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Discovery By Objectors to Class Action Settlement: Montana Supreme Court Opens Door to Discovery

Posted in Class Action Settlements, Health Insurance

A recent 4-3 decision by the Montana Supreme Court allows objectors to a class action settlement to take fairly broad discovery regarding the terms of the settlement, potentially including deposing class counsel regarding the negotiations and mediation, notwithstanding a Montana statute providing for confidentiality of mediations.  This decision demonstrates the importance of recognizing that, although some courts will protect the confidentiality of the class action settlement discussions, other courts may not, and thus the parties involved may want to conduct themselves as if the discussions are not confidential. 

Pallister v. Blue Cross & Blue Shield of Montana, Inc., No. DA 11-0431, 2012 MT 198, 366 Mont. 175, 2012 Mont. LEXIS 276 (Mont. Sept. 5, 2012) involved a settlement of class action in a case involving allegations that health insurance claims were improperly denied based on exclusions that were subsequently disapproved by the Montana insurance commissioner.  The majority remanded the case to allow objectors to the settlement to take fairly broad discovery, despite a lack of any showing of collusion or misconduct in connection with the settlement.  Here is a key passage from the opinion:

The record here reveals that the objectors’ efforts to obtain information about negotiations and the underlying settlement were stymied at every critical turn. The court denied them the right to intervene and denied their request to conduct discovery. The court issued a protective order precluding the dissemination of any settlement information. Thus, the court’s conclusion in its order denying the request for discovery that Pallister had failed to show independent evidence of unfairness begs the question of just how such evidence could be obtained in such a closed proceeding. Moreover, the submission by BCBSMT of affidavits and disclosures of the nature and amount of the settlement claims on the morning of the Fairness Hearing—the very information which the objectors had long sought—effectively denied the objectors any reasonable opportunity to digest and analyze the information. The last minute production of this information also arguably impaired the court’s ability to determine in a comprehensive manner whether the settlement was “fair, reasonable and adequate.”

We emphasize that in reaching this decision, we are not inferring or even suggesting that there was collusion or misconduct of any sort among the parties and their attorneys. Rather, we are simply concluding that in a settlement only class action case— a matter of first impression for this Court—the heightened scrutiny required in such an action mandates that there be sufficient information provided to the class representatives, any objectors, and the district court to enable the parties and the court to reach a well-informed decision of whether the proposed settlement is fair, adequate and reasonable.

On remand, the court shall allow the objectors the opportunity to conduct limited discovery. They should be allowed to explore how the class was chosen, how the medical coding was conducted, and how and why the particular compromises of claims were determined. They should also be allowed to explore how the Settlement Agreement and class counsel’s fee were negotiated, and any other area of inquiry the objectors and the court conclude is relevant.

. . .

Citing § 26-1-813, MCA, the dissent argues that our ruling “infringes upon the confidentiality that accompanies settlement negotiations and mediations.” We respectfully disagree. Section 26-1-813(1), MCA, contemplates a dispute resolution process whereby a mediator “assists disputing parties to resolve their differences.” The parties who participate in such a statutory process are adversaries. By contrast, the objectors’ claims here are aligned with those of the class, and are indeed dependent upon the actions of the class representatives. The objectors and the class are not adversaries— rather, BCBSMT is the adversary of both. It is unfortunately emblematic of this case, however, that the class consistently deemed objectors to be the adversaries. The Dissent in its analysis perpetuates this mindset.

Id. at *23-24, 28.

Justice Morris dissented, joined by Chief Justice McGrath and Justice Baker.  Here is the heart of the dissent:

The Court disregards the evidence of collusion standard normally required to trigger a discovery request by an objecting party to a class action settlement. Lobatz v. U.S. West Cellular of Cal., Inc., 222 F.3d 1142, 1148 (9th Cir. 2000). The Court instead authorizes objectors to undertake an open-ended inquiry of the motives and actions of the settlement parties that fails entirely to take into account the apparent fairness of the proposed settlement. I fear that this departure strikes a fatal blow for class-action litigation in Montana as litigants will shy away from settlements that objectors can challenge, and with little or no cause, subject the settlement parties to unprecedented invasions into the details of the agreement.

. . .

The Court reasons that the requirement for an objector to demonstrate evidence of collusion from other sources “begs the question of just how such evidence could be obtained in a closed proceeding.” Opinion, ¶ 34. I am aware of no cases, however, in which the settlement negotiations have been open to all comers. Nothing in Lobatz indicates anything other than a closed proceeding produced the settlement. Lobatz, 222 F.3d at 1148. The same holds true for the settlement negotiations in Mars Steel, 834 F.2d at 681, and Hanlon, 150 F.3d at 1018. The Manual for Complex Litigation, Fourth, § 21.643, similarly provides that a court “should not allow discovery into the settlement negotiation process unless the objector makes a preliminary showing of collusion or other improper behavior.” The Court seemingly disregards this evidence of collusion requirement in favor of some open-ended discovery requirement regardless of the appearance of an objectively fair settlement.

The Court’s open-ended discovery requirement whenever an objector raises directly or implicitly a claim of collusion will likely have a chilling effect on future class action cases. The objectors’ newly propounded right to discovery infringes upon the confidentiality that accompanies settlement negotiations and mediations. Section 26-1-813(3), MCA. Confidentiality fosters honest communication between parties, and in turn, this honest communication effectuates settlement. M. R. Evid. 408, Commission Comments. The Court’s newly propounded rule strips the ability of parties to a class action to protect such confidential communication. This potential public scrutiny likely will lead class-action parties to be less forthcoming in negotiations, and in turn, leave the parties less likely to settle their dispute. This outcome conflicts with Montana’s public policy of promoting settlements.

Id. at *30-31, 47-48 (Morris, J., dissenting).

As the dissent notes, this decision seems contrary to the weight of authority regarding objectors’ ability to take discovery into class action settlements.  It will be interesting to see whether this decision is followed elsewhere.  One approach that parties to class action settlement discussions may wish to consider is to assume that their discussions might not be confidential and conduct themselves accordingly.