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From Antitrust Law Daily, June 8, 2016

Settlement thrown out in 'MFN' suit against Blue Cross Blue Shield

By Jeffrey May, J.D.

The federal district court in Detroit must conduct "an open and vigorous examination" of the fairness of a $29,990,000 settlement in an antitrust class action against Blue Cross Blue Shield of Michigan over its use of "Most Favored Nation" or "MFN" agreements with Michigan hospitals. The U.S. Court of Appeals in Cincinnati vacated the lower court’s approval of the settlement, as well as orders sealing documents in the court record that might have prevented objectors from adequately challenging the pact (Shane Group v. Blue Cross BlueShield of Mich., June 7, 2016, Kethledge, R.).

The private class actions followed a Department of Justice complaint, challenging the insurer's use of so-called "MFN" and "MFN-plus" agreements. Pursuant to the MFN agreements, Blue Cross purportedly agreed to raise its own reimbursement rates for a hospital’s services, so long as the hospital agreed to charge other commercial health insurers rates at least as high as the hospital charged Blue Cross. Under the MFN-plus agreements, Blue Cross allegedly agreed to pay higher rates to a hospital so long as the hospital agreed to charge even higher rates to other commercial health-insurers. The alleged result was increased rates for hospital customers and the expansion of Blue Cross’s market share.

Ultimately, the Justice Department dropped its suit against Blue Cross after the State of Michigan enacted legislation banning the use or enforcement of MFN clauses like those negotiated by Blue Cross. After the lower court denied a motion to dismiss, the parties reached a settlement agreement in June 2014.

Under the settlement agreement, Blue Cross agreed to pay just under $30 million into a settlement fund. The settlement terms included the following to be paid out of the settlement fund: a fee award for class counsel of approximately $10 million, $3.5 million in expenses, and "incentive awards" to the named plaintiffs in amounts up to $10,000 per individual and $50,000 per organization. Over objections from various class members, the settlement was approved as fair, reasonable, and adequate.

The settlement fund—after deductions for fees, expenses, and incentive awards—was $14,661,560, just over 12 percent of the damages calculated by interim class counsel's antitrust expert and less than four percent of the damages and fees the class would recover if successful at trial. The fund was intended to compensate three to seven million class members.

The appellate court called the lower court's statements supporting the settlement "conclusory." In order to protect the interests of the unnamed class members, the district court had to specifically examine what those unnamed class members would give up in the proposed settlement, and then explain why—given their likelihood of success on the merits—the trade-off embodied in the settlement is fair to unnamed members of the class. The district court did not make that examination, in the appellate court's view.

The lower court’s discussion of the plaintiffs’ likelihood of success was only a single paragraph. Moreover, the lower court did not explain why it was fair for the unnamed class members to receive only 12 percent of the expert’s estimate of their damages, and only 4 percent of the damages to which they might be entitled if they prevailed at trial. "The district court’s opinion thus leaves an ‘analytical gap' between the data on which it relies—namely the court record, much of which was sealed—and its conclusion that the settlement is fair to unnamed class members," the appellate court decided.

The district court was required to begin the Rule 23(e) process anew. "On remand, the district court needs to fill that gap with a careful analysis that acknowledges what the unnamed class members would give up in this settlement and what the named class members and class counsel would receive, and includes reasoned explanation as to whether—in light of the merits of this case specifically—the settlement is fair."

Attorney fees. The lower court also erred in approving class counsel’s fee request of approximately $10 million when it relied in part on the higher amount calculated by means of the "lodestar method." It did not explain why rates of up to $900 per hour for some of the attorneys and $228 per hour for some of the paralegals were reasonable. Also concerning was the lack of time records and descriptions of work performed to support the time spent working on the case.

Incentive awards. Questioning the amount of the incentive awards for the named plaintiffs, the appellate court noted that class counsel had to provide specific documentation—in the manner of attorney time sheets—of the time actually spent on the case by each recipient of an award in order to "ensure that these amounts are not in fact a bounty." The documentation will assist the lower court on remand to determine whether the awards were actually a disincentive for the named class members to care about the adequacy of relief afforded unnamed class members.

Sealed documents. The district court abused its discretion when, at the parties’ behest, it sealed from public view most of the court filings and exhibits that underlay the proposed settlement, the appellate court ruled. Thus, the orders sealing documents in the court record were vacated.

The district court sealed most of the parties’ substantive filings. Among other things, the plaintiffs’ amended complaint, the motion for class certification and the defendant’s response, and testimony of the plaintiffs’ expert witness were sealed. The appellate court noted that the expert report did not discuss any patient information and for the most part discussed only the antitrust implications of unsealed allegations in the amended complaint. Thus, the general public and the class could access "only fragmentary information about the conduct giving rise to this litigation, and next to nothing about the bases of the settlement itself."

"[E]very document that was sealed in the district court was sealed improperly," the appellate court held. On remand, the parties and/or third parties were free to demonstrate—on a document-by-document, line-by-line basis—that specific information in the court record met the demanding requirements for a seal. The appellate court rejected as meritless the defendant's contention, among others, that the documents should remain sealed because the objector's attempt to unseal the court records was "untimely." The objectors should not have needed to ask permission to review the records in the first place.

"Class members cannot participate meaningfully in the process contemplated by Federal Rule of Civil Procedure 23(e) unless they can review the bases of the proposed settlement and the other documents in the court record," the appellate court explained.

This is Case Nos. 15-1544/1551/1552.

Attorneys: E. Powell Miller (Miller Law Firm PC) for Shane Group, Inc. Daniel A. Small (Cohen Milstein Sellers & Toll PLLC) for Michigan Regional Council of Carpenters Employee Benefits Fund. Constantine L. Trela, Jr. (Sidley Austin) for Blue Cross Blue Shield of Michigan.

Companies: Shane Group, Inc.; Michigan Regional Council of Carpenters Employee Benefits Fund; Blue Cross Blue Shield of Michigan

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