482 F.3d 225 (3rd Cir. 2007), 06-3031, Wachtel v. Health Net, Inc.

Docket Nº:06-3031, 06-3032.
Citation:482 F.3d 225
Party Name:Zev WACHTEL; Linda Wachtel, individually and on behalf of their minor children, Tory, Jesse and Brett Wachtel, and on behalf of all others similarly situated, v. HEALTH NET, INC.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc. Renee McCoy, individually and on behalf of all others similarly situated v. Health Net, Inc., Health Net
Case Date:April 02, 2007
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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482 F.3d 225 (3rd Cir. 2007)

Zev WACHTEL; Linda Wachtel, individually and on behalf of their minor children, Tory, Jesse and Brett Wachtel, and on behalf of all others similarly situated,


HEALTH NET, INC.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc.

Renee McCoy, individually and on behalf of all others similarly situated


Health Net, Inc., Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc.

Health Net, Inc.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc., Appellants.

Nos. 06-3031, 06-3032.

United States Court of Appeals, Third Circuit.

April 2, 2007

Argued on Dec. 13, 2006.

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Herve Gouraige, Esquire, Epstein, Becker & Green, Newark, NJ, Jay H. Calvert, Jr., Esquire, Peter Buscemi, Esquire (Argued), Joseph B.G. Fay, Esquire, Morgan, Lewis & Bockius, Washington, D.C., John J. Gibbons, Esquire, Gibbons, Del Deo, Dolan, Griffinger & Vecchione, Newark, NJ, for Appellants Health Net, Inc.; Health Net of the Northeast, Inc.; Health Net of New Jersey, Inc.

Stanley M. Grossman, Esquire, D. Brian Hufford, Esquire, Robert J. Axelrod, Esquire, Pomerantz Haudek Block Grossman & Gross LLP, New York, NY, Stuart M. Feinblatt, Esquire, Barry M. Epstein, Esquire, Barbara Gail Quackenbos, Esquire, A.R. Pearlson, Esquire (Argued), Sills, Cummis, Epstein & Gross, Newark, NJ, for Appellees.

Arlin M. Adams, Esquire, Bruce P. Merenstein, Esquire, Schnader, Harrison, Segal & Lewis LLP, Philadelphia, PA, Stephanie Kanwit, Esquire, Deborah Reichmann, Esquire, Washington, D.C., for Amicus-Appellant America's Health Insurance Plans, Inc.

Jay E. Sushelsky, Esquire, AARP Foundation Litigation, Melvin R. Radowitz, Esquire, Washington, D.C., for Amicus-Appellee American Assoc. of Retired Persons.

Before SMITH and ROTH, Circuit Judges YOHN [*], District Judge.

ROTH, Circuit Judge.

This appeal requires us to consider the application of a common-law evidentiary rule known as the "fiduciary exception" to the attorney-client privilege. Under this exception to the privilege, certain fiduciaries who obtain legal advice in the execution of their fiduciary obligations are precluded from asserting the attorney-client privilege against their beneficiaries. Although the fiduciary exception has been adopted by a number of other federal courts of appeals, we have not yet had the opportunity to decide whether the rule should apply within our circuit. We decline to make that decision today because we hold that, even if we were to adopt the

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fiduciary exception, the exception would not apply to the defendants in this case. For this reason, we will vacate the order of the District Court requiring the production of otherwise privileged attorney-client communications.

I. Factual and Procedural Background

Health Net of New Jersey, Inc. (HN-NJ) sells and maintains health insurance policies for employee benefit plans. The company offers a variety of policies, covering services by health maintenance organizations, preferred provider organizations, and point-of-service policies. HN-NJ is a subsidiary of Health Net of the Northeast, Inc. (HN-NE). Health Net, Inc. (HNI) is the corporate parent not only of HN-NJ and HN-NE but also of other subsidiary insurance companies that provide medical benefits to participants in benefit plans established under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. Although certain policy formulation and administrative services are shared among the Health Net companies, a subsidiary is responsible for deciding claims in accordance with these policies and for paying claims to participants from the subsidiary's assets. HNI and its subsidiaries do not hold or manage the assets of their customer benefit plans. Rather, the Health Net subsidiaries sell insurance policies to the plans. When a plan beneficiary submits a claim, the subsidiary will process the claim and, if appropriate, pay the beneficiary from the subsidiary's own funds. Similarly, when HNI or any of the subsidiaries obtains legal advice, counsel is paid from HNI's or the subsidiary's funds. Neither HNI nor any of the subsidiaries is a plan administrator or trustee for any of the benefit plans.

The plaintiffs are beneficiaries of two different employee benefit plans that purchased point-of-service policies from HN-NJ. Under the plaintiffs' policies, health care providers are classified as in-network or out-of-network. When beneficiaries obtain care from out-of-network providers, they must pay a higher share of the cost than they would had they obtained care from in-network providers. In determining what percentage of an out-of-network charge HN-NJ will pay, HN-NJ will look to the Usual, Customary, and Reasonable (UCR) charge for the service provided. In defining UCR charges, Health Net companies rely on data contained in certain national databases. The plaintiffs allege that HN-NJ relied on antiquated data and improper methods to define UCR charges, thereby violating both New Jersey law and the Health Net companies' duties as statutory fiduciaries under ERISA. The plaintiffs filed suit under § 502 of ERISA to recover benefits and to redress the alleged violations of fiduciary duties and failure to supply information to beneficiaries.

On August 5, 2004, the District Court for the District of New Jersey consolidated the plaintiffs' cases and granted class certification to a national class of beneficiaries. HNI, HN-NE, and HN-NJ (collectively, Health Net) appealed the certification. On September 27, 2005, we issued a Stay Order, requiring that the District Court "refrain from holding any trial, or entering any judgment that would have the effect of resolving any claims or issues affecting the disputed class until this Court has issued its ruling deciding the pending appeal under Rule 23(f)...." On June 30, 2006, we vacated the Class Certification Order and remanded for further certification proceedings.

During the pendency of the Rule 23(f) appeal, the District Court moved forward on issues of discovery. On June 24, 2005, the District Court assigned a Special Master to examine documents listed on defendants' privilege logs to determine whether

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the documents were discoverable. The Special Master reviewed over 4,000 documents in Health Net's first eleven privilege logs. After determining which documents were protected as work-product or privileged as attorney-client communications, the Special Master considered whether any of those documents were nonetheless discoverable pursuant to the fiduciary exception to the attorney-client privilege. He recognized that the exception has not been considered within our circuit, but he concluded that, given the opportunity, we would adopt the fiduciary exception and apply it to Health Net. Having found that certain attorney-client communications related to fiduciary acts by Health Net and were not prepared in connection with adversarial proceedings against the beneficiaries, the Special Master ordered Health Net to produce those communications.

Health Net appealed this ruling to the District Court. In addition, HNI moved for summary judgment, arguing that it was not an ERISA fiduciary and therefore owed no fiduciary obligations to the plaintiffs. The District Court, in an order entered May 12, 2006, denied HNI's motion for summary judgment, finding that HNI exerted sufficient control over day-to-day operations at HN-NJ for the court to hold HNI liable as a fiduciary. In the same order, the District Court adopted the Report and Recommendation of the Special Master and ordered the production of all documents on Privilege Logs 1-11 which the Special Master had determined should be produced. Because of the District Court's finding regarding HNI's status as a fiduciary, this production order applied to attorney-client communications with HNI in addition to communications with the other Health Net defendants. Health Net appeals the May 12 order on the basis that the District Court wrongly applied the fiduciary exception and wrongly determined HNI's status as a fiduciary.

II. Jurisdiction and Standard of Review

The District Court had jurisdiction over this case under 28 U.S.C. § 1331 because the plaintiffs' claims arise under § 502 of ERISA, 29 U.S.C. § 1132. We have appellate jurisdiction under 28 U.S.C. § 1291 to review the District Court's order of May 12, 2006, ordering the production of certain documents. Though not a final resolution of the case, an order for the production of documents over which a privilege is asserted is appealable as finally resolving a collateral discovery issue. Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949); In re Ford Motor Co., 110 F.3d 954, 962-63 (3d Cir.1997). Thus, insofar as Health Net contends that the District Court improperly ordered the discovery of privileged documents, its appeal is properly before us.

HNI has also appealed the District Court's summary judgment determination regarding HNI's status as an ERISA fiduciary. Ordinarily, an order denying a motion for summary judgment is not an appealable final order; to the contrary, it is an order permitting litigation to continue. Robinson v. Hartzell Propeller, Inc., 454 F.3d 163, 168 (3d Cir.2006). Nonetheless, HNI urges us to consider the issue and vacate the order denying summary judgment.

HNI argues that we have jurisdiction to vacate the order because the District Court, in denying HNI's motion for summary judgment, violated our Stay Order of September 27, 2005. This argument lacks merit. Our Stay Order prevented the District Court from entering judgments affecting the disputed class during the pendency of Health Net's Rule 23(f) appeal.

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The question whether HNI was a fiduciary is wholly independent of the question whether the class was properly certified. 1

HNI also contends that we must review...

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