California Court Rejects Dignity Health Settlement Again

Oakland, CAThe long-awaited settlement in Rollins v. Dignity Health, a class action ERISA lawsuit, that has been moving through the legal system since 2013, continues to be just that – long awaited. On June 12, the District Court for the Northern District of California refused to approve a proposed settlement for the second time since 2019.

Judge Jon S. Tigar denied the uncontested motion for approval because the amount Dignity Health will be required to contribute is unknown. In addition, the court noted that the settlement includes separate provisions for two subgroups of plaintiffs, which made it difficult to evaluate the relative fairness of the settlement for these groups. According to the court, by offering “considerably more value to one class of plaintiffs than to another,” the proposed settlement risked “trading the claims of the latter group away in order to enrich the former group.”  

Fairness among participants – the sticking point this time   

       
As the opinion notes, courts have an active role to play in deciding whether or not to approve a settlement. Under Ninth Circuit rules, the court does not simply rubber stamp whatever the parties have agreed to.

The review process has two steps. Step one involves evaluating the settlement as a whole. If the proposal generally appears to be fair and adequate, courts take another look to ensure that no segment of the class receives preferential treatment. The proposal fell apart at step two.

The structure of the proposed settlement is quite complicated, with two classes of plaintiffs, the “Former Participant Vesting Claimants” and the “PEP Plus Claimants,” which was largely comprised of non-unionized nurses. The PEP Plus Claimants were further subdivided into four subgroups on the basis of number of years of service.

The District Court expressed particular concern that the first class, the “Former Participant Vesting Claimants,” appeared to include diverse participants whose interests were actually in conflict with one another. It sent the proposed agreement back to the negotiating table to ensure that no portion of that group was unfairly disadvantaged.

Fairness between plan participants and their attorneys and participants and the employer – the sticking points last time               
This, at least, is progress.  A year ago, in June 2019, the proposed settlement was rejected because it fell apart at step one.

At that stage, the District Court was not satisfied that the proposal was fair and adequate, as a whole. Two features of that proposal were particularly troubling – a “clear sailing” clause, in which Dignity Health agreed not to contest the class lawyer’s petition for attorneys’ fees, and a “reversion” clause that provided that any residual money remaining in a settlement fund would revert back to the health plan. Both, according to the court, raised the specter of collusion. The latest proposal eliminated both clauses, and so proceeded to the next level of review.

The first hurdle - which laws apply?

In its earliest incarnation, the lawsuit addressed an even more fundamental question, which was whether ERISA even applied to the Dignity Health Pension Plan. The plaintiffs argued that it did, and the Plan was substantially underfunded under the rules set out in ERISA Section 302. With an underfunded pension plan, current and future retirees run the risk that the promised benefits will simply not be there when they retire. Dignity Health Retirement Plan participants initially claimed a shortfall of $1.8 billion.

The remedy is full funding; negotiations in this situation usually focus on how much time the plan sponsor is given to catch up, not whether they will ultimately have to contribute substantial sums of money. In Dignity Health, the participants’ financial recovery would likely have been many times the settlement offer.

Dignity Health, however, argued that, since it is loosely affiliated the Catholic Church, the Plan fell under an exemption in ERISA carved out for church plans. ERISA funding standards do not apply to church plans. The exemption is ultimately rooted in the Free Exercise Clause of the First Amendment.

This question was resolved by the Supreme Court in 2017, in an opinion, which agreed that plans similar to the Dignity Health Plan are not subject to ERISA. In addition to raising Constitutional issues, the decision has wide reaching implications for hospital workers since many health care organizations are affiliated with churches.

The number and complexity of the issues involved in the Dignity Health lawsuit explains, in large part, why the litigation has now taken upwards of eight years. The parties announced their intention to settle in April 2019, and the end may finally be in sight.