Part A

Vesuvius, a health insurance company, offers a managed care plan, under which members who receive covered medical treatment from participating providers incur no out-of-pocket costs, and the company reimburses the doctors for the covered treatment at rates set by the company.

Dr. Herbert West is a participating healthcare provider under the Vesuvius managed care plan. Under that plan, a physician submits a form identifying a patient’s diagnosis or condition, and itemizing the procedures performed, using a standardized coding system. Vesuvius processes each form using a computer program that compares procedure codes against diagnosis/condition codes to determine whether the procedure was medically appropriate & covered under the plan. For each approved procedure, Vesuvius reimburses the physician at the corresponding rate under its reimbursement rate schedule.

West believes that Vesuvius has been underpaying him for procedures he performed. Specifically, he believes that Vesuvius has manipulated its reimbursement review programs to systematically reduce reimbursements through “downcoding” (i.e. changing a procedure code to one with a lower reimbursement rate) and “bundling” (i.e. combining codes for multiple procedures into a single code with a lower reimbursement rate than if the procedures were coded separately).

West is President of an organization, Physicians Against Insurance Nightmares (“PAIN”), the mission of which is to abolish private medical insurance and replace it with a government-funded national health service. Seeing an opportunity to rake an insurance company over the coals & expose the industry’s shady practices, West decides to sue. He meets with an attorney, Amanda Bonner, and tells her he believes Vesuvius has shortchanged him by about $100,000 in reimbursements through downcoding and bundling. West also tells Bonner, “I don’t really care about the money. My goal is to take down the insurance companies. They’re greedy, soulless pencil-pushers, I hate them with a burning passion, and they must be destroyed.”

Bonner has never had a case involving a health insurance company before, and is not familiar with industry practices or the applicable law. After some quick research, Bonner finds the North Carolina Unfair or Deceptive Acts & Practices (“UDAP”) statute. The elements of a claim under that statute are as follows:

• The defendant made a false or misleading representation to the plaintiff.

• The misrepresentation was material to the parties’ transaction.

• The plaintiff actually relied on the misrepresentation in deciding to enter into the transaction.

• The plaintiff lost money or suffered other harm as a result.

Bonner files a suit on behalf of West against Vesuvius in the U.S. District Court for the Middle District of North Carolina. The complaint asserts a claim under the NC UDAP statute, and includes the following allegations:

• Defendant falsely & misleadingly represented to Plaintiff that he would be compensated for covered procedures based on commonly accepted medical practice and standard coding practices, and as represented in Defendant’s promotional material and reimbursement rate schedule. Examples of Defendant’s false & misleading representations are contained in its promotional material and reimbursement rate schedule, copies of which are attached as Exhibit A.

• In reliance on Defendant’s false & misleading representations, Plaintiff became a participating provider under Defendant’s managed care plan.

• Defendant intentionally “downcoded” and “bundled” procedures that Plaintiff performed for patients in Defendant’s managed care plan, improperly applying codes carrying lower reimbursement rates than those for the procedures Plaintiff actually performed, and thus paying reimbursements to Plaintiff at rates lower than those indicated in Defendant’s promotional material and reimbursement rate schedule. Examples of such downcoding and bundling are contained in the reimbursement statements that Plaintiff received from Defendant, copies of which are attached as Exhibit B.

• As a result of Defendant’s false, misleading, and deceptive representations and practices, Plaintiff has wrongfully been denied, and Defendant has dishonestly pocketed, at least $100,000 in reimbursements for procedures he performed under Defendant’s managed care plan.

In response to the complaint, Vesuvius files a motion to dismiss under FRCP Rule 12(b)(6). Should the court grant the motion to dismiss?

Part B

Assume that, in a case decided one year before Bonner filed the West’s suit, the U.S. Court of Appeals for the Fourth Circuit held that a federal statute, the Health Insurance Company Competition & Unfair Practices Act (“HICCUP”), provides the exclusive remedy for unfair or deceptive practices associated with a health insurance plan, and that all state-law claims are preempted. The Fourth Circuit is the only federal appellate court to have decided whether HICCUP preempts state-law claims; federal district courts outside the Fourth Circuit have been divided on the issue.

Based on the controlling Fourth Circuit precedent, the District Court dismisses West’s state-law UDAP claim. Vesuvius then moves for sanctions against Bonner and West under FRCP Rule 11. Vesuvius contends that the UDAP claim was frivolous, based on the Fourth Circuit’s holding that the HICCUP Act preempts all state-law claims. Vesuvius also contends that West brought the suit for the improper purpose of advancing his political agenda of destroying the health insurance industry.

Should the court grant the motion for sanctions on either ground?

Part A

A Rule 12(b)(6) motion seeks dismissal of a complaint for failure to satisfy Rule 8(a)(2).1 A court will dismiss under Rule 12(b)(6) where the allegations in the complaint are legally insufficient to show that the defendant may be held liable. FRCP Rule 8(a)(2) sets the basic requirement for sufficiency of a complaint: it must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” For allegations of fraud, Rule 9(b) adds a heightened standard, requiring that the pleading “must state with particularity the circumstances constituting fraud …” At a minimum, the plaintiff must identify the allegedly fraudulent statements or conduct by the defendant, and explain why they were fraudulent.

In Twombly & Iqbal, the Supreme Court applied a plausibility standard to determine whether a complaint is legally sufficient. Under that standard, a court will assume the truth of the factual allegations in the complaint, ignoring all legal conclusions. The court will also give the plaintiff the benefit of all reasonable inferences based on the explicit factual allegations. If the factual allegations and inferences add up to a plausible claim—i.e. one that, based on common sense and the court’s experience may overcome competing, non-culpable explanations—the claim will survive the motion to dismiss.

In this case, Vesuvius contends that the allegations in West’s complaint are legally insufficient to show that Vesuvius may be liable under the state UDAP statute. West’s UDAP claim alleges that Vesuvius made false and misleading representations about its reimbursement rates, and engaged in deceptive practices to reduce the amounts paid to West. Analyzing this claim under the Twombly/Iqbal standard, the court should ignore the conclusory allegations, such as “falsely & misleadingly”, “improperly”, etc. What remains are factual allegations about representations and conduct by Vesuvius.

The allegations of false and misleading representations are akin to allegations of fraud. Assuming Rule 9(b) applies, the complaint most likely satisfies that heightened standard. It provides (in the documents that are included as exhibits) specific examples of representations by Vesuvius and identifies specific instances of downcoding and bundling in the reimbursements West received. For purposes of Rule 12(b)(6), the court will assume these factual allegations are true, and will deny the motion to dismiss as long as those facts would be enough to hold Vesuvius liable.

In Iqbal, the plaintiffs didn’t allege any facts to establish a discriminatory intent by the Attorney General, as required to hold him liable. The mere fact that the plaintiffs fit an ethnic & religious profile was insufficient, in the Court’s opinion, to support an inference of discriminatory intent, against the alternative, non-culpable explanation that the Attorney General ordered the detentions based on non-discriminatory law enforcement considerations. In contrast, given the facts alleged in West’s complaint, no inferential leap is required to conclude that Vesuvius did not pay reimbursements as represented. Accordingly, the court should deny the motion to dismiss.

Part B

The purpose of Rule 11 is to deter frivolous, bad faith, or abusive litigation. Rule 11(b) enumerates standards for pleadings and motions: they must not be presented for an improper purpose; must not assert frivolous claims or defenses; and must not contain unfounded allegations or denials of fact. Rule 11(c) allows a court, either on motion by a party or on the court’s own initiative, to impose sanctions against an attorney or party whose pleading or motion violates the standards under Rule 11(b). A court has broad discretion in the choice of sanction, provided it serves the deterrent goal of Rule 11. A motion for sanctions must be made separately from any other motion, and must specify the conduct alleged to violate Rule 11(b). The party served with a Rule 11 motion has 21 days in which to correct or withdraw the pleading and avoid imposition of sanctions (though the court may still order payment of expenses and attorney’s fees incurred by the moving party).

In this case, Vesuvius has moved for sanctions under two of the Rule 11(b) standards. First, Vesuvius contends that West’s state law claim is completely preempted by the federal HICCUP Act, and is thus unwarranted by existing law, in violation of Rule 11(b)(2). Second, Vesuvius contends that West’s motive in bringing his suit was to advance his political agenda of destroying the health insurance industry, and that this is an improper purpose in violation of Rule 11(b)(1).

Regarding the first ground, a lawsuit asserting claims unwarranted by existing law or by a non-frivolous argument for changing the law, would violate Rule 11(b)(2). Under 4th Circuit precedent (which is binding on the NC federal district court), West’s state law claims are preempted by the federal HICCUP Act. However, the 4th Circuit is the only appellate court to have held that the HICCUP Act preempts state law claims like West’s. West & his attorney may still be able to offer a non-frivolous argument for distinguishing or reversing the 4th Circuit’s prior decision. The existence of a split among courts outside the 4th Circuit would bolster that argument. That should be enough to overcome the motion for sanctions based on Rule 11(b)(2).

Regarding the second ground, a lawsuit filed for the purpose of harassing the defendant would violate Rule 11(b)(1). A problem for Vesuvius is that, on its face, West’s complaint alleges that he suffered monetary harm as a result of Vesuvius’s business practices, and does not refer to West’s political goal of abolishing private health insurance. Vesuvius might rely on public statements and actions by West in his role as PAIN’s president. They might also use the discovery process to adduce evidence of West’s ulterior motive. Their argument would be that West’s claim for damages is merely a façade, and that he only brought the suit as part of a harassment campaign against the insurance industry.

However, West does at least attempt to state a claim for damages he allegedly suffered as a result of Vesuvius’s business practices. Assuming his allegations about those business practices have evidentiary support (as Rule 11(b)(3) requires), a suit for damages resulting from those practices would be proper. The fact that West may also have a political motive would not render the purpose improper. Rather, this type of “impact litigation” is a common strategy for interest groups. In such cases, the plaintiffs assert claims seeking to vindicate their own legal rights, while simultaneously using the courts to achieve broader social or political change. Even in cases where a plaintiff acted with the “mixed motive” of spite or a desire to harm the defendant’s business, federal courts have denied sanctions under Rule 11(b)(1) where the plaintiff was also asserting a non-frivolous claim for relief. Unless the court concludes that West’s claims lacked any legal or factual basis, the court should deny the motion for sanctions based on Rule 11(b)(1).