Case 2:01-cv-04183-FSH-PS Document 898 Filed 09/12/14 …...Case 2:01-cv-04183-FSH-PS Document 898 Filed 09/12/14 Page 1 of 128 PageID: 35604 ~MONTGOMERY McCRACKEN ATTORNEYS AT LAW

Case 2:01-cv-04183-FSH-PS Document 898 Filed 09/12/14 Page 1 of 128 PageID: 35604

~MONTGOMERY McCRACKEN ATTORNEYS AT LAW

PauiH. Zoubek Admitted in New Jersey, Pennsylvania & New York

Via Hand Delivery and Electronic Filing

The Honorable Faith S. Hochberg

LibertyView, Suite 600 457 Haddonfield Road Cherry Hill, NJ 08002-2220

September 12, 2014

United States District Court for the District of New Jersey M.L. King, Jr. Federal Building & U.S. Courthouse 50 Walnut Street, Room 5037 Newark, NJ 07102

Re: Zev Wachtel, et al. v. Health Net, Inc., et al. Civil Docket No. 01-4183 (FSH)

Renee McCoy v. Health Net, Inc., et al. Civil Docket No. 03-1801 (FSH)

Scharfman, et al. v. Health Net, Inc., et al. Civil Docket No. 05-0301 (FSH)

Dear Judge Hochberg:

856-488-7700 Main 856-488-7731 Direct 856-488-7720 Fax [email protected]

This Report and Recommendation is being submitted pursuant to Fed. R. Civ. P. 53 and the Court's Order of August 13, 2013. Wachtel (Doc. No. 895); McCoy (Doc. No. 899); Scharfman (Doc No. 126). The Court's Order directed me as follows:

On August 13, 2013, the Court "having received the parties' consent to the appointment of a Special Master and their recommendation of Paul H. Zoubek, Esq." entered an Order appointing Paul H. Zoubek as Special Master under Federal Rule of Civil Procedure 53 for the following purposes:

a. to conduct factual inquiry into the reasons for the length of time that elapsed between the Final Order and Opinion approving the Settlement in 2008 and the submission of the Motion to Amend the Settlement in 2012, including the reasons for the disputes, the merits of the disputes, and whether they could have been resolved in a more expeditious manner;

MONTGOMERY McCRACKEN WALKER IS. RHOADS L LP

PENNSYLVANIA • NEW YORK • NEW .JERSEY • DELAWARE

A PENNSYLVANIA liMITED LIABILITY PARTNERSHIP

LOUIS A. PETRONI, NEW JERSEY RESPONSIBLE PARTNER


Montgomery McCracken Walker & Rhoads LLP

The Honorable Faith Hochberg September 12, 2014 Page 2

b. to conduct a factual inquiry into why no partial distributions were made from the Settlement Fund until after the hearing on May 29, 2013;

c. to conduct a factual inquiry into Health Net's rejections of claims against the Prove-Up Fund, including a statistical sampling of the rejections, to determine whether they were legitimate and made in good faith;

d. to issue a recommendation as to whether Class Counsel should be replaced or ordered to repay any or all of the counsel fees it received based on the amount of the original Settlement and any diminution to date;

e. to issue a recommendation as to whether sanctions should issue or any other disciplinary actions taken against either side, either Health Net or Class Counsel, on any grounds within the authority of this Court[.]

Wachtel (Doc. No. 895); McCoy (Doc. No. 899); Scharfman (Doc No. 126) at 2.

The Report and Recommendation addresses the Court's directives above and analyzes the relevant facts, procedural history and applicable law. A copy of the Appendix is being filed electronically with this Report. A hard copy of the Report and Appendix will be delivered to the Court as well.

PHZ:plh

En c.

cc: via e-mail without Appendix: Jay H. Calvert, Jr., Esquire Marc I. Gross, Esquire Kevin P. Roddy, Esquire


WACHTEL, et al.,

v.

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

Plaintiffs, CIVIL ACTION No. 01-4183 (FSH)

HEALTH NET, INC., et al., Defendants.

McCOY, et al., Plaintiffs, CIVIL ACTION No. 03-1801 (FSH)

v.


SCHARFMAN, et al., Plaintiffs, CIVIL ACTION No. 05-0301 (FSH)

v.


REPORT AND RECOMMENDATION OF SPECIAL MASTER PAUL H. ZOUBEK, ESQ.


TABLE OF CONTENTS

Page

I. PROCEDURAL HISTORY ............................................................................................... 1

A. The Wachtel, McCoy and Scharfman Actions ....................................................... 1

B. Mediation and Settlement ....................................................................................... 3

C. Motion to Approve Amendment to Settlement Agreement.. .................................. 5

D. Special Master Appointment and Investigation ...................................................... 8

II. FACTUAL BACKGROUND ........................................................................................... 17

A. Settlement Agreement (March 2008) ................................................................... 17

1. Establishes $175 Million Cash Settlement Fund for Group A Claims ....................................................................................................... 17

2. Establishes $40 Million Prove-Up Settlement Fund for Group B and C Claims ............................................................................................ 18

3. Provides For Two Separate Administrators .............................................. 20

B. Engagement of Berdon Claims Administration LLC (May 2008) ....................... 21

C. Mailing of Notice, Proof of Claim Form, and Blue Sheet (May-June 2008) ....... 23

D. Assistance Provided by Berdon and Class Counsel to Class Members During Initial Reply Period (Summer 2008) ........................................................ 25

E. Response Rate ....................................................................................................... 28

F. Berdan's Intake, Identification and Initial Review of the 31,000 Prove-Up Settlement Claims ........................................................................................... 28

G. Deficiency Review ............................................................................................... 30

1. Need for Deficiency Review and Cure Period Discovered ...................... 30

2. Health Net Agrees to Conduct Deficiency Review .................................. 34

3. Parties Begin to Negotiate Rules for Health Net Deficiency Review ...................................................................................................... 36

4. Exchange of Draft Deficiency Letters and Database ................................ 41

H. Cure Period ........................................................................................................... 44

I. Health Net's Final Adjudication of Group Band C Claims ................................. 52

J. Health Net's Discharge Report. ............................................................................ 55

K. Health Net's Final Prove-Up Report .......................................................... , ......... 55

L. Parties Attempt to Resolve Issues Revealed Following Final Prove-Up Report ............................................................................................................ , ...... 56

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TABLE OF CONTENTS (continued)

Page

M. Berdon' s Review of Group B and Group C Claims ............................................. 61

N. Discussions Regarding a Partial Distribution of Cash Settlement Fund .............. 63

0. Health Net Issues Revised Final Prove-Up Report .............................................. 65

P. Mediation .............................................................................................................. 66

Q. Class Counsel's Motion to Amend the Settlement, the Fairness Hearing and Appointment of Special Master ..................................................................... 66

III. APPLICABLE LEGAL STANDARDS ........................................................................... 66

A. Class Action Settlements and Claims Administration .......................................... 66

1. Class Action Litigation ............................................................................. 66

2. Duties of Class Counsel. ........................................................................... 67

3. Duties of Defense Counsel ....................................................................... 70

4. Claims Administration .............................................................................. 72

5. Scope and Authority of the Special Master .............................................. 76

(a) Court's Authority to Supervise Class Action Settlements ............ 76

(b) Order Appointing Special Master ................................................. 76

(c) Authority to Appoint Special Master.. .......................................... 77

B. Counsel Fees and Benefit to the Class .................................................................. 79

1. Fee Award in McCoy v. Health Net ......................................................... 79

2. Percentage of Total Fund Versus Actual Payout to Claimants ................ 83

3. Class Counsel Fees and Reversionary Prove-Up Settlement Funds ......... 86

4. Relationship Between the Payment to Class Members and the Counsel Fees Awarded ............................................................................. 87

IV. DISCUSSION ................................................................................................................... 92

A. What Were the Reasons for the Length of Time that Elapsed between the Final Order and Opinion Approving the Settlement in 2008 and the Submission of the Motion to Amend the Settlement in 2012, including the Reasons for the Disputes, the Merits of the Disputes, and Whether They Could Have Been Resolved in a More Expeditious Manner ................................ 92

1. The Bifurcated Administration Process Was the Source of Many Misunderstandings and Considerable Delay ............................................ 93

2. Negotiating a Deficiency/Cure Period (August 2008 to October 2008) ......................................................................................................... 95

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(a) The Settlement Agreement Did Not Explicitly Provide for a

Page

Deficiency/Cure Period ................................................................ 95

(b) Health Net's Position .................................................................... 95

(c) Class Counsel's Position .............................................................. 96

(d) The Discovery of the Dispute Regarding Cure Period ................. 97

(e) The Reasonableness of the Parties' Positions with Respect to Whether There Was a Cure Period ........................................... 99

3. Negotiating the Parameters for the Deficiency Review, Deficiency Letters and Cure Submissions (November 2008 to November 2009) ....................................................................................................... 104

(a) The Issues Disputed and Addressed with Respect to the Terms and Scope of the Deficiency Review/Cure Period .......... 1 05

(b) The Reasonableness of the Parties' Positions with Respect to the Terms and Scope ofthe Deficiency Review and Cure Period .......................................................................................... 105

4. The Cure Period (November 2009-February 2010) ............................... 106

(a) Disputes Arising During the Cure Period ................................... 1 07

5. The Adjudication Period (February 2010-0ctober 15, 2010) ................ 108

6. Negotiating Issues after the Issuance of the Final Prove-Up Report (November 2010 to January 2012) ......................................................... 109

7. The Dispute Relating to Class Members Who Received Incomplete or No Notice of their Claims as a Result of Health Net's Programming Logic Issues ..................................................................... 11 0

(a) Overview of the Programming Logic Issues .............................. 11 0

(b) Description of First Programming Logic Issue (the MC400 Systetn) ....................................................................................... 111

(c) Description of Second Programming Logic Issue (the ABS System) ....................................................................................... 112

(d) Description of Third Programming Logic Issue (the MHN System) ....................................................................................... 114

(e) The Negotiation of Class Counsel's Demands for Health Net to Pay for Additional Class Notices and Additional Settlement Funds Relating to the Programming Logic Issues .......................................................................................... 114

-lll-



Page

(f) The Parties' Positions ................................................................. 116

(1) Class Counsel's Position ................................................ 116

(2) Health Net's Position ...................................................... 117

(g) The Potential Value ofthe Unnoticed and Under-Noticed Claims ......................................................................................... 118

(h) The Section 5 Balance Bill Amount for Claim Lines Where Class Members Received Incomplete Notices (the Under-Noticed Claims) .......................................................................... 119

(i) The Section 5 Balance Bill Amount for Claims Where Class Members Received No Notice (the "Unnoticed Claims) ........................................................................................ 120

(j) The Increase in the Potential Section 5 Balance Bill Amounts for all Claim Lines that Were Affected by the Programming Logic Issues and Are Eligible .............................. 120

(k) Discussion ................................................................................... 122

8. The Dispute over Whether ASO Subscribers were Wrongfully Excluded from the Wachtel, McCoy, and Scharfman Classes ............... 123

(a) The Parties' Positions on Whether ASO Subscribers Were Included in Class ........................................................................ 129

(1) Class Counsel's Position ................................................ 129

(2) Health Net's Position ...................................................... 131

(b) The Resolution ofthe ASO Issue ............................................... 132

(c) The Maximum Exposure if the ASO Members Requested To Be Noticed Filed Claims ....................................................... 13 3

(d) Maximum Exposure for Cash Settlement Fund Claims ............. 133

(e) Maximum Exposure for Prove-Up Settlement Fund Claims ...... 134

(f) Discussion ................................................................................... 134

9. The Section 6 Dispute (January 2010-January 2012) ............................. 137

(a) Background ................................................................................. 137

(b) Section 6 Deficiency Was Discussed in 2008 and 2009 During Negotiations Regarding Scope of Deficiency Review ........................................................................................ 139

(c) Section 6 Deficiency Was Included in Deficiency Letters ......... 141

-IV-



Page

(d) The Scope and Application ofthe July 2, 2009 Agreement ....... 142

(e) The Statistics Regarding Claims Rejected for Failure to Populate Section 6 ...................................................................... 14 3

(f) Discussion of the Reasonableness of the Parties' Positions on the Section 6 Issue ................................................................. 14 5

10. The Member Responsibility Dispute (February 2011-January 2012) ....................................................................................................... 147

(a) Background ................................................................................. 147

(b) The Parties' Positions on the Definition of Balance Bill and the Application of Member Responsibility ................................ 148

(c) Applying the Definition of Balance Bill Consistent with the Settlement Agreement ................................................................ 149

(d) Class Counsel's Objection to Purported Double Dipping .......... 151

(e) The Member Responsibility Amount ......................................... 154

(f) Analysis of Issue ......................................................................... 154

11. The Parties' Agreement Subsequent to Mediation With Respect to an Additional $6.25 Million Payment to the Cash Settlement Fund and How that Payment May Impact the Four Issues Mediated .............. 155

12. Whether the Disputes Between the Parties Could Have Been Resolved in a More Expeditious Manner ............................................... 157

(a) Delays in Connection with Negotiating the Deficiency Review ........................................................................................ 157

(b) Delay in Investigating and Resolving Issues Relating to the Administration of Group B and C Claims .................................. 160

B. Factual Inquiry Into Why No Partial Distributions Were Made From the Cash Settlement Fund Until After the Hearing on May 29, 2013 ...................... 163

C. Factual Inquiry Into Health Net's Rejections of Claims Against the ProveUp Settlement Fund, Including a Statistical Sampling of the Rejections, to Determine Whether They were Legitimate and Made in Good Faith ................ 171

1. Overview of The Results of My Factual Investigation and the Statistical Analysis and Claims Review ................................................. 171

2. The Factual Investigation into the Reasons for Rejections and Why So Few Claims Were Proven Up and Whether Health Net's Rejections Were Legitimate and Made in Good Faith ........................... 173

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3. Statistical Sampling and Review of The Prove-Up Settlement Fund

Page

Claims by EisnerAmper .......................................................................... 177

(a) The Engagement ofEisnerAmper .............................................. 177

(b) Guidance Provided to Eisner Am per ........................................... 177

(c) The Eisner Am per Report ............................................................ 181

(1) Claims Characterized as Having No Eligible Claim Lines ............................................................................... 182

(2) Claims Characterized as Having at Least one Eligible Claim Line and No Documentation Attached ("Claims with No Documentation") ................ 183

(3) Claims Characterized as Having Documentation and at Least One Eligible Line and Some Documentation ("Claims with Documentation") ........... 184

(4) The Calculation of the Total Under-Proven Claim Amount with Respect to the 400 Claims ........................ 186

(5) The Non-Parametric Testing .......................................... 188

4. Reasons for Rejections and Why So Few Claims Were Proven Up ...... 189

(a) Claimants Often Failed to Indicate Whether their Claims were Intended to Be Adjudicated as Group A, B or C Claims at Section 6 or Explicitly Indicated that only Some and Not All of the Claim Lines in their Claim Should Be Adjudicated under the Prove-Up Settlement Fund ..................... 192

(b) Failure of Class Counsel and Berdon to Provide Assistance to Most of the Claimants Requesting Help on their Proof of Claim Form or Blue Sheet in Obtaining Documents from their Providers ............................................................................. 194

(1) Even Where Berdon Made Efforts to Assist in Obtaining Records from Providers, Berdan's Efforts Were Limited and the Rate of Return on the Requests to Providers Was Low ..................................... 202

(2) The Relatively Small Number of Cure Documents Submitted ........................................................................ 204

(3) Evidence of Assistance Provided by Class Counsel and Berdan in the Sample of 250 Claims with No Documentation ................................................................ 205

-Vl-



(c) Evidence of Assistance Provided by Class Counsel and

Page

Berdon in the Sample of 400 Claims with Documentation ........ 206

(d) Other Potential Explanations for the Low Prove-up of Claims: Potential Confusion by Claimants as to the Difference between Group A and Group B and Group C Claims and the Need for Documentation under the Prove-Up Settlement Fund .................................................................... 208

D. Should Class Counsel Be Replaced or Ordered to Repay Any or All of the Counsel Fees it Received Based on the Amount of the Original Settlement and any Diminution to Date ................................................................................ 209

1. Class Counsel's Position ........................................................................ 21 0

2. Recommendation of the Special Master as to the Replacement of Class Counsel and the Repayment of Attorneys' Fees ........................... 213

(a) Rule 60 Permits the Court to Provide Relief if Warranted by Extraordinary Circumstances or Fraud on the Court ............. 214

(1) Federal Rule of Civil Procedure 60 ................................ 214

(i) ReliefUnder60(b)(6) ......................................... 217

(ii) Relief Under 60(d)(3) ......................................... 218

(2) Neither Fraud Nor Extraordinary Circumstances Exist As Required for Rule 60 Relief.. ........................... 219

(i) Class Counsel's Conduct .................................... 220

(ii) Reversion of the Prove-Up Fund Does Not Result in a Disproportionate Allocation of Fees Creating an Extraordinary Circumstance ...................................................... 224

(b) Class Counsel Should Not Be Replaced ..................................... 226

E. Should Sanctions Issue Or Any Other Disciplinary Actions Be Taken Against Either Side, Either Health Net or Class Counsel, on Any Grounds Within the Authority of this Court ..................................................................... 228

1. Health Net ............................................................................................... 230

2. Class Counsel ......................................................................................... 233

V. CONCLUSION .............................................................................................................. 241

-vii-


I. PROCEDURAL HISTORY

A. The Wachtel, McCoy and Scharfman Actions

On July 23,2001, Plaintiffs Zev Wachtel and Linda Wachtel, individually and on behalf

of their minor son, Tory Wachtel, filed a Complaint against Defendants Guardian Life Insurance

Company of America, Physicians Health Services, Inc. and Physicians Health Services ofNew

Jersey, Inc. in Superior Court ofNew Jersey, Bergen County claiming that Defendants breached

their obligation to make payments to Plaintiffs consistent with Plaintiffs' health plan for health

care costs related to their son. Wachtel et al. v. Guardian Life Ins. Co. of Am. et al., Superior

Court ofNew Jersey, Law Division, Bergen County, Docket No. L-6153-01. The Complaint

was filed by Barry M. Epstein of Sills Cummis Radin Tischman Epstein & Gross, P.A. ("Sills

Cummis"). On August 31, 2001, Defendants filed a Notice of Removal in the United States

District Court for the District of New Jersey. Wachtel v. Guardian Life Insurance Co. of Am.,

No. 01-4183 (D.N.J. Aug. 31, 2001) ("Wachtel"), Doc. No. 1. The matter was referred to the

Honorable FaithS. Hochberg on September 4, 2001. (Wachtel Doc. No.2.)

On April23, 2003, Plaintiff Renee McCoy filed an action against Defendants Health Net,

Inc., Health Net of the Northeast, Inc. and Health Net ofNew Jersey, Inc. in the United States

District Court for the District ofNew Jersey. McCoy v. Health Net, Inc., et al., No. 03-1801

(D.N.J. Apr. 23, 2003) ("McCoy"), Doc. No. 1. The McCoy Complaint was also filed by Mr.

Epstein of Sills Cummis with Pomerantz Haudek Block Grossman & Gross LLP ("Pomerantz")

as co-counsel. On August 11, 2003, Plaintiff McCoy filed an Amended Class Action Complaint

alleging that the Health Net Defendants "deprived their beneficiaries of appropriate out-of

network reimbursement for medical services by implementing a variety of unauthorized policies

and procedures." (McCoy Doc. No. 20.)


On August 5, 2004, Judge Hochberg entered an Order consolidating the Wachtel and

McCoy cases for trial and granting class certification. (McCoy Doc. Nos. 69 and 72.) 1 On June

30, 2006, the Third Circuit vacated the Court's August 5, 2004 Order and remanded it to the

District Court "for a definition of the claims, issues, or defenses to be treated on a class basis."

Wachtel v. Guardian Life Ins. Co. of Am., 453 F.3d 179, 190 (3d Cir. 2006). The Court issued a

new class certification order on September 25, 2006, in which it set forth the claims, issues, or

defenses to be treated on a class basis, but did not alter the class definitions given in the August

5, 2004 opinion. (Wachtel Doc. No. 551.)

The Court certified the Wachtel and McCoy classes as follows:

All persons in the United States who are, or were, from April 1997 to August 2004 subscribers or beneficiaries in any large or small employer plan, other than in a New Jersey small employer plan, who received medical services or supplies (including, inter alia, surgery, anesthesia, and the like) from an out-of-network provider and for whom Defendants made reimbursement determinations less than the providers' actual charge (the "Wachtel Class").

All persons in the United States who are, or were, from July 1995 through August 2004, subscribers or beneficiaries in any New Jersey small employer plan, who received medical services from an out-of-network provider and for whom Defendants made reimbursement determinations less than the providers' actual charge (the "McCoy Class").

(Wachtel Doc. No. 89.)

On January 13, 2005, Plaintiffs Stuart Scharfman and Joseph I. Tabacco filed a Class

Action Complaint against Health Net, and an Amended Complaint was filed on March 12, 2007.

Scharfman et al. v. Health Net, Inc. et al., No. 05-301 (D.N.J. Jan. 13, 2005) ("Scharfman"),

Doc. No. 1, 20. The Scharfman action, like Wachtel and McCoy, was filed by the Sills Cummis

and Pomerantz firms. The Scharfman Complaint included claims arising under ERISA as well

On March 22, 2004, Guardian Life Insurance Company was dismissed by stipulation of the parties. The case proceeded against Health Net, Inc. and its subsidiaries. (Wachtel Doc. No. 121.)

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as under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S. C.

§§ 1962(c) and 1964(c). A Second Amended Complaint was filed on August 7, 2007, which

revised the definition of the RICO class. (Scharfman Doc. No. 54.)

B. Mediation and Settlement

In August 2007, the parties advised the Court that they had reached a settlement in

principle that encompassed the Wachtel, McCoy, and Scharfman actions. From August 2007 to

April 2008, the parties continued to negotiate the terms ofthe settlement, including

comprehensive business practice changes. On March 13, 2008, the parties executed a Settlement

Agreement, and on April 17, 2008, Plaintiffs filed a Motion for Preliminary Approval of the

Class Settlement, Certification of the Proposed Scharfinan Settlement Classes, and Approval of

the Form and Manner ofNotice to the Classes. (McCoy Doc. No. 835.)

The Court conducted a preliminary fairness hearing on April 24, 2008 and a final fairness

hearing on July 24, 2008, at which time the Court approved the Settlement, certified the

Scharfman class, and approved the award of counsel fees and expenses. (McCoy Doc. No. 877

at 39-40.) On July 24, 2008, the Court entered a Final Order finding that the Scharfman ERISA

class and the Scharfman RICO class met all of the requirements of Federal Rule of Civil

Procedure 23(a) and (b)(3), approving the Settlement Agreement and Plan of Allocation,

awarding Wilentz, Goldman & Spitzer ("Wilentz")2 and Pomerantz, as class counsel, attorneys'

fees totaling $69,720,000 and costs and expenses totaling $1,725,337.06, together with interest,

approving Plaintiff incentive awards and dismissing all claims with prejudice. (McCoy Doc. No.

870.) Pursuant to the Order, the Scharfman classes were defined as follows:

Mr. Epstein and Ms. Quackenbos left Sills Cummis in 2006 to join Wilentz. Barry Epstein Transcript ("Epstein Tr.") at 7:24-25; 8:2-9 (App. Tab 80). Wilentz subsequently became class counsel after Ms. Quackenbos and Mr. Epstein joined the firm

-3-


I d.

All persons in the United States who are, or were, from September 1, 2004 through July 31, 2007, members in any large or small employer plan insured by Health Net, and subject to ERISA, who received medical services or supplies (including, inter alia, surgery, anesthesia, and the like) from an Out-of-Network Provider and received reimbursement of less than the provider's billed charge (the "Scharfman ERISA Class"); and

All persons in the United States who are, or were, from September 1, 2004 through July 31, 2007, members in any large or small employer plan, or any individual and family plan, insured by Health Net, who received medical services or supplies (including, inter alia, surgery, anesthesia, and the like) from an Out-ofNetwork Provider and received reimbursement of less than the provider's billed charge that was determined by Health Net, Guardian or a third party vendor applying Health Net's out-of-network claims practices, including the use of Ingenix data (the "Scharfman RICO Class").

Judge Hochberg issued an Opinion on August 8, 2008. (McCoy Doc. No. 872.) The

Court stated that the "instant Settlement comes after seven years of extraordinarily contentious

litigation" and is "among the largest ERISA health insurance settlements on record." Id. at 3, 5.

Judge Hochberg noted that the "Wachtel and McCoy cases are two of the oldest on this Court's

docket. The litigation has been fierce and without respite, through several changes of defense

counsel. ... In sum, it gives new meaning to the term 'scorched earth' litigation tactics." Id. at

3. The Court continued by referring to its opinion following a ten-day Rule 37 Integrity Hearing

in which Health Net was sanctioned for certain discovery abuses. Id. at 3-4 (citing Wachtel v.

Health Net, Inc., 239 F.R.D. 81, 84 (D.N.J. 2006)). There, the Court stated that "Health Net's

repeated and unabated discovery abuses and lack of candor leave this Court no other choice in

order to protect the integrity of the judicial process, remedy the prejudice suffered by Plaintiffs,

punish the wrongdoers, and accord a measure of relief to the other parties and counsel in this

case." Wachtel, 239 F.R.D. at 84.

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C. Motion to Approve Amendment to Settlement Agreement

From 2008 to 2012, the parties worked to administer the Settlement. The "fierce" and

"contentious litigation" continued throughout the administration process and resulted in a

number of disputes between the parties. On January 26 and 27, 2012, the parties participated in

mediation with the Honorable John J. Hughes (ret.) serving as the mediator. As a result of the

mediation, Health Net agreed to pay an additional $6.25 million towards the Settlement in

exchange for a complete release of all past and future liability arising under the Settlement and

its administration.

On April 20, 2012, class counsel filed a Motion to Approve the Amendment to the

Settlement Agreement and Related Matters ("Motion to Amend Settlement"), in which counsel

sought the following relief: (1) approval of the amendment to the Settlement Agreement; (2)

mailing of a cover letter, amended notice, proof of claim, and release form, and list of eligible

services to subscribers of Health Net who did not previously receive individual notice or

received individual notice that contained incomplete claims data; (3) approval of the

recommendations of Berdan Claims Administration LLC ("Berdan") regarding recognition and

rejection of previously-filed Group A claims; ( 4) distribution of 50% of the Cash Settlement

Fund to approved Group A Claims now, or alternatively, the postponement of the distribution

until all Group A Claims are filed and processed, including those Group A Claims submitted by

class members who will receive the amended notice; and ( 5) partial payment of fees and

expenses due to Berdan. (McCoy Doc. No. 878-1.)

On June 5, 2012, the Court conducted a fairness hearing with respect to the $6.25 million

amendment to the Settlement. Class counsel explained that the "reason for that additional money

is because we are including additional class members who were not included in the first noticing,

largely because of some computer screw-ups." (McCoy Doc. No. 882 at 3:16-19.) Class

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counsel stated that the Prove-Up Settlement Fund "process turned out to be extremely laborious

and difficult and complex, much more so than we realized when we submitted that initial

settlement to Your Honor. Having lived it and learned it, we decided the best thing to do would

be to just get that additional money into the cash settlement and get that money out to all of the

class members in the fairest and best way that we can." I d. at 4: 10-17.

On March 6, 2013, the Court entered an Order requesting additional information

including the total amount of money distributed to Group A, B, and C claimants to date, whether

any attorneys' fees had been paid to class counsel from the Cash Settlement Fund, and if so, to

what extent, and a full explanation of what other distributions, if any, had been made from the

Cash Settlement Fund and the Prove-Up Settlement Fund. (McCoy Doc. No. 884.) On March 8,

2013, class counsel provided certified responses to the Court's March 6th request for additional

information. (McCoy Doc. No. 885.) Class counsel advised that Health Net transferred

$937,659.99 from the $40 million Prove-Up Settlement Fund to the Cash Settlement Fund to be

used to compensate proven Group B Claims. I d. at 3. Class counsel also advised the Court that,

to date, Health Net had paid $132,393.61 for Group C Claims and that the additional non

reversionary $6.25 million would be made available first to Group B and C claimants, and then

to Group A claimants. Id. at 2. Finally, class counsel also advised that it had received attorneys'

fees and expenses in the amount of$72,387,530.72. Id.

On May 29, 2013, the Court held a hearing among the parties due to "very grave

concerns about the amendment and what it does." (McCoy Doc. No. 894 at 2:23-24) (App. Tab

89). The parties advised the Court that a "million one, million two" had been paid out of the $40

million Prove-Up Settlement Fund and that approximately $50 to $60 million in claims were

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submitted? Id. at 5:20; 7:14-18; 7:23-25; 8:1-4; 9:22-25; 10:1. The Court expressed concern

about approving the $6.25 million amendment and releasing Health Net of the $39 million

liability remaining in the Prove-Up Settlement Fund without knowing whether the fund was

administered fairly. Id. at 46:4-11. The Court advised that a Special Master would be appointed

to conduct an audit and determine whether the Prove-Up Settlement Fund had been administered

fairly. Id. at 11:12-14.

The Court additionally expressed concern regarding the $60 million in eligible claim

lines that the parties had estimated were properly rejected by Health Net as not proven up and

which would be returned to the Cash Settlement Fund for treatment as Group A claims. The

Court questioned whether these claim lines were properly being sent to the Cash Settlement Fund

after being rejected from the Prove-Up Settlement Fund. Id. at 6:24-11:12.4

The Court further expressed concern as to why it took the parties four years to go to

mediation and not seek a partial distribution during that time. Id. at 21:20-23; 22:8-23. The

Court explained that "what you've done is not fair to this class, on both sides. It's not fair to this

class. There's no good reason, unless the claims administrator can tell me why, why you

couldn't do a partial distribution a long, long, long time ago." Id. at 23:1-5. The Court directed

The representation that "approximately $50 to $60 million in claims were submitted" to the Prove-Up Settlement Fund, without further explanation, is misleading. This number, frequently quoted by the parties, represents the potential amount that could have been proven, if every claimant with eligible claim lines produced documentation for every eligible claim line on his Proof of Claim Form and proved every eligible claim line. As explained further infra at Section IV.C, it was highly unlikely based on the claims submitted that this amount of claims could ever have been proved up. Indeed, the amount ultimately proven up was only a small fraction of the $50 to $60 million.

As discussed infra at Section IVA.( a), thousands of the claim lines ended up being sent to the Prove-Up Settlement Fund for adjudication and then rejected. Many of these claim lines, however, were never intended by the claimant to be sent to the Prove-Up Settlement Fund or had no documents attached, a requirement under the ProveUp Settlement Fund. Accordingly, many of the claim lines rejected by the Prove-Up Settlement Fund arguably should never have been sent there in the first place.

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the parties to immediately issue a 50% or greater partial distribution to the Group A claimants.

Id. at43:17-23.

D. Special Master Appointment and Investigation

On May 30, 2013, the Court entered an Order to Show Cause as to why a Special Master

should not be appointed to review the issues discussed on the record on May 29, 2013. (McCoy

Doc. No. 888.) On May 31,2013, the Court entered an Order requiring a "partial distribution of

the Cash Settlement Fund in the amount of 50% or greater." (McCoy Doc. No. 890.) The

parties were also ordered to "inform the Court when the distribution takes place." Id. On June

19, 2013, the parties submitted a joint report to the Court advising that "checks representing all

of the Group B Prove-Up Claims approved to date were mailed" and that "checks representing

partial payment of all Group A Claims approved to date will start being mailed on June 19, 2013,

and will be completed before the end of next week." (McCoy Doc. No. 893.) The parties

advised the Court that the average Group A check totaled $530.75, the largest of which was

$207,306.17 and that the average Group B check totaled $1,019 .42, the largest of which was

$17,687.50. Id.

On August 13, 2013, the Court "having received the parties' consent to the appointment

of a Special Master and their recommendation of Paul H. Zoubek, Esq." entered an Order

appointing me as Special Master under Federal Rule of Civil Procedure 53 for the following

purposes:



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d. to issue a recommendation as to whether Class Counsel should be replaced or ordered to repay any or all of the counsel fees it received based on the amount of the original Settlement and any diminution to date;

e. to issue a recommendation as to whether sanctions should issue or any other disciplinary actions taken against either side, either Health Net or Class Counsel, on any grounds within the authority of this Court[.]

(McCoy Doc. No. 899 at 2.)

On August 20, 2013, I conducted a teleconference with the parties to discuss scheduling

issues, initial requests for information, and the procedures to be followed in this matter. The

following day, I sent a letter to counsel confirming my request that the parties provide an

overview of the "key events, obstacles, disputes and delays which arose after August 2008 in

administering the Settlement," my request that all records and communications be preserved and

that an in-person conference would be held on September 4, 2013.5 Letter from Special Master

to Parties (Aug. 21, 2013) at 2 (App. Tab 134 ). At the September 4, 2013 conference, the parties

provided an overview of the settlement administration process, including the initial claims

review process and the administration of the Prove-Up Settlement Fund.

On September 3, 2013, I was advised by Mr. Epstein and his colleague, Barbara Quackenbos, that they were no longer associated with the Wilentz firm, but that they were "ready and willing to cooperate" with any request for information. Apparently, Mr. Epstein and Ms. Quackenbos left Wilentz in July 2013. See Barbara Quackenbos Transcript ("Quackenbos Tr.") at 9:13-14 (App. Tab 85). Mr. Epstein and Ms. Quackenbos were asked to produce all responsive documents and they were advised of and invited to attend all proceedings. Ms. Quackenbos attended several of the witness interviews. I also interviewed Mr. Epstein and Ms. Quackenbos as part of my investigation. Mr. Epstein testified that when he and Ms. Quackenbos left Wilentz they withdrew from the case and thus, they no longer represent the class. Epstein Tr. at 9:10-21; 1 0:4-19; 11:3-13 (App. Tab 80). Mr. Epstein stated that the Health Net litigation remained with Wilentz. I d. at 9:17-21. No withdrawal of appearance, however, was filed by Mr. Epstein or Ms. Quackenbos on the docket in Wachtel, McCoy, or Scharfman.

As ofthe beginning of2014, class counsel, Brian Hufford, Esq., was no longer associated with Pomerantz. As of May 2014, class counsel, Robert Axelrod, Esq., was no longer associated with Pomerantz.

-9-


On September 6, 2013, following the in-person conference, I sent the parties a second

extensive request for documents and scheduled a second informational session for September 19,

2013.6 Letter from Special Master to Parties (Sept. 6, 2013) (App. Tab 135). I held additional

informational sessions with the parties on September 26, October 7, and October 8, 2013 for

purposes of gaining an understanding of the factual background of the case. I sent additional

requests for documents to the parties following the informational sessions, including requests

made on September 30,2013 (Letter from Special Master to Parties (Sept. 30, 2013) (App. Tab

136)), requests made at the witness interviews on January 7 and January 16, 2014 (and reiterated

in a letter to the parties dated January 21,2014 (Letter from Special Master to Parties (Jan. 21,

2014) (App. Tab 143)) and requests made on March 17, 2014. Letter from Special Master to

Parties (Mar. 17, 2014) (App. Tab 151). In total, the parties produced approximately41,317

documents, two databases, and thousands of claim files.

Between October 22,2013 and March 12,2014, I held nineteen days of evidentiary

hearings in which I interviewed under oath personnel from Berdan, the Claims Administrator;

personnel from Rust Consulting, Inc. ("Rust Consulting" or "Rust"), the firm that adjudicated the

claims for Health Net; class counsel and former class counsel from Wilentz and Pomerantz; and

outside counsel for Health Net. The following individuals were interviewed on the dates

indicated:

On September 18, 2013, in response to my request for documents, I received a letter from counsel at Pomerantz advising me that the firm no longer had copies of documents for the period prior to June 2011. Counsel explained that the hard copies of all settled cases as well as all electronic back-up tapes of files were discarded when the firm moved offices in July 2012. Pomerantz attempted to restore all relevant electronic files and e-mails and produced 5,122 documents. Although I find Pomerantz's failure to preserve records for a case that was still ongoing troubling, I have determined that Pomerantz's failure to preserve documents did not affect the investigation in that counsel from Wilentz, Berdon personnel and/or counsel for Health Net were often copied on documents and e-mails, and those documents have been produced by those parties. Pomerantz has also advised that it has implemented measures that will avoid this from happening in the future.

-10-


• Garry Rothbaum (October 22, 2013) Former Director of Claims Operations (Berdon)

• Vlady Gleizer (October 23, 2013) Claims Administration Manager (Berdon)

• Jason Stinehart (December 4, 2013) Project Manager (Rust)

• Amy Lake (December 5, 2013) Senior Project Administrator (Rust)

• Barry Epstein, Esq. (December 11, 2013) Class counsel (formerly at Wilentz)

• Barbara Quackenbos, Esq. (December 12, 18, and 19, 2013) Class counsel (formerly at Wilentz)

• Jay Calvert, Jr., Esq. (January 7, 8, and 16, 2014) Counsel for Health Net (Morgan, Lewis & Bockius, LLP)

• Robert Axelrod, Esq. (January 16, 17, and 23, 2014) Class counsel (Pomerantz)

• Lynne Kizis, Esq. (January 24 and 29, 2014) Class counsel (Wilentz)

• George McClellan, Esq. (January 30, February 18 and 19, 2014) Counsel for Health Net (formerly at Morgan, Lewis & Bockius, LLP)

• Michael Rosenbaum (March 12, 2014) Managing Director (Berdon)

In connection with each of these interviews, I gave the parties the opportunity to pose

questions to the witnesses. To the extent the parties had questions, they provided me with an

oral or written list of inquiries (and relevant documents), which I used to question the witnesses

on the parties' behalf.

Because of the voluminous nature of the transcripts ofthe witness interviews, the

informational sessions, phone conferences, and other proceedings I have included in the

Appendix only the pages actually cited in this report. If the Court would like the full transcripts

of these proceedings, I will supply them. The parties have copies or have access to these

transcripts.

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In addition, at my request the Court appointed the accounting firm of EisnerAmper LLP

on December 19, 2013, 7 to assist as an expert "in designing and conducting statistical sampling

of, and reviewing, the claims determinations made by Health Net and Rust Consulting in

connection with the administration of the Prove-Up Fund[.]" (McCoy Doc. No. 902.)8 In

connection with the statistical sampling, I requested that Health Net produce certain electronic

data with respect to four subsets of claims which constituted the Group B and C Claims reviewed

by Health Net. Special Master's Request Regarding Production of Data from Health Net (Dec.

16, 2013) (App. Tab 142). These requests had previously been discussed with the parties.

Health Net provided the requested data on the four subsets on December 24, 2013. EisnerAmper

raised numerous inquiries regarding the data, to which Health Net responded during January and

February.

Health Net subsequently produced the Rust database, including the adjudication coding

data, certain programming logic, data dictionaries, and various other information. Health Net

also produced additional data from its vendor, Navigant Consulting, Inc. ("Navigant"), including

the Navigant eligibility data collected from Health Net's systems and certain programming logic.

In preparation for selecting samples of the claims to be reviewed, Eisner Am per generally

reviewed the database used by Health Net's consultant, Rust, as well as the eligibility data

On November 12,2013, I sent the parties a letter indicating my intention to engage the firm of EisnerAmper. Letter from Special Master to Parties (Nov. 12, 2013) (App. Tab 140). I provided the parties with the curriculum vitae of the EisnerAmper personnel who would have primary responsibility for this matter and requested that the parties inform me in writing ifthere were any reason that EisnerAmper should be disqualified from serving as an expert in this matter. The parties raised no objections to the appointment ofEisnerAmper.

In order for EisnerAmper to assist with the statistical sampling and review of claims, it was required to review certain "Protected Health Information" ("PHI") as that term is defined by statue and regulation. On January 7, 2014, the Court entered an Order authorizing Health Net to produce the PHI of claimants who submitted Group B and C Claims under the Prove-Up Settlement Fund, that the PHI would be used for the sole purpose of sampling, analyzing and reviewing the claims adjudication in this litigation and that all PHI shall be held in the strictest confidence. (McCoy Doc. No. 903). ·

-12-


supplied by Navigant. 9 In Febmary 2014, Health Net provided the thousands of tiffs of claim

files to EisnerAmper.

During Febmary, EisnerAmper conducted various programming logic and other inquiries

in connection with the thousands of claim lines prepopulated on the materials included with the

Proof of Claim Forms which Health Net had represented were ineligible. EisnerAmper

communicated the various questions it had regarding the logic and data used by Health Net's

vendors to Health Net (and class counsel) through me. I held numerous conference calls with the

parties and Health Net's consultants regarding these and other issues.

On March 7, 2014, I sent a letter to the parties describing the methodology that

EisnerAmper had used to conduct the mechanical testing of the subset of claims as to which

Health Net represented there was no eligible claim line and all claim lines prepopulated on the

materials included with the Proof of Claim Forms which Health Net had found ineligible. Letter

from Special Master to Parties (Mar. 7, 2014) (App. Tab 150). This letter further outlined the

methodology that EisnerAmper proposed using in connection with reviewing claim lines added

by claimants to the Blue Sheet and its statistical review of three subsets of claims. In this letter, I

communicated my intention to have EisnerAmper select and review the following: 250 sample

claims from the subset of claims which Health Net represented had at least one eligible line and

no documentation attached, 200 sample claims from the subset of claims that Health Net

represented had at least one eligible line, some documentation and no claim lines proven up, and

200 sample claims from the subset of claims that Health Net represented had at least one eligible

line, some documentation and at least one claim line proven up. I invited the parties to submit in

9 In preparation for its review of claims, EisnerAmper considered the various training materials and instructions used by Rust personnel in its review of claims and the various objections asserted by class counsel to the training materials and instructions used by Health Net and Rust.

-13-


writing any comments which they had on the proposed sampling methodology. Id. The parties

made no objections to the sampling methodology.

On March 17, 2014, I provided schedules to the parties of the 650 sample claims

described above, which EisnerAmper had selected using certain strata criteria outlined in my

prior correspondence to the parties and using a computer program for the selection of random

claims. The schedule provided detailed information to the parties regarding the subsets, strata

and Balance Bill Amounts of the various claims in the sample. Letter from Special Master to

Parties (and attachments) (Mar. 17, 2014) (App. Tab 151). These selections had previously been

discussed with the parties on March 12, 2014. Here again, I invited the parties to contact me if

they had questions.

On March 20, 2014, I provided to the parties for comment a draft of the Special Master's

Guidance Regarding Settlement Agreement in Health Net for Utilization by EisnerAmper in

Review of Group B and Group C Claims ("Draft Guidance") and a draft of EisnerAmper' s

Procedures for Review of Group B and Group C Claims ("Draft Procedures for Review). Letter

from Special Master to Parties (and attachments) (Mar. 20, 2014) (App. Tab 152). On March 24,

2014, I conducted a conference call with the parties regarding these proposed procedures,

wherein the parties provided comments on the Draft Guidance and Draft Procedures for Review.

On March 26, 2014, Health Net provided a letter including its comments with respect to these

documents. Letter from G. McClellan to Special Master (Mar. 26, 2014) (App. Tab 153). On

March 28, 2014, class counsel responded to the comments of Health Net and made additional

comments regarding the review. Letter from M. Gross and K. Roddy to Special Master (Mar.

28, 2014) (App. Tab 155). On April 1, 2014, Health Net submitted another letter following up

-14-


on class counsel's comments relating to the Draft Guidance and Draft Procedures for Review.

Letter from G. McClellan to Special Master (Apr. 1, 2014) (App. Tab 156).

I conducted a second conference call on April 1, 2014 in which the parties provided

further comments on the Draft Guidance and Draft Procedures for Review. In particular, counsel

for Health Net elaborated on the comments made in the letter of March 26, 2014. At the end of

the conference, I described on the record the various revisions that I would be willing to make to

the Draft Guidance and Draft Procedures for Review in light of the parties' input. I noted that I

would accept Health Net's request for EisnerAmper to (1) conduct an initial review of the

sample claims without knowing the results that Health Net had reached or the comments of Rust

Consulting on any particular claim (referred to as a "blinded" review) and then (2) conduct an

unblinded review of these claims, during which EisnerAmper would be provided with Health

Net's results and any codes or comments recorded by Rust or Health Net during its adjudication.

I explained that adding the initial blinded review "may increase the expense of the review that's

conducted by EisnerAmper." Transcript of Conference Call with Parties (Apr. 1, 2014) at 45:23-

48:13 (App. Tab 92). I subsequently revised the Draft Guidance and Draft Procedures for

Review to take into account some of the suggestions made by the parties. Draft Special Master's


Review of Group B and C Claims (Mar. 20, 2014) (App. Tab 161) and Final Special Master's


Review of Group Band C Claims (Apr. 9, 2014) (App. Tab 162).

In April of 2014, I provided the parties an opportunity to submit proposed findings of fact

as well as briefing with respect to several topics, including, but not limited to, the Court's ability

to impose sanctions, class counsel's efforts to assist class members and the legal standard that

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should apply, as well as Health Net's obligations, if any, to assist class members in submitting

claims under the Prove-Up Settlement Fund. Letter from Special Master to Parties (Apr. 7,

2014) (App. Tab 157). The parties submitted proposed findings of facts and briefs on May 16,

2014.

During April and May 2014, EisnerAmper conducted a blinded review ofthe 400 claims

samples. In late May 2014, after having concluded the blinded review of the 400 samples,

EisnerAmper began an unblinded review on those claims in which there was a material

difference between Health Net's and EisnerAmper's findings with respect to the number of claim

lines and the dollar amount proven up by the claimant. During this period and beyond, numerous

questions were communicated to the parties with regard to issues such as the use and meaning of

the several benefit limitation codes employed by Health Net and the various programming logic

used to deduct member responsibility obligations (i.e. co-payments, coinsurance, etc.) in Health

Net's numerous systems.

Starting in June 2014, I forwarded for review by the parties various claims in which

EisnerAmper had preliminarily identified material differences between the amounts proven up

by Health Net and EisnerAmper. Health Net's counsel responded to each of these inquiries and

provided considerable analysis on many of these claims, including information that was not

available in the Rust adjudication and claims data. With respect to each claim, Health Net set

forth its agreement or disagreement with EisnerAmper's initial findings. EisnerAmper reviewed

these various analyses, and updated its findings based on the information or explanation provided

by Health Net. These findings were incorporated into EisnerAmper's statistical analysis.

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II. FACTUALBACKGROUND

A. Settlement Agreement (March 2008)

On March 13, 2008, the parties executed a Settlement Agreement that encompassed the

Wachtel, McCoy, and Scharfman actions. Settlement Agreement (Mar. 13, 2008) ("Epstein Ex.

1 ") (App. Tab 16). The Settlement provided for two funds, totaling up to $215 million, from

which class members could receive payment depending on eligibility. Id. at Section 8. Pursuant

to the Settlement Agreement, Health Net was to establish a Cash Settlement Fund consisting of

$1 7 5 million and the remaining $40 million was to be set aside for class members through a

Prove-Up Settlement Fund to be administered by Health Net "or its designee." Id. at Sections 9

and 10. The Settlement Agreement also provided for significant business practice initiatives that

were valued at an additional $26 to $38 million. Id. at Section 12.

1. Establishes $175 Million Cash Settlement Fund for Group A Claims

The $1 7 5 million Cash Settlement Fund was designed to compensate class members who

desired to submit a claim but not submit documents ("Group A Claims"). Epstein Ex. 1 at

Section 8.1 (a). Essentially, Group A Claims would be reimbursed on a pro-rata basis for the

ONET provider's charges disallowed by Health Net (the "Balance Bill") without having to prove

that they actually were billed for or paid the Balance Bill. 10 The Group A Claims were to be paid

from the Cash Settlement Fund on a pro rata basis once deductions were made from the Fund for

attorneys' fees, administrative expenses and a $15 million payment by Health Net to the New

Jersey Department ofBanking and Insurance ("DOBI''). Id. at Sections 10, 10.1 and 10.3.

10 The term "Balance Bill" is defined in the Settlement Agreement as "an amount billed for a Covered ONET Service or Supply by an ONET Provider to a Class Member, in excess of an Allowable Amount greater than zero. Any deductible, co-insurance or co-payment obligation of the Class Member under the terms of the Class Member's Plan, as well as services and supplies that are not Covered ONET Services or Supplies, are not included within the definition of a Balance Bill." Epstein Ex. 1 at Section 2.

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Case 2:03-cv-01801-FSH-MAH Document 912-5 Filed 11/21/14 Page 2 of 23 PageID: 43578




Administrator was to then send all Group B and Group C Claims together with the supporting

documentation to Health Net within fifteen (15) days of the Claim Form Deadline of August 25,

2008. Id.

The Settlement Agreement also provided that class counsel were to provide assistance to

class members in obtaining the necessary proof to submit a valid Group Band/or Group C Claim

under the Prove-Up Settlement Fund. Specifically, the Agreement provided that "Class Counsel

will assist Class Members with Group B and Group C Claims, as needed, to obtain and submit to

Health Net, Inc. the proofrequired [to prove the payment and/or discharge of a Balance Bill]."

Id. at Section 9.4. The Settlement Agreement set forth the proof that was required to be eligible

for a payment from the Prove-Up Settlement Fund. I d. at Section 9 .1. 16

B. Engagement of Berdon Claims Administration LLC (May 2008)

On May 30, 2008, the parties retained Berdon Claims Administrator LLC to serve as the

Claims Administrator under the Cash Settlement Fund. Berdon Engagement Letter (May 30,

2008) ("Rothbaum Ex. 1 ") (App. Tab 55). Pursuant to the Berdon Engagement Letter, Berdon

was tasked with individually filing and processing all Claim Forms as well as "[m]aintain[ing] a

database of all information for each claim received that [would] enable the extrapolation of

reports and schedules in connection with claims profiling, evaluation, status, accepted and

rejected claims, loss calculations and check payments." Id. Specifically, with respect to Group

16 Specifically, the Settlement Agreement provided that in order to be eligible for a Group B Claim, a class member had to present proof of the following: "(a) the actual Balance Bill from the provider for the balance due for ONET Benefits; (b) a receipt (received contemporaneously with the payment), cancelled check or credit card statement showing the payment of the Balance Bill; (c) proof sufficient to establish whether the payment made satisfied or discharged the Balance Bill; and (d) proof sufficient to establish that the Class Member is entitled to receive the payment." Epstein Ex. 1 at Section 9.1. In order to be eligible for a Group C Claim, a class member had to submit proof of a Balance Bill from an ONET Provider and certify that such Balance Bill had not already been paid, released and/or discharged. Id. at Section 9.3.

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A Claims, Berdan was to conduct a deficiency and cure period and calculate the payment for

each authorized claimant based on the Plan of Allocation. 17 Id. at 3-4.

The Berdan Engagement Letter also sets forth a number of administrative tasks that

Berdan was to perform in administering the Settlement, including, but not limited to: (1)

reviewing and editing the notices and Claim Forms; (2) creating a mailing list and updating

address changes; (3) responding to all mail, faxes and e-mail correspondence; ( 4) fulfilling all

requests for copies of notice documents; (5) establishing and maintaining a website containing

notice documents, answers to frequently asked questions and e-mail capabilities for

communication between class members and Berdan's staff; (6) tabulating exclusion requests and

prepare weekly reports; and (7) maintaining a 800 number with customer service representatives

to answer questions and give assistance with filing a claim. I d. at 2-3.

Under the Settlement Agreement and Berdan Engagement Letter, Berdan also had

specific responsibilities regarding the Group B and C Claims in the Prove-Up Settlement Fund:

Berdan was to assist class members, "when requested," in obtaining the provider proof required

under the Settlement Agreement. In connection with assisting claimants, Berdan agreed to:

• obtain signed HIP AA waivers from Class Members in connection with requesting payment proof from providers;

• communicate with Class Members and their providers in order to obtain proof required for Group B and/or Group C Claims with which to verify claims;

17 The Plan of Allocation (App. Tab 127), which was approved by the Court, provided relief first to those class members with claims in the Prove-Up Settlement Fund that could demonstrate they were Balance Billed by their ONET provider, and that they paid the Balance Bill. These Group B Claims were to receive priority reimbursement from the $40 million Prove-Up Settlement Fund up to 100% of their out of pocket losses (subject to a 25% reduction for member responsibility obligation and any setoffs under Section 9.2 of the Settlement Agreement). The second priority was to those class members who could prove they were Balance Billed, but who had not yet paid the Balance Bill, also known as Group C Claims. Health Net would attempt to directly negotiate with the ONET provider and discharge Group C debts from the remainder of the $40 million Prove-Up Settlement Fund after Group B Claims were satisfied. Any Group B or Group C Claims that remained unsatisfied would become Group A Claims. All Group A Claims would then share in the $160 million Cash Settlement Fund (less attorneys' fees and costs) on a pro rata basis. (McCoy Doc. No. 872 at 37.)

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Id. at 4.

• obtain and forward HIP AA waivers; and

• communicate with Class Members about their Group Band/or Group C Claim including mailing a letter to correct any deficiencies in their claim forms.

C. Mailing of Notice, Proof of Claim Form, and Blue Sheet (May-June 2008)

Berdan mailed notices to all class members in Wachtel, McCoy, and Scharfman between

May 19,2008 and June 11,2008. (McCoy Doc. No. 872 at 4). Approximately 2.6 million

notices were sent out to the class. The Class Notice consisted of twelve single-spaced pages that

provided information regarding the lawsuit, information regarding who was included within the

Settlement, what was provided for under the Settlement, including a description of the Group A,

Group Band Group C Claims, how to submit a claim, and how to opt-out or object to the

Settlement. Class Notice (May 14, 2008) ("Epstein Ex. 2") (App. Tab 17). Highlighted within

the Class Notice was the class member's "Legal Rights and Options," which advised class

members that if "you wish to receive a cash settlement payment described in this Notice, you

must fill out and return the attached Claim Form by first class mail, postmarked no later than

August 25, 2008." Id. Included with the Class Notice were a Proof of Claim Form and Blue

Sheet, all of which were drafted by class counsel with Berdan's assistance. Proof of Claim Form

and Sample Populated Blue Sheet ("Rothbaum Ex. 3") (App. Tab 56). Class counsel explained

that they relied on Berdan and their own experience to make the Proof of Claim Form as

readable and understandable as possible. Robert Axelrod Transcript ("Axelrod Tr. ") at 185:22-

25; 186:2-15; 187:2-4; 189:16-20 (App. Tab 78).

The Proof of Claim Form was a six-page single-spaced document that directed the class

member to check a box indicating whether they were filing a Group A, Group B, or Group C

Claim. Rothbaum Ex. 3 at 3-4 (App. Tab 56). The Proof of Claim Form also directed the class

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member to check a box if he or she wanted Berdan's assistance in obtaining the documentation

needed from their medical provider to submit an eligible claim. Id. at 5. Finally, the last page of

the Proof of Claim Form provided a "Reminder Checklist," which Berdan claimed was "unique"

in that it identified ten steps the class member must follow to submit a valid claim. Id. at 6;

Rothbaum Ex. 1 at 2 (App. Tab 55). By way of example, the checklist reminded class members

to sign the certification and release, to include the class member's Blue Sheet with the Proof of

Claim Form, to attach copies of "supporting documentation" for those members submitting

Group B or Group C Claims, and to complete a HIPAA Authorization Form if seeking Berdan's

assistance in contacting providers for supporting documentation. Rothbaum Ex. 3 at 6 (App. Tab

56).

The Blue Sheet or "smart notice" was designed by class counsel and Berdan as a way of

providing the class members with a pre-populated list of services that may be eligible for

payment under the settlement. Rothbaum Ex. 3 (App. Tab 56). Quackenbos Tr. at 130:14-25;

131:2-15 (App. Tab 85); Axelrod Tr. at 219:21-25; 220:2-14 (App. Tab 78); Calvert Tr. at

145:17-25 (App. Tab 79). Class counsel explained that it "was a terrific benefit to people to

orient them in, you know, basically time and space as to what providers they had with this

insurance company." Quackenbos Tr. at 130:18-23 (App. Tab 85).

The Blue Sheet consisted of a Section A and Section B. Rothbaum Ex. 3 (App. Tab 56);

see also Sample Populated Blue Sheet ("Axelrod Ex. 5") (App. Tab 1 ). Section A set forth the

pre-populated claims that were potentially eligible for payment under the settlement whereas

Section B provided space for the class member to make any changes, corrections and/or updates

to their claims history. Id. The pre-populated information contained in Section A consisted of

the date of service, the provider's name and ID number, the allowed amount, and the Balance

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Bill Amount. ld. The class member was asked to identify, with respect to each claim line,

whether they wanted the claim to be treated as a Group A, Group B, or Group C Claim, whether

they paid their provider, the amount that they paid, whether they owed a Balance Bill, and

whether they authorized Berdon to contact their provider for supporting documentation. Id. at

Sections 6-10.

Berdon was responsible for pre-populating the Blue Sheet. Quackenbos Tr. at 132:4-6

(App. Tab 85); Axelrod Tr. at 220:15-25; 221:2-3 (App. Tab 78). The data used to pre-populate

Section A of the Blue Sheet was the data that had been provided by Health Net to class counsel

during discovery and ultimately used during settlement negotiations. Calvert Tr. at 146:3-25;

147:2-3 (App. Tab 79). Class counsel determined that the Blue Sheet should include all of the

class member's claim history, including those claims that were ineligible under the terms of the

settlement. Axelrod Tr. at 221:16-21 (App. Tab 78). Class counsel explained that they were

concerned that the data received from Health Net was not accurate, and counsel wanted to give

the class members an opportunity to contest the claims history with evidence and rebut the

presumption that the claim was ineligible. Axelrod Tr. at 221 :22-25; 222:2-25; 223:2-25; 224:2-

16 (App. Tab 78); Quackenbos Tr. at 133:19-25; 134:2-25; 135-136; 137:2-11 (App. Tab 85).

D. Assistance Provided by Berdon and Class Counsel to Class Members During Initial Reply Period (Summer 2008)

In connection with the mailing of the class notices and the response period, class counsel

and Berdon worked to assist class members seeking information about the claims process and

requesting help in understanding and filling out the Proof of Claim Forms. Both Berdon and

class counsel had operating websites which made available information to class members,

including answers to frequently asked questions regarding the Settlement, drafted by class

counsel and Berdon. Michael Rosenbaum Transcript ("Rosenbaum Tr.") at 84:16-85:20 (App.

-25-


Tab 86); Garry Rothbaum Transcript ("Rothbaum Tr.") at 103:21- 104:23 (App. Tab 87). The

Berdon website included forms for claimants, including HIPAA Authorization Forms, for

claimants to access, complete, mail, fax or send by e-mail to Berdon and allowed class members

to e-mail their questions directly to Berdon.

In addition to making information available on its website, Berdon engaged a call center

and set up a toll-free number for inquiries from class members. The call center offered both a

menu of recorded answers to frequently asked questions and live operators to assist claimants.

The live operators answered thousands of calls from class members during the summer of 2008,

responding to general questions regarding the Settlement and Proof of Claim Forms based upon a

telephone script and the frequently asked questions script produced by Berdon and class counsel.

Rothbaum Tr. at 92:21-93:7 (App. Tab 87); Rosenbaum Tr. at 71:25-72:13 (App. Tab 86);

Outside Call Center Automated Integrated Voice Recording ("Rothbaum Ex. 5") (App. Tab 57);

Outside Call Center Live Operator Help Line Script (June 12, 2008) ("Rothbaum Ex. 6") (App.

Tab 58). During the period from May 21, 2008 through December 31, 2008, the live operators at

the call center logged approximately 2,100 hours responding to class members' general

questions. Invoice from Call Center ("Rosenbaum Ex. 1") (App. Tab 54); Rosenbaum Tr. at

73:7-15 (App. Tab 86). During this same period, class members spent more than 3,300 hours

accessing the recorded answers to frequently asked questions menus. Id.

Berdon also trained and maintained "in-house customer service representatives and

claims administrators who staffed Berdon's in-house toll-free telephone line, had access to the

[information in claimant's Blue Sheets] and were called upon when the third-party call center

could not respond to detailed and claims specific inquiries from claimants with Group Band/or

Group C Claims." (McCoy Doc. No. 878-5 at~ 25(k)) ("Rosenbaum Aff. (Apr. 19, 2012)")

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(affidavit of Michael Rosenbaum dated April 19, 20 12). Berdon estimates that it "assist[ ed]

more than 8,000 Class Members in reviewing their options and the requirements for filing Group

Band/or C Claims." ld. at~ 25(e). Berdan's supervisor Garry Rothbaum recalled "at least a

half a dozen staff members" responding to phone calls during this period. Rothbaum Tr. at

106:5-9 (App. Tab 87). Mr. Rosenbaum and Mr. Rothbaum both testified regarding their own

experiences in responding to calls from claimants during the summer of 2008 and were well

acquainted with the types of questions posed by claimants. Rosenbaum Tr. at 90:22-91:16 (App.

Tab 86); Rothbaum Tr. at 105:23-106:4, 106:13-18 (App. Tab 87).

Class counsel were also heavily involved in responding to class members' inquiries

during this period. Lynn Kizis explained, "[t]here was an 800 number that class counsel

established that was tended to by personnel of both the Wilentz [and] Pomerantz firm[s] ....

The call volume started in the order of a couple hundred [a] day and reached peaks of over 1,000

class members calling a day. . . . In addition to that, we had a website with e-mail contact. ...

To equip everybody to do this, we developed and continued to revise sets ofF AQs .... "

Transcript oflnformation Session (Sept. 4, 2013) at 85-86 (App. Tab 90). Ms. Kizis likewise

testified to the many types of inquiries and the numerous requests for copies of Blue Sheets from

class members that she and her law firm colleagues responded to during this period. Kizis Tr. at

132:10-135:10 (App. Tab 82); see also Affidavit of Heather Duncan (Oct. 1, 2013) ("Duncan

Aff.") (App. Tab 113) and Affidavit of Shannon M. Bishop (Oct. 1, 2013) ("Bishop Aff.") (App.

Tab 114) (describing the thousands of calls received by class counsel during this period).

Berdon personnel and class counsel actively responded to class members' phone calls and

e-mails regarding the Proof of Claim Forms, the type of documentation needed to prove up

claims, and the general requirements of the Cash Settlement Fund and Prove-Up Settlement Fund

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during the summer of2008. Where claimants reached out and contacted Berdon or class counsel

by phone or e-mail, to ask questions, request HIP AA Authorization Forms or copies of the Blue

Sheets, Berdon and class counsel appear to have responded conscientiously.

E. Response Rate

Of the approximately 2.6 million notices mailed, Berdon received 199,180 Proof of

Claim Forms from claimants. Rosenbaum Aff. (Apr. 19, 2012) at~ 19. Berdon identified

168,080 ofthe Proof of Claim Forms received as seeking solely Group A treatment. Berdon

identified 31,100 of the Proof of Claim Forms received as potentially seeking Group B or Group

C treatment for at least part of their claim and forwarded the claims to Health Net's counsel. Id.

at~~ 19-20.

F. Berdon's Intake, Identification and Initial Review of the 31,000 Prove -Up Settlement Claims

Berdon was responsible for identifying Group B and Group C Claims from among the

more than 199,000 claims received and forwarded those claims to Health Net. Berdon initially

identified 31,100 of the claims received as potentially seeking Group B or Group C treatment for

at least part of their claim and forwarded the claims to Health Net's counsel. Id. Berdon

identified the Group B and Group C Claims by searching the claim file for any indicia of a

Group B or Group C Claim. Berdon testified that "anything that would indicate that a claimant

wants to be processed as a B or C claim can be considered a potential B or C claim."

Rosenbaum Tr. at 57:25-58 (App. Tab 86). Accordingly, populated boxes at Section 6 of the

Blue Sheet (with "B" or "C" written in) checked boxes on the Proof of Claim Form, notations on

the Proof of Claim Form from claimant, or the attachment of any documents were among the

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indicia that caused Berdon to characterize a claim as a potential Group B or C Claim to be sent

over to Health Net. 18

On the Proof of Claim Form, there was a box for claimants to check to request assistance

from Berdon in obtaining documentation from their providers. There was also a section on the

Blue Sheet for each claim line, referred to as "Section 1 0," where claimants could request

assistance from Berdon in obtaining documentation from their provider with respect to a specific

claim line.

Class counsel and Berdon, however, made no effort to record the names and information

of the more than 7,500 claimants with eligible claims who requested help from Berdon on their

Proof of Claim Forms or Section 10 of the Blue Sheets. Class counsel and Berdon also made no

effort to collect documents from providers on behalf of claimants requesting help during the

summer of 2008. Prior to sending the claim files to Health Net, Berdon collected only the

reference numbers of the claims; Berdon made no effort to collect other information, including

the phone numbers and e-mail addresses of claimants that were provided by claimants on their

Proof of Claim Forms. 19 Rosenbaum Tr. at 99:17-102:24 (App. Tab 86). Berdon and class

counsel justified the decision not to collect the foregoing information or begin providing

18 The process by which Berdan separated claims intended to be adjudicated under the Cash Settlement Fund from those intended to be sent to the Prove-Up Settlement Fund was at best a very rough cut. Berdan identified claims to be sent to the Prove-Up Settlement Fund based on l.illY indicia, however small, that the claimant may have intended any claim line to be treated as a Group B or Group C Claim line. To the extent that a claim file had some documentation, however minimal, or the claim had a claim line designated for Group B or C treatment at Section 6 or elsewhere on the Proof of Claim Form, Berdon forwarded the claim to the Prove-Up Settlement Fund. Though necessary, this process ofidentif)dng Group Band C Claim lines in a claim and then sending the entirety of the claim lines over to the Prove-Up Settlement Fund resulted in claim lines identified as Group A Claims and thousands of claim lines that had no designation at Section 6 going to the Prove-Up Settlement Fund for adjudication.

19 Health Net ultimately agreed that it would record the requests for assistance made by claimants, as part of its review ofthe claims and provided that information as part of the deficiency data produced to Berdon in October 2009.

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assistance in the summer of 2008 based on their assumption that that there would be a cure

period, following a deficiency review of the claim files by Health Net.

Indeed, Berdon did not even retain copies of the vast majority of claims files forwarded

by it to Health Net during the late summer 2008 when claims were at their heaviest. Id. at 99:17-

102:24. Berdon obtained the permission of class counsel to stop making copies and delivered the

original claim files by courier directly to Health Net- thereby avoiding the need to maintain

copies and making the delivery within the deadline.

Berdon and class counsel decided that it would not be "productive for Berdon to

communicate with claimants before Health Net determine[ d) the status of the claim, since

[Berdon] was unaware of their criteria for a good claim." Berdon Memorandum to Class

Counsel (Aug. 6, 2008) ("Rothbaum Ex. 16") at 3 (App. Tab 64). Berdon and class counsel

contend that they made a conscious decision at the outset of the claims administration period in

May 2008 regarding how and when Berdon would assist claimants in curing deficiencies and

affirmed that decision in August 2008. Class Counsel's Proposed Findings of Fact and Brief

(May 16, 2014) at 3 (App. Tab 160); see also Berdon Planning Memorandum (May 21, 2008)

("Rothbaum Ex. 8") (App. Tab 59). Accordingly, notwithstanding the lack of an explicit

provision for a cure period in the Settlement Agreement and notwithstanding Berdon's

agreement to provide help as needed to claimants, Berdon took no action to identify claimants

requesting assistance or to assist those claimants in obtaining documentation in the summer of

2008.

G. Deficiency Review

1. Need for Deficiency Review and Cure Period Discovered

Berdon issued its first planning memorandum in connection with the claims in the Prove-

Up Settlement Fund on May 21, 2008, entitled "Process Setup and Commencement of

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Operations." Rothbaum Ex. 8 at 1-2 (App. Tab 59). The memorandum noted that Berdan would

first assign claims numbers to the Group B and Group C Claims that it received, and then

forward those claims to Health Net. Id. The memorandum stated that, "[i]n its review of claims,

Health Net may conclude that some of these claims are either incomplete or deficient.

Deficiency notices will need to be issued to such claimants." Id. The memorandum queried:

"At what point will [Berdan] be informed as to the status of each Group B/C claim (claim-by-

claim basis of when all claims have been reviewed and evaluated)." I d.

Berdan's May 21, 2008 planning memorandum was forwarded to Health Net for

discussion and response. E-mail from L. Kizis to J. Calvert (May 21, 2008) ("Calvert Ex. 2")

(App. Tab 6). Several weeks later, on July 10, 2008, Health Net finally responded, stating that it

would inform Berdan on the "status" of each Prove-Up Settlement Fund claim "at the end of the

period set forth in Section 9.10 of the Settlement Agreement," and would "provide [Berdan] with

language for the letters to be distributed pursuant to the terms of Par. 9.9 of the Settlement

Agreement."20 E-mail from G. McClellan toM. Rosenbaum, G. Rothbaum, M. Hurwitz (July

10, 2008) ("Calvert Ex. 3") (App. Tab 7).

The first set of Group B and Group C Claim files were sent by Berdan to Health Net's

counsel on July 29, 2008. Letter from G. Rothbaum to G. McClellan (July 29, 2008)

("Rothbaum Ex. 11 ") (App. Tab 60). Accompanying the claim files was a letter from Garry

Rothbaum, Director of Claims Operations, in which he advised Health Net's counsel that "[a]fter

the initial determinations by Health Net, we will communicate with Class Members as to any

deficiencies in their claims and/or payments to be made from the Prove-Up Settlement Fund. Id.

20 Sections 9.9 and 9.10 of the Settlement Agreement required that Health Net review the claims submitted under the Prove-Up Settlement Fund and, within a certain period oftime, provide notice in the form of a report to Berdon regarding the claims that were found payable under the Prove-Up Settlement Fund. There was no specific provision for a cure period in the Settlement Agreement.

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Mr. Rothbaum stated that "[w]hen we receive Health Net's determinations, we will mail

deficiency letters to claimants and will subsequently provide you with the additional information

they furnish in an effort to cure their claims." Id.

As Health Net's counsel began to review the initial claims that were received, counsel

noticed that a number of claims were submitted without any supporting documentation. Calvert

Tr. at 212:7-18 (App. Tab 79). On August 6, 2008, Health Net's counsel, Jay Calvert, Jr., sent

Berdon a letter advising Berdon and class counsel that under Section 9.9 of the Settlement

Agreement all Claim Forms and supporting documentation must be received on or before

September 9, 2008. Letter from J. Calvert toM. Rosenbaum (Aug. 6, 2008) ("Rothbaum Ex.

12") (App. Tab 61). Mr. Calvert stated that "[o]ur initial review ofthe Group Band C Claims in

the first box that Berdon has submitted indicates that a significant number consist of a claim

form (some including the Blue Sheet) with no supporting documentation whatsoever." Counsel

advised that if the requisite supporting documentation was not received by September 9, 2008,

"all such claims [would] be listed as rejected for failure to prove entitlement to participation in

the Prove-Up Settlement Fund." Id. at 2. Finally, Mr. Calvert stated that "we are concerned that

Berdon lacks the necessary resources to meet the September 9, 2008 deadline for submission of

Group B and C Claims, together with all supporting documentation[.]" Id.

Following Mr. Calvert's letter, the parties met on August 11, 2008- 14 days before the

claims submission deadline. At the August meeting, the parties discussed in detail the plan for

administering the Group Band C Claims, including whether Health Net would conduct a

deficiency review and allow for a cure period. Calveti Tr. at 226:13-25; 227:2-21 (App. Tab

79); Kizis Tr. at 152:24-25; 153:2-13 (App. Tab 82). Class counsel's position was that although

a deficiency review and cure period were not explicitly included within the Settlement

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Agreement, a deficiency review and cure period are implicit in the obligations of a claims

administrator administering a fund in a class action settlement. Calvert Tr. at 226:21-25 (App.

Tab 79). Health Net's position was that Berdon had the opportunity to review the claim files and

assist in curing any deficiencies prior to the September 9, 2008 deadline. Id. at 233:15-21.

On August 19, 2008, class counsel sent a letter to Health Net outlining the "procedure

and schedule to be followed ... on a going-forward basis." Letter from K. Roddy to J. Calveti

(Aug. 19, 2008) ("Rothbaum Ex. 13") (App. Tab 62). With respect to a deficiency review and

cure period, Berdon agreed, on an ongoing basis, to identify deficiencies in Group B and C

Claims, send deficiency letters to class members, and offer an opportunity to cure such

deficiencies. Id. at 2. Berdon also agreed that "whenever requested," Berdon would assist class

members in their efforts to obtain documents to support their Group B and C Claims. Id. Class

counsel requested that the parties execute an amendment to the Berdon Engagement Letter to

cover the costs for these services. Id. at 2-3. Class counsel also requested that the parties discuss

a new deadline to allow Berdon to perform these services. Id. at 3. Draft deficiency letters were

prepared by Berdon and shared with class counsel and counsel for Health Net. E-mail from G.

Rothbaum to Class Counsel and J. Calvert attaching draft deficiency letter (Aug. 14, 2008)

("Rothbaum Ex. 14") (App. Tab 63).

On September 5, 2008, Health Net responded to class counsel's August 19th letter stating

that "Berdon already should have been identifying deficiencies, if any, in Group B and C

Claims" and that "Berdon has always had the right to contact Class Members to obtain whatever

information is needed to support a Claim." Letter from J. Calvert to J. Roddy (Sept. 5, 2008)

("Quackenbos Ex. 4") at 2 (App. Tab 29). Health Net agreed to Berdon sending deficiency

notices to Group B and C claimants and extended the September 9, 2008 deadline for receiving

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supporting documentation to October 31, 2008. Id. at 4. Health Net also agreed to prepare a

checklist for Berdon to use during its review of what proof was acceptable for a Group B or C

Claim as those standards were clearly set forth in the Settlement Agreement and Proof of Claim

Form. Id. at 3; Calvert Tr. at 246:12-25; 247:2-13 (App. Tab 79).

2. Health Net Agrees to Conduct Deficiency Review

On October 16, 2008, class counsel sent Health Net a letter requesting a "status report on

Health Net's review of the Group Band C claims" as well as the "rules for review." Letter from

B. Epstein to G. McClellan (Oct. 16, 2008) ("Epstein Ex. 4") (App. Tab 19). According to class

counsel, this letter was intended to "spur a continuation of the discussion that had been stmied

with the meeting on August 11th." Kizis Tr. at 178:16-19 (App. Tab 82). On October 27,2008,

Health Net responded to class counsel stating that pursuant to the Settlement Agreement and the

Berdon Engagement Letter, Health Net was not responsible for assisting class members in

obtaining and submitting proof with respect to Group B and C Claims. Letter from J. Calvert to

K. Roddy (Oct. 27, 2008) ("Epstein Ex. 5") (App. Tab 20). Nonetheless, "for purposes of

resolving this dispute" and "by way of compromise," Health Net offered to review the Group B

and C Claims for deficiencies in the Proof of Claim Form, Blue Sheet, and supporting

documentation. Id. at 1-2. Health Net agreed to undertake this effort, but under certain

conditions, including, but not limited to, the following: (1) a certain list of claim lines would be

excluded from payment under the settlement;21 (2) all claim lines under $100 would be excluded

21 Health Net set forth the following thilteen categories of claims that would be ineligible: (1) duplicate lines; (2) duplicate claims; (3) claims by non-ERISA and individual members for the McCoy and Wachtel classes but not the Scharfman class; (4) government products; (5) claims for health care services from verified participating INET Providers; (6) claim lines with an allowed amount equal to zero dollars; (7) interest payments; (8) non-Health Net affiliated members; (9) divested entities; ( 1 0) capitation; (11) independent/affiliated networks; (12) fee negotiation; and (13) miscellaneous adjustment reason codes in MC 400 Professional and Institutional, MHN Professional and Institutional and Landmark. Epstein Ex. 5 at 2 (App. Tab 20).

-34-


and ineligible for payment as a Group B or C Claim; (3) any unsigned Proof of Claim Form

would be considered deficient; ( 4) any class member that failed to clearly identify a claim line as

a Group A, B or C Claim in Section 6 of the Blue Sheet would be deficient; and (5) the failure to

provide supporting documentation would be deficient for Group B and Claims. Id. at 2-4.

On November 26, 2008, Health Net retained Rust Consulting for "claims administration

services ... related to claims administration support for the identification of deficiencies in the

Proof of Claim Forms, Blue Sheets, and supporting documentation for Group B and C Claims

submitted against the Prove-Up Settlement Fund[.]" Claims Services Agreement (Nov. 26,

2008) ("Stinehart Ex. 2") at 1 (App. Tab 70); Calvert Tr. at 228:16-18 (App. Tab 79). Rust was

also retained to perform database development and capture data in the Proof of Claim Forms and

Sections A and B of the Blue Sheets. Stinehart Ex. 2 (App. Tab 70). According to the

Agreement, Rust was hired as a consulting expert within the meaning of Federal Rule of Civil

Procedure 26(b )( 4 ), and all communications between Rust and Health Net were to be protected

by the attorney-client privilege and attorney work-product doctrine. I d. at 1-2.22 Health Net

explained that Rust was hired as an expert because "they weren't being hired by both sides.

They were just working for us. They were advising us as to a lot of matters, as well as

adjudicating the claims, about the process." Calvert Tr. at 255:9-13 (App. Tab 79).

22 Health Net has asserted throughout this proceeding, during the information sessions and witness interviews and in a letter to the Special Master dated November 25, 2013, that various communications between Health Net and its vendors Rust and Navigant and various material created by these vendors may be protected by attorney-client privilege and/or the work-product doctrine. Letter from G. McClellan to Special Master (Nov. 25, 2013) (App. Tab 141). Health Net avers that certain reports produced by Rust and Navigant for Health Net may be protected, as a result of these vendors' roles in helping "Health Net understand the claims as the threat of litigation arising out the administration of the Prove-Up settlement developed" and assisting Health Net's counsel in "providing legal advice" to Health Net. JQ,_

I have agreed during these proceedings that any disclosure of privileged or protected documents or information connected with this proceeding shall: (a) apply to this proceeding only; (b) not be a waiver of the subject matter of the document or information generally, but only be a waiver of the specific information contained in the document or communication itself; and (c) not be a waiver for any purpose in any other proceeding.

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3. Parties Begin to Negotiate Rules for Health Net Deficiency Review

On December 4, 2008, the parties had a conference call to discuss the rules for the Health

Net deficiency review as initially set forth in Mr. Calvert's October 27, 2008 letter. Outline of

Topics Covered During December 4, 2008 Telephone Conference Regarding Deficiencies in

Group Band C Claims Submitted Against the Prove-Up Settlement Fund (Dec. 4, 2008)

("Rothbaum Ex. 17") (App. Tab 65). Health Net's counsel prepared an extensive memorandum

outlining the issues discussed during the call. Id.; Axelrod Tr. at 361:23-25 (App. Tab 78). The

memorandum discussed the procedures Health Net would follow in reviewing deficiencies in the

Proof of Claim Form, Blue Sheet, and supporting documentation. Rothbaum Ex. 17 at 2-11

(App. Tab 65). The parties dispute whether an agreement was reached on the call regarding

these procedures. Axelrod Tr. at 363:15-21 (App. Tab 78); Kizis Tr. at 191:14-20 (App. Tab

82); George McClellan Transcript ("McClellan Tr.") at 110:22-25; Ill :2-6 (App. Tab 84). The

memorandum concludes with a list of action items, including those issues remaining to be

discussed between counsel, such as the amount of time for a cure period and whether more than

one cure period would be provided to claimants. Rothbaum Ex. 17 at 11 (App. Tab 65).

On December 16, 2008, Health Net's counsel sent an e-mail to class counsel stating that

"we have a review team prepared to commence the proposed deficiency review of Group B and

C Claims submitted against the Prove-Up Settlement Fund." E-mail from G. McClellan to L.

Kizis (Dec. 16, 2008) ("Calvert Ex. 11 ") (App. Tab 9). However, in order to start, counsel

advised that "we need to reach a resolution on a few outstanding issues." Id. Counsel identified

the remaining six issues as follows: (1) whether the $100 Balance Bill threshold will be applied

by claim line or on an aggregated "date-of-service" level; (2) whether class counsel has any

comment regarding the deficiencies outlined in the December 4, 2008 memorandum; (3) whether

class counsel will agree that Berdon must mail out the deficiency letters seven days after

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receiving them from Health Net and that the claimants have 90 days to cure any deficiencies; (4)

whether class counsel will agree that Health Net will not pay for any costs incurred in assisting

class members during the cure period; (5) whether class counsel will agree that there will only be

one cure period; and (6) that Health Net "will not provide either a set of rules or samples to

plaintiffs or Berdon regarding how Defendants will review proof submitted in support of Group

Band C Claims." Id. Health Net's position was that it would not have been helpful to Berdon or

class counsel to provide the rules or training materials to be used by Rust because class counsel

were really looking for a checklist or guidance for when class members called during the cure

period and said, "I don't understand why Health Net is saying my documents are deficient."

McClellan Tr. at 115:16-25; 116; 117:2-5 (App. Tab 84).

From December 2008 to April 2009, the parties continued to negotiate the rules for the

deficiency review and cure period. Kizis Tr. at 197:23-25; 198:2-15; 213:3-6 (App. Tab 82); see

also Letter from G. McClellan to L. Kizis (Jan. 9, 2009) ("Quackenbos Ex. 6") (App. Tab 31 ).

During that time, Rust conducted a data capture and deficiency review of the Group B and C

Claims. Jason Stinehart Transcript ("Stinehart Tr.") at 130:14-16 (App. Tab 88). Health Net's

counsel provided training materials to Rust in order to assist Rust in its review. Stinehart Tr. at

96:16-21 (App. Tab 88); Amy Lake Transcript ("Lake Tr.") at 81:4-10 (App. Tab 83); see also

Health Net/McCoy Group B and C Claims Deficiency Analysis Training Power Point

Presentation (Jan. 22, 2009) ("Stinehart Ex. 7") (App. Tab 71 )_23 Health Net did not share the

training materials with class counsel at this time because Health Net did not consider it to be

helpful for purposes of the cure period. McClellan Tr. at 127:3-12 (App. Tab 84). Health Net's

23 Because of the voluminous nature ofthe training materials, I have not included these documents in the Appendix. If the court would like a copy, I will provide it.

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counsel explained that "the settlement agreement set forth everything that class counsel, class

members, Berdan, Health Net or anybody else would possibly ever need to know about

submitting a Group B or C Claim to receive a benefit from the Prove-Up Settlement Fund." Id.

at 127:18-24. Health Net also had "serious questions about the attorney-client privilege." Id. at

130:2-6. At the time, class counsel did not know Rust was involved and would be conducting

the deficiency review nor did class counsel know that the deficiency review had been completed

because there were still negotiating issues regarding the deficiency review. Kizis Tr. at 226:16-

22; 229:21-25; 230:2; 231:5-25; 232:2 (App. Tab 82).

On April 23, 2009, Health Net's counsel sent a letter to class counsel that set "forth in

one place the agreements that the parties [had] reached through the course of various

correspondence, e-mail, and telephone conferences regarding the deficiency review of Group B

and C Claims and administration of the Settlement." Letter from G. McClellan to L. Kizis (Apr.

23, 2009) ("Quackenbos Ex. 8") at 1 (App. Tab 32). On May 19, 2009, class counsel responded

stating that "your April 23, 2009 letter writes as though Berdan had also agreed with all of the

understandings that counsel arrived at, and such was just not true. Berdan was seeing the

outcome of many of these issues for the first time via April23, 2009 letter and has raised a

number of questions and concerns that we need to address." Letter from L. Kizis to G.

McClellan (May 19, 2009) ("Quackenbos Ex. 9") at 1 (App. Tab 33). Specifically, class counsel

questioned how the ineligible and conditionally ineligible transactional lines would be presented

to the class members in the deficiency letter, how the $100 Balance Bill threshold would be

applied, who would pay for the deficiency notices, and the time within which Berdan would

have to send out the deficiency notices. Id. at 2-4.

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The parties met in person on July 2, 2009. Kizis Tr. at 222:11-19 (App. Tab 82); see also

Transcript of Proceedings (July 2, 2009) ("Epstein Ex. 6") (App. Tab 21 ). Class counsel

explained that the meeting was intended to have "all of us around a table, not on the phone, have

everybody in the room, let everybody say everything they needed to say and have a stenographer

present to take down carefully articulated dispositions of any of the pending issues, that that was

the best way to end this back-and-forth." Kizis Tr. at 222:11-19 (App. Tab 82); Axelrod Tr. at

387:21-25; 388:2-11 (App. Tab 78).

One of the issues discussed at the meeting was how Health Net would distinguish

between a class member's intent of filing a Group A, B or C Claim where claimant had not

explicitly indicated their intent. Health Net's concern was that it did not want to be in the

position of having to make a "determination of what the class member had in mind when they

submitted their claims as to what kind of- what category a claimant should be in." Calvert Tr.

at 449:5-12 (App. Tab 79). Health Net wanted a "bright-line test." Id. at 465:11-19. At the

meeting, counsel reached the following agreement with respect to this issue:

[Health Net's Counsel]: Where the claimant has, however, failed to populate Section 624 of the Blue Sheet for a covered ONET service or supply in a particular transactional row, the claim for that covered ONET service or supply is fatally deficient and will not be paid if Section 6 is not populated.

[Class Counsel]: Let's add to the record that we are in agreement with [Health Net's counsel's] statement. And if everyone is done with number 1, I'll move on to issue number 2.

Epstein Ex. 6 at 11 (App. Tab 21 ).

24 Section 6 of the Blue Sheet asked that the claimant "indicate [for each claim line] whether you wish this claim to be processed as a Group A, Group B or Group C Claim. If you do not mark, it will be handled as a Group A." Rothbaum Ex. 3 (App. Tab 56).

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Class counsel's understanding of the agreement was that Section 6 was a way for Health

Net to focus its efforts and review only those claim lines where the class member had a real

intent to file a Group B or C Claim. Kizis Tr. at 248:2-25 (App. Tab 82). Class counsel

explained that "in no way was class counsel expecting that we were talking about a situation

where we would have claimants that did all of the difficult work of getting all of the documents

required to prove a B or C Claim and that this would be the only reason that that claim would not

be paid .... It ended up having an application that we didn't expect at the time." Id. at 249:8-

15; 249:25; 250:2-4. The parties also agreed at the meeting that Health Net would prepare the

deficiency letters, but that Berdan would mail them out to the class members. Id. at 254: 11-20;

Epstein Ex. 6 at 21 (App. Tab 21 ).

Prior to the July meeting, Health Net knew that "approximately half or more" of the

Group B and C Claims were "completely ineligible" and the potential claims prior to the cure

period were "significantly under the cap of $40 million" because a lot of people did not present

any evidence. McClellan Tr. at 82:3-7 (App. Tab 84); Calvert Tr. at 446:18-21 (App. Tab 79).

On June 30, 2009, Rust prepared a report for Health Net's counsel that showed the potential

proven amount as $8,061,704.64. E-mail from A. Lake to G. McClellan (June 30, 2009)

("Stinehart Ex. 17") (App. Tab 72). On July 2, 2009, Rust prepared a second report showing the

potential proven amount as $6, 136,673.90. E-mail from A. Lake to G. McClellan (July 2, 2009)

("Stinehart Ex. 18") (App. Tab 73). Health Net did not share these numbers with class counsel

or Berdan at the July 2nd meeting because Health Net thought the numbers were inaccurate and

Health Net had concerns that "if we started giving plaintiffs inaccurate information that they

didn't even ask for, that would have caused even further fights." Calvert Tr. at 453:2-13 (App.

Tab 79); McClellan Tr. at 176:12-14 (App. Tab 84). These reports inaccurately overstated the

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potential claims that had been proven up prior to the cure; Health Net testified that these initial

reports were incorrect because of programming logic issues. According to Mr. McClellan, the

programming logic required to "harvest the information" based on specific criteria and create

reports from the data was extremely complex and took time to refine. 25

Rust later prepared two more reports regarding the potential proven amount prior to the

cure period. On September 16, 2009, Rust prepared a report for Health Net's counsel that

showed the potential proven amount as $3,407,277.36. E-mail from A. Lake to G. McClellan

(Sept. 16, 2009) ("Stinehart Ex. 19") (App. Tab 74). Here again, it would appear the

programming logic needed to be refined. On October 20, 2009, Rust prepared a report for

Health Net's counsel that showed the potential proven amount as $2,027,526.70. E-mail from A.

Lake to G. McClellan (Oct. 20, 2009) ("Lake Ex. 1 ") (App. Tab 25). None of these reports were

shared with class counsel or Berdan.

4. Exchange of Draft Deficiency Letters and Database

Following the July 2nd meeting, the parties worked together to finalize the deficiency

letters and exchange the database that would be used to populate the letters and answer

claimants' questions. From August to October 2009, the parties worked to exchange and

understand the corresponding deficiency databases for the Group B and C claimants. E-mail

from G. McClellan toM. Rosenbaum (Aug. 13, 2009) (App. Tab 96); E-mail from G. McClellan

to M. Rosenbaum (Sept. 17, 2009) ("Axelrod Ex. 11 ") (App. Tab 3); E-mail exchange between

G. McClellan and G. Rothbaum (Oct. 19, 2009) (App. Tab 97). Problems arose regarding the

compatibility between Health Net's and Berdan's data systems, which would hamper Berdan's

25 Mr. McClellan testified: "We had asked Rust to do something that was extremely difficult, which is slice and dice the numbers based on mutually exclusive and jointly exhaustive Proof of Claim categories. The programming logic to make that happen was extremely difficult to write." McClellan Tr. at 174:17-175:25 (App. Tab 84).

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ability to understand the deficiencies and answer claimants' questions. Vlady Gleizer Transcript

("Gleizer Tr.") at 156:2-23 (App. Tab 81 ). As a result, Berdon also requested .pdf copies of the

deficiency letters, which Health Net agreed to provide. E-mail from G. McClellan to G.

Rothbaum (Nov. 12, 2009) (App. Tab 98).

On November 3, 2009, during a conference call, Berdon learned from Health Net's

counsel that the amount of the $40 million Prove-Up Settlement Fund that was already perfected

was "small." Memorandum from Berdon Claims Administration to Class Counsel (Dec. 17,

2009) ("Rothbaum Ex. 24") at 3 (App. Tab 67).26

On November 5, 2009, the parties agreed on the draft of the deficiency letter and Health

Net's counsel advised that it would start printing the letters "first thing tomorrow morning." E-

mail from G. McClellan toR. Axelrod (Nov. 5, 2009) ("Axelrod Ex. 13") (App. Tab 4). The

parties also agreed that Health Net would mail the letters to the claimants. E-mail from L. Kizis

to G. McClellan (Nov. 5, 2009) ("McClellan Ex. 7") (App. Tab 26). The deficiency letters were

customized to the class member and included a list of the class member's claim lines that were

found to be deficient. Draft Deficiency Letter ("Quackenbos Ex. 12") (App. Tab 35). The letter

also directed those class members who requested Berdon's assistance in obtaining supporting

documentation to complete a HIPAA Authorization Form and return it to Berdon. Id. at 6. On

November 12, 2009, Health Net advised Berdon that it would be providing Berdon the .pdfs of

the deficiency letters by November 16, 2009. E-mail from G. McClellan to G. Rothbaum (Nov.

12, 2009) (App. Tab 98).

26 This observation was consistent with the October 20, 2009 Rust report to counsel for Health Net that showed the potential proven amount prior to cure as $2,027,526.70. E-mail from A. Lake to G. McClellan (Oct. 20, 2009) ("Lake Ex. 1 ") (App. Tab 25).

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On Friday, November 13, 2009, Berdon contacted Health Net stating that "if the letters

have not yet been mailed, we suggest strongly that they NOT be mailed until we are provided

with the promised records within the previously agreed timetable. Please advise ASAP." E-mail

from M. Rosenbaum to G. McClellan (Nov. 13, 2009) ("Rothbaum Ex. 20") (App. Tab 66).

That same day, Health Net's counsel responded stating that 12,991 deficiency letters were

mailed to class members who have at least one eligible or conditionally eligible health care

service in their Group B or Group C Claims, "all of which were contained in the deficiency

database DVD that Berdon received on November 11th." Id. at 2. In addition, Health Net

advised that an additional 17,796 deficiency letters were mailed to class members who had zero

eligible or conditionally eligible health care services. Id. "On November 16th, we will send you

the complete list of Class Members who have zero eligible and/or conditionally eligible health

care services in their Group Band/or C claims." Id.

According to Health Net's counsel, Berdon had "everything they needed" at the time the

deficiency letters were sent out because Berdon had the database since October 2009 and "the

deficiency letters, we told them we'd have them to them by Monday." McClellan Tr. at 240:16-

24 (App. Tab 84). Health Net counsel explained that a .pdf of the deficiency letters "would not

have been of any assistance in responding to class members in this case" and would have been an

"impediment" because Berdon removed the item number from the deficiency letter and the item

number was the only way to meaningfully distinguish between a class member's claim lines. Id.

at 241:18-22; 242:2-13; 242:16-25; 243-244. Counsel for Health Net stated that "[h]ere you

would need, and hopefully only rely on, the deficiency database." Id. at 242:8-13.

Berdon, however, asserted that not everyone at Berdon was able to easily translate the

deficiency data and that some Berdon personnel needed the . pdf copies of the letters sent to the

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claimants to be able to efficiently answer claimants' questions. According to Garry Rothbaum,

the Berdon supervisor charged with heading up the process, "[Berdon] may have had data files,

but it would be in electronic format not useable to a person like myself." Rothbaum Tr. at 168:6-

169:10 (App. Tab 87). According to Mr. Rothbaum, until Health Net provided the .pdf copies of

the letters, he made do by asking the claimants who called with specific questions to send him a

copy of their deficiency letter by fax or e-mail so that he could address the service lines at issue.

Mr. Rothbaum asserts that "[Berdon] was staffed and ready to help class members [on November

16, 2009] but Berdon couldn't do the right job of assisting the class members [who] called

because we were missing a copy of the deficiency letter with the appropriate information so

Berdon could assist class members more efficiently." I d. at 171 : 1-1 72:20.

Berdon began receiving .pdf copies ofthe deficiency letters on November 16,2009 and

all .pdf copies were received by November 23, 2009. See E-mail from G. McClellan toM.

Rosenbaum (Nov. 16, 2009) (App. Tab 99); E-mail from G. McClellan to M. Rosenbaum (Nov.

23, 2009) ("Gleizer Ex. 6") (App. Tab 22). The deadline for claimants to submit documents to

Berdon was January 13, 2010.

H. Cure Period

In anticipation of the cure period, class counsel and Berdon made various preparations in

order to be able to handle the claimants' inquiries and requests that would follow the mailing of

the ineligibility and deficiency letters to claimants. Class counsel [Ms. Kizis] met during the fall

of 2009 with a "core response" team of personnel at the Wilentz firm to familiarize them with

the deficiency letter, the upcoming cure period, and the types of inquiries they were likely to

receive from claimants during the cure period. Kizis Tr. at 266:12-269:3 (App. Tab 82). The

core response team was "introduced to where the whole deficiency and cure period process

ended up, and the letters were gone through in great detail that the class members would be

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getting. And everyone was prepped on what we expected to do in terms of helping any class

members that contacted class counsel, as opposed to Berdon." Id. at 318:25-321:8. Because the

claimant data was maintained by Berdon, there was a system to transfer to Berdon calls relating

to claim-specific inquiries that required access to the data. Ms. Kizis also worked to coordinate

with Berdon in this regard and had discussions with co-counsel Pomerantz regarding the

preparation for responding to inquiries from claimants during the cure period. I d. at 266:12-

269:3. Class counsel's preparations for the cure period continued through late October. Id. at

280:11-15.

In November 2009, Ms. Kizis additionally provided directions regarding how to respond

to class inquiries during the cure period by e-mail to Wilentz personnel outside of the core

response group with whom she had previously met. E-mail from L. Kizis to Wilentz personnel

(Nov. 19, 2009) ("Kizis Ex. 3") (App. Tab 24). She sent the e-mail to eighty-five Wilentz

attorneys and staffto ensure class member communications would be effectively addressed. Id.

In order to assist class members during the cure period, class counsel, and Berdon

prepared telephone scripts and answers to frequently asked questions. Rothbaum Ex. 25 (App.

Tab 68); Rothbaum Tr. at 181:16-186:4 (App. Tab 87).

Starting on November 13,2009, Health Net mailed 17,697 ineligibility letters (to

claimants with no eligible claim lines) and 13,592 deficiency letters (to claimants who had at

least one eligible claim line). Affidavit ofMichael Rosenbaum (Feb. 19, 2014) ("Rosenbaum

Aff. (Feb. 19, 2014)") at~ 3 (App. Tab 146). In the deficiency letters, claimants were advised

that they had sixty days after the date of the letter (or approximately January 13, 2010) to cure

any deficiencies. Quackenbos Ex. 12 (App. Tab 35). Berdon had an additional thirty days

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thereafter in which to submit supporting documentation to Health Net. Epstein Ex. 6 at 24 (App.

Tab21).

During the cure period, class counsel and Berdon responded to thousands of telephone

calls from class members. Rosenbaum Aff. (Feb. 19, 2014) at~ 23 (App. Tab 146); Kizis Tr. at

322:7-11 (App. Tab 82). Between November 2009 and March 2010, Berdon recorded handling

calls for over 2,500 Group Band Group C claimants. Rosenbaum Aff. (Feb. 19, 2014) at~ 23

(App. Tab 146). Berdan's personnel records indicate that twenty-four people were working on

the Health Net claims administration at the peak of the deficiency cure period (November 2009-

January 2010). Berdon Time Summary (App. Tab 110). Berdan's time summaries indicate that

Berdon expended over 4,481 hours during the cure period.

Berdan's records reflect that there were 712 Health Net related e-mails during the

deficiency period that were sent to or from the Health Net general mailbox maintained by

Berdon for corresponding with claimants. Rosenbaum Aff. (Feb. 19, 2014) at~~ 9, 12 (App. Tab

146).

As claimants reviewed the deficiency letters explaining Health Net's determinations as to

their claims, some claimants disagreed with or questioned Health Net's conclusions and

contacted Berdon. Berdon assisted some of those claimants by reviewing the claim files and

investigating the determinations made by Health Net. Rosenbaum Aff. (Feb. 19, 2014) at~ 25

(App. Tab 146); Rothbaum Tr. at 174-178, 192:6-194:19 (App. Tab 87); Rothbaum Ex. 24

(App. Tab 67); E-mail from M. Fried to G. Rothbaum (Jan. 27, 2010) ("Rothbaum Ex. 26")

(App. Tab 69). Berdon, acting through Garry Rothbaum, reviewed dozens of denied claims at

the request of claimants and approached Health Net regarding at least forty-three of these claims

during the cure period in an effort to have Health Net reconsider its deficiency finding as to those

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claims. Rothbaum Tr. at 174-178, 192:6-194:19 (App. Tab 87); Rothbaum Ex. 24 (App. Tab

67); Rothbaum Ex. 26 (App. Tab 69). Berdon was successful in obtaining an increase in the

prove-up amount adjudicated by Health Net with respect to some of these claims.

On December 17, 2009, Berdon sent a memorandum to class counsel to provide an

overview ofBerdon's experience with class members following the mailing of the deficiency

letters and conveyed to class counsel Berdon's understanding, as confirmed by Health Net, that

the amount of claims prove-up was "small." Rothbaum Ex. 24 at 1 (App. Tab 67). Berdon

began the memorandum by noting the following: "[W]e believe the procedures established by

the Settlement Agreement are flawed in that Health Net is unilaterally charged with auditing

claims, the total of which directly affects a potential reversion of up to $40 million." Id. Berdon

continued by setting forth four major areas of concern. Id. First, Berdon had identified

additional claim lines that class members had added to Section B of their Blue Sheet, which were

missed by Health Net. Id. Berdon expressed concern that these class members may not have

received "a deficiency letter giving them detailed information regarding their deficiency and the

opportunity to cure the deficiency in the prescribe time frame." Id. at 2. Berdon noted that they

believed the review process was conducted by Rust, "as their name [was] attached to the data

files we received from [Health Net's counsel], as well as appear[ed] in the proofofmailing

receipts are from their offices." I d. Second, Berdon expressed concern that Health Net failed to

identify supporting documentation submitted by claimants and wrongly concluded that Blue

Sheets were improperly completed by class members. Id. Third, Berdon expressed concern that

Health Net failed to "diligently review the originally submitted supporting documentation." Id.

at 3. Berdon noted that "there is a potential that a large number of claims will be excluded from

the Prove-Up Settlement Fund .... [I]n our conference call on November 3, 2009 with George

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McClellan, he was asked what amount of the $40 million Prove-Up Settlement Fund was already

perfected, he said 'small."' Id. Fourth, Berdon questioned the accuracy ofthe deficiency data

file provided by Health Net in that decimal points were misplaced and Health Net's total Balance

Bill for Group Band C Claims was $106 million whereas Berdan's was $61 million. Id. at 4.

Berdon also recommended that class counsel request from Health Net the "list of procedures

and/or review protocol that [were] used in connection with the processing of the Group B and

Group C claims." Id. Berdon stated that the "review of this list of procedures and/or review

protocol may also identify additional areas of concern based on the procedures utilized." Id.

Between December 17, 2009 and February 17,2010, Berdon sent 6,975 requests (which

included the HIPAA Authorization Forms signed by claimants) to providers for documents on

behalf of940 claimants. Affidavit ofVlady Gleizer (Feb. 13, 2014) ("Gleizer Aff.") at~ 8 (App.

Tab 147); Gleizer Aff., Ex. G (App. Tab 148).

Ofthe 6,975 requests for documents sent to providers, Berdon received responses to

1,116 ofthe requests or 16%. Rosenbaum Aff. (Feb. 19, 2014) at~~ 5-6 (App. Tab 146). In

many cases, the vast majority of the requests submitted on behalf of claimants were not returned.

There was, however, no follow-up because Berdon had no procedures in place to contact

providers who had not responded to the requests for documents. Id.

On January 13, 2010, class counsel sent an e-mail to counsel for Health Net putting them

"on notice" that there are "serious problems arising out of Health Net's handling of the Group B

and C claims including deficiency and ineligibility findings." E-mail from B. Quackenbos to G.

McClellan (Jan. 13, 2010) ("Quackenbos Ex. 14") (App. Tab 36). Class counsel stated that "we

dispute the sufficiency of the 'cure' period and ask that you take no further steps (including

regarding any purported 'deadlines' for curing deficiencies) until we are able to discuss and

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hopefully resolve these issues." Id. The following day, Health Net's counsel responded as

follows:

The parties agreed what would constitute deficiencies and ineligibilities as well as the length of the period within which claimants could submit documents to cure deficiencies with their Group B and C Claims. The agreement on these items has been in place for over six months. Health Net relied on this agreement as consideration for undertaking an expensive deficiency review, with which (as you will recall) Health Net did not agree was required by the Settlement Agreement. We are, however, prepared to discuss with you whatever issues you wish to raise next week.

E-mail from G. McClellan to Class Counsel (Jan. 14, 201 0) ("Calvert Ex. 1 0") at 1 (App. Tab 8).

Health Net requested that class counsel send an outline or agenda of issues to be discussed in

advance of the meeting. I d.

On February 1, 2010, class counsel sent Health Net a spreadsheet of forty-three claims,

totaling $105,000, "which Berdon asserted "Health Net [had] agreed to include in the Prove-Up

Settlement Fund after being contacted by Berdon" and which class counsel wished to discuss at

the meeting. E-mail from B. Epstein to G. McClellan (Feb. 1, 201 0) ("Quackenbos Ex. 15")

(App. Tab 37). Berdon claimed that Health Net missed these claims during its deficiency

review. Rothbaum Ex. 26 (App. Tab 69). Class counsel also requested certain information be

produced by Health Net, including, but not limited to, the following: (1) what the total amount

of money that Health Net stood to pay forB and C Claims out of the $40 million Prove-Up

Settlement Fund prior to the mailing of the deficiency letters; (2) what entity made the final

determinations; (3) whether there had been any audit, review, or report of ineligible and deficient

Group B and C Claims; and ( 4) the written protocols, instructions, and guidelines given to the

Group B and C Claim reviewers. Quackenbos Ex. 15 (App. Tab 3 7).

The parties met on February 3, 2010 to discuss several issues. According to class

counsel, Health Net's counsel would not provide an estimate of the amount Health Net stood to

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pay in perfected Band C Claims prior to the cure period. Kizis Tr. at 357:4-358:11 (App. Tab

82). E-mail from M. Fried to B. Epstein (Feb. 4, 2010) ("Quackenbos Ex. 16") (App. Tab 38).

Health Net's counsel did not recall discussion of the topic at the meeting, but stated that Health

Net would have been reluctant to "start throwing out numbers" since Health Net had yet to do

the adjudication. Calvert Tr. at 530:15-25; 531 :2 (App. Tab 79). Class counsel asserts that

Health Net's counsel informed class counsel that the total value of the Band C Claims prior to

sending out the deficiency and ineligibility letters was the $51.5 million Section 5 amount?7

Health Net's counsel could not say how or if he articulated the value of the claims prior to

sending out the deficiency letters, but stated that "everyone knew [$51.5 million] was the delta.

And what we were saying is we haven't adjudicated the claims yet. We haven't looked at what

has come in by way of additional proof." Calvert Tr. at 532:18-533:9 (App. Tab 79).

On February 19, 2010, Health Net's counsel sent an e-mail to class counsel to follow up

on some of the issues discussed between the parties at the February 3rd meeting. E-mail from G.

McClellan to L. Kizis and R. Axelrod (Feb. 19, 201 0) ("Axelrod Ex. 14") (App. Tab 5). Health

Net advised that it was preparing to provide Berdon with an updated file of the deficiency data

for Group Band C Claims that would address the decimal place errors, the health care services

that claimants added outside of Section B of the Blue Sheet where the claimant had at least one

eligible health care service, and any modifications to the adjudications of supporting

documentation that were made through February 16,2010. Id. Also, "in the spirit of

compromise and in order to expedite the adjudication process," Health Net agreed to review the

27 The dollar amount disallowed by Health Net (or Balance Bill) for services listed on each claim line was set forth at Section 5 of the Blue Sheet for each line. As discussed supra, class counsel often focused on the total Section 5 amount for all lines in all claims of the Blue Sheets in the Prove-Up Settlement Fund, which was approximately $51 million for eligible claim lines. This estimate, however, assumed that claimants would provide documentation for and prove up every single eligible claim on their Blue Sheet- an assumption which was inconsistent with the claimants' actual conduct.

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"2,372 Group Band C Claims with zero eligible health care services in Section A of the Blue

Sheet that Health Net ha[d] identified where the claimant added health care services to Section B

of the Blue Sheet."28 Id. Finally, Health Net took issue with Berdan's spreadsheet of forty-three

claimants because Berdon "excluded Claims that Health Net correctly adjudicated" and Health

Net had determined that some of the claims would be included in the Prove-Up Settlement Fund

as a result of Health Net's quality control efforts and not because Health Net was contacted by

Berdon. Id. at 2.

The cure period was concluded by the end of February 2010. In response to the 17,697

ineligibility letters and 13,592 deficiency letters sent in November 2009, 1,261 claimants

submitted documents in an effort to cure the deficiencies in their claims. Rosenbaum Aff. (Feb.

19, 2014) at~ 3 (App. Tab 146). As compared to the number of claimants who received a

deficiency letter (as opposed to an ineligibility letter), this constitutes a response rate of9.3%

(1,261 responses out of 13,592 deficiency letters).

Class counsel's expectation was that the $40 million Prove-Up Settlement Fund would be

exhausted following the cure period, particularly if supporting documentation was obtained for

sufficiently large claims.29 Quackenbos Tr. at 397:25; 398:2-17 (App. Tab 85). Class counsel's

28 Class counsel's memorandum following the February 3, 2010 meeting states the following with respect to the Section B added lines issue:

Their rationale for not reviewing any of those added line items was that none of the 26,000 added line items from the 14,000 deficient claims prove eligible, so none of the line items added by the 17,000 ineligible would be valid either. [Class counsel] took the position that the settlement agreement requires that all line items be reviewed, including the line items added by these 17,000 people. They said they'd take our position 'under advisement.'

Quackenbos Ex. 16 (App. Tab 38). For further discussion of claim lines written-in by claimants at Section B of the Blue Sheet, see Report of Eisner Am per LLP to Special Master in this matter (Sept. 10, 2014) ("Eisner Am per Report") at N. II. A copy ofEisnerAmper's Report is attached to my report as Exhibit A ("Ex.A").

29 Class counsel and Berdon were aware of the substantial number of claims that had no documentation from Berdon having reviewed all of the Group B and C Claim files prior to sending them to Health Net in the summer of

Continued ...

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position was that an extension of the cure deadline was not needed because "[n]o one ever said

that there was a problem with obtaining or having people mail in the supplemental

documentation." Id. at 416:21-25; 417:2-3 (App. Tab 85). According to class counsel, the

"problems of that deficiency cure period [were] the interpretation given to submitted documents,

not that documents weren't submitted." Id.

I. Health Net's Final Adjudication of Group Band C Claims

In connection with the end of the cure period and the upcoming final adjudication of

claims, Health Net executed an addendum to the claims services agreement in mid-February

2010, in which Rust agreed to perform claims administration services relating to the final

adjudication of the Group Band C Claims submitted against the Prove-Up Settlement Fund.

First Addendum to Claims Services Agreement (Feb. 19, 2010) ("Stinehart Ex. 21") (App. Tab

75). Specifically, Rust agreed to "review documents submitted in support of Group Band C

Claims to determine if the claimant ha[ d] satisfied the requirements for proven Group B and C

claims." Id. at 2. With respect to Group C Claims for which a claimant had proved the receipt

of a Balance Bill, Rust would "attempt to negotiate with the out-of-network providers to whom

the Balance Bill [was] owed to accept less than the full amount of the Balance Bill." I d. Rust

was also required to provide final reports regarding the amounts of the proven Group B Claims

and the amount Health Net would be required to pay to discharge proven Group C Claims. Id.

On March 25,2010, Health Net's counsel provided training to Rust personnel regarding

the final adjudication of the Group Band C Claims. Morgan Lewis Power Point, "Health

Net/McCoy Group B and C Claims Final Adjudication Training" (Mar. 25, 201 0) ("Stinehart Ex .

.... Continued 2008. Based on this knowledge alone, class counsel and Berdon should have been on notice that it was highly unlikely that the Prove-Up Settlement Fund would be exhausted.

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22) (App. Tab 76); Morgan Lewis Power Point, "Health Net/McCoy Group B and C Claims

Final Adjudication Training" with Annotations (Mar. 25, 201 0) ("Stinehart Ex. 23") (App. Tab

77)?0 The purpose of the training was to instruct Rust employees on how to adjudicate the

Group B and C Claims. Stinehart Ex. 23 at 1. Health Net's counsel explained to the reviewers

that the "most important goal is to make sure that every Class Member who has submitted

documents that prove the receipt and/or payment of a Balance Bill receives the appropriate

benefit from the Prove-Up Settlement Fund. Our efforts must be accurate and thorough such that

they strictly adhere to the requirements of the Settlement Agreement." Id. The training focused

primarily on whether the class member submitted supporting documentation and how a class

member populated Section 6 of the Blue Sheet. I d. at 22. The training makes clear that if a class

member populated any letter other than "B" or "C" in Section 6 of the Blue Sheet, or left it

blank, then the health care service is ineligible to participate in the Prove-Up Settlement Fund.

Id. With respect to member responsibility, the Power Point notes that "[i]t is important to

understand that when a Class Member proves the receipt and/or payment of a bill for the Class

Member's member responsibility, the Class Member has failed to show the receipt and/or

payment of a Balance Bill." Id. at 14.

Health Net's final adjudication of the Group Band C Claims was completed by July

2010. During Health Net's quality control review,31 Health Net discovered "documentation for a

healthcare service that wasn't on the Blue Sheet." McClellan Tr. at 441:14-21 (App. Tab 84).

Health Net consulted Navigant, the consultant originally responsible for gathering much of the

30 Because of the voluminous nature of the training materials, I have not included these documents in the Appendix. If the Court would like a copy, I will provide it.

31 Health Net asserts that, it continued to review claims multiple times, including "high-dollar" and "highvolume" claims for quality control purposes. McClellan Tr. at 445:21-25; 446:2-5 (App. Tab 84).

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class claims data ultimately used on the Blue Sheets. Navigant discovered that it did not have

that particular claim line in its database. Id. Health Net's counsel explained the problem as

follows:

What Navigant didn't know when they started pulling MC400 data way back when was that once Health Net's MC400 professional claim system hits a certain number, I think it's 99, it resets to zero, just like a deli counter would. So that there would be a number of instances where the proper programming logic would not look for the highest two-digit value. You would need to come up with programming logic that looked for the final line based on something else.

What happened as a result of that error is, threshold [sic] matter, some of the final adjudications of claim lines were missed because the programming logic was looking for the highest value when that wasn't necessarily the final.

The second and actually bigger problem is that when the programming logic looked for what it believed to be the final version of the line, to the extent that other claim lines in a claim?

And, again, now we're- I'm not talking anything to do with the adjudication of the Prove-Up Fund. This is all- think your ONET provider sending the bill to Health Net, Health Net processes it. Think of a service where the doctor does four procedures.

So, there are four CPT codes on a single HCFA-1500 form. Health Net adjudicates all four of those claim services on August 1, 2006. Health Net subsequently readjudicates the last one, you know, September 25th, 2006. Navigant's programming logic would have picked up only that September 25th, 2006 readjudication, inadvertently lopping offthe first three.

McClellan Tr. at 448:22-25; 449:2-25; 450:2-9 (App. Tab 84).

On July 15, 2010, Health Net's counsel advised class counsel regarding the programming

logic error that occurred in the MC400 database. 32 E-mail from M. Fried to G. McClellan and J.

Calvert (July 15, 2010) ("Calvert Ex. 12") (App. Tab 10); see also Kizis Tr. at 386:10-25; 387:2-

24 (App. Tab 82). Health Net advised that the errors affected the data of approximately 100,000

32 Health Net's claims data is contained in approximately forty different claims systems across the country, three of which represent approximately 85 to 90 percent of the current claims. Calvert Tr. at 27:13-19 (App. Tab 79). The MC400 system, one of Health Net's larger claims systems, covers the Northeast and Arizona. McClellan Tr. at 448:6-8 (App. Tab 84). In August 2010, Health Net discovered a second, unrelated programming logic error involving Health Net's ABS California system and, in the spring of2011, Health Net discovered a programming logic error involving its Managed Health Network ("MHN"). I d. at 456: 12-15; 459: 16-23; 461:21-25.

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class members and affected the class members in the following ways: (1) some class members

received notice but received Blue Sheets that were either missing claim lines or had incorrect

claim lines ("under-noticed claims"); and (2) some class members were never given notice of the

settlement at all ("unnoticed claims"). Calvert Ex. 12 (App. Tab 1 0). In response, class counsel

requested additional information regarding the "exact nature of the errors" and stated that "[ w ]e

believe that the errors we learned about today are so substantial that they will need to be brought

to the Court's attention." Id.

J. Health Net's Discharge Report

Pursuant to Section 9.9 of the Settlement Agreement, Health Net was required to provide

to Berdon a list of those class members that submitted a valid Group C Claim, "together with a

notice of confirmation of discharge of the Balance Bill." Epstein Ex. 1 at Section 9.9 (App. Tab

16); Calvert Tr. at 596:12-18 (App. Tab 79). On August 31, 2010, Health Net sent Berdon a

Confirmation of Discharge Report. E-mail from G. McClellan to M. Rosenbaum, G. Rothbaum

and V. Gleizer (Aug. 31, 2010) ("Calvert Ex. 13") (App. Tab 11). The report showed that Health

Net had paid $131,555.54 to discharge proven Group C Claims in the amount of $255,366.18.

Id.; Calvert Tr. at 596:19-25; 597:2-12 (App. Tab 79); McClellan Tr. at 568:2-10 (App. Tab 84).

Class counsel was "shocked" by these numbers considering their expectation that the Group C

Claims would be "very voluminous" and "potentially themselves overwhelm this Prove-Up Fund

report." Kizis Tr. at 391:11-25 (App. Tab 82).

K. Health Net's Final Prove-Up Report

On October 15, 2010, Health Net sent class counsel the Final Prove-Up Settlement Fund

Report as required pursuant to Section 9.10 of the Settlement Agreement. E-mail from G.

McClellan to Class Counsel (Oct. 15, 201 0) ("Quackenbos Ex. 17") (App. Tab 39). The Report

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stated that Health Net paid $784,566.19 in Group B Claims. Id. In the report, Health Net set

forth its "Substantive Findings" as follows:

By and large, 5,856 Class Members who submitted documents to support their Group B and/or C Claims failed to show that they had either received or paid a Balance Bill for a Covered ONET Service or Supply. In fact, many ofthe documents showed that the Class Member actually did NOT receive a Balance Bill for a Covered ONET Service or Supply. Hundreds of these documents showed that the ONET providers either waived or adjusted the Balance Bill amount such that the Class Member was not responsible for the payment thereof. In addition, the documents revealed that to the extent that ONET providers attempted to collect anything from the Class Member, it was the Class Member's co-insurance, deductible, and co-payment obligations, which are expressly excluded from the definition of a Balance Bill in the Settlement Agreement.

Id. at 3. Class counsel explained that they were "greatly perturbed" and "stunned" by the results

of the report and "believed that that small amount was incorrect" because it was "too low ... and

had to have been the product of the adjudication process that did not seem correct." Axelrod Tr.

at 459:11-19 (App. Tab 78); see also Epstein Tr. at 163:2-3 (App. Tab 80); Quackenbos Tr. at

430:24-25 (App. Tab 85). Class counsel (Ms. Kizis) also recalls that the member responsibility

issue "jumped out at me, because I recognized as I was reading this that, you know, we would

have had no means of identifying or helping a class member who didn't happen to write a note

on the check what payments were for these amounts." Kizis Tr. at 395:18-25 (App. Tab 82).

Class counsel again sought to "get the information from Health Net to determine how they

adjudicated the claims and the rules as to how they adjudicated the claims." Axelrod Tr. at

462:2-6 (App. Tab 78).

L. Parties Attempt to Resolve Issues Revealed Following Final Prove-Up Report

On November 1, 2010, the parties sent a joint letter to the Court advising that there was

an error involving the "programming logic that was used to obtain the claims data that was then

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used to prepare some ofthe settlement notices."33 Letter from B. Quackenbos to Honorable

FaithS. Hochberg (Nov. 1, 201 0) ("Quackenbos Ex. 19") at 1 (App. Tab 40). The parties set

forth a proposed plan to address the notice issues associated with the programming logic errors

and advised the Court that following a meet and confer counsel would contact the Court for

approval of "a joint plan to address these issues." I d. at 3. The parties also advised that they

would develop a plan to make an interim distribution of the Cash Settlement Fund "and report to

the Court in the near future." Id. Finally, the parties advised that they would "report any

potential issues arising from the adjudication of Group B and C Claims as soon as the meet and

confer process regarding this payment of Group Band C Claims concludes." Id. at 4. The

parties decided not to advise the Court regarding the results of the Prove-Up Settlement Fund

because the issue was "premature" and there were issues that still needed to be "addressed or

resolved" between the parties. Quackenbos Tr. at 453:7-13 (App. Tab 85); Calvert Tr. at 642:11-

21 (App. Tab 79). Health Net's counsel explained:

[W]hat we were trying to do [was] send [the Court] letters with some information that would - could be useful to the court.

Information about how many B and C Claims, when we were still talking about them, that came in and before we made a final request for distribution or something else was really getting the court involved at a time and at a detail level that we didn't think [the Court would] appreciate.

Calvert Tr. at 643:10-20 (App. Tab 79).

On January 5, 2011, class counsel sent Health Net a letter requesting, in advance of a

meet and confer, the names and addresses ofthose class members affected by the programming

33 Between October 20, 2010 and October 27, 2010, the parties exchanged various drafts of the proposed letter to the Court. E-mail from B. Quackenbos to J. Calvert (Oct. 20, 2010) ("Calvert Ex. 14") (App. Tab 12); Email from G. McClellan to Class Counsel (Oct. 22, 2010) ("Calvert Ex. 15") (App. Tab 13); E-mail from L. Kizis to counsel (Oct. 26, 201 0) and E-mail from G. McClellan to Class Counsel (Oct. 27, 201 0) (together, "Calvert Ex. 17") (App. Tab 14).

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logic error and the "instructions or protocols used by Rust and/or Health Net to adjudicate Group

Band C claims." Letter from B. Quackenbos to G. McClellan (Jan. 5, 2011) ("Quackenbos Ex.

20") (App. Tab 41 ). Class counsel stated that "[i]f we agree that such instructions or protocols

are consistent with the settlement, that will limit or narrow the areas potentially in dispute

between us." Id. at 2. On January 14, 2011, Health Net responded by providing information

related to the unnoticed and under-noticed class members. Letter from G. McClellan to B.

Quackenbos (Jan. 14, 2011) ("Quackenbos Ex. 21") (App. Tab 42). With respect to class

counsel's request for the instructions or protocols used by Rust and/or Health Net to adjudicate

Group B and C Claims, Health Net responded by providing a one-and-a-half page "general

outline" that "we created for you that describes the approach taken to adjudicate Claims." Id. at

2.

On January 21, 2011, class counsel responded stating that "[i]n order to make this [meet

and confer] as productive as possible, you need to provide the information we have been

requesting that has not been furnished. Specifically, you must provide the precise criteria used to

determine 'eligibility for Group B and C claims.' This 'general outline that we created for you

that describes the approach taken to adjudicate Claims' (attached as Exhibit E) may be a good

start, but it does not replace or eliminate the need for you to furnish the precise criteria used." E-

mail from B. Quackenbos to G. McClellan and J. Calvert (Jan. 21, 2011) ("Quackenbos Ex. 22")

(App. Tab 43). Class counsel also stated the following with respect to administrative services

only ("ASO") claims:

Finally, your e-mail of January 21,2011 to Garry Rothbaum (on which I am cc'ed) contends that a member's Group A claim was denied because Health Net determined from scrutinizing adjustment reason codes that Health Net had sent her claims to MHN, and MHN had, in turn, sent her claims for processing to a company called CBIA. You then state: "The health care services were adjudicated pursuant to an administrative services only (' ASO') agreement with a

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Id. at 1.

company named CBIA. Per the parties' agreement, ASO claims are excluded from the Settlement."

Again, we need to know the precise criteria being used to make decisions to disqualify individuals from the cash settlement. We also need to understand why you contend that an ASO agreement that MHN had with another company (CBIA) has any bearing on Group A claims in this settlement. There is no agreement to exclude ASO claims generally or these particular ASO claims (which do not indicate that the claims are self-funded by the member's employer group, which is the common understanding of "ASO claims").

There is no basis for concluding that this member's claims are not eligible for Group A payment. HN must provide details including names of members and reasons as to any of the members that HN disqualified from receiving money under the settlement based on its interpretation that there is an applicable ASO exclusion (and if so, what the ASO "agreement" was and who it was between).

The parties conducted a meet and confer on January 24, 2011, almost three months after

the parties' November 1, 2010 letter to Judge Hochberg. E-mail from M. Fried to class counsel

(Jan. 26, 2011) ("Quackenbos Ex. 25") (App. Tab 45). During the meeting, Health Net's counsel

indicated their willingness to share the materials given to Rust to adjudicate the Group B and C

Claims so long as class counsel agreed that there would not be a waiver of attorney work-product

or attorney-client privilege. 34 Id.; McClellan Tr. at 646:4-16 (App. Tab 84). Health Net's

34 When asked whether Health Net considered asking class counsel for a limited waiver of any potential work-product issue in this matter, counsel responded:

The limited waiver option had never been proposed by class counsel.

Second, with respect to the October 16th-ish or 18th-ish, 2008 letter from Mr. Epstein, as I previously testified, based on a December 23rd or 24th, 2008 e-mail that memorialized a conversation with Ms. Quackenbos and Ms. Kizis, we understood that request [for the Rules used by Health Net in adjudicating claims] to have been withdrawn.

As of February 2010, when a request for the rules was made, it was not accompanied by a proposal from class counsel that they would not- that they would agree to a limited waiver.

It wasn't until 2011 that we thought that might be a way to accommodate their request, as well as protect against a potential waiver argument. And I think the overarching presumption in the question is that the provision of the rules would have somehow benefited class counsel or Berdon.

McClellan Tr. at 649: 15-25; 650:2-11 (App. Tab 84).

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counsel also confirmed that Rust, Navigant, and Health Net were all involved in the adjudication

of the Group Band C Claims. Id. Health Net's counsel stated that the "best case scenario" for

the proven amount of Group Band C Claims was $24-$28 million whereas Berdon's "best case

scenario" was $51 million.35 Id. Health Net also advised that approximately 1,000 class

members (or $1 million in claims) were determined ineligible under the Prove-Up Settlement

Fund for failure to correctly complete Section 6 ofthe Blue Sheet. ld. On February 1, 2011,

Health Net sent to class counsel the following three categories of documents that were requested

during the January 24, 2011 meet and confer: (1) "Documents relating to Class Counsel's

agreement that ASO claims data is excluded from the Settlement;" (2) "Documents relating to

the Rust reviewers' adjudication of Group Band C Claims;" and (3) "Group Band C Claims

Statistics." E-mail from G. McClellan to class counsel and Berdon (Feb. 1, 2011) ("Quackenbos

Ex. 30") (App. Tab 47). This was the first time that Health Net provided class counsel with a

copy of the training materials that were given to Rust for the deficiency review and final

adjudication. Calvert Tr. at 676:9-10 (App. Tab 79).

On March 11,2011, class counsel sent Health Net's counsel a letter stating that they "had

an opportunity to review the materials you sent on February 1, 2011 in conjunction with our

meeting on January 24, 2011." Letter from B. Quackenbos to G. McClellan and J. Calvert (Mar.

11, 2011) ("Quackenbos Ex. 31 ") at 1 (App. Tab 48). Class counsel requested additional

materials "to enable [class counsel] to fully understand the review by Health Net/Morgan

Lewis/Rust/Navigant ("reviewers")[.]" Id. By way of example, class counsel requested

35 The fact that class counsel and Berdon still believed, as of January 24, 2010, that the "best case scenario" for the ultimate prove-up amount of the Group Band Group C Claims was $51 million after having seen firsthand the large number of claims files that had no documentation and the modest number of claimants who were producing cure documents, suggests that class counsel and Berdon were not effectively analyzing the numbers in this case.

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information related to the following issues: (1) the coding used by the reviewers; (2) the results

of any and all audits; and (3) instructions related to the Section 6, member responsibility, and

ASO issues. I d. Between March 17 to March 31, 2011, the parties exchanged correspondence

regarding class counsel's request for additional information and Health Net's adjudication

procedures. E-mail from B. Quackenbos to G. McClellan and J. Calvert (Mar. 24, 2011)

("Quackenbos Ex. 32") (App. Tab 49); E-mail from G. McClellan to B. Quackenbos and M.

Fried (Mar. 28, 2011) ("Quackenbos Ex. 33") (App. Tab 50); Letter from G. McClellan to B.

Quackenbos (Mar. 31, 2011) ("Quackenbos Ex. 34") (App. Tab 51).

M. Berdon's Review of Group Band Group C Claims

On June 10, 2011, Berdon sent class counsel a summary of its "sample review of 100

randomly-selected Group Band/or C claims." E-mail from V. Gleizer to B. Quackenbos and M.

Gross (June 10, 2011) (App. Tab 130). The purpose of the exercise was "to compare the

outcomes of the two processes, that employed by [Rust and Health Net] and that employed by

Berdon." Id. Berdon concluded that "[w]hile no statistical testing of a hypothesis has been

done, I believe it is reasonable to conclude that the two processes are materially different." I d.

Based on Berdan's review, Berdon identified a total of seventeen claims that should have

received additional Prove-Up Settlement Fund proceeds totaling $34,809.37. Id. On June 29,

2011, class counsel sent to Health Net Berdan's results as to those seventeen claims. Letter from

G. McClellan to Berdon (July 14, 2011) (App. Tab 128). On July 14,2011, Health Net

responded, by way of letter; Health Net agreed with Berdan's adjudication of the supporting

documentation with respect to fourteen of the Group B and C Claims, but disagreed with

Berdan's adjudication on three of the claims. Id.

As a result of Berdon' s initial review, class counsel instructed Berdon to randomly select

and review an additional 100 claims from the following three groups: (1) claims deemed

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ineligible; (2) claims deemed eligible but not documented; and (3) claims deemed eligible and

documented. Gleizer Tr. at 203:24-25; 204:2-3 (App. Tab 81). On August 8, 2011, Berdon

reported the results of its second review to class counsel. E-mail from G. Rothbaum to M. Fried

(Aug. 8, 2011) (App. Tab 131). With respect to Berdon's review of 100 ineligible claims,

Berdon found "minimal" discrepancies between Berdon's review and that of Health Net. Id.; see

also Gleizer Tr. at 206:12-16 (App. Tab 81). Berdon found two claim lines that were

undocumented and should have received a deficiency letter as opposed to being deemed

ineligible by Health Net. E-mail from G. Rothbaum toM. Fried (App. Tab 131); Gleizer Tr. at

206:23-25 (App. Tab 81 ). With respect to the 100 deficient claims, Berdon found three claims

that had suppmiing documentation totaling $1,238.00. E-mail from G. Rothbaum toM. Fried

(App. Tab 131 ). As for the eligible and documented claim lines, Berdon determined that forty

five Group B Claims were properly documented representing a Balance Bill of$57,113.07 and

four Group C Claims were properly documented representing $3,860.33. Id. Berdon found no

discrepancies with fifty-one of the claims. I d.

Health Net disputed Berdon's findings with respect to the forty-five eligible Group B and

C Claims that Berdon suggested should be included in the Final Prove-Up Settlement Fund

Report. Letter from G. McClellan toM. Gross (Sept. 20, 2011) ("Calvert Ex. 18") (App. Tab

15). Health Net contended that Berdon agreed with fifty-five ofthe 100 claims reviewed. Id. at

2. Of the remaining forty-five claims, Health Net contended that Berdon agreed with its

adjudication of the supporting documentation for twenty-one of those claims. Id. Health Net

explained that a majority of those twenty-one claims were not included on the Final Prove-Up

Fund Settlement Report because the class member did not populate Section 6 of the Blue Sheet.

I d.

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N. Discussions Regarding A Partial Distribution of Cash Settlement Fund

On July 18,2011, class counsel sent Health Net a letter stating that "[a]s you know, we

do not agree with many of the decisions Health Net made in its administration of Group B & C

claims. Rather than let this ongoing dispute delay relief for the bulk of the class, we suggest that

we continue to work through those issues without prejudice to either party's rights." Letter from

B. Quackenbos to J. Calvert and G. McClellan (July 18, 2011) ("Quackenbos Ex. 35") at 2 (App.

Tab 52). Class counsel advised that they were "preparing a motion and order authorizing, inter

alia:

1. A partial distribution to all Group A claimants;

2. A pay out of approved amounts to Group B claimants (including those complete but for Section 6 designation);

3. Mailing a class notice to all previously unnoticed or erroneously noticed class members at HN's [Health Net's] expense (as well as limited discovery to assure us that all such class members have been properly identified);

4. Identification and mailing of class notice to ASO class members;

5. Modification of the class notice to avoid some ofthe problems encountered in the claims administration process to date; and

6. Partial payment of fees and expenses incurred by Berdon."

Id. at 1-2. Class counsel requested that the parties schedule a meet and confer "in the next week

or so to determine areas of common ground, and to submit any unresolved issues submitted to

Judge Hochberg for resolution." Id. at 2.

On July 22, 2011, Health Net's counsel responded by providing potential dates for a meet

and confer. Letter from G. McClellan to B. Quackenbos (July 22, 2011) at 1 (App. Tab 124).

With respect to the partial distribution issue, counsel noted that they "suggested a way to issue a

partial payment to Class Members who submitted Group A Claims" in July 201036 and that

36 There is a dispute among the parties as to when the issue of a partial distribution was first raised. Class counsel contend that they have "no recollection" of this July 2010 overture by Health Net and that this statement

Continued ...

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Health Net "will continue to assist Class Counsel and Berdan in developing a way to issue such a

payment." Id. Counsel concluded the letter by noting that they "remain committed to

concluding the settlement process accurately and promptly." ld. at 2.

The parties met on August 9, 2011. E-mail from M. Gross to J. Calvert, G. McClellan,

M. Fried, and B. Epstein and attached Summary of August 9, 2011 Meeting (Aug. 11, 2011)

("Quackenbos Ex. 36") (App. Tab 53). During the meeting, the parties discussed the issue of a

partial distribution. Following the meeting, Berdan was to assemble the "list of all

recommended A claims, including the approximately 8,500 Group Band/or Group C Claims that

have at least one eligible health care service but no supporting documentation that will be

converted to A claims," which the parties would then submit to the Court for approval and pro

rata distribution of 50% of the Cash Settlement Fund. Id.; see also Summary of August 9, 2011

Meeting at 1 (App. Tab 1 08) .

.... Continued was "written in response to Class Counsel's overture on July 15, 2011 that the parties revisit a partial distribution." Letter from B. Quackenbos to counsel for Health Net (July 15, 2011) (App. Tab 129) ("We are writing to advise you that we are preparing a request for Court approval from Judge Hochberg for a partial distribution to all Group A claimants."). Class counsel also note that Health Net first advised class counsel of the programming logic errors on July 15, 2010. Submission to Special Master from Class Counsel re Cash Settlement Fund Distribution Chronology Certification (Feb. 6, 2014) ("Class Counsel Distribution Cert.") at 2 (App. Tab 145). Even if Health Net suggested a partial distribution as early as July 2010, class counsel's position was that "[n]o distribution ofthe Cash Settlement Fund could be recommended to the Court until the scope of [the] notice problem was determined by Health Net. Without knowing the size of these potential claims (as well as the spill-over from the Prove-Up Settlement Fund to the Cash Settlement Fund), there was a significant risk of overpayment." lQ_,

Health Net contends that they also suggested a partial distribution in October 2010. E-mail from G. McClellan to L. Kizis (Oct. 26, 201 0) (App. Tab 117) ("When I spoke with you and Barbara on Friday, I understood that Class Counsel wanted me to reach out to [Berdon] to get the total Balance Bill Amount (reflected in Section 5 of the Blue Sheet) for the Class Members who submitted Group A Claims. This information should help us to discuss the possibility of making a preliminary distribution of the Cash Settlement Fund."). Class counsel's position is that a partial distribution was not appropriate in October 2010 because at this was the "first time that Class Counsel [was] informed of the maximum amount of claims that could spill over from Groups B and C to Group A, thereby providing Class Counsel with the claimants that needed to be covered by any distribution, partial or otherwise." Class Counsel Distribution Cert. at 3 (App. Tab 145). Class counsel contend that they "were shocked by the low rate of approval and thus still had legitimate questions about the amount of unproven B and C claims that spilled into the Cash Settlement Fund." lQ_,

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From August 19,2011 to October 4, 2011, the parties engaged in a series oftelephone

calls and meetings to discuss the remaining disputes between the parties, including the issue of a

partial distribution. Submission to Special Master from Class Counsel Regarding Cash

Settlement Fund Distribution Chronology Certification (Feb. 6, 2014) ("Class Counsel

Distribution Cert.") at 6-8 (App. Tab 145); see also Submission by Health Net to Special Master

re Partial Distribution Chronology (Feb. 6, 2014) ("Health Net Distribution Cert.") at 3-5 (App.

Tab 144). On October 4, 2011, the parties determined that the disputes, including the issue of a

partial distribution, should be presented to a mediator consistent with the terms of the Settlement

Agreement.37 Class Counsel Distribution Cert. at 8 (App. Tab 145); Health Net Distribution

Cert. at 4-5 (App. Tab 144). Once the parties decided to pursue mediation, Health Net's position

was that the issue of a partial distribution was in "dispute" as well and would be addressed at the

mediation. E-mail from G. McClellan toM. Gross and J. Calvert (Dec. 12, 2011) (App. Tab

126) ("Moreover, now that Class Counsel have identified the issues that they seek to mediate,

whether there can be any distribution from the Cash Settlement Fund is in dispute as well. Thus,

awaiting the results of the mediation will be necessary before we respond to [Berdon].").

0. Health Net Issues Revised Final Prove-Up Report

On September 22, 2011, Health Net issued a Revised Final Prove-Up Settlement Fund

Report. E-mail from G. McClellan toM. Gross (Sept. 22, 2011) (App. Tab 103). Pursuant to the

report, Health Net paid an additional $152,281.55 in Group B Claims and $704.82 in Group C

Claims. Id.

37 Section 23 of the Settlement Agreement provides that "[i]n the event of such a dispute, the Parties agree that representatives from Class Counsel and the Company shall meet and confer in an attempt to resolve such dispute. If these representatives reach an agreement regarding the dispute, that resolution shall be binding upon the Parties. If these representatives are unable to resolve the dispute, then the Parties shall submit the dispute to mediation by a neutral mediator to be agreed upon by Class Counsel and the Company." Epstein Ex. 1 (App. Tab 16).

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Chardon v. Fumero Soto, 462 U.S. 650, 660-61 (1983) (citing Am. Pipe & Constr. Co. v. Utah,

414 U.S. 538, 553 (1974)).

One of the major goals of class action litigation is "to simplify litigation involving a large

number of class members with similar claims." Devlin v. Scardelletti, 536 U.S. 1, 10 (2002).

Class actions are meant to provide remedies to large numbers of aggrieved individuals when,

otherwise, relief may not have been economically feasible on an individual basis. Deposit Guar.

Nat'l Bank v. Roper, 445 U.S. 326, 339 (1980). Indeed, "[w]here it is not economically feasible

to obtain relief within the traditional framework of a multiplicity of small individual suits for

damages, aggrieved persons may be without any effective redress unless they may employ the

class-action device." Id. As promulgated in Federal Rule of Civil Procedure 23, class actions

should promote accountability, efficiency, and equity. Fed. R. Civ. P. 23(b)(3) advisory

committee's note (observing that Rule 23(b)(3) encompasses those cases "in which a class action

would achieve economies of time, effort, and expense, and promote uniformity of decision as to

persons similarly situated, without sacrificing procedural fairness").

2. Duties of Class Counsel

Class counsel's duties to class members are drawn from four sources: (1) Federal Rule of

Civil Procedure 23, which states that class counsel must represent the class fairly and adequately,

In reGen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 799 (3d Cir.

1995); (2) counsel's general fiduciary duty to class members, Greenfield v. Villager Indus., Inc.,

483 F.2d 824, 832 (3d Cir. 1973); (3) the Rules of Professional Conduct which set forth

counsel's ethical duties, Dittimus-Bey v. Taylor, No. Civ. 05-063 JBS/JS, 2013 WL 6022128, at

*4 (D.N.J. Nov. 12, 2013); and (4) counsel's contractual duties as set forth in applicable

settlement agreements, In re Diet Drugs Prods. Liab. Litig., MDL No. 1203, 2003 WL 22341305,

at *7 (E.D. Pa. Aug. 14, 2003).

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Class counsel's ongoing Rule 23 duty to represent the interests of the class fairly and

adequately is well-settled. See Sheinberg v. Sorensen, 606 F.3d 130, 132-33 (3d Cir. 2010); In

re Prudential Ins. Co. Am. Sales Pract. Litig. Agent Actions, 148 F.3d 283, 308 (3d Cir. 1998);

Dittimus-Bey, 2013 WL 6022128, at *3.

Importantly, the duty to represent the interest of class members fairly and adequately

does not end once the litigation reaches settlement; it is "clear and beyond question that class

counsel have a continuing duty to class members to represent their interests vigorously in all

phases of the class suit, including the administration of the settlement." Valente v. Pepsico, Inc.,

90 F.R.D. 170, 173 (D. Del. 1981). Courts have, in fact, acknowledged a duty of class counsel to

assist class members with the claims administration process when such a duty is set forth in the

settlement agreement. See,~, Grays Harbor Adventist Christian Sch. v. Carrier Corp., No.

C05-5437-RBL, 2008 WL 1901988, at *3 (W.D. Wash. Apr. 24, 2008) (noting that, per the

settlement agreement, counsel had an ongoing responsibility which included "assisting class

members with claims administration issues").

Class counsel also owe a general fiduciary duty to class members. Gen. Motors Corp., 55

F.3d at 801 (noting that, beyond their ethical obligations to their clients, class counsel purporting

to represent a class also owe the class a fiduciary duty once the class complaint is filed); see also

In re Cmty. Bank ofN. Va., 418 F.3d 277,313 (3d Cir. 2005) (observing that class counsel owe

a generalized fiduciary duty to unnamed class members). Like class counsel's Rule 23 duty,

class counsel's fiduciary duty to class members extends throughout the entire litigation. In re

Chiron Corp. Sec. Litig., No. C-04-4293 VRW, 2007 WL 4249902, at* 14 (N.D. Cal. Nov. 30,

2007) (citing Foe v. Cuomo, 892 F.2d 196, 198 (2d Cir. 1989) (noting that counsel's obligations,

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and the court's obligation to evaluate the adequacy of those obligations, continues throughout the

litigation)).

The Rules of Professional Conduct also govern counsel's action in the context of class

action litigation. See Lazy Oil Co. v. Witco Corp., 166 F.3d 581,588-89 (3d Cir. 1999)

(consulting the Model Rules of Professional Conduct in disqualifying class counsel due to a

conflict of interest); Hall v. AT & T Mobility LLC, No. 07-5325 JLL, 2010 WL 4053547, at *17

(D.N.J. Oct. 13, 2010) (analyzing class counsel's fee splitting arrangement under New Jersey

Rules of Professional Conduct). Pursuant to the Rules of Professional Conduct, class counsel

also have a duty to represent the interest of their clients zealously. Essex Cnty. Jail Annex

Inmates v. Treffinger, 18 F. Supp. 2d 418,438 n.7 (D.N.J. 1998).

Finally, class counsel must always carry out contractual duties and obligations to class

members as set forth in the settlement agreement. See,~, Martens v. Thomann, 273 F.3d 159,

172-73 (2d Cir. 2001) (remanding action to district court for clarification where moving

plaintiffs contended that class counsel violated their obligations by failing to prepare statistical

analysis as mandated by the settlement agreement).

Class counsel acknowledge their various duties to class members. Class counsel have

recognized their duty to represent the interests of the class fairly and adequately. Class

Counsel's Proposed Findings of Fact and Brief at 46-47 (May 16, 2014) (App. Tab 160). Class

counsel also acknowledge that, in addition to the duties imposed by Rule 23(g), they owe

fiduciary obligations to the members ofthe class. Id. at 47. Class counsel further accept their

contractual duties under the Settlement Agreement to assist class members in maximizing their

payout under the Prove-Up Settlement Fund. Id. at 47-50. Ultimately, class counsel state that

their obligations to assist class members in this case were no different than the obligations

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undertaken by any class counsel in connection with a settlement that requires proof of claims

with documentation. Id.

3. Duties of Defense Counsel

While defendants, and by association defense counsel, do not typically owe a generalized

duty to class members, defendants and counsel are obligated to carry out their duties as set forth

in the settlement agreement. See,~' Castagna v. Madison Sq. Garden, L.P., No. 09-CV-10211

LTS HP, 2011 WL 2208614, at *12 (S.D.N.Y. June 7, 2011) (entering final approval for class

action settlement and noting that, in addition to paying appropriate settlement amounts,

defendant must perform the additional duties outlined in the settlement agreement); In re

Farmers Group Stock Options Litig., No. 88-4994, 1991 WL 332500, at *12 (E.D. Pa. Dec. 19,

1991) (same).

In this case, class counsel have maintained that Health Net, pursuant to the Settlement

Agreement and as designated administrator and a co-signatory to the Berdon engagement letter,

owed fiduciary obligations to Prove-Up Settlement Fund claimants. Class Counsel's Proposed

Findings of Fact and Brief at 49 (App. Tab 160). Additionally, during this investigation, class

counsel have asserted that Health Net owes- and continues to owe- a fiduciary duty to the

settlement class. Class Counsel Letter Brief(Oct. 23, 2013) (App. Tab 138). Class counsel's

support for this assertion is threefold. First, class counsel states that Health Net owes ERISA

based fiduciary duties to plan members who took part in the Settlement. Id. at 1-3. Class

counsel maintains that, in insuring and administering ERISA plans, Health Net was a fiduciary as

defined by the ERISA statute, 29 U.S.C. § 1002(21)(A)(i)-(iii). Second, class counsel contend

that Health Net owes fiduciary duties to class members pursuant to the Settlement Agreement, as

administrator and adjudicator of Group B and Group C claims. Class Counsel Letter Brief (Oct.

23, 2013) at 3-4 (App. Tab 138). Class counsel note that Health Net, in fact, insisted on this duty

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during settlement negotiations. Id. Third, class counsel insist that Health Net, as a health

insurer, owes common law fiduciary duties to its insureds who took part in the Settlement

Agreement. Id. at 4.

Conversely, Health Net maintains that, pursuant to Section 9 of the Settlement

Agreement, Health Net took on duties that were contractual in nature, not fiduciary. Health Net

Letter Brief (Nov. 1, 20 13) at 4-9 (App. Tab 139). Health Net insists that its obligations in this

case are controlled exclusively by the terms of the Settlement Agreement as interpreted under

New Jersey law and that it would be improper to treat Health Net's performance of these

contractual obligations as fiduciary functions governed by ERISA. Id. at 3. Health Net

maintains that any ERISA obligations it may have owed to certain claimants were terminated

when Health Net executed the Settlement Agreement and the issue of Health Net's ERISA

obligations was among the very issues argued and settled in the underlying litigation. Id. at 6.

Likewise, Health Net contends that the determinations and adjudications it made regarding

Group B and Group C Claims were carried out within its contractual capacity under the

Settlement Agreement. Id. at 7. Finally, Health Net asserts that it is a holding company, not an

"insurer," so it does not owe claimants fiduciary obligations relating to an insurer and insured

relationship. Id. at 8. Health Net asserts that the claims at issue relate to contractual claims

under the Settlement Agreement, not claims for insurance benefits under an insurance contract.

Health Net concedes that, with respect to its duties under the Settlement Agreement, it

had an implied covenant of good faith and fair dealing as imposed by New Jersey law. Id. at 1;

see also Health Net's Brief in Support ofProposed Findings of Fact at 12 (May 16, 2014) (App.

Tab 159). Indeed, New Jersey law imposes an implied covenant of good faith and fair dealing in

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every contract. Black Horse Lane Assoc., L.P. v. Dow Chern. Corp., 228 F.3d 275, 291 (3d Cir.

2000) (citing New Jersey law). Health Net states that, pursuant to this duty, it adjudicated the

Group B and Group C Claims in good faith and that, contrary to class counsel's assertions, the

implied contractual covenant cannot be used to rewrite the Settlement Agreement by improperly

shifting responsibility or costs to Health Net. Health Net Letter Brief at 10 (App. Tab 139); see

also Health Net's Brief in Support of Proposed Findings of Fact at 12-13 (App. Tab 159).

4. Claims Administration

District courts have broad supervisor powers over claim administration. Sullivan v. DB

Invs., Inc., 667 F.3d 273, 328 (3d Cir. 2011); In re Royal Dutch/Shell Transp. Sec. Litig., No.

CIV.A. 04-374 JAP, 2008 WL 9447623, at *23 (D.N.J. Dec. 9, 2008); In re Remeron Direct

Purchaser Antitrust Litig., No. CIV.03-0085 FSH, 2005 WL 3008808, at* 11 (D.N.J. Nov. 9,

2005). As with the approval of settlement agreements, courts must "consider whether

distribution plans are fair, reasonable, and adequate." Remeron Direct Purchaser, 2005 WL

3008808, at *11 (quoting In re Lorazepam & Clorazepate Antitrust Litig., 205 F.R.D. 369,381

(D.D.C. 2002)). In order to approve a plan for administration, courts must decide whether the

claims, whatever the number, can be managed and administered efficiently in a way that

safeguards the rights of all parties. In re Domestic Air Transp. Antitrust Litig., 137 F.R.D. 677,

694 n.20 (N.D. Ga. 1991); see also In re Veeco Instruments Inc. Sec. Litig., No. 05 MDL 0165

CM, 2007 WL 4115809, at *14 (S.D.N.Y. Nov. 7, 2007) (noting that the proposed plan of

allocation adequately allocated the proceeds of the settlement to class members "who submit

valid claims, with a minimum of complication, ensuring efficiency in claims administration").

Claims administrators are typically selected by the parties and are tasked with creating an

effective notice plan, mailing, and publishing proof of claims forms, handling intake of returned

proof of claims forms, assisting claimants with identifying, locating, and submitting the proper

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prove-up documentation, and ultimately distributing the funds to the appropriate claimants.

While little guidance exists regarding the general obligations and duties of claims administrators,

the claims administrator's duties are often set forth and defined within the settlement agreement.

See,~' Bradburn Parent Teacher Store, Inc. v. 3M (Minnesota Mining & Mfg. Co.), 513 F.

Supp. 2d 322, 328-30 (E.D. Pa. 2007) (observing that pursuant to the settlement agreement the

settlement administrator was responsible for assisting with the administration of the settlement,

mailing class notice to class members, identifying undeliverable notices and performing database

searches to obtain new addresses, hosting a website, and dedicating a toll-free telephone number

to claimant access); In re Diet Drugs Prods. Liab. Litig., No. 99-20593, 2000 WL 34016479, at

* 10 (E.D. Pa. Sept. 5, 2000) (noting that pursuant to the settlement agreement the appointed

claims administrator shall assist in administering claims by receiving and processing forms

received by class members and directing the disbursement of funds).

Requirements for providing notice to class members are set forth in Federal Rule of Civil

Procedure 23( c )(2). Courts must provide the best notice practicable to class members, utilizing

plain, easily-understood language. Fed. R. Civ. P. 23(c)(2). The notice must state: (1) the

nature ofthe action; (2) the definition of the certified class; (3) the class claims, issues, or

defenses; (4) that a class member may appear through an attorney; 5) that the court will exclude

members who request exclusion; 6) the time and manner of requesting exclusion; and 7) the

binding effect of a judgment. Id. Likewise, courts have cited Rule 23 as authorizing the use of

proof of claim forms to obtain information pertaining to the claims of absent class members.

See,~' In reAm. Bus. Fin. Servs. Inc. Noteholders Litig., No. 05-232, 2008 WL 4974782, at

* 11 (E.D. Pa. Nov. 21, 2008) (holding that notice and proof of claim form satisfied Rule 23);

Kyriazi v. W. Elec. Co., 527 F. Supp. 18, 20 (D.N.J. 1981) (noting that, pursuant to Fed. R. Civ.

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P. 23(d)(2), the district court directed defendant to send a notice and proof of claims form to each

class member whose addresses were known); cf. In re Sacred Heart Hosp. ofNorristown, 177

B.R. 16, 22 (Bankr. E.D. Pa. 1995) (observing that the proof of claim device under Fed. R. Civ.

P. 23(d)(2) may be utilized in appropriate contexts). Claims forms are a common method by

which parties determine individual claimant's recognized loss during the relevant time period so

that accurate distributions from the settlement fund can be made. See Alba Conte & Herbert B.

Newberg, Newberg on Class Actions§ 12.35 (4th ed. 2002). Indeed, within the claims-made

class action settlement context, the proof of claims form is perhaps most fundamental to the

ultimate distribution of settlement benefits. Counsel and claims administrators often construct

claims forms with a focus on legal and administrative needs. In approving the claims forms, it is

imperative, however, that class counsel not lose sight of their duty to represent the interests of

the class fairly and adequately as well as to protect the class members' needs. See discussion of

Rule 23 duties of class counsel, supra at Section III.A.2. The proof of claims form should be as

simple as possible, easily understood, and should not require information inaccessible to

potential claimants. See generally Federal Judicial Center, Judges' Class Action Notice and

Claims Process Checklist and Plain Language Guide (2010), available at

http://ww.fjc.gov/public/home.nsf (last visited Sept. 8, 2014). The proof of claims form should

be well-designed and should contain clearly-worded instructions and questions. Moreover, the

parties should ensure that proof of claims forms are as short and concise as possible. Id. The

forms should be inviting, not exclusive in nature and should include only reasonable

questions/requirements that encourage participation in the litigation, and not deter or hamper

claimant responses. Id. Generally, the parties should not "make class members jump through

hoops to obtain the benefits to which they are entitled." John B. Isbister et al., Seven Steps to a

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Successful Class Action Settlement, Class Actions Today, American Bar Association, Committee

on Class Actions & Derivative Suits (2008), available at

http://apps.americanbar.org/litigation/committees/classactions/settlement-class-action.html (last

visited Sept. 8, 2014).

Claims administrators are generally selected by the parties in order to ease and facilitate

the claim submission process. Particularly during the claims administration process, claims

administrators should ensure open lines of communication in order to field class member

questions and provide class members with consistent and organized responses to questions and

concerns. Marcy Hogan Greer, A Practitioner's Guide to Class Actions, p. 23 5 (20 1 0). It is

customary for a single claims administrator to serve as liaison between the claimants and the

defendant involved in the settlement. As noted above, a claims administrator (individual or

organization) is generally selected by the parties in order to ease and facilitate the claim

submission process. See,~' In re Flonase Antitrust Litig., 951 F. Supp. 2d 739, 754 (E.D. Pa.

2013) (Rust Consulting, Inc. retained by class counsel as claims administrator); Blank v. Jacobs,

No. 03-CV -2111 JS WDW, 2013 WL 1310503, at* 1 (E.D.N.Y. Mar. 27, 2013) (Berdon Claims

Administration, LLC selected to administer and distribute settlement funds); Clem v. Keybank,

N.A., No. 13 CIV. 789 JCF, 2014 WL 2895918, at *8 (S.D.N.Y. June 20, 2014) (Angeion Group

selected as claims administrator).

In this case, there was a bifurcated claims process. Pursuant to the Settlement

Agreement, while a "Claims Administrator" was responsible for administering the Cash

Settlement Fund, Health Net or "its designee" was responsible for adjudicating the Prove-Up

Settlement Fund. Epstein Ex. 1 at Sections 9.9 and 10 (App. Tab 16). As discussed infra at

Section IV .A.1, the bifurcation of duties in the settlement administration in this case was

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generally problematic, triggering disputes, prolonging the resolution of those disputes, and

generally delaying the overall administration process.

5. Scope and Authority of the Special Master

(a) Court's Authority to Supervise Class Action Settlements

Because of the potential for abuse, district courts have "both the duty and the broad

authority to exercise control over a class action and to enter appropriate orders governing the

conduct of counsel and parties." Gulf Oil Co. v. Bernard, 452 U.S. 89, 100 (1981). Because

class actions are a special type of proceeding, wherein unnamed parties are bound to the court's

judgments, district courts have an ongoing duty to supervise class counsel in order to protect

absent class members. In reFine Paper Antitrust Litig., 617 F.2d 22,27 (3d Cir. 1980); see also

Dittimus-Bey, 2013 WL 6022128, at* 1 (considering the matter of class counsel's

disqualification on the court's own motion pursuant to the court's ongoing duty to supervise

class counsel and protect absent class members). In class actions, the district court must act as a

fiduciary, guarding the rights of absent class members. Cendant Corp. Litig. 404 F.3d at 187;

see also In reGen. Instrument Sec. Litig., 209 F. Supp. 2d 423, 428 (E.D. Pa. 2001) (noting the

court's duty to protect the class under Rule 23(e) and approving settlement where applicable

factors are met); Carducci v. Aetna U.S. Healthcare, No. 01-4675 JBS, 2003 WL 22207204, at

*7 (D.N.J. Apr. 16, 2003) (noting the court's continuing duty to protect absent class members).

District courts" ... enjoy broad supervisory powers over the administration of class action

settlements to allocate the proceeds among the claiming class members equitably."); Remeron

Direct Purchaser, 2005 WL 3008808 at * 11.

(b) Order Appointing Special Master

Consistent with the Court's ongoing duty and broad authority to supervise the

administration ofthe Settlement, in its August 13, 2013 Order, the Court determined that there

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was "additional critical information needed with respect to the administration of the settlement in

this matter." (Wachtel Doc. No. 895 at 2.) The Court appointed me as Special Master in this

case:

Id. at 2.




d. to issue a recommendation as to whether class counsel should be replaced or ordered to repay any or all of the counsel fees it received based on the amount of the original Settlement and any diminution to date;

e. to issue a recommendation as to whether sanctions should issue or any other disciplinary actions taken against either side, either Health Net or class counsel, on any grounds within the authority of the Court.

(c) Authority to Appoint Special Master

The Court appointed me as Special Master in this case for the purposes outlined above,

pursuant to Federal Rule of Civil Procedure 53. I d. The Court ordered that I, in my capacity as

Special Master, shall have all the rights, powers and duties provided for by Rule 53 and that I

may adopt such procedures as are not inconsistent with that rule or with this Court's orders.

Pursuant to Rule 53, a court may appoint a master to:

(A) perform duties consented to by the parties; (B) hold trial proceedings and make or recommend findings of facts on issues to be decided without a jury if appointment is warranted by: (i) some exceptional condition; or (ii) the need to perform an accounting or resolve a difficult computation of damages; or (C) address pretrial and post-trial matters that cannot be effectively and timely addressed by an available district judge or magistrate judge of the district.

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Fed. R. Civ. P. 53(a)(1). Generally, a master has the authority to "(A) regulate all proceedings;

(B) take all appropriate measures to perform the assigned duties fairly and efficiently; and (C) if

conducting an evidentiary hearing, exercise the appointing court's power to compel, take, and

record evidence." Fed. R. Civ. P. 53(c)(l). With respect to a master's report, once a report has

been submitted, the court "must give the parties notice and an opportunity to be heard; may

receive evidence; and may adopt or affirm, modify, wholly or partly reject or reverse, or

resubmit to the master with instructions." Fed. R. Civ. P. 53(f)(2).

Within his or her report, the master may "by order impose on a party any noncontempt

sanction provided by Rule 37 or 45, and may recommend a contempt sanction against a party

and sanctions against a nonparty." Fed. R. Civ. P. 53(c)(2). See generally 9C Charles Alan

Wright and Arthur C. Miller, Federal Practice and Procedure§ 2609 (3d ed. 2008) (observing the

authority of a master to impose sanctions according to Rule 53( c )(2) and noting the subdivision

of the rule which authorizes a master to, by order, impose on a party any noncontempt sanction

relating to discovery which relates to discovery or subpoenas).

While, pursuant to Rule 53, a master may impose noncontempt sanctions against a party

under Rule 37 (relating to discovery) and Rule 45 (relating to subpoenas), a master has the

authority only to recommend contempt sanctions against parties and sanctions against non

parties. 9C Wright & Miller, supra, § 2609. Due to the possible severity of contempt sanctions,

as well as jurisdictional issues with respect to exercise of such power, only the court can impose

contempt sanctions; accordingly, such sanction recommendations must be approved by the court.

Id.; see,~, N. L. R. B. v. Local 825, Int'l Union of Operating Eng'rs, 430 F.2d 1225, 1229-30

(3d Cir. 1970) (approving special master's conclusion that respondent engaged in contemptuous

misconduct and imposing special master's recommended sanctions); In re Intel Corp.

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Microprocessor Antitrust Litig., 562 F. Supp. 2d 606, 608 (D. Del. 2008) (adopting special

master's recommendation of contempt sanction against non-party where special master found

vexatious litigation conduct and noting that special master declined to make a specific finding of

bad faith and relied upon the court's inherent authority to sanction non-parties).

B. Counsel Fees and Benefit to the Class

1. Fee Award in McCoy v. Health Net

The Court conducted a thorough analysis in determining class counsel fees in this case.

See McCoy v. Health Net, Inc., 569 F. Supp. 2d 448, 475-479 (D.N.J. 2008). The Court noted

that the matter of counsel fees is left up to the discretion of the district court and that courts have

developed two techniques of calculating attorneys' fees: the lodestar and the percentage-of

recovery methods. ld. at 475 (citing In re Cendant Corp. PRIDES Litig., 243 F.3d 722, 736 (3d

Cir. 2001) and Gen. Motors Corp., 55 F.3d at 821). The Court used the percentage-of-recovery

method and cross-checked that amount using the lodestar multiplier to determine class counsel's

fee award. McCoy, 569 F. Supp. 2d at 475 (citing In re Rite Aid Corp. Sec. Litig., 396 F.3d 294,

306-07 (3d Cir. 2005)); see,~' In re Remeron End-Payor Antitrust Litig., CIV. 02-2007 FSH,

2005 WL 2230314, at *26 (holding that the percentage of common fund approach is the proper

method for compensating counsel in common fund case); Cendant Corp. PRIDES Litig., 243

F.3d at 742) (suggesting that that district courts cross-check the percentage award at which they

arrive against the 'lodestar' award method).

The Court determined the appropriate fee for class counsel based on the factors set forth

by the Third Circuit in Gunter v. Ridgewood Energy Corp. See McCoy, 569 F. Supp. 2d at 476-

479. In Gunter, the Third Circuit held that when determining the appropriate attorney fee award

in a common fund case, the following factors should be considered: (1) the size ofthe fund

created and the number of persons benefitted; (2) the presence or absence of substantial

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objections by members of the class to the settlement terms or fees requested by counsel; (3) the

skill and efficiency of the attorneys involved; ( 4) the complexity and duration of the litigation;

(5) the risk of nonpayment; (6) the amount of time devoted to the case by plaintiffs' counsel; and

(7) the awards in similar cases. 223 F.3d 190, 195 n.l (3d Cir. 2000).

The Court observed that the common fund and the equitable relief in this case would

benefit a class of over two million current and former Health Net subscribers, noting that the size

of the cash fund and the number of persons benefitted weighed in favor of a substantial fee

award. McCoy, 569 F. Supp. 2d at 476 (citing Cendant Corp. PRIDES Litig., 243 F.3d at 737).

The Court observed that it received only nine objections to the Settlement Agreement and

observed that this lack of significant opposition supported the reasonableness of a substantial fee

request. Id. (citing Lenahan v. Sears, Roebuck & Co., No. CIV. 02-0045, 2006 WL 2085282, at

*19 (D.N.J. July 24, 2006)). 38

The Court further observed that it had previously found that "Counsel for McCoy and the

Wachtels are well-seasoned and have demonstrated adequacy and tenacity during the protracted

proceedings that have already occurred in this case." Id. at 476 (citing Wachtel v. Guardian Life

Ins. Co., 223 F.R.D. 196, 216 (D.N.J. 2004)). The Court stated this litigation involved complex

issues oflaw under ERISA and RICO, overshadowed only by the litigation's "extraordinary and

intense duration." Id. The Court stated that in the seven years since the original complaint was

removed to the Court, the parties filed 141 motions, 283 briefs, and 316 other applications,

requiring tens of thousands of hours from the attorneys. I d. The Court noted that class counsel

38 The Court rejected class member Adam R. Smiarowski's objection and contention that fees should be paid in installments in order to guard against class counsel abandoning class members during the claims administration process. Citing the court's language in AT&T Corp., the Court noted that there was no basis for suddenly distrusting class counsel with respect to assisting claimants in the administration of the Settlement after seven years of zealous advocacy. McCoy, 569 F. Supp. 2d at 473 (citing In re AT&T Corp. Sec. Litig., No. 00-5364 GEB, 2005 WL 6716404, at *9 (D.N.J. Apr. 25, 2005)).

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had expended 71,918.38 hours in this matter and had paid over $1.7 million in expenses. The

Court found that these figures were representative of class counsel's extraordinary efforts and

weighed in favor of a sizeable fee award. ld. at 477 (citing In re Lucent Techs., Inc., Sec. Litig.,

327 F. Supp. 2d 426,438 (D.N.J. 2004) (describing class counsel's 61,000 hours as an

"extraordinary effort[]")). The Court also took note of the extensive settlement process that led

to the Proposed Settlement Agreement. Id. The Court observed that class counsel assumed a

substantial risk of nonpayment due to the uncertain nature of the contingent fee arrangement. I d.

(citing Remeron Direct Purchaser, 2005 WL 3008808, at *14).

Finally, the Court examined the awards in similar cases for guidance in determining the

appropriate fee award. Id. at 477-78. The Court noted that the Third Circuit has reviewed cases

in which the common fund exceeded $1 00 million, found that "the attorneys' fee awards ranged

from 2.8% to 36%, and observed that in 2005 the Third Circuit approved a district court's

reliance on a study that found that in "class action settlements between $100 million and $200

million ... recoveries in the 25-30% range were 'fairly standard.'" Id. at 477 (citing Cendant

Corp. PRIDES Litig., 243 F.3d at 736; Rite Aid Corp., 396 F.3d at 303). The Court continued,

"[t]he complexity and duration ofthis case, the number of hours Class Counsel expended to see

it through, and the outstanding result reached all warrant a fee at the high end of the range." Id.

at 4 77. The Court also noted that the value of the injunctive relief achieved by class counsel was

highly relevant in determining what percentage of the common fund class counsel should receive

as fees. Id. The Court observed that class members will receive a significant financial benefit

from the injunctive relief in this case. I d. at 4 78. In total, the parties estimated that the

Settlement's total value was between $249 and $261 million. I d. at 463.

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The Court concluded that the high end of the attorneys' fees percentage for settlements

over $100 million was approximately 30%, sometimes as high as 36%. Id. at 478. Ultimately,

the Court awarded class counsel fees of $69,720,000, noting that the award represented just over

32% ofthe Common Fund of$215 million or 28% ofthe $249 million overall value (Common

Fund plus the parties' lowest estimated value of the injunctive relief). Id. The Court observed

that this award was well within the proper range for a case of such exceptional duration and

complexity. The Court then cross-checked this figure against class counsel's 71,918.38 billed

hours, a lodestar of$30,355,758.55 (based on each billing attorney's actual rate), and a lodestar

multiplier of just under 2.3. Id. at 478-79. The Court noted that the lodestar cross-check

demonstrated that, "based on class counsel's extraordinary efforts in obtaining this Settlement

Agreement, the fee award is reasonable" and that these figures were well within the range

approved by the Third Circuit in a case involving less-complex issues and with a settlement of

approximately $341,000,000. Id. (citing Cendant Corp. PRIDES Litig., 243 F.3d at 742). The

Court cited the United States Supreme Court's decision in Boeing Co. v. Van Gemert, 444 U.S.

4 72, 4 78 (1980), observing that the Supreme Court "has recognized consistently that a litigant or

a lawyer who recovers a common fund for the benefit of persons other than himself or his client

is entitled to a reasonable attorney's fee from the fund as a whole .... The doctrine rests on the

perception that persons who obtain the benefit of a lawsuit without contributing to its costs are

unjustly enriched at the successful litigant's expense." The Court concluded that class counsel

achieved an excellent result, "among the largest ERISA health insurance settlements on record,"

and that class counsel defended the action in a hard fought, persistent and determined manner,

continuously representing the classes while zealously, and admirably dealing with Defendants'

discovery abuses. Id. at 452, 458-59, 476. The Court emphasized class counsel's capability and

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zealous advocacy not only within the context of the Settlement Agreement's substantial cash

component, but also the significant business practice changes they negotiated, explaining that the

changes "will have a lasting impact on the way Health Net reimburses its subscribers for out-of

network medical services." Id. at 452.

2. Percentage of Total Fund Versus Actual Payout to Claimants

As described above, the Court relied on the Supreme Court's decision in Boeing, which

governs fee awards in class action settlements involving common funds, to determine that the

common fund doctrine was applicable in this case, and class counsel's fee award should be

measured as a percentage ofthe available fund as a whole. McCoy, 569 F. Supp. 2d at 477-78

(citing Boeing Co. v. Van Gemert, 444 U.S. 472 (1980)). In Boeing, the defendant called for the

redemption of certain convertible debentures (utilizing newspaper notices and investor mailings),

setting a date by which holders could convert them into two shares of Boeing's stock (worth

$316.25) or redeem them (for $103 .25), after which, they would be able to convert at only

slightly more than face value. Boeing, 444 U.S. at 474. When the deadline expired, debenture

holders with debentures valued at $1,544,300 had not answered the call. I d. These non

converting debenture holders brought a class action claiming Boeing violated federal law by not

providing reasonably adequate notice of redemption. Id. The district court valued the amount of

Boeing's liability to the class as a whole at $3,289,359 and fixed the amount individuals could

recover to $100 in debentures, with each individual recovery to carry its share of attorneys' fees.

I d. at 4 75-76. The district court ordered Boeing to deposit the amount of the judgment in an

escrow account at a commercial bank and appointed a special master to administer judgment and

determine the validity of individual claims. I d. at 4 76. Boeing appealed only with respect to

attorneys' fees provision, contending that fees should be awarded only from the portion of the

fund actually claimed by class members, not from the unclaimed portion. Id. at 477.

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The Supreme Court held that class counsel may recover fees based on the entire common

fund created for the class even if some members failed to exercise their rights against the fund.

I d. at 480-81. The Court held that in order "[t]o claim their logically ascertainable shares of the

judgment fund, absentee class members need prove only their membership in the injured class.

Their right to share the harvest of the lawsuit upon proof of their identity, whether or not they

exercise it, is a benefit in the fund created by the efforts of the class representatives and their

counsel. ... " Id. at 480.

Within the Third Circuit, in class action litigation involving common funds, courts often

award class counsel fees based on a percentage of the entire settlement fund created. See, ~'

Sullivan, 667 F.3d at 330-33 (affirming the district court's award of counsel fees representing

25% ofthe class settlement fund); Milliron v. T-Mobile USA, Inc., 423 F. App'x 131, 135 (3d

Cir. 2011) (holding that the district court did not abuse its discretion in applying the percentage

of-recovery and lodestar cross check method and noting that the percentage-of-recovery method

is favored in common fund cases); In re Diet Drugs Prods. Liab. Litig., 582 F.3d 524, 540-41 (3d

Cir. 2009) (holding that the district court correctly applied the percentage-of-recovery method in

awarding counsel fees of 6.75% of the $6.4 billion settlement fund obtained by counsel); In re

AT & T Corp., 455 F.3d 160, 169-72 (3d Cir. 2006) (holding that the district court did not abuse

its discretion in approving counsel fee award based on 21.25% of the entire $100 million

settlement fund and noting that the percentage-of-recovery method is generally favored because

"it allows courts to award fees from the fund in a manner that rewards counsel for success and

penalizes it for failure"); Gen. Motors Corp., 55 F.3d at 821-22 (remanding the case to the

district court and suggesting that it reexamine counsel fees based on the percentage-of-recovery

scheme and in so doing, determine a precise valuation of the entire settlement; noting that the

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courts typically employ the percentage-of-recovery method in common fund cases on the theory

that the "class would be unjustly enriched if it did not compensate the counsel responsible for

generating the valuable fund bestowed on the class"). Notably, as discussed below, the Third

Circuit recently examined a district court's application of the percentage-of-recovery method in

In re Baby Products Antitrust Litig., 708 F.3d 163, 180 (3d Cir. 2013), and added an inquiry

regarding the settlement's actual payout to claimants compared to the allocation ofthe remaining

funds. Id. at 179 (noting that "comis need to consider the level of direct benefit provided to the

class in calculating attorneys' fees ... " and leaving to the district court's discretion what effect,

if any, that consideration should have on future fee award).

Courts around the country have and continue to base attorneys' fees in common fund

settlement cases on the entire fund created and made theoretically available to the class

members. See, ~' In re Thirteen Appeals Arising Out of San Juan DuPont Plaza Hotel Fire

Litig., 56 F.3d 295, 308 (1st Cir. 1995) (holding that in a common fund case, the district court

may calculate counsel fees on a percentage ofthe fund); Uselton v. Comm. Lovelace Motor

Freight, Inc., 9 F.3d 849, 853-54 (lOth Cir. 1993) (same); see also McCoy v. Health Net, at 477-

78. But see Strong v. BellSouth Telecoms., Inc., 137 F.3d 844, 852 (5th Cir. 1998) (holding that

the district court acted within its discretion in considering actual claims awarded to class

members, not the overall value of the settlement, in determining attorneys' fees); Wise v. Popoff,

835 F. Supp. 977, 982 (E.D. Mich. 1993) (determining counsel fees based on the number ofvalid

claims submitted and paid from the common fund and noting that "[a]lthough the Supreme Court

has authorized courts to award attorney's fees based on the entire fund ... the Court notes that

such a method is not mandated.").

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3. Class Counsel Fees and Reversionary Prove-Up Settlement Funds

In reversionary settlement cases, defendants agree to pay claimants up to an amount

indicated, depending on the number and value of the submitted claims, with any portion ofthe

settlement fund not paid to claimants reverting back to the defendants. See,~' Int'l Precious

Metals Corp. v. Waters, 530 U.S. 1223 (2000) (noting that defendants agreed to create a $40

million "reversionary fund" for class members, any portion of which not paid to class members

or to counsel in attorneys' fees was to revert to defendants); Cendant Corp. PRIDES Litig., 243

F.3d at 734 (observing that, per the agreement between the parties, any unclaimed funds from the

$341,000,000 pool of available funds would revert to defendant). Claims made against this type

of fund sometimes require claimants to submit additional documentation in order to validate their

claims and to determine the proper amount of claimants' recognized transactions during the

relevant time period. 39 Courts and commentators have expressed concern regarding reversionary

funds, noting that the structure of reversionary funds may create opportunities for conflicts of

interest- even unintentionally- between the class, class counsel, and the defendant. Indeed, the

Federal Judicial Center disfavors such settlement provisions, criticizing settlements with

reversionary clauses and stating that such provisions "create[] perverse incentives for

[defendants] to impose restrictive eligibility conditions and for class counsel and defendants to

use [] artificially inflated settlement amount[s] as a basis for attorney fees." Barbara J. Rothstein

and Thomas Willging, Managing Class Action Litigation: A Pocket Guide for Judges, p. 20

39 Some class action settlement administration processes require claimants to submit additional documentation in order to prove their claim, while others simply require that claimants identify themselves as members of the class (or not opt-out) in order to share in the settlement. See,~, Henry v. Little Mint, Inc., No. 12 CIV. 3996 CM, 2014 WL 2199427 (S.D.N.Y. May 23, 2014) (granting final approval of settlement in class action where class consisted of all hourly employees employed at any of defendant's four restaurant locations during the class period; fund was reversionary and would be distributed to claimants based on hours worked); Parker v. Time Warner Entm't Co., L.P., 631 F. Supp. 2d 242, 251 (E.D.N.Y. 2009) (noting that notice was sent to class members whose names were contained in defendants' list sales database; various class member categories were previously determined according to defendants' records; and class members need only return a claim form to receive benefits).

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(3rd ed. 2010); see,~. Mirfasihi v. Fleet Mort. Corp., 356 F.3d 781,785-86 (7th Cir. 2004)

(reversing the district court's approval of class action settlement where the court failed to discuss

the numerous potential conflicts between class counsel and class members, among them, the

reversion provision which provided for the return of unclaimed funds to the defendant); Kakani

v. Oracle Corp., No. C 06-06493 WHA, 2007 WL 1793774, at *5-*6 (N.D. Cal. June 19, 2007)

(denying settlement that provided a $9 million payment to participating class members less $2.25

million in attorneys' fees, in part because the settlement would be "a bonanza" for defendant,

who, as a result of a complete reversion, "would only have to pay a fraction of what the

complaint alleged was really due" and also "a bonanza for plaintiffs' counsel," who would

receive "$2.25 million regardless of how many claims were actually submitted").

4. Relationship Between the Payment to Class Members and the Counsel Fees Awarded

Courts have expressed concern when the amount of counsel fees awarded is

disproportionate to the payment to class members. See Int'l Precious Metals, 530 U.S. at 1223;

Baby Prods., 708 F.3d at 178-79; In re TJX Companies Retail Sec. Breach Litig., 584 F. Supp.

2d 395 (D. Mass. 2008). Justice Sandra Day O'Connor's concurring opinion in the Supreme

Court's denial of the petition of writ of certiorari in International Precious Metals is one of the

most prominent expressions of the widespread dissatisfaction with disproportionate counsel fees,

particularly in the context of cases involving reversionary funds. In International Precious

Metals, the attorney fee award was more than twice the amount claimed by the class. 530 U.S. at

1223. Justice O'Connor noted that previously the Court had no occasion to address "whether

there must at least be some rational connection between the fee award and the amount of the

actual distribution to the class," but nonetheless explained:

The approval of attorney's fees absent any such inquiry could have several troubling consequences. Arrangements such as that at issue here decouple class

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counsel's financial incentives from those of the class, increasing the risk that the actual distribution will be misallocated between attorney's fees and the plaintiffs' recovery. They potentially undermine the underlying purposes of class actions by providing defendants with a powerful means to enticing class counsel to settle lawsuits in a manner detrimental to the class. And they could encourage the filing of needless lawsuits where, because the value of each class member's individual claim is small compared to the transaction costs in obtaining recovery, the actual distribution to the class will inevitably be minimal. The Courts of Appeals have differed in their approaches to the problem .... Although I believe this issue warrants the Court's attention, this particular case does not present a suitable opportunity for its resolution .... Nonetheless, I believe the importance of the issue counsels in favor of granting review in an appropriate case.

Recently, in Baby Products the Third Circuit encouraged courts analyzing the terms of

settlement agreements to consider the direct benefit conferred on the class when a case involves

low claim rates and large fY pres distributions. In Baby Products, the court noted that class

action settlements can sometimes result in "troubling ... [and] surprising allocation[s] ofthe

settlement fund." 708 F.3d at 169. The parties in Baby Products contemplated that the majority

of the settlement funds would be distributed to class members through an exhaustive claims

process and the excess funds would be provided to charity through a fY pres distribution. Id. In

that case, defendants paid $35,500,000 into the settlement fund; $14,000,000 was to be awarded

to class counsel; and only $3,000,000 was expected to be distributed to class members. The

remainder, approximately $18,500,000 was to be distributed to fY pres recipients. Id. at 169-70.

The Baby Products court noted that the district court was apparently unaware of the amount of

the fund that was to be distributed to fY pres recipients. Id. at 170. In vacating the district

court's approval of the settlement, the court added an additional inquiry that may be applied in

order to obtain a thorough analysis of settlement terms: "the degree of direct benefit provided to

the class." Id. at 174. The court stated that, "[i]n making this determination, a district court may

consider, among other things, the number of individual awards compared to both the number of

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claims and the estimated number of class members, the size of the individual awards compared

to claimants' estimated damages, and the claims process used to determine individual awards."

I d.

While Baby Products involved a fY pres distribution, the court's reasoning can be applied

to cases involving reversionary funds. ld. at 177-78 (citing the Supreme Court's decision in

Boeing and noting the need to confront "essentially the same issue when calculating percentage

fee awards against a settlement fund that will partially revert to defendant."). The Third Circuit

vacated the district court's fee award because it was based on a settlement no longer in effect, but

the court noted that because of the allocation of funds in the case, "class counsel, and not their

client, may [have been] the foremost beneficiaries of the settlement." I d. at 180. The Third

Circuit noted "where a district court has reason to believe that counsel has not met its

responsibility to seek an award that adequately prioritizes direct benefit to the class, we think it

appropriate for the court to decrease the fee award." Baby Prods., 708 F.3d at 178. In discussing

percentage fee awards calculated against the entire settlement fund in cases where a significant

portion of the settlement would revert back to the defendant, the court cited approvingly Justice

O'Connor's opinion in International Precious Metals that expressed concern over the potential

conflicting incentives between class counsel and the class. Baby Prods., 708 F.3d at 178 (citing

Int'l Precious Metals Corp, 530 U.S. at 1223).

Other courts have also expressed concern with the disproportionate allocation of

attorneys' fees compared to benefit to claimants. See,~, In re Bluetooth Headset Prods. Liab.

Litig., 654 F.3d 935, 947 (9th Cir. 2011) (instructing courts approving settlements to be wary of

warning signs common to class actions, among them, "when counsel receive a disproportionate

distribution of the settlement, or when the class receives no monetary distribution but class

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counsel are amply rewarded"); TJX Companies, 584 F. Supp. 2d at 410 (holding that future

attorneys' fees in class actions involving reversionary fund settlements will be awarded with

reference to the actual benefit to the class); Schwartz v. Dallas Cowboys Football Club, Ltd., 157

F. Supp. 2d 561, 573-82 (E.D. Pa. 2001) (refusing to approve the settlement due in large part to

the minimal benefit conferred on the class in comparison to class counsel's high fees, noting that

"Chevrolet-type results do not warrant Cadillac-size legal fees"); Polar Int'l Brokerage Corp. v.

Reeve, 187 F.R.D. 108, 118 (S.D.N.Y. 1999) (rejecting proposed settlement agreement and

finding class counsel inadequate where the settlement provided a nonpecuniary benefit of very

little value to class members and a substantial award of attorneys' fees to class counsel in

exchange for a modest amount of work).

In TJX Companies, $200,000,000 was set aside for settlement purposes, only $6,100,000

was claimed by eligible class members, and class counsel sought $6,500,000 in fees. 584 F.

Supp. 2d at 398-401. Although the court approved the attorney fee award based on the overall

fund available (because of lack of notice of its concern to class counsel), it warned that, "[i]n the

future, however, plaintiffs' counsel can expect that this Court, when confronted with

reversionary common fund or claims-made settlements, will award attorneys' fees by reference

to the value of benefits actually put in the hands of the class members." Id. at 410 (emphasis in

the original). The court lamented, "[s]imply put, the class action vehicle is broken." Id. at 406.

The court noted that assessing attorneys' fees based upon the value of the benefits paid to class

members "strikes the Court as the best way to encourage settlements that actually serve the needs

and desires of the class as well as a solid first step toward bettering the effectiveness and

efficiency of the class action vehicle as a whole by providing an incentive to its key players to

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begin looking for solutions to its problems." Id. at 410. The court expressed its concerns

regarding the disproportionately low claims rate and benefit to the class:

A common theme recited by class action lawyers when confronted with concerns about fee awards disproportionate to benefits actually disbursed to class members is, "You can lead a horse to water, but you can't make him drink." In this case, for example, class counsel argued that the Court's proposed linkage of fees to benefits claimed was not "fair" because counsel "made much, much more available to people than they chose to accept," and because the low claim rate was not class counsel's "fault." This may be true, but it stands to reason that one can maximize the chances that a horse will drink by, for example, verifying the horse can see the water, choosing clear, fresh, and cold water so that the horse is given the utmost incentive to drink, and making sure there are no obstacles in the horse's path. This Court plans to ensure that class counsel does everything in their power "to ensure that the settlement provides real value (or, to extend the metaphor of the just quoted aphorism, 'actual drinks')" to the class.

I d. at 409-10 (internal citations omitted).

Taken together, Justice O'Connor's concurring opinion in the Supreme Court's denial of

the petition of writ of certiorari in International Precious Metals, the Third Circuit's decision in

Baby Products, and TJX Companies can be read for the proposition that class counsel fees

markedly disproportionate to the monetary benefit actually paid to claimants is an important and

potentially troubling issue that warrants a court's careful attention. These cases suggest that

courts ought to examine whether some "rational connection between the fee award and the

amount of the actual distribution to the class" should be required prior to final approval of

settlement agreements and related counsel fees. 530 U.S. at 1223. These cases also demonstrate

courts' awareness of the manner in which reversionary provisions can exacerbate this issue by

potentially incentivizing parties to "settle lawsuits in a manner detrimental to the class." 530

U.S. 1223 (2000). Moreover, Baby Products represents the Third Circuit's view that district

courts may examine specifically class counsel's prioritization of the "direct benefit to the class"

when determining counsel fees and indeed, courts should be wary when "class counsel, and not

their client, may be the foremost beneficiaries ofthe settlement." 708 F.3d at 179. The TJX

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Companies court notes that requiring a connection between counsel fees and the actual class

benefit may well provide incentive for counsel to craft settlements that actually reach the class in

a meaningful way and further incentivize class counsel to maximize participation in the class.

584 F. Supp. 2d at 404-05.

IV. DISCUSSION

A. What Were the Reasons for the Length of Time that Elapsed between the Final Order and Opinion Approving the Settlement in 2008 and the Submission of the Motion to Amend the Settlement in 2012, including the Reasons for the Disputes, the Merits of the Disputes, and Whether They Could Have Been Resolved in a More Expeditious Manner

My investigation has revealed that there were several reasons, both structural and factual,

for the length of time that elapsed between the Final Order approving the Settlement in 2008 and

Class Counsel's Motion to Amend the Settlement in 2012. The overarching construct of a

bifurcated settlement administration (the "bifurcated claims administration process") in which

class counsel and Berdan were solely responsible for assisting claimants, while Health Net was

solely responsible for adjudicating the claims, fostered many of the disputes, prolonged the

resolution of disputes, and generally contributed to the delay. The sheer number and complexity

of the factual and legal disputes at issue, in turn, added significantly to the length ofthe claims

administration period. These disputes, discussed below, included, but were not limited to:

whether the settlement included a deficiency and cure period for the Prove-Up Settlement Fund;

what were the requirements of any deficiency review and cure period; whether Health Net's

adjudications under the Prove-Up Settlement Fund were legitimate;40 whether Health Net was

required to serve notice on certain class members who had been inadvertently excluded and pay

40 It should be noted that the Settlement Agreement contemplated that the adjudication of claims would take time. The Settlement Agreement allowed Health Net 255 days- more than eight months- to adjudicate all of the claims and issue a report. Epstein Ex. I at Section 9.9 (App. Tab 16).

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additional compensation as a result; whether ASO subscribers were improperly excluded from

the settlement and, if so, whether Health Net had to pay additional compensation as a result;

whether claimants who had failed to complete Section 6 of the Proof of Claim Form were

entitled to any prove-up dollars; and how member responsibility should be applied under the

Settlement Agreement.

1. The Bifurcated Administration Process Was the Source of Many Misunderstandings and Considerable Delay

Under the Settlement Agreement, Berdon was responsible for sending out and receiving

the Notices and Proof of Claim Forms, communicating with class members and assisting class

members in obtaining supporting documentation for Group B or Group C Claims and curing

their deficiencies. Health Net reviewed the claims for deficiencies and was the ultimate decision

maker as to whether the documentation was sufficient and the claim was ultimately proven. 41

Under the bifurcated structure, it was essential that the parties establish clear procedures

for handling the claims and communicate frequently and effectively to ensure a fair and efficient

41 In many claims administrations there is a single administrator, who works with both parties; Amy Lake of Rust Consulting testified to her experience in other cases as a neutral claims administrator:

Q. In the case, the case you talked about where it was both defendant and class counsel that you were dealing with, you would be communicating the same information as it relates to the statistical review to the class counsel as you would to the defendant. Is that right?

A. That's typical. There are definitely exceptions to that that-- you know, where we work primarily with plaintiff or primarily with defense. But in sort of what I would say your average project would be, we would communicate to both.

Q. And as you develop, ... the claim form, in those cases, as problems or issues might have come up in the course of that, that would be something that you would communicate to both class counsel and counsel for the defendant?

A. Usually.

Lake Tr. at 50:25-51:20 (App. Tab 83). Arguably, a single administrator (who takes part in the design of the notice of claim and proof of claim form, assists class members in understanding and filing their claim forms, develops standards of review, reviews the claim forms for deficiencies, is involved with the entire process, and is responsible for identifying deficiencies) would be in the best position to assist class members in curing those deficiencies and advancing the purpose of the settlement.

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process in which claimants would have a full opportunity to prove their claims and maximize

recovery under the Prove-Up Settlement Fund (and thereby maximize the prorated payments

from the Cash Settlement Fund). However, because of a lack of effective communication

between the parties, the bifurcated claims administration process became a continuation of the

contentious litigation in this case. Fundamental disagreements arose early as to questions as to

when documentation was due and whether there would be an opportunity for claimants to cure

deficiencies. This fundamental disagreement caused a significant delay in the process,

engendered substantial disputes concerning how a deficiency review and an opportunity to cure

would be designed, what rules would be used, which claims were eligible, how data would be

collected and stored, and numerous other administrative and substantive issues. The problems

encountered with data issues- the differences in Health Net's (Rust's) and Berdan's databases

and systems and the parties' failure to share data effectively- cannot be understated. There was

a need to coordinate the sharing of databases and documentation between the two claims

administrators. The separation of responsibility under the bifurcated administration created an

unwieldy and inefficient process which was exacerbated by a lack of effective communication.

The communication issues were further compounded by the fact that there was no direct

communication between Rust and Berdon. Health Net hired Rust as a consulting expert and all

Health Net communications came solely through counsel for Health Net. 42

In order for the bifurcated claims administration process to be successful, there needed to

be continuous communication and cooperation between the parties instead of the sometimes

contentious and oft-times litigious relationship observed throughout this bifurcated claims

42 Health Net hired Rust as a consulting expert under Fed. R. Civ. P. 26 in November of2008. Class counsel and Berdon did not learn of Rust's involvement until November of2009.

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administration process. As the following discussion of the cure period dispute and other disputes

demonstrates, the bifurcated administration and frequent "disconnects" in the communications

between the parties created and contributed to the disputes which lengthened this claims

administration process.

2. Negotiating a Deficiency/Cure Period (August 2008 to October 2008)

The parties spent almost three months (from August 2008 through October 2008)

negotiating whether or not there would be a cure period following Health Net's review of the

claims.

(a) The Settlement Agreement Did Not Explicitly Provide for a Deficiency/Cure Period

The Settlement Agreement did not explicitly provide for an opportunity for claimants to

cure deficiencies after the claims and documentation had been submitted to Health Net and

reviewed for deficiencies. Notices and Proof of Claim Forms were sent to class members

between May 19,2008 and June 11,2008. Rosenbaum Aff. (Apr. 20, 2012) at~~ 15, 18. Proof

of Claim Forms were to be returned to Berdon by August 25, 2008, and Berdon was responsible

for getting the Proof of Claim Forms and supporting documentation to Health Net by September

9, 2008. Epstein Ex. 1 at Section 9.9 (App. Tab 16). Thereafter, Health Net had 210 days from

the Effective Date to adjudicate the Group C Claims and 255 days from the Effective Date to

adjudicate the Group B Claims and report the results to class counsel. Id. There was no mention

of a cure period in the Settlement Agreement.

(b) Health Net's Position

Health Net asserts that since the Settlement Agreement did not explicitly require Health

Net to provide class members an opportunity to cure deficiencies in their claims after Heath Net

had reviewed the claims, there was no obligation to do so.

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Health Net further argues that the explicit language of the Settlement Agreement negates

any argument that there would be a cure period after Health Net reviewed claims. Specifically,

Health Net took the position that any assistance provided to claimants in supplementing their

claims had to be carried out by class counsel and Berdon under the deadlines of the Settlement

Agreement agreed to by the parties. The Settlement Agreement required that: claimants return

"all claims and documentation" to Berdon by the claim form deadline [August 25, 2008] which

was set within sixty days of the last objection. Epstein Ex. 1 at Section 7.2 (App. Tab 16). The

Settlement Agreement required that "all [claims] and supporting documentation must be sent by

the Claims Administrator" to Health Net within fifteen days of the claim form deadline [by

September 9, 2008] and that Health Net adjudicate the claims and issue a Final Prove-Up report

within 210 days ofthe Effective Date for Group C Claims and 255 days for Group B Claims. Id.

at Section 9.9. Based on these deadlines, Health Net contended that, under the Settlement

Agreement, class counsel and Berdon were responsible for assisting claimants in obtaining any

supplemental documentation from providers and forwarding the claims and additional

documentation to Health Net by September 9, 2008. Health Net argues that that the Settlement

Agreement permitted it to adjudicate claims based only on the documentation, if any, submitted

by September 9, 2008.

(c) Class Counsel's Position

Class counsel do not contest that the Settlement Agreement makes no reference to a cure

period. Instead, class counsel assert that "in a settled class action, the provision of a cure period

is taken for granted: "[i]ndeed, that level of detail is not always set forth in Settlement

Agreements." Kizis Tr. at 69:10-74:14 (App. Tab 82). According to class counsel, a cure period

was implicit in settlement administration. Since Health Net was appointed to administer the

claims in the Prove-Up Settlement Fund under Section 9.9 of the Settlement Agreement, class

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counsel reason that Health Net was responsible for providing and paying for a cure period. Class

counsel and Berdon assert that the Berdon Engagement Letter signed by the Health Net, class

counsel, and Berdon envisioned a cure period for Group B and C Claims since the letter provides

under "Additional Services relating to Claims Processing" that, "[w]hen requested, [Berdon will]

assist Claim Members with Group B and Group C Claims in obtaining the provider proof

required pursuant to the claim form ... communicate with Class Members about their Group B

and/or Group C Claims including mailing a letter to correct any deficiencies in their claim

account." Rothbaum Ex. 1 at 5 (App. Tab 55).43 Class counsel further argue that under the tight

deadlines in the Settlement Agreement, it was not feasible to assist class members in obtaining

documentation of their claims prior to September 9, 2008.

(d) The Discovery of the Dispute Regarding Cure Period

The fundamental dispute between the parties with respect to the existence of a cure

period was not discovered until well into the period for submitting claims, and less than a month

before the claims form deadline. 44 On July 29, 2008, Berdon sent Health Net the first box of

Group B and C Claims along with a letter indicating that Berdon would communicate and work

43 Health Net, in turn, takes the position that if a deficiency letter was needed, class counsel and Berdon should have sent it in the summer of2008 before documents were due to be submitted to Health Net.

44 The fact that Berdon believed that there would be a deficiency review followed by a cure period seems to be reflected in its May 21, 2008 internal process memo, which was also sent to Health Net. Rothbaum Ex. 8 (App. Tab 59). The memorandum stated that, "[i]n its review of claims, Health Net may conclude that some of these claims are either incomplete or deficient. Deficiency notices will need to be issued to such claimants." Id. The memorandum queried: "At what point will [Berdon] be informed as to the status of each Group B/C claim (claimby-claim basis of when all claims have been reviewed and evaluated."). Me Health Net did not respond to this query until July 10, 2008. In its response, Health Net stated that it would inform Berdon on the "status" of each Prove-Up Settlement Fund claim "at the end of the period set fmth in Section 9.10 of the Settlement Agreement," and would "provide [Berdon] with language for the letters to be distributed pursuant to the terms of Par. 9.9 of the Settlement Agreement." Calvert Ex. 3 at 3 (App. Tab 7).

Here again, there is a disconnect in the parties' communications. Berdon apparently thought claimants would have a chance to cure once Health Net issued the "status" of the claims and the language for the deficiency letters, while Health Net appeared to refer to final letters that would be issued to claimants denying their claims as deficient or ineligible.

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with class members to cure deficiencies identified by Health Net's initial review of the claims.

Rothbaum Ex. 11 (App. Tab 60). On August 6, 2008, Health Net's counsel responded advising

Berdon and class counsel that the claims that had been forwarded to Health Net so far contained

very few supporting documents and that pursuant to the Settlement Agreement, the Proof of

Claim Forms and all supporting documentation were to be submitted to Health Net by September

9, 2008, fifteen days after the August 25, 2008 Proof of Claim Form deadline. Rothbaum Ex. 12

(App. Tab 61). Health Net informed class counsel and Berdon that since there was no cure

period provided for under the Settlement Agreement, Health Net would adjudicate the claims

based upon whatever documentation was received by the September 9, 2008 deadline in support

of a claim.

Class counsel and Berdon objected, advised that they had been operating under the

assumption that there would be an opportunity for claimants to cure deficiencies after Health Net

reviewed the claims, and took the position that a deficiency review and cure period were an

inherent part of the claims administration process even though the Settlement Agreement did not

specifically call for one. During August, September, and early October 2008, class counsel and

Health Net actively negotiated whether there would be a cure period. On August 19, 2008, class

counsel offered to have Health Net pay for Berdon to conduct the deficiency review. Rothbaum

Ex. 13 (App. Tab 62). On September 8, 2008, Health Net rejected that proposal. Letter from L.

Kizis to J. Calvert (Nov. 7, 2008) ("Quackenbos Ex. 5") (App. Tab 30). In September, while the

parties continued to negotiate, Health Net agreed to extend the deadline for submitting

supporting documentation until October 31, 2008 and began investigating the time and costs that

would be involved in permitting class members to cure deficiencies. Rust Claims Administration

Health Net Prove Up Process Cost Estimates (Oct. 27, 2008) (App. Tab 107). By the end of

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October, Health Net agreed in writing to provide a cure period after Health Net's deficiency

review and proposed rules to govern the deficiency review and cure period, which were

subsequently negotiated by the parties. See supra at Section II.G for further discussion on the

deficiency and cure period. As of the end of October 2008, the parties were still negotiating the

question of which party would pay for the deficiency review.

(e) The Reasonableness of the Parties' Positions with Respect to Whether There Was a Cure Period

Based in part on the assumption that there would be an opportunity to cure deficiencies

after Health Net reviewed the claims, class counsel and Berdon made the decision not to evaluate

the adequacy of the submissions at the time they were received, not to communicate with

claimants regarding deficiencies in their claims, and not to assist class members affirmatively in

obtaining documentation from providers prior to the August 25, 2008 deadline. Class Counsel's

Proposed Findings of Fact and Brief at 3-4, 57 (App. Tab 160); see also Rothbaum Ex. 8 (App.

Tab 59); Rothbaum Ex. 16 (App. Tab 64). Berdon segregated the claims that had some

indication that a claimant was making a Group B or C Claim so those claims could be forwarded

to Health Net for review. Transcript oflnformation Session (Sept. 19, 2013) at 56:2-60:4 (App.

Tab 91). Berdon ultimately did not copy or retain copies of the vast majority of claims

forwarded to Health Net. Indeed, Berdon chose not to review these files or to record e-mail

addresses, telephone numbers, or requests for assistance from claimants on the Proof of Claim

Form or at Section 10 ofthe Blue Sheet. 45 Rosenbaum Tr. at 99:17-102:24 (App. Tab 86).

Berdon made no effort to communicate with claimants regarding the patently deficient claims -

45 Health Net ultimately agreed in December 2008 that it would record the requests for assistance made by claimants, as part of its review of the claims, and provided that information in October 2009 as part of the deficiency data produced to Berdon. There is no evidence that Berdon requested this information earlier.

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which lacked any documentation- or collect documentation from providers during the summer

of2008.

Class counsel's and Berdon's decision not to contact claimants or providers in the

summer of 2008 has been a matter of great concern throughout these proceedings. I am

particularly concerned about the failure: (1) to follow up with claimants who submitted no

documents whatsoever; (2) to reach out to claimants who specifically requested class counsel's

and Berdon's assistance but failed to produce a HIPAA Authorization Form to allow for the

collection of documents from providers; and (3) to follow up with providers who failed to

respond to written requests for documents. As will be discussed at Section IV.C, the small

payout under the Prove-Up Settlement Fund was due, in large part, to the lack of documentation.

Indeed, Health Net rejected approximately 8,000 of the 31,000 Group B and C Claims because

substantially no documentation was submitted by a claimant- a fact that was readily apparent

the minute the claimant's submission was opened by Berdon in the summer of2008. Berdon's

assignment to obtain documents from providers as requested by claimants was a critical

component of the Settlement as reflected by the fact that thousands of claimants sought

assistance from Berdon in doing so. It was reasonable that claimants would rely on that promise

of assistance.

More than 7,500 claimants with eligible claim lines requested at Section 10 of the Blue

Sheet or on the Proof of Claim Form that Berdon assist them in obtaining documents from their

providers to support their claims as provided for by the Settlement Agreement.46 In order to

provide such assistance, Berdon needed to complete a number of tasks: (1) obtain signed

HIPAA Authorization Forms from the claimants for each provider with relevant documents; (2)

46 See EisnerAmper Report (Exhibit A) at 26.

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obtain the addresses of the providers; (3) draft and mail letters of request to each provider

including the completed HIP AA Authorization Form; ( 4) process the responses from the

providers when they came in; (5) follow up with providers who failed to respond to requests; and

(6) forward the documents to Health Net- all of which required time.

Given the critical importance of obtaining documents from providers and the length of

time one could reasonably expect that process would take, Berdon should have established a

process for obtaining those documents as soon as the first Proof of Claim Form came in seeking

assistance. After all, there was a first-come, first-served provision in the Plan of Allocation in

case the Prove-Up Settlement Fund was exhausted. Plan of Allocation (App. Tab 127). The first

claimant who returned a Proof of Claim Form and requested assistance should have received that

assistance in the summer of 2008 so the claimant could maintain his or her place in line.

Class counsel and Berdon, however, chose not to provide any assistance to claimants in

obtaining documents from providers in the summer of2008 despite the fact that documentation

was due to be submitted to Health Net by September 9, 2008. By choosing not to record the

names of claimants who had requested help on the Proof of Claim Form and by not starting the

process for collecting provider records immediately upon receipt of the claims, class counsel and

Berdon virtually assured that claimants who had requested their assistance would not be able to

meet the original deadlines set forth in the Settlement Agreement.

Class counsel and Berdon defend the lack of any affirmative review or assistance in

obtaining documents from providers in the summer of 2008 by asserting that it would not have

been cost-effective for Berdon to contact claimants or providers until Health Net had identified,

and notified claimants of, any deficiencies in the claims. Class counsel and Berdon additionally

argue that they were not aware of what Health Net would find deficient and that, in any event, it

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would not have been cost-effective to duplicate work that had been assigned to Health Net.

Class Counsel's Proposed Findings of Fact and Brief at 56 (App. Tab 160) ("Unless and until

Health Net made an initial determination of the claim's validity, class counsel and Berdon could

not know whether that claim was in fact valid, or deficient."). Class counsel and Berdon also

point to their competing duties to the Group A claimants: any costs incurred in assisting

claimants under the Prove-Up Settlement Fund would come directly out of the Cash Settlement

Fund and thus would decrease amounts available to Group A Claims. Class counsel finally

argue that Berdon had no obligation under the Settlement Agreement or Berdan's Engagement

Letter "to undertake a shadow or parallel claims administration to review and analyze the Prove

Up Settlement Fund claims, which Health Net was obligated to do." Id. at 3-6. Class counsel

further assert that "[it] had been Class Counsel's and Berdan's expectation to help cure and

document any deficient claims 'as needed,' to the extent the Prove-Up Fund was not already

exhausted, and to the extent the claims were otherwise eligible Group B and Group C claims,

after Health Net reviewed them." I d.

While Berdan's failure to assist in obtaining provider documents prior to the August 25,

2008 deadline certainly contributed to the number of undocumented claims, there was also the

practical reality that many of the claimants filed their claims right before the Proof of Claim

Form deadline, making it difficult to obtain documents from providers within the short fifteen

day turn around period following the deadline for submission of documents to Health Net. The

schedule set under the Settlement Agreement failed to account for that reality. In the absence of

a cure period, class members would have effectively been deprived of the assistance that had

been offered to them under the Settlement Agreement and thereby prejudiced.

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Moreover, the bifurcated claims administration process made the assistance of Berdon to

claimants especially important since there was no requirement that Health Net or its

administrator advocate affirmatively for claimants' interests or reach out for additional

documentation during adjudication.

Whether or not it was provided for in the Settlement Agreement, it subsequently became

clear that a cure period was necessary to the considerable number of Group B and Group C

Claims that lacked documentation. The fact that the failure to submit documentation was fatal to

a claim, the potentially confusing nature of the Proof of Claim Form, the large number of

claimants who had requested but did not receive assistance prior to the Proof of Claim Form

deadline, and the bifurcated structure of the claims administration made the provision of a cure

period important to ensure fairness in the administration of the Prove-Up Settlement Fund.

However, given the lack of any specific provision for a cure period in the Settlement

Agreement, Health Net's initial opposition to the request for a cure period was not unreasonable.

Health Net should receive some credit for agreeing to a cure period and for ultimately assuming

the costs. While class counsel deserve credit for vigorously negotiating and securing a cure

period, it should be noted that much of the problem was class counsel's own making. Ifthere

was to be a cure period after September 9, 2008, the Settlement Agreement should have provided

for it. Had class counsel anticipated the need and provided for a cure period at the time of the

settlement of the action in March 2008, class members might have been spared some of the

thirteen to sixteen month gap between the submission of their claims to Berdon and the receipt of

a deficiency letter.

Moreover, given the lack of any provision for a cure period after September 9, 2008,

class counsel's and Berdon's decision not to undertake any efforts whatsoever in the summer of

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2008 to obtain documents from providers when claimants requested assistance, placed claimants

at substantial risk if there was no opportunity to cure. Since a substantial number ofthe claims

submitted were patently defective because no documents were submitted, class counsel's and

Berdan's decision not to perform a relatively simple review of the claim files to determine

whether documents were attached47 or provide assistance to claimants in obtaining

documentation prior to the September 9, 2008 deadline meant that numerous claims would be

denied for lack of documentation in the absence of a cure period. The decision by class counsel

and Berdon in the summer of 2008 to not begin the process of obtaining documents for claimants

who requested assistance was not justified because: (1) claims were to be paid on a first-come,

first-served basis in case the Prove-Up Settlement Fund was oversubscribed and claimants who

requested assistance had a right to immediate assistance from class counsel and Berdon since

they clearly "needed" assistance under Section 9.4 of the Settlement Agreement; and (2) class

counsel and Berdon knew, or should have known, that it would take time and persistence to

obtain the documents from providers.

3. Negotiating the Parameters for the Deficiency Review, Deficiency Letters and Cure Submissions (November 2008 to November 2009)

Health Net proposed rules to govern the deficiency review and cure period on October

27, 2008. Epstein Ex. 4 (App. Tab 19). Health Net, class counsel, and Berdon spent the next

thirteen months negotiating the rules that would govern the deficiency and cure period and

setting up the mechanism - databases, deficiency letter templates, programming logic -that

would ultimately enable the parties to create the approximately 31,000 deficiency and

ineligibility letters that were eventually mailed to claimants in November 2009.

47 Berdon was already reviewing the claim forms to determine if there was any indicia of claimant's intention to file a Group B or C Claim- the presence of documents was such an indicia.

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(a) The Issues Disputed and Addressed with Respect to the Terms and Scope of the Deficiency Review/Cure Period

As discussed above, there were a myriad of issues to be addressed by the parties during

this period, including, but not limited to: what categories of claim lines were ineligible under the

Settlement Agreement; how the $100 claim threshold would be applied; whether there would

there be one or two cure periods; the list of deficiencies to be captured; the content, language,

and format of the deficiency letters; the manner in which the deficiency data would be

transmitted by Health Net to Berdon; who would pay for the deficiency letters; who would send

the deficiency letters; how long the cure period would last; and whether claimants whose Group

B and Group C Claims were denied would have a right of appeal.

In late November 2008, Health Net engaged Rust as a consultant to conduct the

deficiency review and put in place a process for the review of claims. Stinehart Ex. 2 (App. Tab

70). Accordingly, while the parties were negotiating, the deficiency review process was moving

forward. Health Net's vendor created tiff images of the more than 30,000 claims files; Rust

captured the data from these files, created a database, and began the process of reviewing claims

and identifying deficiencies. Stinehart Tr. at 130:14-16 (App. Tab 88).

(b) The Reasonableness of the Parties' Positions with Respect to the Terms and Scope of the Deficiency Review and Cure Period

From November 2008 until the deficiency letters were mailed out in November 2009, the

record demonstrates a stream of letters, e-mails, and phone calls reflecting the parties'

negotiations and agreements. There was give and take on many issues. Health Net initially

proposed a $100 threshold by claim line -a stringent proposal -but acceded to class counsel's

insistence that the threshold be applied to claim lines aggregated by date of service and provider

or by hospital stay. Class counsel initially floated the idea of two cure periods, but acceded to

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Health Net's position that there should only be one. Health Net proposed a list of claim lines

that should be excluded as outside the Settlement. While class counsel initially resisted, they

ultimately agreed with most of Health Net's proposed list when Health Net provided the data to

back up its position. Health Net initially refused to pay for the deficiency letters, but ultimately

agreed to class counsel's request and ended up paying for the printing and mailing of the

deficiency letters.

The negotiations and communications between the parties vacillated between cooperative

and contentious. While there was certainly time wasted due to class counsel removing Berdon,

for a time, from the negotiations and the sniping between the parties, considerable time was

required to negotiate the issues and reach agreement as to the process. In the end, there was

agreement with respect to the deficiencies that would be captured and communicated to the class

members in the deficiency and ineligibility letters; the letters were sent out; and the cure period

occurred. I cannot say that the parties' positions with respect to the terms and scope of the

deficiency review period were unreasonable. While the parties' negotiations should have

occurred more expeditiously, I cannot conclude that the actions of the parties or the positions

taken during this period were taken in bad faith.

4. The Cure Period (November 2009-February 2010)

Prior to the mailing of the approximately 31,000 deficiency and ineligibility letters in

November 2009, Health Net and Berdon were aware that the amount of potentially proven-up

claims prior to the submission of cure documents was "small." Rosenbaum Tr. at 146:5-149:9

(App. Tab 86); Rothbaum Ex. 24 at 3 (App. Tab 67). As highlighted earlier, prior to this date,

Berdon and class counsel had not taken any affirmative steps to contact those claimants who

requested assistance, obtain the necessary HIP AA Authorizations Forms from claimants, and

gather the supporting documentation from providers. Berdon did ultimately obtain the

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information regarding the claimants who requested assistance in October 2009 from Health Net,

and used that information in connection with drafting the deficiency letters.

For the vast majority of the more than 7,500 class members with eligible lines who

requested assistance back in 2008, the deficiency letter was the first follow-up received from

Berdon regarding the need to submit a HIPAA Authorization Form. Pursuant to the deficiency

letter, all information was to be provided to Berdon within sixty days ofthe date of the letter and

Berdon only had an additional thirty days to obtain and provide to Health Net the required

supporting documentation.48 Once that time expired, the doors would close on a claimant's

ability to prove their claim.49

(a) Disputes Arising During the Cure Period

During the cure period, disputes arose between the parties regarding Health Net's initial

deficiency determinations with respect to the Group B and Group C Claims. Class counsel wrote

to counsel for Health Net stating that there were "serious problems" with Health Net's handling

of the Group B and Group C Claims. Class counsel further stated that no further steps should be

taken with respect to the deadlines for curing deficiencies and requested that the parties schedule

a meeting to discuss class counsel's concerns. Quackenbos Ex. 14 (App. Tab 36). The parties

met on February 3, 2010, only days before the cure period was scheduled to end.

Notwithstanding class counsel's contention that there were serious problems with Health

Net's adjudication of claims, class counsel did not seek to extend the cure period. Class

48 It should be noted that the first group ofletters was mailed on November 13, 2009, shortly before Thanksgiving. Claimants were required to return any cure documentation by the middle of January 2010.

49 Health Net did continue to accept additional documentation from Berdon after the cure deadline. Kizis Tr. at 323:23-324:21 (App. Tab 82). Berdon, however, did not continue to request documentation after the cure period deadline. Berdon mailed its last requests for documents to providers on February 16, 2010. Berdon Requests for Documents to Providers (App. Tab 112).

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counsel's position was that an extension of the cure deadline was not needed because "[n]o one

ever said that there was a problem with obtaining or having people mail in the supplemental

documentation." Quackenbos Tr. at 416:21-25; 417:2-3 (App. Tab 85). According to class

counsel, their view at the time was that the "problems of that deficiency cure period [were] the

interpretation given to submitted documents, not that documents weren't submitted." Id.

5. The Adjudication Period (February 2010-0ctober 15, 2010)

The Settlement Agreement provided 210 and 255 days following the "Effective Date" for

the adjudication and issuance of a report on the Group C and Group B Claims, respectively.

Health Net had more than eight months from the submission of the last cure documents by

Berdon under the Settlement Agreement to adjudicate and issue a report on all the Prove-Up

Settlement Fund claims. At class counsel's request, Health Net ultimately accepted cure

documents after the February 201 0 deadline.

Notwithstanding class counsel's concerns regarding Health Net's processing of claims,

there seemed to be little communication between the parties regarding the adjudication process

during this period. With the exception of some initial discussions relating to the discovery of the

programming logic issues in July 2010 described below, there was only modest communication

between the parties during the approximately eight months between the official end of the cure

period and Health Net's issuance of its report. Class counsel have explained that their

expectation was that the second review of the documents submitted during the cure period

"would lead to a lot more approved claims." Quackenbos Tr. at 433:23-434:1 (App. Tab 85).

Class counsel additionally asserted that they had identified certain issues to Health Net during

the cure period and thought that the fixes discussed with Health Net with respect to individual

claims could have a "systematic application" and "conceivably would" sweep in more claims.

Id. at 434:21-435:12.

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Between June 1 and late October 2010, Health Net discovered and notified class counsel

of two (in a series of three) unrelated computer programming logic issues in the programs, which

it had used to collect the class data necessary to identify and notify class members. The

programming logic issues potentially affected thousands of class members. During this same

period, Health Net had completed its final adjudication of the Group Band Group C Claims and

issued its Confirmation of Discharge Report and Final Prove-Up Settlement Fund Report on

August 31, 2010 and October 15, 2010, respectively. The reports identified that only a little

more than $1 million was paid out from the Prove-Up Settlement Fund (approximately $932,000

in Group B Claims and approximately $132,000 in discharged Group C Claims).

The combination of the programming logic errors and the low payout on the claims

against the Prove-Up Settlement Fund provoked new disputes and negotiations between the

parties and resulted in a joint letter to the Court on November 1, 2010. In their letter to the

Court, the parties advised that: (1) Health Net had failed to properly notify over 27,000 Class

Members with eligible claims from the MC 400 system; (2) "[i]n addition, Health Net has

identified programming logic errors that caused an incomplete extract of the claims data from the

ABS system (which hosts the claims data for Health Net's subsidiaries on the West Coast);" (3)

there were problems with administration of the Band C Claims that were under investigation;

and ( 4) the parties intended to submit a proposal for "partial distribution" of the Cash Settlement

Fund in the near future. Quackenbos Ex. 19 (App. Tab 40).

6. Negotiating Issues after the Issuance of the Final Prove-Up Report (November 2010 to January 2012)

In the twelve months following the parties' November 1, 2010 letter to the Court, the

parties attempted to resolve the issues referenced in the letter, as well as subsequently discovered

disputes. The efforts to resolve these issues culminated in the parties' reaching a decision in

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Blue Sheets [in their Proof of Claim Forms] with incomplete or incorrect listings of the claim

lines. See Health Net's Brief in Support of Proposed Findings of Fact at 46-48 (App. Tab 159);

see also Class Counsel's Proposed Findings of Fact and Brief at~~ 12.1-21.4 (App. Tab 160).

There has been no assertion made, or evidence presented suggesting, that these programing

issues were intentional. In each case, the programming logic issues were discovered by Health

Net or its vendors and disclosed to class counsel.

(b) Description of First Programming Logic Issue (the MC400 System)

In early June 2010, Health Net learned that the program written to identify claim lines in

the MC400 professional and institutional claims systems contained errors. Letter from G.

McClellan to L. Kizis (Aug. 23, 201 0) (App. Tab 1 00); see also McClellan Tr. at 441:14-443:4

(App. Tab 84). Unlike Health Net's other claims systems, the MC400 professional claims

system assigned each claim line a form number that designated each adjudication of a claim line.

Letter from G. McClellan to L. Kizis (Aug. 23, 2010) (App. Tab 100); see also McClellan Tr. at

453:3-7 (App. Tab 84). The program written to identify the final version of claim lines searched

for the form number with the greatest value because that was believed to show the final version.

Beginning in June 2005, however, intermittent surges in the volume of claim lines exhausted

usable form number values. To accommodate these intermittent surges, form number values

were reset. In these instances, a lesser form number would designate the final version of a claim

line. Letter from G. McClellan to L. Kizis (Aug. 23, 2010) at 1 (App. Tab 100); McClellan Tr. at

448:13-450:9 (App. Tab 84).

This issue was compounded by the fact that the program searched for the final version of

a claim- as opposed to searching for the final version of a claim line. Letter from G. McClellan

to L. Kizis (Aug. 23, 2010) at 1 (App. Tab 100). Thus, ifHealth Net readjudicated a single claim

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line in a claim and did not readjudicate the other claim lines in that claim, the form number with

the greatest value (which is the value that the computer program searched for) contained only the

readjudicated claim line and dropped the claim lines that were not readjudicated. Id. at 1-2.

After obtaining an understanding of the parameters of the problem, Health Net alerted class

counsel ofthe issue on July 15,2010. Id.; see also Kizis Tr. at 385:18-19; 386-2-25; 387:2-24

(App. Tab 82). On that same date, class counsel made a series of requests to Health Net

demanding a written explanation of: "(1) the exact nature of the errors (2) the number of class

members effected ... and (3) a complete explanation and chronology of how and when these

errors came to Health Net's representative's attention." Calvert Ex. 12 (App. Tab 10). Health

Net proceeded to do more diligence on the nature, extent, and source ofthe problem in order to

put the parties in a better position to discuss the problem and communicate it to the Court. Kizis

Tr. at 388:5-25; 389:2-18 (App. Tab 82).

(c) Description of Second Programming Logic Issue (the ABS System)

Health Net subsequently and independently discovered a second unrelated issue in a

different program that was written to identify claim lines in a different system, the ABS

professional and institutional claims systems. Quackenbos Ex. 21 (App. Tab 42); see also

McClellan Tr. at 457:5-16 (App. Tab 84). The program that was written to collect relevant data

from the ABS claims system inadvertently used an "inner join" (which identifies content that is

in both "A" and "B") as opposed to an "outer join" (which identifies content that is in neither

"A" nor "B").50 McClellan Tr. at 461:3-15 (App. Tab 84). As previously discussed, on

November 1, 2010, the parties sent a joint letter to the Court including a general description of

50 These are two commands that are routinely used by computer programmers.

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the first two programming logic issues and setting forth a plan to address the issue. Quackenbos

Ex. 19 (App. Tab 40).

[The parties] propose to work with Berdon to send an appropriate explanatory cover letter, proof of claim and release form and blue sheet with correct and information about their ONET services to the subscribers who have an ONET Service that was not, but should have been, listed on their blue sheets. In addition, the subscribers who did not receive a settlement notice will receive a notice. These potential class members will have an opportunity to participate in the Settlement as well as to opt out. After the parties meet and confer, the parties will ask the court to approve a joint plan to approve these issues.

I d. at 3. On January 5, 20 11, class counsel followed up with a letter to Health Net requesting

addresses and other information relating to the affected class members. Quackenbos Ex. 20

(App. Tab 41). On January 14, 2011, Health Net responded to class counsel's requests and

provided the numbers of class members affected by the programming logic issues with respect to

the MC400 system and ABS systems. Health Net attached for class counsel's review drafts of

proposed cover letters to be sent to under-noticed and unnoticed class members. Quackenbos

Ex. 21 (App. Tab 42). On January 24,2011, the parties met to discuss, among other issues, the

programming logic issues and the notices to be served on class members. The various other

issues on the agenda at the meeting, however, included class counsel's recent realization that

certain individuals purportedly included in the class (i.e. the ASO subscribers) had not been

included in the Class Notice and Health Net's apparent disclosure that approximately $1 million

in claims had been denied based on claimants' failure to populate Section 6. Quackenbos Ex. 25

(App. Tab 45). These hot-button topics consumed much of the discussions and correspondence

between the parties for the next several months and slowed down progress on resolving the

programming logic issues and the related notice issue.

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(d) Description of Third Programming Logic Issue (the MHN System)

At some point in the spring 2011, Health Net uncovered and informed class counsel of a

third computer programming logic issue error in a program written to extract claims data from

the MHN claims systems. Letter from G. McClellan to L. Kizis (May 6, 2011) (App. Tab 102).

When Health Net retrieved the claims data from the MHN claims systems, the "PA Funding

Type" field was used to identify ASO claim lines so that those claim lines could be excluded,

along with other claim lines Health Net believed were not involved in the litigation, from the

extraction of claims data from these systems. I d.; see also McClellan Tr. at 461 :21-463: 11,

474:14-477:10 (App. Tab 84). When the program was written, this field inadvertently did not

distinguish (1) ASO arrangements between Health Net and self-funded employer groups from (2)

ASO arrangements between Health Net and MHN for employer groups underwritten by Health

Net, but where the mental health and substance abuse benefits were administered by MHN.

Letter from G. McClellan to L. Kizis (May 6, 2011) (App. Tab 102). Thus, some class members

in non-ASO employer groups were inadvertently excluded from the data obtained from the MHN

claims systems. Id.

(e) The Negotiation of Class Counsel's Demands for Health Net to Pay for Additional Class Notices and Additional Settlement Funds Relating to the Programming Logic Issues

As each of these programming logic issues surfaced, class counsel aggressively

demanded that Health Net identify and investigate the underlying problem and provide

information on the number of class members and the Section 5 Balance Bill Amounts of the

claim lines affected. Calvert Ex. 12 (App. Tab 10); Quackenbos Ex. 20 (App. Tab 41);

Quackenbos Ex. 21 (App. Tab 42). Investigating each ofthese programming logic issues and

ascertaining the extent to which it affected claims data was time consuming. Moreover, the

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parties' review of the multiple programming issues, estimation and analysis ofthe associated

dollar value of omitted claim lines, and subsequent negotiation of these issues took further time.

The fact that there were three different unrelated errors discovered in three different systems

within less than a year, each requiring investigation, quantification, and negotiation- on top of

the many other issues that plagued this class administration- helps to explain in part, some of

the delay in this Settlement administration.

In connection with the programming logic issues, the parties apparently agreed, at least as

of the time they notified the Court on November 1, 2010, that the under-noticed and unnoticed

class members should receive new notices, subject to the approval of the Court? Quackenbos

Ex. 21 (App. Tab 42).

51 Health Net has argued that it would have prevailed on its arguments that the class members who were affected by the programming logic issues (both under-noticed and unnoticed) are not entitled to receive additional notice and Health Net should have made no contribution to the settlement based on the programming logic issues. See Health Net's Brief in Support ofproposed Findings of Fact at 43-47 (App. Tab 159).

In support of its position, Health Net cites Rule 23(c)(2) which provides that the Court "must direct to class members the best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." Moreover, "[s]o long as the method of providing the notices was reasonably calculated, under all the circumstances, to inform the class members of the pendency of the class action, due process considerations have been satisfied." Breslow v. Prudential-Bache Props., Inc., No. 91 C 1230, 1994 WL 478611 at *2 (N.D. Ill. Sept. 1, 1994). Health Net also points to the expertise ofNavigant, "the specialized global expert services" firm and that firm's efforts and quality control measures taken in identifying, the fifty-five million claim lines that were extracted from Health Net's claims systems. Letter from G. McClellan to L. Kizis (App. Tab 102).

Health Net further avers the errors in programming logic that resulted in these unintentional omissions "were virtually impossible to detect" and points to the small percentage of omitted lines relative to the total extracted data. McClellan Tr. at 460:6-15 (App. Tab 84).

Health Net argues the approximately 65,000 class members (out of approximately 2.6 million total class members) who received a notice that contained incorrect or incomplete data for some of their claim lines are not required to receive any additional notice because the initial notice satisfied the requirements of Federal Rule of Civil Procedure 23(b )(3) and claimants were permitted to correct or add claim lines to their claim. Axelrod Tr. at 96:12-97:19 (App. Tab 78). Finally, Health Net Points to Paragraph 14 ofthe Final Order and argues that facts discovered by class members would fall among the definition of Released claims. (Wachtel Doc. No. 868.)

Similarly, Health Net argues the approximately 8,000 class members who did not receive an individual notice also are not required to receive additional notice. Health Net asse1ts that, the publication notice was sufficient to notify and bind the 8,000 subscribers. Moreover, Health Net states that it "expended an extraordinary effort to identify the relevant class members" though it was only required to expend "reasonable" efforts to provide

Continued ...

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In connection with the programming logic errors, class counsel began vigorously

demanding, at least by July 18, 2011, that Health Net make an additional payment to the Cash

Settlement Fund. Quackenbos Ex. 35 (App. Tab 52). While Health Net rejected the notion that

it should pay additional monies, the parties continued to exchange information regarding the

notice issues and financial impact of the programming logic issues on and off through the fall of

2011. Quackenbos Ex. 36 (App. Tab 53).

(f) The Parties' Positions

(1) Class Counsel's Position

In a July 18, 2011letter to Health Net, class counsel made the following arguments in

support of their demand for a contribution of additional funds to the settlement in connection

with the programming logic errors:

The identity of these admittedly unnoticed, or incorrectly noticed, class members, and their damages was not disclosed to Plaintiffs during the original settlement negotiations. These members did not receive notice without fault on their part. As a result of mistakes made by Health Net, these members are going to receive notice four years later than other class members. This delay will make their documentation of Group B & C claims more difficult. Moreover, since these class members' claims data was not provided at the time settlement negotiations, class wide damages were understated. In our view, Health Net should contribute more money to the settlement to compensate for the exclusion of these class members from the negotiation of the settlement and the settlement notice.

Quackenbos Ex. 35 at 3 (App. Tab 52). Class counsel's argument for additional compensation

was based in part, prior to the mediation, on the assumption that, had these members' claims data

(claim lines) been identified during the settlement negotiations, class counsel would have

requested and obtained a higher settlement amount.

.... Continued individual notice. For Health Net's full arguments in support of its position that the under-noticed and unnoticed claimants need not be noticed, see Health Net's Brief in Support of Proposed Findings of Fact at 43-48 (App. Tab 159).

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