On August 12, 2011, the Sixth Circuit released its decision in Pipefitters Local 636 Insurance Fund, et al. v. Blue Cross Blue Shield of Michigan, ___ F.3d ___, 2011 WL 3524325 (6th Cir. Aug. 12, 2011) (“Pipefitters”). On an interlocutory appeal, the court reversed an order certifying a class of hundreds of multi-employer trust funds asserting fiduciary claims arising under the Employee Retirement Income Security Act (“ERISA”). As discussed below, the decision is significant (1) for its application of the “rigorous analysis” standard and its directive that courts analyze the substantive requirements of each claim before certifying a class; (2) its finding that class treatment is not superior to other methods of adjudication where individualized inquiries are required to determine threshold issues; and (3) its decision to reverse the case rather to remand for further consideration by the trial court.
Pipefitters I: First Trip to the Sixth Circuit
In Pipefitters I, the plaintiff originally alleged that Blue Cross had violated its fiduciary duty as an ERISA administrator by imposing certain cost transfer subsidy fees to subsidize coverage for non-group insureds within the State of Michigan. Id. at *1. The plaintiffs argued that such fees were barred by statute, and that Blue Cross breached its fiduciary duty both by collecting the fee and failing to disclose what it was doing. Id. at *2. Blue Cross moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6), and the district court granted the motion. Id.
On appeal, the Sixth Circuit reversed, and set forth complex, fact-driven rules defining what constituted an ERISA fiduciary. Id. According to the court, “determining whether an administrator is a fiduciary with respect to a particular action requires a functional analysis to determine if the administrator exerted any authority or control over a fund's assets when it took the action in question. Id. at *10.
Pipefitters II: District Court’s Decision on Remand
On remand in the district court, the plaintiff moved to certify a class consisting of all similarly situated self-insured employee health and welfare benefit plans “which were improperly assessed the cost transfer” subsidy. Id. at *3. The parties also filed cross motions for summary judgment addressing the key issues in the case: Whether Blue Cross acted as an ERISA fiduciary when it assessed the fee, and whether the fee was authorized under Michigan law. Id. at *5.
Without issuing a written decision, the district court granted the plaintiff's motion for summary judgment on both issues, holding that Blue Cross was acting as a fiduciary when it assessed the fee, and that the fee was not authorized as to non-group insureds. Id. at *6-7.
In the same hearing, the district court also certified the class under Rule 23(b)(3). First, it found that Rule 23(a) was satisfied, among other reasons, because whether the fee was contrary to law was a common question, “one that [the district court] already resolved on summary judgment, and included is whether Blue Cross was a fiduciary in assessing the [fee].” Id. at *7. The court then found that Rule 23(b)(1)(A) (i.e. prosecuting separate actions would create a risk of inconsistent adjudications) was satisfied because “one court might tell Blue Cross that it was legal to assess the fee; another court might say it wasn't, and indeed, could assess the fee again.” Id.
And, the court found that Rule 23(b)(3) was satisfied, reasoning that “[c]ommon questions predominate because it's a common question whether Blue Cross controlled assets and whether the assessment was consonant with [the] Michigan statute.” Id. Blue Cross appealed pursuant to Rule 23(f).
Second Trip to the Sixth Circuit: The Sixth Circuit Reverses Class Certification
(1) There Was No “Rigorous Analysis”
The Sixth Circuit's first objection to the decision was that it failed to meet the “rigorous analysis” requirement under Rule 23(a). Id. at *9. According to the court, the issues that were certified — whether Blue Cross acted in a fiduciary capacity as to each of the hundreds of class members — “would require individualized attention” and, as a result, there was “no common contention capable of class wide resolution such 'that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke’” Id. (citing Wal-Mart Stores, Inc. v. Dukes, 564 U.S. __, 131 S.Ct. 2541, 2551 (2011)).
This holding is significant for those opposing class certification because it underscores the perils of defining common questions in abstract terms. Whether Blue Cross was a “fiduciary” only frames the question; it does not answer it. Commonality must be analyzed in light of the substantive burden of proof necessary to find liability. Here, the threshold factual inquiry — whether Blue Cross was a plan fiduciary — was complex and would vary from plan to plan. Id. The court's concern with conclusory findings of commonality is well-founded “[g]iven the huge amount of judicial resources expended by class actions, particular care in their issuance is required.” Id. (citing AT&T Mobility LLC c. Concepcion, 563 U.S. __, 131 S. Ct. 1740, 1751 (2011)). The district court's failure to consider the factual threshold of the central claim failed to satisfy the “rigorous analysis” requirement.
The decision also suggests a tactical opportunity where a court has issued rulings against a defendant on common legal issues prior to class certification. Where only individualized inquiries remain, there is a powerful argument that none of the benefits of class treatment can be achieved. Thus, early motion practice may serve a dual benefit: Either the defendant wins on the merits, or loses but gains an argument to defeat class certification later.
(2) The Class Was Not “Superior”
The Sixth Circuit also held that a class was not the superior method for fair and efficient adjudication, as required by Rule 23(b)(3). The court provided guidelines for analyzing the superiority requirement, which include “the difficulties of managing a class action,” and comparing “other means of disposing of the suit” to determine if “the expenditure of judicial time and energy” is warranted. Id. at *10.
But the court was most concerned, again, with the complexity of the initial factual inquiry. Referring to its decision in the remand of Pipefitters I — that determining whether Blue Cross acted as a fiduciary was a complex “functional analysis.” The district court was criticized for “ignoring the critical, factual threshold issue specific to each and every class member.” Id. at *11. What did the superiority analysis mean here? It “mean[t] looking at the contract terms and funding arrangements of 550 to 875 class members” to see if Blue Cross “exerted any authority or control over a fund's assets when it took the action in question.” Id. at *10.
The lesson here is that the superiority analysis, as well as its Rule 23(b)(3) counterpart of predominance, must be analyzed from the practical perspective of proof at trial. That is, merely reciting that each class member must answer the same question does not mean that each question will be answered the same way for each class member. The critical question is whether the proof required to establish the plaintiff's claim is the same for all of the other class members. Only then can “the validity of each one of the claims [be decided] in one stroke.” Wal-Mart, 564. U.S. __, 131 S. Ct. 2541, 2551.
The Sixth Circuit also noted the “irony” that the district court had already granted summary judgment on the “the only issue that was truly 'common' and certified the questions that require individualized contract-by-contract assessment.” Id. at *11. According to the court, had the district court engaged in the comparison of other methods of resolving the suit, it would have realized that “it would have been more judicially efficient to enter a final judgment in the individual action so as to allow [Blue Cross] to file an appeal.” Id. Depending on the outcome of the appeal, “other potential class members could then decide whether to pursue an individual suit against [Blue Cross] depending on . . . the individual contractual relationship each class member has with [Blue Cross].” Id.
This observation suggests that early dispositive motion practice may provide creative opportunities for those defending class action claims. A defense victory will dispose of the suit, while a defense defeat may provide a “superior” method of adjudication: Appeal and finality.
(3) Reversed, Not Remanded
Perhaps the most significant aspect of the Pipefitters opinion was the court's decision to reverse the case, rather than to remand for further proceedings. The court acknowledged that the “normal” course would have been to remand, but “the record is clear that a class action is not a superior method of adjudication.” Id. at *9. The dissent noted this departure from “normal” practice and would have remanded because, in his view, “the record is devoid of certain essential facts,” —whether Blue Cross used a form contract with all other plans — and that “we simply have no way of knowing the extent to which individualized inquiry is necessary to adjudicate class members' claims.” Id. at *16.
The majority's decision to reverse is of real significance to defendants taking interlocutory appeals under Rule 23(f). Pipefitters suggests that in an appropriate case, the Sixth Circuit will be willing to end the class proceedings at the appellate level, thus saving the parties time and money in remand proceedings. The decision may also suggest a practical judgment that the cost of class litigation — both to the court and the litigants — simply does not justify the cost of continued trial proceedings where the flaws in the class analysis are primarily legal in nature. An exhaustive factual record may not be necessary where the substantive legal burden is inherently fact-specific. District courts may be encouraged by Pipefitters to rigorously examine not only the legal issues, but also to consider ever more thoroughly the alternatives to class adjudication that the substantive legal burdens suggest.
But the most practical lesson is this: If an order certifying a class is accepted for interlocutory appeal, Pipefitters provides authority for asking for reversal, and avoiding remand.