September 5 2012
DA 11-0431
IN THE SUPREME COURT OF THE STATE OF MONTANA
2012 MT 198
TYSON S. PALLISTER, KEVIN BUDD,
JESSICA NORMANDEAU, and LAURA FORTUNE,
Class Members and Appellants,
v.
BLUE CROSS AND BLUE SHIELD OF MONTANA,
INC., AND MONTANA COMPREHENSIVE HEALTH
ASSOCIATION,
Defendants and Appellees,
v.
BRITTANY C. SMITH, RENEE NEARY, as parent and
guardian of Dylan Dallaserra; KRISTA LUCAS and
ALICE JEAN SPEARE; each individually and as
representative members of a class of similarly
situated plaintiffs,
Class Representatives and Appellees.
APPEAL FROM: District Court of the Second Judicial District,
In and For the County of Butte/Silver Bow, Cause No. DV-08-553
Honorable Bradley G. Newman, Presiding Judge
COUNSEL OF RECORD:
For Class Members and Appellants Pallister, Budd and Normandeau:
James G. Hunt (Argued), Jonathan McDonald, Dix, Hunt & McDonald,
Helena, Montana
Erik B. Thueson, Thueson Law Office, Helena, Montana
Jory C. Ruggiero, J. Breting Engel, Western Justice Associates,
Bozeman, Montana
For Class Member and Appellant Laura Fortune:
Lawrence A. Anderson (Argued), Attorney at Law, Great Falls, Montana
Rex Palmer, Attorneys Inc., P.C., Missoula, Montana
For Appellee Blue Cross and Blue Shield of Montana, Inc.:
Michael F. McMahon, Stefan T. Wall (Argued), McMahon, Wall
& Hubley, PLLC, Helena, Montana
For Appellee Montana Comprehensive Health Association:
Jacqueline T. Lenmark (Argued), Keller, Reynolds, Drake, Johnson
& Gillespie, P.C., Helena, Montana
For Class Representatives and Appellees:
Robert G. McCarthy (Argued), McCarthy Law, P.C., Butte, Montana
Argued: April 11, 2012
Submitted: April 26, 2012
Decided: September 5, 2012
Filed:
__________________________________________
Clerk
2
Justice Patricia O. Cotter delivered the Opinion of the Court.
¶1 This case arises out of claims asserted by multiple persons against Blue Cross and
Blue Shield of Montana (BCBSMT) and Montana Comprehensive Health Association
(MCHA). 1 Claimants assert that while they were fully insured by BCBSMT or MCHA,
they submitted claims that the insurers denied based upon exclusions contained in their
insurance policies. These exclusions were subsequently disapproved by the Montana
Commissioner of Insurance (Commissioner) and the insureds sought the
previously-denied benefits. Eventually, the matter evolved into a class action and three
of the claimants, Krista Lucas, Brittany Smith, and Alice Speare, were named class
representatives. 2 A class was certified that included claims filed—or claims that could
have been filed—from December 29, 2000, through December 31, 2008. Class counsel
was appointed. Subsequently, a settlement was negotiated. Three other claimants, Tyson
Pallister, Kevin Budd and Jessica Normandeau, objected to the settlement and sought
review by the Second Judicial District Court. The District Court approved the settlement.
Pallister, Budd and Normandeau appeal asserting numerous errors by the District Court
including but not limited to the court’s error in denying Pallister’s motion to conduct
discovery. We reverse and remand on the discrete issue of discovery and vacate the
1
MCHA is a program that offers policies of individual health insurance to eligible Montana
residents who are considered uninsurable due to medical conditions. MCHA coverage is also
available to persons who are leaving group coverage. Montana Comprehensive Health
Association, http://www.mthealth.org (accessed August 23, 2012).
2
Renee Neary, named in the caption of this case, was dismissed as a plaintiff on December 11,
2009.
3
District Court’s approval of the Settlement Agreement. As a result, we do not address the
parties’ remaining allegations of error.
FACTUAL AND PROCEDURAL BACKGROUND
¶2 This case has a long and complex procedural history. It involves multiple actions
filed by numerous individuals in two state district courts and in the Montana federal
court, as well as an interim proceeding before this Court. Our resolution of this matter
does not require that we recite a detailed description of the many parties and their claims.
However, to the extent facts pertaining to specific parties are relevant to our analysis,
they are presented below.
¶3 The appellants/objectors, the class representatives/appellees, and all class
members, were insured by BCBSMT or MCHA at the time they were injured in separate
automobile accidents over a period of several years. They were covered under both
ERISA3 and non-ERISA policies. Each of their policies contained an exclusion for
automobile medical coverage, generally providing that the insurer would not pay for
health care costs of its injured insureds if the insureds received, or were entitled to
receive, benefits from any automobile liability policy. The parties filed timely claims for
benefits with BCBSMT and/or MCHA based upon the dates of their respective accidents
and the insurers denied all, or part, of their claims based upon the exclusions in their
individual policies.
3
ERISA, the Employee Retirement Income Security Act, is a federal law which establishes
minimum standards for retirement and health benefits plans in private industry. U.S. Dept. of
Labor, http://www.dol.gov/ebsa/compliance_assistance.html (accessed August 23, 2012).
4
¶4 An earlier action initiated by complaints to the Commissioner about BCBSMT’s
denial of claims based upon these or similar exclusions was the forerunner to the case
now before us. In Blue Cross & Blue Shield of Mont. v. Mont. State Auditor, 2009 MT
318, 352 Mont. 423, 218 P.3d 475 (State Auditor), we explained that BCBSMT submits
its policy forms to the Commissioner for approval in accordance with applicable law,
§ 33-1-501, MCA. In October 2001, the Commissioner disapproved certain terms,
conditions and provisions contained in BCBSMT’s policies and forms, including the
above-referenced automobile insurance exclusion provisions. BCBSMT requested an
administrative hearing. State Auditor, ¶ 5. In March 2002, the Commissioner and
BCBSMT reached an agreement, memorialized by correspondence rather than a formal
order, allowing BCBSMT to continue to use the agreed-upon exclusion language in its
forms. The administrative proceeding was not dismissed and BCBSMT continued using
these forms through most of 2006. State Auditor, ¶ 6.
¶5 In October and November 2006, BCBSMT once again submitted forms containing
the exclusion language to the Commissioner for approval. In May 2007, the
Commissioner disapproved the forms on the grounds that the exclusion language
conflicted with the subrogation statutes at §§ 33-30-1101 and -1102, MCA (2005), and
applicable case law. Resurrecting the 2002 administrative hearing proceeding, BCBSMT
requested a contested case hearing which was held in July 2007. The hearing examiner
issued his proposed findings of fact and conclusions of law in October 2007 upholding
the decision to disapprove the forms. State Auditor, ¶ 6.
5
¶6 In March 2008, the Commissioner adopted the hearing examiner’s proposed
decision. BCBSMT sought judicial review by the First Judicial District Court. That
court, in December 2008, upheld the Commissioner’s decision and BCBSMT appealed.
State Auditor, ¶ 7. On September 24, 2009, we affirmed the Commissioner’s rejection of
the forms, expressly holding that the exclusions allowed BCBSMT:
to avoid any payment of benefits to its insured if the insured is “entitled to
receive” benefits from any other auto . . . liability policy, whether or not the
insured actually receives any of those benefits, and whether or not the
insured has been made whole. Only when the insured is made whole as
defined in Montana law, and then only after BCBS has paid out benefits to
its insured, could BCBS be entitled to claim subrogation. . . . The BCBS
exclusions therefore violate Montana statutory and case law on subrogation.
State Auditor, ¶ 19.
¶7 It is against the backdrop of State Auditor that the action currently before us was
filed and evolved into a class action, potentially including over 3,000 class members who
were denied benefits between 2000 and 2008 based upon these policy exclusions.
ISSUE
¶8 The dispositive issue for purposes of this Opinion is whether the District Court
abused its discretion by denying Pallister’s motion to conduct discovery.
STANDARD OF REVIEW
¶9 We review a district court’s discovery rulings for an abuse of discretion. Heggem
v. Capitol Indem. Corp., 2007 MT 74, ¶ 17, 336 Mont. 429, 154 P.3d 1189.
DISCUSSION
¶10 Did the District Court abuse its discretion by denying Pallister’s motion to
conduct discovery?
6
¶11 Neary, Lucas and Speare filed their initial action against BCBSMT in the Second
Judicial District Court on December 29, 2008, shortly after the First Judicial District
Court affirmed the Commissioner’s decision in State Auditor. In January 2009, their case
was removed to federal court where Neary was ultimately dismissed as a plaintiff. In
March 2009, MCHA moved, and was granted the right, to intervene as a defendant. The
case remained in federal court until January 14, 2010, when it was remanded back to the
Second Judicial District Court.4
¶12 On the day the Second Judicial District Court again took control of the case,
BCBSMT, MCHA, Lucas, and Speare filed a M. R. Civ. P. 23(c) (Rule 23) Stipulation
for Class Certification Consideration (Stipulation) with the District Court.5 In this
Stipulation, they agreed to consolidate their case with a similar case filed by Smith
against BCBSMT in September 2009 in the Second Judicial District Court.6 The
consolidated case for purposes of this Opinion will be referred to as In re
BCBSMT/MCHA. On January 19, 2010, Pallister and Budd moved to intervene, as a
matter of right, in In re BCBSMT/MCHA. Normandeau then moved to intervene as well.7
The proposed intervenors, who were members of the class, believed the Stipulation
compromised and did not protect their rights. They requested that the District Court take
4
In the meantime, we decided State Auditor in September 2009.
5
We acknowledge that Rule 23 controls the aspects of a class action; however, we need not
address the Rule 23 factors in this Opinion as they are not applicable to the issue before us.
6
Unless otherwise specified, hereinafter Lucas will refer to Lucas, Speare and Smith
collectively.
7
Unless otherwise specified, hereinafter Pallister, or Objectors, will refer to Pallister, Budd and
Normandeau collectively.
7
no action on the proposed Stipulation until the proposed intervenors had fully briefed the
issue and the court ruled on their motions for intervention.
¶13 On January 22, 2010, BCBSMT, MCHA and Lucas filed a Stipulated Protective
Order governing the “use of ‘Confidential Information’ produced in response to any
discovery request, deposition, subpoena or other means.” “Confidential information”
was defined, in part, as “any patient and/or client information including but not limited to
name of patient, date of birth, Social Security number, healthcare information, billing
record, note, or other document, generated and/or maintained by [BCBSMT] or [MCHA]
or any person or entity on their behalf, involving financial or proprietary information.”
The District Court judge signed both of the insurers’ and Lucas’s stipulated motions on
January 22.
¶14 On January 25, 2010, Honorable John Whelan as mediator met with counsel for
BCBSMT, counsel for MCHA, and Smith, Speare and their attorney to discuss a
proposed settlement agreement. Whelan’s report dated February 3, 2010, concluded that
“the terms and conditions of [BCBSMT, MCHA, Speare and Smith’s] Settlement
Agreement are fair, reasonable and adequate to resolve this matter.” Whelan
recommended that the District Court approve the settlement. At this point in time, the
class had not yet been certified, nor had class counsel been approved. The settlement
negotiations were conducted under the “Confidential Information” protective order
precluding settlement information from being provided to purported class members.
Notably, Whelan’s report references neither the existence of the objectors nor their
concerns.
8
¶15 On February 4, 2010, BCBSMT, MCHA and Lucas filed a Joint Motion for
Preliminary Certification and Settlement Approval. The joint motion sought preliminary
certification of four defined classes, appointment of class counsel, and approval of their
January 25, 2010 Settlement Agreement.
¶16 On April 9, 2010, the District Court denied the January 2010 motions to intervene.
¶17 On May 27, 2010, the District Court preliminarily certified the class action and
preliminarily approved the Settlement Agreement reserving final approval until after a
Settlement Fairness Hearing was conducted.
¶18 On June 10, 2010, Pallister, individually, filed a Motion to Conduct Discovery in
In re BCBSMT/MCHA seeking discovery into “the fairness of the preliminary settlement,
class certification and appointment of class counsel.” He argued that information “about
how many class members exist, the methodology used by BCBSMT to identify class
members, [and] the medical bills incurred by class members” was not available to assist
the class members, counsel, the mediator, or the court, in determining the fairness of the
Settlement Agreement.
¶19 On August 5, 2010, the District Court, citing Rule 23(d) which grants the trial
court discretion to make appropriate orders governing the fair conduct of class actions,
denied Pallister’s motion to conduct discovery. Relying on federal authority, the court
explained that it could “permit limited discovery where such process would assist [it] in
determining the fairness and adequacy of a settlement.” It further stated that “discovery
by an individual class member is appropriate only in those rare cases in which the class
member ‘lays a foundation by adducing from other sources evidence indicating that the
9
settlement may be collusive.’ ” The court determined that, under the circumstances of the
case, Pallister’s “motion and supporting documents . . . fail to satisfy Pallister’s burden of
showing independent evidence that the settlement negotiations involved collusion or
other unfair conduct.” In early September 2010, Normandeau, Fortune,8 and Pallister,
individually, filed objections to the proposed settlement.
¶20 On September 27, 2010, a Settlement Fairness Hearing was conducted in the
District Court. The following parties attended this hearing: Smith, Speare and class
counsel, BCBSMT and MCHA attorneys, Pallister’s counsel, Budd’s counsel,
Normandeau’s attorney and Fortune’s attorney. Immediately prior to the hearing,
BCBSMT filed a supplemental exhibit referencing, among other things, notice
procedures, identification of class members, and the total amount of claims submitted on
behalf of those insureds that were not paid as a result of the policy exclusions. Class
counsel also submitted his time sheets to the court stating his intention to have a witness
testify to the propriety of the time records.
¶21 Counsel for Pallister and Fortune moved to continue the hearing to allow them the
opportunity to study these newly-submitted documents. Counsel explained that they had
specifically requested this information when seeking discovery, but the court had denied
their discovery motion and BCBSMT/MCHA had refused to provide it. The District
Court, with some qualification, denied the motion to continue and allowed the Fairness
8
Laura Fortune, though not listed consistently in the caption of the case before us, received
notice of the class action proceeding because she met the “class member” definition in the
proposed Settlement Agreement. She thereafter filed a written objection to the proposed
settlement. Fortune was represented by counsel in the District Court and before this Court on
appeal.
10
Hearing to proceed. The court invited the objectors to respond in writing to the
newly-submitted information. Pallister subsequently filed an objection to class counsel’s
fee request, but no objector requested an additional hearing on this matter.
¶22 On June 28, 2011, the District Court issued its Findings of Fact and Conclusions
of Law, and on June 29, its Final Order and Judgment, approving the Settlement
Agreement. On July 28, 2011, Pallister, Budd, Normandeau and Fortune appealed. The
case was fully briefed and oral argument was held. We conclude, for the reasons set forth
below, that the District Court abused its discretion in denying Pallister’s motion to
conduct discovery. Therefore, we are remanding this case to the District Court with
instruction to allow discovery to be conducted into the settlement negotiations and the
billing records of the class counsel, to hold another fairness hearing, and to issue new
findings of facts and conclusions of law based upon the entirety of evidence received in
the original proceeding and during remand proceedings.
¶23 As we begin our analysis, we note that in the case before us the proposed class
was certified for settlement purposes only. This makes it distinguishable from a class
action certified for purposes of litigation. A settlement class action is designed to avoid
litigation altogether. This being so, some of the adversarial protections inherent in
litigation will be absent in settlement class actions. Class counsel and defense counsel
may develop an alliance designed to find common ground toward settlement. The
absence of an adversarial relationship between legal representatives for the plaintiffs and
the defendants sometimes prompts accusations of collusion and conflicts of interest from
11
other class members and objectors. See Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277
(7th Cir. 2002).
¶24 In Reynolds, the Seventh Circuit noted that lawyers for a class, “may, in
derogation of their professional and fiduciary obligations, place their pecuniary
self-interest ahead of that of the class.” Reynolds, 288 F.3d at 279. It is for this reason
that the Reynolds court stated that district court judges must “exercise the highest degree
of vigilance in scrutinizing proposed settlements of class actions.” The court further
stated that it and “other courts have gone so far as to term the district judge in the
settlement phase of a class action suit a fiduciary of the class, who is subject . . . to the
high duty of care that the law requires of fiduciaries.” Reynolds, 288 F.3d at 279-80
(citations omitted). See Amchem Prods. v. Windsor, 521 U.S. 591, 620 (1997)
(“[S]pecifications of [Rule 23]—those designed to protect absentees by blocking
unwarranted or overbroad class definitions—demand undiluted, even heightened,
attention in the settlement context. Such attention is of vital importance, for a court
asked to certify a settlement class will lack the opportunity, present when a case is
litigated, to adjust the class, informed by the proceedings as they unfold.”).
¶25 Applicable case law and Rule 23 require that a settlement agreement in a class
action proceeding must be approved by a district court judge after a determination that
the settlement is “fair, adequate and reasonable,” i.e., the “fairness” standard. Neuwirth
12
v. Allen,9 1964 U.S. Dist. LEXIS 8858 (S.D.N.Y. Feb. 3, 1964). Apropos to the case
before us, several courts have held that settlement approval that takes place before formal
class certification or appointment of class counsel requires a higher standard of fairness.
In Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998), the Ninth Circuit
Court of Appeals stated:
The dangers of collusion between class counsel and the defendant, as well
as the need for additional protections when the settlement is not negotiated
by a court-designated class representative, weigh in favor of a more probing
inquiry than may normally be required under Rule 23(e). This is the
position adopted by the Third Circuit in GM Pick-Up Litig., 55 F.3d at 805
(“We affirm the need for courts to be even more scrupulous than usual in
approving settlements where no class has yet been formally certified.”); the
Second Circuit in Weinberger v. Kendrick, 698 F.2d 61, 73 (2nd Cir. 1982)
(“district judges who decide to employ such a procedure are bound to
scrutinize the fairness of the settlement agreement with even more than the
usual care”); and the Seventh Circuit in Mars Steel Corp. v. Continental
Illinois Nat’l Bank & Trust, 834 F.2d 677, 681 (7th Cir. 1987) (“Simer and
Weinberger emphasize . . . that when class certification is deferred, a more
careful scrutiny of the fairness of the settlement is required. We
agree . . . .”). See also Manual for Complex Litigation § 30.45 (3rd. ed.
1995) (“Approval under Rule 23(e) of settlements involving settlement
classes . . . requires closer judicial scrutiny than approval of settlements
where class certification has been litigated.”)[.] No circuit has held to the
contrary. Because settlement class actions present unique due process
concerns for absent class members, we agree with our sister circuits and
adopt this standard as our own.
¶26 Generally speaking, “[a] proposed settlement agreement is entitled to a
presumption of fairness where: ‘(1) the settlement negotiations occurred at arm’s length;
(2) there was sufficient discovery; (3) the proponents of the settlement are experienced in
similar litigation; and (4) only a small fraction of the class objected.’ ” In re CertainTeed
9
Neuwirth appears to be the first case to announce that a class action settlement could not be
approved unless the parties proposing the settlement demonstrate that the settlement is “fair,
adequate, and reasonable.”
13
Corp. Roofing Shingle Prods. Liab. Litig., 269 F.R.D. 468, 484 (E.D. Pa. 2010). While
these factors have usually been applied to proposed settlement agreements following
litigation, the CertainTeed court concluded that this “presumption of fairness may attach
even where a class is certified for settlement purposes only” provided the “requirement of
adequate representation has been satisfied.” In re CertainTeed, 269 F.R.D. at 484.
(Internal citations omitted.)
¶27 A “presumption of fairness”—whether based upon the presence of a mediator or
not—is not insurmountable and objectors to a class action settlement can play a role in
overcoming it. Objectors can encourage scrutiny of a proposed settlement and identify
areas that need improvement. They can provide important information regarding the
fairness, adequacy, and reasonableness of the settlement terms. They can also seek
discovery and access to information that can help the parties, counsel and the reviewing
court determine if the agreement meets the fairness standard. Manual for Complex
Litigation, Fourth, § 21.643.
¶28 The objectors here argue that the District Court could not adequately evaluate
whether the Settlement Agreement met the fairness standard because the District Court
did not allow objectors to conduct discovery into the settlement negotiations, and much
of the critical information required for the fairness analysis was not presented to the
District Court. Pallister alleges the settlement negotiations were conducted in secrecy
and resulted in compromising the claims and defenses of many uninformed class
members. Pallister sought to discover how BCBSMT and class counsel identified the
class members and the rationale for the compromise of the class claims. Pallister also
14
wished to cross-examine class counsel at the Fairness Hearing pertaining to class
counsel’s billing records.
¶29 In denying Pallister’s motions for discovery, the District Court relied, in part, upon
Hemphill v. San Diego Ass’n of Realtors, 225 F.R.D. 616 (S.D. Cal. 2004). In Hemphill,
a California federal court stated that objecting class members “do not have an absolute
right to discovery” but rather the court “may, in its discretion, limit . . . discovery or
presentation of evidence to that which may assist it in determining the fairness and
adequacy of the settlement.” Hemphill, 225 F.R.D. at 619.
¶30 Many courts have addressed a class member or objector’s right to discovery. In re
Domestic Air Transp. Antitrust Litig., 144 F.R.D. 421, 424 (N.D. Ga. 1992), noted that
objectors should be allowed “meaningful participation in the fairness hearing without
unduly burdening the parties or causing an unnecessary delay.” In re General Tire &
Rubber Co. Sec. Litig., 726 F.2d 1075, 1084 (6th Cir. 1984), suggested that the court
allow or disallow discovery based upon whether the district judge has sufficient facts
before him to intelligently approve or disapprove the settlement. In In re Cmty. Bank of
N. Va. & Guar. Nat’l Bank of Tallahassee Second Mortg. Loan Litig., 418 F.3d 277 (3rd
Cir. 2005), the Third Circuit, relying on decisions by various other courts, ultimately
remanded the matter before it to the district court with instructions that the district court
“develop fully the record and reevaluate whether an order limiting discovery is
appropriate in light of its duty to ‘employ the procedures that it perceives will best permit
it to evaluate the fairness of the settlement.’ ” Cmty. Bank, 418 F.3d at 317 (citing In re
Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp. 450, 563 (D.N.J. 1997)).
15
¶31 In its analysis, the Third Circuit noted that in Girsh v. Jepson, 521 F.2d 153 (3rd
Cir. 1975), it had reversed and remanded a trial court’s final approval of a class action
settlement, explaining, inter alia, that the “objector . . . was not afforded an adequate
opportunity to test by discovery the strengths and weaknesses of the proposed
settlement.” Cmty. Bank, 418 F.3d at 316. The court clarified, however, that Girsh did
not “stand for the proposition that, as a general matter, objectors have an absolute right to
discovery.” Cmty. Bank, 418 F.3d at 316. The court continued that “discovery may be
appropriate if lead counsel has not conducted adequate discovery or if the discovery
conducted by lead counsel is not made available to objectors.” Cmty. Bank, 418 F.3d at
316.
¶32 Lastly, in Clark v. Am. Residential Services, LLC, 175 Cal. App. 4th 785 (2009),
the California Court of Appeals, while noting the participation of a “well-respected
mediator with significant experience,” reversed a trial court’s approval of a class action
settlement on the ground that the trial court did not have the information required for “an
understanding of the amount that [was] in controversy and the realistic range of outcomes
of the litigation”—information it called “a core legal issue” needed to assess whether the
proposed settlement was fair and reasonable. Clark, 175 Cal. App. 4th at 801, 807.
Relying on Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116 (2008), the court
observed that
in the final analysis it is the court that bears the responsibility to ensure
that the recovery represents a reasonable compromise, given the magnitude
and apparent merit of the claims being released, discounted by the risks
and expenses of attempting to establish and collect on those claims by
pursuing the litigation. “The court has a fiduciary responsibility as
16
guardians of the rights of the absentee class members when deciding
whether to approve a settlement agreement.”
Clark, 175 Cal. App. 4th at 800 (citing Kullar, 168 Cal. App. 4th at 129) (emphasis in
original).
¶33 The objectors argue that without the benefit of the discovery they sought, the
District Court simply did not have the information necessary to make an informed
judgment regarding, among other things, the identity of class members and the suitability
of the compromise of the members’ claims; therefore, its determination of fairness was
uninformed and potentially flawed.
¶34 On the basis of the authorities cited herein and the unique progression of these
proceedings, we are constrained to agree with the objectors. 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
17
impaired the court’s ability to determine in a comprehensive manner whether the
settlement was “fair, reasonable and adequate.”
¶35 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.
¶36 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. The District Court may set parameters on how and under
what time frame this will be accomplished. Upon completion of this discovery and
assuming the negotiation of the same or a different settlement, the District Court shall
then conduct another fairness hearing and make a determination of whether the proposed
settlement is “fair, reasonable and adequate.”
¶37 There are numerous factors district courts consider and balance in a determination
of whether a class action settlement is fair, adequate and reasonable. In Detroit v.
18
Grinnell Corp., 356 F. Supp. 1380, 1385-89 (S.D.N.Y. 1972) (affirmed in part and
reversed in part on other grounds in Detroit v. Grinnell Corp., 495 F.2d 448 (2nd Cir.
1974) which, in turn, was abrogated on other grounds in Detroit v. Grinnell Corp., 560
F.2d 1093 (2nd Cir. 1977)), the court, reviewing decisions by several other jurisdictions,
articulated nine factors to be considered when determining the fairness of a proposed
settlement: (1) the complexity, expense and likely duration of the litigation; (2) the
reaction of the class to the settlement; (3) the stage of the proceedings and the amount of
discovery completed; (4) the risks of establishing liability; (5) the risks of establishing
damages; (6) the risks of maintaining the class action through the trial; (7) the ability of
the defendants to withstand a greater judgment; (8) the range of reasonableness of the
settlement fund in light of the best possible recovery; and (9) the range of reasonableness
of the settlement fund to a possible recovery in light of all the attendant risks of litigation.
Many courts have since relied upon the Grinnell factors in determining whether a trial
court conducted an adequate fairness evaluation of a settlement agreement. For example,
in Girsh, the court noted that while the district court had referred to the Grinnell factors
in its evaluation, the court had nonetheless failed to “live up to its fiduciary
responsibility, as the guardian of the rights of the absentee class members in approving
the settlement based upon the inadequate record before it.” Girsh, 521 F.2d at 157.
¶38 In Jones v. GN Netcom, Inc. (a/k/a In re Bluetooth Headset Prods. Liab. Litig.),
654 F.3d 935, 946 (9th Cir. 2011), the Ninth Circuit noted that “[t]he factors in a court’s
fairness assessment will naturally vary from case to case . . . .” The court then recited
several factors that courts must weigh, including many of the Grinnell factors: (1) the
19
strength of the plaintiff’s case; (2) the risk, expense, complexity, and likely duration of
further litigation; (3) the risk of maintaining class action status throughout the trial; (4)
the amount offered in settlement; (5) the extent of discovery completed and the stage of
the proceedings; (6) the experience and views of counsel; (7) the presence of a
governmental participant; and (8) the reaction of the class members of the proposed
settlement. See also Livingston v. Toyota Motor Sales USA, 1995 U.S. Dist. LEXIS
21757, 22 (U.S.N.D. Ca. 1995).
¶39 The foregoing cases and others illustrate that courts have been asked to consider
numerous, varied and sometimes redundant factors when reviewing settlement
agreements. Here, the District Court did consider several of the Grinnell factors in
making its fairness analysis. On remand, the District Court shall endeavor to analyze the
factors set forth above in Jones, as well as any other factors it deems critical to the case
before it.
¶40 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—
20
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.
¶41 Finally, though we do not reach the remaining issues raised by the appellants, two
matters require clarification. First, we note that the District Court found that the
objectors “in choosing not to opt out of the Class . . . have acquiesced in a finding that the
settlement is fair and reasonable as applied to them.” This is incorrect. Generally, the
Rule 23(c) notice of class action notifies a prospective class member of his or her right to
opt out of the class action, object to any proposed settlement, or accept the terms and
conditions of the settlement and waive the right to pursue other remedies against the class
defendants. In the case before us, objectors had the right to object to the proposed
Settlement Agreement and yet remain in the class. It bears noting that objectors could
not have intelligently exercised their “opt out” rights without the benefit of some of the
critical information they sought in discovery. Objectors did not waive their right to
object by failing or refusing to opt out.
¶42 Second, Fortune claims that she presented adequate proof to the District Court that
she is a member of the putative class; therefore, she is entitled to object to the Settlement
Agreement. The District Court determined that she lacked standing to object to the
fairness of the Settlement Agreement because her excluded claims had been paid in full
by BCBSMT. Fortune disputes this assertion. Because we are remanding for further
discovery, Fortune shall be given the opportunity to present evidence to the District Court
21
that will establish whether or not she has been paid for her excluded claims and whether
she therefore has standing.
CONCLUSION
¶43 For the foregoing reasons, we reverse the District Court’s order denying Pallister
the right to conduct discovery and vacate the District Court’s approval of the Settlement
Agreement. We remand to the District Court for further proceedings in accordance with
this Opinion.
/S/ PATRICIA COTTER
We concur:
/S/ JAMES C. NELSON
/S/ MICHAEL E WHEAT
/S/ JIM RICE
Justice Brian Morris dissents.
¶44 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
22
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.
Objectors’ Claim for Discovery
¶45 Objectors filed a motion to conduct discovery on June 11, 2010. The apparent secrets
that objectors seek to unearth involve how BCBSMT and MCHA and class counsel identified
class members and the rationale for the compromise of certain potential claims by class
members. Opinion, ¶ 21. Objectors also sought “copies of all discovery conducted in the case,”
and “all written communications” among the representative plaintiffs, class counsel, BCBSMT,
and BCBSMT’s counsel.
¶46 Objectors also sought the ability to depose “those participating in the proposed settlement
and the negotiations for that settlement.” Objectors’ last request presumably would include those
parties who participated in the mediation. Montana law expressly prohibits the disclosure of “all
mediation-related communications, verbal or written” made during mediation absent consent or
an express statutory exception. Section 26-1-813(3), MCA. Objectors’ request for “all written
communications” among class counsel, the class representatives, BCBSMT, and BCBSMT’s
counsel raises concerns over attorney-client privilege. The Court’s remand elides consideration
of these issues.
¶47 Courts repeatedly have made clear that objectors should be allowed to engage in
discovery relating to settlement negotiations “only where the party seeking it lays a foundation
by adducing from other sources evidence indicating that the settlement may be collusive.”
Lobatz, 222 F.3d at 1148. As a general matter, “a settlement should stand or fall on the adequacy
of its terms.” Newby, 394 F.3d 296, 307 (5th Cir. 2004) (citing In re Corrugated Container
Antitrust Litig., 643 F.2d 195, 211 (5th Cir. 1981)).
23
¶48 Objectors’ counsel twice assured this Court during oral argument that the objectors
“never” accused class counsel of collusion with BCBSMT and MCHA. The accusation may not
have been express, but it permeates the briefs and objections filed on this appeal. Rather than
dirty its hands with claims of outright collusion, the objectors, with a wink and a nod, allege that
BCBSMT selected class counsel as the prime candidate for a favorable settlement and that class
counsel decided to “throw in” with BCBSMT and take “the deal offered to him.”
¶49 In effect, objectors argue that the settlement arose from a “reverse auction” whereby the
defendants, in a series of class actions, pick the most ineffectual class lawyer to negotiate a
settlement with the hope that the court will approve a weak settlement that will preclude other
claims against the defendant. Reynolds, 288 F.3d 277, 282 (7th Cir. 2002). The ineffectual
lawyer under these circumstances happily sells out a class for which he could not accomplish
much anyway in exchange for generous attorney’s fees.
¶50 The defendants happily pay the generous attorney’s fees to the ineffectual lawyer in order
to reach a better bottom line—the sum of the settlement and the attorney’s fees— with no regard
for the allocation of the money between the money designated for the class members and the
money designated for the ineffectual lawyer. Reynolds, 288 F.3d at 282. The court in Reynolds
reversed a settlement negotiated during a private lunch with no outside party present under which
the defendants would pay up to $4.25 million to three lawyers who did not have active cases
against the class defendant—Beneficial National Bank—at the time of the settlement. Reynolds,
288 F.3d at 280-81. The settlement prompted the district court to enjoin a separate class action
against H & R Block proceeding in a Texas court that sought disgorgement of up to $2 billion in
ill-gotten gains.
24
¶51 The Seventh Circuit noted that the class members received no consideration for the
release of H & R Block from the Texas class action. Reynolds, 288 F.3d at 283-84. The court
reasoned that Beneficial National Bank had brought H & R Block into the settlement for the sole
purpose of allowing Beneficial to cut its own expense for the settlement in half. Reynolds, 288
F.3d at 284. Beneficial and H & R Block agreed to divide responsibility for the $25 million
settlement amount. Two years earlier, Beneficial’s counsel had indicated to the district court that
$25 million represented a “ballpark figure” for settlement with Beneficial alone. Reynolds, 288
F.3d at 283. As these circumstances indicate, the settlement “richly rewarded” class counsel for
negotiations that greatly diminished the cost of the settlement to Beneficial. Reynolds, 288 F.3d
at 284. Not surprisingly these “suspicious circumstances” stirred the Seventh Circuit to order the
district court to evaluate the settlement more closely. Reynolds, 288 F.3d at 284-85.
¶52 None of the “suspicious circumstances” present in Reynolds exist here. The parties
reached the settlement here through the supervision of a court-appointed mediator. Class counsel
had been litigating this matter in state and federal courts for three years before the parties
reached the settlement. Class counsel’s fee of $600,000, or about 25 percent of the expected
settlement amount of $2.37 million, represents a reasonable fee under the parties’ contingent fee
arrangement.
¶53 Courts rarely grant objectors the right to undertake discovery. Lobatz, 222 F.3d at 1148.
In re General Motors Corp. Engine Interchange Litig., 594 F.2d 1106, 1126 (7th Cir. 1979)
represents one of the few decisions that has approved discovery by objectors. The record in
General Motors established that the settlement presented to the court by the Illinois Attorney
General had been negotiated without the permission of the other class counsel in violation of the
court’s first pretrial order. General Motors, 594 F.2d at 1126. The pretrial order expressly
25
prohibited the class counsel executive committee from entering into settlement negotiations
without the consent of all plaintiffs’ attorneys. General Motors, 594 F.2d at 1126.
¶54 A lawyer from the office of the Illinois Attorney General served as a member of the
committee and therefore remained subject to the pretrial order’s restrictions. General Motors,
594 F.2d at 1126. The lawyer nevertheless participated in negotiations with General Motors
without the consent of other counsel. This violation of the court order prompted the Seventh
Circuit to allow the objectors to undertake discovery to determine whether the negotiations may
have prejudiced the interests of the class. General Motors, 594 F.2d at 1126. There the court
was concerned about “attorney-shopping,” where a person unofficially representing a plaintiff in
negotiations “shops” a settlement to appease defense counsel. General Motors, 594 F.2d at
1125.
¶55 The Seventh Circuit in Mars Steel Corp. v. Continental Illinois Nat’l Bank and Trust Co.
of Chicago, 834 F.2d 677, 684 (7th Cir. 1987), pointed to the settlement negotiations in violation
of the court order in General Motors as the type of “hanky-pank” that could justify a decision to
allow objectors to engage in discovery. The court denied a discovery request by the objectors,
however, when they had failed to adduce evidence of collusion from other sources. Mars Steel
Corp., 834 F.2d at 684. The court highlighted the need to resist the “temptation to convert a
settlement hearing into a full trial on the merits.” Mars Steel Corp., 834 F.2d at 684.
¶56 The objectors in Hemphill v. San Diego Assn. of Realtors, 225 F.R.D. 616, 621 (S.D. Cal.
2004), likewise relied on their unsubstantiated claim that the settlement was collusive to support
their discovery request. The court in Hemphill rejected the claim of collusion and objectors’
demand for discovery based, in part, on the fact that a court-appointed mediator supervised the
settlement negotiations. Hemphill, 225 F.R.D. at 621. Here the District Court appointed Judge
26
Whelan to serve as mediator. In that capacity, Judge Whelan supervised the mediation that led to
the settlement. Judge Whelan attested that the parties had negotiated in “good faith” and that the
parties fully and fairly had assessed the strength and weaknesses of their respective cases. He
further believed that the settlement was fair based on the strengths and weaknesses of each
party’s case.
¶57 The District Court cited Judge Whelan’s supervision of the mediation as a factor in
rejecting objectors’ request for discovery. Judge Whelan participated intimately in the
negotiation process. He stands in the best position to state objectively whether an agreement has
been reached free of collusion. See Newby, 394 F.3d at 307. Courts normally afford great
deference to a mediator’s assessment of an arm’s length negotiation. See D’Amato v. Deutsch
Bank, 236 F.3d 78, 85 (2d Cir. 2001). Courts have afforded this deference even in the most
suspect of circumstances.
¶58 For example, the court in Newby determined that a mediator’s involvement eliminated
any question of collusion despite no discovery occurring between the parties. Newby, 394 F.3d at
307. The objectors argued on appeal that the district court’s failure to order discovery had left
unexplored the possibility that the settlement had been the product of collusion. The court
rejected objectors’ accusation of collusion as the claim had “never, at any point in the record,
been advanced with the slightest factual substantiation.” Newby, 394 F.3d at 307. The court
further distinguished the objectors’ “open-ended plea for more evidence” from the “four
carefully delineated interrogatories” submitted in Girsh v. Jepson, 521 F.2d 153, 157, 159-60 (3d
Cir. 1975). Finally, the court rejected the objectors’ reliance on General Motors, where the court
raised concerns about “attorney-shopping.”
27
¶59 Similarly, the court in Rodriquez expressed concern that an initially undisclosed six-
figure incentive payment for the class representatives suggested collusion. Rodriquez, 563 F.3d
at 960-61. The court noted that the class representatives’ failure to disclose the incentive
payments to the court, and to the class, “violated the contracting representatives’ fiduciary duties
to the class and duty of candor to the court.” Rodriquez, 563 F.3d at 959. The court ultimately
determined, however, that no collusion had occurred based, in large part, on the fact that the
mediator had attested that “[e]ach side aggressively advocated their positions,” class counsel
“ha[d] as their primary goal achieving the maximum substantive relief that they could,” and the
parties had reached the agreement “through arm’s length negotiations by counsel who were
skilled and knowledgeable about the facts and law of this case.” Rodriquez, 563 F.3d at 961.
The Court fails to explain why Judge Whelan’s role in supervising the settlement negotiations
similarly should not weigh in favor of the settlement’s validity.
¶60 For their part, objectors, “not to disparage Judge Whelan,” proceeded to do just that.
Objectors suggested during oral argument that Judge Whelan’s role should be discounted
because he owed “no fiduciary duty” to the class and that he had no power to require discovery.
None of the courts in Rodriguez, Hemphill, or Newby discuss any fiduciary duty to protect the
interests of class members, yet the courts uniformly relied on the mediator’s neutral analysis and
involvement in resolving the disputes “through arm’s-length negotiations.” Rodriquez, 563 F.3d
at 961. The notion that a mediator owes a fiduciary duty to one party, and not the other, raises
concerns regarding the mediator’s neutrality. I similarly am unaware of any authority that
suggests that a reviewing court should disregard the role of a court-appointed mediator when the
mediator lacks the power to order discovery. Nothing in Rodriguez (where the mediator was a
retired state court judge), Newby, or any case cited by objectors, suggest that the mediator
28
possessed the power to order the parties to engage in discovery. A mediator, such as Judge
Whelan in this case, does not serve in the same role as a special master who might be used as
part of a preliminary adjudication process.
¶61 The declared public policy of Montana “encourages[s] settlement” to “avoid unnecessary
litigation.” Augustine v. Simonson, 283 Mont. 259, 266, 940 P.2d 116, 120 (citing Holmberg v.
Strong, 272 Mont. 101, 106, 899 P.2d 1097, 1100 (1995)). We have recognized this public
policy due to a settlement’s ability to eliminate cost, prevent stress that accompanies litigation,
and to preserve judicial resources. Miller v. State Farm Mut. Auto Ins. Co., 2007 MT 85, ¶ 14,
337 Mont. 67, 155 P.3d 1278 (citing Durden v. Hydro Flame Corp., 1999 MT 186, ¶ 20, 295
Mont. 318, 983 P.2d 943). Moreover, settlement frequently provides the parties with a more
equitable outcome than is possible through a jury trial. Durden, ¶ 20 (quoting Black v. Martin,
88 Mont. 256, 269-70, 292 P. 577, 581 (1930)). I find it difficult to square this public policy in
favor of settlement with objectors’ requirement that the mediator possess the fiduciary duties of a
trustee and the authority of a court to order the exchange of documents and information before
allowing the parties to settle a dispute.
¶62 The court in Hemphill also cited the small number of objectors as another factor that
supported its decision to deny discovery. Class counsel mailed 27,000 settlement notices in
Hemphill. Nine people submitted objections and 24 others opted out of the settlement.
Hemphill, 225 F.R.D. at 620. The fact that the objectors “represent only a small number of the
thousands of class members” weighed against the discovery requests. Hemphill, 225 F.R.D. at
620. This lack of objectors implies that the class as a whole deems the settlement to be fair.
Rodriquez, 563 F.3d at 967 (noting only 54 objectors out of a class of 376,301); Hanlon v.
29
Chrysler Corp., 150 F.3d 1011, 1025 (9th Cir. 1998) (noting that 99.9 percent of class members
agreed to be bound).
¶63 Three members out of a class of 2,699 objected in this case. In essence, 0.01 percent of
the class raised any qualms about the settlement, and 99.99 percent opted to accept the settlement
terms. Not one single class member opted out. The three objectors represent a “surprisingly
small fraction” if the settlement sells out the class as objectors claim. Mars Steel, 834 F.2d at
681 (1.5 percent of class members opted out). These numbers suggest that the overwhelming
majority of class members deemed the settlement fair. These numbers further suggest that the
overwhelming majority of class members believed that the class action would result in a better
outcome than if they opted-out to pursue their own action. Hanlon, 150 F.3d at 1025. The Court
fails to explain why the paucity of objectors should not weigh against discovery.
¶64 I recognize, however, that collusion may not always be evident on the face of a
settlement. Courts look too for “subtle signs that class counsel allowed pursuit of their own self-
interests and that of certain class members to infect the negotiations.” In re Bluetooth Headset
Products Liability Litigation, 654 F.2d 935, 947 (9th Cir. 2011). In re Bluetooth identified three
of these “subtle signs” of collusion. First, courts should look to whether class counsel received a
disproportionate distribution of the settlement. In re Bluetooth, 654 F.3d at 947. Second, courts
should be wary of a “clear sailing” arrangement that provides for the payment of attorney’s fees
separate and apart from class funds. This arrangement carries the potential of “enabling a
defendant to pay class counsel excessive fees and costs in exchange for class counsel accepting
an unfair settlement on behalf of the class.” In re Bluetooth, 654 F.3d at 947 (quoting Lobatz,
222 F.3d at 1148). And finally, courts should consider whether the parties have arranged for fees
30
not awarded to revert to the defendants rather than be added to the class fund. In re Bluetooth,
654 F.3d at 947.
¶65 Class counsel in In re Bluetooth received up to $800,000 compared to $100,000 for the
class in cy pres awards to be distributed to four separate non-profit groups dedicated to the
prevention of hearing loss. In re Bluetooth, 654 F.3d at 947. The class members themselves
received no money at all. Here the class members would receive $2.37 million. The final
amount remains to be determined, but the settlement puts no firm cap on the amount of class
recovery. Class counsel would receive $600,000 in fees and costs, derived from a separate fund,
under the settlement. Class members originally retained class counsel to represent them on a
contingent fee basis of one-third of any recovery. The District Court noted that class counsel’s
fee request falls below the normal range of 33 percent to 40 percent charged by counsel in
individual cases. Class counsel’s fee award strikes me in no way as “disproportionate” under
these circumstances.
¶66 Any notion that class counsel in this case negotiated a “clear sailing” provision regarding
his fees proves unavailing here. The court in In re Bluetooth explained that these “clear sailing”
provisions raise concerns where the defendant pays class counsel an excessive fee compared to
the settlement amount to be received by the class. In re Bluetooth, 654 F.3d at 947. Class
counsel’s fee of $600,000 equates to about 25 percent of the settlement amount. The fee raises
no concerns of a sell-out of the class members’ interest. Finally, the settlement negotiated in this
case contained no reversion provision. The settlement expressly provides that class counsel can
pursue claims not previously submitted by class members on a contingent fee basis.
¶67 Objectors also seek to cross-examine class counsel regarding class counsel’s billing
records. This request presumably would attempt to demonstrate that class counsel had served as
31
a patsy who sold out the interest of the class members in exchange for an unreasonable fee. This
line of attack suffers from two fatal flaws. First, class counsel obtained a settlement for the class
members of up to $2.37 million in cash in exchange for a fee derived from a separate fund,
which equals approximately 25 percent of the settlement amount. The District Court correctly
deemed this fee to be reasonable. Objectors point to no authority that would classify this fee
award as “disproportionate.” In re Bluetooth, 654 F.3d at 947. Second, and more importantly,
class counsel did not arrive on the scene in the nick of time to sell-out the class members. Unlike
the previously client-less lawyers in Reynolds, class counsel had been litigating this matter in
state and federal court for more than three years on behalf of numerous individual clients. Class
counsel also had fought unsuccessfully to certify a class in federal court. Objectors opposed
these class certification efforts.
¶68 The Court insists that it too is “not inferring or even suggesting that there was collusion
or misconduct of any sort among the parties or their attorneys.” Opinion, ¶ 35. I cannot agree.
As a general principle, “the courts respect the integrity of counsel and presume the absence of
fraud or collusion in negotiating the settlement, unless evidence to the contrary is offered.”
Herbert Newberg, Newberg on Class Actions § 11.51 at 158-59 (4th ed. 2002). Objectors have
offered no direct evidence of collusion or misconduct. The Court addresses only tangentially the
requirement that an objector demonstrate evidence of collusion from other sources before the
objector may engage in discovery. Lobatz, 222 F.3d at 1148; Hemphill, 225 F.R.D. at 621-22.
¶69 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
32
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.
¶70 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. Miller, ¶ 14.
Other Factors for the Court to Consider
¶71 The Court purports to rely upon the multi-factor test set forth in Hanlon to justify its
remand to allow further discovery. Opinion, ¶ 25. Hanlon approved a nationwide class
settlement under facts much less favorable than those presented to the District Court here.
Hanlon involved a consolidated nationwide class action against Chrysler Corporation in which
the plaintiffs alleged defects with the rear safety latches in certain models of Chrysler minivans.
33
Hanlon, 150 F.3d at 1018. The parties submitted a proposed settlement to the court three days
after filing the case. Hanlon, 150 F.3d at 1018.
¶72 The settlement required Chrysler Corporation to correct the defect and replace the latches
on class members’ vans. The class members received no cash compensation. The settlement
excluded personal injury claims that arose from the defective latches. Class counsel received
$5.2 million in fees and costs. The court recognized that settlement represents “the offspring of
compromise.” In this regard, the court declined to address whether the final settlement “could be
prettier, smarter or snazzier . . . .” Hanlon, 150 F.3d at 1027. The court instead focused on
whether the settlement “is fair, adequate and free from collusion.” Hanlon, 150 F.3d at 1027.
The fact that 99 percent of the class willingly approved the offer and stayed in the class “presents
at least some objective positive commentary as to its fairness.” Hanlon, 150 F.3d at 1027.
Hanlon’s admonition that a district court’s final determination to approve a class settlement
should be reversed “only upon a strong showing that the district court’s decision was a clear
abuse of discretion,” Hanlon, 150 F.3d at 1018, apparently sets the framework for the Court’s
analysis. Opinion, ¶ 25.
Extent of Discovery between Class Counsel and BCBSMT
¶73 Objectors allege that class counsel reached the settlement with BCBSMT without
conducting any discovery. The court in Newby noted that the “overriding theme of our caselaw”
discourages formal discovery in class settlements where “the interests of the class are not
prejudiced by the settlement negotiations and there are substantial factual bases on which to
premise settlement.” Newby, 394 F.3d at 306. More importantly, the objectors’ claim conflicts
with the District Court’s extensive findings of fact regarding discovery undertaken by the parties
when this matter rested in federal court.
34
¶74 The District Court noted that parties previously had litigated the class action in federal
court. Federal R. Civ. P. 26(a) accordingly required the parties to make extensive pre-trial
disclosures. These disclosures produced “thousands of documents relating to class claims,
individual claims of Plaintiffs and the defenses. . . .” The District Court further noted that the
disclosures provided class counsel with the number of class members and the amount of
coverage excluded by BCBSMT. It determined that any further discovery would have been
redundant, and would have “substantially increased the related costs, thereby reducing the
ultimate recovery of Class Members.”
¶75 To support its decision to allow objectors to undertake discovery, the Court relies, in
large part, on the fact that BCBSMT submitted “affidavits and disclosures of the nature and the
amount of the settlement claims on the morning of the Fairness Hearing.” Opinion, ¶ 34
(emphasis in original). BCBSMT admittedly submitted affidavits and disclosures to the District
Court on the morning of the Fairness Hearing. These affidavits and disclosures, however,
constituted little new information.
¶76 The first of these materials, Exhibit A, listed all of the class members and replicated the
materials previously produced by BCBSMT on January 25, 2010. The original list of class
members produced by BCBSMT on January 25, 2010, included the Diaz class members. See
Diaz v. Blue Cross and Blue Shield of Montana, 2011 MT 322, ¶ 1, 363 Mont. 151, 267 P.3d
756. BCBSMT had hoped to include the Diaz class members in the settlement. The Diaz class
members are proceeding, of course, with their own separate class action against the State of
Montana. Diaz, ¶ 49.
¶77 BCBSMT recognized by the time of the Fairness Hearing that it could not include the
Diaz class members in the settlement and thus revised Exhibit A to exclude them. Objectors
35
sought a continuance at the Fairness Hearing on the basis that they needed more time to evaluate
why Exhibit A had been amended. Objectors seemed to concede at oral argument, however, that
BCBSMT was correct to remove the Diaz class members from Exhibit A. In any event,
objectors never at oral argument pointed to any substantive changes to Exhibit A that would
support rejection of the class settlement. They simply continued to argue that the last minute
modification and disclosure of the amended Exhibit A supported rejection of the settlement.
¶78 Class counsel also filed on the morning of the Fairness Hearing time sheets that reflected
the hours that he had worked on the case. These records reflect 2,156.75 hours. Objectors
challenge the legitimacy of these hours. Objectors raise several alleged discrepancies in the time
sheets in their briefs on appeal. I will not attempt to refute these challenges. I will point instead
to the fact that class counsel’s fee of $600,000 compares favorably with the expected $2.37
million payout to class members. I will further point to the fact that the District Court found that
payment of class counsel’s fees by BCBSMT represents “a benefit provided to Class Members
obtained by Class Counsel.”
¶79 Finally, BCBSMT and class counsel submitted a joint report on class notice (“Joint
Report”) on the morning of the Fairness Hearing. This 11-page document, along with attached
affidavits of four BCBSMT employees, explains the process by which BCBSMT provided notice
to potential class members. BCBSMT developed a process “to identify the best manner and
method to query the computer system to run a report which would result in a list consistent with
the class definition.” To this broad query, BCBSMT attempted to narrow the list “only to those
claims to which the settlement exclusion was applied.”
¶80 BCBSMT processed more than 750,000 claim lines per month during the subject period.
This fact alone would make it difficult to ensure complete accuracy of the class members.
36
BCBSMT undertook further steps to review the list generated through the computer queries to
ensure the accuracy of the list, including review by staff. BCBSMT then sent notice of the
proposed class-action settlement to class members and established a class-action website that
housed all of the pertinent information.
¶81 Objectors sought a continuance at the time of the Fairness Hearing to evaluate the
methodology by which BCBSMT identified potential class members. On appeal, objectors
pointed to few specific defects or flaws in the methodology used by BCBSMT other than the fact
that BCBSMT failed to include Budd as a class member. Budd appeared at the Fairness Hearing.
He sought to highlight his experience as evidence of the perceived flaws in the class settlement’s
identification of potential class members.
¶82 Budd had been involved in an automobile accident with a third-party tortfeasor. Budd
alleged that BCBSMT initially had refused to pay his medical bills until he produced
documentation that the tortfeasor’s insurer had declined to pay them. Budd admitted at the
Fairness Hearing, however, that BCBSMT eventually had paid in full the medical bills submitted
by Budd’s health care providers upon Budd’s filing of an action against BCBSMT. Budd’s
omission from the prospective class, therefore, should have come as no surprise. As a result, the
District Court previously had concluded that Budd was not a potential class member at the time
of the settlement based upon BCBSMT’s payment of all of his medical bills.
¶83 Moreover, objectors could have obtained much of the materials outlined in the Joint
Report simply by filing in their own cases against BCBSMT in federal court their preliminary
disclosures pursuant to F. R. Civ. P. 26(a). Objectors’ filing of these disclosures would have
triggered their right to propound discovery requests to BCBSMT. BCBSMT previously had filed
its preliminary disclosures in federal court in the separate cases brought by objectors. Objectors
37
opted not to file the preliminary disclosures before the time that the federal court remanded these
cases to state court.
¶84 This decision highlights the fact that class counsel, objectors, and BCBSMT had litigated
this matter in state and federal court for nearly three years. This protracted litigation likely
familiarized all parties with the nature of the claims, the value of these potential claims, and the
approximate size of the potential class. In light of the volume of claims data and the complexity
of ascertaining class-specific information from it, I have to agree with the District Court that
efforts to refine these figures through further discovery would have “substantially increased the
related costs, thereby reducing the ultimate recovery of Class Members.”
¶85 I take a moment to address one further claim by objectors that the class settlement fails to
identify all eligible class members. Objectors point to Budd’s exclusion from the prospective
class as evidence that the proposed settlement likely excludes eligible claimants. Based on the
complexity and volume of claims data from which the parties worked, I do not doubt that the
proposed settlement class might exclude some eligible claimants. The proposed settlement
contains a mechanism, however, to address this problem.
¶86 The settlement provides class counsel with the authority to file unsubmitted claims on
behalf of eligible class members even after the court approves it. As found by the District Court,
class counsel likely will further publish the settlement in light of the fact that the settlement
provides class counsel with a contingency fee interest in these unsubmitted claims. This
provision undermines any objection that the proposed settlement fails to identify all eligible class
members and deprives these unidentified class members the right to benefit from the settlement.
Range of Reasonableness
¶87 The fairness of a settlement remains the most pertinent factor in evaluating whether the
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settlement amount falls within the range of reasonableness in light of all the attendant risks of
recovery. See Carson v. Am. Brands, 450 U.S. 79, 88 n. 14 (1981); UAW v. GMC, 497 F.3d 615,
631 (6th Cir. 2007). A court should assess the reasonableness of a proposed settlement by
comparing “the present value of the damages plaintiffs would likely recover if successful [at
trial], appropriately discounted for the risk of not prevailing . . . with the amount of the proposed
settlement.” Krell v. Prudential Ins. Co. of Am., 148 F.3d 283, 322 (3rd Cir. 1998). Moreover, a
court in conducting this analysis must “guard against demanding too large a settlement based on
its view of the merits of the litigation; after all, settlement is a compromise, a yielding of the
highest hopes in exchange for certainty and resolution.” In re GMC Pick-up Truck Fuel Tank
Prods. Liab. Litig., 55 F.3d 768, 806 (3rd Cir. 1995).
¶88 The Third Circuit took this advice to heart in Sullivan v. De Beers, 667 F.3d 273 (3rd Cir.
2011), when it approved a class settlement of an alleged overcharging scheme undertaken by De
Beers, the holder of the “undisputed position as the dominant participant in the wholesale market
for gem-quality diamonds throughout much of the twentieth century.” The proposed class
settlement represented about 20 percent of the potentially recoverable single damages. Sullivan,
667 F.3d at 324. The court rejected the objectors’ argument that it should have evaluated the
reasonableness of the settlement based upon the potential treble damages available to the class.
Among other matters, the court noted that many of the state law claims asserted would not have
provided for treble recovery. Sullivan, 667 F.3d at 325.
¶89 The Court cites two California cases, Clark and Kullar, that involve wage and hour
claims to support its determination that the District Court lacked sufficient information to
evaluate the settlement’s fairness. Opinion, ¶ 32. The court in Clark rejected a settlement that
compensated the class members for “for only about 1 percent of the total value of their claims.”
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Clark, 175 Cal. App. 4th at 790. The court undertook “no independent assessment” of the
strength of the class’s claim and instead “simply accepted class counsel’s conclusion” that the
overtime claim had “absolutely no” value in what the objectors characterized as a “staggering
mistake of law.” Clark, 175 Cal. App. 4th at 803. Kullar too recognized that “the strength of the
case for plaintiffs on the merits, balanced against the amount offered in settlement” represents
the most important factor in evaluating the fairness of a settlement. Kullar, 168 Cal. App. 4th at
130. Kullar cautioned that the court “must stop short of the detailed and thorough investigation
that it would undertake if it were actually trying the case.” Kullar, 168 Cal. App. 4th at 130.
¶90 The District Court’s analysis here stands in marked contrast to the “rubber-stamp
approval” rejected in Kullar. Kullar, 168 Cal. App. 4th at 130 (citing Newberg, Newberg on
Class Actions at § 11:41). The settlement provided all class members with 50 to 75 percent of
their denied medical bills depending on when they filed their claim. These medical bills typically
would have been subject to co-payments and deductibles that would have reduced the amount of
insurance coverage available. BCBSMT waived these coverage offsets in order to reach a
settlement. The District Court found that BCBSMT’s concession on the deductible’s provision
alone produced an extra $1,349,500 for the class when applied to an average deductible of $500
for every class member.
¶91 The District Court’s order includes a finding that some class members would receive
more than they otherwise would have been entitled under their insurance policies if BCBSMT
applied the co-payment and deductible provisions of the class members’ policies. For example,
BCBSMT agreed to pay slightly more for those class members whose insurance policies
provided for deductibles of $500 and co-payment obligations of 20 percent. BCBSMT agreed to
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pay substantially more for those class members whose insurance policies provided for
deductibles of more than $500 and co-payment obligations of 20 percent.
¶92 BCBSMT next waived its right to assert a time bar to the class members’ claims. For
example, ERISA requires a claimant to exhaust administrative remedies before the claimant may
pursue a court action. Vaught v. Scottsdale Healthcare Corp. Health Plan, 546 F.3d 620, 626
(9th Cir. 2008). A typical ERISA claimant must make an administrative appeal of his denied
claim within the time period prescribed by the insurer—usually 180 days. Vaught, 546 F.3d at
626. Some class members with ERISA claims likely had failed to exhaust their remedies. As a
result, the proposed settlement may provide these ERISA class members with the only recovery
that they could obtain.
¶93 BCBSMT also possessed subrogation rights against some class members that would have
reduced recovery. BCBSMT waived too these potential subrogation rights in order to achieve a
settlement. It must be kept in mind that each class member already has received payment from a
tortfeasor for their medical bills. BCBSMT’s payment potentially would duplicate this payment
for medical bills from the tortfeasor. BCBSMT would have retained the right to conduct a
subrogation analysis.
¶94 The facts support the legitimacy of BCBSMT’s potential right to subrogation against
some class members. The average class member presented a claim of $1,580.30 for medical
expenses. Montana law requires a driver to maintain a minimum liability policy of $25,000 for
personal injury and $10,000 for injury to property. Section 61-6-103, MCA. This fact left more
than $33,000 available from the tortfeasor’s liability policy to cover non-medical damages, such
as lost wages, pain and suffering, and damage to the class member’s vehicle. Some class
members may have been made whole in the process.
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¶95 At a minimum, BCBSMT would have been required to conduct an individualized
assessment to determine whether each class member had been made whole. This analysis would
have required that the parties first establish the class member’s total damages, including the costs
and attorney’s fees to recover these damages. The parties then would have had to establish
whether the claimant has recovered that total amount from the tortfeasor. If the class member
has not recovered the full amount of damages, including costs and attorney’s fees, the parties
would have needed to assess how much Blue Cross had to pay to satisfy the difference between
the class member’s recovery from the tortfeasor and the class members’ total damages. This fact
intensive, individualized inquiry likely would have reduced the recoveries of some class
members.
¶96 Objectors further have raised the specter of squandered interest by class counsel in
attacking the amount of the settlement. Objectors claimed at the fairness hearing that the
prejudgment interest due to the class amounted to approximately $3.7 million. Similarly,
objectors noted that BCBSMT’s total liability under the settlement is “likely less than just the
prejudgment interest BCBSMT should pay on the benefits withheld.” Numerous erroneous
assumptions underlie these claims.
¶97 First, the objectors reach these inflated amounts using the number of class members from
the original projected class—3,585. This original projected class, produced by BCBSMT on
January 25, 2010, included state employees from the Diaz class. These Diaz class members are
no longer class members, so the number of class members and unpaid claims has decreased
dramatically. BCBSMT filed an amended class list on September 27, 2010, the amended Exhibit
A, at the Fairness Hearing. The amended class, as reflected in Exhibit A, contains 2,699
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members. Objectors need to modify their claims of prejudgment interest to reflect a decrease of
nearly 1,000 class members from the original list.
¶98 Objectors also seem to have miscalculated the interest that may have accrued on any
ERISA claims in reaching their claim of $3.7 million in lost interest. A district court possesses
discretion to award prejudgment interest on an award of ERISA benefits. Blankenship v. Liberty
Life Assur. Co., 486 F.3d 620, 627-28 (9th Cir. 2007). Objectors appear to assume that any
interest due to ERISA members under this standard will be calculated at the Montana statutory
rate of 10 percent. Courts generally use, however, “the interest rate prescribed for post-judgment
interest under 28 U.S.C. § 1961” to fix the rate of pre-judgment interest for ERISA claims.
Nelson v. EG & G Energy Measurements Group, Inc., 37 F.3d 1384, 1391 (9th Cir. 1994). The
statute prescribes that interest be set “at a rate equal to the weekly average 1-year constant
maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System,
for the calendar week preceding.” 28 U.S.C. § 1961. The current Treasury bill yield stands at
0.18 percent. Federal Reserve, Selected Interest Rates (Daily),
http://www.federalreserve.gov/releases/H15/update (last accessed August 27, 2012).
¶99 These rates admittedly have been higher during the period at issue in this case, but the
rates have fallen far below 10 percent. Nevertheless, application of the appropriate Treasury bill
yield to the class members’ claims premised on ERISA violations would result in much lower
amounts of prejudgment interest. For example, application of the annual Treasury bill yield to
the claims of the roughly 2100 ERISA class members would result in approximately
$547,380.56 in prejudgment interest. This total represents an average interest award of about
$260 for each ERISA class member.
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¶100 The significantly smaller non-ERISA class—572 class members—would be much less
likely to recover prejudgment interest if their cases proceeded individually. A party may recover
prejudgment interest under Montana law under the following circumstances: (1) the person must
be “entitled to recover damages certain or capable of being made certain by calculation. . . ” and
(2) “the right to recover that [sum certain] is vested in the person on a particular day. . . .”
Section 27-1-211, MCA. Serious questions exist as to whether the non-ERISA class members
could satisfy either the liquidated requirement or the undisputed requirement. See § 27-1-211,
MCA; Baltrusch v. Baltrusch, 2003 MT 357, ¶ 67, 319 Mont. 23, 83 P.3d 256.
¶101 With respect to the liquidated requirement, it would appear that the amount owed to each
class member would remain uncertain until BCBSMT had completed a made- whole analysis.
As discussed previously, BCBSMT would have been entitled to pursue a subrogation action
against any class member who had been made whole through the payment from the tortfeasor.
The fact intensive, individualized inquiry of the made- whole analysis likely would require
adjudication in many cases. These factors weigh heavily against the notion that the amount
owed by BCBSMT to each class member easily could have been liquidated.
¶102 Similarly, difficult questions accompany the notion of whether the class members’ right
to prejudgment interest vested on the day that they filed their claims. Objectors’ argument rests
entirely on the alleged unlawfulness of BCBSMT’s policies in effect at the time of the class
members’ accidents. They point to this Court’s decision in Blue Cross Blue Shield of Montana,
Inc., v. Montana State Auditor, 2009 MT 318, 352 Mont. 423, 218 P.3d 475. We determined in
State Auditor that the Commissioner properly had rejected insurance forms submitted by
BCBSMT on the basis that the offset language in the insurance forms conflicted with §§ 33-30-
1101 and -1102, MCA. State Auditor, ¶ 19.
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¶103 The Commissioner, of course, had allowed BCBSMT to use these same forms from
March 2002 through March of 2008. BCBSMT’s use of these forms during this six year period
undisputedly spawned this litigation and the litigation in Diaz and Shattuck. A dispute remains,
however, when the class members’ claims accrued based upon BCBSMT’s use of these
insurance forms. The Commissioner allowed BCBSMT to include the offset in its insurance
policies until March 2008. The District Court upheld the Commissioner’s decision in December
2008 and we affirmed that decision in 2009. Blue Cross’s liability for denying claims based on
the offset contained in the insurance forms arguably did not become apparent until at least 2008.
This determination would limit eligible class members to only a few years of prejudgment
interest.
¶104 Objectors’ claim of $3.7 million in prejudgment interest also fails to take into account the
fact that many of the class members’ claims would have been time barred if not for BCBSMT’s
concession. Class counsel’s decision to forego an indeterminate amount of prejudgment interest
in exchange for these trade-offs, especially BCBSMT’s waiver of its potential exhaustion
defense and co-payments and deductibles requirement, looks more reasonable when viewed in
light of the full terms of the settlement.
Risk of Maintaining Class Action Status
¶105 The remaining factors weigh heavily in favor of upholding the settlement. The class
faced the risk of whether it could obtain class certification. Rodriquez, 563 F.3d at 966;
D’Amato, 236 F.3d at 86. The class faced a substantial risk, at the time of settlement, that they
would not be able to certify the class. The district court judge in Diaz, being litigated
contemporaneous with this case, had declined to certify a class comprised of members in
circumstances nearly identical to those here. Diaz, ¶ 6. The District Court similarly signaled
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concerns with class certification. The District Court noted that BCBSMT had waived multiple
defenses that would have posed a “very substantial barrier” to class certification. The District
Court stated that it “does not see how the Class could have been properly certified over
[BCBSMT’s] objections.” This clear risk to class certification undoubtedly weighed in the
settlement negotiations.
The Risk, Expense, Complexity, and Likely Duration of Further Litigation
¶106 The risk for prolonged litigation and appeals also loomed. Rodriquez, 563 F.3d at 966;
Rutter & Wilbanks Corp. v. Shell Oil Co., 314 F.3d 1180, 1188 (10th Cir. 2002). This factor
recognizes that settlement in itself weighs in favor of fairness because settlement possesses
inherent benefits. For example, class members possess an interest in a settlement check today
versus a settlement several years from now. Rodriquez, 563 F.3d at 966; Rutter & Wilbanks
Corp. 314 F.3d at 1188. Litigation and appeals substantially increase costs, which in turn, may
reduce overall recovery for the class. Rodriquez, 563 F.3d at 966; See Mars Steel, 834 F.2d at
682.
¶107 It must be noted in this regard that the class representatives stood more inclined than
class counsel to buy their peace and settle the class action. Judge Whelan stated in his mediation
report that class representatives were more risk-averse than class counsel and were more inclined
to accept the settlement. Not surprisingly, objectors do not allege that these class representatives
participated in collusion in light of the token incentive payment of $2,500 that each class
representative would receive under the settlement. The class representatives valued an
immediate, risk-free and stress-free settlement against the gamble of a potentially larger
judgment that could only occur after prolonged and expensive litigation.
Conclusion
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¶108 Assessing the fairness of a proposed class-action settlement requires a court to evaluate
numerous well-established factors. Hanlon, 150 F.3d at 1026; Sullivan, 667 F.3d at 319-20. The
Court recognizes the factors that it should consider, but fails to analyze these factors in the
context of this settlement and fails to apply them to the facts presented here. Opinion, ¶ 37. The
Court instead isolates the reaction of a few class members to the proposed settlement and, based
largely upon speculation, remands the class settlement for further delay and expense to an
uncertain end. In doing so, the Court ignores the well-settled requirement that an objector must
provide some evidence suggesting collusion or misconduct in order to be entitled to undertake
discovery of the class settlement negotiations. The Court’s imposition of what amounts to some
sort of arbitrary “smell test” on the validity of a class settlement casts a dark pall upon the
legitimacy of future class certifications that may come before this Court. See, e.g., Diaz.
Today’s outcome produces few winners. Without doubt, however, today’s outcome resounds to
the detriment of the class members. I dissent.
/S/ BRIAN MORRIS
Chief Justice Mike McGrath joins in the foregoing dissent.
/S/ MIKE McGRATH
Justice Beth Baker joins in the foregoing dissent.
/S/ BETH BAKER
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Pallister v. Blue Cross & Blue Shield of Montana, Inc.
Court: Montana Supreme Court
Date filed: 2012-09-05
Citations: 2012 MT 198, 366 Mont. 175
Copy CitationsCombined Opinion