State Farm Mutual v. Tri-Borough
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Opinion
22-1318 (L) State Farm Mutual v. Tri-Borough
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
August Term, 2023
Argued: January 11, 2024 Decided: October 24, 2024
Docket Nos. 22-1318-cv, 22-1362-cv, 22-1386-cv
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, STATE FARM FIRE AND CASUALTY COMPANY,
Plaintiffs-Appellees-Cross-Appellants,
— v. —
TRI-BOROUGH NY MEDICAL PRACTICE P.C., METRO PAIN SPECIALISTS P.C., LEONID SHAPIRO, M.D., REUVEN ALON, AKA ROB ALON, COLUMBUS IMAGING CENTER LLC, MEDAID RADIOLOGY LLC, YAN MOSHE, AKA YAN LEVIEV, HACKENSACK SPECIALTY ASC LLC, FKA DYNAMIC SURGERY CENTER LLC, INTEGRATED SPECIALTY ASC LLC, FKA HEALTHPLUS SURGERY CENTER LLC,
Defendants-Appellants-Cross-Appellees.1
1 The Clerk of Court is respectfully directed to amend the caption as set forth above. B e f o r e:
KEARSE, LYNCH, and NARDINI, Circuit Judges.
Defendants-Appellants-Cross-Appellees, who are health care providers and related individuals and entities that treat automobile accident victims, appeal from an order of the United States District Court for the Eastern District of New York (Brodie, Ch. J.) granting in part a motion for a preliminary injunction made by Plaintiffs-Appellees-Cross-Appellants State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Insurance Company (collectively, “State Farm”). This appeal concerns benefits provided under New York’s Comprehensive Motor Vehicle Insurance Reparations Act (“No-Fault Act”) to reimburse covered individuals injured in automobile accidents for necessary health expenses, without regard to fault. State Farm alleges that Defendants engaged in a scheme to fraudulently obtain No-Fault benefits and pursued baseless arbitrations and state-court proceedings to seek reimbursement of unpaid bills. The district court granted the motion for a preliminary injunction in part by enjoining Defendants from proceeding with the pending arbitrations and from initiating new arbitrations and state-court proceedings, but denied an injunction of the pending state-court proceedings. In resolving this appeal, we address four key issues: (1) our appellate jurisdiction; (2) the propriety of the preliminary injunction; (3) whether the Federal Arbitration Act, 9 U.S.C. § 1 et seq., allows enjoining the arbitrations; and (4) whether an exception to the Anti- Injunction Act, 28 U.S.C. § 2283, allows enjoining the pending state-court proceedings. We REVERSE the district court’s orders denying a preliminary injunction of the pending state-court proceedings, AFFIRM its orders in all other respects, and REMAND the matter for further proceedings consistent with this opinion.
ROBERT T. SMITH, Katten Muchin Rosenman LLP, Washington, DC (Mary C. Fleming, Ally Jordan, Katten Muchin
2 Rosenman LLP, Washington, DC; Jonathan L. Marks, Katten Muchin Rosenman LLP, Chicago, IL; Christopher T. Cook, Katten Muchin Rosenman LLP, New York, NY, on the brief), for Plaintiffs-Appellees-Cross- Appellants.
PETER STROILI (Kevin Joseph Windels, Matthew Lee, on the brief), Kauffman Dolowich & Voluck LLP, New York, NY, for Defendants-Appellants-Cross-Appellees Tri-Borough NY Medical Practice P.C., Metro Pain Specialists P.C., and Leonid Shapiro, M.D.
KEITH J. ROBERTS, Brach Eichler LLC, Roseland, NJ (Charles H. Horn, The Russell Friedman Law Group, LLP, Garden City, NY, on the brief), for Defendants-Appellants-Cross- Appellees Reuven Alon, AKA Rob Alon, Columbus Imaging Center LLC, Medaid Radiology LLC, Yan Moshe, AKA Yan Leviev, Hackensack Specialty ASC LLC, FKA Dynamic Surgery Center LLC, and Integrated Specialty ASC LLC.
GERARD E. LYNCH, Circuit Judge:
Plaintiffs State Farm Mutual Automobile Insurance Company and State
Farm Fire and Casualty Insurance Company (collectively, “State Farm”) provide
automobile insurance coverage in New York and are required under New York’s
Comprehensive Motor Vehicle Insurance Reparations Act (“No-Fault Act”) to
reimburse covered individuals injured in automobile accidents for necessary
health expenses, without regard to fault. See N.Y. Ins. Law §§ 5101–5109. Insureds
3 can assign their No-Fault benefits to health care providers, who can then seek
reimbursement directly from State Farm for treatment provided to the insureds.
In this case, State Farm alleges that Defendants, who are health care providers
and related individuals and entities that treat automobile accident victims,
engaged in a massive scheme to fraudulently obtain No-Fault benefits by
providing medically unnecessary treatment and services pursuant to illegal “pay-
to-play” financial arrangements, seeking reimbursement of such claims from
State Farm, and then bringing thousands of baseless arbitrations and state-court
proceedings when State Farm denied the claims.
State Farm accordingly brought this lawsuit in the United States District
Court for the Eastern District of New York, asserting claims under the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and
state law. State Farm then sought a preliminary injunction to prevent Defendants
from pursuing the pending arbitrations and state-court proceedings and from
bringing any new actions. Granting State Farm’s motion for a preliminary
injunction in part, the district court (Margo K. Brodie, Ch. J.) stayed the pending
arbitrations and enjoined Defendants from commencing any new arbitrations or
state-court proceedings, but declined to enjoin the pending state-court
4 proceedings. Defendants appeal, contending that the district court abused its
discretion in granting a preliminary injunction and that the Federal Arbitration
Act (“FAA”), 9 U.S.C. § 1 et seq., bars an injunction of the arbitrations. State Farm
cross-appeals, arguing that the pending state-court proceedings can be enjoined
under exceptions to the Anti-Injunction Act (“AIA”), 28 U.S.C. § 2283.
First, as to Defendants’ appeal, we conclude that the district court did not
exceed its discretion in granting a preliminary injunction and correctly
determined, albeit for different reasons than our own, that the arbitration
agreements here are unenforceable under the FAA. Second, as to State Farm’s
cross-appeal, we disagree with the district court’s conclusion that the AIA bars an
injunction of the pending state-court proceedings here. Accordingly, we
REVERSE the district court’s orders declining to enjoin the pending state-court
proceedings, AFFIRM its orders in all other respects, and REMAND the matter
for further proceedings consistent with this opinion.
BACKGROUND
I. New York’s No-Fault Insurance Regime
New York’s No-Fault Act requires insurers to compensate victims of
automobile accidents for their injuries regardless of fault. See N.Y. Ins. Law
5 §§ 5101–5109. The No-Fault regime aims “to ensure prompt compensation for
losses incurred by accident victims without regard to fault or negligence, to
reduce the burden on the courts and to provide substantial premium savings to
New York motorists.” Med. Soc’y of New York v. Serio, 100 N.Y.2d 854, 860 (2003).
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22-1318 (L) State Farm Mutual v. Tri-Borough
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
August Term, 2023
Argued: January 11, 2024 Decided: October 24, 2024
Docket Nos. 22-1318-cv, 22-1362-cv, 22-1386-cv
STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, STATE FARM FIRE AND CASUALTY COMPANY,
Plaintiffs-Appellees-Cross-Appellants,
— v. —
TRI-BOROUGH NY MEDICAL PRACTICE P.C., METRO PAIN SPECIALISTS P.C., LEONID SHAPIRO, M.D., REUVEN ALON, AKA ROB ALON, COLUMBUS IMAGING CENTER LLC, MEDAID RADIOLOGY LLC, YAN MOSHE, AKA YAN LEVIEV, HACKENSACK SPECIALTY ASC LLC, FKA DYNAMIC SURGERY CENTER LLC, INTEGRATED SPECIALTY ASC LLC, FKA HEALTHPLUS SURGERY CENTER LLC,
Defendants-Appellants-Cross-Appellees.1
1 The Clerk of Court is respectfully directed to amend the caption as set forth above. B e f o r e:
KEARSE, LYNCH, and NARDINI, Circuit Judges.
Defendants-Appellants-Cross-Appellees, who are health care providers and related individuals and entities that treat automobile accident victims, appeal from an order of the United States District Court for the Eastern District of New York (Brodie, Ch. J.) granting in part a motion for a preliminary injunction made by Plaintiffs-Appellees-Cross-Appellants State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Insurance Company (collectively, “State Farm”). This appeal concerns benefits provided under New York’s Comprehensive Motor Vehicle Insurance Reparations Act (“No-Fault Act”) to reimburse covered individuals injured in automobile accidents for necessary health expenses, without regard to fault. State Farm alleges that Defendants engaged in a scheme to fraudulently obtain No-Fault benefits and pursued baseless arbitrations and state-court proceedings to seek reimbursement of unpaid bills. The district court granted the motion for a preliminary injunction in part by enjoining Defendants from proceeding with the pending arbitrations and from initiating new arbitrations and state-court proceedings, but denied an injunction of the pending state-court proceedings. In resolving this appeal, we address four key issues: (1) our appellate jurisdiction; (2) the propriety of the preliminary injunction; (3) whether the Federal Arbitration Act, 9 U.S.C. § 1 et seq., allows enjoining the arbitrations; and (4) whether an exception to the Anti- Injunction Act, 28 U.S.C. § 2283, allows enjoining the pending state-court proceedings. We REVERSE the district court’s orders denying a preliminary injunction of the pending state-court proceedings, AFFIRM its orders in all other respects, and REMAND the matter for further proceedings consistent with this opinion.
ROBERT T. SMITH, Katten Muchin Rosenman LLP, Washington, DC (Mary C. Fleming, Ally Jordan, Katten Muchin
2 Rosenman LLP, Washington, DC; Jonathan L. Marks, Katten Muchin Rosenman LLP, Chicago, IL; Christopher T. Cook, Katten Muchin Rosenman LLP, New York, NY, on the brief), for Plaintiffs-Appellees-Cross- Appellants.
PETER STROILI (Kevin Joseph Windels, Matthew Lee, on the brief), Kauffman Dolowich & Voluck LLP, New York, NY, for Defendants-Appellants-Cross-Appellees Tri-Borough NY Medical Practice P.C., Metro Pain Specialists P.C., and Leonid Shapiro, M.D.
KEITH J. ROBERTS, Brach Eichler LLC, Roseland, NJ (Charles H. Horn, The Russell Friedman Law Group, LLP, Garden City, NY, on the brief), for Defendants-Appellants-Cross- Appellees Reuven Alon, AKA Rob Alon, Columbus Imaging Center LLC, Medaid Radiology LLC, Yan Moshe, AKA Yan Leviev, Hackensack Specialty ASC LLC, FKA Dynamic Surgery Center LLC, and Integrated Specialty ASC LLC.
GERARD E. LYNCH, Circuit Judge:
Plaintiffs State Farm Mutual Automobile Insurance Company and State
Farm Fire and Casualty Insurance Company (collectively, “State Farm”) provide
automobile insurance coverage in New York and are required under New York’s
Comprehensive Motor Vehicle Insurance Reparations Act (“No-Fault Act”) to
reimburse covered individuals injured in automobile accidents for necessary
health expenses, without regard to fault. See N.Y. Ins. Law §§ 5101–5109. Insureds
3 can assign their No-Fault benefits to health care providers, who can then seek
reimbursement directly from State Farm for treatment provided to the insureds.
In this case, State Farm alleges that Defendants, who are health care providers
and related individuals and entities that treat automobile accident victims,
engaged in a massive scheme to fraudulently obtain No-Fault benefits by
providing medically unnecessary treatment and services pursuant to illegal “pay-
to-play” financial arrangements, seeking reimbursement of such claims from
State Farm, and then bringing thousands of baseless arbitrations and state-court
proceedings when State Farm denied the claims.
State Farm accordingly brought this lawsuit in the United States District
Court for the Eastern District of New York, asserting claims under the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and
state law. State Farm then sought a preliminary injunction to prevent Defendants
from pursuing the pending arbitrations and state-court proceedings and from
bringing any new actions. Granting State Farm’s motion for a preliminary
injunction in part, the district court (Margo K. Brodie, Ch. J.) stayed the pending
arbitrations and enjoined Defendants from commencing any new arbitrations or
state-court proceedings, but declined to enjoin the pending state-court
4 proceedings. Defendants appeal, contending that the district court abused its
discretion in granting a preliminary injunction and that the Federal Arbitration
Act (“FAA”), 9 U.S.C. § 1 et seq., bars an injunction of the arbitrations. State Farm
cross-appeals, arguing that the pending state-court proceedings can be enjoined
under exceptions to the Anti-Injunction Act (“AIA”), 28 U.S.C. § 2283.
First, as to Defendants’ appeal, we conclude that the district court did not
exceed its discretion in granting a preliminary injunction and correctly
determined, albeit for different reasons than our own, that the arbitration
agreements here are unenforceable under the FAA. Second, as to State Farm’s
cross-appeal, we disagree with the district court’s conclusion that the AIA bars an
injunction of the pending state-court proceedings here. Accordingly, we
REVERSE the district court’s orders declining to enjoin the pending state-court
proceedings, AFFIRM its orders in all other respects, and REMAND the matter
for further proceedings consistent with this opinion.
BACKGROUND
I. New York’s No-Fault Insurance Regime
New York’s No-Fault Act requires insurers to compensate victims of
automobile accidents for their injuries regardless of fault. See N.Y. Ins. Law
5 §§ 5101–5109. The No-Fault regime aims “to ensure prompt compensation for
losses incurred by accident victims without regard to fault or negligence, to
reduce the burden on the courts and to provide substantial premium savings to
New York motorists.” Med. Soc’y of New York v. Serio, 100 N.Y.2d 854, 860 (2003).
The No-Fault Act provides compensation for “basic economic loss,” which
covers, as relevant here, “necessary” health expenses up to $50,000 per person.
N.Y. Ins. Law § 5102(a).
The Act’s implementing regulations allow covered individuals to assign
their statutory benefits to licensed health care providers in exchange for services,
and the providers in turn can submit claims directly to the insurance companies
for medically necessary expenses. N.Y. Comp. Codes R. & Regs. tit. 11,
§ 65-3.11(a) (“An insurer shall pay benefits . . . directly to the applicant or . . .
upon assignment by the applicant[,] . . . shall pay benefits directly to providers of
health care services . . . .”). Providers, however, are ineligible to receive
reimbursement of No-Fault benefits in a number of circumstances, including if
they “fail[] to meet any applicable New York State or local licensing requirement
. . . or meet any applicable licensing requirement necessary . . . in any other
state.” Id. § 65-3.16(a)(12). For example, a medical services corporation may be
6 operated only by a licensed professional, such as a physician. See, e.g., N.Y. Bus.
Corp. Law §§ 1503(b), 1507, 1508(a). Providers are also prohibited from paying or
receiving kickbacks in exchange for patient referrals or in connection with the
performance of professional services. See, e.g., N.Y. Educ. Law § 6530(11),
(18)–(19); N.Y. Comp. Codes R. & Regs. tit. 8, § 29.1(b)(3)–(4).
In the event of a dispute regarding an insurer’s obligation to pay No-Fault
benefits, the No-Fault Act specifies that “[e]very insurer shall provide a claimant
with the option of submitting any dispute involving the insurer’s liability to pay
first party benefits, or additional first party benefits, . . . to arbitration,” and such
arbitrations are held “pursuant to simplified procedures.” N.Y. Ins. Law
§ 5106(b). Insurers must accordingly include a mandatory personal injury
protection endorsement in their liability policies providing for the option to
arbitrate. See N.Y. Comp. Codes R. & Regs. tit. 11, § 65-1.1.
II. Factual Background1
A. The Parties
Plaintiffs are insurance companies that issue automobile insurance policies
1 As explained further below, the factual background is derived from the First Amended Complaint (“FAC”). See infra note 5.
7 in New York. Defendants are health care providers and related individuals and
entities that treat automobile accident victims and have submitted claims to State
Farm seeking reimbursement of No-Fault benefits or worked with other
Defendants who have submitted such claims. Defendants include physicians,
physical therapists, chiropractors, and acupuncturists, as well as related
corporations and medical centers. Although there are numerous Defendants in
the case, only two groups of Defendants have pursued this appeal. The first
group of Defendants-Appellants includes Dr. Leonid Shapiro (“Shapiro”), Metro
Pain Specialists P.C. (“Metro Pain”), and Tri-Borough NY Medical Practice P.C.
(“Tri-Borough Medical”) (collectively, “Metro Pain Defendants”). Shapiro is a
licensed anesthesiologist in New York and New Jersey who purportedly owns
and controls several health care entities, including Metro Pain and its successor
entity Tri-Borough Medical, as well as PMR Medical P.C. (“PMR Medical”).
Shapiro has also incorporated and/or has ownership interests in companies that
provide medical documentation and technology services to attorneys and
medical clinics. In addition to his ownership of various entities, Shapiro has
served as the medical director of certain ambulatory surgery centers (“ASCs”),
including Excel Surgery Center LLC (“Excel Surgery”), Hackensack Specialty
8 ASC LLC, f/k/a Dynamic Surgery Center LLC (“Dynamic Surgery”), and
Integrated Specialty ASC LLC, f/k/a HealthPlus Surgery Center LLC
(“HealthPlus Surgery”), as well as the Director of Anesthesiology for NJMHMC
LLC, d/b/a Hudson Regional Hospital (“Hudson Regional”), and the primary
provider of anesthesia services at SCOB LLC d/b/a SurgiCare of Brooklyn
(“SurgiCare”).
Metro Pain is a medical practice that operates approximately thirty
multidisciplinary clinics in the New York area serving individuals injured in
automobile accidents. Metro Pain staffs those clinics with physicians and other
health care providers, such as physical therapists, acupuncturists, and
chiropractors, who sublease space from Metro Pain. Four of its locations operate
as “gatekeeper” clinics where Metro Pain conducts initial examinations of
patients and then refers them for further treatment and services, which are often
performed at Metro Pain clinics by the various providers who work there.2 Metro
Pain has accordingly submitted claims to State Farm for reimbursement under
the No-Fault program for treatment and services provided to patients. Metro
2 The four gatekeeper clinics are located at (a) 105-10 Flatlands Ave., Brooklyn, NY 11236; (b) 204-12 Hillside Ave., Hollis, NY 11423; (c) 717 Southern Blvd., Bronx, NY 10455; and (d) 2451 E. Tremont Ave., Bronx, NY 10461.
9 Pain, however, ceased operations around April 2021, and Shapiro began
operating Tri-Borough Medical as its successor entity in May 2021, assuming its
role and functions in nearly all respects. Like Metro Pain, Tri-Borough Medical is
a medical practice serving individuals injured in automobile accidents, and it
operates at many of Metro Pain’s prior locations, treating the same patients
through the physicians and other health care professionals previously employed
by Metro Pain. State Farm alleges that Shapiro operates Tri-Borough Medical as a
successor entity to Metro Pain in part to induce State Farm and other insurers to
reimburse claims for No-Fault benefits that they would not have paid to Metro
Pain.
The second group of Defendants-Appellants includes Reuven Alon (also
known as Rob Alon) (“Alon”), Columbus Imaging Center LLC (“Columbus
Imaging”), Medaid Radiology LLC (“Medaid Radiology”), Yan Moshe (also
known as Yan Leviev) (“Moshe”), Dynamic Surgery, and HealthPlus Surgery
(collectively, “MRI and ASC Defendants”). Alon is a businessman, not a
physician, who allegedly owns Columbus Imaging and Medaid Radiology,
which provide MRI services for Metro Pain patients, and which have submitted
bills to State Farm for such services. Alon also owns the Beshert Corp.
10 (“Beshert”), which is an advertising and marketing company directed at No-Fault
medical providers, attorneys, and victims of automobile accidents. Beshert also
functions as a referral network among No-Fault providers and attorneys and
requires its members to refer patients to other members in that network.
Moshe is Alon’s cousin and a businessman who allegedly owns several
health care entities, but he is not a physician or a licensed health care
professional. Moshe allegedly owns many ASCs, including Excel Surgery,
Dynamic Surgery, HealthPlus Surgery, and Hudson Regional, which serve
individuals injured in automobile accidents. State Farm further alleges that
Moshe secretly owns and controls companies that provide MRI services
including Citimedical I, PLLC (“Citimedical I”), Citimedical Services P.C., and
Citimed Complete Medical Care P.C., as well as anesthesia provider Citimed
Services P.A. (collectively, “Citimed Companies”), all of which are owned on
paper by Moshe’s sister, Dr. Regina Moshe (“Dr. Moshe”). Finally, Moshe owns
and controls Med Capital LLC (“Med Capital”), which is a medical receivables
financing company.
11 B. The Alleged Fraudulent Scheme
Beginning in November 2016 and continuing since then, Shapiro, Alon,
and Moshe allegedly devised a scheme to profit from New York’s No-Fault
regime by submitting fraudulent claims for reimbursement to State Farm. State
Farm alleges that Shapiro, Alon, and Moshe jointly orchestrated the scheme, and
that the relationship among them is symbiotic such that they each play important
roles to mutually benefit one another and further the scheme.
The alleged fraudulent scheme generally operates as follows: As a first
step, Metro Pain and Tri-Borough Medical conduct initial examinations of
patients at the gatekeeper clinics that are not intended to diagnose and treat
patients’ conditions, but rather are predetermined to find various injuries
requiring extensive treatment. Then, Metro Pain and Tri-Borough Medical refer
patients for further unnecessary treatment to health care providers within their
clinics or to Moshe’s and Alon’s health care centers. Alon advances the scheme
by providing Shapiro’s and Moshe’s health care entities access to patients
through Beshert, which receives compensation in return for those marketing
services. Moshe profits through Metro Pain’s and Tri Borough Medical’s referral
of patients for unnecessary treatment at his ASCs and some of the Citimed
12 Companies. In return, Moshe compensates Shapiro by paying him $400,000 in
salary for serving as the “medical director” of his ASCs and granting him the
primary, if not exclusive, ability to provide anesthesia services at his ASCs.
Moshe also advanced the scheme by providing Shapiro with a $2.5 million loan
against Metro Pain’s receivables. Some Defendants then submit claims for
reimbursement to State Farm for the medically unnecessary treatment and
services provided to patients and attempt to conceal their scheme by, inter alia,
“submitting multiple bills from multiple providers and by changing providers
operating at each address.” Joint Appendix (“J.A.”) 158.
As a final step in the alleged scheme, Defendants routinely initiate
litigation in state court and arbitration actions if State Farm denies Defendants’
claims for reimbursement. As of December 2021, Defendants had commenced
over 2,450 arbitrations and approximately 480 suits in state court seeking
reimbursement of No-Fault benefits from State Farm to further the alleged
scheme.3 Id. at 255. State Farm contends that those arbitrations and state-court
proceedings are baseless and advance the scheme in two ways. First, the
proceedings help monetize the scheme as further attempts to obtain No-Fault
3 As of January 8, 2024, 103 of those state-court proceedings remained pending.
13 benefits. Second, the proceedings obscure the fraud because the proceedings
often concern individual claims for individual patients, making it difficult to
prove a pattern of medically unnecessary services across multiple patients. As a
result of this elaborate and extensive alleged scheme, State Farm claims that it has
suffered more than $15 million in damages.
More specifically, State Farm alleges that the No-Fault claims are
fraudulent for three key reasons: (1) predetermined treatment protocols,
(2) kickbacks and “pay-to-play” financial arrangements, and (3) violations of
licensing requirements.
1. Predetermined Treatment Protocols
First, State Farm alleges that Defendants provide treatment and services
that are not medically necessary. As mentioned above, the Metro Pain
Defendants operate several multidisciplinary clinics, at least four of which
operate as gatekeeper clinics that conduct initial examinations of patients to
determine additional treatment and services. State Farm alleges that the initial
examinations are not legitimately performed to diagnose a patient’s condition
and genuine needs but are rather performed to justify unnecessary care through
identical treatment plans. Regardless of the patient’s actual needs, the
14 predetermined treatment protocols “virtually always conclude [that] patients
require a treatment plan consisting of a combination of physical therapy,
chiropractic care, and acupuncture, as well as other services” offered by the
Metro Pain Defendants or other providers with whom it has financial
arrangements. Id. at 51. In addition, the Metro Pain Defendants refer virtually
every patient who receives more than one office visit to Alon’s and Moshe’s
companies for MRIs, the majority of which were medically unnecessary.
Similarly, some of Metro Pain’s patients receive unnecessary cervical collars,
lumbar orthoses, prescription gels, and patches, as well as pain management and
orthopedic consultations that are followed by procedures performed by Metro
Pain and Tri-Borough Medical at Moshe’s ASCs where they receive anesthesia
from Shapiro’s or Moshe’s anesthesia companies. Finally, State Farm asserts that
the Metro Pain Defendants routinely order unnecessary diagnostic tests for
patients that do not affect their treatment, and that some of those tests are
duplicative of information already obtained through the initial predetermined
treatment protocols. The Metro Pain Defendants then bill State Farm for those
allegedly unnecessary treatment and services to fraudulently take advantage of
patients’ No-Fault benefits. As a result of the predetermined treatment protocols,
15 State Farm claims that victims injured in automobile accidents are not
appropriately examined and diagnosed, and that they receive treatment for
conditions they do not have, resulting in a diversion of the No-Fault benefits that
patients could have otherwise used for legitimate care.
2. Kickbacks and “Pay-to-Play” Financial Arrangements
In addition to providing medically unnecessary treatment and services,
some Defendants allegedly provide kickbacks in exchange for patient referrals
and have entered into other illegal “pay-to-play” financial arrangements with
each other. State Farm alleges that Defendants disguise some of those kickbacks
as rent. Specifically, the Metro Pain Defendants lease spaces to operate its
gatekeeper clinics and then sublease those spaces to physicians and other health
care professionals who provide services like chiropractic, acupuncture, and
physical therapy treatment after patients’ predetermined initial examinations
with Metro Pain and Tri-Borough Medical. Those providers accordingly pay
Metro Pain “rent” for the sublease, but State Farm alleges that the payments are
intended to compensate Metro Pain for referring its patients to the providers for
further treatment. For example, State Farm alleges that Metro Pain paid a
monthly rent of approximately $8,500 for a particular clinic, but it received about
16 $9,500 in “rent” payments from providers subleasing that space, which State
Farm contends was not tied to the fair market value of the space. As further
support, State Farm points to discrepancies in clinic usage by various providers,
alleging that many providers paid the same amount in “rent” to Metro Pain even
though some of them only treated patients for one to four days a month at Metro
Pain’s clinics, whereas others treated patients at the same locations five days a
week, four weeks a month. State Farm accordingly asserts that such payments to
Metro Pain must have been for other than, or more than, simply rent, such as
patient referrals.
Aside from disguised rent payments, State Farm alleges that there are
many other illegal financial arrangements among Defendants that further the
scheme. Pursuant to one such arrangement, Metro Pain performs every pain
management and orthopedic procedure for its patients at Moshe-owned facilities
such as Dynamic Surgery, HealthPlus Surgery, SurgiCare, Citimed Surgery, and
Hudson Regional, and those patients receive anesthesia from Shapiro- or Moshe-
owned providers. That arrangement resulted from an alleged kickback
relationship between Shapiro, Moshe, Alon, and Alon’s marketing company
Beshert, through which Metro Pain obtains access to patients in exchange for
17 referring patients to Moshe’s Dynamic Surgery and HealthPlus Surgery ASCs,
and Moshe compensates Shapiro in return. Another alleged “pay-to-play”
financial arrangement is the participation agreement Beshert has with its
members. Pursuant to that agreement, members pay Beshert monthly dues, with
Shapiro and Metro Pain paying dues as high as $10,000 each month, and Moshe’s
Dynamic Surgery and HealthPlus Surgery, the only two ASCs in the Beshert
network, paying $50,000 each month. As required by that membership, Metro
Pain exclusively uses Moshe’s ASCs for procedures and routinely refers patients
for MRIs at other facilities in the Beshert network. Due to such “pay-to-play”
financial arrangements and kickbacks, State Farm alleges that some Defendants
are not eligible to collect No-Fault benefits.
3. Violation of Licensing Requirements
Finally, State Farm alleges that Defendants’ claims are fraudulent because
many Defendants operate in violation of licensing requirements. For example,
although on paper Dr. Moshe owns Citimedical I and Citimed Services, her
brother Moshe effectively owns and controls them in violation of New York
licensing laws, such that any claims submitted by those companies are ineligible
for reimbursement. As another example, State Farm alleges that Metro Pain
18 entered into several financial arrangements with Moshe’s company Med Capital,
which agreed to lend up to $2.5 million to Shapiro’s Metro Pain and PMR
Medical. As a result of those arrangements, State Farm claims that Moshe was
able to control and direct Metro Pain despite being a layperson.
State Farm also alleges that Shapiro was not a true and qualified medical
director of Dynamic Surgery and HealthPlus Surgery, in violation of licensing
requirements. Specifically, State Farm alleges that Shapiro was “in no position to
perform his regulatory duties as a medical director because his own professional
corporations were significantly expanding.” Id. at 102. State Farm elaborates that
Moshe had a pattern and practice of hiring nominal medical directors even
before Shapiro. Accordingly, State Farm alleges that any claims submitted by
those ASCs when Shapiro served as the nominal medical director are ineligible
for reimbursement and that the alleged violations of various licensing
requirements altogether render claims submitted by some Defendants
fraudulent.
III. Procedural Background
State Farm filed this lawsuit in October 2021 and amended its complaint in
December 2021 (“First Amended Complaint” or “FAC”). The FAC brought
19 twenty-six claims against various Defendants under the following causes of
action: (1) common law fraud; (2) aiding and abetting fraud; (3) unjust
enrichment; (4) violation of RICO, 18 U.S.C. § 1962(c)–(d); and (5) declaratory
relief under 28 U.S.C. § 2201. In December 2021, State Farm moved to stay all
pending arbitrations and state-court proceedings brought by Defendants against
it and to enjoin Defendants from commencing any new arbitrations or state court
lawsuits concerning benefits provided by Defendants to patients of Metro Pain or
Tri-Borough Medical. In May 2022, the district court granted the motion in part,
enjoining all (1) pending arbitrations, (2) new arbitrations, and (3) new state-
court proceedings, but declined to stay the pending state-court proceedings. State
Farm Mut. Auto. Ins. Co. v. Metro Pain Specialists P.C. (“State Farm I”), No.
21-CV-5523 (MKB), 2022 WL 1606523, at *2 (E.D.N.Y. May 20, 2022).
In June 2022, State Farm moved for reconsideration of the district court’s
order declining to stay the pending state-court proceedings, and the district court
denied that motion in August 2022. Defendants appealed while the motion for
reconsideration was pending. State Farm then cross-appealed.4
4 State Farm first filed a notice of appeal on June 29, 2022 while its motion for reconsideration was pending. After the district court resolved that motion, State Farm filed an amended notice of appeal on August 10, 2022, which included the
20 JURISDICTION
Before we can address the propriety of the preliminary injunction, we must
ensure that the case is properly before this Court. Although the parties did not
raise the issue of appellate jurisdiction in their briefs, we have an independent
obligation to ensure that we have jurisdiction over the appeal. See Stafford v. Int’l
Bus. Machs. Corp., 78 F.4th 62, 68 (2d Cir. 2023). Thus, after oral argument, this
Court ordered the parties to brief the issue of this Court’s appellate jurisdiction.
Having reviewed the parties’ submissions, we conclude that this appeal is not
moot and that we have jurisdiction over the district court’s orders. But before
explaining the basis for our jurisdiction, we review certain aspects of the
procedural history that bear directly on the question of our appellate jurisdiction.
In January 2023, while the appeal was pending in this Court, State Farm
moved for leave to file a Second Amended Complaint (“SAC”) in which it added
sixteen new Defendants and further details about the alleged fraud. To cover the
newly-added Defendants, State Farm also moved for a temporary restraining
order and to modify the scope of the previously entered preliminary injunction.
Chief Judge Brodie granted the temporary restraining order in February 2023 and
district court’s reconsideration decision.
21 determined that the existing preliminary injunction already applied to the new
Defendants under Federal Rule of Civil Procedure 65(d)(2)(C), which makes an
injunction enforceable against “persons who are in active concert or participation
with” the already-enjoined Defendants. Chief Judge Brodie then referred State
Farm’s motion for leave to file the SAC to Magistrate Judge Peggy Kuo who
granted the motion, and State Farm filed the SAC on August 17, 2023.
Then, in September 2023, Chief Judge Brodie denied State Farm’s motion to
modify the scope of the existing preliminary injunction. Referring back to her
prior decision granting the temporary restraining order, Chief Judge Brodie
stated that because the existing injunction already covered the newly-added
Defendants, there was no need to modify the injunction. She elaborated that
“each of the newly-added entities is closely associated with or controlled by one
or more of the existing Defendants, while each of the newly-added individuals
owns an entity alleged to have provided unnecessary treatments under the
challenged scheme.” State Farm Mut. Auto. Ins. Co. v. Metro Pain Specialists P.C.
(“State Farm II”), No. 21-CV-5523 (MKB), 2023 WL 7181653, at *4 (E.D.N.Y. Sept.
13, 2023). Thus, the district court declined to modify the preliminary injunction,
which remains unchanged since the district court granted it in May 2022.
22 Those developments occurred while the appeal was pending in this Court,
so the precise question before us is whether the SAC renders this appeal moot.
We conclude that the appeal is not moot. To avoid mootness, there must be an
“actual controversy” through which the parties can obtain some relief from the
court, and that controversy must exist “through all stages of the litigation.” See
Already, LLC v. Nike, Inc., 568 U.S. 85, 90–91 (2013) (internal quotation marks
omitted). “A case becomes moot . . . when the issues presented are no longer live
or the parties lack a legally cognizable interest in the outcome.” Id. at 91 (internal
quotation marks omitted). In other words, and as relevant here, the preliminary
injunction must still be effective, and there must be something left for the court to
do.
Generally, “[o]nce an amended pleading is interposed, the original
pleading no longer performs any function in the case.” Laza v. Reish, 84 F.3d 578,
581 (2d Cir. 1996) (internal quotation marks omitted). Building upon that
understanding, a growing number of unpublished decisions from this Court
have concluded that the “filing of an amended complaint will generally moot a
pending appeal when . . . the appeal would require the Court to analyze factual
allegations contained in the superseded complaint.” Medidata Sols., Inc. v. Veeva
23 Sys. Inc., 748 F. App’x 363, 365 (2d Cir. 2018) (summary order); see also Tripathy v.
McClowski, No. 21-3094, 2022 WL 2069228, at *2 (2d Cir. June 9, 2022) (summary
order) (holding that the appeal of a preliminary injunction was moot because the
amended complaint filed while the appeal was pending requested new injunctive
relief); Adamou v. Doyle, 674 F. App’x 50, 52 (2d Cir. 2017) (summary order)
(ruling that the “appeal became moot upon the filing of the . . . amended
complaint because the operative facts changed” and the Court therefore “lack[ed]
jurisdiction to review an order that was based on an old universe of facts”).
As these cases suggest, the filing of an amended complaint will generally
moot the appeal of a preliminary injunction, because an amended complaint will
commonly “change[]” the “operative facts,” Adamou, 674 F. App’x at 52, on which
the district court based the injunction. As a result, once a new set of facts is
alleged, there is typically no point in assessing whether the now-superseded
“universe of facts,” id., supported the injunction.
But that will not invariably be the case. Two of our sister courts of appeals,
in determining whether such appeals are moot, have analyzed whether the
revised pleadings in fact affect the substantive basis for a district court’s order.
See Auto Driveaway Franchise Sys., LLC v. Auto Driveaway Richmond, LLC, 928 F.3d
24 670, 674–75 (7th Cir. 2019) (concluding that the appeal was not moot because the
“new pleadings did no more than to add” a party and “had no effect on [the
plaintiff’s] basic grievance”); see also Johnson v. 3M Co., 55 F.4th 1304, 1309
(11th Cir. 2022) (determining that the court had jurisdiction over the appeal of an
immunity order because the “key point” was that the amended complaint did not
change the allegations on which the immunity defense was based, “leav[ing] the
status of th[e] appeal of the immunity order unaffected”).
We agree with that reasoning and conclude that whether a revised
pleading renders an appeal moot turns on whether that pleading materially
changes the substantive basis for the appeal. Here, the SAC borrows heavily from
the FAC, with the primary difference between the two complaints being that the
SAC adds sixteen Defendants and further details about the alleged fraudulent
scheme. The newly-added Defendants do not meaningfully alter the substantive
basis of the appeal because, as the district court found, they are either closely
associated with or controlled by the existing Defendants, or provided
unnecessary treatments under the scheme. Neither party disputes that finding on
appeal.
25 As for the additional allegations included in the SAC, the most significant
difference appears to be that the scheme is now described as revolving around
Moshe instead of the Metro Pain Defendants. But even that does not alter State
Farm’s basic grievance that Defendants allegedly operate a complex scheme to
fraudulently obtain No-Fault benefits by, inter alia, providing unnecessary
treatment and services and kickbacks for patient referrals. Moreover, both the
SAC and FAC allege that Moshe played an important role in the scheme, with the
SAC merely placing greater emphasis on his role. Any other additional
allegations in the SAC operate to further strengthen State Farm’s claims.
Tellingly, the May 2022 preliminary injunction remains predicated on the FAC, as
the district court declined to amend it in any way based on the additional
allegations in the SAC. Thus, although the FAC is no longer the operative
complaint governing further proceedings in the district court, the issues on
appeal remain unaffected by that change, and the propriety of the injunction
does not turn on any change effected by the SAC.
The preliminary injunction thus remains in place, unmodified, and
continues to constrain Defendants by preventing them from commencing new
26 arbitrations and state-court litigation and proceeding with the pending
arbitrations. In other words, Defendants are still aggrieved by the preliminary
injunction even after the filing of the SAC. Accordingly, we conclude that this
appeal is not moot, and we have jurisdiction over it.5
MERITS DISCUSSION
I. Standards of Review
We review the grant or denial of a preliminary injunction for abuse of
discretion. Sunward Elecs., Inc. v. McDonald, 362 F.3d 17, 24 (2d Cir. 2004). “A
district court ‘abuses’ or ‘exceeds’ the discretion accorded to it when (1) its
decision rests on an error of law . . . or a clearly erroneous factual finding, or
(2) its decision—though not necessarily the product of a legal error or a clearly
erroneous factual finding—cannot be located within the range of permissible
decisions.” Zervos v. Verizon New York, Inc., 252 F.3d 163, 169 (2d Cir. 2001)
5 Although the SAC does not divest us of appellate jurisdiction, we review only the FAC in this opinion to determine the propriety of the preliminary injunction because the district court granted the injunction based on the FAC. See Deeper Life Christian Fellowship, Inc. v. Sobol, 948 F.2d 79, 81 (2d Cir. 1991) (where a district court issued a preliminary injunction and the plaintiff thereafter amended the complaint, the Court “considered only the original complaint” on appeal). In any event, our conclusion that the district court did not abuse its discretion in granting a preliminary injunction is not altered by the SAC, which primarily includes additional detail beyond the allegations already included in the FAC.
27 (footnote omitted). That said, “[w]here allegations of error in a preliminary
injunction involve questions of law, our review is de novo.” Briggs v. Bremby,
792 F.3d 239, 241 (2d Cir. 2015). Thus, we review the district court’s decision to
grant the preliminary injunction here for abuse of discretion but review its
interpretation of the FAA and AIA de novo. See Cedeno v. Sasson, 100 F.4th 386, 393
(2d Cir. 2024) (FAA); Wyly v. Weiss, 697 F.3d 131, 137 (2d Cir. 2012) (AIA).
II. Analysis
We first consider Defendants’ appeal, which challenges (1) the propriety of
the preliminary injunction issued by the district court and (2) the district court’s
conclusion that the arbitrations can be enjoined, notwithstanding the FAA. Then,
we consider State Farm’s cross-appeal, which challenges the district court’s
conclusion that the pending state-court proceedings cannot be enjoined under the
AIA.
A. Preliminary Injunction
First, Defendants challenge the preliminary injunction insofar as it stays
the pending arbitrations and enjoins them from commencing any new
arbitrations or state-court proceedings. A preliminary injunction “‘is an
extraordinary and drastic remedy, one that should not be granted unless the
28 movant, by a clear showing, carries the burden of persuasion.’” Moore v. Consol.
Edison Co. of New York, 409 F.3d 506, 510 (2d Cir. 2005), quoting Mazurek v.
Armstrong, 520 U.S. 968, 972 (1997). To obtain a preliminary injunction, a party
must show “(1) irreparable harm; (2) either a likelihood of success on the merits
or both serious questions on the merits and a balance of hardships decidedly
favoring the moving party; and (3) that a preliminary injunction is in the public
interest.” North American Soccer League, LLC v. United States Soccer Fed’n, 883 F.3d
32, 37 (2d Cir. 2018). Because under the “serious questions” standard a party
would have to demonstrate both serious questions on the merits and a balance of
hardships decidedly favoring the moving party, the “overall burden is no lighter
than the one [the party] bears under the ‘likelihood of success’ standard.”
Citigroup Glob. Mkts., Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d
30, 35 (2d Cir. 2010).
Defendants argue that the district court abused its discretion in granting
the preliminary injunction. We disagree.
1. Irreparable Harm
The irreparable harm requirement is “‘the single most important
prerequisite for the issuance of a preliminary injunction.’” Faiveley Transp. Malmo
29 AB v. Wabtec Corp., 559 F.3d 110, 118 (2d Cir. 2009), quoting Rodriguez v. DeBuono,
175 F.3d 227, 234 (2d Cir. 1999). This requirement must therefore be satisfied
before the other requirements for an injunction can be considered. Kamerling v.
Massanari, 295 F.3d 206, 214 (2d Cir. 2002). To make this showing, the moving
party “‘must demonstrate that absent a preliminary injunction [it] will suffer an
injury that is neither remote nor speculative, but actual and imminent, and one
that cannot be remedied if a court waits until the end of trial to resolve the
harm.’” Faiveley, 559 F.3d at 118, quoting Grand River Enter. Six Nations, Ltd. v.
Pryor, 481 F.3d 60, 66 (2d Cir. 2007). Thus, irreparable harm exists “where, but for
the grant of equitable relief, there is a substantial chance that upon final
resolution of the action the parties cannot be returned to the positions they
previously occupied.” Brenntag Int’l Chems., Inc. v. Bank of India, 175 F.3d 245, 249
(2d Cir. 1999). But “[w]here there is an adequate remedy at law, such as an award
of money damages, injunctions are unavailable except in extraordinary
circumstances.” Moore, 409 F.3d at 510. Therefore, the moving party must show
that “there is a continuing harm which cannot be adequately redressed by final
relief on the merits and for which money damages cannot provide adequate
compensation.” Kamerling, 295 F.3d at 214 (internal quotation marks omitted).
30 In this case, the district court determined that State Farm satisfied the
irreparable harm requirement because “the global and intertwined nature of the
fraud is effectively obscured in the fragmented state-court proceedings and
arbitrations due to an incomplete factual record, in addition to the risk of
inconsistent judgments, frustration of declaratory judgment relief, and possible
preclusive effect.” State Farm I, 2022 WL 1606523, at *19 (internal quotation marks
and alterations omitted). The district court also noted that the parties are
currently in the midst of thousands of pending arbitrations, and Defendants are
likely to initiate new arbitrations and lawsuits to recover unpaid claims.
We discern no error, much less an abuse of discretion, in the district court’s
conclusion that State Farm satisfied the irreparable harm requirement. To begin,
State Farm plausibly alleges that the arbitrations and state-court proceedings
often involve single claims for a single date of service, so that these fragmented
proceedings end up obscuring what State Farm contends is an elaborate and
complex fraudulent scheme. Although a state court or arbitrator reviewing an
individual claim may conclude that the claim involves necessary medical
treatment under the No-Fault Act, State Farm sufficiently alleges that the massive
fraudulent scheme here becomes apparent only when the claims are analyzed
31 altogether. That is, to prove up allegations of a predetermined treatment
protocol, a reviewing court or arbitrator must consider whether Defendants have
repeatedly provided the same treatment or services to several patients regardless
of their actual medical needs, which is exceedingly difficult to establish in a
proceeding on a single claim. Put another way, Defendants’ alleged fraudulent
scheme is not readily apparent when viewed on an individual claim-by-claim
basis, and the arbitrations and state-court proceedings therefore help to insulate
the alleged fraud from detection.
That risk of harm is amplified by the potential preclusive effect of the state-
court proceedings and arbitrations. It is settled law that state-court judgments
can have a preclusive effect in federal court. See Whitfield v. City of New York,
96 F.4th 504, 522 (2d Cir. 2024) (noting that federal courts are required “to give to
a state-court judgment the same preclusive effect as would be given that
judgment under the law of the State in which the judgment was rendered”
(internal quotation marks omitted)). It is likewise settled “that res judicata and
collateral estoppel apply to issues resolved by arbitration where there has been a
final determination on the merits, notwithstanding a lack of confirmation of the
award.” Jacobson v. Fireman’s Fund Ins. Co., 111 F.3d 261, 267–68 (2d Cir. 1997)
32 (internal quotation marks omitted); see also Benjamin v. Traffic Exec. Ass’n E.
Railroads, 869 F.2d 107, 110 (2d Cir. 1989) (“[T]he findings of arbitration boards
can serve as the basis for collateral estoppel in a federal court proceeding.”). In
fact, the No-Fault Act specifically provides that “[a]n award by an arbitrator shall
be binding.” N.Y. Ins. Law § 5106(c). Because the arbitrations and state-court
proceedings here could determine that certain claims were reimbursable based
on findings of medical necessity for individual patients, those decisions could
have a preclusive effect in this action, thereby preventing complete relief to State
Farm if it is so entitled. See Benjamin, 869 F.2d at 114 (noting a sister circuit’s
decision holding that “arbitration findings may be given collateral estoppel effect
over issues in a RICO claim”). Of course, whether such findings will in fact be
preclusive will depend on the precise circumstances of the proceedings. For
example, courts determining the preclusive effect of arbitrations consider
whether the procedures employed adequately protected the rights of the parties
and whether an arbitrator’s decision and rationale can be determined with
“clarity and certainty.” See Postlewaite v. McGraw-Hill, 333 F.3d 42, 48–49 (2d Cir.
2003) (internal quotation marks and emphasis omitted). But it is premature at this
point to attempt to ascertain the definitive preclusive effect of such proceedings
33 because our task at this juncture is solely to determine whether there is a
sufficient showing of a risk of irreparable harm absent an injunction. We believe
there is.
Those harms also threaten to continue absent an injunction. To establish
irreparable harm, the moving party must show “a continuing harm which cannot
be adequately redressed by final relief on the merits.” Kamerling, 295 F.3d at 214
(internal quotation marks omitted and emphasis added). Without the preliminary
injunction currently in place, Defendants would continue bringing new actions to
recover the remaining unpaid claims for No-Fault benefits, which total around $9
million as of December 2021. State Farm contends that Defendants use those very
proceedings “to monetize their fraud against the State Farm Companies,” such
that they are “essentially financing their fraudulent practices with proceeds paid
by” State Farm. Appellees’ Br. 37–38. Thus, we conclude that State Farm has
sufficiently demonstrated a risk of irreparable harm that threatens to continue
absent an injunction.
Allstate Insurance Co. v. Harvey Family Chiropractic, on which Defendants
place principal reliance, is not to the contrary. 677 F. App’x 716 (2d Cir. 2017)
(summary order). In that case, an insurer brought a RICO action alleging that the
34 defendants presided over an enterprise that fraudulently received No-Fault
benefits because the key defendant was illegally organized. See id. at 717. The
insurer also sought a preliminary injunction preventing the defendants from
proceeding with pending state-court proceedings and from commencing any
new arbitrations or lawsuits, which the district court denied on the basis that it
lacked the authority to issue the injunction under the AIA. See id. We affirmed in
a summary order on a different ground, concluding that plaintiffs had failed to
establish the irreparable harm required for a preliminary injunction because there
was no evidence that “plaintiffs cannot be fully compensated through money
damages for the alleged harm suffered from the defendants’ fraudulent claims.”
Id. at 718. We explained that “mere injuries . . . in terms of money, time and
energy . . . are not enough to establish irreparable harm.” Id. (internal quotation
marks omitted).
Although both cases involve allegations of fraudulent claims for No-Fault
benefits, Harvey is readily distinguishable from the instant action.6 To begin, the 6 Separately, we note that our summary orders do not have precedential effect because such orders “frequently do not set out the factual background of the case in enough detail to disclose whether its facts are sufficiently similar to those of a subsequent unrelated case to make our summary ruling applicable to the new case.” Jackler v. Byrne, 658 F.3d 225, 244 (2d Cir. 2011); see also 2d Cir. Local R. 32.1.1(a). Harvey is one such case, with its brief description of the facts limiting
35 nature and complexity of the fraudulent scheme in each case is meaningfully
different. The insurer in Harvey alleged that the No-Fault claims submitted by the
defendants there were fraudulent because the key defendant was illegally
organized, see id. at 717, whereas, here, State Farm alleges that Defendants have
engaged in a massive and highly complex scheme involving predetermined
treatment protocols to justify unnecessary treatment across a myriad of
providers, kickbacks for patient referrals, and violations of licensing laws. That
distinction affects the irreparable harm analysis because the allegation in Harvey
(illegal organization) can be more easily established in arbitrations and state-
court proceedings for individual claims in comparison to the complex allegations
here which are obscured in such piecemeal proceedings. Moreover, Harvey
primarily focused on economic harms and did not discuss the potential
preclusive effects of the arbitrations and state-court proceedings. See id. at 718.
Furthermore, we review the decision to grant or deny a preliminary
injunction for abuse of discretion, not de novo. Sunward Elecs., 362 F.3d at 24.
Harvey is therefore also distinguishable because the district court there denied a
preliminary injunction, whereas the district court here granted an injunction, and
the meaningful comparisons we can draw to the instant action.
36 we analyze whether those decisions can “be located within the range of
permissible decisions.” Zervos, 252 F.3d at 169. We think the district court’s
decision here can, and we therefore conclude that the district court did not abuse
its discretion in concluding that State Farm satisfied the irreparable harm
requirement.
2. Serious Questions on the Merits
Second, State Farm must demonstrate “either a likelihood of success on the
merits” or “serious questions on the merits.” North American Soccer League,
883 F.3d at 37. “The ‘serious questions’ standard permits a district court to grant
a preliminary injunction in situations where it cannot determine with certainty
that the moving party is more likely than not to prevail on the merits of the
underlying claims, but where the costs outweigh the benefits of not granting the
injunction.” Citigroup, 598 F.3d at 35. This standard is also frequently referred to
as the “fair ground for litigation” standard. Able v. United States, 44 F.3d 128, 131
(2d Cir. 1995).
Before resolving whether this standard is satisfied here, we address
Defendants’ contention that the district court erred in relying on unsworn and
unverified allegations to determine that there were serious questions going to the
37 merits. We have previously explained that “‘there is no hard and fast rule in this
circuit that oral testimony must be taken on a motion for a preliminary injunction
or that the court can in no circumstances dispose of the motion on the papers
before it.’” Maryland Cas. Co. v. Realty Advisory Bd. on Lab. Rels., 107 F.3d 979, 984
(2d Cir. 1997), quoting Consol. Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 256
(2d Cir. 1989). Although there should generally be an evidentiary hearing when
essential facts are in dispute, see id., “[a] party may . . . waive its right to an
evidentiary hearing,” Charette v. Town of Oyster Bay, 159 F.3d 749, 755 (2d Cir.
1998).
Defendants do not appear to have requested an evidentiary hearing on the
preliminary injunction motion in the district court, and they have thus forfeited
their right to such a hearing. Moreover, although the district court could have
cultivated a fuller record by conducting an evidentiary hearing, it has greater
flexibility to resolve the motion on the papers when it relies on the “serious
questions” standard as opposed to the more rigorous “likelihood of success”
standard. The “serious questions” standard allows courts to “assess[] the merits
of a claim at the preliminary injunction stage” by affording considerable
“flexibility in the face of varying factual scenarios and the greater uncertainties
38 inherent at the outset of particularly complex litigation.” Citigroup, 598 F.3d at 35
(internal quotation marks omitted). Put another way, this standard
“accommodates the needs of the district courts in confronting motions for
preliminary injunctions in factual situations that vary widely in difficulty and
complexity.” Id. at 38. And while we have noted above that the alternative
showings that can warrant a preliminary injunction are overall of comparable
difficulty, as to the substantive components of those alternatives, we have
repeatedly recognized that “there can be no doubt . . . that the
likelihood-of-success standard is more rigorous than the serious-questions
standard.” Trump v. Deutsche Bank AG, 943 F.3d 627, 637 n.22 (2d Cir. 2019)
(collecting cases), vacated and remanded on other grounds sub nom. Trump v.
Mazars USA, LLP, 591 U.S. 848 (2020); see also Citigroup, 598 F.3d at 38 (describing
the “serious questions” standard as “the more flexible standard for a preliminary
injunction”). The significance of this flexibility is that courts applying the “serious
questions” standard have the discretion to rely on the pleadings and
accompanying affidavits, particularly when no party has requested an
evidentiary hearing, to resolve preliminary injunction motions, provided that the
movant has raised “questions going to the merits so serious, substantial, difficult
39 and doubtful, as to make them a fair ground for litigation and thus for more
deliberate investigation.” Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738,
740 (2d Cir. 1953). “A determination not to hold an evidentiary hearing is
reviewed for abuse of discretion.” United States v. Amico, 486 F.3d 764, 779 (2d
Cir. 2007). The district court here did not abuse its discretion in determining that
the record before it was sufficient to allow it to decide, without a hearing and
solely on the papers before it, that there was a fair ground for litigation.
We further conclude that the district court did not err in determining that
State Farm demonstrated sufficiently serious questions going to the merits. In the
159-page FAC, State Farm alleges in substantial detail that Defendants have
participated in an elaborate RICO scheme spanning several years. The allegations
describe a web of interconnected relationships among the various Defendants,
illegal financial arrangements tying many of the Defendants together, medically
unnecessary treatment and services provided to patients, and unauthorized
ownership or operation of medical facilities by some Defendants.
In particular, State Farm’s allegations describe the (1) history and operation
of the four “gatekeeper clinics” and the specific amounts in “rent” kickbacks that
providers paid for patient referrals at each of those locations; (2) predetermined
40 treatment protocols utilized at the gatekeeper clinics and unnecessary medical
care further provided to patients, including the precise medical procedures,
devices, and treatments rendered; (3) operation of medical facilities by
unauthorized laypersons like Alon and Moshe; and (4) illegal financial
relationships among Defendants for patient referrals, exclusive rights to perform
certain procedures, and otherwise fraudulent methods to obtain No-Fault
benefits. State Farm also attached approximately 360 pages in exhibits to the FAC
demonstrating the alleged predetermined treatment protocols utilized to provide
treatment to virtually every patient regardless of their actual needs. Those
exhibits include detailed charts on individual patients identifying the claim
number, gatekeeper clinic the patient visited, number of office visits, medical
findings (e.g., neck pain, low back pain, etc.), and exact treatment and care billed
to State Farm (e.g., physical therapy, chiropractic care, acupuncture, MRIs,
cervical collars, etc.). The exhibits also include initial examination reports
describing patients’ treatment plans, documents ordering tests, services, and
devices for patients, follow-up reports regularly ordering the continuation of
allegedly unnecessary treatment, and other treatment notes from providers.
41 That is not all. State Farm also attached an affidavit and exhibits to its
preliminary injunction motion detailing the number of pending arbitrations and
state-court proceedings that Defendants had filed. Defendants responded to State
Farm’s motion and attached multiple declarations in opposition. The district
court then evaluated that record and concluded that the allegations were
sufficiently serious, detailed, and complex, making them fair ground for litigation
and for additional investigation. We find no error or abuse of discretion in that
conclusion.
3. Balance of Hardships
Third, we consider whether State Farm demonstrated that the balance of
hardships tips decidedly in its favor. See Citigroup, 598 F.3d at 35. In determining
whether State Farm has satisfied this requirement, “we must ‘balance the
competing claims of injury and must consider the effect on each party of the
granting or withholding of the requested relief.’” Yang v. Kosinski, 960 F.3d 119,
135 (2d Cir. 2020), quoting Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24
(2008). This factor is “related” to the irreparable harm requirement as “both . . .
consider the harm to the parties” with the relevant harm being that which
“(a) occurs to the parties’ legal interests and (b) cannot be remedied after a final
42 adjudication, whether by damages or a permanent injunction.” Salinger v. Colting,
607 F.3d 68, 81 (2d Cir. 2010) (footnote omitted).
Defendants argue that in balancing the hardships, the district court failed
to consider the financial impact of an injunction on them given the millions of
dollars in unpaid bills and the risk of policy exhaustion resulting from the
$50,000 limit on patients’ No-Fault benefits. But the district court expressly
considered the economic impact on Defendants and weighed that hardship
against the thousands of arbitrations and state-court proceedings State Farm
faces absent an injunction. The district court noted that unlike State Farm,
Defendants do not “face a similar level of uncertainty in their competing concern
of policy exhaustion” and acknowledged “the impact of the COVID-19 pandemic
on the healthcare industry,” but concluded that Defendants could recover any
balance owed plus interest if they eventually prevail on the merits. State Farm I,
2022 WL 1606523, at *20–22. Defendants undoubtedly face some hardship as
relatively small companies or individual medical providers. But State Farm raises
serious and substantial allegations that demonstrate actual and imminent
irreparable harm absent an injunction, whereas Defendants’ alleged hardships of
economic impact can be remedied by monetary damages should they later
43 prevail. See Kamerling, 295 F.3d at 214. Accordingly, Defendants’ arguments
evince plausible disagreement with the district court’s balancing of the
hardships, but the balance reached by the district court falls squarely within its
discretion. See Zervos, 252 F.3d at 169.
4. Public Interest
Fourth, we consider whether the preliminary injunction is in the public
interest, which concerns the “public consequences in employing the
extraordinary remedy of injunction.” Yang, 960 F.3d at 135–36 (internal quotation
marks omitted). Preventing fraud, especially the kind of elaborate and complex
RICO scheme alleged here, is plainly in the public interest. See Allstate Ins. Co. v.
Mun, 751 F.3d 94, 100 (2d Cir. 2014) (stating that “the prevention of insurance
fraud for the protection of consumers in New York” is an “important public
policy interest” (internal quotation marks omitted)); Perl v. Meher, 18 N.Y.3d 208,
214 (2011) (“No-fault abuse still abounds today. In 2010, no-fault accounted for
53% of all fraud reports received by the Insurance Department.”).
New York’s No-Fault regime is aimed at ensuring prompt compensation
for victims of automobile accidents without regard for fault. Insurers are integral
components of that expedited regime as they are uniquely positioned to combat
44 the depletion of public resources caused by fraudulent claims for No-Fault
benefits. To that end, New York requires most insurers to implement anti-fraud
measures by preparing plans “for the detection, investigation and prevention of
fraudulent insurance activities” in the state. N.Y. Ins. Law § 409(a). Among other
things, the fraud prevention plans must provide for the “coordination with other
units of an insurer for the investigation and initiation of civil actions based upon
information received by or through the[ir] special investigation unit.” Id.
§ 409(c)(4) (emphasis added). That public interest in detecting and preventing
insurance fraud is thwarted, however, when insurers like State Farm find
themselves facing thousands of arbitrations and state-court proceedings for the
reimbursement of individual claims for No-Fault benefits into which “[c]omplex
fraud and RICO claims . . . cannot be shoehorned.” Mun, 751 F.3d at 99. Thus, we
conclude that the district court did not err in granting a preliminary injunction to
preserve State Farm’s ability to prove its allegations of a complex fraudulent
scheme involving insurance benefits, which is clearly in the public interest. The
district court therefore did not abuse its discretion in determining that a
preliminary injunction was warranted here.
45 5. Security Bond
Finally, the MRI and ASC Defendants argue that the district court erred in
declining to require State Farm to post a bond.7 We disagree. Federal Rule of
Civil Procedure 65(c) provides that a “court may issue a preliminary injunction . .
. only if the movant gives security in an amount that the court considers proper to
pay the costs and damages sustained by any party found to have been
wrongfully enjoined or restrained.” (Emphasis added). Courts have the
discretion, however, to require no security at all depending on the specific
circumstances. See Corning Inc. v. PicVue Elecs., Ltd., 365 F.3d 156, 158 (2d Cir.
2004); see also Doctor’s Assocs., Inc. v. Stuart, 85 F.3d 975, 985 (2d Cir. 1996)
(explaining that district courts have wide discretion in determining whether to
require a security).
Here, the MRI and ASC Defendants argue that the district court erred
because other district courts have sometimes required plaintiff insurers to post
bond in actions involving No-Fault benefits. But that does not mean that the
district court’s decision here involved an error of law or a clearly erroneous
factual finding, or cannot otherwise be located within the range of permissible 7 The Metro Pain Defendants do not challenge the district court’s refusal to require security.
46 decisions. See Zervos, 252 F.3d at 169. Rule 65(c)’s security requirement is
designed to “assure[] the enjoined party that it may readily collect damages from
the funds posted in the event that it was wrongfully enjoined, and that it may do
so without further litigation and without regard to the possible insolvency of the
plaintiff.” Nokia Corp. v. InterDigital, Inc., 645 F.3d 553, 557 (2d Cir. 2011). The
district court did not abuse its discretion in finding that “Defendants may readily
collect damages from Plaintiffs” should they prevail as there is no evidence to the
contrary. State Farm I, 2022 WL 1606523, at *22 (referencing Plaintiffs’ statement
that they “undoubtedly have the ability to pay Defendants’ claims, plus any
interest owed”). Thus, the district court did not abuse its discretion by not
requiring State Farm to post security.
B. Federal Arbitration Act
Having determined that the district court’s grant of the preliminary
injunction meets the standards generally applicable to such provisional relief, we
turn to Defendants’ remaining contention, that the FAA prohibits injunctions
barring them from instituting or proceeding with arbitrations. That is a question
of law that we review de novo. See Briggs, 792 F.3d at 241. Originally enacted in
1925, the FAA aimed to “reverse the longstanding judicial hostility to arbitration
47 agreements that had . . . been adopted by American courts, and to place
arbitration agreements upon the same footing as other contracts.” Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). Accordingly, Section 2 of the
FAA provides that agreements to arbitrate controversies arising out of a contract
“shall be valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Section 3 of the
FAA then “provides for stays of proceedings in federal district courts when an
issue in the proceeding is referable to arbitration,” and Section 4 provides “for
orders compelling arbitration when one party has failed, neglected, or refused to
comply with an arbitration agreement.” Gilmer, 500 U.S. at 25; see also 9 U.S.C.
§§ 3–4. Those provisions evince a “policy [designed] to make arbitration
agreements as enforceable as other contracts, but not more so.” Morgan v.
Sundance, Inc., 596 U.S. 411, 418 (2022) (internal quotation marks omitted).
New York’s No-Fault Act specifies that “[e]very insurer shall provide a
claimant with the option of submitting any dispute involving the insurer’s
liability to pay first party benefits, or additional first party benefits, the amount
thereof or any other matter which may arise pursuant to subsection (a) of this
section to arbitration pursuant to simplified procedures.” N.Y. Ins. Law § 5106(b).
48 The No-Fault Act’s implementing regulations further require that insurers
include a “[m]andatory personal injury protection endorsement” in their liability
policies providing that “[i]n the event any person making a claim for first-party
benefits and the [insurer] do not agree regarding any matter relating to the claim,
such person shall have the option of submitting such disagreement to
arbitration.” N.Y. Comp. Codes R. & Regs. tit. 11, § 65-1.1. The automobile
insurance policies State Farm issued to Defendants’ patients complied with the
“statutory requirement of providing [State Farm’s] insureds with the option to
arbitrate the denial of their claims.” Tri-Borough Medical Reply Br. at 1.
We apply “a two-part test to determine the arbitrability of claims,”
considering “(1) whether the parties have entered into a valid agreement to
arbitrate, and, if so, (2) whether the dispute at issue comes within the scope of the
arbitration agreement.” In re Am. Express Fin. Advisors Sec. Litig. (“American
Express”), 672 F.3d 113, 128 (2d Cir. 2011). The parties here dispute only the first
part of this test, disagreeing about whether the arbitration agreement was
“privately negotiated” and therefore valid and enforceable. The Supreme Court
has acknowledged that “the purpose behind [the FAA’s] passage was to ensure
judicial enforcement of privately made agreements to arbitrate,” and the FAA
49 therefore provides for the enforcement of “privately negotiated arbitration
agreements.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219 (1985). That
axiom recognizes that “an obligation to arbitrate can be based only on consent,”
because like any other contract, a party cannot be required to arbitrate a dispute
that it has not agreed to arbitrate. Sokol Holdings, Inc. v. BMB Munai, Inc., 542 F.3d
354, 358 (2d Cir. 2008). Thus, it is “essentially only by making a commitment to
arbitrate that one gives up the right of access to a court of law in favor of
arbitration,” which is most frequently done “by entering into an agreement to
arbitrate or by entering into a relationship which is governed by an agreement to
arbitrate.” Id. (emphasis added).
Here, the district court agreed with State Farm that because the arbitration
provision is mandated by New York law, it is not “privately negotiated” and is
therefore unenforceable under the FAA. Defendants respond that the arbitration
provision is “privately negotiated” because State Farm chose to do business in
New York and therefore agreed to be bound by its laws, including the No-Fault
Act.
The parties’ and district court’s focus on the “privately negotiated”
requirement, however, is misguided. Because “[p]ersons are generally entitled to
50 have their dispute settled by the ruling of a court of law,” the “privately
negotiated” requirement is aimed at ensuring that persons are subjected to
arbitration only if they have consented to arbitrate. See id. (“It is black letter law
that an obligation to arbitrate can be based only on consent.”). In other words,
this requirement is intended to protect parties who may have been coerced or
defrauded into forgoing their opportunity to bring claims in court, not to render
arbitration agreements invalid simply because they were mandated by state
insurance law. Cf. American Express, 672 F.3d at 128 (noting that a company had
“consented to arbitrate with its customers” “by virtue of its membership in” a
self-regulatory organization).
That understanding of the “privately negotiated” requirement finds
further support in other cases concluding that even adhesion contracts containing
arbitration provisions that were offered on a take-it-or-leave-it basis are not
necessarily invalid. See, e.g., Gilmer, 500 U.S. at 33 (holding that an arbitration
agreement was enforceable even when an employer required arbitration because
there was no indication that the employee was “coerced or defrauded into
agreeing to the arbitration clause”); Ragone v. Atl. Video Manhattan Ctr., 595 F.3d
51 115, 122 (2d Cir. 2010) (rejecting the argument that an arbitration agreement was
signed under “procedurally unconscionable” conditions because it was offered
on a take-it-or-leave-it basis). We have even enforced arbitration agreements
against non-signatories in certain situations. See Ross v. Am. Express Co., 478 F.3d
96, 99 (2d Cir. 2007) (noting that this Court has “recognized a number of common
law principles of contract law that may allow non-signatories to enforce an
arbitration agreement”). Thus, the crux of the “privately negotiated” requirement
is to ensure that parties consent to arbitration and are not coerced or defrauded
into agreeing to arbitrate.
There was no such coercion here. It is undisputed that State Farm and the
insureds knowingly agreed to enter into insurance policies that included a
provision to arbitrate certain disputes regarding No-Fault benefits. There is no
allegation that the arbitration provision was extracted by fraud, coercion, duress,
or in some other unconscionable way that would render the provision invalid.
Moreover, State Farm chose to do business in New York, and that choice requires
it to comply with New York law (including the No-Fault Act). Thus, State Farm
and the insureds both “agreed in advance to submit such grievances to
arbitration,” AT & T Techs., Inc. v. Commc’ns Workers of Am, 475 U.S. 643, 648–49
52 (1986) (emphasis added), and their relationship is “governed by an agreement to
arbitrate,” Sokol, 542 F.3d at 358 (emphasis added).
State Farm would have us hold that an agreement to arbitrate is not
“privately negotiated” solely because governing law mandates such arbitration.
In its view, and in the view of the district court, an arbitration agreement lacks
consent where applicable law requires parties to arbitrate because the provision
was not “bargained for.” We decline to adopt an interpretation of the “privately
negotiated” requirement that would have such sweeping consequences. Not only
would such an interpretation call into question the validity of all sorts of
arbitration agreements that are required by federal or state law, but those
consequences may even extend to other types of contractual terms that are
mandated by law. That cannot be what Congress intended in enacting the FAA.
Thus, given that both State Farm and the insureds consented to policies that
include arbitration provisions, we conclude that the provisions here are
“privately negotiated” under the FAA.
But although we depart from the district court’s conclusion on this specific
issue, we nonetheless agree with the district court that it was permitted to enjoin
the arbitrations, notwithstanding the FAA, because of the unique circumstances
53 in this case. Although the FAA provides for the enforcement of arbitration
agreements, see 9 U.S.C. §§ 2–4, there are exceptions to that general rule.
Developed by the Supreme Court, the “effective vindication” doctrine is a judge-
made exception to the FAA that invalidates, “on public policy grounds,
arbitration agreements that operate as a prospective waiver of a party’s right to
pursue statutory remedies.” Am. Express Co. v. Italian Colors Rest., 570 U.S. 228,
235 (2013) (internal quotation marks, alterations, and emphasis omitted).8 The
“effective vindication” exception to the FAA originated in Mitsubishi Motors Corp.
v. Soler Chrysler-Plymouth, Inc., where the Supreme Court noted that although
statutory claims can be the subject of arbitration agreements, “not . . . all
controversies implicating statutory rights are suitable for arbitration.” 473 U.S.
614, 627 (1985). The Court further explained that “[b]y agreeing to arbitrate a
statutory claim, a party does not forgo the substantive rights afforded by the
8 The “effective vindication” doctrine is different from the analysis of whether the FAA’s mandate has been overridden by a “contrary congressional command.” See Italian Colors, 570 U.S. at 233–35 (stating that the Court’s “finding of no ‘contrary congressional command’ does not end the case” as the respondents had also invoked the “effective vindication” doctrine). The Supreme Court has already held that civil “RICO’s text and legislative history fail to reveal any intent to override the provisions of the Arbitration Act.” Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 239 (1987). Thus, we only consider whether the “effective vindication” doctrine applies here.
54 statute; it only submits to their resolution in an arbitral, rather than a judicial,
forum.” Id. at 628; see also Viking River Cruises, Inc. v. Moriana, 596 U.S. 639, 653
(2022) (“An arbitration agreement thus does not alter or abridge substantive
rights; it merely changes how those rights will be processed.”). Therefore, “so
long as the prospective litigant effectively may vindicate its statutory cause of action
in the arbitral forum, the statute will continue to serve both its remedial and
deterrent function.” Mitsubishi Motors, 473 U.S. at 637 (emphasis added).
The “effective vindication” exception serves as a way to “reconcile[] the . . .
FAA . . . with all the rest of federal law” and “prevent arbitration clauses from
choking off a plaintiff’s ability to enforce congressionally created rights.” Italian
Colors, 570 U.S. at 240 (Kagan, J., dissenting). The exception therefore furthers the
purposes of the FAA, which “reflects a federal policy favoring” the enforcement
of valid contracts for arbitration – “that is, arbitration as a streamlined ‘method of
resolving disputes,’ not as a foolproof way of killing off valid claims.” Id. at
243–44, quoting Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U. S.
477, 481 (1989). The exception accordingly stems from the principle that other
federal statutes are on equal footing with the FAA.
55 Although the Supreme Court has so far declined to apply the “effective
vindication” exception in any case before it, it has repeatedly reaffirmed the
existence of the exception. See, e.g., 14 Penn Plaza LLC v. Pyett, 556 U.S. 247,
273–74 (2009); Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 90–91 (2000);
Gilmer, 500 U.S. at 28; see also Sutherland v. Ernst & Young LLP, 726 F.3d 290, 298
(2d Cir. 2013). In Italian Colors, for example, plaintiffs argued that “[e]nforcing the
waiver of class arbitration bars effective vindication . . . because they have no
economic incentive to pursue their antitrust claims individually in arbitration.”
570 U.S. at 235. The Supreme Court recognized the existence of the “effective
vindication” exception but rejected its application in that case because “the fact
that it is not worth the expense involved in proving a statutory remedy does not
constitute the elimination of the right to pursue that remedy.” Id. at 236
(emphases omitted). But Italian Colors did not foreclose application of the
doctrine entirely, explaining that the exception “would certainly cover a
provision in an arbitration agreement forbidding the assertion of certain statutory
rights” and “would perhaps cover filing and administrative fees attached to
arbitration that are so high as to make access to the forum impracticable.” Id.
Those are but two examples of circumstances where the doctrine may apply, with
56 the key determination being whether “the prospective litigant effectively may
vindicate its statutory cause of action in the arbitral forum.” Mitsubishi Motors,
473 U.S. at 637.
Since Italian Colors, we have applied the “effective vindication” doctrine in
other contexts. In Gingras v. Think Finance, Inc., for example, this Court
considered arbitration agreements in which “borrowers [we]re forced to disclaim
the application of federal and state law in favor of tribal law.” 922 F.3d 112, 126
(2d Cir. 2019). We noted that “the Supreme Court has made clear that arbitration
agreements that waive a party’s right to pursue federal statutory remedies are
prohibited,” and the arbitration agreements were therefore unenforceable
because they appeared to “foreclose [borrowers] from vindicating rights granted
by federal and state law.” Id. at 127, citing Italian Colors, 570 U.S. at 235–36. Most
recently, this Court applied the “effective vindication” exception in Cedeno,
where we held that “courts will not enforce provisions in arbitration agreements
that prevent a party from effectively vindicating their statutory rights and
securing their statutory remedies.” 100 F.4th at 396. In Cedeno we considered
whether an arbitration agreement was unenforceable because it “purport[ed] to
limit [employee benefit plan] participants or beneficiaries to seeking relief in
57 arbitration solely for the benefit of their own individual plan accounts, and
preclude[d] relief that would benefit other account holders.” Id. at 389.
Emphasizing that “[a] core concern of the FAA is protecting the enforceability of
agreements to vindicate substantive rights through an arbitral forum using
arbitral procedures,” we determined that certain provisions of the arbitration
agreement there were unenforceable because they waived certain statutory
remedies under the Employee Retirement Income Security Act of 1974 and
therefore prevented plaintiffs from vindicating their federal statutory rights. Id. at
395, 408 (emphases in original).
Bearing in mind a healthy regard for the federal policy in favor of
enforcing valid arbitration agreements, we recognize that the “effective
vindication” exception applies in rare cases where an arbitration agreement
“prevent[s] parties from effectively vindicating their statutory rights.” Id. at 395.
We believe this is just the kind of unusual case the exception intended to address.
Among other claims, State Farm brings federal statutory claims under RICO,
which can be the subject of arbitration agreements generally. See Shearson/Am.
Exp., Inc. v. McMahon, 482 U.S. 220, 238 (1987). Critically, here, State Farm alleges
that the thousands of arbitrations, like the state-court proceedings discussed
58 below, demonstrate a pattern of baseless and repetitive claims that themselves
help to perpetuate and monetize a RICO violation. Specifically, State Farm
contends that Defendants routinely commence frivolous arbitrations after State
Farm denies their claims in order to fraudulently obtain No-Fault benefits that
are then used to finance the RICO scheme. Additionally, because the fragmented
arbitrations often concern a “single bill for a single date of service,” State Farm
argues that the arbitrations are intended to obscure the fraud and prevent State
Farm from proving up its claims. Appellees’ Br. 19. That renders the arbitrations
effectively powerless to resolve State Farm’s RICO claims, both because their
piecemeal nature obscures the alleged massive and complex scheme and because
the pursuit of the arbitrations itself helps to further the RICO scheme. Cf. Mun,
751 F.3d at 99 (describing that “[c]omplex fraud and RICO claims . . . cannot be
shoehorned” into “New York’s arbitration process for no-fault coverage [which]
is an expedited [and] simplified affair”).
Although the terms of the arbitration agreement here do not expressly
prohibit State Farm from bringing federal statutory claims, enforcement of the
agreement would have the effect of preventing State Farm from effectively
vindicating its RICO claims given the unusual circumstances in this case. See
59 Cedeno, 100 F.4th at 395 (“[T]erms in an arbitration agreement that have the effect
of prospectively waiving a party’s statutory remedies are not enforceable.”
(emphasis added)). Thus, for many of the reasons described in our discussion of
the AIA below, we conclude that the arbitrations materially interfere with State
Farm’s ability to seek relief under RICO, so much so that if the thousands of
arbitrations here were allowed to proceed, State Farm would be prevented from
“effectively vindicating” its RICO cause of action.9
We recognize the strong federal policy favoring parties’ ability to agree on
arbitration as a mechanism for dispute resolution. See Morgan, 596 U.S. at 418.
Ultimately, however, arbitration is an issue of contract, and the “effective
vindication” exception intends to balance the liberal federal policy favoring the
enforcement of valid arbitration agreements with the recognition that other
9 Moreover, given our conclusion below that the state-court proceedings can be enjoined under a narrow exception to the AIA, Defendants would be left in the anomalous position of contending that private arbitrations are more sacred and protected than state-court proceedings and should therefore not be enjoined. That is an odd position considering the “longstanding public policy against federal court interference with state court proceedings.” Younger v. Harris, 401 U.S. 37, 43 (1971). In fact, “[s]ince the beginning of this country’s history Congress has . . . manifested a desire to permit state courts to try state cases free from interference by federal courts.” Id. The AIA furthers that objective by generally prohibiting injunctions of pending state-court proceedings subject to narrowly tailored exceptions, including the exception we apply in this case below.
60 federal statutes are on equal footing with the FAA. It does so by permitting
interference with arbitration in limited circumstances where, as here, arbitration
would deny State Farm the effective vindication of its federal statutory claims
under RICO. We therefore conclude that the “effective vindication” exception to
the FAA applies here, allowing the district court to stay the pending arbitrations
and enjoin any new arbitrations. We emphasize that this case presents unusual
circumstances that drive our conclusion that the “effective vindication” exception
is applicable; namely, the thousands of allegedly baseless arbitrations that help to
further the massive and complex RICO scheme alleged here. Thus, as to
Defendants’ appeal, we conclude that the district court did not abuse its
discretion in granting a preliminary injunction barring the arbitrations.
C. Anti-Injunction Act
Finally, we turn to State Farm’s cross-appeal. State Farm contends that the
district court erred in declining to include in the preliminary injunction a
provision enjoining Defendants from proceeding with already-pending
state-court litigation, on the ground that the AIA bars federal courts from
enjoining such state-court proceedings. State Farm argues that various exceptions
to the AIA’s general prohibition on such injunctions apply to the unusual facts of
61 this case. For the reasons set forth below, we agree that one of those exceptions
applies here.10
Almost as old as the Constitution, the AIA today provides that “[a] court of
the United States may not grant an injunction to stay proceedings in a State court
except as expressly authorized by Act of Congress, or where necessary in aid of
its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C. § 2283. The
AIA reflects our “dual system of federal and state courts,” and its “core message
is one of respect for state courts.” Smith v. Bayer Corp., 564 U.S. 299, 306 (2011)
(internal quotation marks omitted). Application of the AIA is limited only by the
“three specifically defined exceptions” in the statute that are “narrow,” so “[a]ny
doubts as to the propriety of a federal injunction against state court proceedings
should be resolved in favor of permitting the state courts to proceed.” Id.
(internal quotation marks omitted).
In this case, the district court declined to enjoin the pending state-court
proceedings, concluding that no exceptions to the AIA apply here. Application of
the AIA is a question of law that we review de novo. See Wyly, 697 F.3d at 137. In
10 The AIA “does not prevent a federal court from restraining a party from instituting future state proceedings,” so our discussion of the AIA concerns only the pending state-court proceedings. Pathways, Inc. v. Dunne, 329 F.3d 108, 114 (2d Cir. 2003).
62 its cross-appeal, State Farm contends that the district court erred because the first
and second exceptions to the AIA, which respectively allow injunctions of state-
court proceedings “as expressly authorized by Act of Congress” or “where
necessary in aid of its jurisdiction,” 28 U.S.C. § 2283, are applicable. We agree
with State Farm that the preliminary injunction here falls within the “expressly-
authorized” exception, and we therefore have no occasion to decide whether the
second exception also applies.
As mentioned, the first exception to the AIA allows federal courts to enjoin
state-court proceedings when “expressly authorized by Act of Congress.” Id.
Although that language would seem to require Congress to have (1) expressly
authorized (2) injunctions of state-court proceedings in the relevant federal
statute, the Supreme Court held in the seminal case of Mitchum v. Foster that “no
prescribed formula is required” for the exception to apply, and that the federal
statute “need not expressly refer to § 2283” nor “expressly authorize an
injunction of a state court proceeding in order to qualify as an exception.”
407 U.S. 225, 237 (1972) (internal quotation marks omitted). Instead, for the
exception to apply, “Congress must have created a specific and uniquely federal
right or remedy, enforceable in a federal court of equity, that could be frustrated
63 if the federal court were not empowered to enjoin a state court proceeding.” Id.
Mitchum accordingly created a two-part test providing that the “expressly-
authorized” exception to the AIA applies if Congress “[1] clearly creat[ed] a
federal right or remedy enforceable in a federal court of equity, [2] [that] could be
given its intended scope only by the stay of a state court proceeding.” Id. at 238.
In Mitchum, the Supreme Court held that an injunction of state-court
proceedings under 42 U.S.C. § 1983 fell within the scope of that exception even
when the statute merely authorized suits in equity without any mention of state-
court proceedings. See id. at 243. In arriving at that conclusion, the Court relied on
Section 1983’s legislative history which provided that “[t]he very purpose of
[Section] 1983 was to interpose the federal courts between the States and the
people, as guardians of the people’s federal rights—to protect the people from
unconstitutional action under color of state law, whether that action be executive,
legislative, or judicial.” Id. at 242 (internal quotation marks omitted). Congress
was concerned that “state instrumentalities could not protect” the federally
created rights, highlighting that both state officers and courts might “be
antipathetic to the vindication of those rights.” Id. More specifically, proponents
of Section 1983 had “noted that state courts were being used to harass and injure
64 individuals, either because the state courts were powerless to stop deprivations
or were in league with those who were bent upon abrogation of federally
protected rights.” Id. at 240. Based on that legislative history, the Supreme Court
concluded that injunctions of state-court proceedings under Section 1983 fell
within the “expressly-authorized” exception to the AIA. See id. at 243.
Since Mitchum, the Supreme Court has addressed that issue only in Vendo
Co. v. Lektro-Vend Corp., 433 U.S. 623 (1977). In Vendo, the Court split three ways
on whether Section 16 of the Clayton Act fell within the “expressly-authorized”
exception. See id. Section 16 of the Clayton Act authorizes federal courts to issue
injunctions against the “threatened loss or damage by a violation of the antitrust
laws.” 15 U.S.C. § 26. Justice Rehnquist authored the lead plurality opinion in
Vendo and was joined by Justices Stewart and Powell in concluding that even
though Section 16 satisfied the first part of the Mitchum test as a uniquely federal
right or remedy, the statute failed the second part of the test because the Clayton
Act could be given its intended scope without staying the state-court proceedings
there. 433 U.S. at 632–33 (plurality opinion). The plurality distinguished Mitchum
by noting that unlike Section 1983, the Clayton Act’s legislative history lacked
concern about the “possibility that state-court proceedings would be used to
65 violate the Sherman or Clayton Acts” and that “Congress in no way focused
upon a scheme using litigation in the state courts.” Id. at 634.
Justice Rehnquist’s view, however, failed to command a majority of the
Court. Instead, a majority of the Court concluded that an injunction of state-court
proceedings under Section 16 of the Clayton Act could fall within the scope of the
“expressly-authorized” exception under “narrowly limited circumstances” that
were not present in Vendo. Id. at 643–45 (Blackmun, J., concurring). Those
circumstances include where the “pending state-court proceedings . . . are
themselves part of a pattern of baseless, repetitive claims that are being used as
an anticompetitive device, all the traditional prerequisites for equitable relief are
satisfied, and the only way to give the antitrust laws their intended scope is by
staying the state proceedings.” Id. at 644 (internal quotation marks omitted). In
other words, Justice Blackmun, joined by Chief Justice Burger, concluded in a
concurring opinion that where the state-court proceedings furthered an antitrust
violation, they could be enjoined to give the antitrust laws their full scope. See id.
at 644–45. Similarly, the dissent, authored by Justice Stevens and joined by
Justices Brennan, White, and Marshall, agreed that “[Section] 16 of the Clayton
Act . . . expressly authorizes an injunction against a state-court proceeding which
66 violates the antitrust laws.” Id. at 654–56, 660–61 (Stevens, J., dissenting). Six
Justices, therefore, agreed that an injunction of state-court proceedings under
Section 16 of the Clayton Act would fall within the “expressly-authorized”
exception where multiple frivolous proceedings further a violation of the
antitrust laws.
Those six Justices disagreed only on whether the facts in Vendo satisfied
that standard. Justice Blackmun’s concurrence concluded that the “expressly-
authorized” exception did not apply in Vendo because there was no “pattern of
baseless, repetitive claims” with “[o]nly one state-court proceeding . . . involved
in th[e] case.” Id. at 644–45 (Blackmun, J., concurring) (internal quotation marks
omitted). The dissenters, in contrast, would have found the injunction proper
even on those facts. See id. at 661–62 (Stevens, J., dissenting). But that
disagreement should not obscure the fact that a solid, six-Justice majority of the
Vendo Court agreed that the “expressly-authorized” exception applied at least
where pending state-court proceedings were “themselves part of a pattern of
baseless, repetitive claims” that furthered a violation of a federal statute that
67 authorized equitable relief.11 See id. at 644 (Blackmun, J., concurring) (internal
quotation marks omitted).
In pre-Mitchum cases, this Court had similarly concluded that the
“expressly-authorized” exception applies where the state-court proceedings
themselves further a violation of the federal statute at issue. For example, in
Studebaker Corp. v. Gittlin, we held that Section 21(e) of the Securities Exchange
Act expressly authorized an injunction of a state-court proceeding where that
proceeding furthered a violation of the securities laws. See 360 F.2d 692, 697-98
(2d Cir. 1966); Vernitron Corp. v. Benjamin, 440 F.2d 105, 108 (2d Cir. 1971)
(explaining that the “expressly-authorized” exception applied in Studebaker
because “the prosecution of the state action there . . . would itself have furthered
the violation of the Securities Exchange Act”). Although we have not
subsequently specifically opined on the narrow path carved by Vendo, we now
11 Justice Blackmun’s concurrence controls because it took the narrowest ground to decide the case. See Marks v. United States, 430 U.S. 188, 193 (1977) (“When a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of five Justices, the holding of the Court may be viewed as that position taken by those Members who concurred in the judgments on the narrowest grounds.” (internal quotation marks omitted)); see also Trustees of Carpenters’ Health & Welfare Tr. Fund of St. Louis v. Darr, 694 F.3d 803, 809 (7th Cir. 2012) (describing Justice Blackmun’s concurrence in Vendo as the “controlling opinion”).
68 join a number of our sister circuits in acknowledging the existence of that path
for unusual cases involving a pattern of baseless state-court proceedings that
further a violation of the relevant federal statute.12 Cf., e.g., 1975 Salaried Ret. Plan
for Eligible Emps. of Crucible, Inc. v. Nobers, 968 F.2d 401, 409 (3d Cir. 1992); Vill. of
Bolingbrook v. Citizens Utils. Co. of Illinois, 864 F.2d 481, 483 (7th Cir. 1988); Los
Angeles Mem’l Coliseum Comm’n v. City of Oakland, 717 F.2d 470, 472 (9th Cir.
1983).
Applying Mitchum and Vendo, we agree with State Farm that a preliminary
injunction of the hundreds of pending state-court proceedings here falls within
the “expressly-authorized” exception to the AIA. Under the Mitchum test, we first
consider whether RICO is a “specific and uniquely federal right or remedy,
enforceable in a federal court of equity.” 407 U.S. at 237. The RICO statute
provides for private civil actions by “[a]ny person injured in his business or
property by reason of a violation of section 1962 of this chapter” and specifies
12 There are some similarities between the Vendo concurrence’s narrow path for allowing an injunction of state-court proceedings under the “expressly- authorized exception” to the AIA and the “effective vindication” exception to the FAA which renders certain arbitration agreements unenforceable. Both approaches are driven by concerns of affording federal statutes their full force and effect and apply in rare circumstances where state litigation or arbitration may prevent that.
69 that “district courts of the United States shall have jurisdiction to prevent and
restrain violations of section 1962.” 18 U.S.C. § 1964(a), (c). We have accordingly
held that “a federal court is authorized to grant equitable relief to a private
plaintiff who has proven injury” under RICO. Chevron Corp. v. Donziger, 833 F.3d
74, 137 (2d Cir. 2016); see also Gingras, 922 F.3d at 124 (“RICO authorizes private
rights of action for injunctive relief.”).
Substantively, RICO makes it unlawful, inter alia, “for any person
employed by or associated with any enterprise . . . 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” or to conspire to do so.
18 U.S.C. § 1962(c)–(d). RICO was the “culmination of some two decades of
Congressional concern about the infiltration of legitimate businesses by
organized crime.” United States v. Ivic, 700 F.2d 51, 62 (2d Cir. 1983), abrogated on
other grounds by Nat’l Org. for Women, Inc. v. Scheidler, 510 U.S. 249 (1994). The
statute thus reflects “Congress’[s] undeniable desire to strike at organized crime”
and was a broad and “aggressive initiative to supplement old remedies and
develop new methods for fighting crime.” Sedima, S.P.R.L. v. Imrex Co., 473 U.S.
479, 494, 498 (1985). RICO was specifically “designed to remedy injury caused by
70 a pattern of racketeering, and concepts such as RICO ‘enterprise’ and ‘pattern of
racketeering activity’ were simply unknown to common law.” Agency Holding
Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 149–50 (1987) (internal quotation
marks and alterations omitted); see also Hecht v. Com. Clearing House, Inc., 897 F.2d
21, 24 (2d Cir. 1990) (“[T]he purpose of civil RICO liability does not extend to
deterring any illegal act such as retaliatory firings for which there are state and
common law remedies.”). Accordingly, RICO creates a uniquely innovative
federal remedy that did not exist at common law.
Importantly, RICO’s legislative history demonstrates that Congress
modeled civil RICO on the Clayton Act, see Horn v. Med. Marijuana, Inc., 80 F.4th
130, 135 (2d Cir. 2023) (noting the legislative history), cert. granted on other
grounds, 144 S. Ct. 1454 (2024), which all the Justices in Vendo agreed was a
specific and uniquely federal right or remedy, see 433 U.S. at 632 (Rehnquist, J.,
joined by Stewart, J., and Powell, J.); id. at 643-644 (Blackmun, J., concurring,
joined by Burger, C.J.); id. at 656-57 (Stevens, J., dissenting, joined by Brennan, J.,
White, J., and Marshall, J.). The Supreme Court has stressed that the “close
similarity of [RICO and the Clayton Act] is no accident” as the “‘clearest current’
in the legislative history of RICO ‘is the reliance on the Clayton Act model,’”
71 which applies antitrust concepts to target widespread organized crime. Agency
Holding, 483 U.S. at 151, quoting Sedima, 473 U.S. at 489. Civil RICO and the
Clayton Act thus share “similarities in purpose and structure” and “aim to
compensate the same type of injury.” Id. at 151–52.
Moreover, RICO’s legislative history reveals that in adopting the RICO
statute, Congress was animated by concerns similar to those underlying 42 U.S.C.
§ 1983 that Mitchum found persuasive. One of the major studies that shaped
RICO was produced in 1967 by the Katzenbach Commission, which undertook a
comprehensive inquiry into the problem of organized crime and made
recommendations to address it. See President’s Commission on Law Enforcement
and Administration of Justice, The Challenge of Crime in a Free Society (1967). The
report emphasized the dangers of organized crime infiltrating legitimate
institutions, with one of the principal findings being that organized crime had
“corrupted police officials, prosecutors, legislators, judges, . . . and other public
officials, whose legitimate exercise of duties would block organized crime and
whose illegal exercise of duties helps it.” Id. at 191. Later, the chief proponents of
RICO similarly highlighted the corruption of governmental actors, noting that
“wherever organized crime exists, it corrupts public officials and wields
72 extensive political influence which insulate its activities from governmental
interferences.” 116 Cong. Rec. S601 (daily ed. Jan. 21, 1970) (statement of Sen.
Roman Hruska). In other words, “[e]ven the judiciary is not beyond reach.” Id. at
S596 (statement of Sen. John L. McClellan).
RICO’s legislative history thus reflects Congress’s concern that the state
courts might be ineffective against a racketeering enterprise, principally because
of the possible involvement of state courts in organized crime. Although there
are no allegations of state judicial corruption here, RICO’s legislative history
shows that Congress was nonetheless concerned about state courts being used to
further a violation of RICO and accordingly contemplated that state-court
proceedings could be enjoined to “prevent and restrain violations” of RICO. 18
U.S.C. § 1964(a). That history is similar to that of 42 U.S.C. § 1983, which evinced
concern that “state courts were powerless to stop deprivations or were in league
with those who were bent upon abrogation of federally protected rights,”
Mitchum, 407 U.S. at 240, and accordingly authorized equitable relief. Therefore,
the similarities between RICO’s purpose and function and those of the Clayton
73 Act and 42 U.S.C. § 1983 bolster our conclusion that RICO is a sufficiently specific
and unique federal remedy under the first part of the Mitchum test.13
13 Defendants argue that because there is concurrent jurisdiction over civil RICO claims in state and federal courts, it is not a uniquely federal right or remedy. Even assuming, for the sake of argument, that exclusive federal jurisdiction is sufficient to satisfy the first part of the Mitchum test, we conclude that it is not necessary. In the only binding precedent from the Supreme Court on that issue, Mitchum did not identify any such requirement and concluded that an injunction of state-court proceedings under 42 U.S.C. § 1983, a cause of action that can be brought in both federal and state court, fell within the “expressly-authorized” exception. See 407 U.S. at 242-43. Mitchum analyzed the purpose and legislative history of Section 1983 to reason that it was a specific and uniquely federal right or remedy. See id. at 238–42. We do the same. We acknowledge that the plurality in Vendo stated that Section 16 of the Clayton Act met the first part of the test “in that actions based upon it may be brought only in the federal courts,” 433 U.S. at 632 (plurality opinion), but that opinion is not controlling for the reasons described above. See supra note 11. The Vendo concurrence, which is the controlling opinion, does not require that there be exclusive federal jurisdiction to conclude that Congress intended to create a uniquely federal right or remedy. See 433 U.S. at 643–45 (Blackmun, J., concurring). Moreover, the Vendo plurality uses the phrase “in that” to describe why the Clayton Act’s exclusive federal jurisdiction means that it satisfied the first part of the Mitchum test. Id. at 632 (plurality opinion). “In that,” however, is “used to introduce a statement that explains or gives more specific information” about a prior statement. In That, Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/in%20that (last visited July 17, 2024). That definition does not suggest that the Vendo plurality believed that exclusive federal jurisdiction was necessary to satisfy the Mitchum test. Thus, we disagree with the district court and Defendants that Mitchum requires exclusive federal jurisdiction for Congress to have created a uniquely federal right or remedy.
74 Turning to the second part of the Mitchum test, we conclude that RICO
could be given its intended scope only by a stay of the hundreds of pending
state-court proceedings here. As discussed in detail above, a majority of the
Supreme Court in Vendo believed that, where multiple meritless proceedings are
a part of a scheme to violate the relevant federal law in order to give that law its
intended scope, an injunction of state-court proceedings could fall within the
“expressly-authorized” exception. See 433 U.S. at 643–45 (Blackmun, J.,
concurring); id. at 645–66 (Stevens, J., dissenting). Per Justice Blackmun’s
controlling opinion, the narrow path carved by Vendo applies only in rare
circumstances where the state-court proceedings are “themselves part of a
pattern of baseless, repetitive claims that are being used” to further a violation of
the relevant federal law. Id. at 644 (Blackmun, J., concurring) (internal quotation
marks omitted). The instant action presents exactly the kind of injunction that a
majority of the Vendo Court had contemplated could fall within the “expressly-
authorized” exception.
Here, State Farm contends that “Defendants are using a pattern of baseless
state no-fault proceedings to monetize and perpetuate their violations of RICO”
in order “to harass and injure” State Farm. Appellees’ Br. 64. State Farm
75 elaborates that “the state-court litigation is a component of the overall fraud
scheme alleged in the federal action; it is Defendants’ means of collecting on their
fraudulent claims for reimbursement and provides a financial lifeline for their
scheme.” Id. Thus, State Farm alleges that the hundreds of frivolous state-court
proceedings themselves help to further the RICO violation because Defendants use
the fraudulently obtained No-Fault benefits from those proceedings to continue
financing their scheme, thereby constituting a “pattern of baseless, repetitive
claims.” Vendo, 433 U.S. at 644 (Blackmun, J., concurring) (internal quotation
We agree with State Farm that the unusual circumstances here fall squarely
within Vendo. The state-court proceedings further the alleged RICO violation in
two key ways. First, the proceedings help finance the purported scheme because
whenever State Farm denies claims for No-Fault benefits, Defendants typically
commence allegedly baseless litigation in state court (or arbitration actions) to
fraudulently obtain the benefits. Second, because the state-court proceedings
often concern individual claims, the piecemeal nature of those proceedings
obscures the overall complex scheme, which becomes apparent only when one
zooms out to view the alleged predetermined treatment protocols and “pay-to-
76 play” arrangements relevant to several claims. In other words, State Farm
plausibly argues that the state courts are unlikely to even recognize the alleged
massive RICO scheme because those proceedings often concern individual
claims. That renders the “state courts . . . powerless to stop” the alleged RICO
violations which the state-court proceedings help monetize and sustain. Mitchum,
407 U.S. at 240.
We thus conclude that state litigation of the kind alleged here – involving
hundreds of baseless state-court proceedings that are part of a massive
fraudulent scheme – may itself further a RICO violation, which in this case
consists of alleged repeated violations of the federal mail fraud statute, 18 U.S.C.
§ 1341.14 If the pending state-court proceedings are allowed to continue, State
14 We do not determine whether the state-court proceedings here constitute predicate acts under RICO, as the parties do not address that issue, and it is not necessary for us to reach. That said, we briefly address some general points relevant to that issue. This Court held in Kim v. Kimm that “allegations of frivolous, fraudulent, or baseless litigation activities—without more—cannot constitute a RICO predicate act.” 884 F.3d 98, 104 (2d Cir. 2018). Because the plaintiff there had alleged that the defendant “engaged in a single frivolous, fraudulent, or baseless lawsuit,” we determined that “such litigation activity alone cannot constitute a viable RICO predicate act.” Id. at 105 (emphases added). We declined, however, “to reach the issue of whether all RICO actions based on litigation activity are categorically meritless.” Id. The instant action is distinguishable from Kim. State Farm does not appear to contend that the state- court proceedings here are predicate acts under 18 U.S.C. § 1961(1), but instead that they help further the RICO violation, which consists of a pattern of
77 Farm faces the irreparable harm of never having a forum to demonstrate the
existence of Defendants’ alleged RICO scheme. Thus, the only way to give RICO
its intended scope in the specific circumstances here is by staying the pending
state-court proceedings.
Given that both parts of the Mitchum test are therefore satisfied, we
conclude that enjoining the pending state-court proceedings here falls within the
“expressly-authorized” exception to the AIA. We again note that our decision
today is narrow and limited to the unusual circumstances alleged here, which
involve a massive scheme including hundreds of purportedly meritless state-
court proceedings that help further a RICO violation, such that RICO can only be
given its intended scope if those proceedings are enjoined.15
CONCLUSION
We have considered all of the parties’ remaining arguments and conclude
that they are without merit. For the foregoing reasons, we REVERSE the district
racketeering activity under the mail fraud statute through other fraudulent activities alleged in the complaint. In other words, the issue is not whether the state-court proceedings are themselves predicate acts, but rather that they are allegedly designed to perpetuate and monetize the RICO scheme for the reasons described above. Thus, we need not consider whether the state-court proceedings are themselves predicate acts. 15 We leave it to the district court on remand to craft the particular terms of the appropriate injunction.
78 court’s orders declining to enjoin the pending state-court proceedings, AFFIRM
its orders in all other respects, and REMAND the matter for further proceedings
consistent with this opinion.
Related
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State Farm Mutual v. Tri-Borough, Counsel Stack Legal Research, https://law.counselstack.com/opinion/state-farm-mutual-v-tri-borough-ca2-2024.