Wong v. Accretive Health, Inc.

• Decision Date: 09 December 2014
• Docket Number: No. 14–2191.,14–2191.
• Citation: 773 F.3d 859
• Parties: Linda WONG, individually and on behalf of all others similarly situated, Plaintiff–Appellee, v. ACCRETIVE HEALTH, INC., et al., Defendants–Appellees. Appeal of James J. Hayes.
• Court: U.S. Court of Appeals — Seventh Circuit

773 F.3d 859

Linda WONG, individually and on behalf of all others similarly situated, Plaintiff–Appellee

v. ACCRETIVE HEALTH, INC., et al., Defendants–Appellees.Appeal of James J. Hayes.

No. 14–2191.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 2, 2014.

Decided Dec. 9, 2014.

Rehearing En Banc Denied Jan. 26, 2015.^*

James E. Barz, Attorney, Robbins Geller Rudman & Dowd LLP, Chicago, IL, Kevin Kamuf Green, Attorney, Robbins Geller Rudman & Dowd LLP, San Diego, CA, for Plaintiff-Appellee.

James J. Hayes, Annandale, VA, pro se.

Leonid Feller, Attorney, Kirkland & Ellis LLP, Chicago, IL, for Defendants-Appellees.

Before FLAUM, MANION, and HAMILTON, Circuit Judges.

Opinion

MANION, Circuit Judge.

The Indiana State Police Benefit System, as lead plaintiff in a class action, sued Accretive Health, Inc., and two of its officers under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. James Hayes, a member of the class, appeals pro se from the approval of the class settlement and plan of distribution.¹ We hold that the district court did not abuse its discretion in approving the settlement, and therefore affirm.

I. Background

Accretive is a nationwide company that provides cost control, revenue cycle management, and compliance services primarily to not-for-profit healthcare providers. Underlying the suit are two contracts Accretive entered into with Minnesota-based Fairview Health Systems worth several million dollars each. The first contract, called a Revenue Cycle Operations Agreement (“RCA”), accounted for approximately 12% of Accretive's revenue during the class period. Accretive's second contract with Fairview, called a Quality and Total Cost of Care (“QTCC”) contract, was the first of its kind and was held out by Accretive as the future for healthcare services. The Indiana State Police Benefit System (“ISPBS”) alleged that Accretive provided its services through overly aggressive collection practices and with inadequate regulatory compliance, conduct that was both illegal and in violation of its contracts with Fairview. ISPBS further alleged that Accretive concealed this fact and instead represented that it complied with the law and its contractual obligations in an effort to artificially inflate the price of Accretive common stock.

Certain newsworthy events eventually uncovered Accretive's alleged improper and unlawful conduct. On January 19, 2012, the Minnesota Attorney General sued Accretive for failure to comply with healthcare, debt collection, and consumer protection laws. In response to the lawsuit, Accretive announced on March 29, 2012, that it was winding down its RCA contract well short of its five-year term and expecting a loss of $62 to $68 million in revenue. On April 24, 2012, the Minnesota Attorney General released a voluminous and damaging report on Accretive's business practices. Three days later, on April 27th, Accretive announced that Fairview was cancelling its QTCC contract, thereby severing all ties with Accretive. News of these events caused Accretive's stock to plummet from over $24 per share on March 29, 2012, to under $10 per share on April 27, 2012.

Accretive moved to dismiss all claims on the grounds that the alleged misrepresentations were mere puffery or immaterial omissions not actionable as securities fraud and that ISPBS did not adequately allege scienter. The motion was fully briefed, and the district court held a hearing on the motion. After the hearing, the parties submitted the case to an established mediation firm and participated in an in-person session with an experienced mediator. After five weeks of negotiation, before the district court ruled on the motion to dismiss, the parties agreed to the mediator's proposal of $14 million to settle all claims against Accretive.

The district court granted ISPBS's motion for preliminary approval of the class settlement and plan of distribution and denied Accretive's motion to dismiss as moot. The proposed settlement of $14 million amounted to $0.20 per share, or $0.14 per share once attorneys' fees and expenses were deducted. Notice of the proposed settlement and plan of distribution was sent to over 34,200 potential class members and published in Investor's Business Daily and over the Business Wire. Only one individual opted out of the class settlement, and only Hayes filed an objection.

At the fairness hearing, the district court granted final approval to the class settlement and plan of distribution and overruled Hayes's objection. The district court awarded attorneys' fees of 30% of the settlement proceeds, or $4.2 million, and expenses in the amount of $63,911.14. Hayes did not attend the proceedings.

II. Discussion

A district court may approve a class action settlement if it finds it to be fair, adequate, and reasonable. Fed.R.Civ.P. 23(e)(2). “In the past, we have gone so far as to characterize the court's role as akin to the high duty of care that the law requires of fiduciaries.” Synfuel Technologies, Inc. v. DHL Express (USA), Inc., 463 F.3d 646, 652–53 (7th Cir.2006) (quotation omitted). We review such an approval for an abuse of discretion. Isby v. Bayh, 75 F.3d 1191, 1196 (7th Cir.1996). “Our focus, then, is upon the general principles governing approval of class action settlements and not upon the substantive law governing the claims asserted in the litigation.” Id. at 1197 (quotation omitted).

Hayes raises five arguments on appeal: 1) the settlement recovers too low a percentage of class members' potential damages; 2) the plan of distribution provides settlement funds to those who were not damaged by the alleged fraud; 3) a district court lacks sufficient information to judge the fairness of a class action settlement prior to ruling on a motion to dismiss; 4) we should adopt a rule that attorneys' fees in class action settlements are deducted from each claim paid by the settlement fund at a set rate per share, what he calls “per share terms”; and, 5) we should direct the district court on remand to replace the lead plaintiff with the named plaintiff and himself. We address each argument in turn.

Hayes's first argument has two parts. First, he contends that the district court erred by approving the settlement because the Private Securities Litigation Reform Act (“PSLRA”) of 1995 does not allow it. Hayes correctly points out that Congress enacted the PSLRA to discourage frivolous securities class actions.

Recognizing the “concern over the use of then-existing class action procedures to bring strike suits in order to exact extortionate settlements,” Congress enacted the PSLRA “to discourage frivolous lawsuits by establishing special procedures for instituting private class actions under the securities laws.”Hazen, Law of Securities Regulation § 12.15 [1] (6th ed.2009) (quotation omitted). See also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (recognizing “the PSLRA's twin goals: to curb frivolous, lawyer-driven litigation, while preserving investors' ability to recover on meritorious claims”). However, Hayes mistakenly equates frivolous lawsuits with those that recover a low percentage of potential damages. The fact that a lawsuit may recover a small portion of a plaintiff's potential damages does not make it frivolous. A lawsuit is frivolous if it “lacks an arguable basis either in law or in fact.” Neitzke v. Williams, 490 U.S. 319, 325, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989). Although Congress expressed concern that frivolous lawsuits for securities fraud often resulted in limited recovery for the investor, see S.Rep. No. 104–98 at 9 (1995), 1995 U.S.C.C.A.N. 679, 688 (“The ‘victims' on whose behalf these lawsuits are allegedly brought often receive only pennies on the dollar in damages.”), it also expressed concern that abusive lawsuits often resulted in exorbitant settlements, see H.R. Conf. Rep. No. 104–369 at 32 (1995), 1995 U.S.C.C.A.N. 730, 731 (“In these and other examples of abusive and manipulative securities litigation, innocent parties are often forced to pay exorbitant ‘settlements.’ ”). See also Tellabs, 551 U.S. at 321, 127 S.Ct. 2499 (noting that Congress also limited recoverable damages). When enacting the PSLRA, Congress was not concerned with low recoveries but with abusive practices; the PSLRA is not a per se bar to low settlements. See H.R. Cong. Rep. No 104–369 at 31–32 (1995).

Next, Hayes relies on our guidance in Reynolds v. Beneficial Nat'l Bank, 288 F.3d 277 (7th Cir.2002), that the district court should “quantify the net expected value of continued litigation to the class, since a settlement for less than that value would not be adequate.” Id. at 284–85. In this case, ISPBS did not provide the district court with a damage estimate from which it could “estimat[e] the range of possible outcomes and ascrib[e] a probability to each point on the range” as laid out in Reynolds. Id. at 285. As ISPBS explained to the district court, for the court to have quantified the case in this manner would have required testimony by a damages expert. Any such testimony would have been hotly contested by Accretive. This would have resulted in a lengthy and expensive battle of the experts, with the costs of such a battle borne by the class—exactly the type of litigation the parties were hoping to avoid by settling.

Rather, the district court followed our general, longstanding guidance on the matter, namely, that when conducting a fairness determination relevant factors include: “(1) the strength of the case for plaintiffs on the merits, balanced against the extent of settlement offer; (2) the complexity, length, and expense of further litigation; (3) the amount of opposition to the settlement; (4) the reaction of members of the class to the settlement; (5) the opinion of competent counsel; and (6) stage of the proceedings and the amount of discovery completed.” Gautreaux v. Pierce, 690 F.2d 616, 631 (7th Cir.1982) (citing Armstrong v. Board of...