ROBERT CARTER, Senior District Judge
Plaintiffs Adrian W. Selby and Jill Selby ("the Selbys") and defendant Principal Life Insurance Company f/k/a Principal Mutual Life Insurance Company ("Principal") move for approval of a class settlement pursuant to Rule 23(e), F.R.Civ.P. After five years of pre-trial litigation involving various individual and class action claims arising out of defendant's denial of health insurance benefits under an employee welfare benefit plan regulated by the Employee Retirement Income Security Act ("ERISA") of 1974, 29 U.S.C. § 1001 et seq., the parties have agreed to resolve the final and remaining class count ("Count I") by means of the settlement agreement ("Settlement") discussed herein.
The procedural history of this case is well documented in the court's prior decisions, Selby v. Principal Mutual Life Ins. Co., No. 98 Civ. 5283, 2000 WL 178191 (S.D.N.Y. Feb. 16, 2000) (Carter, J.) ("Selby I"); Selby v. Principal Mutual Life Ins. Co., 197 F.R.D. 48 (S.D.N.Y. 2000) (Carter, J.) ("Selby II"); and Selby v. Principal Mutual Life Insurance Company, No. 98 Civ. 5283, 2000 WL 1863760 (S.D.N.Y. 2000) (Carter, J.) ("Selby III"), with which familiarity is presumed.
Background
In Selby v. Principal Mutual Life Ins. Co., 197 F.R.D. 48 (S.D.N.Y. 2000) (Carter, J.) ("Selby II"), the court certified a class under Rule 23(b)(3), F.R.Civ.P., for the claims set forth in Count I of the plaintiffs Amended Class Action Complaint. Count I alleges that Principal's on-line review process violates 29 C.F.R. § 2560.503-(1)(b)(1)(iii) of ERISA because it fails to display multiple diagnoses submitted by an insured's doctor. Id. at 55. By listing only one diagnosis on computer screens during online review, it is alleged, Principal's claims workers were apt to accept or reject a claim based on that single diagnosis even where several diagnoses were submitted as a basis for treatment.
On or about September 10, 2001, the parties entered into a stipulation pursuant to which, through their experts and/or employees, a Mediation Testing Procedure ("Testing Procedure") was jointly developed and implemented. The Testing Procedure called for sampling certain dates within the class period and manually reviewing paper or recorded documents of applicable claims denied on those dates. Manual review was necessary to determine if claims had been denied for reasons other than the computer system's failure to recognize multiple diagnoses,
The Testing Procedure was applied to the years 1995-1997, the previously certified Count I class period. 3,722 claims for manual review were identified for five sampling dates selected at random from the 1995-1997 period. The parties agreed to cap manual review at 1,861 claims 51 and then further agreed that Principal could stop reviewing claims once it reached 500 claims submitted with multiple diagnoses. (Goldstein Aff. ¶ 2.)
Affidavits from the parties' experts and personnel who conducted the Testing Procedure concluded that the practice at issue had little or no impact on the disposition of claims. (Johnson Aff. ¶ 17; Goldstein Aff. ¶ 4; Doyle Aff. ¶ 5.) Based upon the sampling methodology, it was determined that at no time during the class period did Principal's system automatically deny claims for reasons solely related to the diagnosis submitted by the provider. Rather, denials of claims were related to additional factors including the applicability of deductibles, co-pays, out-of-pocket maximums, or individual policy limitations. The Testing Procedure confirmed that during the class period Principal had captured and stored all diagnoses submitted by providers on either electronic, paper and/or filmed formats, and that claims personnel had access to those diagnoses. It also confirmed instances in which Principal considered all diagnosis codes submitted even though all diagnosis codes were not inputted into the online system.
The Testing Procedure revealed that the likely amount of class-wide benefits potentially at issue would be less than $22,000 per year for the class period, and that additional manual review of each potential claimant would be required to determine whether any individual was actually harmed. It took nearly six months for Principal to assemble and review only 500 claims submitted with multiple diagnoses, and of that sample only five claims were identified where consideration of additional diagnoses might have changed the claims action taken. Of those five claims, further discovery was still necessary to determine if any individual was actually harmed.
The total amount potentially at issue for the five claims was $181.86. (Johnson Aff. ¶ 18.)
The court infers from the record that close to half a million claims could potentially require further manual review to determine if they belong within the class.
The Testing Procedure initially identified 3,722 claims over the five-day sampling period "that might have multiple diagnoses." (Goldstein Aff. ¶ 2.) Approximately 744 claims-per-day (3,722 / 5) over the 631-day class period (Id.) results in approximately 469,716 claims. See Medicare Beneficiaries' Defense Fund v. Empire Blue Cross Blue Shield, 938 F. Supp. 1131, 1140 (E.D.N.Y. 1996) (explaining that the court may estimate the number of persons in a class based on reasonable inferences made from the evidence submitted.) The court previously considered that approximately two million people were insured under Principal's insurance programs during each year of the class period. Selby II 197 F.R.D. at 57.
Based upon the Testing Procedure the parties stipulated that the enormous cost of identifying and providing notice to potential class members far outweighs any potential benefits to be gained from continued litigation. They entered into the Settlement calling for certification of the Count I class solely for prospective injunctive relief and for settlement purposes only pursuant to Rule 23(a), F.R.Civ.P., and Rule 23(b)(2), F.R.Civ.P.
Accordingly, the Settlement calls for the Count I class to be decertified from its previous Rule 23(b)(3), F.R.Civ.P. categorization.
The Settlement requires Principal to change its computer system so that during on-line review its computers will capture and display up to eight diagnosis codes per claim, as well as a message indicating that additional diagnoses may exist. Principal will also supplement and/or amend its manuals and training to advise personnel of these changes. In exchange, the Count I class agrees to release class claims arising out of the alleged practice for declaratory and injunctive relief only.
Specifically, the Settlement release reads as follows: "All plan participants and beneficiaries in ERISA covered medical benefit plans insured or administered by Principal throughout the United States from January 1, 1995 through final implementation of the prospective injunctive relief . . . do release and forever discharge Principal . . . of and from any and all claims and rights for any declaratory and/or injunctive relief (A) arising out of or in any way related to Principal's failure to consider multiple diagnoses in denying a claim, where the failure: (i) occurred between January 1, 1995 and final implementation of the injunctive relief described herein, and (ii) resulted from any failure to display or consider, in its online claims review procedures, all diagnosis codes submitted by providers or (B) challenging the number of diagnosis codes that Principal captures and/or inputs and displays in the online portion of its claims processing system." (Final Order at 10.)
The Settlement revises the class definition as follows: "All plan participants and beneficiaries in ERISA-covered medical benefit plans insured or administered by Principal throughout the United States from January 1, 1995 through final implementation of the prospective injunctive relief described herein." (Final Order at 7.)
Additional boilerplate provisions of the Settlement do not merit discussion here, with the exception of one provision, discussed below, requiring that notice to the class be waived.
Discussion
Approval of class action settlements will generally be left to the sound discretion of the trial court. Reynolds v. National Football League, 584 F.2d 280, 282-83 (8th Cir. 1978). The court must evaluate the terms of the settlement to determine their fairness, wisdom, reasonableness and adequacy. City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974). Considerations that should inform the court's discretion have been set forth for this circuit in Grinnell, 495 F.2d at 463. Those factors most relevant to the settlement of an action seeking purely injunctive relief are the reaction of class members to the settlement, the state of the proceedings and the amount of discovery completed, the terms of the settlement, the costs and risks of continued litigation and the likelihood of recovery. Rieyman v. Burlington Northern Railroad Company, 118 F.R.D. 29 (S.D.N.Y. 1987) (Carter, J.) The "most significant" of these factors is "the strength of plaintiffs' case balanced against the settlement offer." In re Traffic Executive Assoc. v. Eastern Railroads, 627 F.2d 631, 633 (2d Cir. 1980): Accord Plummer v. Chemical Bank, 668 F.2d 654, 660 (2d Cir. 1982).
This factor will be disregarded since in this case notice to the as yet unidentified class will not be given. See discussion on notice to absent class infra p. 7.
In this case the likelihood of significant recovery is marginal and by no means assured. Furthermore, even if recovery were fully obtained at the amount anticipated by the parties (see infra note 10 at p. 6), it is outweighed by the high costs and risks of continued litigation. The Testing Procedure provides the court with a sound basis upon which to evaluate the relative strengths and weaknesses of the parties' claims.
No determination on the merits of the parties' claims are made here. Indeed, the very purpose of settlement is to avoid determination of sharply contested issues and to dispense with wasteful litigation.In re Prudence Co., 98 F.2d 559 (2dCir. 1938).
In this case, simply identifying members of the class would involve great time and expense. It would involve manual review of potentially up to a half-million multiple diagnosis claims (supra note 4 at p. 3). For each of those claims it would then need to be determined whether claims were denied due to Principal's alleged failure to consider multiple diagnoses during online review, or for some other reason. Thus, irrespective of attorneys fees and the cost of notice to class members, it is clear that the mere identification of class members likely entails an expense that far outweighs any potential benefit to that class once formed.
The parties did not provide the court with estimated costs of manual review or further discovery, but much can be inferred from the record. Testing Procedure analysts predicted the likely amount of benefits potentially at issue to be less than $22,000 per year (Goldstein Aff. ¶ 4), or $66,000 for the three-year class period. Assuming the cost of reviewing a single claim was one dollar (undoubtedly a very low estimate), the cost of reviewing up to half a million claims far exceeds the anticipated recovery. Attorneys fees and costs of notice to the class would drive costs up even further.
In light of the very limited probable recovery and high cost of continued litigation, the terms of the settlement agreement seem eminently fair and reasonable. The proposed injunctive relief adequately addresses the problem that was originally alleged to be the cause of inaccurate denials of benefits. Furthermore, in light of the very narrow release of class claims (see supra note 6 at p. 4), class members who believe they may have been injured by the alleged practice still have options to pursue claims for monetary relief through individual or class suits. In short, there is no prejudice to the unidentified absent class.
With the exception of the Selbys, who are bound by a much broader release under the Settlement. (General Release. Ex. E.)
This assumes, of course, that such claims are not barred by the statute of limitations. Statutes of limitations are commonly considered in settlement approvals. See, e.g., Laventhall v. General Dynamics Corp., 91 F.R.D. 208, 210 (D.C.Mo. 1981): see also City of Detroit v. Grinnell 356 F. Supp. 1380 (S.D.N.Y 1972) (Metzner, J.). They are of less concern in this case where it is too expensive to identify the class, much less provide notice to it. Because potential class members received no notice of this suit, there is no reason to believe they would have forgone their own suits during the applicable limitations period in reliance on this pending litigation. See Laventhall 91 F.R.D. at 210.
Finally, the Testing Procedure, upon which the court bases its evaluation of the case, was sound and unbiased. Plaintiffs' qualified expert conducted statistical analysis of information requested from and provided by Principal, the results of which were certified by class counsel and one of Principal's agents in charge of claims review. The satisfactory and unbiased nature of the Testing Procedure weighs in favor of settlement approval. (Resume, Richard Goldstein, Ex. D; Mediation Testing Procedure, Ex. B; Doyle Aff. Ex. F; Johnson Aff Ex. C.)
Notice to Absent Class
The final issue to be resolved is whether Rule 23(e), F.R.Civ.P., requires notice to the absent class members in this case.
Rule 23(e), F.R.Civ.P. provides: "A class action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to all members of the class in such manner as the court directs."
The general view is that Rule 23(e) requires notice of compromise or dismissal "in all cases under Rule 23." 7B Charles Alan Wright Arthur R. Miller, Federal Practice and Procedure § 1797, p. 365 (2d ed. 1986 Supp. 2003). Cited in Handschu v. Special Services Division, 787 F.2d 828, 833 (2d Cir. 1986). Courts have allowed limited exception to the rule, however, where class members will not be prejudiced by a compromise or dismissal without notice. Wright Miller, supra, § 1797, p. 366 n. 50.
The Second Circuit has not ruled directly on the issue of whether the notice requirement of Rule 23(e), F.R.Civ.P., is mandatory in all cases. Second Circuit cases only provide guidance on notice issues that arise at the initiation of and throughout the course of class action litigation. The cases are silent about settlement or a "proposed dismissal or compromise" pursuant to Rule 23(e). Sec Handschu, 787 F.2d at 833; See also Frost v. Weinberger, 515 F.2d 57, 65 (2d Cir. 1975) (Friendly, J.), cert. denied, 424 U.S. 958 (1976).
The purpose of Rule 23(e) is to ensure the opportunity to contest a dismissal or compromise that would affect the rights of absent class members. Accordingly, if no rights would be jeopardized, there is no need for absent class members to intervene or receive notice. Wright Miller, supra § 1797, p. 366 n. 50.
Situations where courts declined to require notice include: a case involving pre-certification dismissal where absent members would not be bound by the dismissal, Shelton v. Pargo, Inc., 582 F.2d 1298, 1314 (4th Cir. 1978); a case where the statute of limitations was tolled for an independent action by absent class members, thus reducing the danger of foregoing individual claims, American Pipe Construction Co. v. Utah, 414 U.S. 538, 554 (1973); and a case where the court determined it was unlikely absent potential class members would forego their own litigation of a claim in reliance on a class action suit they likely would never learn about, Laventhall v. General Dynamics Corp., 91 F.R.D. 208 (D.C.Mo. 1981).
Other factors that have guided a court on the issue of dispensing with Rule 23(e) notice are whether the terms of settlement extended near complete relief to the plaintiff class; whether there was any evidence of collusion amongst the parties; whether settlement negotiations were conducted at arms-length; and whether the cost of notice itself would jeopardize the settlement agreement. See, e.g., Green v. American Express Co., 200 F.R.D. 211 (S.D.N.Y. 2001) (Baer, J.).
These decisions that have dispensed with Rule 23(e) notice all hinge on whether the rights of absent class members were compromised in any way. As another often-cited treatise on the subject opines, "each case must be examined on its own circumstances to determine whether dismissal with court approval but without notice may violate the purpose of Rule 23(e). If the court determines that dismissal of the class action will not benefit the individual representative to the detriment of the class or prejudice the class by effectively foreclosing its members from commencing a similar action, the court may dispense with notice." 3 Alba Conte Herbert B. Newberg, Newberg on Class Actions § 8:18, para. 8 (4th Ed. 2003)
Settlement of the instant case will not prejudice absent class members who, as discussed above, effectively retain their rights to sue for any damages they may have incurred from the alleged practice. The only thing they may not do, according the class release, is sue for some alternative form of injunctive or declaratory relief that seeks to redress the alleged practice. Even if they could do that, the court is hard pressed to imagine a more adequate form of injunctive relief than what is already required by the Settlement. Furthermore, since there are substantial risks and costs involved in continuing this litigation, there is no guarantee such an effort would result in any injunctive relief.
There is no evidence of collusion between the parties, and the settlement negotiations were conducted at arms-length. With the court's approval, the parties agreed upon the sampling methodology and the steps that were taken to ensure an unbiased Testing Procedure. (Med. Proc. Stip. Ex. A.) Both sides were represented by experienced counsel, and class counsel in particular has extensive experience handling complex plaintiffs' class actions. (Doyle Aff. August 14, 2003.) See Cotton v. Hinton, 559 F.2d 1326, 1330 (5th Cir. 1977) (opinion of experienced counsel carries great weight in approval of settlements.)
Finally, the cost of notice to class members in this case would jeopardize the class settlement. In order to provide individual notice, absent class members would first need to be identified. As discussed above, the process of determining which individuals fall within the class requires an arduous and costly manual review of potentially up to half a million claims. Such would clearly jeopardize the Settlement, as the parties have stated in their submissions to the court (Stip. of Settlement at 10.) Nor is publication notice a superior option. Assuming such notice was given and a large reaction from hopeful claimants ensued, the same arduous and costly process of determining actual class membership would have to be conducted. Such could easily derail the settlement. See Newman v. Stein, 464 F.2d 689 (2d Cir. 1972), cert. denied, 409 U.S. 1039 (1972); D.H. Overmyer Co. v. Loflin. Inc., 440 F.2d 1213, 1215 (5th Cir. 1971), cert. denied, 404 U.S. 851 (1971) (affirming long-standing policy favoring settlement). Nor would reaction from a smaller number of potential claimants constitute sufficient opposition to justify risking the benefits and assurances provided by this settlement. Bryan v. Pittsburgh Plate Glass Co., 494 F.2d 799, 803 (3d. Cir. 1974), cert. denied, 419 U.S. 900, 95 S.Ct. 184, 42 L.Ed.2d 146 (1974), (proportion of class opposed to settlement is one factor to be considered in assessing fairness of settlement of class action, but is not controlling); League of Martin v. Milwaukee, 588 F. Supp. 1004 (D.C. Wis. 1984) (although presence of objecting class members is relevant factor in determining approval of settlement in a class action, it is not dispositive even when many class members object.)
For these reasons, the court will not require notice of settlement to the Count I class.
Attorneys Fees, Costs, and Incentive Payment
Plaintiffs' counsel seeks $277,000 in attorneys' fees and $32,000 in costs. Principal agreed to pay these amounts as part of the Settlement and in exchange for release of any potential further liability. The court finds these amounts to be reasonable. See Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 50 (2d Cir. 2000) (factors considered in determining reasonable attorneys fees). Class counsel further requests an incentive fee of $10,000 to be paid to the named plaintiffs, the Selbys. The court approves this amount as reasonable compensation for the Selby's active participation in this litigation, which extended well beyond the pro forma designation of a representative plaintiff.
The fees represent a 58.22% discount from the current lodestar value of counsel's time (Joint Petition ¶ 4).
Conclusion
The court hereby approves in its entirety and incorporates into this Opinion the settlement agreement between the parties as reflected in the "Stipulation and Agreement of Settlement of Class Action" and the "Final Order" submitted to the court. Pursuant to the Final Order, the court grants $277,000 in attorneys' fess and $32,000 in costs to plaintiffs' counsel, and a $10,000 incentive fee to the Selbys.
IT IS SO ORDERED.