04-3300(L), 04-3464(CON), 04-3545 (CON), 04-3871(CON) Gruer v. Merck-Medco Managed Care, LLC
1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT
3 August Term, 2004 4 5 (Argued: May 18, 2005 Appeal Reinstated: November 9, 2006 Decided: October 4, 2007) 6 7 Docket Nos. 04-3300-cv(L), 04-3464-cv(CON), 04-3545-cv (CON), 04-3871-cv(CON)
8 CENTRAL STATES SOUTHEAST AND SOUTHWEST AREAS HEALTH AND WELFARE 9 FUND, SWEETHEART CUP COMPANY, INC., and IRON WORKERS TRI-STATE 10 WELFARE FUND,
11 Movants-Appellants,
12 LINDA J. CAHN, ESQ., 13 14 Movant-Appellant,
15 GROUP HOSPITALIZATION AND MEDICAL SERVICES, d/b/a CAREFIRST BLUE CROSS 16 BLUE SHIELD,
17 Movant-Appellant,
18 - v. -
19 MERCK-MEDCO MANAGED CARE, L.L.C., a/k/a MEDCO HEALTH SOLUTIONS, INC.,
20 Defendant-Counter-Claimant-Appellee,
21 FRANK STEVE McMILLAN, DAVID J. GIBSON, ADAM MILES, MONICA KEIM, on behalf 22 of Northwest Airlines Prescription Plan and all other similarly situated plans, PAMELA STOLZ, 23 on behalf of Northwest Airlines Prescription Plan and all other similarly situated plans, 24 ROSEMARIE DeLONG, CARL J. GOODMAN, TRUSTEES OF THE UNITED FOOD & 25 COMMERCIAL WORKERS, GARY PIETRZAK, on behalf of the Minnesota Teamsters Health 26 and Welfare Benefit Plan, and PEABODY ENERGY CORPORATION,
27 Consolidated Plaintiffs,
1 1 BETTY JO JONES,
2 Intervenor Plaintiff,
3 GENIA GRUER, on behalf of herself and all others similarly situated, WALTER J. GREEN, on 4 behalf of himself and all others similarly situated, MILDRED BELLOW, on behalf of herself and 5 all others similarly situated, ELIZABETH O’HARE, on behalf of herself and all others similarly 6 situated, EMPLOYERS HEALTH AND WELFARE PLAN AND TRUST, and MARGARET J. 7 WEENER,
8 Plaintiffs-Appellees,
9 MARISSA JANAZZO, as fiduciary for The County Line Buick Nissan Employee Welfare 10 Benefit Plan, on behalf of herself as fiduciary and all other similarly situated fiduciaries of 11 employee welfare benefit plans,
12 Plaintiffs-Counter-Defendants-Appellees,
13 HARRY J. BLUMENTHAL JR. and ALAN HORWITZ, as fiduciaries for the Blumenthal Print 14 Works, Inc. Welfare Benefit Plan, on behalf of themselves as fiduciaries and all other similarly 15 situated welfare benefit plans,
16 Plaintiffs. 17 ______________________________________________________________________________
18 Before: MINER and POOLER, Circuit Judges, and BLOCK, Judge.*
19 Appeals from a judgment entered June 28, 2004 in the United States District Court for the 20 Southern District of New York (Brieant, J.) finally approving a settlement agreement in a class 21 action brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), the 22 District Court having incorporated orders (i) certifying the class action pursuant to FED . R. CIV . 23 P. 23(a) and (b)(3); (ii) denying a motion by movant-appellant health benefit payor to intervene 24 in the class action; (iii) approving the amended proposed settlement agreement as fair, 25 reasonable, and adequate; (iv) awarding legal fees and disbursements; and (v) severing cases in 26 which the ERISA plans opted out of the settlement. Also challenged on appeal is the order of the 27 District Court on remand dated August 10, 2006 finding constitutional standing on the part of the 28 certified representative plaintiffs.
29 Affirmed in part; vacated and remanded in part.
* The Honorable Frederic Block, Senior District Judge for the Eastern District of New York, sitting by designation.
2 1 KENNETH P. ROSS, Coleman Law Firm, Chicago, 2 IL (Robert F. Coleman and Sean B. Crotty, Robert 3 F. Coleman & Associates, Chicago, IL, and Eugene 4 I. Pavalon, Pavalon, Gifford, Laatsch & Marino, 5 Chicago, IL, on the brief), for Movants-Appellants 6 Central States Southeast and Southwest Areas 7 Health and Welfare Fund, Sweetheart Cup 8 Company, Inc., and Iron Workers Tri-State Welfare 9 Fund.
10 W. SCOTT SIMMER, Robins, Kaplan, Miller & 11 Ciresi LLP, Washington, D.C. (Christopher P. 12 Sullivan, Robins, Kaplan, Miller & Ciresi LLP, 13 Washington, D.C., and Robert A. Scher, Foley & 14 Lardner LLP, New York, NY, on the brief), for 15 Movants-Appellants Group Hospitalization and 16 Medical Services d/b/a Carefirst Blue Cross Blue 17 Shield.
18 LINDA J. CAHN, Law Firm of Linda J. Cahn, Esq., 19 Morristown, NJ, Movant-Appellant.
20 ARTHUR N. ABBEY, Abbey Spanier Rodd & 21 Abrams LLP, New York, NY (Karin E. Fisch, on 22 the brief), for Plaintiffs-Appellees Elizabeth 23 O’Hare, Genia Gruer, Mildred Bellow, Walter J. 24 Green, and Marissa Janazzo.
25 PHILIPPE Z. SELENDY, Boies, Schiller & Flexner 26 LLP, New York, NY (David Boies and Edward 27 Normand, Boies, Schiller & Flexner LLP, Armonk, 28 NY, on the brief), for Plaintiffs-Appellees Elizabeth 29 O’Hare, Genia Gruer, Mildred Bellow, Walter J. 30 Green, and Marissa Janazzo.
31 STEPHEN J. HERMAN, Mathis, Casey, Kitchens 32 & Genell, LLP, New Orleans, LA, for Intervenor 33 Plaintiff Betty Jo Jones.
3 1 MINER, Circuit Judge:
2 These appeals challenge the District Court’s approval of an amended settlement
3 agreement (the “Settlement Agreement”) reached in a class action lawsuit brought against
4 defendant-counter-claimant-appellee Merck-Medco Managed Care, L.L.C., a/k/a Medco Health
5 Solutions, Inc., and its former parent company, Merck & Co., Inc. (collectively, “Medco”), by a
6 plaintiff class of employee welfare benefit plans (the “Plaintiffs”). Plaintiffs, the trustees and
7 beneficiaries of various employee welfare benefit plans, brought this action alleging that Medco
8 breached its fiduciary duty under the Employee Retirement Income Security Act of 1974
9 (“ERISA”) by failing to act in their best interest in its capacity as a pharmaceutical benefits
10 manager for the plans. Movant-appellant Group Hospitalization and Medical Services, doing
11 business as CareFirst Blue Cross Blue Shield (“CareFirst”), appealed from the judgment of the
12 District Court denying CareFirst’s motion to intervene in the class action litigation and approving
13 the Settlement Agreement. Movants-appellants CareFirst, Central States Southeast and
14 Southwest Areas Health and Welfare Fund (“Central States”), Sweetheart Cup Company, Inc.
15 (“Sweetheart”), Iron Workers Tri-State Welfare Fund (“Iron Workers”), and Linda J. Cahn, Esq.
16 (“Cahn”) (collectively, “Movants-Appellants”) all appealed from the same judgment of the
17 District Court incorporating orders (i) certifying the instant action as a class action pursuant to
18 FED . R. CIV . P. 23(a) and (b)(3); (ii) approving the amended Settlement Agreement as fair,
19 reasonable, and adequate; (iii) awarding legal fees and disbursements; and (iv) severing cases in
20 which the ERISA plans opted out of the settlement.
21 On appeal, we determined that serious questions had been raised as to whether the
22 certified representative Plaintiffs had constitutional standing to assert ERISA claims and to enter
4 1 into the Settlement Agreement on behalf of the class. Cent. States Se. & Sw. Areas Health &
2 Welfare Fund v. Merck-Medco Managed Care, L.L.C., 433 F.3d 181, 185 (2d Cir. 2005). We
3 therefore remanded to the District Court for consideration of the standing issue and retained
4 jurisdiction pursuant to United States v. Jacobson, 15 F.3d 19 (2d Cir. 1994). Cent. States, 433
5 F.3d at 202–04. Following remand, the District Court reviewed additional evidence submitted by
6 the parties and concluded that Plaintiffs had established standing. Having remanded for a limited
7 purpose, we now resume jurisdiction of this case at the parties’ request. We assume familiarity
8 with our earlier opinion, the underlying facts, the procedural history, and the scope of issues
9 presented on appeal, to which we refer only as necessary to explain our decision. Upon our
10 review, we agree with the District Court that Plaintiff Marissa Janazzo has established standing,
11 but we conclude that the court erred both in certifying the class without properly considering the
12 conflicts of interest among members of the class and in approving the Settlement Agreement.
13 We therefore vacate the judgment of the District Court and remand for further proceedings
14 consistent with this Opinion. We affirm the judgment in all other respects.
15 BACKGROUND
16 I. ERISA Litigation and the Settlement Agreement
17 A. Litigation History
18 Plaintiffs are the trustees and beneficiaries of employee welfare benefit plans (the
19 “Plans”) that directly or indirectly contracted with Medco to receive pharmacy benefit
20 management services. As a pharmaceutical benefits manager (“PBM”), Medco was endowed
21 with discretionary authority to manage certain aspects of the Plans for the primary purpose of
22 containing pharmaceutical costs. By way of an indirect contract, insured Plans paid set
5 1 premiums to their insurance companies in exchange for full payment of their beneficiaries’
2 prescription drugs, and the insurance companies in turn contracted with Medco for plan
3 management services. By contrast, capitated Plans paid set premiums directly to Medco in
4 exchange for full payment of their beneficiaries’ drugs. In the case of both the insured and
5 capitated Plans, respectively, the insurer or Medco bore the risk of higher drug cost in paying
6 each beneficiary’s claims for prescription medications. Plans that were self-funded, however, did
7 not pay set premiums to either an insurer or to Medco and instead paid the entire cost of the
8 prescription drugs directly to Medco as PBM or through a third-party administrator for a fee.
9 Accordingly, self-funded Plans alone carried the direct risk of higher drug cost.
10 Plaintiffs alleged in their Complaint that Medco breached its fiduciary duties to their
11 Plans under ERISA in its capacity as PBM by (i) managing formularies — lists of preferred
12 prescription drugs — to favor the products of its parent company, Merck & Co., Inc. (“Merck”),
13 over competing drugs; (ii) implementing programs tending to increase the sales of Merck drugs,
14 including by interchanging lower cost competing drugs with relatively higher cost Merck drugs;
15 (iii) entering into drug purchase contracts with pharmaceutical manufacturers, including Merck,
16 that included price, rebate, and discount terms that were favorable to Medco but more costly to
17 the Plans; (iv) engaging in practices prohibited under ERISA, including the effective transfer of
18 Plan assets to Merck through drug purchase agreements with Merck negotiated by Medco; and
19 (v) generally failing to disclose to the Plans that it was not acting in their best interest but in the
20 interests of Merck. Medco’s motion for summary judgment dismissing the Complaint was
21 deferred pending discovery and later withdrawn due to settlement negotiations that culminated in
22 the Settlement Agreement.
6 1 On July 31, 2003, the same day that it preliminarily approved the Settlement Agreement,
2 the District Court preliminarily granted Plaintiffs’ motion for certification of the class, which
3 included all employee welfare benefit plans that contracted with Medco, whether they were self-
4 funded, insured, or capitated. The named plaintiffs in four of the consolidated class action cases,
5 Genia Gruer, Walter Green, Mildred Bellow, and Elizabeth O’Hare (collectively, the “Individual
6 Plaintiffs”), are individual Plan beneficiaries seeking derivative relief for each of their Plans and
7 their members, as well as for all similarly situated Plans that contracted directly with Medco on a
8 capitated basis or with insurers that contracted with Medco. The fifth named plaintiff, Marissa
9 Janazzo (now Marissa Salsbury) (“Janazzo”), is a Plan trustee purporting to sue on behalf of the
10 County Line Buick Nissan Employee Welfare Benefit Plan (the “County Line Plan”) and all
11 similarly situated Plan trustees whose plans contracted directly with Medco or with third-party
12 administrators or insurers that contracted with Medco. Harry J. Blumenthal Jr. and Alan
13 Horwitz, the named plaintiffs in a sixth case, are Plan trustees suing on behalf of their Plan (the
14 “Blumenthal Plan”) and on behalf of all other similarly situated Plan trustees whose Plans
15 contracted directly with Medco.1
16 B. Provisions of the Settlement Agreement
17 The Settlement Agreement defined the class to include all employee welfare benefits
18 Plans that had either direct contracts with Medco or indirect contracts with Medco through
19 insurance companies, third-party administrators, HMOs, Blue Cross Blue Shield entities, or any
20 other intermediaries (collectively, third-party administrators or “TPAs”), where the contracts
21 were in force at any time between December 17, 1994 and the date of the final approval of the
1 1 The Blumenthal Plan ultimately elected to opt out of the class.
7 1 settlement and were subject to ERISA. Under the Settlement Agreement, Medco agreed, among
2 other things, to pay $42.5 million into a settlement fund to be paid to class members. Attorneys’
3 fees, not to exceed 30%, together with expenses, also would come from the fund. In exchange,
4 Plaintiffs agreed to release all claims of the class insofar as they arose under ERISA or were in
5 any way connected to the actions that were the subject of the Complaint against Medco.
6 Plaintiffs further agreed to release those claims against TPAs, as well as Plan sponsors that
7 contracted with TPAs, that were connected to Medco’s alleged conduct. Plaintiffs did not,
8 however, release antitrust claims or any contract claims not arising under ERISA.
9 The settlement fund allocates an amount to the settling class members that is based
10 primarily on the amount of each settling Plan’s proportionate share of the total drug spend of all
11 settling Plans for the class period. Accordingly, each Plan’s proportionate share of the total drug
12 spend varies depending on the nature of the Plan’s relationship with Medco. Insured or capitated
13 Plans, which paid set premiums to an insurance company or Medco in exchange for full payment
14 of their members’ drug prescriptions, receive an allocation that is reduced by 55% to reflect the
15 fact that they were more insulated from the conduct alleged in the Complaint. Said differently, if
16 a Plan “pays for prescription drug benefits on an insured or capitated basis (e.g., a fixed premium
17 or per-member, per-month sum) or if [the] Plan does not participate in any brand-to-brand
18 therapeutic interchange program administered by Medco, [its] proportionate share of the total
19 drug spend will be reduced by fifty-five percent (55%) to reflect the fact that [the] Plan could not
20 have been damaged directly by certain of the conduct that Plaintiffs allege increase[d] costs to
21 Plans.” By contrast, Plans that were self-funded and assumed the financial risk of paying for
22 their members’ prescriptions in their entirety receive a proportionate share of the total drug spend
8 1 without any reduction.
2 II. Objections to the Settlement Agreement by the Self-Funded Plans
3 After the District Court preliminarily granted Plaintiffs’ motion for class certification and
4 approval of the Settlement Agreement, the Class Notice issued notifying class members of the
5 proposed Settlement Agreement and informing them that they could opt out of the class. At the
6 ensuing hearing to determine the fairness of the Settlement Agreement, approximately 200
7 individual Plans exercised their right to opt out of the settlement. In addition, several self-funded
8 Plans asserted that their interests were not adequately protected by the settling Plaintiffs. Central
9 States, Iron Workers, and Sweetheart (collectively, the “Self-Funded Plans”) objected both to the
10 certification of the class and to the terms of the Settlement Agreement and sought leave to
11 intervene in the class action to represent all of the self-funded Plans, which they argued should be
12 a certified subclass. The Self-Funded Plans first asserted that there was a conflict of interest in
13 the representation of the class and that only a self-insured Plan or sponsor could adequately
14 represent their interests, because the Plans that paid set premiums to Medco or insurers to avoid
15 the risk of paying claims would share in the settlement fund notwithstanding the fact that they
16 suffered no damages. Following the fairness hearing, the District Court rejected these claims and
17 held that:
18 [I]n practical reality no such conflict of interest exists. The same legal theory 19 underlies all [c]lass [m]embers’ claims, that Medco violated ERISA in exercising 20 its discretionary authority to negotiate with drug manufacturers on behalf of its 21 [P]lan sponsors, and in its control over the formularies and therapeutic drug 22 interchange program. Although the negative drug interchange claim directly 23 affected the self-funded [P]lans as opposed to the insured [P]lans, this is 24 insufficient to find a conflict of interest exists. Class [c]ounsel determined that 25 Medco’s failure to pass through rebates may have increased or failed to reduce the 26 drug-acquisition costs of the members of the insured [P]lans in addition to those
9 1 of the self-funded [P]lans. Accordingly, the 55% reduction applying to the 2 insured [P]lans was determined to be a reasonable discount of their claims. “Even 3 where there are some individualized damages issues,” common issues may 4 predominate “when liability can be determined on a class-wide basis.” In re Visa 5 Check/MasterMoney Antitrust Litig., 280 F.3d 124, 139 (2d Cir. 2001).
6 In re: Medco Health Solutions, Inc., Pharmacy Benefits Mgmt. Litig., No. 03 MDL 1508 (CLB),
7 2004 WL 1243873, at *4 (S.D.N.Y. May 25, 2004).
8 The Self-Funded Plans next claimed that the allocation of settlement funds between the
9 self-funded Plans and the insured or capitated Plans was unfair, inadequate, and unreasonable,
10 because “the Settling Plaintiffs did not submit proof as to how, during their negotiations, they
11 calculated the 55% reduction in recovery for self-insured [P]lans.” Id. at *7. The District Court
12 also rejected this contention and held simply that the reduction “balances the equities” among
13 self-funded and insured Plans. Id. In upholding the 55% figure, the court deferred to class
14 counsel who negotiated the Settlement Agreement:
15 [T]he allocation is reasonable. . . . The insured or capitated fund[s] were not 16 directly financially damaged by the actions of Medco on the negative interchange 17 claim because the Plans paid a flat capitation for every person regardless of the 18 type of drug prescribed. Through the negotiation process, relying on advice from 19 experts of their own choosing and assistance by the Special Maser, and in light of 20 the important non-monetary benefits of the Settlement, Class counsel determined 21 to discount the allocation of the [s]ettlement [f]und to insured [P]lans relative to 22 the self-funded [P]lans as provided in the Settlement Agreement.
23 Id. at *9.
24 In addition, the Self-Funded Plans claimed that the Settlement Agreement inadequately
25 described the distribution of the settlement funds. Specifically, they contended that the language
26 in the Class Notice and the Settlement Agreement providing that the allocation of funds “shall be
27 made primarily on the basis of each settling Plan’s proportionate share of the total drug spend of
10 1 all settling Plans” did not sufficiently (i) explain the meaning of “primarily”; (ii) disclose the
2 non-primary bases for determining allocation; or (iii) indicate the total drug spend of the
3 proposed class during the class period. Id. at *4. The Self-Funded Plans also contended that
4 there was no basis to determine whether the $42.5 million settlement amount was reasonable. Id.
5 The District Court rejected these contentions and concluded that the Plan of Allocation was
6 “reasonable and fair.” Id.
7 Finally, the Self-Funded Plans argued that the Class Notice and paragraph seventeen of
8 the Settlement Agreement were unclear as to which claims would be retained by the class
9 members. Paragraph seventeen of the Settlement Agreement provides:
10 Nothing in [the release] is intended to release or to be construed to release Medco 11 from contract claims asserted by parties with which Medco has contracted to 12 provide services, including (where permitted by applicable state law) contract 13 claims for breach of implied covenant of good faith and fair dealing, provided, 14 however, that claims not based on contract are released to the extent provided for 15 in [the release]. Nothing in paragraph [sixteen] is intended to release or to be 16 construed to release TPAs from contract claims asserted by parties with which any 17 TPA has contracted to provide services, including (where permitted by applicable 18 state law) contract claims for breach of the implied covenant of good faith and fair 19 dealing, provided, however, that claims not based on contract are released as 20 provided for in [the release].
21 In interpreting the Agreement, the District Court held that the language was unambiguous with
22 respect to which claims would be released and reasoned as follows: “The Amended Settlement
23 Agreement is clear and it speaks for itself. Further, it was admitted by Medco during the
24 December 11, 2003, conference that ‘the contract claims are carved out and not released. . . .
25 Medco agrees with settling counsel that none of the contract claims will be released for any of
26 Medco’s clients and no contract claims are preempted by ERISA.’” Id. at *5.
27 III. CareFirst’s Motion to Intervene in the Class Action
11 1 Subsequently, CareFirst, a TPA that provides insurance and administrative services to
2 insured and self-funded Plans governed by ERISA, opposed certification of the settling class and
3 filed a motion to intervene in order to argue that the opt-out provisions of the Class Notice
4 should include the right of a health benefit payor to opt out of the settlement class, and to
5 challenge certification of the class in the event that its opt-out were deemed ineffective.
6 CareFirst sought to exclude itself from the class action settlement both as the insurer and the
7 TPA of the ERISA Plans it administered.
8 As a TPA, CareFirst claimed that it “is bound by contract and course of dealing to act on
9 behalf of its self-funded plan customers to pursue overpayment of benefits” and that “[i]nsurers
10 and TPAs were specifically carved from the class, yet the plans they insured and administered
11 were included [in the class].” CareFirst thus argued that its claims against Medco, some of
12 which are being litigated in another action in New Jersey, see Group Hospitalization & Med.
13 Servs., d/b/a CareFirst Blue Cross Blue Shield v. Merck-Medco Managed Care, L.L.P., No.
14 CAM-L-4144-03 (N.J. Sup. Ct. 2003), could be improperly released by the Settlement
15 Agreement if CareFirst were denied an opportunity to opt out the claims of its insured and
16 self-funded Plans.
17 The District Court denied CareFirst’s motion to intervene, concluding that the right to
18 accept or reject the proposed settlement belonged to the Plan fiduciaries and not to TPAs such as
19 CareFirst. The District Court determined that “[b]ecause Care[F]irst is not a member of the
20 [c]lass, and its rights will not be affected by the approval of the Settlement, Care[F]irst lacks
21 standing to object on its own behalf and has failed to demonstrate that it has authority to act for a
22 [P]lan in opting out.” In re: Medco Health Solutions, Inc., 2004 WL 1243873, at *6. With
12 1 respect to CareFirst’s concerns that its claims in the New Jersey action could be released as a
2 result of the Settlement Agreement, the District Court concluded that the Agreement did not
3 release any contract or other direct claims that TPAs may assert against Medco and that, in any
4 event, a TPA was free to demand that its Plan opt out of the settlement. Id.
5 The District Court thereafter certified the instant action as a class action, pursuant to FED .
6 R. CIV . P. 23(a) and (b)(3), and approved the Settlement Agreement, concluding that it was
7 “within the range of fair, reasonable, and adequate settlement of the claims of the [c]lass.” Id. at
8 *16. The District Court also awarded legal fees and disbursements and held that “[t]hose
9 consolidated cases in which the Plans have opted out of the settlement are hereby severed.” Id.
10 IV. Attorneys’ Fees and Disbursements to Class Counsel and Linda Cahn
11 The settling Plaintiffs’ counsel, Abbey Gardy LLP and Boies, Schiller & Flexner LLP,
12 requested that the District Court approve their application for attorneys’ fees in the amount of
13 $12.75 million, or 30% of the settlement fund — a 1.79 multiple of their lodestar — and for
14 disbursements in the amount of $893,294.50. From their fee award, Plaintiffs’ counsel agreed to
15 absorb payment of a reasonable fee to Lowey Dannenberg Bemporad & Selinger and Rawlings &
16 Associates (collectively the “Lowey Firm”), which had requested a fee award in the amount of
17 $637,500 — a 1.317 multiplier of its lodestar of $483,947.50 — and disbursements in the
18 amount of $19,576.96. The District Court determined that counsel’s requests were reasonable
19 and approved their applications:
20 [T]he present fee application for 30% of the [s]ettlement [f]und made by Abbey 21 Gardy and Boies, Schiller & Flexner and including the services of the Lowey firm 22 is reasonable. It is clear by [s]ettling Plaintiffs’ submissions that [c]ounsel 23 expended a substantial amount of time and effort in this litigation. The total 24 combined lodestar for [s]ettling Plaintiffs’ [c]ounsel and the Lowey firm is
13 1 $7,138,047.25, representing almost 16,000 hours spent litigating this case. 2 Settlement negotiations began almost three years ago, and were completed only by 3 the tremendous effort of counsel.
4 The litigation occurred over a period of six years, and was performed on a purely 5 contingent basis, with [c]lass [c]ounsel advancing the many thousands of dollars 6 of necessary disbursements. If, after trial, [c]lass Plaintiffs were unsuccessful, due 7 to the contingent nature of the lawsuit, [s]ettling Plaintiffs’ [c]ounsel would have 8 received no compensation. [C]ontingency risk and quality of representation must 9 be considered in setting a reasonable fee. Goldberger v. Integrated Res., Inc., 209 10 F.3d 43, 54 (2d Cir. 2000). 11 12 Settling Plaintiffs’ [c]ounsels’ request of 30% of the [s]ettlement [f]und, applies a 13 multiplier of 1.786 to the submitted lodestar. This multiplier is reasonable and 14 fair. . . . 15 16 The [c]ourt awards [s]ettling Plaintiffs’ [c]ounsel (including the Lowey Firm) a 17 fee award of 30% of the [s]ettlement [f]und, calculated as $12.75 million, less the 18 award of legal fees to Linda J. Cahn . . ., and disbursements in the amount of 19 $893,294.50 for [s]ettling Plaintiffs’ [c]ounsel and disbursements for the Lowey 20 firm in the amount of $19,576.96. Under the class notice, total fees may not 21 exceed 30%.
22 Id. at *11.
23 In addition, Linda Cahn, attorney for the Blumenthal Plan, moved for an award of legal
24 fees and disbursements to be paid out of the common fund that resulted from the Settlement
25 Agreement. Cahn sought reimbursement for a lodestar of 2,182 hours, together with $4,698 in
26 expenses, as well as an award of 10% of the total attorneys’ fees awarded to class counsel of
27 record. With respect to Cahn’s application for fees, the District Court concluded that, although
28 the Settlement Agreement had been agreed upon in principle by class counsel and without any
29 input from Cahn, her participation was an important part in the finalization of its terms and that
30 her efforts benefitted the class as to “support a reasonable legal fee out of the fund in the nature
31 of quantum meruit.” Id. at *13. The District Court determined, however, that there was “no
14 1 basis to award a percentage fee of the recovery to Ms. Cahn. She neither created the class action
2 settlement nor did she induce acceptance of it by the Defendants. Her assistance was limited to
3 fine tuning of provisions and documents after the [s]ettlement had been agreed to in principle.”
4 Id. Ultimately, the District Court awarded Cahn attorneys’ fees and disbursements in the amount
5 of $165,578, to be deducted from the 30% award to class counsel in light of the cap on total fees.
6 Id. at *15.
7 IV. Appeals to this Court
8 CareFirst appealed from the District Court’s denial of its motion to intervene in the class
9 action, contending that the court erred in determining that it was not a member of the class and
10 therefore lacked standing to object to, or opt out of, the Settlement Agreement. Movants-
11 Appellants all appealed from the same judgment incorporating orders (i) certifying the instant
12 action as a class action, pursuant to FED . R. CIV . P. 23(a) and (b)(3); (ii) approving the amended
13 Settlement Agreement; (iii) awarding legal fees and disbursements; and (iv) severing cases in
14 which the ERISA plans opted out of the settlement.
15 On appeal, we did not reach the merits of the case because we concluded that the
16 threshold question of Article III standing of the settling class Plaintiffs was insufficiently
17 established. Cent. States, 433 F.3d at 185–86, 203. We determined that the District Court had
18 failed to rule on the objections to Plaintiffs’ standing raised by the parties and observed that “we
19 do not have the benefit of the District Judge’s views as to whether the Plaintiffs have
20 demonstrated the requisite injury-in-fact for supporting a finding of constitutional standing.” Id.
21 at 200. With respect to the Individual Plaintiffs, we held that:
15 1 [S]erious questions remain as to whether the Individual Plaintiffs have 2 demonstrated how Medco’s alleged wrongdoings caused any injury to any 3 individual or entity other than the Plans that Medco contracted with, and provided 4 prescription benefit coverage to, during the class period. It is especially unclear 5 whether any evidence supports the claim that Medco’s drug-switching programs 6 and formulary caused the Individual Plaintiffs — as opposed to the Plans to which 7 they belong — any injury (either by paying more for prescription drugs or by 8 having to take different prescription drugs), given that Plan participants generally 9 pay a flat co-pay for a drug regardless of the cost of the drug. Seemingly, only 10 plan participants who paid percentage coinsurance would incur injury if Medco 11 favored the higher-cost drugs. . . . Similarly, the Individual Plaintiffs appear to 12 have failed to demonstrate (i) that they incurred an injury resulting from Medco’s 13 failure to pass along formulary rebates to the Plans; or (ii) that they have been 14 impacted by defendants’ allegedly wrongful disclosures or misstatements. 15 16 Id. at 202–203 (footnote omitted).
17 With respect to Janazzo and the County Line Plan, we determined that:
18 The parties also have raised a considerable question regarding whether the fifth 19 settling plaintiff, Janazzo, a Plan trustee, represents a Plan with Article III 20 standing, given that Janazzo failed to produce a signed, executed contract between 21 the Plan and either Medco or a TPA that contracted with Medco. Moreover, 22 counsel for Medco also stated before the District Court that it “could not find any 23 record of Medco sending a bill to County Line Buick [Janazzo’s Plan] for drugs. 24 [Medco does not believe] that [Janazzo’s Plan is] a client of Medco.” In the 25 absence of evidence of a contractual relationship with Medco, Janazzo is 26 precluded from demonstrating any injury resulting from Medco’s alleged 27 wrongdoings. 28 29 Id. at 203 (alterations in original). Accordingly, we remanded to the District Court to resolve the
30 standing issue in any way it deemed proper and retained jurisdiction pursuant to United
31 States v. Jacobson, 15 F.3d 19, 21–22 (2d Cir. 1994). Cent. States, 433 F.3d at 203.
32 V. District Court’s Decision on Remand
33 On remand, the District Court permitted the parties to submit additional discovery,
34 including document and deposition discovery, to further develop the record as to the issue of
35 Plaintiffs’ standing. By Order dated August 10, 2006, the District Court determined that (i)
16 1 Janazzo, as Plan Trustee for County Line, established that her Plan had a contractual relationship
2 with Medco and likely suffered an injury as a result of its conduct; (ii) the Individual Plaintiffs
3 Green and Bellow suffered injury-in-fact and therefore had Article III standing; and (iii) all of the
4 Individual Plaintiffs had representational and statutory standing under ERISA sufficient to satisfy
5 Article III standing. Subsequently, Plaintiffs, CareFirst, and the Self-Funded Plans restored
6 jurisdiction to this Court, and the parties filed supplemental letter briefs and appendices in
7 accordance with this Court’s previous decision. The District Court having issued its opinion on
8 remand, our jurisdiction having been restored, and the standing issue having been fully briefed,
9 we now resume jurisdiction over this case.
10 ANALYSIS
11 I. Article III Standing
12 A. Standard of Review
13 Whether a plaintiff has constitutional standing is a question of law that we review de
14 novo. Field Day, LLC v. County of Suffolk, 463 F.3d 167, 175 (2d Cir. 2006) (citing Shain v.
15 Ellison, 356 F.3d 211, 214 (2d Cir. 2004)).
16 B. Janazzo’s Standing
17 As a threshold matter, we note that only one of the named Plaintiffs is required to
18 establish standing in order to seek relief on behalf of the entire class. See 1 ALBA CONTE &
19 HERBERT B. NEWBERG , NEWBERG ON CLASS ACTIONS § 2:6 n.3 (4th ed. 2002) (“To establish
20 Article III standing in a class action, it is not required that each named plaintiff must have a claim
21 against each named defendant. Rather, for every named defendant there must be at least one
22 named plaintiff who can assert a claim directly against that defendant, and at that point standing
17 1 is satisfied and only then will the inquiry shift to a class action analysis”); see also Comer v.
2 Cisneros, 37 F.3d 775, 788 (2d Cir. 1994). Plaintiffs contend that Janazzo represents a Plan with
3 constitutional standing because the County Line Plan was involved in a contractual relationship
4 with Medco during the class period. They assert that, during the first part of the class period, the
5 County Line Plan operated as a self-funded Plan with M.D. Health Plan acting as its third-party
6 administrator, and that, during the later part of the class period, the County Line Plan was fully
7 insured through M.D. Health Plan. Plaintiffs further allege that M.D. Health Plan used Medco to
8 manage its pharmaceutical benefits over the entire class period.
9 Based upon the record before us, we are satisfied that Janazzo has constitutional standing
10 because the County Line Plan was Medco’s client during the class period. Plaintiffs produced
11 competent proof in support of County Line’s contract with M.D. Health Plan, including: (1) a
12 “Third Party Administrative Service Agreement” with M.D. Health Plan signed by a County Line
13 representative; (2) a form letter from M.D. Health Plan apparently produced from County Line’s
14 files advising clients that it would consolidate its pharmaceutical services under Medco; (3) a
15 letter from M.D. Health Plan to County Line’s consultant, Brian Lynch, summarizing the Plan’s
16 transfer from self-funding to fully-insured status; (4) a “Group Administration Agreement”
17 signed by a representative of M.D. Health Plan identifying Lynch as the “Agent of Record”; (5) a
18 “Third Party Administrative Services Run-Out Agreement” signed by a representative of M.D.
19 Health Plan and sent to Lynch; (6) Janazzo’s applications for group insurance coverage on behalf
20 of County Line listing M.D. Health Plan as Plan Supervisor; (7) copies of Janazzo’s and her
21 beneficiary father’s drug prescriptions indicating group prescription coverage through M.D.
22 Health Plan and a subsidiary of Medco; (8) invoices showing County Line’s payment of
18 1 premiums to M.D. Health Plan; and (9) Lynch’s sworn statement that County Line contracted
2 with M.D. Health Plan with respect to its employee benefits, that he regularly dealt with M.D.
3 Health Plan in assisting County Line, and that “M.D. Health Plan in turn used Merck-Medco
4 Managed Care, Inc. (‘Medco’) for its pharmaceutical services for Countyline Motors.” Although
5 each of the formal written agreements between County Line and M.D. Health Plan appears to be
6 signed by only one party, the evidence, viewed in its totality, demonstrates at least an implied
7 contract between the parties since they “agreed, either by words or actions or conduct, to
8 undertake [some] form of actual contract commitment.” Cweklinsky v. Mobil Chem. Co., 364
9 F.3d 68, 77 (2d Cir. 2004) (applying Connecticut law).2 As the District Court correctly held on
10 remand, these documents “still ha[ve] evidentiary value of both an intent to execute the
11 [a]greement, and progress toward such execution.”
12 The record also establishes a contract for plan management services between M.D. Health
13 Plan and Medco during the time that M.D. Health Plan was involved with the County Line Plan.
14 Significantly, it was Medco that produced documents showing that County Line employees filled
15 drug prescriptions through its pharmaceutical network, and Medco does not dispute that it had a
16 contractual relationship with M.D. Health Plan. Indeed, Plaintiffs have filed under seal in this
17 Court the “Integrated Prescription Drug Program Master Agreement” between M.D. Health Plan
2 1 The parties do not dispute that the relationship between the County Line Plan and M.D. 2 Health Plan is governed by Connecticut law. Both the County Line Plan and M.D. Health Plan 3 are based in Connecticut, and their contractual relationship evolved wholly in Connecticut. 4 Moreover, the “Third Party Administrative Service Agreement” and the “Third Party 5 Administrative Services Run-Out Agreement” each contains a choice-of-law clause providing 6 that the validity, interpretation, and performance of the agreement shall be controlled by 7 Connecticut law.
19 1 and Medco demonstrating that Medco was the exclusive provider of prescription drug benefits to
2 M.D. Health Plan at that time.
3 We reject the Self-Funded Plans’ claim that Janazzo must establish specific financial
4 harm before her Plan has standing, since it conflates a defense to the merits of the Plan’s claim
5 against Medco with the requirement to make a threshold jurisdictional showing. In our view, the
6 foregoing evidence supports the District Court’s determination that Janazzo’s Plan was involved
7 in a contractual relationship with Medco so as to give her standing. Accordingly, we need not
8 reach the issue of standing as it pertains to any of the other named Plaintiffs and instead proceed
9 to the merits of this case.3
10 II. CareFirst’s Motion to Intervene
11 CareFirst argues that the District Court abused its discretion in denying its motion to
12 intervene and refusing to hear its objections to class certification. With respect to the court’s
13 denial of its motion to intervene, CareFirst contends that it is prevented from acting under
14 contract to “pursue overpayment of benefits” on behalf of the self-funded plans that it
15 administers because “TPAs were specifically carved from the class, yet the plans they ensured
16 and . . . administered were included.” CareFirst also claims that the District Court’s denial of its
17 motion has the effect of improperly releasing its claims as an insurer in a parallel New Jersey
3 1 In addition to arguing that they have incurred individualized injury, the plan 2 participants and beneficiaries on remand and in this round of briefing urge that (1) they have 3 representational standing under the doctrine enunciated in Vermont Agency of Natural Res. v. 4 United States, 529 U.S. 765 (2000), and (2) they have standing to assert the vindication of the 5 intangible right to the honest services of fiduciaries guaranteed to them by ERISA. Because 6 these theories were not argued to us in an intelligible fashion prior to our original decision, that 7 decision should not be read as rejecting them. Because addressing these difficult issues is not 8 necessary to our resolution of the standing issue in this case, we express no opinion on them. 9 Instead, we leave their resolution to a future panel.
20 1 action without compensation and results in prejudice because the Settlement Agreement
2 “distribut[es] proceeds directly to CareFirst’s insured customers, thus bypassing CareFirst.”
3 With respect to the District Court’s certification of the class, CareFirst contends that (i) the
4 claims of the class do not raise questions common to all class members; (ii) the claims of the
5 class are not typical of those of the class; and (iii) the class representatives do not adequately
6 represent the interests of the class.
7 We are not persuaded by CareFirst’s contentions because CareFirst lacks the authority to
8 opt out the claims of the Plans that it administers or object to the settlement on their behalf.
9 Neither the certified class nor the Settlement Agreement includes TPAs such as CareFirst.
10 Indeed, TPAs are expressly excluded from the class, which includes only Plans, and only the
11 Plans’ fiduciaries can opt out their Plans in accordance with the provisions of the Settlement
12 Agreement: “TPAs are excluded from the definition of the class except that to the extent a given
13 TPA is a plan sponsor with respect to an employee benefit plan, the TPA shall be a member of
14 the class solely in such capacity.” As the District Court correctly observed, “[t]he fiduciary duty
15 is vested in the Plan sponsor or the designated fiduciary named in any particular [P]lan, and such
16 statutory duty may not be evaded by delegation to an administrator. If anybody’s rights were
17 violated by [Medco], it was the rights of the Plan not the administrator with whom the Plan
18 fiduciaries contracted.” See 29 U.S.C. § 1104(a)(1)(A) (providing that “a [plan’s] fiduciary shall
19 discharge his duties with respect to a plan solely in the interest of the participants and
20 beneficiaries and . . . for the exclusive purpose of . . . (i) providing benefits to participants and
21 their beneficiaries; and (ii) defraying reasonable expenses of administering the plan). Because
22 CareFirst is not a class member, it does not have an affected interest in the class Plaintiffs’ claims
21 1 against Medco so as to be able to assert its objections on behalf of its Plans. “Nonparties to a
2 settlement generally do not have standing to object to a settlement of a class action.” 4 ALBA
3 CONTE & HERBERT B. NEWBERG , NEWBERG ON CLASS ACTIONS § 13:69 (4th ed. 2002); see also
4 In re Drexel Burnham Lambert Group, Inc., 130 B.R. 910, 923 & n.8 (S.D.N.Y. 1991) (citing
5 cases), aff’d, 960 F.2d 285 (2d Cir. 1992).
6 CareFirst’s argument that it could be prejudiced in a parallel action against Medco in
7 New Jersey is unavailing for essentially the same reasons. TPAs are not members of the class,
8 and as such, no actionable claim held by CareFirst in New Jersey is released by the terms of the
9 Settlement Agreement. Stated simply, CareFirst would possess the same legal rights against
10 Medco whether or not the Settlement Agreement were approved. If CareFirst believes that any
11 Plan is obligated to opt out, it may exercise its discretion to make such a demand upon that Plan.
12 In any event, because CareFirst’s rights against Medco would not be impaired by the disposition
13 of this action, its intervention would serve no purpose. Accordingly, we cannot say that the
14 District Court abused its discretion in denying CareFirst’s motion.
15 III. Challenges to Class Certification
16 A. Standard of Review
17 Turning next to the challenges raised to the certification of the class, this Court reviews a
18 district court’s approval of a class certification under an abuse of discretion standard of review.
19 As this Court recently has observed:
20 We review the district court’s order granting class certification for abuse of 21 discretion, a deferential standard. See Parker v. Time Warner Entm’t Co., 331 22 F.3d 13, 18 (2d Cir. 2003). “A district court ‘abuses’ or ‘exceeds’ the discretion 23 accorded to it when (1) its decision rests on an error of law (such as the
22 1 application of the wrong legal principle) or a clearly erroneous factual finding, or 2 (2) its decision — though not necessarily the product of a legal error or a clearly 3 erroneous factual finding — cannot be located within the range of permissible 4 decisions.” Zervos v. Verizon N.Y., Inc., 252 13 F.3d 163, 169 (2d Cir. 2001) 5 (footnotes omitted).
6 In re Simon II Litig., 407 F.3d 125, 132 (2d Cir. 2005).
7 B. Requirements for Class Certification
8 Federal Rule of Civil Procedure 23(a) sets forth the requirements for a class action:
9 One or more members of a class may sue or be sued as representative parties on 10 behalf of all only if (1) the class is so numerous that joinder of all members is 11 impracticable, (2) there are questions of law or fact common to the class, (3) the 12 claims or defenses of the representative parties are typical of the claims or 13 defenses of the class, and (4) the representative parties will fairly and adequately 14 protect the interests of the class.
15 FED . R. CIV . P. 23(a). Said differently, in order to qualify for class certification, plaintiffs in the
16 proposed class must demonstrate that they satisfy four requirements: (1) numerosity, (2)
17 commonality, (3) typicality, and (4) adequacy of representation. See FED . R. CIV . P. 23(a).
18 The numerosity requirement in Rule 23(a)(1) does not mandate that joinder of all parties
19 be impossible — only that the difficulty or inconvenience of joining all members of the class
20 make use of the class action appropriate. “The commonality requirement is met if plaintiffs’
21 grievances share a common question of law or of fact.” Marisol A. v. Giuliani, 126 F.3d 372,
22 376 (2d Cir. 1997) (per curiam). Typicality “requires that the claims of the class representatives
23 be typical of those of the class, and is satisfied when each class member’s claim arises from the
24 same course of events, and each class member makes similar legal arguments to prove the
25 defendant’s liability.” Robinson v. Metro-N. Commuter R.R. Co., 267 F.3d 147, 155 (2d Cir.
26 2001). Adequacy of representation means that the class representatives “will fairly and
23 1 adequately protect the interests of the class.” Denney v. Deutsche Bank AG, 443 F.3d 253, 267
2 (2d Cir. 2006) (internal quotation marks omitted). If the foregoing criteria are satisfied, the court
3 must then decide whether “questions of law or fact common to the members of the class
4 predominate over any questions affecting only individual members,” and whether a class action
5 “is superior to other available methods for the fair and efficient adjudication of the controversy.”
6 Moore v. PaineWebber, Inc., 306 F.3d 1247, 1252 (2d Cir. 2002) (quoting FED . R. CIV . P.
7 23(b)(3)).
8 The Self-Funded Plans and CareFirst claim on appeal that the District Court abused its
9 discretion in certifying the class because the Self-Funded Plans represent a subclass whose
10 interests differ from those of the insured Plans. Specifically, they contend that all self-funded
11 Plans should have been represented by independent counsel because they were more damaged by
12 Medco’s conduct by virtue of paying Medco the entire cost of their beneficiaries’ drugs and were
13 more damaged by Medco’s conduct as a result.
14 In determining whether “the representative parties will fairly and adequately protect the
15 interests of the class,” FED . R. CIV . P. 23(a)(4), a district court must determine whether
16 “plaintiff’s interests are antagonistic to the interest of other members of the class.” In re Visa
17 Check/MasterMoney Antitrust Litig., 280 F.3d 124, 142 (2d Cir. 2001) (internal citations
18 omitted); see also In re Drexel Burnham, 960 F.2d at 291. With respect to the adequacy of
19 representation in this case, the District Court determined that:
20 The record shows that all members of the class share a common interest in 21 establishing that Medco violated ERISA. All members similarly wish to obtain 22 the highest possible recovery.
24 1 The question is whether the insured or capitated [P]lans suffered the same injury 2 or any injury at all. As insured funds, they paid the same premiums regardless of 3 which type of drug Medco purchased for the account of their plan. It is highly 4 unlikely that the Plans incurred any monetary damages as a result of Medco’s 5 activities as alleged by the drug interchange claim, which principally affects the 6 self-funded [P]lans. However, to the extent that Medco was keeping rebates and 7 breaching its fiduciary duties under ERISA as claimed by the Plaintiffs, those 8 claims are equally meritorious and equally viable for the self-funded [P]lans and 9 the insured [P]lans. For all these reasons, the Settlement Agreement balances the 10 equities. It provides for the insured [P]lans’ claims to be reduced to 55% as 11 compared to the claims of the self-funded [P]lans. That the two different types of 12 [P]lans might recover different amounts had they brought suit on their own, is 13 insufficient to establish antagonistic interests among class members. This Court 14 rejects the argument that Rule 23(a)(4) has not been satisfied.
15 In re: Medco Health Solutions, Inc., 2004 WL 1243873, at *7.
16 While we agree with the District Court that the Plans advanced similar theories of
17 liability against Medco predicated on the same or similar facts, we are persuaded by the
18 challenges to class certification raised by the Self-Funded Plans based upon the nature of their
19 relationship with Medco. Self-funded Plans differ significantly from insured or capitated Plans
20 because only self-funded Plans assumed the direct risk of absorbing any increases in prescription
21 drug costs that were caused by Medco’s conduct. They argue that since the insured and capitated
22 Plans avoided that risk by paying set premiums, those Plans were not damaged and should
23 receive no part of the settlement fund. The insured and capitated Plans nevertheless claim a
24 substantial share in the fund, contending that if Medco had passed through rebates, “[t]he pass-
25 throughs would have directly reduced the drug-acquisition costs of the self-funded plans, and
26 indirectly reduced (through lower insurance premiums over time) the drug-acquisition costs of
27 the [insured or] capitated plans.” The insured or capitated Plans thus claim that Medco’s failure
28 to pass on savings damaged them financially.
25 1 In our view, this conflict among the Plans does not represent a simple disagreement over
2 potential differences in the computation of damages, since the relationship of the Plans to Medco
3 and its effect on each Plan goes to the very heart of the litigation. While we do not here decide
4 whether the self-funded Plans in fact suffered greater injury, we think it proper to allow them to
5 raise their claims as part of a separate subclass. The Self-Funded Plans dispute any recovery to
6 the insured or capitated Plans, yet none of the class representatives is part of an exclusively
7 self-funded plan that could adequately advance this position. Because the antagonistic interests
8 apparent in the class should be adequately and independently represented, we remand to the
9 District Court for certification of a subclass encompassing the self-funded plans in order to better
10 protect their claims in this litigation. See Amchem Prods. v. Windsor, 521 U.S. 591, 604, 626
11 (1997) (holding that in a class action including both claimants who already had incurred an
12 asbestos-related injury and claimants who merely had been exposed to asbestos, adequacy was
13 not established because “the interests of those within the single class are not aligned [as] for the
14 currently injured, the critical goal is generous immediate payments [, but for the] exposure-only
15 plaintiffs [, there is an interest] in ensuring an ample, inflation-protected fund for the future”);
16 Broussard v. Meineke Disc. Muffler Shops, Inc., 155 F.3d 331, 338, 340 (4th Cir. 1998) (holding
17 that class certification was improper because “plaintiffs simply cannot advance a single collective
18 breach of contract action on the basis of multiple different contracts” when there are “manifest
19 conflicts of interest” in their claimed recovery); In re General Motors Corp. Pick-Up Truck Fuel
20 Tank Prods. Liab. Litig., 55 F.3d 768, 801 (3d Cir. 1995) (holding that class certification was
21 improper because the named plaintiffs “had no incentive to maximize the recovery” of the other
22 class members in light of the disparity in settlement benefits).
26 1 IV. Challenges to the Settlement Agreement
2 A. Standard of Review
3 This Court has explained that “[a] district court’s approval of the settlement of a class
4 action is reviewable under an abuse-of-discretion standard.” In re Ivan F. Boesky Sec. Litig., 948
5 F.2d 1358, 1368 (2d Cir. 1991). We review a district court’s factual conclusions related to a
6 settlement agreement under the clearly erroneous standard of review, and we review de novo a
7 district court’s legal conclusions with respect to its interpretation of the terms of a settlement
8 agreement. Omega Eng’g, Inc. v. Omega, S.A., 432 F.3d 437, 443 (2d Cir. 2005).
9 B. Approval of the Settlement Agreement
10 The Self-Funded Plans contend that the District Court abused its discretion in approving
11 the Settlement Agreement because it is ambiguous and does not adequately reflect the disparate
12 damages suffered by the Self-Funded Plans as compared to insured or capitated Plans. Under
13 FED . R. CIV . P. 23(e)(1)(C), “the court may approve a settlement, voluntary dismissal, or
14 compromise that would bind class members only after a hearing and on finding that the
15 settlement, voluntary dismissal, or compromise is fair, reasonable, and adequate.” In re Masters
16 Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1026 (2d Cir. 1992).
17 With respect to the Agreement’s description of how class members calculate their
18 proportionate share, the Agreement provides that allocation of funds “shall be made primarily on
19 the basis of each settling [P]lan’s proportionate share of the total drug spend of all settling
20 plans.” Although the Agreement does not specifically define the word “primarily,” the Class
21 Notice indicates that a Plan’s “proportionate share of the total drug spend will be reduced by
22 fifty-five percent (55%) to reflect the fact that [the] Plan could not have been damaged directly
27 1 by certain of the conduct that Plaintiffs allege increase costs to Plans.” Read together, these
2 provisions indicate that allocations will be calculated “primarily” on the basis of each Plan’s
3 proportionate share of the total drug spend, but that they will be reduced by 55% for insured or
4 capitated Plans. This conclusion is supported by the explanation of the Plan of Allocation on the
5 settlement website, which is incorporated by reference into the Class Notice and the contents of
6 which appear in the record:
7 The allocation will be made primarily on the basis of each setting plan’s 8 proportionate share of the total “drug spend” of all settling plans that timely file 9 claims in the Settlement. However, the distribution for plans that did not 10 participate in Medco Health’s brand-to-brand therapeutic interchange program or 11 that paid for the cost of prescription drugs primarily through an insurance or 12 “capitated” arrangement will be reduced by 55%.
13 Medco ERISA Settlement Website, Frequently Asked Questions, How will the Settlement Fund
14 be allocated (or how will the Settlement Fund be divided)?, http://completeclaimsolutions.com/
15 erisa settlment/faq_a.html (last visited May 17, 2007). In addition, while the Class Notice does
16 not provide the “total drug spend” of the class, that figure is to be calculated by Medco after each
17 Plan submits the attached Identification Form detailing its relationship with Medco during the
18 class period. See Medco ERISA Settlement Website, Frequently Asked Questions, Who
19 calculates my “drug spend”?, http://completeclaimsolutions. com/erisa settlment/faq_a.html (last
20 visited May 17, 2007).
21 Moreover, the provisions of the Settlement Agreement explaining which claims are
22 retained by the class are not misleading. The Agreement expressly provides that it does not
23 release Medco or third-party administrators from any contract claims asserted by the parties.
24 Medco indicated during the fairness hearing that “the contract claims are carved out and are not
28 1 released” by the Agreement and that it “agrees with settling counsel that none of the contract
2 claims will be released for any of Medco’s clients and no contract claims are preempted by
3 ERISA.” As the District Court aptly noted, “[t]he Amended Settlement Agreement is clear and it
4 speaks for itself.” In re: Medco Health Solutions, Inc., 2004 WL 1243873, at *8. We are,
5 however, persuaded by the Self-Funded Plans’ contention that the Agreement fails to adequately
6 explain the allocation discount provided to the insured or capitated Plans. “[W]here, as here, the
7 district court simultaneously certifies a class and approves a settlement of the action, we will
8 more rigorously scrutinize the district court’s analysis of the fairness, reasonableness and
9 adequacy of both the negotiation process and the proposed settlement.” In re Drexel Burnham,
10 960 F.2d at 292. Notwithstanding the lengthy negotiation process leading up to the Agreement
11 upon which the District Court relied, In re: Medco Health Solutions, Inc., 2004 WL 1243873, at
12 *8, there is no indication how the 55% allocation discount was calculated or why it properly
13 reflects the relative losses suffered by the Plans. As even the District Court recognized, “[t]he
14 [Class] Notice is silent as to how the proponents of the settlement derived the insured [P]lans’
15 claim reduction of 55% relative to the claims of the self-funded [P]lans.” Id. at *4.
16 Class members had different relationships with Medco that affected the extent to which
17 they were damaged. The District Court’s conclusion that the 55% discount to insured plans was
18 fair, adequate, and reasonable did not rest on any specific factual findings or adequately explain
19 how it accounted for the difference in these relationships. The District Court held simply that the
20 Agreement “balances the equities” between self-funded and insured plans by providing the 55%
21 allocation reduction for insured Plans. In re: Medco Health Solutions, Inc., 2004 WL 1243873,
22 at *7. Although class counsel now attempt to rationalize the Plan of Allocation in their brief, we
29 1 do not have record evidence relating to the basis for the 55% reduction or the benefit of a more
2 elaborate explanation of this discount by the District Court to allow us to determine whether it
3 represents a fair, reasonable, and adequate discount.
4 In light of the foregoing, we conclude that the Settlement Agreement is not ambiguous as
5 to how the class members calculate their proportionate shares in the fund, but we remand to the
6 District Court for necessary findings and an explanation in support of any reduction in the shares
7 of the insured or capitated Plans. We note that the new subclass containing only self-funded
8 Plans will be better able to assert any challenge to the discount with the benefit of independent
9 counsel. Since the Self-Funded Plans do not challenge on appeal, as they did in the District
10 Court, the reasonableness of the size of the settlement fund, there is no need to renegotiate that
11 aspect of the Settlement Agreement; the new subclass will be free on remand to negotiate only
12 for a reallocation of the settlement proceeds, with any agreed change subject to the reasoned
13 approval of the District Court.
14 V. Attorneys’ Fees
15 A. Attorneys’ Fees for Class Counsel
16 With respect to a district court’s ruling on a fee application, “[w]hat constitutes a
17 reasonable fee is properly committed to the sound discretion of the district court and will not be
18 overturned absent an abuse of discretion, such as a mistake of law or a clearly erroneous factual
19 finding.” Goldberger v. Integrated Res., Inc., 209 F.3d 43, 47 (2d Cir. 2000) (internal citation
20 omitted); see Jones v. Unum Life Ins. Co. of Am., 223 F.3d 130, 138 (2d Cir. 2000). The
21 Supreme Court has held that when a representative plaintiff successfully establishes or protects a
22 fund in which the other class members have a beneficial interest, the costs of litigation may be
30 1 distributed among the fund’s beneficiaries. See Mills v. Elec. Auto-Lite Co., 396 U.S. 375,
2 390–95 (1970). Moreover, under the “equitable fund” doctrine, attorneys for the successful party
3 may petition for a portion of the fund as compensation for their efforts: “[A] litigant or lawyer
4 who recovers a common fund for the benefit of persons other than himself or his client is entitled
5 to a reasonable attorney’s fee from the fund as a whole.” Boeing Co. v. Van Gemert, 444 U.S.
6 472, 478 (1980).
7 In common fund cases, courts typically use either the lodestar method or the percentage
8 method to compute attorneys’ fees. The lodestar method multiplies
9 the numbers of hours expended by each attorney involved in each type of work on 10 the case by the hourly rate normally charged for similar work by attorneys of like 11 skill in the area and, once this base or lodestar rate is established, . . . [the court] 12 determine[s] the final fee by then deciding whether to take into account other less 13 objective factors, such as the risk of litigation, the complexity of the issues, and 14 the skill of the attorneys.
15 Savoie v. Merchants Bank, 166 F.3d 456, 460 (2d Cir. 1999) (internal citations and quotation
16 marks omitted). The percentage method, by contrast, calculates the fee award as some
17 percentage of the settlement fund created for the benefit of the class. See Masters v. Wilhelmina
18 Model Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007).
19 This Court has observed that the fee awarded must reflect “the actual effort made by the
20 attorney to benefit the class” and that a court is “to act as a fiduciary who must serve as a
21 guardian of the rights of absent class members.” City of Detroit v. Grinnell Corp., 560 F.2d
22 1093, 1099 (2d Cir. 1977) (internal quotation marks omitted), abrogated on other grounds,
23 Goldberger, 209 F.3d 43. Moreover, “[d]istrict courts should continue to be guided by the
24 traditional criteria in determining a reasonable common fund fee, including: (1) the time and
31 1 labor expended by counsel; (2) the magnitude and complexities of the litigation; (3) the risk of
2 the litigation . . .; (4) the quality of representation; (5) the requested fee in relation to the
3 settlement; and (6) public policy considerations.” Goldberger, 209 F.3d at 50 (internal quotation
4 marks omitted).
5 Applying these criteria, the District Court determined that the fee application requesting
6 30% of the settlement fund was reasonable. See In re: Medco Health Solutions, Inc., 2004 WL
7 1243873, at *11. The District Court applied the Goldberger test and made specific and detailed
8 findings from the record, as well as from its own familiarity with the case, including the fact that
9 counsel expended substantial time and effort in the litigation, that the case was litigated on a
10 purely contingent basis, and that the fee award was 30% of the fund as permitted by the
11 Settlement Agreement. See id. at *6–11. Accordingly, we find no reason to disturb the District
12 Court’s approval of class counsel’s application.
13 We note in passing that counsel retained to represent the interests of the new subclass on
14 remand also may be entitled to recover reasonable attorneys’ fees. We leave it to the District
15 Court’s informed discretion to determine how to accommodate a fee claim by counsel for the
16 subclass within the 30% cap provided in the Settlement Agreement.
17 B. Attorneys’ Fees for Cahn
18 With respect to Cahn’s application for fees, the District Court held that:
19 [T]he efforts of Ms. Cahn did effectuate certain improvements in the Settlement 20 Agreement which were ultimately of benefit to the class members, and . . . she is 21 therefore entitled to a reasonable fee in the nature of quantum meruit, limited to 22 the efforts actually directed towards achieving the benefits obtained. Equity 23 requires fair treatment of one who confers a benefit, even where the actor has no 24 standing and participates as an interloper or volunteer.
32 1 In re: Medco Health Solutions, Inc., 2004 WL 1243873, at *12. On appeal, Cahn claims that the
2 District Court abused its discretion by awarding her a fee based upon the theory of quantum
3 meruit instead of a percentage of recovery. We disagree.
4 The District Court correctly observed that Cahn was never the attorney for the plaintiff
5 class or the attorney of record for any settling Plaintiff who belonged to the class. Cahn neither
6 created the class action settlement nor induced Medco to accept it. Moreover, Cahn’s “assistance
7 was limited to fine tuning of provisions and documents after the Settlement had been agreed to in
8 principle.” Id. at *13. The District Court made extensive findings with respect to Cahn’s time
9 and efforts in the case and concluded that the majority did not ultimately benefit the settlement
10 fund. Id. at *14. In light of the District Court’s thorough analysis of Cahn’s involvement in this
11 case, we discern no abuse of discretion in the resulting award.
12 CONCLUSION
13 Based upon the foregoing, the judgment of the District Court is vacated insofar as it
14 certified the class without creating a subclass of the self-funded Plans and approved the
15 Settlement Agreement without setting forth the basis for the 55% allocation discount to insured
16 or capitated Plans; and the case is remanded for certification of the subclass and for necessary
17 findings and an explanation in support of any allocation discount. The judgment is affirmed in
18 all other respects.