Barry P. Langford v. Rite Aid of Alabama, Inc. , 231 F.3d 1308 ( 2000 )

Barry P. LANGFORD, individually as representatives of a class of similarly situated persons, Lucia Kaye
Morgan, individually and as representative of a class of similarly situated persons, et al., Plaintiffs-Appellants,
v.
RITE AID OF ALABAMA, INC., Rite Aid Corporation, et al., Defendants-Appellees.
No. 00-10167.
United States Court of Appeals,
Eleventh Circuit.
Nov. 2, 2000.
Appeal from the United States District Court for the Northern District of Alabama. (No. 99-02651-CV-S-NE),
C. Lynwood Smith, Jr., Judge.
Before COX, WILSON and GIBSON*, Circuit Judges.
WILSON, Circuit Judge:
Plaintiffs appeal from the district court's dismissal of their civil RICO claim against Rite Aid of
Alabama, Inc., in which plaintiffs argued that Rite Aid had implemented a scheme to defraud its uninsured
consumers of prescription medication by charging them higher prices for medication than it charged its
insured customers, and failing to disclose this fact. Plaintiffs contend that this differential pricing policy
violated federal statutes prohibiting mail and wire fraud (18 U.S.C. §§ 1341, 1343), and that violations of
those statutes constitute predicate offenses giving rise to civil RICO liability. The district court dismissed
the complaint for failure to state a claim, finding that appellees had no affirmative duty to disclose their
pricing practices, and that silence in the absence of a duty to speak could not constitute fraud. The district
court relied almost exclusively upon the common law of Alabama to come to its conclusion. We find that
the district court's exclusive focus on state law in evaluating the scope of the federal mail and wire fraud
statutes was unduly narrow. Nonetheless, the district court's ultimate conclusion in this case was correct-Rite
Aid was not subject to a duty to reveal its differential pricing policy, and its failure to disclose its retail
pricing structure was not fraudulent. We therefore affirm the decision of the district court.
BACKGROUND
Rite-Aid, Inc., a Delaware Corporation, is a large retail pharmacy chain, with over 80,000 employees
in more than 3,000 store locations. The corporation does business in over 30 states both directly and through
*
Honorable John R. Gibson, U.S. Court of Appeals for the Eighth Circuit, sitting by designation.
its wholly owned subsidiaries. Rite Aid of Alabama is a wholly owned subsidiary of the parent corporation,
and handles Rite-Aid's retail operations throughout the state.
The plaintiffs are residents of Madison County, Alabama, and were regular customers of a local Rite
Aid pharmacy. At some point(s) between July of 1995 and October of 1999, each of the plaintiffs lacked
medical insurance that would reimburse them for the cost of prescription medication. They therefore
personally bore the costs of their prescription drug purchases from Rite Aid during the periods that they were
uninsured.
On September 30, 1999, plaintiffs initiated this action in the district court, alleging that Rite Aid
maintained an elaborate scheme to defraud uninsured customers by increasing the prices of prescription drugs
for customers lacking insurance. Plaintiffs claimed that Rite Aid maintained a policy of charging the
uninsured higher prices for prescription medication, and failed to disclose this fact to its uninsured consumers.
Rite Aid allegedly implemented this policy in three ways: (a) through an online computer network that would
automatically increase the price of prescription drugs once the operator noted that the customer was
uninsured, (b) through managerial and staff training policies that ensured that employees would know to
increase the retail price for uninsured consumers, and (c) through Rite Aid's intensive monitoring of the extent
to which its individual pharmacies participated in "up charging" individual consumers through the online
computer system. Plaintiffs charged that this pricing policy and its implementation were little more than
fraudulent attempts to prey upon the vulnerabilities of uninsured consumers, and because implementing the
pricing policy involved the use of interstate wires and mails, Rite Aid's actions constituted mail and wire
fraud in violation of 18 U.S.C. §§ 1341 and 1343. As such, plaintiffs alleged that mail and wire fraud were
the relevant "predicate offenses" for a civil RICO action, and sought relief pursuant to 18 U.S.C. §
1962(a)-(d)(the civil RICO act). Plaintiffs also sought relief on several state law claims arising out of the
transactions, and asked the court to certify as a class all uninsured consumers of prescription drugs that had
patronized Rite Aid pharmacies over the past five years. On October 19, 1999, plaintiffs amended their
complaint, adding a new named plaintiff and amplifying their civil RICO charges.
Rite Aid responded to the charge by filing a motion to dismiss for failure to state a claim pursuant
to Federal Rule of Civil Procedure 12(b)(6). The gist of Rite Aid's motion was that plaintiffs failed to allege
a predicate offense as required by the provisions of the RICO act, because the conduct ascribed to Rite Aid
in the complaint, even if true, could not constitute mail or wire fraud under the terms of the relevant federal
statutes. Rite Aid argued that retailers have no affirmative duty to disclose their pricing schemes to
consumers; as such, their failure to disclose the pricing scheme could not legally be fraudulent.
The district court granted Rite Aid's Rule 12(b)(6) motion. The court focused its attention on narrow
question of whether the federal mail and wire fraud statutes imposed a duty of disclosure upon Rite Aid in
this case. Relying heavily upon Alabama common law, the court determined that Rite Aid owed no such duty
of disclosure to plaintiffs. With plaintiff's RICO claim thereby dismissed, the court had no jurisdictional
foundation to review plaintiff's separate state law claims, and declined to hear them. Plaintiffs filed this
appeal in a timely fashion.
DISCUSSION
Plaintiffs essentially make two arguments on appeal. First, they contend that the district court erred
in relying upon state law to ascertain whether Rite Aid owed plaintiffs a duty to disclose their pricing policies
pursuant to 18 U.S.C. §§ 1341 and 1343. Plaintiffs contend that questions involving the interpretation of the
mail and wire fraud statutes are matters of federal law and federal law alone. Secondly, plaintiffs contend
that Rite Aid owed its uninsured consumers a duty to disclose its pricing structure, and that the failure to do
so subjects Rite Aid to liability under the mail and wire fraud statutes.
We apply de novo review to a district court's dismissal of an action for failure to state a claim. See
Harper v. Blockbuster Entertainment Corp., 139 F.3d 1385, 1387 (11th Cir.1998). A court may dismiss a
complaint for failure to state a claim only if it is clear that the plaintiff alleged no facts which could lead to
any judicial relief. See Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984);
Stephens v. H.H.S., 901 F.2d 1571, 1573 (11th Cir.1990); Delong Equipment Co. v. Washington Mills
Abrasive Co., 840 F.2d 843, 845 (11th Cir.1988).
The provisions of 18 U.S.C. § 1961 et seq. (the RICO Act) provide civil and criminal liability for
persons engaged in "a pattern of racketeering activity." See 18 U.S.C. § 1962(a-d). Persons injured by
reasons of a RICO violation have a civil cause of action under the terms of the act. See 18 U.S.C. § 1964.
The four elements of civil RICO liability are (1)conduct (2) of an enterprise (3) through a pattern (4) of
racketeering activity. See Durham v. Business Management Assocs., 847 F.2d 1505, 1511 (11th Cir.1988)
(internal quotation marks omitted). Plaintiffs in such an action must identify and prove a pattern of
racketeering activity, defined as two "predicate acts" of racketeering activity within a 10 year period. See 18
U.S.C. § 1961(5). The phrase "racketeering activity" is defined as including any act which is indictable under
a lengthy list of criminal offenses, including the federal statutes prohibiting mail and wire fraud. Plaintiffs
in this action seek to show that Rite Aid violated the federal mail and wire fraud statutes, and thus committed
the requisite predicate acts for civil RICO liability.
A plaintiff must prove the following elements to establish liability under the federal mail and wire
fraud statutes: (1) that defendants knowingly devised or participated in a scheme to defraud plaintiffs,(2) that
they did so willingly with an intent to defraud, and (3) that the defendants used the U.S. mails or the interstate
wires for the purpose of executing the scheme. See Neder v. United States, 527 U.S. 1, 24-25, 119 S.Ct. 1827,
144 L.Ed.2d 35 (1999); United States v. O'Malley, 707 F.2d 1240, 1246-47(11th Cir.1983). Intent to defraud
need not be shown through active misrepresentation-material omissions can be fraudulent if they are intended
to create a false impression. See Beck v. Prupis, 162 F.3d 1090, 1096 (11th Cir.1998); O'Malley, 707 F.2d
at 1247. Plaintiffs in the instant case charge that Rite Aid suppressed the fact that it was charging uninsured
consumers a premium price for prescription medication, and that this omission was enough to show a
fraudulent intent by Rite Aid.
The district court found that no liability could attach under the mail and wire fraud statutes unless
Rite Aid was found to have violated a duty to disclose the pricing information to the plaintiffs. There has
been some dispute at the circuit level concerning when a "duty to disclose" can arise for the purposes of the
federal mail and wire fraud statutes. Plaintiffs contend that a duty need not be formally imposed by statute
or regulation; rather, they argue that a duty to disclose can be found through an examination of the
relationship between the parties. At least one case from another circuit has rejected this contention, and held
that only the abrogation of a formal statutory, contractual, or regulatory duty can give rise to liability under
sections 1341 and 1343. See Reynolds v. East Dyer Dev. Co., 882 F.2d 1249, 1252 (7th Cir.1989) ("mere
failure to disclose, absent something more" cannot constitute mail or wire fraud). Other circuits have found
that a duty to disclose can be inferred by the relationship between the parties, and need not be formalized
through a statute or regulation. See United States v. Cochran, 109 F.3d 660, 665 (10th Cir.1997)("while a
fiduciary relationship is not an essential element of a wire fraud prosecution ... it can trigger a duty of
disclosure as can some other relationship of trust and confidence between the parties.").
Our own precedent tends to support the latter of the two positions. See United States v. Brown, 79
F.3d 1550, 1557 ("[C]ertain people must always disclose facts where non-disclosure could result in harm.
This circumstance exists when there is a special relationship of trust, such as a fiduciary relationship between
people"); United States v. Ballard, 663 F.2d 534 (5th Cir. Unit B Dec.1981), modified in part on other
grounds, 680 F.2d 352 (1982) (duty to disclose may be imposed by federal or state statute or may arise from
the relationship itself). The texts of the mail and wire fraud statutes are also informative, in that they do not
include any language indicating that an independent duty to disclose is necessary for liability under their
terms. See 18 U.S.C. §§ 1341, 1343.
We therefore feel that it would be an error to find that a duty to disclose information for purposes
of the federal mail and wire fraud statutes can only be found where a statute, regulation, or formalized legal
relationship between the parties expressly delineates such a duty. Plaintiffs are correct in their assertion that
concealment of critical data, even without a formalized duty to disclose that data, can constitute mail and/or
wire fraud in certain situations. Schemes to defraud can take many forms-criminal ingenuity is an amazing,
if disturbing, thing to behold. It would be unduly constrictive to hold that a duty to disclose can only exist
where it is statutorily or contractually implied; the complexity of transactional relationships is such that
duties to disclose may exist in other situations if the transaction is to be legitimate. We can envision many
situations in which a failure to disclose information could constitute fraud pursuant to 18 U.S.C. §§ 1341 and
1343, even when no duty to disclose exists independently. Determinations as to whether a duty to disclose
information exists must be made on a case by case basis, with appropriate attention given to the nature of the
transaction and the relationship between the parties.
Applying these principles to the instant case, we first must determine whether the positive law
contains any statute or regulation that would impose a duty upon Rite Aid to disclose its prescription drug
pricing structure to its uninsured retail customers. Despite its efforts to locate such a duty in federal and state
law, plaintiffs have not cited a statute or regulation that can be fairly applied to this situation. Nothing in the
American Pharmaceutical Association's standards imposes a duty to disclose this sort of pricing information
to plaintiffs. If a duty to disclose does in fact exist in this case, it will have to be inferred by the nature of the
relationships and transactions involved, not by reference to an independent duty to disclose found in the law.
In its exploration of the nature of the relationship and duties owed between Rite Aid and the
plaintiffs, the district court relied exclusively upon the common law of Alabama, and whether that body of
law could be construed to impose duties on retailers in similar situations. Its discussion of the Alabama
precedent was comprehensive and helpful, and we adopt its finding that no duty to disclose can be located
in Alabama law in this circumstance. This inquiry, however, must be considered incomplete. In exploring
the question of whether a duty to disclose exists in a particular situation, federal courts must go beyond state
common law, and conduct an inquiry into relevant federal sources of authority. See United States v. deVegter,
198 F.3d 1324, 1329 (11th Cir.1999) ("The nature and interpretation of the duty owed is a question of federal
law."); Ballard, 663 F.2d at 541("[t]he duty to disclose ... may be imposed by state or federal statute or may
arise from the employment relationship itself."); McNally v. United States, 483 U.S. 350, 377 n. 10, 107 S.Ct.
2875, 97 L.Ed.2d 292 (1987) (Stevens, J. dissenting)(fraudulent scheme need not violate state law to support
federal mail fraud conviction). State law is simply not exhaustive on this point-the fact that no duty to
disclose retail pricing schemes can be located in analogous Alabama cases does not mean that no such duty
can be located in federal law. The district court's analysis on the issue of whether a duty to disclose can be
inferred is thus incomplete.
[6] However, the fact that the district court used unduly constrictive methods in evaluating this question does
not mean that it reached an improper result. A close examination of the relationship between Rite Aid and
the plaintiffs in the context of the relevant federal law indicates that Rite Aid was under no duty to disclose
its pricing structure to plaintiffs.
As a general matter of federal law, retailers are under no obligation to disclose their pricing structure
to consumers. See Bonilla v. Volvo Car Corp., 150 F.3d 62, 71(1st Cir.1998); Katzman v. Victoria's Secret
Catalogue, 167 F.R.D. 649, 656 (S.D.N.Y.1996). Plaintiffs have failed to identify any federal case where
such duty was imposed on retailers; in fact, variable pricing is the norm in many industries. Airlines
frequently charge different groups of consumers different rates for the same seat, hotels often charge different
rates to different consumers for the same room, and car dealerships sell identical vehicles for a variety of
prices, depending upon the identity (and savvy) of the consumer. There are a number of legitimate business
reasons for doing this, obnoxious as it may seem for the individual consumer forced to purchase an item at
a different price from his friends. Differential pricing alone is not a fraudulent practice; plaintiffs must assert
some particular reason why the relationship in this case was such that non-disclosure of the differential
pricing structure constitutes a violation of the mail and wire fraud statutes.
Two facts about the relationship between Rite Aid and plaintiffs make Rite Aid's nondisclosure of
its differential pricing policy troubling: the fact that plaintiffs were uninsured consumers, and the fact that
Rite Aid was not an ordinary retailer, but a pharmacy employing licensed pharmacists to perform professional
services. Taking the initial concern first, we should note that prescription medication is an expensive
commodity in a relatively inflexible market. Many patients pick up their prescriptions on the way home from
the hospital, and may have little inclination or ability to comparison shop at that point. Uninsured consumers,
who bear the full cost of their prescription needs, are especially sensitive to high drug prices. They also
arguably have less bargaining power than insured consumers, who have large insurance entities working on
their behalf to keep prices as low as possible. It can be argued that Rite Aid's policy is little more than a
deceptive effort to soak its most vulnerable consumers.
Nonetheless, uninsured status is not an impediment per se to information gathering on the open
market. In an open market economy, consumers have the appropriate incentives to obtain information about
acceptable cost of consumer goods, and to make purchases from the retailer who most closely matches that
price. We do not expect retailers to disclose information about their pricing schemes-consumers are the actors
who are best able to gather pricing information and put it to its highest and best use. If uninsured consumers
were somehow less able to shop around and identify attractive drug prices than were other consumers, the
situation may have demanded that Rite Aid make certain disclosures to them. However, uninsured consumers
are just as capable of seeking and using information as are others. In fact, because the uninsured are
shouldering the entire cost of their prescription drug needs, they have even more powerful incentives than
insured consumers do to actively obtain information about retail drug prices. Rite Aid's failure to disclose
its pricing practices seems less an element of a fraudulent scheme than a powerful argument for uninsured
consumers to seek another pharmacy that makes some effort to retain their business.
It is true that pharmacists and their patients share an intimate bond, and that relationship gives rise
to certain duties on the part of the pharmacist. However, plaintiffs have been unable to identify a case or
persuasive authority holding that pharmacists have a duty to disclose their parent company's pricing structure
with regard to prescription drugs. Pharmacists owe duties to their patients ranging from diligence in
recommending medication to confidentiality in maintaining patient's records; however, nothing in their
professional code of conduct suggests, even obliquely, that pharmacists violate that duty by not disclosing
the pricing policies of their pharmacy. Nothing in the record suggests that Rite Aid's pharmacists breached
their code of conduct in any way, and we decline to infer the duty to disclose plaintiffs seek in this case.
In conclusion, plaintiffs have not alleged any facts that would suggest that Rite Aid was subject to
a duty to disclose the fact that it charged plaintiffs more for their prescription medication than it charged other
consumers. Nothing in the positive law imposes any such duty on Rite Aid, and the relationship between Rite
Aid and plaintiffs was not such that a duty can be inferred by reference to federal law. As such, plaintiffs
have failed to allege a predicate act giving rise to RICO liability, and the district court did not err when it
granted Rite Aid's motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6).
AFFIRMED.