CLARK et al v. PRUDENTIAL LIFE INSURANCE COMPANY OF AMERICA
Filing
246
OPINION. Signed by Judge Dickinson R. Debevoise on 4/18/13. (jd, )
FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
BEVERLY CLARK, JESSE J. PAUL,
WARREN GOLD, LINDA M.
CUSANELLI, CAROLE L. WALCHER,
and TERRI L. DROGGEL, on behalf of
themselves and all others similarly situated,
Plaintiffs,
Civ. No. 08-6197 (DRD)
v.
OPINION
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, a New Jersey
corporation,
Defendant.
Appearances by:
NAGEL RICE LLP
Bruce Nagel, Esq.
Robert H. Solomon, Esq.
103 Eisenhower Parkway
Roseland, NJ 07068-1031
KASOWITZ, BENSON, TORRES & FRIEDMAN LLP
Charles N. Freiberg, Esq.
Brian P. Brosnahan, Esq.
David A. Thomas, Esq.
Jacob N. Foster, Esq.
101 California Street, Suite 2300
San Francisco, CA 94111
LAW OFFICES OF CRAIG A. MILLER
Craig A. Miller, Esq.
225 Broadway, Suite 1310
San Diego, CA 92101
1
Attorneys for Plaintiffs
LOWENSTEIN SANDLER PC
Douglas S. Eakeley, Esq.
Natalie J. Kraner, Esq.
65 Livingston Avenue
Roseland, NJ 07068
GOODWIN PROCTOR LLP
John D. Aldock, Esq.
Mark S. Raffman, Esq.
Adam M. Chud, Esq.
901 New York Ave., N.W.
Washington, D.C. 20001
Attorneys for Defendant
DEBEVOISE, Senior District Judge
I.
BACKGROUND
This case concerns allegations of deception and bad faith against a health insurance
company, The Prudential Insurance Company of America (“Prudential”). The heart of the
complaint is that Prudential stopped selling a certain health insurance policy to new customers
(“closing the block”), knowing that this would result in prohibitive increases in premium rates as
sick policyholders remain in the block and healthy policyholders leave, resulting in the sick
getting locked-in to the increasingly expensive policy and locked-out of alternative options due
to development of a pre-existing condition. Plaintiffs, former policyholders, contend that
Prudential had falsely misrepresented to its policyholders that the only reason for increased
premiums would be increasing age of the insured and rising medical costs, and failed to disclose
that a major reason for the premium increases was the closing of the block and the consequences
thereof. On February 5, 2013, the Court rendered a decision denying class certification on
multiple grounds and granting Prudential’s summary judgment in part based on the statute of
limitations.
2
Currently before the Court are three motions filed by Plaintiffs: a motion for
reconsideration of the order denying Plaintiffs’ motion for class certification; a motion to alter or
amend the class certification order with respect to redefining the class and bifurcating liability
and damages issues so that the class may be certified solely for purposes of liability; and a
motion for reconsideration of the order granting Prudential’s motion for summary judgment in
part.
II.
DISCUSSION
A. STANDARD OF REVIEW
In the District of New Jersey, motions for reconsideration are governed by Local Civil
Rule 7.1(i) and are considered "extremely limited procedural vehicle(s)." Resorts Int'l, Inc. v.
Greate Bay Hotel & Casino, 830 F. Supp. 826, 831 (D.N.J. 1992). As a result, "reconsideration
is an extraordinary remedy, that is granted 'very sparingly[.]'" Brackett v. Ashcroft, Civ. No. 033988 (WJM), 2003 U.S. Dist. LEXIS 21312, 2003 WL 22303078, at *2 (D.N.J. Oct. 7, 2003)
(quoting Interfaith Community Org. v. Honeywell Int'l, Inc., 215 F. Supp. 2d 482, 507 (D.N.J.
2002)).
Local Civil Rule 7.1(i) permits a party to seek reconsideration by the Court of matters
which the party "believes the Judge or Magistrate Judge has overlooked" when it ruled on the
motion. See L. Civ. R. 7.1(i). The movant has the burden of demonstrating either: "(1) an
intervening change in the controlling law; (2) the availability of new evidence that was not
available when the court [issued its order]; or (3) the need to correct a clear error of law or fact or
to prevent manifest injustice." Max's Seafood Cafe v. Quinteros, 176 F.3d 669, 677 (3d Cir.
1999) (citing N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1218 (3d Cir. 1995)).
The Court will grant a motion for reconsideration only where its prior decision has overlooked a
3
factual or legal issue that may alter the disposition of the matter. See Compaction Sys. Corp., 88
F. Supp.2d at 345; see also L. Civ. R. 7.1(i). "The word 'overlooked' is the operative term in the
Rule." Bowers v. NCAA, 130 F. Supp. 2d 610, 612 (D.N.J. 2001) (citation omitted).
Moreover, L. Civ. R. 7.1(i) does not allow parties to restate arguments which the court
has already considered. See G-69 v. Degnan, 748 F. Supp. 274, 275 (D.N.J. 1990). Thus, a
difference of opinion with the court's decision should be dealt with through the normal appellate
process. See e.g., Bowers, 130 F. Supp. 2d at 612 (citations omitted); Florham Park Chevron,
Inc. v. Chevron U.S.A., Inc., 680 F. Supp. 159, 162 (D.N.J. 1988); NL Indus., Inc. v.
Commercial Union Ins. Co., 935 F. Supp. 513, 516 (D.N.J. 1996) ("Reconsideration motions . . .
may not be used to re- litigate old matters, or to raise arguments or present evidence that could
have been raised prior to the entry of judgment."). In other words, "[a] motion for
reconsideration should not provide the parties with an opportunity for a second bite at the apple."
Tischio v. Bontex, Inc., 16 F. Supp. 2d 511, 533 (D.N.J. 1998) (citation omitted).
B. ANALYSIS
After extensive briefing and oral argument, the Court issued a 107-page opinion
concluding that the claims of the proposed 17,000-member class spanning a thirty-year period
across four states were not fit for class treatment. (See Opinion, ECF 227, hereinafter “Op.”)
The ruling considered hundreds of pages of briefing and analysis, thousands of pages of exhibits,
oral argument, and supplemental briefing. First, the Court set forth a factual record going to the
individual plaintiffs’ experiences with the Comprehensive Health Insurance Policy (“CHIP”), the
overall experience of CHIP policyholders over a thirty year period, and the methodology
proposed and critiqued by experts in lengthy reports, rebuttals, and certifications as to the ability
to establish a reliable common approach to assess damages for the class. The Court then
4
assessed objections to evidence, and examined the original proposal to categorize the class and
subclass, and the revised proposal for class categorization. Part Two of the Opinion analyzed
the facts in light of the Rule 23 requirements for class certification. Part Three addressed the
individual facts of four of the six proposed class representatives with respect to summary
judgment based on the statute of limitations. The facts and findings of the Court are set forth in
full in the Opinion, and are discussed below with respect to objections raised by Plaintiffs in
their motions to reconsider and amend.
The briefs with regard to the motion for reconsideration of the order denying the motion
for class certification (hereinafter “MRCC”) and the motion to alter or amend the class
certification order to redefine the class and bifurcate liability from damages (hereinafter
“MAC”), are inter-related and cross-referential, and are addressed jointly first. The motion for
reconsideration of the order granting in part Prudential’s motion for summary judgment
(hereinafter “MRSJ”) is then addressed in part two of the discussion below.
1. Motion for Reconsideration of the Order denying Class Certification and the
Motion to Alter or Amend the Order denying class certification
In the event that the Court does not reverse its Order denying class certification, Plaintiffs
propose two types of narrowing of the class certification: 1) limiting class membership to
policyholders who maintained CHIP in force until at least 2001; and/or 2) bifurcating the issue of
liability and damages so that the class may be certified as to liability, with a separate trial to
handle individuals’ damages. These two proposals are introduced for the first time, despite the
substantial procedural history in this case detailed in the Court’s prior opinion, which includes
the addition and removal of class representatives, claims, and a revised class categorization
proposal.
5
A. Damages and Bifurcation
Plaintiffs argue that the Court made a clear error of fact in concluding that the damages
methodology proposed by Dr. Frech did not satisfy Plaintiffs’ burden to propose a common
approach to measuring damages. First, Plaintiffs argue that the Court made a clear error of fact
in concluding that the damages methodology proposed by Dr. Frech fails to account for
individualized factors such as age, gender, geographic location, health status, approvals of
premium rate increases by resident state, deductible levels, and addition or removal of
dependants because these factors are incorporated in the actual dollar premiums, and the percent
excess premiums mathematically cancel out the individual factors. (MRCC Br. at 1-5.)
However the Court noted that “Dr. Frech seems to justify his proposal by arguing that these
individualized considerations go to the wayside because they are already weighted and included
in his actual premium index and the but-for premium index.” (Op. at 80.)
The Court went on to determine that Dr. Frech’s proposal failed because criticism
submitted by Mr. Wildsmith “suggests that the formula offered by Dr. Frech is static and does
not account for a range of possible changing conditions over time.” (Op. at 81.) Indeed,
Plaintiffs submit as follows:
[O]ne could argue that [Dr. Frech’s calculation] was not an exact
apples-to-apples’ comparison because the but-for index does not
account for aging while the average market premium was for [Ms.
Clark’s] 2009 age. Mr. Wildsmith correctly noted and adjusted her
but-for premium for aging. The result was that the implied but-for
premium for her was roughly twice the average market premium.
(MRCC Br. at 6-7.) Plaintiffs attempt to reframe Mr. Wildsmith’s critique as a validation of the
model because it shows that Dr. Frech’s calculation is conservative. Additionally, Plaintiffs
summarily argue that Dr. Frech’s damages calculation is substantiated because it “factors in the
6
relative richness of CHIP’s benefits compared to other policies[, as] one would expect the
implied but-for premium for a rich policy to be substantially higher than an average market
premium[.]” (Id.) However, the reasonableness check clearly establishes that Dr. Frech’s
proposed substitutive methodology for an actual yardstick fails because his projected implied
but-for premium was two-times larger than the proposed comparative check, and therefore of
questionable accuracy and reliability. The Court has not overlooked any factual or legal matter
dispositive to the resolution of the case, and the motion for reconsideration on this point is
denied.
Additionally, Plaintiffs argue that the Court’s approach to damages is “fundamentally
wrong on the law because it ignores the well accepted principles that 1) precision in calculation
of damages is not required for recovery, and 2) some individualized calculation of damages is
frequently required in class cases, yet that rarely defeats class certification where common issues
predominate as to liability.” (MRCC at 8). Plaintiffs primarily look to the instruction provided
by the Third Circuit Court of Appeals in the seventies, Bogosian v. Gulf Oil Corp., 561 F.2d 434,
456 (3d Cir. 1977):
[I]f for any reason the district court were to conclude that there
would be problems involved in proving damages which would
outweigh the advantages of class certification, it should give
appropriate consideration to certification of a class limited to the
determination of liability. See Rule 23(c)(4)(A).
Thus, Plaintiffs now assert for the first time, that the “common issues as to liability are divisible
from any individual issues of damages, and there are no impediments to bifurcation of liability
issues for class treatment.” (MCC at 8.) Plaintiffs simply drop a supporting footnote for this
7
assertion with no additional explanation, citing to an environmental tort class challenge, Gates v.
Rohm & Haas Co., 655 F.3d 255, 273 (3d Cir. 2011). 1
In Gates, the Third Circuit Court of Appeals acknowledges this complicated area of class
action procedure, and advises the trial court to consider a list of factors 2 when deciding whether
1
Plaintiffs also list another case from the seventies in this general section, Geraghty v.
U.S. Parole Com., 579 F.2d 238, 253 (3d Cir. 1978). However, the relevant portion in Geraghty
is simply the quote from Bogosian, supra, embedded in footnote 64. Aside from its reference to
Bogosian, Geraghty is not persuasive here because it turned on the district court’s failure to
consider the categorization of prisoner subclasses to which the claims applied rather than any
class issue as to damages for the declaratory and injunctive relief sought there. The Third Circuit
Court of Appeals held that by not limiting the overbroad classes by use of subclasses under Rule
23(c)(4), the district court abused its discretion.
2
Specifically, the Third Circuit Court of Appeals informed:
In light of the adoption of the Final Draft of the Principles of
Aggregate Litigation, when deciding whether or not to certify an
issue class, the trial court should consider: the type of claim(s) and
issue(s) in question; the overall complexity of the case; the
efficiencies to be gained by granting partial certification in light of
realistic procedural alternatives; the substantive law underlying the
claim(s), including any choice-of-law questions it may present and
whether the substantive law separates the issue(s) from other issues
concerning liability or remedy; the impact partial certification will
have on the constitutional and statutory rights of both the class
members and the defendant(s); the potential preclusive effect or
lack thereof that resolution of the proposed issue class will have;
the repercussions certification of an issue(s) class will have on the
effectiveness and fairness of resolution of remaining issues; the
impact individual proceedings may have upon one another,
including whether remedies are indivisible such that granting or
not granting relief to any claimant as a practical matter determines
the claims of others; and the kind of evidence presented on the
issue(s) certified and potentially presented on the remaining issues,
including the risk subsequent triers of fact will need to reexamine
evidence and findings from resolution of the common issue(s). See
Principles of the Law of Aggregate Litigation §§ 2.02-05 (2010);
Hohider, 574 F.3d at 201. This non-exclusive list of factors should
guide courts as they apply Fed. R. Civ. P. 23(c)(4) "to 'treat
common things in common and to distinguish the
8
or not to certify a liability-only class. Id. The Third Circuit Court of Appeals concluded that the
trial court did not abuse its discretion by declining to certify a liability-only issue when it “found
liability inseverable from other issues that would be left for follow-up proceedings. Nor did the
court err in finding no marked division between damages and liability.” Id.
Nor is a division between damages and liability present here. In addition to explaining
the wide array of reasons why policyholders would have dropped CHIP, (Op. at 77-78), the
varied nature and frequency of oral communications with policyholders further “elucidate[d] the
fact-specific individual inquiry that will be necessary to determine presence of the fraud.” (Id. at
78-79.) Specifically, the Court examined individualized instances which defy commonality
when proposed class representatives called Prudential and expressed general concern and
disbelief about the nature of the premium increases, and in some cases made an express
connection between the premium increases and the block closure. (Id.) The Court later
examined these communications in light of the motion for summary judgment as to four of the
six proposed class representatives, and found that based on review of the individuals’ records,
distinguishable."" Chiang, 385 F.3d at 256 (quoting Jenkins, 400
F.2d at 35).
When certifying an issue class the court should clearly enumerate
the issue(s) to be tried as a class as required by Fed. R. Civ. P.
23(c)(1)(B). See Wachtel v. Guardian Life Ins. Co. of Am., 453
F.3d 179, 184-85 (3d Cir. 2006). It should also explain how class
resolution of the issue(s) will fairly and efficiently advance the
resolution of class members' claims, including resolution of
remaining issues. See Principles of the Law of Aggregate
Litigation §§ 2.02(e) (2010).
Gates, 655 F.3d at 273.
9
the limitations period had already expired as to two of the four individually considered. (Id. at
99-106.)
Moreover, it is still good law in the Third Circuit that “plaintiffs must establish that the
alleged damages are capable of measurement on a class-wide basis using common proof.”
Behrend v. Comcast Corp., 655 F.3d 182, 200 (3d Cir. 2011) (citing Hydrogen Peroxide, 552
F.3d at 211, 325-326; c.f. Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154,
187 (3d Cir. 2001) (stating that the “Herculean task” of calculating individual damages from
hundreds of millions of different transactions “counsels against finding predominance”)); cert.
granted, 133 S. Ct. 24 (2012); rev’d on other grounds, 133 S. Ct. 572 (Nov. 2, 2012). Newton is
instructive here, where an actual yardstick of a comparative policy’s price is not being offered,
an individualized proof produces a damages assessment which is approximately double that
calculated by the substitute formula, and individualized considerations surmount. (See Op. at
78-81.)
In Newton, the Third Circuit Court of Appeals considered a securities fraud class
challenge brought by thousands of investors against broker-dealers for offering stock trades at
the price offered on the central National Best Bid and Offer system (NBBO) rather than
investigating alternatives that potentially offered better prices. Critical to the determination of
whether class certification was proper, the appeals court noted the individualized proof
necessary:
Ascertaining what prices are reasonably available to any
particular situation may require a factual inquiry into all of the
surrounding circumstances . . . .
[...]
10
These factors would appear to vary from class member to
class member and, for each class member, from trade to trade.
Whether a class member suffered economic loss from a given
securities transaction would require proof of the circumstances
surrounding each trade, the available alternative prices, and the
state of mind of each investor at the time the trade was requested.
This Herculean task, involving hundreds of millions of
transactions, counsels against finding predominance.
Newton, 259 F.3d at 187 (quoting in part Newton, 135 F.3d 266, 270 & n.2 (3d Cir. 1998) (en
bank)). Newton reasoned that a factual inquiry into all of the surrounding inquiries is necessary
based on factors which vary from class member to class member and trade to trade such as an
available alternative price and the state of mind of each investor at the time the trade was
requested.
Similarly, here the Court has already noted the various possible explanations for the
switching behavior of health insurance policyholders:
The evidentiary record here makes clear that a substantial
portion of the proposed class of 17,000 CHIP policyholders over a
thirty year period would not find the pertinent information
material, and that resolution of the materiality inquiry requires
individualized consideration. First, the proposed class does not
differentiate the substantial number of policyholders who dropped
CHIP for reasons independent of the block closure and before the
staggering premium increases took root. For example, even in the
first two years of CHIP’s introduction on the market in 1975 and
1976, 55.4% and 53.3% of policyholders dropped the policy.
Similarly, an almost identical proportion of CHIP policyholders
dropped out the year of the block closure and the first year that
premium increases went into effect: 43.1% in 1981, and 43.2% in
1982. See Table, supra at 47. Moreover, three years after the first
premium increases following block closure, the proportion of the
proposed class dropped-out by a whopping 85 percent. See Table,
supra at 15-16. In sum, CHIP policyholders consistently
maintained a significant lapse rate which predated and was
consistent well after block closure.
Possible explanations for the drop-out are varied. For
example, some policyholders were only interested in short-term
coverage until they either gained employment and eligibility for
11
employer-provided insurance. Another explanation for switching
behavior is [a] policyholder’s aging into CHIP’s separate and
attractive limited medical program, which currently includes 70%
of CHIP policyholders and held nearly two-thirds of policyholders
when the block was closed. Similarly, perhaps some aged into
Medicare and did not wish to convert into CHIP’s supplemental
limited medical policy. Although these limited medical care
policyholders are not formulated as a part of the class here, the
switching behavior of major medical policyholders into limited or
other outside care is relevant because it goes to the intention to stay
with CHIP for a long period of time and thus the materiality of the
disclosure or omission. Another explanation for CHIP drop-outs is
that policyholders joined the major national shift in the 1980s and
1990s away from indemnity plans like CHIP and towards managed
health care plans. These possible explanations corroborate the
high lapse rate prior to the block closure and the ongoing lapse rate
well into the eighties. What is clear, however, is that uniform
treatment of these policyholders as reliant on the omission or
misrepresentation is not proper due to such varied and nondelineated factors.
[...]
(Op. at 77-78.) In sum, the individualized issues which arise in the calculation of damages and
damages in fact are so inextricably linked that bifurcation would be judicially inefficient.
B. The Common Law Fraud Claim and Materiality
Plaintiffs go on to argue that the Court made three broad errors of fact and law in
concluding that materiality could not be determined on a class-wide basis for purposes of
Plaintiffs’ common law fraud claims. First, Plaintiffs contend that the Court ignored their
argument that class-wide materiality could be shown by the fact that the nondisclosure meant
that all class members paid above-market premiums. (MRCC 9.) Second, Plaintiffs take issue
that the Court made a clear error of fact when it relied on post-block-closure lapse rates and
speculation about varying reasons for lapse to support its conclusion that materiality could not be
established on a class-wide basis. Plaintiffs put forth that “[t]he inquiry is not why class
members who, ignorant of the fraud, eventually dropped out of CHIP; it is instead whether, had a
12
reasonable class member known of the fraud, he would have considered the undisclosed
information important to his decision to keep the policy in force for any amount of time.”
(MRCC at 9-10)(emphasis in original.)
However, the Court clearly considered these issues but rejected them. (See Op. at 77-80,
“In sum[ ] . . . although having some common core as to the omission or misrepresentation of the
block closure and its consequences, the fraud is not suitable for class treatment based on the
varying degrees of its materiality and reliance by the proposed class of 17,000 policyholders over
a thirty year period, and the lack of commonality with regard to communications with
policyholders.”) Indeed, the Court expressly noted Plaintiffs’ thesis, explaining that “Plaintiffs
claim that this omission prevented class members from making the rational choice to switch to
an alternate policy . . . .” (Op. at 5.) After a full review of the record, Court considered various
factors and concluded that materiality was not proper on a class-wide basis, see e.g,. supra at 910. The question is ripe for appeal, but not for a “second bite of the apple” via motion for
reconsideration. Tischio v. Bontex, Inc., 16 F. Supp. 2d at 533.
Third, Plaintiffs argue that the Court made a clear error of fact and law in finding that Dr.
Frech “‘concede[d]’ that 3.5% to 6.4% of class members would not have been able to switch out
of CHIP and that the implications of this number precluded class certification.” (MRCC at 10.)
It is uncontested that Dr. Frech submitted this approximation; what is contested however is the
weight that it should be given. Plaintiffs contend that the record supports that Dr. Frech
emphasized that this was a conservative estimate. Plaintiffs also take issue that the Court did not
mention Dr. Buchmueller’s notation that “very few” individuals experienced these health shocks
at the time of block closure. (MRCC Br. at 10.) However, this figure, which translated to
approximately 600 to 1,100 putative class members (Op. at 79), was only one of the factors
13
taken into consideration in the Court’s review of predominance. Indeed, the Court described
“varied and non-delineated factors why policyholders would not have relied on the disclosure”
(supra at 11-12), in addition to varying oral communications, to find lack of commonality, which
also pointed to dismissal on summary judgment due to the statute of limitations. The
conservative nature of Dr. Frech’s calculation of the number of CHIP policyholders who had a
pre-existing condition at the time of block closure and to whom notice of the block closure
would therefore be immaterial is noted. However, as per the standard of review before the
Court, no factual or legal issue has been overlooked that may alter the disposition here.
C. The UCL
In oral argument, Plaintiffs argued that “the flaws of the opinion are most pronounced in
[the UCL] area because the opinion ignores the unique elements of a UCL violation.” (Tr. at
26:24 – 27:1.) Plaintiffs overlook the need for individualized litigation concerning materiality,
conduct, and limitations defenses, and a reliable approach to establish damages by common
proof.
a. Fraudulent Prong
First, Plaintiffs argue that the Court made clear errors of law regarding the claims under
the fraud prong of the UCL. Specifically, Plaintiffs contend that the line of authority relied on
by the Court “is contrary to the law expressed in Vioxx [180 Ca. App. 4th 116 (2009)] and many
other decisions because the UCL’s fraudulent prong merely requires a showing under an
objective, ‘reasonable person’ standard that the challenged act or practice was ‘likely to deceive’
members of the public; it does not involve an individualized assessment of materiality.” (MRCC
at 14.)
The Court relied on several California cases in support of its analysis:
14
The fraud prong of the UCL is distinct from common law
fraud, which requires allegations of actual falsity and reasonable
reliance. In re Tobacco II Cases, 46 Cal. 4th 298, 312 (Cal. 2009).
Thus, to state a claim under California’s UCL, “it is necessary only
to show that members of the public are likely to be deceived” by
the defendant’s conduct.” Stearns v. Ticketmaster Copr., 655 F.3d
1013, 1020 (9th Cir. 2011) (quoting Tobacco II, 46 Cal. 4th at
312). The focus of the UCL – a consumer protection law – is on
the defendant’s conduct, and not on the plaintiff’s damages. Id.
Indeed, the UCL provides only for equitable relief, such as
injunctive relief and restitution, in light of the statute’s overarching
“purpose of protecting the general public against unscrupulous
business practices.” See Tobacco II, 46 Cal. 4th at 312; see also
Stearns, 655 at 1020. Thus, “relief under the UCL is available
without individualized proof of deception, reliance and injury.” Id.
(quoting Tobacco II, 46 Cal. 4th at 320.)
An interesting potential contradistinction appears in California
law to establish commonality under the fraudulent business prong
of the UCL. Namely, the California Supreme Court instructs that
reliance need not be determined by common proof and only the
class representative need show it, while the issue of materiality of a
representation is subject to common proof. Compare Tobacco II,
46 Cal. 4th at 327-28 with Fairbanks et al., v. Farmers New World
Life Ins. Co. et al., 197 Cal. App. 4th 544 (Cal. Ct. App. 2011),
modified in separate part, 2011 Cal. App. LEXIS 995 (Aug. 1,
2011), denying rev., 2011 Cal. LEXIS 10787 (Ca. Supreme Court,
Oct. 19, 2011). See also Stearns, [655 F.3d 1013, 1020 (9th Cir.
2011)] (citing Wal-Mart and cautioning predominance may be
lacking in UCL claim where there is “no cohesion among the
members because they were exposed to quite disparate information
from various representatives of the defendant”).
“[A]s Stearns makes clear, while class members need not prove
individualized deception, reliance and injury, the Court must
consider whether disclosures to class members were made and, if
so, whether such disclosures: (a) tend to defeat the claim that the
common conduct attributed to the defendant is likely to deceive the
entire class, and (b) are so numerous and individualized that they
defeat commonality.” In re: Countrywide Fin. Corp. Mort. Mktg.
& Sales Practices Litig. V. Countrywide Home Loans, Inc., 2011
U.S. Dist. LEXIS 147689, *41-42 (S.D. Cal. Dec. 16, 2011).
This analysis corresponds with that reached by the [Southern
District of Illinois 3] – while the UCL does not require a showing of
3
The Court’s review of the Opinion revealed a typographical error in its explanation of
Yasmin, which was decided by the Southern District of Illinois and not the Seventh Circuit Court
15
reliance and a plaintiff must show that the fraudulent conduct was
likely to deceive a reasonable consumer, “[t]his standard is subject
to common proof if the actionable conduct was both uniform and
material. Thus, materiality is a relevant factor in the Court’s class
certification analysis.” In re Yasmin & Yaz Mktg, 2012 U.S. Dist.
LEXIS 33183, *65 (S.D. Ill. Mar. 13, 2012); see also id. at *73-76.
Thus, while Plaintiffs are correct in arguing that materiality is not
an explicit element of the UCL, it is still a relevant factor in the
analysis.
Further, despite Plaintiffs’ contentions that the reasoning
reached by the Court of Appeal in Fairbanks is not appropriate
here because it was in dictum and not authoritative, the case is
directly on point. There, the court found it impossible to determine
as a matter of common proof whether the allegedly misrepresented
permanence of certain life insurance policies was material to the
entire class because many buyers did not intend for the insurance
to be permanent and only purchased it for a fixed term. 197 Cal.
App. 4th at 565. The court further explained that “[w]hile it may
have been material to a sizeable subclass of policyholders,
plaintiffs made no attempt to seek certification of a class for whom
materiality was subject to common proof.” Id.
(Op. at 84-86.)
Additionally, the Court held that the UCL claim for fraudulent practices failed because
individualized determinations were necessary to gauge the equitable relief available. In reaching
that conclusion, the Court relied in part on the reasoning employed by the California Court of
Appeal in In re Vioxx Class Cases, 180 Cal. App. 4th 116, 136 (2009). There, the appellate
court refused to certify a UCL claim where the plaintiffs’ attempted identification of a
comparable product did not establish the amount of restitution due because “the issue of a proper
of Appeals. The accompanying order will amend the Opinion to properly reflect the applicable
court.
16
comparator was a patient-specific issue, incorporating the patient’s medical history, treatment
needs, and drug interactions.” (See also Op. at 87.) 4
4
Plaintiffs point out that the Court erroneously conflated the UCL with the Consumer
Legal Remedies Act (CLRA) in its restatement of the holding in Vioxx that individualized
review is necessary to establish reliance of the class under the UCL. (Op. at 86.) Plaintiffs
exaggerate that the Court “relied heavily” on Vioxx and insist that the Court was therefore in
clear error of law. While the typographical error is noted, it is inapposite as to the Court’s
holding. Indeed, the Court’s analysis clearly conveys the necessary class-wide consideration of
the materiality of the fraud and its uniformity to state a claim of fraudulent business practices
under the UCL. See discussion, supra 14-16.
For ease of clarity, the accompanying Order will amend the relevant portion of the
Opinion to reflect as follows, with a strike-through and underline to illustrate deletion and
addition of text respectively:
Similarly, in Vioxx, the Court of Appeal found that the
evidence supported “the trial court’s conclusion that whether
Merck’s misrepresentations were material, and therefore induced
reliance, is a matter on which individual issues prevailed over
common issues, justifying denial of class certification with respect
to the CLRA [UCL] claim.” In re Vioxx Class Cases, 180 Cal.
App. 4th 116, 134 (2009). The individualized considerations under
the CLRA analysis included that some would have taken the drug
regardless “because, for some patients, the benefits outweigh the
risk[,]” and that “physicians consider many patient-specific factors
in determining which drugs to prescribe, including the patient’s
history and drug allergies, the condition being treated, and the
potential for adverse reactions with the patient’s other medications
– in addition to the risks and benefits associated with the drug.”
Id. While it is widely recognized that reliance is a relevant factor
in a class certification analysis under the CLRA and not the UCL
as discussed above, class-wide consideration of the materiality of
the fraud and uniformity of communications to establish a claim
under the fraudulent business prong of the UCL is still appropriate.
Further, with regard to damages, Vioxx upheld the refusal to
certify a UCL claim where the plaintiffs’ attempted identification
of a comparable product did not establish the amount of restitution
due because “the issue of proper comparator was a patient-specific
17
Plaintiffs’ contention that the Court made a clear error of law is not persuasive. The
Court expressly recognized the tension in the UCL that reliance need not be shown by common
proof, but that materiality and uniformity of communications need be. Plaintiffs grasp firmly to
the conclusion reached by the California Supreme Court in Occidental Land, 18 Cal. 3d 355
(1976), in which 155 homeowners sought class certification in an action against a developer for
fraudulent misrepresentation of the cost and extent of monthly maintenance fees of their housing
project. The proposed class claimed that after inducing the homeowners to purchase their
property, the developer tried to collect a fee nearly four times greater than that initially proposed.
The California Supreme Court concluded that the cost of monthly maintenance fees is manifestly
a material factor in planned development and condominium purchases. In footnote 6, the court
articulated that it was unmoved by defendants’ argument that the materiality of the alleged
representation depends on a highly particularized proof of each individual’s financial status. The
court concluded that there was “no authority for this novel proposition. Requiring proof of this
nature would necessarily preclude the certification of virtually all class actions based on
allegations of fraud. Our decision in Vasquez repudiates such a concept.” Id. at 363, n. 6; see
also Vasquez v. Supreme Court, 4 Cal. 3d 800, 814 (1971) (“[I]f the trial court finds material
misrepresentations were made to the class members, at least an inference of reliance would arise
as to the entire class.”).
The holding of Occidental Land is unpersuasive here. The issue there was
misrepresentation of construction and maintenance costs to home purchasers. The Supreme
Court found that class certification based on materiality of the misrepresentation should not be
issue, incorporating the patient’s medical history, treatment needs,
and drug interactions.” Id. at 136.
18
denied due to the purchasers’ varying financial status. Here, CHIP was a particularly unique and
rich policy which individuals purchased and dropped or maintained for a variety of reasons,
amidst varied conduct and reasons including but not limited to a large national shift in the health
insurance industry away from indemnity plans like CHIP and towards managed health care
plans. The Court’s decision of course does not foreclose future class actions challenging health
insurance fraud. However, Plaintiffs have cited no controlling decision to support the notion that
materiality is not relevant to the Court’s class certification analysis, and courts considering the
issue support its relevancy. The Court has not overlooked any factual or legal issue on this point
to support reconsideration of its holding.
a. Unfairness Prong
Plaintiffs also take issue with the Court’s handling of the unfairness prong under the
UCL. During oral arguments, Plaintiffs argued that the applicable tests to assess unfairness
under the UCL do not provide for individualized consideration. (Tr. at 27:9-30:2.) 5 The Court
5
Plaintiffs dedicate only one paragraph in the underlying briefs, found in the motion brief
for class certification, in relation to the applicable tests:
For purposes of Plaintiffs’ UCL claim based on unfairness, as this
Court previously discussed, California courts have applied three
different tests to determine whether a business act or practice is
unfair: the balancing test; the Cel-Tech test; and the Section 5 (or
FTCA § 5) test. Common proof for the balancing test will involve
evidence of the harm produced by Prudential’s conduct (class
members’ payment of above-market premiums) balanced against
whatever justification Prudential may offer for its conduct. Under
the Cel-Tech test, the Court already has ruled that Plaintiffs have
stated a UCL unfairness claim because California Insurance Code
section “10176.10 may serve as evidence of a legislatively
declared policy in favor of protecting consumers from the
deleterious consequences that are expected when an insurance
19
previously described the three tests, and concluded that “as in the common law fraud analysis,
individualized considerations predominate the inquiry as to conduct, harm or injury, and
equitable relief.” (Op. at 84.) Plaintiffs are correct to assert that as per Tobacco II, injury is only
required to be shown by the class representatives; however Plaintiffs disregard that this principle
relates to the effect of passage of California Proposition 64 on the issue of standing. 6
Nevertheless, the Court has not overlooked any factual or legal issue which would alter the
disposition of the matter. Plaintiffs reargue the commonality of the inquiry; however the Court
addressed the lack of uniformity in the conduct at issue, the material relevancy to individual
policyholders, and the difficulty in establishing damages by common proof.
Plaintiffs also argue that the Opinion did not explain how inequitable relief could affect
whether the unfairness claim can be certified. However, the Court clearly found that the
damages formula could not be applied by common proof. This is evident by clear implication
following lengthy consideration of the damages issue, and by way of direct reference within the
UCL unfairness discussion to the preceding common law fraud’s consideration of damages.
The same holds under the Cel-Tech test. For, even if the California Insurance Code may provide
evidence of a legislatively declared policy in favor of disclosing a block closure in order to
prevent consumers from continuing to buy insurance in a closed block, as the Court previously
block closes” and Prudential’s conduct could be found to have
offended a legislatively declared policy in section 10176.10
“favoring disclosure of the closed status of an insurance block[ ] in
order to prevent customers from continuing to buy insurance in a
closed block.”
(MRCC Br. at 60-61) (quoting Sept. 9, 2010 Op. at 46-47.)
6
The Court’s subsequent review on the motion for summary judgment, as explained
further below, found that two of the four challenged class representatives lack injury.
20
contemplated (see supra 15, n. 5), it does not necessarily follow that unfairness can be assessed
by class-wide basis. Common proof is still lacking due to the individualized review necessary to
assess conduct, materiality, and damages. Applicability of the Section 5 test is unavailing for the
same reasons.
D. Motion to Amend or Alter the Class
Last, Plaintiffs assert that the Court “made a clear legal error and worked a manifest
injustice” by not considering whether to certify a narrower class which plaintiffs have never
before proposed. (MRCC 14-15.) Despite already having submitted five amended complaints
and multiple proposals for class categorization, at the last hour Plaintiffs propose that the Court
should certify a class defined as:
All current or former CHIP policyholders who resided in
California, Indiana, Ohio, or Texas at the time of policy issuance
and who paid one or more CHIP major medical premiums based
on a rate increase effective on or after May 14, 2001 (for CHIP
policyholders who resided in California at the time of policy
issuance), June 11, 2001 (for CHIP policyholders who resided in
Ohio or Texas at the time of policy issuance, or July 29, 2002 (for
CHIP policyholders who resided in Indiana at the time of policy
issuance).
Specifically excluded from the Class are past or present officers,
directors or employees of the Defendant; any agents or others who
sold CHIP policies for the Defendant; any entity in which the
Defendant has a controlling interest; the affiliates, legal
representatives, attorneys or assigns of the Defendant; any judge,
justice or judicial officer presiding over this matter and the staff
and immediate family of any such judge, justice or judicial officer.
(MAC 6.)
The new class asserts claims for fraudulent misrepresentations and fraudulent omissions.
Plaintiffs maintain that the Court may also certify a “California Subclass” (“Those members of
the Class who resided in California at the time of policy issuance”) that asserts claims for breach
21
of the duty of good faith and fair dealing under California law and violation of California’s
Unfair Competition Law. (MAC Br. at 6.) The proposed Class would consist of approximately
146 members and the California subclass of approximately 58 members. (MAC Br. at 8-9.)
However, the proposed class and subclass still do not overcome the problems of classwide treatment discussed at length above: materiality, varied conduct, or calculation of damages
by common proof. The post-2001 policyholders were subject to the sharp premium increases
once Prudential lifted the cap. As a result of these sharp increases, the post-2001 policyholders
were understandably likely to call Prudential as to the cause of their increased bills and to seek
assistance in lowering the premium. Indeed, the Court’s individualized review of these varied
communications with agents later lead to dismissal of two of the four challenged class
representatives, who all held on to their policy after 2001, due to the triggering of notice and
running of the statute of limitations.
Prudential suggests that the Court did not consider the statute of limitations issue in
consideration of commonality and predominance in the motion for class certification. However,
the Court’s review on the motion for class certification found that “[a]n examination of the oral
communications with the proposed class representatives further elucidates the fact-specific
individual inquiry that will be necessary to determine presence of the fraud.” (Op. at 79.) The
Court then provided some examples of the proposed class members which illustrated varying
knowledge and suspicion of the block closure and its effects on premiums. Those examples were
later repeated and expanded upon in consideration of the motion for summary judgment.
Therefore, implicitly, the Court considered the lack of commonality with respect to the statute of
limitations issue in consideration of the motion for class certification. The motion to amend or
22
alter the class will therefore be denied because the new class still does not overcome the
foregoing obstacles.
2. Motion for Reconsideration of Order granting Prudential’s Motion for Summary
Judgment in part
In its consideration of the motion for summary judgment as to four of the six proposed
class representatives, the Court concluded that the claims raised by Ms. Clark and Ms. Drogell
were time-barred due to the running of the statute of limitations, and that the claims by Mr. Gold
and Ms. Cusanelli could continue because a triable issue of material fact existed as to whether
the delayed discovery rule may apply in their favor. The Court introduced the discussion on the
underlying motion by framing the “main issue [as] whether the individual plaintiffs were put on
inquiry notice such that they incurred a duty to investigate further.” (Op. at 89.) The Court then
dedicated over five pages reviewing California and Ohio law on the issue, and concluded that
“the analysis under both California and Ohio law turns on a suspicion that something is wrong,
based on a layperson’s understanding, and a connection of the wrongdoing with the inquiry, such
that further reasonable investigation is necessary, which would in turn uncover the facts
constituting the fraud.” (Op. at 94.) Plaintiffs argue that the Court misconstrued the relevant
California and Ohio law and misapplied the facts as to Mss. Clark and Drogell.
First, Plaintiffs argue that the Court “overlooked dispositive California law establishing
that merely having a suspicion of wrongdoing is insufficient to commence the running of the
limitations period if the facts known to the plaintiff do not provide him or her with reason to
suspect the basis of the claims in question, and the facts known to Ms. Clark did not give her
reason to suspect the basis of her death spiral-based claims (or, at least, a triable issue of material
fact exists on that point)[.]” (MRSJ at 1.) Plaintiffs zealously advocate that the limitations period
23
did not commence as to Ms. Clark because “the facts known to Ms. Clark gave her no reasonable
basis to suspect that she was being defrauded as to the true reason for her CHIP premium
increases or otherwise that CHIP was in a death spiral; at a minimum, there is a triable issue of
material fact on this point.” (MRSJ Br. at 5.) Plaintiffs continue that “[k]nowledge of the block
closure furnished no clue to a reasonable person, but only to those few in the insurance industry
school in anti-selection dynamics.” (MRSJ Br. at 6.)
The Court already considered Plaintiffs’ position, but explained that “[m]agic words
disclosing the death spiral or lock-in/lock-out phenomena need not be uttered in order to trigger
the statute of limitations. . . . The suspicion that something is amiss itself suggests a fraud here
because they were not being told the whole truth about the escalating premiums.” (Op. at 95.)
Specifically, the Court explained:
[ . . . ] [ ] Plaintiffs argue, that “the named plaintiffs had no
duty to investigate because . . . large premium increases and the
fact that Prudential was not selling CHIP did not provide a
reasonable indication that Prudential might be defrauding them (or,
for that matter, engaging in the other wrongdoing).” (MSJ Opp. Br.
at 27.) Specifically, Plaintiffs maintain that “Prudential is liable
because it failed to disclose the death spiral and its negative
consequences to CHIP policyholders.” (MSJ Opp. Br. at 22.)
However, this is contrary to legal principles surrounding
inquiry notice. Specifically, once the Plaintiffs’ suspicions were
aroused that something is amiss, and suspicion is linked to the
injury, it is at that point when the statute of limitations begin [sic]
to toll. Magic words such as death spiral or lock-in-lock-out need
not be uttered here in order to trigger the statute of limitations. If
that were the case, the litigants would forever have the right to
bring a suit for fraud [ ] despite their suspicion of wrongdoing
related to an injury. Plaintiffs’ logic is circular. The suspicion that
something is amiss itself suggests a fraud here because they were
not being told the whole truth about the escalating premiums.
They did not need to know the precise facts to allege the fraud in
order to trigger the statute of limitations. ‘So long as a suspicion
exists, it is clear that the plaintiffs must go find the facts; she
24
cannot wait for the facts to find her.’ Jolly v. Eli Lilly & Co., 751
P.2d 923, 928 (Cal. 1988).
(Id.)
As to Ms. Clark, the Court examined the record and concluded that she is “clearly out of
time to contest her allegations of fraud.” (Op. at 101.) The Court reasoned:
The record shows that Ms. Clark repeatedly and
unequivocally suspected that Prudential was trying to get rid of
her. In the 1980s when her premiums “started becoming quite
enormous,” Ms. Clark notes that she “didn’t know what to think.”
Plaintiffs argue that Ms. Clark’s testimony only reflects a lack of
understanding at that time as to why her premium increases were
so large. However, closer inspection indicates otherwise. Ms.
Clark attests, “I couldn’t understand why my rates were becoming
so enormous, unless, perhaps, they were trying to get rid of me.”
Thus, Ms. Clark clearly inferred a connection in the 1980s between
her premium increases and some wrongdoing by Prudential. Ms.
Clark again confirms the connection between her injury and
suspected wrongdoing when she believed in or around 1993 that
Prudential was “trying to get me to drop the policy . . . [b]y
increasing my rates.” Indeed, because the premiums “made no
sense” to her “whatsoever[,]” Ms. Clark asked her bookkeeper to
look into the issue in 1993. Those inquiries lead Ms. Clark to learn
that the CHIP policy did not exist anymore. Additionally, in 1996,
she wrote to her attorney that she “expect[ed] a fight” from
Prudential regarding an issue related to her living abroad, and
reaffirmed that Prudential “no longer [has] this policy and don’t
want it.”
Under California law, the statute of limitations runs from
the “date that the complaining party learns, or at least is put on
notice, that a representation is false.” Platt v. Elect. Supply, Inc. v.
EEOF Elec., Inc., 522 F.3d 1049, 1058 (9th Cir. 2008). There is
no genuine issue of fact that by at least 1993 when she asked her
bookkeeper to investigate the premium increases, that Ms. Clark
made a connection between the premium increases and the
misrepresentation or omissions presented by Prudential in form
letters, and that she knew that the policy was no longer sold.
Specifically, in subsequent deposition, when asked whether she
believed the factors listed in the letter were the only reasons why
her premiums increased, Ms. Clark directly responded: “Well,
like I said, I was quite shocked sometimes. I did wonder how could
medical costs be this expensive.” Platt informs the query, “[s]o
25
long as there is a reasonable ground for suspicion, the plaintiff
must go out and find the facts; she cannot wait for the facts to find
her.” Id. at 1054 (quoting Slovensky v. Friedman, 143 Cal. App.
4th 1518, 1528-29 (Cal. Ct. App. 2006) and omitting citations).
(Op. at 101, emphasis added.)
Plaintiffs contend that it is a triable factual question whether Ms. Clark’s suspicion was
not reasonably based on the facts known to her, and thus that a duty to investigate was not
triggered. (MRSJ Br. at 8, “Ms. Clark’s premium increases did not provide a reasonable basis to
suspect Prudential’s fraudulent nondisclosures – or, at least, [ ] a triable issue of material fact
exists here.”) As indicated above, the Court examined the record and considered Ms. Clark’s
knowledge of the premium increases, concern of them and their unexplainable and shocking
nature, knowledge of the block closure by 1993, and confusion related to the list of factors
provided by Prudential to explain the rises. The fraud is imbedded in those underlying facts.
Ms. Clark’s continuous suspicion of Prudential only amplifies her suspicion of the fraud or that
she should have at least suspected the fraud. California jurisprudence is clear that a plaintiff is
on inquiry notice “when the plaintiff suspects or should suspect that her injury was caused by
wrongdoing, that someone has done something to her.” Jolly, 44 Cal. 3d at 1110; accord Norgart
v. Upjohn Co., 21 Cal. 4th 383, 399, n. 4 (Cal. 1999); Platt, 522 F.3d at 1057-58. (See also Op.
at 89- 94, 100-101.) All of the generic elements were in place in 1993 when Ms. Clark suspected
or should have suspected that her injury was caused by the wrongdoing. 7
7
Plaintiffs submit that “[i]t bears mention that although the Court focuses on statements
she made in 1993, Ms. Clark’s premium increases at that time were subject to the 10% annual
cap and thus were not exorbitant on a year-over-year basis (though her premiums were abovemarket).” (MRSJ at 6, emphasis removed). Notwithstanding that Ms. Clark’s premium
increases were capped at 10% annually effective in 1990, Ms. Clark’s testimony indicates that
she was nonetheless concerned about the unexplainable and shocking premium increases at that
time. Moreover, her concern in 1993 is on the heels of her initial CHIP payment in 1978 and her
26
Plaintiffs argue that the Court should not rely on the reasoning of the Ninth Circuit Court
of Appeals in Platt, which applied the relevant California state law of inquiry notice to a fraud
claim. Plaintiffs instead urge that the Court should rely on the reasoning employed by the
California Supreme Court in Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797 (2005).
However, Fox is consistent with Platt:
The discovery rule only delays accrual until the plaintiff has, or
should have, inquiry notice of the cause of action. The discovery
rule does not encourage dilatory tactics because plaintiffs are
charged with presumptive knowledge of an injury if they have
‘information of circumstances to put [them] on inquiry’ or if they
have ‘the opportunity to obtain knowledge from sources open to
[their] investigation.’
Fox, 35 Cal. 4th at 807-808 (emphasis removed from original, internal citations and emphasis
removed). (See also Op. at 90-91.) Moreover, as Prudential notes, Fox cites Jolly and Norgart
repeatedly, and does not overrule them. See, e.g., Fox, 35 Cal. 4th at 814 (“This court’s
decisions in Jolly and Norgart presuppose a situation in which the factual basis for a claim was
reasonably discoverable through diligent investigation. In both Jolly and Norgart, the court
emphasized that the plaintiffs had ample reason to suspect the basis of their claims. Indeed, the
application of the discovery rule as articulated in this opinion would not have yielded a different
result had it been applied in either Jolly or Norgart.”).
The Court clearly did not overlook Fox, as Plaintiffs contend, but directly referenced it
and the Court’s reliance on it. (See Op. 89, 90, 91.) Nor is Fox persuasive upon a second look.
In Fox, the plaintiff initially filed a complaint for medical malpractice against the doctor and the
treating hospital for negligence which resulted in complications in her gastric bypass surgery.
maintenance of CHIP through the eighties, when rising premiums were not capped. (See Op. at
3, Figure 7.)
27
Ms. Fox then sought to amend the complaint to include a defective product claim against a
manufacturer. Subsequent to filing the malpractice claim, Ms. Fox deposed the physician and
discovered for the first time that the stapler used in the surgery was the cause of her injury. The
court noted that neither the operative report nor the reparative operative report indicated that the
stapler had malfunctioned or misfired. Thus, knowledge of the cause for her injury arose during
the normal course of discovery. Fox found it to be “consistent with [ ] prior applications of the
discovery rule to delay accrual of a products liability cause of action even when a related medical
malpractice claim has already accrued, unless the plaintiff had reason to suspect that his or her
injury resulted from a defective product. More broadly stated, if a plaintiff’s reasonable and
diligent investigation discloses only one kind of wrongdoing when the injury was actually caused
by tortuous conduct of a wholly different sort, the discovery rule postpones accrual of the statute
of limitations on the newly discovered claim.” Id. at 813 (emphasis added).
The California Supreme Court in Fox expressly limited its holding: “Although we hold
that plaintiff has shown that the defect in the products liability claim in her first amended
complaint could have been cured, we express no opinion on plaintiff’s ability to prove that she
should not have earlier suspected that her injuries were caused by a defective stapler.” Id. at
811, n. 6 (emphasis added). The express limitation in Fox rings the final-knell on Plaintiffs’
contentions here.
As the Court previously addressed (Op. at 90.), in Norgart, wherein the delayed discovery
rule was most recently discussed prior to Fox, the California Supreme Court explained “that by
discussing the discovery rule in terms of a plaintiff’s suspicion of ‘elements’ of a cause of action,
it was referring to the ‘generic’ elements of wrongdoing, causation, and harm. In so using the
terms ‘elements,’ we do not take a hypertechnical approach to the application of the discovery
28
rule. Rather than examining whether the plaintiffs suspect facts supporting each specific legal
element of a particular cause of action, we look to whether the plaintiffs have reason to at least
suspect that a type of wrongdoing has injured them.” Fox, 35 Cal. 4th at 807 (explaining
Norgart); see also id. at 803.
Nor is Plaintiffs’ dependence on Sime v. A.B. Malouf et al, a case arising from a Court of
Appeal in California in 1949, persuasive here. 95 Cal. App. 2d 82 (1949). Sime involved an
active conspiracy in which the defendants there were involved with Mr. Sime in purchasing
bonds and acquiring property, however failed to disclose to him that they owned a controlling
interest in a corporation that was a party in their joint venture, and that they were in fact both
buyers and sellers in the underlying transaction at issue. Additionally, the defendants produced a
fake purchaser who convinced Mr. Sime to sell his interest in the venture, resulting in acquisition
of Mr. Sime’s interest at a price far below its real value. The Court of Appeal reasoned that it
was a question of fact whether the means were available to Mr. Sime for the discovery of the
frauds, and that the trial court’s finding on that issue was a reasonable deduction from the
evidence as a matter of law. Id. at 107. Sime is not persuasive here because Mr. Sime “did not . .
. even suspect” that the defendants had wronged him. Id. at 105; accord id. at 99 (“Sime did not
suspect and could not have discovered” the concealed facts.)
Plaintiffs attempt to avoid Ms. Clark’s dismissal from the action by arguing that a triable
factual question is present as to whether her suspicion was not reasonably based on the facts
known to her. However, the record shows that Ms. Clark had reason to at least suspect that a
type of wrongdoing had injured her, and that continuous suspicion was supported by her
knowledge of the closed block, the escalating premiums, and Prudential’s proffered reasons for
the rises. The record shows that this factually-supported suspicion was triggered in 1993,
29
approximately fifteen years prior to the filing of this suit. No reasonable trier of fact could
conclude otherwise. Prudential did not need to articulate the word “death spiral” for her to
suspect that a fraud was upon her. As the Court reasoned, to allow otherwise, “litigants would
forever have the right to bring a [ ] fraud suit despite their suspicion of wrongdoing related to an
injury.” (Op. at 95.) The Court has not misconstrued any law or fact here, and the motion for
reconsideration will therefore be denied.
Second, Plaintiffs argue that “the Court overlooked dispositive California and Ohio law
and made a clear factual error when it ruled that, as a matter of law, a reasonably diligent
investigation by Ms. Clark or Ms. Drogell – the second part of the inquiry notice test – could not
include inquiring of Prudential.” (MRSJ Br. at 1.) The excerpt at issue is the Court’s finding that
“understandable, discovery will not be delayed where the plaintiff inquires the very persons he
suspects of wrongdoing.” (Op. at 96.) 8 Ample authority, in addition to that already cited by the
8
The full text of the Opinion provides:
Plaintiffs argue that the limitations period did not run because a
reasonably diligent investigation would not have uncovered the
facts supporting the cause of actions, because the facts supporting
the fraud were inaccessible and in the sole possession of the
defendants. (MSJ Opp. Br. at 13-14.) “Without that information,
Plaintiffs could not allege a colorable claim against Prudential.
Such an inquiry would not have uncovered the death spiral and its
consequences.” (Id. at 35.) “Plaintiffs [expressly] submit that the
most that could be expected of a reasonably diligent investigation
by a CHIP policyholder is for the policyholder to contact
Prudential and inquire as to the reasons for his premium
increases.” (MSJ Opp. Br. at 35.) However, understandably,
discovery will not be delayed where the plaintiff inquires the very
persons he suspects of wrongdoing. See Craggett, 92 Ohio App.
3d at 454-55 (“Once sufficient indicia of misrepresentation are
shown a party cannot rely on its unawareness or the efforts of the
opposition to lull it into a false sense of security to toll the period
of limitations.”); see also Susan L. Thomas, 34 A Cal.
30
Court, support the premise that once a suspicion of a fraud arises, one cannot simply rely on
repeated falsities of the opposition to delay discovery. See, e.g., Doe v. Roman Catholic Bishop,
189 Cal. App. 4th 1423, 1433 (2010) (defendant’s continued misrepresentations do not delay
duty of inquiry, as “[m]isrepresentations are a part of every fraud cause of action”); Militsky v.
Merrill Lynch, Pierce Fenner & Smith, Inc., 540 F. Supp. 783, 787 (N.D. Ohio 1980) (it was “not
sufficient that Militsky continued to inquire of the very persons he suspected of wrongdoing, for
this is not the type of reasonable diligence contemplated by the courts”); Silver v. Watson, 26
Cal. App. 3d 905, 911 (1972) (once plaintiff is on notice of potential fraud, defendant’s
“assertions of innocence thereafter cannot be regarded as ‘concealment’” that would toll the
running of the statute”); Garamendi v. SDI Vendome S.A., 276 F. Supp. 2d 1030, 1044 (C.D.
Cal. 2003) (“[O]nce the Commissioner was on notice of his cause of action . . . supposed
protestations of [defendant’s] innocence could no longer toll the statute.”).
The point of contention here is whether the facts were in the exclusive knowledge of
Prudential such that Mss. Clark and Drogell could not have stumbled upon them to trigger
suspicion. This is a bit of a convoluted argument, however, because the Court has already found
as a matter of law that the facts were in place to connect their suspicion of wrongdoing and
Jurisprudence (Third) Fraud § 59 (2012) (“[I]f a party who has
undertaken to investigate the subject matter of a contract in which
he or she is interested becomes aware of facts that tend to arouse
suspicion, or if the party has reason to believe that any
representations made to him or her in such connection are false or
only partially true, it is the party’s legal duty to complete the
investigation, and he or she has no right to rely on statements of
the other contracting party.”).
(Op. at 96.)
31
discovery of their injury in order to trigger inquiry notice of the fraud, as described at length
above.
Again, the delayed discovery rule is a narrow exception to the inquiry notice rule, and
applies where the plaintiff “proves that a reasonable investigation at that time would not have
revealed a factual basis for [a] particular cause of action.” Fox, 35 Cal. 4th at 803. That was the
case in Fox, supra at 26-27, where the patient had no reason to learn of a stapler’s malfunction
and the corresponding defective product claim until discovery proceedings on the negligence
claim for complications which arose during surgery. That was also the case in Sime, detailed
supra at 27-28, where a particularly active conspiracy was being perpetrated upon the plaintiff.
Plaintiffs argue that the case before the Court is similar to Sime because “the critical facts
as to the nature of the fraud were reasonably available only from the defendant.” (MRSJ Br. at
10.) Plaintiffs purport that “[a]t any rate, there is no general principle in California law that in a
fraud case a plaintiff’s reasonably diligent investigation may never be based on inquiries to the
defendant. And even if such a distinction were to exist and turn on whether the pertinent
information was reasonably available only from the defendant, it is impossible to conclude on
this record that there exists no triable issue of material fact as to whether the pertinent facts about
the death spiral in CHIP were readily available to Plaintiffs. All of this precludes summary
judgment.” (Id.)
Plaintiffs contend that this case is “on all fours” with Bossey v. Al Castrucci, Inc., 105
Ohio App. 3d 666 (1995). Therein, a car dealership repeatedly denied that the car had been
involved in an accident prior to its sale. However, the purchaser of the car, Mr. Bossey, received
opinions from technicians at a car shop indicating that it had. Then, a former employee of the
car dealership informed Mr. Bossey that he knew the car was involved in an accident before Mr.
32
Bossey purchased it, and that this fact was known by numerous employees at the car dealership.
Mr. Bossey argued that he discovered the fraud upon the subsequent disclosure by the former
employee; the car dealership claimed that he first discovered the injury when he spoke to the
technicians at the body shop.
The trial court found in favor of the car dealership on that point,
however the Court of Appeal reversed and found that a genuine issue of material fact remained
for determination by the trier of fact as to when he discovered the fraud.
The operative difference between the findings in Sime and Bossey is that Mss. Clark and
Drogell came upon no new factual information to uncover the fraud. The record as to Mss. Clark
and Drogell is replete with evidence that they were suspicious of Prudential’s averments based
on material facts which were already available to them, and which form the basis of the fraud
claim. The only subsequent event was a confirmation by their attorneys over a decade later that
a fraud was abound based on the underlying facts.
Third, Plaintiffs grasp at the final straw and argue that the Court “committed a clear error
of fact and law in finding that the investigation by Ms. Clark’s attorney ‘confirmed the existence
of the closed block and its connection with illness and escalating premiums’ and, accordingly,
there was no triable issue of material fact as to whether Ms. Clark could reasonably have
uncovered the factual basis for her claims.” (RMSJ Br. at 1-2.) Plaintiffs suggest that “[i]n order
for the Court to support its finding . . . the Court must make a finding that Mr. Goetz’s
investigation was not a reasonable investigation. And further, that a reasonable investigation
would have revealed the facts underlying the cause of action, i.e., the death spiral. That finding
is absolutely essential to sustain the ruling and there has been no such finding and I submit there
can’t be such a finding.” (Tr. at 82:23-83:5.)
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However, the relevant question is whether Ms. Clark’s investigation would have revealed
the factual basis for the cause of action. Her investigation in 1993 did just that. She did not need
to know or understand the term “death spiral” in order to suspect and conclude that a fraud was
being committed upon her. In the event that she had any uncertainty about her knowledge of the
closed block status, the outstanding premium hikes, Prudential’s representations in its form
letters, and her continuous suspicion, she could have consulted with an attorney or individual
reasonably proficient in insurance law, as she fully comprehended that Mr. Goetz was not. The
same holds true for Ms. Drogell, whose investigation lead to the precise theory of her fraud claim
as the Court has already described in full. (See Op. at 33-34, 105-106.)
It also bears mention that at least three cases arising from late eighties and early-nineties
have been brought to the Court’s attention which considered the same CHIP policy and closedblock/premium-hike phenomenon contested here. One was filed in California state court on May
3, 1991 (See Chud Ex. 43); the second was removed from the state court to the United States
District Court in the Central District of California on May 23, 1990 (See Chud Ex. 44); and the
third was decided by the Fifth Circuit Court of Appeals in 1987. See Tusa v. Prudential Ins. Co.,
825 F.2d 69, 71 (5th Cir. 1987). In particular, the second case reflects facts and claims similar to
those currently before the Court, where the plaintiff challenged excessive rate increases via
fraud-based claims related to Prudential’s failure to disclose the closed block status and the
consequences thereof. Of significance, the plaintiff did not wait until after the steep premium
hikes in 2001 to bring suit, but rather discovered injury, recognized the cause of action, and filed
suit in or around 1990 to challenge monthly premiums which rose from $157.82 to $945.69. It
also bears mention that the published opinion by the Fifth Circuit Court of Appeals in 1987
details the specific theory alleged here. See Tusa, 825 F.2d at 71; see also Op. at 18.
34
Mss. Clark and Drogell did not learn any new facts to form the fraud basis of their
claims. They simply waited too long to file the claim. Ms. Clark had already uncovered the
factual basis of her claims in 1993, outside of the statute of limitations. That her attorney at that
time, whom she knew was not knowledgeable in insurance law, did not identify the correct legal
theory here is inapposite. The same is true as to Ms. Drogell as per her phone call with a
Prudential agent on May 27, 2003, also outside of the statute of limitations. The Court thus did
not overlook a factual or legal issue that may alter the disposition of this matter, and the motion
for reconsideration of the partial grant of summary judgment is denied.
III.
CONCLUSION
In conclusion, Plaintiffs’ motion for reconsideration of the order denying class
certification, the motion for reconsideration the order granting summary judgment in part, and
the motion to amend or alter the class, are denied because the Court did not overlook a factual or
legal issue that may alter the disposition of this matter.
An order will be entered in accordance with this opinion.
/s/Dickinson R. Debevoise
DICKINSON R. DEBEVOISE, U.S.S.D.J.
Dated: April 18th, 2013
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