiana’s Racketeering Act made each member of the enterprise liable in solido for the acts of the other.

The defendants removed the case to federal court, and after discovery, the plaintiff moved to remand under CAFA’s local controversy exception. 

The district court concluded that the local controversy exception applied and remanded the action to state court. 

The defendants requested permission to appeal, which the Fifth Circuit granted. 

The Fifth Circuit noted that only two aspects of the local controversy exception were at issue in the appeal – whether at least one local defendant is a defendant from whom significant relief is sought by members of the class and whose alleged conduct forms a significant basis for the claims asserted, 28 U.S.C. § 1332(d)(4)(A)(i)(II)(aa) and (bb). Because failure of either element would require reversal, the Fifth Circuit elected to focus on the second element—whether the alleged conduct of the Louisiana defendant, LEMIC, formed a significant basis for the claims asserted by the proposed plaintiff class.

The Fifth Circuit observed that the plain text of § 1332(d)(A)(i)(II)(bb) relates the alleged conduct of the local defendant, on one hand, to all the claims asserted in the action, on the other. The provision does not require that the local defendant’s alleged conduct form a basis of each claim asserted; it requires the alleged conduct to form a significant basis of all the claims asserted.

The Fifth Circuit, however, remarked that the complaint contained no information about the conduct of LEMIC relative to the conduct of the other defendants, FairPay and Zurich, as it related to the claims of the putative class of Louisiana hospitals or even lead plaintiff, Opelousas General. The plaintiffs alleged that FairPay recommended reduced reimbursements, which did not meet the statutory requirements of the LWCA, and that FairPay and the defendant insurers, LEMIC and Zurich, achieved the lower reimbursement rate by using a different calculation than the one specified by the LWCA.  The plaintiffs further alleged that this scheme was a racketeering activity requiring the joint efforts of all of the defendants, rendering them liable in solido. 

The Fifth Circuit pointed that nothing in the complaint clearly distinguished the conduct of LEMIC from the conduct of the other defendants. Further, the complaint made no effort to quantify or even estimate the alleged illegal underpayments made by LEMIC versus those made by Zurich. The complaint therefore did not allege facts describing LEMIC’s conduct so as to establish that LEMIC’s conduct formed a significant basis of the plaintiff’s claims, the Fifth Circuit concluded. 

Next, the Fifth Circuit remarked that the evidence submitted by the parties added little to the above analysis. It noted that other than conclusory arguments, the plaintiff presented nothing to support any direct contact or communication between the defendants as a group to support its claim of an illegal racketeering enterprise to accomplish these underpayments, and the evidence submitted by the defendants showed that no enterprise existed. The plaintiff submitted a single explanation of reimbursement on which plaintiff alleged that LEMIC misrepresented the method of calculation of the reimbursement. Although the plaintiff argued that LEMIC and Zurich occupied identical roles in the enterprise, none of this evidence connected LEMIC to Zurich or provided any basis to compare LEMIC’s conduct to that of the other defendants to determine whether LEMIC’s conduct was significant to the plaintiff’s claims, the Fifth Circuit observed.

The Fifth Circuit also found that the evidence did not establish that LEMIC’s conduct affected all or a significant portion of the putative class. As described by the plaintiff, FairPay was the hub of the alleged enterprise and LEMIC and Zurich were the spokes. FairPay submitted an affidavit stating that LEMIC was one of more than 100 insurers across the country for whom FairPay reviewed charges by Louisiana hospitals for Louisiana workers’ compensation outpatient services. The plaintiff class asserted claims for all of those charges based on FairPay’s conduct. However, only two insurers, LEMIC and Zurich, were named as defendants.  Accordingly, the Fifth Circuit concluded that these facts failed to establish that LEMIC’s conduct formed a significant basis of the plaintiff’s claims.

Finally, the plaintiff argued that because the Louisiana Racketeering Act imposes solidary liability on all the defendants who are part of an enterprise violating the act, LEMIC’s conduct was necessarily significant because it was equally liable with the other defendants for the entirety of the alleged harm. The Fifth Circuit observed that this argument conflated the requirement that the local defendant’s conduct form a significant basis of the claims with the requirement that the local defendant be one from whom significant relief is sought.  

The Fifth Circuit relied on Evans v. Walter Indus. Inc., 449 F.3d 1159, 1167 (11th Cir. 2006), where the Eleventh Circuit noted in a similar case in which the plaintiffs were alleging joint and several liability against the defendants that “the mere fact that relief might be sought against the local defendant for the conduct of others (via joint liability) does not convert the conduct of others into the conduct of the local defendant so as to also satisfy the ‘significant basis’ requirement.” (Editors’ Note: See CAFA Law Blog analysis of Evans posted on May 25, 2006.) Accordingly, the Fifth Circuit found that the plaintiff could not rely on its claims of a racketeering enterprise to fill the gaps in proof it was required to provide to establish that LEMIC’s conduct formed a significant basis for the claims asserted by the proposed class.

The Fifth Circuit concluded that the plaintiff, Opelousas General, failed to meet its burden to establish that the conduct of LEMIC, the local defendant, formed a significant basis for the claims asserted by the plaintiff class and thus that the local controversy exception to CAFA jurisdiction applied in this case. Accordingly, the Fifth Circuit vacated the judgment of the district court remanding this case to state court.