Preserving transparency for plaintiffs.

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How the Class-Action System Works (and Doesn't)

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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Class-action lawsuits are necessary as a way to police corporations -- but there’s always a chance that they’ll be settled in an effort to keep a company's dirty laundry from being aired.

In a decision Tuesday that polices the policing mechanism, an appeals court reversed an order to permanently seal the records of a particularly embarrassing class action brought against Blue Cross Blue Shield of Michigan. The decision was correct -- and also a warning to lawyers against exploiting a range of pitfalls in the legal system.

The case arose from a classic abuse of power by Michigan’s largest health insurer. At the time of the events that formed the basis of the class-action suit, Blue Cross Blue Shield of Michigan had more than a 60% market share of commercial healthcare in the state.

Abusing that market power, the insurer negotiated deals with numerous Michigan healthcare providers under the most-favored-nation provision that guarantees the best available terms to a client. The deal arranged for BCBS to pay higher reimbursement rates to hospitals, so long as the care providers agreed to charge even higher rates to BCBS's competitors. The net effect was to raise healthcare costs for all Michigan consumers, while enhancing BCBS's market share.

The Department of Justice sued BCBS, and private lawyers quickly filed a class-action suit demanding cash damages for customers who paid more money as a result of the insurance company’s abusive practice.

The events that followed showed the importance of the private suit alongside the government’s efforts. The Michigan legislature passed a law outlawing most-favored-nation clauses in the health insurance industry. Because that achieved the same goals as the Department of Justice lawsuit, the department dropped its suit.

Without the private class action continuing, BCBS would have paid no price at all for its previous wrongdoing. In fact, the Michigan state law served the interests of the insurer in so far as it made the federal lawsuit go away.

In the run-up to trial, lawyers for the class that was filing suit introduced expert testimony suggesting that the class had suffered $118 million in damages. BCBS responded by entering settlement negotiations with the plaintiffs’ lawyers.

The two sides agreed on $30 million in damages, which as a percentage of the potential settlement after trial isn’t unreasonable. It’s worth noting, however, that as part of the agreement, the BCBS agreed not to challenge an award of $10 million in attorneys’ fees and more than $1 million for an administrator -- typically another lawyer – to hand out what was left of the damages to those actually injured.

But that wasn’t all. As part of the deal, both sides agreed to ask the federal district court judge to seal -- permanently -- numerous documents that reveal the details of BCBS’s negotiations with Michigan healthcare providers. The judge approved the settlement.

You can see why both BCBS and the plaintiffs’ lawyers were prepared to make this agreement about keeping documents secret.

For the insurer, it spared embarrassment from the deal they had made, and potentially some revelation of their negotiating strategies.

As for the lawyers, they had no interest in the plaintiffs reviewing the documents produced by BCBS, because that could only lead to one thing: a challenge to the class-action settlement on the grounds that it wasn’t high enough. Once they had their agreement for $10 million in fees, all the plaintiffs’ lawyers wanted was for the case to be over so they could get paid.

And the plaintiffs’ lawyers certainly didn’t mind if BCBS got a benefit -- after all, they wanted to give everything they could in the negotiation to avoid BCBS opposing the fees they wanted.

Why did the judge agree? The simplest answer is that trial judges like to clear their dockets. Their primary job is to resolve disputes. If both sides in the dispute seemed happy, why cause trouble?

The U.S. Court of Appeals for the Sixth Circuit strongly disagreed after some of the claimants objected. In its opinion, a panel of the court smacked the district court for the legal error and confusing the standard for hiding information in the early, discovery stage of the trial, and the much higher standard for making information permanently secret after a case has been adjudicated.

Behind the Sixth Circuit’s reasoning, however, there clearly lurked the worry that BCBS and the plaintiffs’ lawyers had colluded to keep the details of wrongdoing out of the public eye.

The danger of collusion between the defendant and the plaintiffs’ lawyers is the biggest worry about the class-action system. Ordinarily, it comes out in discussion of the size of the attorneys’ fees, not in regard to the secrecy of documents. Most class actions end up with the creation of a website that includes relevant documentation. This one was different.

The lesson of this unusual case is that the courts -- and the public -- need to be vigilant about how the class-action system works in practice. We don’t have a better idea for how to police corporations, and as this case shows, the government alone usually is insufficient to do the trick. But we need someone to guard the guardians -- and that’s the job of the courts.

 

  1. Maybe the long-term plan was to gain a larger market share and then put pressure on the providers to lower rates; or maybe BCBS was just happy to pass on the costs of higher rates to its insured customers, knowing that higher prices wouldn't hurt its market share so long as competitors had to charge an even higher premium.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Noah Feldman at nfeldman7@bloomberg.net

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Susan Warren at susanwarren@bloomberg.net