Close, but No Cigar for Approval of Dignity Health Case Settlement

For the second time, a motion for preliminary approval of a settlement agreement has been denied in the case of Rollins v. Dignity Health.

The case is one of many that have challenged a pension plan’s “church plan” status under the Employee Retirement Income Security Act (ERISA). The case made it to the Supreme Court, which ruled plans maintained by principal-purpose organizations can qualify as “church plans;” however, it did not rule that the hospital was a principal-purpose organization. The parties first announced an agreement to settle last April.

In his order on the plaintiffs’ first motion for preliminary approval, U.S. District Judge Jon S. Tigar of the U.S. District Court for the Northern District of California noted that “many of the relevant factors support a finding that the settlement falls within the range of possible approval.” However, he denied the motion for three main reasons. The parties submitted a revised settlement agreement that eliminated the judge’s concerns about “clear sailing and reversion clauses.” A clear sailing clause is a compromise in which a class action defendant agrees not to contest the class lawyer’s petition for attorneys’ fees. A reversion clause provides that any residual money remaining in a settlement fund revert back to the defendant.

Tigar also said previously that he could not evaluate the reasonableness of the amount the plaintiffs planned to seek in attorney’s fees without a more precise “denominator against which attorney’s fees should be measured,” because the class’s total recovery was insufficiently certain. The third reason for denial was that the plaintiffs “had not adequately shown why certification of two subgroups was not required.”

In his latest order, Tigar explains that the adequacy of the settlement is especially difficult to evaluate because the amount Dignity Health will be required to contribute is unknown. Aside from $100 million in baseline contributions—$50 million for 2020 and at least $50 million for 2021—Dignity Health’s contributions will depend on what minimum contribution recommendations are made by what the settlement calls “the Pension Contribution Reports (PCRs).” In his last order, Tigar noted that that the plaintiffs had “not identified any provisions in the settlement governing how Dignity Health’s actuaries calculate the minimum contribution recommendation.” The plaintiffs remedied this problem by providing estimates from an actuarial expert.

To evaluate whether this amount falls within the range of approval, Tigar noted, he must compare it to the plaintiffs’ expected recovery at trial. They estimate that the monetary component of the expected recovery would be about $630 million over the five-year period covered by the settlement, including $230 million in Pension Benefit Guaranty Corporation (PBGC) premiums and $400 million in ERISA-required funding. Tigar found that compared to the $630 million recovery, the settlement’s high-end value of $747 million provides an excellent outcome for the plaintiffs. And even if the PCRs recommend far smaller contributions, the settlement is likely to provide a significant value to the class, he said. In addition, Tigar noted, the settlement provides procedural guarantees similar to those the plaintiffs would be entitled to if they prevailed at trial—for example, protection of accrued benefits in the event of merger or termination of the plan, summary plan descriptions, annual reports and pension benefit statements. For these reasons, Tigar found that the settlement falls within a reasonable range of recovery.

The settlement agreement includes separate provisions for two subgroups of plaintiffs. In his prior order, Tigar noted that “the very fact that these subgroup members receive payments beyond the classwide relief for their additional claims creates the potential for the settlement to either shortchange or disproportionately favor these claims relative to the classwide claims.” He reviewed additional details provided by the plaintiffs to support their argument that the subgroups do not have a fundamental conflict of interest with the rest of the class and that the subgroups’ recoveries are adequate.

What is called the “PEP Plus Claimant Subgroup” is comprised of 1,050 non-unionized nurses who accrued benefits under the backloaded “PEP Plus” formula. In 2014, Dignity Health amended the plan to change or eliminate this backloading, which the plaintiffs allege had a significant negative impact on the PEP Plus claimants. Tigar noted that if the plan was deemed subject to ERISA, these plaintiffs might be entitled to retrospective relief in addition to any prospective relief for the class as a whole.

Under the settlement, the PEP Plus claimants will benefit from the prospective classwide relief as well as receiving one-time cash payments ranging from $365.75 to $975.32, depending on their years of service. The plaintiffs estimate that this recovery is about 10% of the total value of the PEP Plus subgroup’s claims. Tigar found the PEP Plus claimants are not incentivized to reduce relief for the rest of the class because they, too, will benefit from that relief. And the PEP Plus claimants will receive an additional benefit. For these reasons, he did not find any conflict between these interests and found that certification of a subclass is not necessary. Tigar concluded that the PEP Plus subgroup’s recovery under the settlement is adequate.

What is called the “vesting subgroup” is made up of 3,282 former employees who participated in the “cash balance” portion of the plan and served more than three but less than five years of service. Tigar noted that the plan had a five-year vesting period, whereas ERISA requires that cash balance plans must vest at three years. “Accordingly, these plaintiffs would be entitled to plan benefits only if the plan were deemed subject to ERISA,” he said.

The settlement does not entitle these plaintiffs to future benefits under the plan, but it provides one-time cash payments of $113.40 for those who accrued benefits under the Value Protection Plan and $226.80 for those who accrued benefits under the Guaranteed Growth Account formula. The plaintiffs estimate that this recovery constitutes 3% to 9.5% of the vesting subgroup’s total claims. Citing another court case, Tigar said the settlement is an example of one that, by “offer[ing] considerably more value to one class of plaintiffs than to another,” risks “trading the claims of the latter group away in order to enrich the former group.”

The plaintiffs tried to argue that the seven church plan cases involving similar vesting subgroups have settled in the past three years, and in all of the cases “the plaintiffs and their counsel were able to negotiate for a recovery of no more than a few hundred dollars per” member of the vesting subgroup. But Tigar said he reviewed the final approval orders in these cases and none of them even considered whether there might be an intra-class conflict, much less resolved the question in favor of certification. “It would substantially help plaintiffs’ cause if they could cite a case approving a unitary class in the face of a conflict of similar magnitude, regardless of whether the case involved a defined benefit [DB] plan. But they do not, and the court has not found one,” he said.

Because of the underlying conflict between the vesting subgroup and the rest of the class, Tigar said he cannot find that its interests have been adequately protected. “The court finds a fundamental conflict of interest between the vesting subgroup and the rest of the class that must be addressed by subclass certification. Because the court cannot certify the class, it cannot grant preliminary approval of the settlement,” he said.