On July 21, 2016, we reported on a putative class action filed in a California U.S. district court by Shasta Linen Company against Applied Underwriters, Inc. and its affiliated entities, alleging that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters violated California insurance law and regulations. Shasta asserted that the defendants unlawfully used a Reinsurance Participation Agreement (“RPA”) to control workers’ compensation rates (and thus, charge higher rates) without first having the RPA filed and approved by the department of insurance as required by law. The court dismissed Shasta Linen’s claims to the extent that they sought to invalidate the RPA’s rates on the theory that the RPA was an unfiled plan pursuant to section 11735 of the California Insurance Code. The court reasoned that the use of a rate that has not been filed is not an unlawful rate unless and until the commissioner conducts a hearing and disapproves the rate.
On December 1, 2016, we reported that subsequent to the court’s ruling, the California Commissioner issued an order in an administrative proceeding, finding that the RPA was void because it had not been filed and approved by the department. Shasta Linen then sought reconsideration of the court’s prior dismissal, arguing that the Commissioner’s Order was a “change in controlling authority meriting reconsideration” by the court. On October 17, 2016, the court held that the Commissioner’s order misinterpreted the law, and was not “controlling.” The court denied reconsideration, but it did so “without prejudice as to attempts by plaintiff to invalidate the [RPA] on grounds other than the theory that defendants violated” section 11735.
Since our last blog on the case, Pet Food Express filed a separate class action against Applied Underwriters and its affiliates in California state court, which was removed to federal court. As they had in the Shasta case, the defendants moved to dismiss Pet Food’s complaint to the extent it sought to invalidate the RPA on the ground that it is an unfiled plan in violation of section 11735. The court denied the motion as Pet Food’s complaint did not rely on section 11735. Both plaintiffs in the two action then filed nearly identical amended complaints, asserting claims under RICO, the California Unfair Competition Law (“UCL”), California Business and Professional Code and for unjust enrichment. Defendants moved to dismiss. The court consolidated the actions for pre-trial purposes.
With respect to the motions to dismiss, the court granted them as to the RICO claims because plaintiffs had not sufficiently alleged a plausible basis to infer a specific intent to defraud with respect to the RPA. Consistent with its earlier rulings, it also again granted defendants’ motions to dismiss as to plaintiffs’ attempts to invalidate the RPA on the theory that defendants violated Insurance Code section 11735. The court denied as to plaintiffs’ UCL claim and unjust enrichment claim, and on the ground that plaintiffs lacked standing to seek injunctive relief and to seek restitution.
Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-00158 and Pet Food Express Ltd. V. Applied Underwriters, Inc., Case No. 2:16-cv-012111 (E.D. Cal. Oct. 17, 2017).
This post written by Jeanne Kohler.
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