South Carolina Court Allows Unnamed Class Members to Bring Direct Action Despite Failure to Opt Out of Prior Settlement
One critical component of class action litigation is the obligation of class counsel and the court to protect the rights of unnamed class members. A recent South Carolina federal district court decision should serve as a reminder that when class counsel shirk this obligation, the defendant can suffer the consequences.
In Hege v. Aegon USA, the court permitted unnamed class members in an Arkansas class action to proceed with their own direct claims in South Carolina, even though the Arkansas court had already approved a class settlement over the unnamed class members’ objections, and the unnamed class members did not opt out of the settlement. Although the South Carolina court ruled on several different legal theories, its opinions arose largely out of a similar underlying rationale. In essence, the court found that named plaintiffs and their counsel in the Arkansas litigation had negotiated a self-serving settlement that failed to protect unnamed class members. As a result, the Arkansas court’s ensuing order of dismissal was not entitled to full faith and credit in South Carolina, and the absence of an actual controversy between the named plaintiffs and the defendant deprived the Arkansas court of subject matter jurisdiction.
The two lawsuits are among several challenging Transamerica’s revised interpretation of the term “actual charges” in its supplemental cancer insurance policies. In April 2006, Transamerica stopped paying policyholders “actual charges,” equivalent to full initial fees billed by healthcare providers, and began re-interpreting “actual charges” to mean the payment healthcare providers would ultimately accept. After a federal court in Arkansas denied class certification in one of the lawsuits on the ground that proposed class representatives’ interests conflicted with those of policyholders, class counsel in these lawsuits negotiated a settlement with Transamerica. Class counsel then filed a new action in Arkansas state court, in which the same named plaintiffs from the other prior actions sought judicial approval of the settlement.
Under the settlement, Transamerica agreed to compensate each class member 40% of the difference between a healthcare provider’s initial bill and the amount finally accepted, capped at $15,000. Going forward, the settlement stated that Transamerica would define “actual charges” as “the amount legally owed to the provider.” Transamerica also consented to waive any potential claims against policyholders for overpayment of benefits. Finally, Transamerica agreed to pay $3,500,000 in attorneys’ fees to class counsel pursuant to a “clear sailing” clause.
The settlement notice sent to nationwide class members stated that the new definition of “actual charges” would enable Transamerica to reduce “the amount and frequency of future premium increases,” and that this definition was consistent with South Carolina law. The South Carolina plaintiffs objected to the $15,000 compensation limit, but did not opt out of the class, saying they feared that Transamerica would sue them if they opted out. However, after the expiration of the opt-out period, the plaintiffs and other objecting class members from South Carolina filed a motion in the Arkansas court to carve out a subclass for South Carolina class members. Their argument: after the opt-out deadline, they had learned that the South Carolina definition of “actual charges”—which, as the settlement notice stated, was consistent with the definition to be applied under the settlement—did not apply to policies issued before June 4, 2008. Therefore, for many South Carolina policyholders, the new Transamerica definition was not consistent with South Carolina law, and in fact would narrow the recovery otherwise available to them. The Arkansas court, however, denied all objections and motions to intervene, approved the settlement, awarded the $3,500,000 in attorneys’ fees, and dismissed all claims with prejudice.
When the plaintiffs subsequently filed the South Carolina action, Transamerica responded with a motion for summary judgment, arguing that their lawsuit was barred by the Arkansas settlement. The court disagreed. The court held that the Arkansas ruling was not entitled to full faith and credit because the South Carolina policyholders did not receive due process in Arkansas. First, the settlement notice was materially defective because it implied that South Carolina class members who opted out of the settlement would not be entitled to relief greater than that in the settlement agreement. Second, the South Carolina class members did not receive adequate representation by class counsel. In this regard, the South Carolina court characterized the relationship between class counsel and unnamed class members as “antagonistic,” finding that Transamerica’s $3,500,000 payment discouraged class counsel from engaging in the adversarial process. In particular, the court noted class counsel’s motions to stay proceedings in other courts pending settlement approval, their opposition to the settlement objections, and their failure to seek 100% compensation for the lower “actual charges” payments.
The court further held that the Arkansas court did not have subject matter jurisdiction, in part because the class representatives and Transamerica were not adverse, and no controversy existed between the plaintiffs and Transamerica. Class counsel acknowledged “that no litigation was ever intended to occur within that proceeding” and “independently confirmed the substantive settlement occurred before their filing of the complaint in state court.” According to the court, “the only discernable effort exerted by [class counsel] was to initiate the suit (which only they alone could do and which they did by virtue of their agreement with Transamerica), in exchange for the $3,500,000 attorney fee.”
Lastly, the court held that the Rooker-Feldman doctrine, which precludes a losing party in state court from subsequently challenging the state court judgment in federal court, was inapplicable here. The court found that the plaintiffs qualified as nonparties to the Arkansas action, because Arkansas law prohibits unnamed class members who have not intervened in trial court from directly appealing a settlement obtained by class representatives. As a result, the plaintiffs’ only means to challenge the settlement was through collateral attack.
Defense counsel negotiating class action settlements are routinely called upon to evaluate settlement proposals not only from the standpoint of their clients’ interest, but also with an eye toward the likelihood that the court will approve the settlement. Here, Transamerica cleared both of these hurdles and is left with substantial payouts under the settlement, but without having bought its peace. Hege reminds that if both parties focus only on compensating class representatives and counsel, and fail to consider the interests of the class as a whole, the consequence to defendants can be substantially greater than mere rejection of the settlement.