Opinion ID: 1428164
Heading Depth: 2
Heading Rank: 4

Heading: Challenges to the Settlement Agreement

Text: This Court has explained that [a] district court's approval of the settlement of a class action is reviewable under an abuse-of-discretion standard. In re Ivan F. Boesky Sec. Litig., 948 F.2d 1358, 1368 (2d Cir.1991). We review a district court's factual conclusions related to a settlement agreement under the clearly erroneous standard of review, and we review de novo a district court's legal conclusions with respect to its interpretation of the terms of a settlement agreement. Omega Eng'g, Inc. v. Omega, S.A., 432 F.3d 437, 443 (2d Cir.2005).
The Self-Funded Plans contend that the District Court abused its discretion in approving the Settlement Agreement because it is ambiguous and does not adequately reflect the disparate damages suffered by the Self-Funded Plans as compared to insured or capitated Plans. Under FED.R.CIV.P. 23(e)(1)(C), the court may approve a settlement, voluntary dismissal, or compromise that would bind class members only after a hearing and on finding that the settlement, voluntary dismissal, or compromise is fair, reasonable, and adequate. In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1026 (2d Cir.1992). With respect to the Agreement's description of how class members calculate their proportionate share, the Agreement provides that allocation of funds shall be made primarily on the basis of each settling [P]lan's proportionate share of the total drug spend of all settling plans. Although the Agreement does not specifically define the word primarily, the Class Notice indicates that a Plan's proportionate share of the total drug spend will be reduced by fifty-five percent (55%) to reflect the fact that [the] Plan could not have been damaged directly by certain of the conduct that Plaintiffs allege increase costs to Plans. Read together, these provisions indicate that allocations will be calculated primarily on the basis of each Plan's proportionate share of the total drug spend, but that they will be reduced by 55% for insured or capitated Plans. This conclusion is supported by the explanation of the Plan of Allocation on the settlement website, which is incorporated by reference into the Class Notice and the contents of which appear in the record: The allocation will be made primarily on the basis of each setting plan's proportionate share of the total drug spend of all settling plans that timely file claims in the Settlement. However, the distribution for plans that did not participate in Medco Health's brand-to-brand therapeutic interchange program or that paid for the cost of prescription drugs primarily through an insurance or capitated arrangement will be reduced by 55%. Medco ERISA Settlement Website, Frequently Asked Questions, How will the Settlement Fund be allocated (or how will the Settlement Fund be divided)?, http:// completeclaimsolutions.com/erisasettlment/ faq_a.html (last visited May 17, 2007). In addition, while the Class Notice does not provide the total drug spend of the class, that figure is to be calculated by Medco after each Plan submits the attached Identification Form detailing its relationship with Medco during the class period. See Medco ERISA Settlement Website, Frequently Asked Questions, Who calculates my drug spend?, http://completecla imsolutions.com/erisasettlment/faq_a.html (last visited May 17, 2007). Moreover, the provisions of the Settlement Agreement explaining which claims are retained by the class are not misleading. The Agreement expressly provides that it does not release Medco or third-party administrators from any contract claims asserted by the parties. Medco indicated during the fairness hearing that the contract claims are carved out and are not released by the Agreement and that it agrees with settling counsel that none of the contract claims will be released for any of Medco's clients and no contract claims are preempted by ERISA. As the District Court aptly noted, [t]he Amended Settlement Agreement is clear and it speaks for itself. In re: Medco Health Solutions, Inc., 2004 WL 1243873, at . We are, however, persuaded by the Self-Funded Plans' contention that the Agreement fails to adequately explain the allocation discount provided to the insured or capitated Plans. [W]here, as here, the district court simultaneously certifies a class and approves a settlement of the action, we will more rigorously scrutinize the district court's analysis of the fairness, reasonableness and adequacy of both the negotiation process and the proposed settlement. In re Drexel Burnham, 960 F.2d at 292. Notwithstanding the lengthy negotiation process leading up to the Agreement upon which the District Court relied, In re: Medco Health Solutions, Inc., 2004 WL 1243873, at , there is no indication how the 55% allocation discount was calculated or why it properly reflects the relative losses suffered by the Plans. As even the District Court recognized, [t]he [Class] Notice is silent as to how the proponents of the settlement derived the insured [P]lans' claim reduction of 55% relative to the claims of the self-funded [P]lans. Id. at . Class members had different relationships with Medco that affected the extent to which they were damaged. The District Court's conclusion that the 55% discount to insured plans was fair, adequate, and reasonable did not rest on any specific factual findings or adequately explain how it accounted for the difference in these relationships. The District Court held simply that the Agreement balances the equities between self-funded and insured plans by providing the 55% allocation reduction for insured Plans. In re: Medco Health Solutions, Inc., 2004 WL 1243873, at . Although class counsel now attempt to rationalize the Plan of Allocation in their brief, we do not have record evidence relating to the basis for the 55% reduction or the benefit of a more elaborate explanation of this discount by the District Court to allow us to determine whether it represents a fair, reasonable, and adequate discount. In light of the foregoing, we conclude that the Settlement Agreement is not ambiguous as to how the class members calculate their proportionate shares in the fund, but we remand to the District Court for necessary findings and an explanation in support of any reduction in the shares of the insured or capitated Plans. We note that the new subclass containing only self-funded Plans will be better able to assert any challenge to the discount with the benefit of independent counsel. Since the Self-Funded Plans do not challenge on appeal, as they did in the District Court, the reasonableness of the size of the settlement fund, there is no need to renegotiate that aspect of the Settlement Agreement; the new subclass will be free on remand to negotiate only for a reallocation of the settlement proceeds, with any agreed change subject to the reasoned approval of the District Court.