Priddy v. Health Care Serv. Corp.

• Decision Date: 31 August 2017
• Docket Number: No. 16-4127.,16-4127.
• Citation: 870 F.3d 657
• Parties: Susan PRIDDY, et al., on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, v. HEALTH CARE SERVICE CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

870 F.3d 657

Susan PRIDDY, et al., on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,

v.HEALTH CARE SERVICE CORPORATION, Defendant-Appellant.

No. 16-4127.

United States Court of Appeals, Seventh Circuit.

Argued April 21, 2017

Decided August 31, 2017

Jonathan P. Novoselsky, Attorney, Jonathan P. Novoselsky, Attorney at Law, Glenview, IL, Alexandra de Saint Phalle, Attorney, Londrigan, Potter & Randle, Springfield, IL, Stephen W. Heil, Attorney, Cray Huber Horstman Heil & Vanausdal LLC, Chicago, IL, for Plaintiffs–Appellees.

Christopher Landau, Attorney, Kirkland & Ellis LLP, Washington, DC, Helen E. Witt, Sopan Joshi, Stacey G. Pagonis, Laura K. Riff, Attorneys, Kirkland & Ellis LLP, Chicago, IL, for Defendant–Appellant.

Before Wood, Chief Judge, Sykes, Circuit Judge, and Coleman, District Judge.^*

Wood, Chief Judge.

Health Care Service Corporation (HCSC) is one of the nation's largest health insurance providers. This appeal presents the question whether the district court erred by certifying a class action against HCSC. The named representatives assert that HCSC is violating federal and Illinois law by the way in which it is using third-party affiliates to provide various services. We conclude that the record fails to support class certification, and so we vacate the certification and remand for further proceedings.

I

HCSC is an Illinois not-for-profit corporation that offers Blue Cross and Blue Shield insurance through licensed affiliates in five states: Illinois, Montana, New Mexico, Oklahoma, and Texas. To help provide that coverage, HCSC contracts with outside affiliates for prescription drug services, claim payments, and other administrative work. These relationships are often not at arm's length—HCSC owns or controls its affiliates, and places its officers on their boards. HCSC does not disclose the extent of these ties to its insureds. Its policy terms state that the affiliates pay it rebates, but it does not share those rebates with its customers.

Alleging that these arrangements violated Illinois law and the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001, et seq. , Susan Priddy and ten other named plaintiffs filed the present case as a putative class action against HCSC in November 2014. (Some of them have since been eliminated from the case, but their departure does not affect our analysis.) Their theory is that HCSC's affiliates overcharge beneficiaries and then return the proceeds to HCSC via rebates. Customers are unaware that these hidden financial transactions are taking place because HCSC hides its control of the affiliates. This self-dealing, the plaintiffs believe, violates HCSC's fiduciary duties to beneficiaries under ERISA and Illinois law.

Before much else happened in the district court, the question of class certification arose. See FED. R. CIV. P. 23(c)(1)(A) ("At an early practicable time after a person sues ... the court must determine by order whether to certify the action as a class action."). Plaintiffs moved for certification, and the district court granted their request. It certified four classes under Federal Rule of Civil Procedure 23(b)(3) : (1) employers who purchased HCSC plans for employees in any of the five states served by HCSC; (2) beneficiaries of employer-furnished plans provided by HCSC in any of the five states; (3) individuals who purchased insurance directly from HCSC in any of the five states; and (4) Illinois insureds who were protected by Illinois insurance regulations. The court also spelled out some exclusions not relevant here. Altogether, the four classes included approximately ten million people. The court named Susan Priddy and Michael Beiler as the class representatives, and it designated counsel for the named plaintiffs as class counsel.

The certification decision was concise. Turning first to the four requirements of Rule 23(a), the court found that numerosity was obvious, given the putative class's size. So was commonality: the theory in every case was that HCSC had overcharged its beneficiaries, and "the contract language and the treatment of the putative class members in both classes rests on a uniform corporate policy." Typicality was present, the court thought, because every class member's claim rested on the same legal theory. And it held that the lead plaintiffs provided adequate representation since Priddy's insurance was employer-sponsored, whereas Beiler had bought his individually. (It did not explain why either Priddy or Beiler could represent the employer class; Priddy is from Illinois, which might have explained why she could stand for the group of Illinois insureds.)

Turning to Rule 23(b), the district court recognized that it was looking at a "common question," Rule 23(b)(3) class action. That required it to find that "questions of law or fact common to class members predominate over any questions affecting only individual members," and that a class action is a superior way of handling the litigation. The court made short work of both inquiries. A class action was a superior way of proceeding, it thought, both because of the class size and the slim likelihood that the members would pursue relief on their own. It concluded that the insurance policies governing each class member's relationship to HCSC were uniform, and thus that the common question of the legality of those terms predominated. HCSC disagreed vociferously with all this, pointing out many ways in which the proposed classes were heterogeneous and thus not suited to common treatment. HCSC filed this appeal pursuant to Federal Rule of Civil Procedure 23(f), and a panel of this court agreed to accept it.

II

As the district court recognized, there are two steps in certifying a class under Rule 23. First, the party seeking certification must show numerosity, commonality, typicality, and adequacy, though commonality and typicality "tend to merge." General Telephone Co. of S.W. v. Falcon , 457 U.S. 147, 157 n.13, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982). Rule 23(a) lays out the details of each requirement:

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

(4) the representative parties will fairly and adequately protect the interests of the class.

The second step requires the party to satisfy "at least one of the three requirements listed in Rule 23(b)." Wal-Mart Stores, Inc. v. Dukes , 564 U.S. 338, 345, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011). Because this suit seeks money damages on behalf of the class, based on common questions, it may proceed only under Rule 23(b)(3), which requires both that common questions predominate and that the class form is superior to other ways of adjudicating the case.

These are not inquiries that the court is free to make in a fact-free zone. Unlike a motion under Federal Rule of Civil Procedure 12(b)(6), a motion to certify a class under Rule 23(c) is not one for which the court may "simply assume the truth of the matters as asserted by the plaintiff." Messner v. Northshore Univ. HealthSystem , 669 F.3d 802, 811 (7th Cir. 2012). Instead, "[i]f there are material factual disputes, the court must receive evidence ... and resolve the disputes before deciding whether to certify the class." Id. (internal quotation marks omitted). Sometimes it is necessary to conduct a preliminary inquiry into the merits, when the merits overlap with the considerations under Rule 23(b)(3). Szabo v. Bridgeport Machines, Inc. , 249 F.3d 672, 676 (7th Cir. 2001).

The plaintiff bears the burden of proving by...