Skilstaf, Inc. v. CVS Caremark Corp., et al
Filing
FILED OPINION (BETTY BINNS FLETCHER, SIDNEY R. THOMAS and LEE H. ROSENTHAL) AFFIRMED. Judge: LHR Authoring. FILED AND ENTERED JUDGMENT. [8062386]
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FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SKILSTAF, INC., on behalf of itself
and all others similarly situated,
Plaintiff-Appellant,
v.
CVS CAREMARK CORP.; LONGS
DRUGS STORES CORPORATION; THE
KROGER CO.; NEW ALBERTSON’S,
INC.; RITE AID CORPORATION;
SAFEWAY INC.; SUPERVALU INC.;
WALGREEN CO.; WAL-MART STORES
INC.,
Defendants-Appellees.
No. 10-15338
D.C. No.
3:09-cv-02514-SI
OPINION
Appeal from the United States District Court
for the Northern District of California
Susan Illston, District Judge, Presiding
Argued and Submitted
May 12, 2011—San Francisco, California
Filed February 9, 2012
Before: Betty B. Fletcher and Sidney R. Thomas, Circuit
Judges, and Lee H. Rosenthal, District Judge.*
Opinion by Judge Rosenthal
*The Honorable Lee H. Rosenthal, District Judge for the U.S. District
Court for Southern Texas, sitting by designation.
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SKILSTAF v. CVS CAREMARK CORP.
COUNSEL
R. Bryan McCulley, McCulley McCluer PLLC, Jacksonville,
Florida, for the plaintiff-appellant.
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Fred A. Kelly, Jr., Sarah E. Andre, Nixon Peabody LLP, Los
Angeles, California, for defendants-appellees New Albertson’s. Inc. and Supervalu Inc.
Gregory P. Stone, Michael R. Doyes, Carolyn H. Luedtke,
Munger Tolles & Olson LLP, Los Angeles, California, for
defendant-appellee Safeway Inc.
Matt Oster, McDermott Will & Emery LLP, Los Angeles,
California, for defendant-appellee Walgreen Co.
Laurence A. Weiss, Kristi K. Elder, Hogan Lovells US LLP,
Palo Alto, California, for defendant-appellee The Kroger Co.
Steven H. Frankel, Sandra D. Hauser, Sonnenschein Nath &
Rosenthal LLP, San Francisco, California, for defendantappellee Wal-Mart Stores, Inc.
Peter Buscemi, Morgan, Lewis & Bockius LLP, San Francisco, California, for defendant-appellee Rite Aid Corp.
Tami S. Smason, Robert H. Griffith, Page R. Barnes, Foley &
Lardner LLP, San Francisco, California, for defendantsappellees CVS Caremark Corp. and Longs Drugs Stores Corp.
OPINION
ROSENTHAL, District Judge:
This is an appeal from the dismissal of a putative class
action filed in a California federal district court. The dismissal
was based on a Massachusetts federal district court’s final
judgment certifying a nationwide class and approving a class
settlement. A class member who appeared through counsel as
an objector in the Massachusetts case filed the present suit in
California seeking to represent a nationwide class. The Cali-
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fornia complaint sought damages based in large part on the
same facts alleged in the Massachusetts case, but against different defendants. The putative class was part of the same
class certified in the Massachusetts case.
The California defendants moved to dismiss under Federal
Rule of Civil Procedure 12(b)(6). The motion was based on
a covenant not to sue contained in the settlement and final
judgment entered in the Massachusetts case. Under that provision, the class members, including the member who filed the
California suit as the named plaintiff, not only released their
claims against the Massachusetts defendants but also agreed
not to sue “any other person seeking to establish liability
based, in whole or in part,” on the claims released.
The California defendants argued that the covenant not to
sue in the Massachusetts settlement agreement and final judgment precluded the California action. The district court held
that the covenant was enforceable against the named plaintiff
in the California case, declined to appoint or allow a new
class representative because no class had been certified, did
not decide whether the covenant was enforceable against the
absent members of the putative class, and dismissed. The
named plaintiff appealed. We affirm.
I.
Factual and Procedural Background
A.
The Massachusetts Class Action and the Filing of
the California Suit
The named plaintiff filing the California case is Skilstaf,
Inc., an Alabama payroll-service company that self-funds a
prescription-drug plan for its employees. Skilstaf was a member of the class the Massachusetts district court certified in
New England Carpenters Health Benefits Fund v. First DataBank, Inc. & McKesson Corp.1 The class consisted of third1
Civil Action No. 05-11148-PBS (D. Mass.). Some of the decisions in
the Massachusetts case are reported at 602 F. Supp. 2d 277 (D. Mass.
2009); 248 F.R.D. 363 (D. Mass. 2008); and 244 F.R.D. 79 (D. Mass.
2007).
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party payors—such as insurance companies, self-insured
employers like Skilstaf, and union health and benefit plans—
that made reimbursements for consumers’ purchases of certain prescription drugs. The class also included individual
consumers who made percentage co-payments for such drugs
and uninsured or underinsured individual consumers who paid
the full amounts.
The defendants in the Massachusetts case were McKesson
Corporation, a wholesale prescription-drug distributor that
also owns pharmacy-related businesses, and First DataBank,
a publisher of information about prescription drugs. Wholesalers such as McKesson sell prescription drugs to retail pharmacies and other purchasers. Pharmacies in turn mark up the
price in selling to consumers. If the consumers are insured,
the insurer’s reimbursement payment is typically based on
average wholesale prices (AWPs) published by, among others, First DataBank. Third-party payors typically contract to
reimburse retail pharmacies at a discount from the published
AWP figures. The complaint in the Massachusetts suit alleged
that the third-party payors and the individual consumers paid
improperly inflated prices for many brand-name prescription
drugs based on AWPs published by First DataBank. The
plaintiffs in the Massachusetts case alleged that beginning in
2001, McKesson and First DataBank conspired to publish
AWPs that used a 25% markup for drugs that historically had
only 20% markups. The complaint alleged that this conspiracy increased the amounts the pharmacies charged and the
amounts third-party payors had to pay in reimbursements. In
addition, individual consumers who had percentage co-pay
arrangements with plans that reimbursed the cost of brandname drugs based on the AWPs, or who were uninsured or
underinsured, allegedly overpaid based on the inflated AWPs.
The plaintiffs alleged that the inflated AWPs generated a
windfall for pharmacies, which inclined them to purchase
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drugs from McKesson and to use First DataBank’s AWP publications. The plaintiffs alleged a conspiracy to violate RICO.2
In March 2008, after three years of litigation, the Massachusetts court presiding over New England Carpenters certified the third-party payor and consumer classes described
above.3 The notice of class certification and of the right to
opt-out informed the class members that remaining in the suit
would prevent them from filing a later lawsuit “related in any
way” to the claims against McKesson. The notice did not contain a statement that remaining in the class would prevent a
member from later asserting claims arising out of the same
facts against an entity other than McKesson.
McKesson ultimately agreed to pay $350 million to settle
the claims, consisting of $288 million to the class net of fees
and expenses.4 The district court preliminarily approved the
settlement in January 2009. The settlement agreement
included a section entitled “Releases” that stated as follows:
Upon the Effective Date of this Agreement, the
Released Parties shall be released and forever discharged by all Releasers from all Released Claims.
All Releasers covenant and agree that they shall not
hereafter seek to establish liability against any
Released Party or any other person based, in whole
or in part, on any of the Released Claims.
2
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961
et seq.
3
248 F.R.D. 363 (D. Mass. 2008).
4
In March 2009, the New England Carpenters court approved a separate
settlement with First DataBank for a $2.7 million payment and a rollback
of the average wholesale prices allegedly increased through the scheme
with McKesson back to the original 20% rate. The National Association
of Chain Drug Stores appealed the settlement. The First Circuit affirmed
the district court. Nat’l Ass’n of Chain Drug Stores v. New England Carpenters Health Benefit Fund, 582 F.3d 30, 47 (1st Cir. 2009).
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(emphasis added).
The settlement agreement defined “Released Parties” as:
(I) McKesson, (ii) its respective present and former,
direct and indirect, parents, subsidiaries, divisions,
partners and affiliates, (iii) the respective present and
former stockholders, officers, directors, employees,
managers, agents, attorneys, partners, and any of the
legal representatives of the foregoing, (iv) any future
operating entities created and controlled by McKesson, and (v) any predecessors, successors, heirs,
executors, trustees, administrators and assigns of
each of the foregoing, all in their capacities as such.
The settlement agreement defined “Released Claims” as:
[A]ny . . . claims . . . that any Releaser who has not
timely excluded . . . itself from the . . . Settlement
Class . . . has, . . . arising out of any conduct . . .
relating to the use of . . . the AWP . . . published or
disseminated by First DataBank . . . for any prescription pharmaceuticals, including . . . the allegations
contained in or which could have been contained in
the Class Action . . . . Released claims do not include
claims against any manufacturer regarding pricing or
marketing by the manufacturer or regarding AWP
manipulation by the manufacturer.
The settlement notice sent to class members in April 2009
set out the covenant not to sue with other provisions of the
settlement agreement. But the notice did not emphasize that
the members were giving up claims against “any other person” along with the claims against McKesson and affiliated
entities. In the section entitled “What claims am I giving up?,”
the notice quoted the agreement’s release clause (including
the “any other person” language) and its definition of “Re-
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leased Claims.” The quoted section was preceded by a “plain
language” explanation that stated:
If the Proposed Settlement is approved, the claims
against McKesson will be completely “released.”
This means that you cannot sue McKesson for
money damages or other relief based on the claims
in the lawsuit or otherwise arising from its alleged
involvement in setting AWP for brand drugs in the
relevant period. Settlement Class Members agree to
forever release all claims even if they later discover
new facts about the claims in the lawsuits. This
includes claims whether known or unknown, suspected or unsuspected, contingent or non-contingent.
All claims will be released forever whether or not
the facts were concealed or hidden, without regard to
the subsequent discovery or existence of such different or additional facts.
In the section entitled “What entities am I releasing?,” the settlement notice stated that the “Released Entities” included
“McKesson Corporation, its parent companies, subsidiaries,
and affiliates, and their past, present and future officers, directors, trustees, employees, agents, attorneys, shareholders, predecessors, successors, and assigns.” The settlement notice
stated that the “Released Claims do not include claims against
any manufacturer,” but the notice did not exclude any other
category of potential defendants. The settlement notice provided information about how to object but did not extend a
second opt-out right to the class members.
In April 2009, after the settlement notice was sent, Skilstaf’s counsel wrote to McKesson’s counsel asking whether
the “or any other person” language was intended to release
“class members’ claims against any entity other than McKesson, such as retail pharmacies.” McKesson’s counsel replied
in an email dated April 30, 2009 that “[t]he release was
framed broadly, as is customary in class action settlements,
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but McKesson does not intend the release to extend to claims
against retail pharmacies.”
In June 2009, Skilstaf filed suit in the Northern District of
California against nine retail chain pharmacies: Albertson’s,
CVS, Kroger, Longs, Rite Aid, Safeway, Supervalu, Walgreens, and Wal-Mart. Skilstaf did not sue McKesson or First
DataBank. Skilstaf alleged that these retail pharmacies had
either joined in, or profited from, or both, the conspiracy
between First DataBank and McKesson to inflate the AWPs
for many brand-name prescription drugs. In the California
suit, as in the Massachusetts case, Skilstaf asserted a RICO
conspiracy. In California, Skilstaf also asserted a commonlaw claim for unjust enrichment and money had and received,
based on the profits the retail pharmacies had obtained as a
result of the allegedly inflated AWPs. A substantial part of the
California complaint was cut-and-pasted from the Massachusetts complaint.5
Meanwhile, back in Massachusetts, Skilstaf filed a “limited” objection to the settlement agreement. Skilstaf’s objection
asked the court either to clarify that the settlement agreement
“does not release any claims against entities other than McKesson, such as retail chain pharmacies” or to strike the “or any
other person” provision from the settlement agreement. Skilstaf argued that the “or any other person” language was overbroad, ambiguous, and inconsistent with the settlement notice,
which had identified only McKesson and related entities as
“Released Parties.” Skilstaf also argued that the language was
contradicted by the email from McKesson’s counsel disclaiming an intent to release entities other than McKesson. Skilstaf
attached copies of its letter to McKesson and the April 30,
2009 email response from McKesson’s counsel.
5
At least 13 of 26 sections from the “statement of facts” in the California complaint are identical or nearly identical to sections in the Massachusetts complaint.
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At the fairness hearing, Skilstaf appeared through counsel
to argue its limited objection and alternative motion to strike
or clarify. Skilstaf asked the Massachusetts district court to
rule that the settlement agreement did not release claims
against entities other than McKesson, including the retail
chain pharmacies sued in the California case. Skilstaf emphasized that the notices to the class members did not explicitly
state that remaining in the class or failing to object to the settlement precluded suing not only McKesson but also “any
other person” based on the claims released. As a result,
according to Skilstaf, retaining the “any other person” covenant not to sue violated due process.
In response, McKesson urged the district court to approve
the settlement as fair and reasonable and consistent with due
process. McKesson argued that appointed class counsel, as
well as independent counsel for large groups of third-party
payor class members, and many absent members, were fully
aware of—and had not objected to—the “or any other person”
provision in the settlement agreement. To the contrary,
because the settlement terms were so generous, class counsel,
independent counsel, and some absent class members had
expressed enthusiastic support with full awareness of the covenant not to sue. Besides the limited objection from Skilstaf,
no one had objected to this provision. Indeed, there were only
seven objections filed to any part of the settlement, a .2%
objection rate. One of these objections had already been withdrawn by the fairness hearing and three addressed only attorney’s fees.
During the fairness hearing, McKesson’s counsel stated
that “30 percent of [the third-party payor class] . . . actually
put in a brief after the Skilstaf objection was filed saying,
‘No. We want this settlement to go through.’ ” Independent
counsel representing third-party payor members (other than
Skilstaf) told the court that “[t]he fact that this would quiet
any and all litigation that they could bring in connection with
the violations alleged in the complaint that was brought
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before this Court is well known, well understood . . . . What
is obvious to me from my communications with many thirdparty payors is, they’re very eager to have this settlement
close and collect their share of the $288 million.”
McKesson also argued that its position that the “or any
other person” provision excluded related claims against other
entities was consistent with its counsel’s April 30, 2009 email
to Skilstaf. The settlement contained a release that extinguished the claims against McKesson and a covenant not to
sue that did not extinguish related claims against “any other
person” but would preclude suing to hold “any other person”
liable for such claims. McKesson argued that the distinction
between a release—which extinguished claims—and a covenant not to sue—which precluded suits to pursue claims—was
well recognized. McKesson argued that the broad covenant
not to sue was a critical part of the settlement because “[i]f all
McKesson had was a release, it would remain exposed to
claims for indemnification or contribution if plaintiffs filed
new lawsuits against third parties based on the claims that
McKesson had just settled.” McKesson emphasized the generous amount of the settlement and argued that it was willing
to agree to pay only because of the protections against future
exposure, including against future indemnity claims.
At the fairness hearing, the Massachusetts district judge initially expressed surprise that the settlement agreement contained language barring subsequent related claims against
other entities. The judge expressed concern that this point had
not been clearly stated in the notice and raised the possibility
that some members might have wanted to opt out of a settlement class bound by that provision. The judge emphasized,
however, that the settlement was “fabulous” and that it would
be a shame “to see it scuttled.” The judge noted that Skilstaf’s
limited and only objection was to the four words—“or any
other person”—and not to any aspect of the settlement with
McKesson itself. The judge noted that only Skilstaf had
objected to the “or any other person” settlement term (or to
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any other term besides a few objections to fees); that sending
additional notice to the entire class would cause significant
delay; and that the only lawsuit filed against entities other
than McKesson was the Skilstaf complaint in California,
which could well be barred by limitations. The Massachusetts
district court denied Skilstaf’s limited objection and alternative motion to strike, ruling that any due process concern
relating to Skilstaf was best addressed by allowing Skilstaf a
second opportunity to opt out from the settlement class.
Skilstaf declined to opt out. Instead, Skilstaf moved for
reconsideration of the court’s order approving the settlement.
Skilstaf then withdrew its objection “contingent on the entry
of a final judgment substantially in the form” the parties had
negotiated and submitted to the court. The final judgment, as
negotiated by the parties and approved by the court, included
the following:
As set forth in the Court’s August 3, 2009, Memorandum and Order . . . , the Court declines to strike
or clarify the “any other person” language in Paragraph 15 of the Settlement Agreement as objector
Skilstaf requested. To the extent otherwise permitted
by law, nothing in the foregoing Order precludes
Skilstaf from raising the same contentions before
another court to determine the enforceability or
applicability of the “any other person” language in
Paragraph 15 of the Settlement Agreement.
Skilstaf had unsuccessfully sought language stating
“[n]otwithstanding the foregoing, nothing herein shall preclude the court in Skilstaf, Inc. v. CVS Caremark, Corp., 09CV-2514-SI (N.D. Cal.) from determining the enforceability
of applicability of the ‘any other person’ language in Paragraph 15 of the Settlement Agreement,” without the prefatory
clause “[t]o the extent otherwise permitted by law.” Skilstaf
agreed to the language that included the prefatory clause. This
language was included in the Massachusetts final judgment.
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Shortly after the final judgment was entered, another member of the Massachusetts class, Health Management Associates, Inc. (“HMA”), moved for relief from the judgment
under Federal Rule of Civil Procedure 60(b) so that it too
could pursue claims against retail pharmacies. HMA argued
that the final judgment was void under Rule 60(b)(4) for lack
of due process because the settlement notice was inadequate.
HMA asked the Massachusetts district court to issue a second
class-settlement notice with a 90-day opt-out period and to
reopen the time for class members to object. The Massachusetts district court denied HMA’s motion. Noting that the
claims against retail pharmacies were likely barred by limitations, the court found that HMA’s failure to object before
final judgment was entered was not the result of excusable
neglect under Rule 60(b)(1). The Massachusetts court emphasized that the “or any other person” language was in the settlement notice, Skilstaf had objected to it, HMA had almost
two months between the filing of Skilstaf’s objection and the
final court approval of the settlement to object but had not
done so, and class counsel and counsel for the independently
represented third-party payors had enthusiastically supported
the settlement with full knowledge of the covenant not to sue.6
6
In its opinion rejecting HMA’s Rule 60(b) motion, the Massachusetts
district court stated:
No other [third-party payor] objected to the provision, and there
was no [third-party payor] objection to the settlement. Indeed,
independently represented [third-party payors] comprising thirty
percent of the country’s [third-party payor] market filed a brief
in support of the settlement following Skilstaf’s objection. In
response to Skilstaf’s objection, McKesson agreed to add language to the proposed order and final judgment, later adopted by
the court, that “[t]o the extent otherwise permitted by law, nothing in the foregoing Order precludes Skilstaf from raising the
same contentions before another court to determine the enforceability or applicability of the ‘any other person’ language in Paragraph 15 of the Settlement Agreement.” The Court declined to
strike or otherwise clarify the “any other person” language. The
Court granted Skilstaf ten days to opt out of the settlement, but,
with the amended language in place, it chose to withdraw its
motion.
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The court also rejected HMA’s argument that the settlement
notice was so inadequate as to violate due process. The court
emphasized that the notice quoted the settlement agreement’s
release clause containing the “or any other person” language,
explaining that “[d]ue process can be satisfied where the settlement notice sets forth the release provision verbatim, even
if it is a release that extends to claims asserted in other related
litigation.”
The settlement proceeds were distributed and Skilstaf collected its share of the $288 million. The focus then shifted to
the California case that Skilstaf filed as the named plaintiff
seeking to represent a nationwide class pursuing the same
RICO claims that had been asserted in the Massachusetts case
but against different defendants. Instead of suing McKesson
and First DataBank, Skilstaf sued retail pharmacies that had
contracted with McKesson and had used the First DataBank
information. The complaint Skilstaf filed in the Northern District of California alleged that the nine retail-pharmacy defendants violated RICO by conspiring with McKesson and First
DataBank to inflate AWPs for the same prescription drugs
that were at issue in the Massachusetts case, or, alternatively,
that the pharmacies were unjustly enriched by McKesson and
First DataBank’s conspiracy. Skilstaf sued on behalf of a
nationwide class of third-party payors, part of the same class
that had been certified in the Massachusetts case.
B.
The California Court’s Decision
The California district court dismissed Skilstaf’s claims on
the basis that they were precluded by the covenant not to sue
that the Massachusetts court had approved as part of the settlement agreement in New England Carpenters and included
in the final judgment. The California court granted the
requests from both Skilstaf and from the defendants to take
judicial notice of court filings from the New England Carpenters litigation. The California court considered over 400 pages
of transcripts, letters, pleadings, and other documents filed in
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the Massachusetts case. The California court rejected the
argument that enforcing the covenant not to sue to preclude
Skilstaf’s suit against the retail pharmacies violated Skilstaf’s
due process rights. The court noted that Skilstaf’s “unique
position” in the settlement process evidenced its full knowledge of the “any other person” language. The court emphasized that Skilstaf did not opt out when it was given a second
chance to do so after unsuccessfully objecting to the covenant
not to sue. Describing Skilstaf’s decision to remain in the
class and accept its portion of the settlement proceeds as “informed and strategic,” the court concluded that “Skilstaf cannot now attempt to circumvent the limitations that attended
those benefits.”
The court also rejected Skilstaf’s request to substitute
another class representative because no class had been certified. Finally, the court rejected Skilstaf’s request for additional discovery on “the true intent of the parties to the . . .
settlement agreement.” The court reasoned that the “course of
proceedings” in the Massachusetts case made it clear that
McKesson had intended to bar all future suits and there was
no indication that class counsel had intended something different.
This appeal followed.
II.
The Standard of Review
We review de novo the district court’s grant of a motion to
dismiss under Rule 12(b)(6), accepting all factual allegations
in the complaint as true and construing them in the light most
favorable to the nonmoving party. Newdow v. Lefevre, 598
F.3d 638, 642 (9th Cir. 2010). We also review de novo a district court’s interpretation of a consent judgment. Jeff D. v.
Andrus, 899 F.2d 753, 759 (9th Cir. 1989).
III.
Discussion
Skilstaf raises three arguments on appeal. First, Skilstaf
argues that the district court erred by dismissing the case on
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the pleadings without allowing discovery. Skilstaf contends
that California law on contract interpretation mandates discovery when a party claims that extrinsic evidence makes a
contract ambiguous; when third parties—like the retailpharmacy defendants—seek to benefit from a contract; or
when a party asserts the defense of mutual mistake to the
enforcement of a contract. Second, Skilstaf argues that by
limiting the due process analysis to the issue of whether the
covenant not to sue was enforceable against Skilstaf, the district court failed to provide what the final judgment entered in
New England Carpenters promised: the right to have the California district court determine the enforceability of the covenant not to sue against all members of the Massachusetts
class, not just Skilstaf. And third, Skilstaf argues that even if
the district court properly limited its due process analysis to
whether the covenant not to sue was enforceable against Skilstaf, due process was not met merely by providing Skilstaf,
the objector, with a second opt-out opportunity. Each argument is addressed below.
A.
7
The Challenges to the Dismissal Based on California Contract Law7
The appellees dispute Skilstaf’s assertion that California law governs
the interpretation of the covenant not to sue. The McKesson settlement
agreement contains a choice-of-law provision specifying that California
law governs the interpretation of all terms of the agreement. Under that
provision, California law governs the interpretation of the covenant not to
sue in the settlement agreement. Cf. Botefur v. City of Eagle Point, 7 F.3d
152, 156 (9th Cir. 1993) (“The interpretation of a settlement agreement is
governed by principles of state contract law.”). But the covenant not to sue
was incorporated by reference into the Massachusetts court’s final judgment. That judgment stated, in relevant part: “By operation of this Judgment, the Releasers are forever barred and enjoined from seeking to
establish liability based in whole or in part on any of the Released claims,
as [set] forth in Paragraph 15 of the Amended Settlement Agreement,
which is incorporated by this reference . . . .” Relying on this provision,
the appellees contend that the covenant not to sue in the Massachusetts
final judgment is independent of the covenant not to sue in the settlement
agreement and should be construed under the law governing the interpreta-
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[1] Under California law, “ ‘[t]he fundamental goal of contract interpretation is to give effect to the mutual intent of the
parties as it existed at the time of contracting.’ ” Miller v.
Glen Miller Prods., Inc., 454 F.3d 975, 989 (9th Cir. 2006)
(per curiam) (quoting U.S. Cellular Inv. Co. of L.A. v. GTE
Mobilnet, Inc., 281 F.3d 929, 934 (9th Cir. 2002)). “Because
California law recognizes that the words of a written instrument often lack a clear meaning apart from the context in
which the words are written, courts may preliminarily consider any extrinsic evidence offered by the parties.” Id. at
989-90; see also Dore v. Arnold Worldwide, Inc., 139 P.3d
56, 60 (Cal. 2006) (“‘[E]ven if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning
to which the language of the contract is yet reasonably susceptible.’ ” (quoting Morey v. Vannucci, 75 Cal. Rptr. 2d 573,
578 (Cal. Ct. App. 1998))). “ ‘If the court decides, after consideration of this evidence, that the language of a contract, in
the light of all the circumstances, is fairly susceptible of either
one of the two interpretations contended for, extrinsic evidence relevant to prove either of such meanings is admissible.’ ” Miller, 454 F.3d at 990 (quoting Pacific Gas & Elec.
Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641,
645-46 (Cal. 1968)). If, however, the court decides that the
contract is not reasonably susceptible to more than one intertion of consent decrees, which is less favorable to Skilstaf. Compare Nehmer v. U.S. Dep’t of Veterans Affairs, 494 F.3d 846, 861 (9th Cir. 2007)
(“[I]f the plain language of a consent decree is clear, we need not evaluate
any extrinsic evidence to ascertain the true intent of the parties.”), with
Trident Ctr. v. Conn. Gen. Life Ins. Co., 847 F.2d 564, 568-69 (9th Cir.
1988) (stating that, under California law, if a party claims that extrinsic
evidence renders a contract ambiguous, “the court must consider extrinsic
evidence of possible ambiguity” no matter “how clearly a contract is written”). We need not decide whether the Massachusetts final judgment contains a covenant not to sue to which California law does not apply,
because even under California law—the law more favorable to Skilstaf’s
position—the California district court did not err by dismissing Skilstaf’s
complaint on the pleadings.
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pretation, the court can reject the assertion of ambiguity. See
A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc., 852 F.2d
493, 497 n.2 (9th Cir. 1988) (“If, after considering the evidence, the court determines that the contract is not reasonably
susceptible to the interpretation advanced, the parol evidence
rule operates to exclude the evidence.”); Cedars–Sinai Med.
Ctr. v. Shewry, 41 Cal. Rptr. 3d 48, 60 (Cal. Ct. App. 2006)
(“Whether the contract is reasonably susceptible to a party’s
interpretation can be determined from the language of the
contract itself or from extrinsic evidence of the parties’
intent.”).
[2] There is no ambiguity in the meaning of the “or any
other person” provision in the New England Carpenters settlement agreement and final judgment. The provision bars a
“Releaser” from later seeking to recover from “Released Parties” or from “any other person” on a liability theory “based,
in whole or in part,” on the “Released Claims” in the New
England Carpenters case. Skilstaf is clearly a “Releaser” as
defined in the Massachusetts settlement agreement. The
claims asserted in the California complaint against the retail
pharmacies are clearly related to the Released Claims against
McKesson, as defined in the settlement agreement. The “or
any other person” provision is susceptible to only one
interpretation—that the claims Skilstaf asserted in the California suit against the retail pharmacies relating to the Released
Claims are barred unless the provision is unenforceable.8
Skilstaf relies on extrinsic evidence that was the subject of
judicial notice in the California court to argue that the covenant not to sue the Massachusetts court approved in the New
England Carpenters case is ambiguous.9 The evidence the
8
Indeed, Skilstaf does not offer an alternative reasonable interpretation
of the “any other person” language. Instead, Skilstaf argues that despite
the language, the parties did not intend the settlement to bar related subsequent claims against entities other than McKesson.
9
Although, as a general rule, a district court may not consider materials
beyond the pleadings in ruling on a Rule 12(b)(6) motion, one exception
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California court considered through judicial notice showed
that “30 percent of [the third-party payor class]” had filed a
brief urging approval of the settlement agreement and stating
that it was understood that the agreement barred claims
against third parties, such as the retail pharmacies. During the
fairness hearing in the Massachusetts court, counsel for the
independently represented third-party payor class stated that
many members had communicated their understanding that
the covenant not to sue barred claims against third parties as
well as claims against McKesson. Counsel emphasized that it
was “well understood” that the settlement “would quiet any
and all litigation that they could bring in connection with the
violations alleged in the complaint.” It is undisputed that
when Skilstaf objected and moved to strike or clarify, it knew
about the “or any other person” provision in the settlement
and understood the implications. The evidence also showed
that McKesson made it clear to the Massachusetts court that
all counsel involved understood the need to bar subsequent
suits seeking to impose liability on other entities “based in
whole or in part on any of the Released Claims.” Otherwise,
McKesson would be exposed to the same risks it had settled
to avoid, through indemnification demands from third parties
to this general rule is that a “court may take judicial notice of matters of
public record without converting a motion to dismiss into a motion for
summary judgment, as long as the facts noticed are not subject to reasonable dispute.” Intri-Plex Techs., Inc. v. Crest Grp., Inc., 499 F.3d 1048,
1052 (9th Cir. 2007) (citation and internal quotation marks omitted); see
also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322
(2007) (“[C]ourts must consider the complaint in its entirety, as well as
other sources courts ordinarily examine when ruling on Rule 12(b)(6)
motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial
notice.”). We review a district court’s decision to take judicial notice for
abuse of discretion. Ritter v. Hughes Aircraft Co., 58 F.3d 454, 458 (9th
Cir. 1995). The district court did not abuse its discretion by taking judicial
notice of the filings in the New England Carpenters litigation, and the parties do not argue otherwise. There was no dispute about the contents or
about the statements from those filings that the district court considered
through judicial notice.
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SKILSTAF v. CVS CAREMARK CORP.
sued by class members seeking to impose liability arising
from the same events and facts.
The email from McKesson’s counsel does not show that the
“or any other person” provision is ambiguous. The email
addressed only the extent of the release and did not address
the covenant not to sue. Admittedly, the email did not draw
the distinction made at the fairness hearing by McKesson and
in this case by the retail pharmacies between a release on the
one hand and a covenant not to sue on the other. But that distinction is recognized.10 In light of all the evidence from the
Massachusetts action presented to the California district court,
the informal email response by McKesson’s counsel to the
question by Skilstaf’s counsel did not make the meaning of
the covenant not to sue McKesson “or any other person” on
the Released Claims ambiguous.
The fact that the Massachusetts district court judge initially
expressed surprise and concern over the presence of the “or
any other person” provision in the proposed class settlement
agreement does not show that those who drafted and signed
the agreement did not intend to include such a provision or
misunderstood what it meant. The Massachusetts court’s
orders interpreting and applying this provision are consistent
with the California district court’s later interpretation and
10
A release is “the abandonment, relinquishment or giving up of a right
or claim to the person against whom it might have been demanded or
enforced and its effect is to extinguish the cause of action; hence it may
be pleaded as a defense to the action.” Pellett v. Sonotone Corp., 160 P.2d
783, 787 (Cal. 1945) (internal citation omitted). By contrast, a covenant
not to sue “is not a present abandonment or relinquishment of the right of
claim, but merely an agreement not to enforce an existing cause of action.”
Id.; see also Syverson v. Int’l Bus. Machs. Corp., 472 F.3d 1072, 1084 (9th
Cir. 2007) (discussing the distinction between a release and a covenant not
to sue). Though historically a covenant not to sue had to be enforced
through a separate breach of contract action, under the modern view a covenant not to sue, like a release, operates as a complete bar to the underlying litigation. See Adams v. Cavanagh Communities Corp., 669 F. Supp.
870, 875-80 (N.D. Ill. 1987).
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application. The Massachusetts court declined to strike or
clarify the language despite initially expressing concern about
it during the fairness hearing. The court approved the settlement agreement and entered final judgment. The court later
denied HMA’s motion seeking relief from the final judgment.
[3] Skilstaf, citing this circuit’s unpublished decision in
Atlanta Cancer Care, P.C. v. Amgen, Inc., argues that it was
reversible error to “ ‘dismiss on the pleadings when one party
claims that extrinsic evidence renders the contract ambiguous.’ ” 359 F. App’x 714, 716 (9th Cir. Nov. 12, 2009) (quoting A. Kemp Fisheries, 852 F.2d at 497 n.2). A party’s
assertion of ambiguity does not require the district court to
allow additional opportunities to find or present extrinsic evidence if the court considers the contract language and the evidence the parties have presented and concludes that the
language is reasonably susceptible to only one interpretation.
See Hervey v. Mercury Cas. Co., 110 Cal. Rptr. 3d 890, 895
(Cal. Ct. App. 2010) (“Although parol evidence may be
admissible to determine whether the terms of a contract are
ambiguous, it is not admissible if it contradicts a clear and
explicit [contract] provision.” (citations omitted)). That conclusion can be reached on a motion for summary judgment or,
as here, on a motion to dismiss if the evidence can properly
be considered under Rule 12(b)(6). See id. at 896-97 (holding
that the trial court properly dismissed, without leave to
amend, the plaintiff ’s class-action complaint by taking judicial notice of contract terms and concluding they were not
reasonably susceptible to the plaintiff ’s proposed interpretation).11 The district court properly applied California law by
“provisionally receiving” extrinsic evidence and determining
that the “any other person” provision in the settlement agreement was not ambiguous and was reasonably susceptible to
11
To the extent that our decisions in A. Kemp Fisheries or Trident suggest that under California law a trial court may not make this determination in a motion on the pleadings, Hervey indicates that California courts
can find a contract unambiguous in a motion on the pleadings.
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only one interpretation. See Wolf v. Superior Court, 8 Cal.
Rptr. 3d 649, 659 (Cal. Ct. App. 2004). The district court did
not err in reaching this result and dismissing the case without
allowing Skilstaf further discovery to look for additional
potential extrinsic evidence.
[4] Skilstaf asserts that the defendants are essentially
claiming to be third-party beneficiaries of the settlement
agreement. Skilstaf’s argument that “California law . . .
requires that courts allow discovery of extrinsic evidence in
cases where . . . a third party seeks to show it was an intended
beneficiary of a contract” is unpersuasive. Skilstaf relies on
the California appellate court’s statement in Neverkovec v.
Fredericks, 87 Cal. Rptr. 2d 856, 869 (Cal. Ct. App. 1999),
that “California contract law requires a third party to show he
was an intended beneficiary of a general release and permits
extrinsic evidence of the contracting parties’ intent and the
circumstances in which the agreement was executed.”
Neverkovec does not support Skilstaf’s argument that whenever a third party claims it was an intended beneficiary of a
contract, the opposing party is entitled to discovery of possible extrinsic evidence on that claim. Instead, Neverkovec
states that “[r]elease agreements are governed by the generally applicable law of contracts.” Id. at 865. In the present
case, the record, including the evidence subject to judicial
notice, made it clear that the retail pharmacies were intended
third-party beneficiaries of the settlement agreement to the
extent necessary to protect McKesson from facing the same
exposure through claims for indemnity that it had paid generously in settlement to avoid. Under California law, Skilstaf
was not entitled to discovery of additional extrinsic evidence
because the retail pharmacies asserted that the settlement
agreement approved in the Massachusetts court protected
them from the claims Skilstaf asserted in the California court.
Finally, Skilstaf argues that “[d]iscovery of extrinsic evidence is also required under California law when a party
asserts the defense of mutual mistake.” Skilstaf relies on the
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California Supreme Court’s statement in Hess v. Ford Motor
Co., that to determine whether a contract clause was included
by mistake, “[e]xtrinsic evidence is necessary because the
court must divine the true intentions of the contracting parties
and determine whether the written agreement accurately represents those intentions.” 41 P.3d 46, 52 (Cal. 2002). The
Hess court did not hold that a party is entitled to discovery
any or every time it asserts mutual mistake as a contract
defense. Instead, the court stated that parol evidence may be
required to determine the defense on the merits. Id. at 51-53.
[5] In the present case, the district court considered the evidence the parties presented and concluded that the covenant
not to sue was intended to bar claims against third parties,
such as the retail pharmacies, that were related to the claims
released in the New England Carpenters case. The evidence
amply supports that conclusion. The district court did not err
in its application of California law.
B.
The Enforceability of the Covenant Not to Sue
against Skilstaf
We agree with the district court that enforcing the New
England Carpenters judgment and settlement agreement
against Skilstaf, including the covenant not to sue, does not
violate Skilstaf’s due process rights. The California district
court did not err in finding that Skilstaf had full notice of the
“or any other person” provision when it objected and later
rejected the second opt-out opportunity. See In re Gen. Am.
Life. Ins. Co. Sales Practices Litig., 357 F.3d 800, 804 (8th
Cir. 2004) (stating, in the context of a class action, that “[t]he
most important element of due process is adequate notice”);
see also Hecht v. United Collection Bureau, No. 3:10cv1213
(MRK), 2011 WL 1134245, at *6-7 (D. Conn. Mar. 25, 2011)
(finding, on a motion to dismiss, that a class action settlement
agreement’s broad release barred the plaintiff ’s claim over a
due process objection in part because the plaintiff had an
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opportunity to opt out after notice of the provision it later
objected to).
Relying on Churchill Village, L.L.C. v. General Electric,
361 F.3d 566 (9th Cir. 2004), Skilstaf argues that due process
is not satisfied when a class action defendant provides only
objectors—rather than the entire class—with a second opt-out
opportunity. In Churchill, we considered whether an objecting
class member who had an opt-out opportunity could appeal
the district court’s denial of its objection under the Supreme
Court’s decision in Devlin v. Scardelletti, 536 U.S. 1 (2002).
In Devlin, the Supreme Court considered whether a nonnamed, absent class member who objects to a settlement, but
who cannot opt out because the class action was certified
under Rule 23(b)(1), must intervene to appeal an objection
overruled by the district court. The Supreme Court held that
intervention is not required. The Court stated:
What is most important to this case is that nonnamed
class members are parties to the proceedings in the
sense of being bound by the settlement. It is this feature of class action litigation that requires that class
members be allowed to appeal the approval of a settlement when they have objected at the fairness hearing. To hold otherwise would deprive nonnamed
class members of the power to preserve their own
interests in a settlement that will ultimately bind
them, despite their expressed objections before the
trial court. Particularly in light of the fact that petitioner had no ability to opt out of the settlement, see
Fed. Rule Civ. Proc. 23(b)(1), appealing the
approval of the settlement is petitioner’s only means
of protecting himself from being bound by a disposition of his rights he finds unacceptable and that a
reviewing court might find legally inadequate.
Id. at 10-11.
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In Churchill, we addressed whether an objecting class
member who did have an opt-out right could remain in the
class and still appeal. Rejecting the argument that because an
objecting class member could opt out, it had no basis to
appeal, we stated:
[In Devlin], the Court relied on the fact that Devlin
was unable to opt out of the Rule 23(b)(1) class.
Here, by contrast, the . . . objectors may exclude
themselves from the settlement and thus preserve
their right to seek relief from [the defendant]. Yet
this ostensible independence is belied by an essential
impracticability. Because each objector’s claim is
too small to justify individual litigation, a class
action is the only feasible means of obtaining relief.
By terminating all class actions relating to the dishwasher recall, the settlement will effectively bind the
objectors. They therefore occupy precisely the status
the Devlin Court sought to protect.
361 F.3d at 572.
Skilstaf argues that just as we rejected the argument in
Churchill “that the right to opt-out foreclosed the ability of
the objector . . . to appeal the settlement, so too [we] should
reject the District Court’s reasoning that the second opt-out
opportunity only afforded [to] Skilstaf forecloses it from protecting the class in this case.” Skilstaf contends that if a classaction defendant can provide a second opt-out opportunity
only to the objector, no class settlement will be subject to
“proper review.” If the objecting class member opts out, it
loses its right to appeal the settlement and protect the due process rights of absent class members; if the objecting class
member remains in the class and appeals, “it will be subject
to the . . . flawed reasoning that the class member is bound
by the settlement and cannot challenge its terms on behalf of
the class because the class member was afforded due process
through the second opt-out opportunity.”
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[6] Skilstaf’s argument proves too much. The California
court’s ruling that the New England Carpenters settlement
agreement is enforceable against Skilstaf did not address
whether enforcing that agreement against the nonnamed
members of the putative class of third-party payors Skilstaf
sought to represent would violate their due process rights.
Because the unnamed members of this putative class are not
bound by the decision to dismiss Skilstaf’s claims, see Smith
v. Bayer Corp., 131 S. Ct. 2368, 2381 (2011) (stating that a
class action “with binding effect on nonparties[ ] can come
about in federal courts in just one way—through the procedure set out in Rule 23”), any ability they have to challenge
the applicability or enforceability of the covenant not to sue—
if and when they sue the retail pharmacies—is unaffected.
The district court’s ruling did not create the risk that the Massachusetts class settlement will escape “proper review,” as
Skilstaf contends.
C.
The Challenge to the Dismissal Based on the Provision in the Massachusetts Final Judgment Allowing
Skilstaf to Raise its Contentions Before Another
Court
Skilstaf argues that the California district court erred by
limiting its due process analysis to whether the covenant not
to sue was enforceable against Skilstaf. Skilstaf contends that
the provision it negotiated in the Massachusetts final judgment required the California district court to determine the
enforceability of the covenant not to sue against all the thirdparty payors who had been members of the Massachusetts
certified class and who made up the putative class Skilstaf
sought to represent in California. That is so, Skilstaf asserts,
because one of its contentions before the Massachusetts court
was that the covenant not to sue was unenforceable against
the New England Carpenters class, not just against Skilstaf.
[7] The Massachusetts court’s final judgment did not
require the California court to consider whether the covenant
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not to sue was enforceable against the nonnamed members of
the putative uncertified class, who were in a different position
from Skilstaf because they did not object, appear in the Massachusetts case, or receive and reject a second opt-out opportunity. The Massachusetts court’s final judgment states that
Skilstaf could challenge the covenant not to sue in another
court. The California district court considered Skilstaf’s due
process challenge to the covenant not to sue. Once the California district court determined that the covenant not to sue
was enforceable against Skilstaf, the Massachusetts judgment
did not require the district court to decide more. Before the
California district court, Skilstaf argued that, even if the covenant not to sue was enforceable against it, the district court
should allow Skilstaf an opportunity to substitute another
class representative. The district court refused this request
after dismissing Skilstaf’s claims because no class had been
certified. In this appeal, Skilstaf does not challenge the district
court’s refusal to substitute another class representative. As
noted, the court’s ruling as to Skilstaf’s claims is not binding
on the nonnamed members of the putative class Skilstaf
sought to represent.
The provision in the Massachusetts judgment Skilstaf negotiated with McKesson and with the New England Carpenters
class counsel supports the result the California court reached.
The provision states that Skilstaf may raise before another
court the contentions it raised in the Massachusetts court “[t]o
the extent otherwise permitted by law.” This includes the law
of issue preclusion. Skilstaf was not “permitted by law” to
relitigate issues that had already been decided in Massachusetts and to which issue preclusion applied.
“Issue preclusion bars relitigation of issues adjudicated in
an earlier proceeding if three requirements are met: ‘(1) the
issue necessarily decided at the previous proceeding is identical to the one which is sought to be relitigated; (2) the first
proceeding ended with a final judgment on the merits; and (3)
the party against whom collateral estoppel is asserted was a
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party or in privity with a party at the first proceeding.’ ”
Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746
(9th Cir. 2006) (quoting Kourtis v. Cameron, 419 F.3d 989,
994 (9th Cir. 2005), abrogated by Taylor v. Sturgell, 553 U.S.
880, 904 (2008)). We found these requirements met in Reyn’s
Pasta, for reasons that are instructive here.
In Reyn’s Pasta, class members who appeared through
counsel and objected during a class-action settlement hearing
in the Eastern District of New York attempted to collaterally
attack the release in the settlement approved in that case in a
subsequent suit filed in the Northern District of California. Id.
at 745. The collateral attack was based on the same objections
raised at the settlement fairness hearing in the Eastern District
New York. Id. at 746 n.6. In Reyn’s Pasta, the plaintiffs sued
Visa, MasterCard, and their member banks in the Northern
District of California, alleging that they had violated the federal antitrust statutes by fixing the “interchange rate.” Id. at
743-44. This rate is the difference between the price paid by
a Visa or MasterCard member bank for title to goods purchased by consumers and the price paid by consumers. Id. at
744 n.3. The Reyn’s Pasta plaintiffs were also class members
in a separate action brought by Wal-Mart and other retailers
in the Eastern District of New York against Visa and MasterCard, In re Visa Check/Mastermoney Antitrust Litig., 297 F.
Supp. 2d 503 (E.D.N.Y.) (the “Wal-Mart class action”).
Reyn’s Pasta, 442 F.3d at 743-44. In the Wal-Mart classaction suit, the complaint alleged that Visa and MasterCard
obtained excessive “discount fees”—the difference between
the price charged to a consumer and the price Visa or MasterCard paid the merchant—“by ‘tying’ their debit cards to their
credit cards and conspiring to monopolize the debit-card market.” Id. at 744 n.3, 745. The Wal-Mart suit settled. The settlement agreements the court in the Eastern District of New
York approved included releases “purport[ing] to absolve
Visa, MasterCard, and the [member banks] of all antitrust liability arising out of conduct . . . related to the claims asserted
in the Wal-Mart class action.” Id. at 745. The Reyn’s Pasta
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plaintiffs appeared at the settlement fairness hearing in the
Eastern District of New York and litigated whether the WalMart class-action settlement released the price-fixing claims
they had alleged in the Northern District of California. Id. at
746 n.6. The New York district court “expressly determined”
that the Wal-Mart settlement released these claims. Id. at 745.
After the Eastern District of New York entered this ruling
and approved the settlement agreement in the Wal-Mart class
action, the defendants in the California action argued that the
release in the settlement barred that suit. Id. The California
district court agreed and dismissed. Id. Affirming the district
court, we explained that the elements of issue preclusion—
issue identity, party identity or privity, and final judgment—
were met: in the Wal-Mart class action, the court had ruled
that the release in the settlement agreement applied to the
price-fixing claims, the Reyn’s Pasta plaintiffs were parties to
this decision “by virtue of their membership in the class and
appearance through counsel at the fairness hearing,” and the
New York district court’s approval of the settlement was a
final judgment on the merits. Id. at 746-47. We also rejected
the plaintiffs’ argument “against application of issue preclusion solely from the maxim that a court rendering a judgment
cannot predetermine its res judicata effects.” Id. at 747. We
found the maxim inapplicable because the plaintiffs “brought
about the Wal-Mart [court’s] predetermination of their judgment’s preclusive effects by raising the issue in the Wal-Mart
litigation as opposed to waiting to attack those judgments in
the Northern District of California.” Id.
This case is similar to Reyn’s Pasta. Skilstaf was a class
member in the Massachusetts action and, through counsel,
objected to the covenant not to sue in the settlement agreement. Skilstaf’s objection clearly raised a due process challenge. Skilstaf argued that “you don’t notice [the covenant not
to sue] when you read the documents” because it was “buried
in the release section of the notice” and was not placed in a
separate section. Disagreeing that the settlement notice was
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inadequate, McKesson argued that the notice “was quite
clear” because it quoted the covenant not to sue verbatim.
Counsel for the third-party payor class argued that the absent
members of that class—the same entities who were members
of the putative class Skilstaf sought to represent in California
—were fully aware of the covenant not to sue and expressed
overwhelming support for the settlement.
Explaining that it did not have the authority to modify the
settlement agreement but only to accept or reject it, the Massachusetts district court rejected Skilstaf’s preferred solution
—striking the “or any other person” language—and raised
two possible alternatives. The first was requiring McKesson
to send a new settlement notice providing a second opt-out
opportunity to all class members, and the second was requiring McKesson to provide a second opt-out opportunity to
Skilstaf. The district court rejected the first alternative. It
explained that the settlement agreement had been “pretty
widely publicized,” that no other class member objected to the
“any other person” provision in the one-month period since
Skilstaf filed its objection, and that requiring McKesson to
send a new settlement notice to the entire class would delay
and endanger “a fabulous settlement.” The district court
resolved the due process concern raised by Skilstaf’s objection by giving Skilstaf a second opt-out opportunity. Skilstaf
declined the opportunity, withdrew its motion to reconsider,
and did not appeal. The district judge approved the settlement
and entered final judgment.
[8] The elements of issue preclusion are met. First, the
Massachusetts district court ruled on Skilstaf’s due process
challenge to the covenant not to sue. Skilstaf directly challenged the adequacy of the settlement notice at the fairness
hearing in Massachusetts. The parties—Skilstaf, McKesson,
class counsel, and independent counsel for the third-party
payor class—fully presented their views to the district court.
The Massachusetts court resolved the due process challenge
by overruling Skilstaf’s objection and denying its motion to
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strike, by affording Skilstaf a second opt-out opportunity, and
by approving the settlement agreement.12 In approving the
New England Carpenters settlement as “fair, reasonable, and
adequate” under Federal Rule of Civil Procedure 23(e)(2), the
Massachusetts court “necessarily had to adjudicate the objections [Skilstaf] raised.” Reyn’s Pasta, 442 F.3d at 746. Second, the Massachusetts court’s “approval of the settlement
constituted a final judgment on the merits.” Id. And third,
Skilstaf was a party to the “proceeding by virtue of [its] membership in the [third-party payor] class and appearance
through counsel at the fairness hearing.” Id. at 747.
Skilstaf argues that it should not be precluded from relitigating its due process challenge in California because the New
England Carpenters final judgment included the negotiated
term allowing Skilstaf to challenge the enforceability of the
covenant not to sue before another court. Skilstaf contends
that in exchange for this ability to raise the challenge in the
district court in which its suit against the retail pharmacies
was pending, it agreed to withdraw its objection to the covenant not to sue and waived its right to appeal the Massachusetts district court’s rejection of the objection and denial of
the motion to strike to the First Circuit Court of Appeals.
Contrary to Skilstaf’s assertion, the Massachusetts final judgment does not limit the preclusive effects of the Massachusetts district court’s rulings in this fashion. The provision
states that “[t]o the extent otherwise permitted by law, nothing
in the [Massachusetts court’s order denying Skilstaf’s objection to the settlement agreement] precludes Skilstaf from raising the same contentions before another court to determine
the enforceability or applicability of the ‘any other person’
language in Paragraph 15 of the Settlement Agreement.” If
issue preclusion bars Skilstaf’s due process challenge, Skilstaf
12
The Massachusetts district court later expressly held that the settlement notice satisfied due process in its order denying HMA’s Rule 60(b)
motion. The court did not do so in ruling on Skilstaf’s motion.
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is not “otherwise permitted by law” to raise this “same contention[ ] before another court.”
Skilstaf’s decision to withdraw its motion asking the district court in Massachusetts to reconsider its denial of Skilstaf’s objection to the covenant not to sue in the settlement
agreement and to forgo an appeal from the settlement
approval and final judgment does not permit Skilstaf to collaterally attack the enforceability of the covenant against it in
California. After the Massachusetts district court denied Skilstaf’s objection in a written order, Skilstaf filed a motion for
reconsideration, reurging its argument that the class members
did not receive adequate notice of the covenant not to sue.
Skilstaf argued that the “proposed ‘solution’ of allowing only
Skilstaf an opportunity to opt out [was] meaningless, as all
class members have the due process right to opt-out after
receiving adequate notice.” Skilstaf withdrew its objection
and its motion for reconsideration after it negotiated the language included in the final judgment. Skilstaf then took its
share of the settlement proceeds, as did the other members of
the third-party payor class. The Massachusetts court’s ruling
rejecting Skilstaf’s objection over its due process argument,
based on the facts specific to Skilstaf’s role in the litigation,
remained in place.
Skilstaf relies on Hesse v. Sprint Corp., 598 F.3d 581 (9th
Cir. 2010), to argue that broad collateral review was required
in California. In Hesse, we held that “a broad release of
claims in a nationwide settlement agreement between Sprint
and its customers” in a Kansas class action did not bar a
Washington class action in part because the Washington
plaintiffs—members of the Kansas class—“were not adequately represented” in Kansas. Id. at 584. Rejecting Sprint’s
argument that inquiring “into the adequacy of representation”
in the Kansas action would be “an impermissible collateral
attack on the Kansas court’s judgment,” id. at 587, we
explained that the Kansas court “did not make an explicit
finding” that the Kansas plaintiff was an adequate representa-
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tive for the claims asserted in Washington, id. at 588. “Because that question was not addressed with any specificity by
the Kansas court,” we concluded that it was “a proper subject
for collateral review.” Id.
Unlike the Kansas plaintiff in Hesse, Skilstaf appeared
through counsel at the Massachusetts fairness hearing,
objected to the settlement agreement insofar as it contained
the covenant not to sue, specifically challenged the adequacy
of the notice with respect to the covenant, and obtained a specific ruling that given the absence of any other objection,
given the evidence of widespread knowledge of the covenant,
and given class counsel’s endorsement of the settlement with
full knowledge of the covenant, due process was satisfied by
affording Skilstaf a second opt-out opportunity. Skilstaf withdrew its objection to the covenant not to sue and its motion
for reconsideration in exchange for language in the final judgment that, as we discussed, did not limit the preclusive effect
of issues litigated and decided in the Massachusetts action.
Skilstaf does “not get a second bite at the apple to challenge
collaterally the same issue” in California. Reyn’s Pasta, 442
F.3d at 747.13
13
See In re Diet Drugs, 431 F.3d 141, 146 (3d Cir. 2005) (“Class members are not . . . entitled to unlimited attacks on the class settlement. Once
a court has decided that the due process protections did occur for a particular class member or group of class members, the issue may not be relitigated.”); id. (“No collateral review is available when class members have
had a full and fair hearing and have generally had their procedural rights
protected during the approval of the Settlement Agreement. Collateral
review is only available when class members are raising an issue that was
not properly considered by the District Court at an earlier stage in the litigation.”); Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29, 33 (1st
Cir. 1991) (“The Delaware courts, affording all the prophylaxis which the
Due Process Clause commands, adjudicated the question of whether
appellants had a right, or should have been allowed, to opt out of the settlement. If, having objected and been overruled, appellants were still dissatisfied with the Delaware judgment, their recourse was to the United
States Supreme Court by means of certiorari, not to the lower federal
courts in the vain pursuit of back-door relief.”); cf. Hansberry v. Lee, 311
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[9] The Massachusetts court’s final judgment did not entitle Skilstaf to more than the California court provided. Skilstaf’s arguments provide no basis to reverse. If a member of
the putative class files another suit against the retail pharmacies on its own behalf or as the named plaintiff on behalf of
a class, the question of the enforceability of the covenant not
to sue as to such a party and claims will then be before the
court. The California district court did not address that question, and we express no view on its resolution.
IV.
Conclusion
The district court’s decision to dismiss is affirmed.
U.S. 32, 42-43 (1940) (“It is familiar doctrine of the federal courts that
members of a class not present as parties to the litigation may be bound
by the judgment . . . where they actually participate in the conduct of the
litigation in which members of the class are present as parties . . . .”);
Dosier v. Miami Valley Broad. Corp., 656 F.2d 1295, 1299 (9th Cir. 1981)
(“Although Dosier was not a named party in the Wydermyer class action,
he was represented during the settlement conference by his own attorney.
Dosier cannot now complain that the named plaintiff did not adequately
represent his interests. He is bound by the settlement because of his own
participation in the suit.”); In re Antibiotic Antitrust Actions, 333 F. Supp.
296, 298 (S.D.N.Y. 1971) (“The indisputable fact is that these six plaintiffs were fully and fairly represented by their attorney, Mr. Paul Scanlon,
at the hearing held in New York on March 25, 1970, to determine whether
or not the proposed settlement should be approved. . . . Since these plaintiffs, through their counsel, actually participated in the hearing before
Judge Wyatt, they are bound by the judgment in the Virginia Class Action,
subject of course, to attack by direct appeal to the appropriate court.”).
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