Wachtel v. Health Net Inc , 482 F.3d 225 ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
4-2-2007
Wachtel v. Health Net Inc
Precedential or Non-Precedential: Precedential
Docket No. 06-3031
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 06-3031/3032
ZEV WACHTEL; LINDA WACHTEL, individually and on
behalf of their minor children, Tory, Jesse and Brett Wachtel,
and on behalf of all others similarly situated,
v.
HEALTH NET, INC.; HEALTH NET OF THE
NORTHEAST, INC.;
HEALTH NET OF NEW JERSEY, INC.
(District of New Jersey D.C. 01-cv-04183)
RENEE MCCOY, individually and on behalf of all others
similarly situated
v.
HEALTH NET, INC., HEALTH NET OF THE
NORTHEAST,
INC.; HEALTH NET OF NEW JERSEY, INC.
(District of New Jersey D.C. 03-cv-01801)
Health Net, Inc.; Health Net of the Northeast, Inc.;
Health Net of New Jersey, Inc.,
Appellants.
___________________
On Appeal from the United States District Court
for the District of New Jersey
District Court Nos. 01-cv-04183; 03-cv-01801
District Judge: Hon. Faith S. Hochberg
____________________
Argued on December 13, 2006
Before: SMITH and ROTH, Circuit Judges
YOHN*, District Judge
(Opinion Filed April 2, 2007)
Herve Gouraige, Esquire
Epstein, Becker & Green
Two Gateway Center
12th Floor
Newark, NJ 07102
*The Honorable William H. Yohn, Jr., Senior United
States District Judge for the Eastern District of Pennsylvania,
sitting by designation.
2
Jay H. Calvert, Jr., Esquire
Peter Buscemi, Esquire (ARGUED)
Joseph B.G. Fay, Esquire
Morgan, Lewis & Bockius
1111 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
John J. Gibbons, Esquire
Gibbons, Del Deo, Dolan, Griffinger & Vecchione
One Riverfront Plaza
Newark, NJ 07102
Counsel for Appellants Health Net, Inc.; Health
Net of the Northeast, Inc.; Health Net of New
Jersey, Inc.
Stanley M. Grossman, Esquire
D. Brian Hufford, Esquire
Robert J. Axelrod, Esquire
Pomerantz Haudek Block Grossman & Gross LLP
100 Park Avenue
New York, NY 10017
Stuart M. Feinblatt, Esquire
Barry M. Epstein, Esquire
Barbara Gail Quackenbos, Esquire
A. R. Pearlson, Esquire (ARGUED)
Sills, Cummis, Epstein & Gross
One Riverfront Plaza
Newark, NJ 07102
3
Counsel for Appellees
Arlin M. Adams, Esquire
Bruce P. Merenstein, Esquire
Schnader, Harrison, Segal & Lewis LLP
1600 Market Street
Suite 3600
Philadelphia, PA 19103
Stephanie Kanwit, Esquire
Deborah Reichmann, Esquire
America’s Health Insurance Plans, Inc.
601 Pennsylvania Avenue, N.W.
South Building, Suite 500
Washington, D.C. 20004
Counsel for Amicus-Appellant America’s Health
Insurance Plans, Inc.
Jay E. Sushelsky, Esquire
AARP Foundation Litigation
Melvin R. Radowitz, Esquire
American Association of Retired Persons
601 E. Street, N.W.
Washington, D.C. 20049
Counsel for Amicus-Appellee American Assoc.
of Retired Persons
4
OPINION
ROTH: Circuit Judge:
This appeal requires us to consider the application of a
common-law evidentiary rule known as the “fiduciary
exception” to the attorney-client privilege. Under this exception
to the privilege, certain fiduciaries who obtain legal advice in
the execution of their fiduciary obligations are precluded from
asserting the attorney-client privilege against their beneficiaries.
Although the fiduciary exception has been adopted by a number
of other federal courts of appeals, we have not yet had the
opportunity to decide whether the rule should apply within our
circuit. We decline to make that decision today because we hold
that, even if we were to adopt the fiduciary exception, the
exception would not apply to the defendants in this case. For
this reason, we will vacate the order of the District Court
requiring the production of otherwise privileged attorney-client
communications.
I. Factual and Procedural Background
Health Net of New Jersey, Inc. (HN-NJ) sells and
maintains health insurance policies for employee benefit plans.
The company offers a variety of policies, covering services by
health maintenance organizations, preferred provider
organizations, and point-of-service policies. HN-NJ is a
5
subsidiary of Health Net of the Northeast, Inc. (HN-NE). Health
Net, Inc. (HNI) is the corporate parent not only of HN-NJ and
HN-NE but also of other subsidiary insurance companies that
provide medical benefits to participants in benefit plans
established under the Employee Retirement Income Security Act
(ERISA), 29 U.S.C. § 1001 et seq. Although certain policy
formulation and administrative services are shared among the
Health Net companies, a subsidiary is responsible for deciding
claims in accordance with these policies and for paying claims
to participants from the subsidiary’s assets. HNI and its
subsidiaries do not hold or manage the assets of their customer
benefit plans. Rather, the Health Net subsidiaries sell insurance
policies to the plans. When a plan beneficiary submits a claim,
the subsidiary will process the claim and, if appropriate, pay the
beneficiary from the subsidiary’s own funds. Similarly, when
HNI or any of the subsidiaries obtains legal advice, counsel is
paid from HNI’s or the subsidiary’s funds. Neither HNI nor any
of the subsidiaries is a plan administrator or trustee for any of
the benefit plans.
The plaintiffs are beneficiaries of two different employee
benefit plans that purchased point-of-service policies from HN-
NJ. Under the plaintiffs’ policies, health care providers are
classified as in-network or out-of-network. When beneficiaries
obtain care from out-of-network providers, they must pay a
higher share of the cost than they would had they obtained care
from in-network providers. In determining what percentage of
an out-of-network charge HN-NJ will pay, HN-NJ will look to
the Usual, Customary, and Reasonable (UCR) charge for the
service provided. In defining UCR charges, Health Net
companies rely on data contained in certain national databases.
6
The plaintiffs allege that HN-NJ relied on antiquated data and
improper methods to define UCR charges, thereby violating
both New Jersey law and the Health Net companies’ duties as
statutory fiduciaries under ERISA. The plaintiffs filed suit
under § 502 of ERISA to recover benefits and to redress the
alleged violations of fiduciary duties and failure to supply
information to beneficiaries.
On August 5, 2004, the District Court for the District of
New Jersey consolidated the plaintiffs’ cases and granted class
certification to a national class of beneficiaries. HNI, HN-NE,
and HN-NJ (collectively, Health Net) appealed the certification.
On September 27, 2005, we issued a Stay Order, requiring that
the District Court “refrain from holding any trial, or entering any
judgment that would have the effect of resolving any claims or
issues affecting the disputed class until this Court has issued its
ruling deciding the pending appeal under Rule 23(f) . . ..” On
June 30, 2006, we vacated the Class Certification Order and
remanded for further certification proceedings.
During the pendency of the Rule 23(f) appeal, the District
Court moved forward on issues of discovery. On June 24, 2005,
the District Court assigned a Special Master to examine
documents listed on defendants’ privilege logs to determine
whether the documents were discoverable. The Special Master
reviewed over 4,000 documents in Health Net’s first eleven
privilege logs. After determining which documents were
protected as work-product or privileged as attorney-client
communications, the Special Master considered whether any of
those documents were nonetheless discoverable pursuant to the
fiduciary exception to the attorney-client privilege. He
7
recognized that the exception has not been considered within our
circuit, but he concluded that, given the opportunity, we would
adopt the fiduciary exception and apply it to Health Net. Having
found that certain attorney-client communications related to
fiduciary acts by Health Net and were not prepared in
connection with adversarial proceedings against the
beneficiaries, the Special Master ordered Health Net to produce
those communications.
Health Net appealed this ruling to the District Court. In
addition, HNI moved for summary judgment, arguing that it was
not an ERISA fiduciary and therefore owed no fiduciary
obligations to the plaintiffs. The District Court, in an order
entered May 12, 2006, denied HNI’s motion for summary
judgment, finding that HNI exerted sufficient control over day-
to-day operations at HN-NJ for the court to hold HNI liable as
a fiduciary. In the same order, the District Court adopted the
Report and Recommendation of the Special Master and ordered
the production of all documents on Privilege Logs 1-11 which
the Special Master had determined should be produced.
Because of the District Court’s finding regarding HNI’s status
as a fiduciary, this production order applied to attorney-client
communications with HNI in addition to communications with
the other Health Net defendants. Health Net appeals the May 12
order on the basis that the District Court wrongly applied the
fiduciary exception and wrongly determined HNI’s status as a
fiduciary.
II. Jurisdiction and Standard of Review
The District Court had jurisdiction over this case under
8
28 U.S.C. § 1331 because the plaintiffs’ claims arise under §
502 of ERISA, 29 U.S.C. § 1132. We have appellate
jurisdiction under 28 U.S.C. § 1291 to review the District
Court’s order of May 12, 2006, ordering the production of
certain documents. Though not a final resolution of the case, an
order for the production of documents over which a privilege is
asserted is appealable as finally resolving a collateral discovery
issue. Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546
(1949); In re Ford Motor Co., 110 F.3d 954, 962-63 (3d Cir.
1997). Thus, insofar as Health Net contends that the District
Court improperly ordered the discovery of privileged
documents, its appeal is properly before us.
HNI has also appealed the District Court’s summary
judgment determination regarding HNI’s status as an ERISA
fiduciary. Ordinarily, an order denying a motion for summary
judgment is not an appealable final order; to the contrary, it is an
order permitting litigation to continue. Robinson v. Hartzell
Propeller, Inc., 454 F.3d 163, 168 (3d Cir. 2006). Nonetheless,
HNI urges us to consider the issue and vacate the order denying
summary judgment.
HNI argues that we have jurisdiction to vacate the order
because the District Court, in denying HNI’s motion for
summary judgment, violated our Stay Order of September 27,
2005. This argument lacks merit. Our Stay Order prevented the
District Court from entering judgments affecting the disputed
class during the pendency of Health Net’s Rule 23(f) appeal.
The question whether HNI was a fiduciary is wholly
independent of the question whether the class was properly
9
certified.1
HNI also contends that we must review HNI’s fiduciary status
as part of our resolution of the discovery question properly
before us. However, because we hold that the disputed
documents are privileged no matter how heavily involved HNI
may have been in the daily operations of its subsidiaries, we do
not need to consider HNI’s fiduciary status. We conclude,
therefore, that we do not have jurisdiction at this time to hear the
appeal of the denial of summary judgment.
We exercise de novo review over issues of law
underlying the application of the attorney-client privilege. U.S.
v. Doe, 429 F.3d 450, 452 (3d Cir. 2005). We review the
application of that law for abuse of discretion. Id.
III. Discussion
We confront an issue of first impression. Although the
fiduciary exception has been recognized in many of our sister
circuits, see Becher v. Long Island Lighting Co. (LILCO), 129
F.3d 268, 272 (2d Cir. 1997); Wildbur v. ARCO Chemical Co.,
974 F.2d 631, 645 (5th Cir. 1992); Fausek v. White, 965 F.2d
126, 132-33 (6th Cir. 1992); Bland v. Fiatallis North Am. Inc.,
1
Moreover, HNI is the party which moved for summary
judgment during the pendency of the Rule 23(f) appeal. We are
not sympathetic to HNI’s new position that the District Court
lacked authority to consider the motion which HNI had filed.
10
401 F.3d 779, 787-88 (7th Cir. 2005); United States v. Mett, 178
F.3d 1058, 1062 (9th Cir. 1999); Cox v. Adm'r U.S. Steel &
Carnegie, 17 F.3d 1386, 1415-16 (11th Cir. 1994); In re
Lindsey, 158 F.3d 1263, 1276 (D.C. Cir. 1998), cert. denied, 525
U.S. 996 (1998), and even by district courts within our own
circuit, see, e.g., Arcuri v. Trump Taj Mahal Associates, 154
F.R.D. 97, 106 (D.N.J. 1994); Dome Petroleum Ltd. v.
Employers Mut. Liab. Ins. Co., 131 F.R.D. 63 (D.N.J. 1990); In
re Sunrise Securities Litigation, 130 F.R.D. 560, 596-98 (E.D.
Pa. 1989); Valente v. PepsiCo, Inc., 68 F.R.D. 361, 366-69 (D.
Del. 1975), we have not yet decided whether or to what extent
the exception applies in the Third Circuit. See Depenbrock v.
CIGNA Corp., 389 F.3d 78, 81 (3d Cir. 2004).
We recognize that in a number of circuits it is well-
settled that the fiduciary exception can apply to ERISA
fiduciaries. See, e.g., LILCO, 129 F.3d at 272; Wildbur, 974
F.2d at 645; Bland, 401 F.3d at 787-88; Mett, 178 F.3d at 1062.
Moreover, HN-NJ concedes that it is a fiduciary under ERISA
because it has authority to process individual beneficiaries’
insurance claims. Under ERISA, an entity is considered a
fiduciary to the extent that, inter alia, it holds any discretionary
authority or discretionary responsibility in the administration of
an employee benefit plan. 29 U.S.C. § 1002(21)(A)(iii).2
2
29 U.S.C. § 1002(21)(A) provides in full:
Except as otherwise provided in subparagraph
(B), a person is a fiduciary with respect to a plan
to the extent (i) he exercises any discretionary
11
Interpreting this provision, the Supreme Court has held that an
insurance company with discretionary responsibility over the
award of benefits under an employee benefit plan acts as a
fiduciary under ERISA. See Aetna Health Inc. v. Davila, 542
U.S. 200, 220 (2004) (“[T]he ultimate decisionmaker in a plan
regarding an award of benefits must be a fiduciary and must be
acting as a fiduciary when determining a participant's or
beneficiary's claim.”). Accordingly, at least to the extent that
HN-NJ has discretion to determine claims covered by its
policies, it is an ERISA fiduciary. Health Net characterizes a
subsidiary as a “claims fiduciary” under 29 U.S.C. § 1133 if the
subsidiary exercises discretion in making claims decisions
under insured plans. Health Net maintains, however, that no
Health Net entity is a fiduciary for any other purpose. We need
not examine the particulars of the fiduciary obligations of the
authority or discretionary control respecting
management of such plan or exercises any
authority or control respecting management or
disposition of its assets, (ii) he renders investment
advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other
property of such plan, or has any authority or
responsibility to do so, or (iii) he has any
discretionary authority or discretionary
responsibility in the administration of such plan.
Such term includes any person designated under
section 1105(c)(1)(B) of this title [providing for
the designation of other fiduciaries in the plan
instrument].
12
Health Net companies, except to note that HN-NJ is not a plan
administrator or trustee and that its fiduciary status arises out of
its discretionary authority over the payment of benefits owed to
plan beneficiaries.
Health Net contends that the fiduciary exception
recognized at common law does not apply to every entity which
is designated a fiduciary under ERISA. Instead, it argues that a
fiduciary such as HN-NJ – an insurance company which
contracts with multiple employee benefit plans to provide health
insurance to employee-beneficiaries, processes and pays claims
using its own assets, obtains legal advice using its own funds,
and operates with an eye toward profits – falls outside the scope
of the fiduciary exception. To our knowledge, no court has
considered whether the fiduciary exception to the federal
attorney client privilege applies with equal force to all
fiduciaries under ERISA. It is that question which we now
confront.
A. History and Development of the Fiduciary
Exception
We will begin our consideration with an historical review
of the attorney-client privilege and the development of the
fiduciary exception. In sixteenth-century England, the right to
testimonial compulsion was still in its infancy. Along with the
emergence of this right to compel testimony there also arose an
exception – the attorney-client privilege. 8 J. W IGMORE,
E VIDENCE § 2290 (McNaughton rev. 1961). Jurists originally
justified the privilege as necessary to protect an attorney’s
“point of honor” to refrain from divulging the secrets of his
13
clients. However, by the late 1700s, a new policy underlying the
privilege took hold. Jurists reasoned that “to promote the
freedom of consultation of legal advisers by clients, the
apprehension of compelled disclosure by the legal advisors must
be removed . . ..” Id. at § 2291. This policy has survived as the
modern justification for the privilege. Id. at §§ 2290-91.
As we cross centuries to reach the Federal Rules of
Evidence, we find that the common law development of the
attorney-client privilege continues in the federal courts of the
United States. Under F EDERAL R ULE OF E VIDENCE 501,
evidentiary privileges “shall be governed by the principles of the
common law as they may be interpreted by the courts of the
United States in the light of reason and experience.” Rule 501
requires the federal courts, in determining the nature and scope
of an evidentiary privilege, to engage in the sort of case-by-case
analysis that is central to common-law adjudication. See Upjohn
Co. v. United States, 449 U.S. 387, 396 (1981). Consistent with
this analytical dictate, federal courts have long recognized the
applicability of the attorney-client privilege, “the oldest of the
privileges for confidential communications known to the
common law,” id. at 389, and it is well established that
“[c]onfidential disclosures by a client to an attorney made in
order to obtain legal assistance are privileged.” Fisher v. United
States, 425 U.S. 391, 403 (1976). The policy behind the
privilege is equally well established: Full and frank
communication between attorneys and their clients must be
encouraged because the administration of justice in a complex
society depends upon the availability of sound legal advice, and
in turn, the soundness of legal advice depends upon clients’
willingness to present full disclosures to their attorneys. See
14
Upjohn, 449 U.S. at 389.
For centuries, the common law has also recognized “as
a fundamental maxim that the public . . . has a right to every
man’s evidence” and “that any exemptions which may exist are
distinctly exceptional, being so many derogations from a
positive general rule.” 8 W IGMORE at § 2192. Because the
attorney-client privilege has this effect of withholding relevant
information from fact-finders, federal courts must apply it only
where necessary to achieve its purpose. Fisher, 425 U.S. at
403. As a result, the well-established limitations which have
been developed under the common law all are consistent with
the purpose of encouraging clients to speak fully with their
lawyers without concern that what they say to the lawyer will be
disclosed. See Swidler & Berlin v. United States, 524 U.S. 399,
409-10 (1998). Where this purpose ends, so too does the
protection of the privilege.
For example, because the purpose of the privilege is to
promote the dissemination of sound legal advice, the privilege
will extend only to advice which is legal in nature. Where a
lawyer provides non-legal business advice, the communication
is not privileged. 8 W IGMORE at § 2303; In re Lindsey, 158 F.3d
at 1270. Similarly, the protections of the privilege are restricted
to those communications which are made in confidence, since
a client who speaks openly or in the presence of a third party
needs no promise of confidentiality to induce disclosure. 8
W IGMORE at § 2311; Westinghouse Elec. Corp. v. Republic of
Philippines, 951 F.2d 1414, 1424 (3d Cir. 1991). As for two
clients having a common legal interest who are represented by
the same attorney, the confidentiality requirement means that,
15
although communications between a client and the attorney may
be privileged as to outsiders, they are not privileged inter sese.
8 W IGMORE at § 2312; Matter of Grand Jury Subpoena Duces
Tecum Dated November 16, 1974 406 F. Supp. 381, 387
(S.D.N.Y. 1975). On the other hand, the administration of
justice is not improved by protecting communications designed
to further a crime or a fraud; such communications consequently
fall outside the scope of the attorney-client privilege. United
States v. Zolin, 491 U.S. 554, 562-563 (1989). To these
exceptions, many courts have added another – the fiduciary
exception. The fiduciary exception first emerged in nineteenth-
century England as a principle of trust law. Under English
common law, when a trustee obtained legal advice relating to his
administration of the trust, and not in anticipation of adversarial
legal proceedings against him, the beneficiaries of the trust had
the right to the production of that advice. See Talbot v.
Marshfield, 2 Drew & Sm. 549, 62 Eng. Rep. 728 (Ch. 1865).
See also Wynne v. Humbertson, 27 Beav. 421, 54 Eng. Rep. 165
(1858). The theory of the rule was that the trustee obtained the
advice using both the authority and the funds of the trust, and
that the benefit of advice regarding the administration of the
trust ran to the beneficiaries. Talbot, 2 Drew & Sm. at 550-51,
62 Eng. Rep. at 729. The rule recognized in Talbot and Wynne
quickly became well-established at English common law. See,
e.g., In re Mason, 22 Ch. D. 609 (1883).
It was not, however, until the 1970s that the fiduciary
exception found its way into American case law. American
courts adopted the exception in two separate contexts – trusts
and shareholder suits. The application to trusts was the more
straight-forward of the two, as it involved a direct application of
16
the principles enunciated in Talbot and Wynne. In Riggs Nat’l
Bank of Wash., D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976),
the Delaware Court of Chancery held that the beneficiaries of a
trust were entitled to discover a legal memorandum which had
been prepared for their trustees in connection with matters of
trust administration, and for which the trustees had paid using
trust assets. Noting that “American case law is practically
nonexistent on the duty of a trustee in this context,” the court
looked back to Talbot, Wynne, and Mason and found a clear and
applicable rule of trusts. Id. at 712-13. In applying this rule, the
court found the memorandum to be discoverable for two
reasons. First, the court placed a great deal of weight on the
duty of a trustee to furnish information to the trust beneficiaries.
Id. at 712, 714. Second, the court found the memorandum
discoverable for the equally compelling reason that it
determined that counsel’s “real” clients – in whom, under long-
standing principle, the attorney-client privilege vested – were
the beneficiaries, not the trustees (whom the court described as
mere representatives). Id. at 712-13. Identification of the “real”
client was informed by several factors: (1) the content of the
advice was for the benefit of the trust, not the trustees; (2) the
advice was paid for with assets of the trust, not the trustees; and
(3) no adversarial proceeding against the trustees was pending,
meaning that the trustees had no need to seek personal legal
advice. Id. at 711. Indeed, the court noted that a trustee who
properly executes his duties acts only on behalf of the
beneficiaries. Id. In this sense, the fiduciary exception is
something of a misnomer because it is the beneficiary, rather
than the trustee, who is the “client” component of the “attorney-
client” privilege.
17
Although the discussion in Riggs is focused on principles
of trust law, American application of the fiduciary exception has
not been limited to the trust context. Even before Riggs was
decided, the Fifth Circuit held in Garner v. Wolfinbarger, 430
F.2d 1093 (5th Cir. 1970), that in a shareholder action, legal
advice given to corporate managers by corporate counsel for the
benefit of the corporation was not privileged. The court
recognized that corporate managers, and even sometimes the
corporate entity, may have interests adverse to some or all of the
shareholders, particularly because shareholders’ varying
ownership interests mean that shareholders’ interests often are
not uniform. Id. at 1101. The court concluded that “when all is
said and done the management is not managing for itself.” Id.
Central to this conclusion was the fundamental fact that
corporate managers in the ordinary course can have no
legitimate personal interests for which the advice of corporate
counsel (paid for from corporate funds) is needed. When a
legitimate personal interest does emerge – such as when a
corporate manager is sued by shareholders – the manager then
becomes entitled to legal advice which is not discoverable by the
shareholders. Thus, of central importance in both Garner and
Riggs was the fiduciary’s lack of a legitimate personal interest
in the legal advice obtained. Id.; 355 A.2d at 712.
B. Scope of the Fiduciary Exception under ERISA
In the early 1980s, federal courts began extending the
principles of Garner and Riggs to apply against ERISA
fiduciaries. First, in 1981, the fiduciary exception was used to
render discoverable attorney-client communications by pension
fund officials regarding the administration of the fund.
18
Donovan v. Fitzsimmons, 90 F.R.D. 583, 585 (N.D. Ill. 1981).
The court relied on both Garner and Riggs to hold that, where
beneficiaries sue their fiduciaries alleging breaches of fiduciary
duty, the attorney-client privilege does not attach to legal advice
rendered to the fiduciaries for assistance in the performance of
fiduciary duties. Id. at 585-86. Most notably, the court
recognized that the Garner rule might not apply in every
fiduciary situation but found it applicable to the ERISA
fiduciaries before it because of the strong parallels to the trustee
situation in Riggs. Id. at 586.
It is not surprising that the court found the analogy
between trust law and ERISA to be apt; the Supreme Court has
recognized that fiduciary duties under ERISA “draw much of
their content from the common law of trusts, the law that
governed most benefit plans before ERISA’s enactment.”
Varity Corp. v. Howe, 516 U.S. 489, 496 (1996).
The following year, another federal district court applied
the fiduciary exception in an ERISA action. See Washington-
Baltimore Newspaper Guild, Local 35 v. The Washington Star
Co., 543 F. Supp. 906 (D.D.C. 1982). For our purposes, the
case is most significant for the broad, sweeping language with
which the court asserted that “[w]hen an attorney advises a
fiduciary about a matter dealing with the administration of an
employees' benefit plan, the attorney's client is not the fiduciary
personally but, rather, the trust's beneficiaries.” Id. at 909. On
its face, this language suggests that the court’s holding applies
to any ERISA fiduciary acting in its fiduciary capacity,
regardless of whether the fiduciary is a plan administrator,
trustee, or a limited-purpose statutory fiduciary. Such a reading
19
would be unjustified. The court’s analysis focused on the
responsibilities of trustees; the defendants in that case were the
trustees and the sponsor of an ERISA-regulated plan. The court
simply did not consider whether the fiduciary exception applied
with equal force to all ERISA fiduciaries, its broad language
notwithstanding.
Since Donovan and Washington Star were decided, many
other courts have applied the fiduciary exception to ERISA
fiduciaries. Just as the Riggs court recognized that the exception
was premised on both the beneficiaries’ right to inspection and
their identity as the “real” clients, courts applying the fiduciary
exception to ERISA fiduciaries have cited these same rationales.
See Mett, 178 F.3d at 1063. These courts also have recognized
two types of situations in which the fiduciary exception does not
apply. First, under the “liability exception,” a fiduciary, seeking
the advice of counsel for its own personal defense in
contemplation of adversarial proceedings against its
beneficiaries, retains the attorney-client privilege. Mett, 178
F.3d at 1063-64; Riggs, 355 A.2d at 711. Second, under the
“settlor exception,” courts distinguish between fiduciary acts
and settlor acts, the former being discretionary acts of plan
administration and the latter involving the adoption,
modification, or termination of an employee benefit plan. See
29 U.S.C. § 1002(21)(A)(iii); Aetna, 542 U.S. at 220; Lockheed
Corp. v. Spink, 517 U.S. 882, 891 (1996). The fiduciary
exception does not apply to settlor acts because such acts are
more akin to those of a non-fiduciary trust settlor than they are
to those of a trustee. See Lockheed, 517 U.S. at 891; Bland, 401
F.3d at 787-88.
20
These two exceptions to the fiduciary exceptions share a
common justification – both allow the attorney-client privilege
to remain intact for an ERISA fiduciary when its interests
diverge sufficiently from those of the beneficiaries that the
justifications for the fiduciary exception no longer outweigh the
policy underlying the attorney-client privilege. The beneficiaries
are no longer the real clients, and disclosure of attorney-client
communications is no longer an obligation.
ERISA fiduciaries, however, come in many shapes and
sizes, and we do not believe that the logic underlying the
fiduciary exception applies equally to all. We conclude that the
fiduciary exception does not apply to an insurer like HN-NJ and
its corporate parents because the plaintiff-beneficiaries are not
the “real” clients obtaining legal representation.
In some respects, an insurer providing benefits to the
beneficiaries of an ERISA-regulated plan is no differently
situated than a plan administrator or an ERISA trustee. All are
considered to be fiduciaries under ERISA, and all owe duties of
loyalty and care to their beneficiaries. Because they are
fiduciaries, they must act in furtherance of their beneficiaries’
interests. Nonetheless, significant differences exist between
insurance company fiduciaries such as HN-NJ and other ERISA
fiduciaries to whom the fiduciary exception has been applied.
1. Identity of the Client
The first significant difference is the identity of the entity
for whom the legal advice is given. When a contractual service
provider such as HN-NJ obtains legal advice regarding the
21
execution of its fiduciary obligations, the beneficiaries of the
customer benefit plans are not the “real” clients. We look to
four factors in reaching this conclusion. The first is the
ownership of the assets. In situations in which the fiduciary
exception traditionally has been applied, the fiduciary is
managing assets over which it lacks ownership rights. For
instance, a trustee, by definition, manages a trust res it does not
own; because the trust separates ownership from management,
the trustee can have no legitimate personal interest in the trust’s
funds or its management. See Riggs, 355 A.2d at 711.
Similarly, a corporate manager manages assets owned by the
shareholders of the corporation.3 In contrast, although ERISA
typically requires that plan assets be held in trust, 29 U.S.C. §
1103(a), this requirement is excepted for insurance companies
providing insurance contracts. 29 U.S.C. § 1103(b)(1)-(2).
Although HN-NJ’s disposition of its assets may be limited by its
contractual and statutory obligations, legal title to the assets
nonetheless remains with HN-NJ. This convergence of
management and ownership places an insurer like HN-NJ in a
different position than other ERISA fiduciaries to whom the
fiduciary exception has been applied, and demonstrates that HN-
NJ has a substantial and legitimate interest in the management
of its assets – even while it engages in fiduciary acts.
Second, our Court has recognized that when an insurance
3
A corporate manager may be a shareholder of the same
corporation whose assets it manages. That such a manager may
wear two hats does not change the fact that the hats it wears are
legally distinct.
22
company, pursuant to a contract with an employer or benefit
plan, determines eligibility for benefits and pays those benefits
from its own funds, a structural conflict of interests arises. In
this situation, “the fund from which monies are paid is the same
fund from which the insurance company reaps its profits. This
is in contrast to the actuarially determined benefit funds
typically maintained by employers (especially in the pension
area) that usually cannot be recouped by the employer or directly
redound to its benefit.” Pinto v. Reliance Standard Life Ins. Co.,
214 F.3d 377, 378-79 (3d Cir. 2000). Because of the conflict
inherent in an insurer’s profit motive, we have held that when an
insurer exercises discretionary authority over benefits, we will
review its discretionary acts under a different, heightened
standard of review than we will use to review the acts of other
ERISA fiduciaries. See id. at 379. Although a structural
conflict of interests increases the need for judicial scrutiny, it
also undermines the argument that when an insurer retains
counsel, the real clients being served are the beneficiaries. In
Pinto, we adopted a sliding scale approach to reviewing
fiduciaries’ discretionary acts, under which we increase our
scrutiny as the fiduciary’s conflicts increase. Id. at 392.
Inversely, as a fiduciary’s conflicts with its beneficiaries
increase, the beneficiaries’ ability to claim that they are the real
clients of counsel retained by the fiduciary must diminish.
Although the presence of a conflict of interest, without more,
may not be enough to render the fiduciary exception
inapplicable, it is a factor that weighs in favor of retaining the
23
evidentiary privilege.4
Third, many insurers (including HN-NJ) face the
additional conflict of handling multiple ERISA benefit plans at
once, not to mention other, non-ERISA regulated customers.
This situation is far different from that of a corporation whose
shareholders have different interests because they hold different
amounts or classes of stock. Cf. Garner, 430 F.2d at 1101. In
the Garner situation, at least the corporate managers know that
they owe their fiduciary obligations to a single, discrete group
– the shareholders of the corporation. Similarly, although the
trustee of a benefit plan must take care to ensure that all the
plan’s beneficiaries receive the benefits which they are owed,
4
Health Net argues for a “mutuality of interests” requirement
that would preclude application of the fiduciary exception where
the interests of the fiduciary and the beneficiaries diverge.
Complete mutuality is not a requirement for the fiduciary
exception to apply. As early as Garner, courts have recognized
that the relevant shareholders or beneficiaries may have interests
so divergent that the fiduciary cannot possibly align itself with
every interest at once. 430 F.2d at 1101. Nonetheless, the
Garner court allowed the fiduciary exception to apply in such a
situation. We believe that conflicts of interests must be judged
using a sliding scale on a case-by-case basis. This approach is
consistent both with our approach to conflicts of interests in
other contexts, see Pinto, 214 F.3d at 392, and with our
obligation to evaluate evidentiary privileges using the common
law method. See F EDERAL R ULE OF E VIDENCE 501; Upjohn, 449
U.S. at 396-97.
24
management of the overall trust is meant to be a conflict-free
endeavor. An insurer such as HN-NJ, however, owes distinct
duties to each of its customers, including various benefit plans
and other entities. Even while acting as a loyal fiduciary to the
beneficiaries of one plan, HN-NJ must be mindful of the duties
it owes to the beneficiaries of other customer plans, all of whom
are paid from the same pool of assets. Again, we see that HN-
NJ and the Health Net companies have interests larger and
distinct from those of its beneficiaries.
Finally, we note that HN-NJ and its parent companies
paid for legal advice using their own assets, not those of their
beneficiaries. Courts have noted that when a trustee pays
counsel out of trust funds, rather than out of its own pocket, the
payment scheme is strongly indicative of the beneficiaries’
status as the true clients. E.g., Riggs, 355 A.2d at 712 (“[T]he
payment to the law firm out of the trust assets is a significant
factor, not only in weighing ultimately whether the beneficiaries
ought to have access to the document, but also it is in itself a
strong indication of precisely who the real clients were.”).
Conversely, when a fiduciary obtains legal advice using its own
funds, the payment scheme is an indicator (albeit only an
indicator) that the fiduciary is the client, not a representative.
Together, these four factors – unity of ownership and
management, conflicting interests regarding profits, conflicting
fiduciary obligations, and payment of counsel with the
fiduciary’s own funds – indicate that an insurer which sells
insurance contracts to ERISA-regulated benefit plans is itself the
sole and direct client of counsel retained by the insurer, not the
mere representative of client-beneficiaries, and not a joint client
25
with its beneficiaries. Were the insurer’s counsel to also
represent the beneficiaries who seek to maximize their benefit
payments, that counsel would face a direct conflict of interest
under any standard of legal ethics. It would be odd indeed if
ERISA were to force lawyers into precisely this conflicted role.
2. Duty of Disclosure
Even though we conclude that HN-NJ and its corporate
parents are the sole and direct clients of their retained counsel,
we must also consider a second rationale for applying the
fiduciary exception – the fiduciary’s duty of disclosure. The
obligation of a trustee to disclose to beneficiaries the advice of
counsel retained by the trust has been recognized in each of
three Restatements of Trusts. See R ESTATEMENT (F IRST) OF
T RUSTS § 173 (1935); R ESTATEMENT (S ECOND) OF T RUSTS
§ 173 (1959); R ESTATEMENT (T HIRD) OF T RUSTS § 82 cmt. f
(Tentative Draft No. 4, 2005). Some courts have used language
broad enough to suggest that every ERISA fiduciary has an
obligation to disclose counsel’s statements to its beneficiaries.
E.g., LILCO, 129 F.3d at 271-72 (“An ERISA fiduciary has an
obligation to provide full and accurate information to the plan
beneficiaries regarding the administration of the plan.” (empasis
added)); Washington Star, 543 F. Supp. at 909.
We conclude that such broad language does not represent
an intentional expansion of the fiduciary exception. Because
fiduciary duties under ERISA “draw much of their content from
the common law of trusts,” Varity, 516 U.S. at 496, it is
appropriate to apply a trustee’s disclosure obligations to ERISA
plan administrators who operate as trustees. When Congress
26
extended obligations under the common law of trusts to reach
entities which had not been deemed to be trustees under the
common law, however, Congress did not intend to expand the
full panoply of trustees’ obligations to every entity which might
be designated a fiduciary under ERISA. Specifically, Congress
provided that the assets of an insurance company need not be
held in trust. 29 U.S.C. § 1103(b)(1)-(2). For that reason, we do
not believe that Congress intended to impose upon insurance
companies doing business with ERISA-regulated plans the same
disclosure obligations that have been imposed upon trustees at
common law. Section 1103(b)(1)-(2) excepts insurers from
trustee-like obligations; we see no reason to impose trustee-like
disclosure obligations upon an entity excepted from ERISA’s
analogy to trust. Thus, simply because an insurer has certain
limited fiduciary obligations under ERISA, those obligations are
not coextensive with the common law obligations of a trustee.
We do not suggest that an insurer servicing an ERISA
plan owes no disclosure obligations to plan beneficiaries.
Indeed, under 29 U.S.C. § 1133(a), an insurer-fiduciary denying
a claim for benefits must disclose the specific reasons for the
denial. But we do conclude that the disclosure obligations of an
insurer-fiduciary cannot be defined through rote application of
the common law of trusts.
Two additional factors convince us that Health Net’s
disclosure obligations do not require it to reveal the advice it
obtains from its own retained counsel. First, the fiduciary
obligations of insurers who contract with ERISA plans are not
well-settled at law. Definition of those obligations often will be
one of the most hotly contested issues in a lawsuit. It would be
27
imprudent to craft an evidentiary privilege in such a way as to
require the difficult task of defining fiduciary obligations to be
met at the discovery stage. Moreover, when dealing with the
attorney-client privilege, courts must be particularly careful not
to craft rules that cause application of the privilege to turn on the
answers to extremely difficult substantive legal questions. “An
uncertain privilege, or one which purports to be certain but
results in widely varying applications by the courts, is little
better than no privilege at all.” Upjohn, 449 U.S. at 393. We
are reluctant to ask lawyers to read tea leaves and predict how
courts will resolve the imponderables of ERISA before they can
take the most preliminary step of advising their clients as to
whether their communications will remain confidential.
We note a certain paradox inherent in any application of
the fiduciary exception to an insurer which is acting as a
fiduciary in deciding claims under an ERISA plan. The need for
the attorney-client privilege is at its height where the law with
which the client seeks to comply is complicated and the
penalties for noncompliance are great. Cf. id. at 392 (noting that
corporations have a strong need for confidential legal advice
because of the complicated legal rules confronting them).
ERISA is an enormously complicated statute. An entity’s ability
to secure confidential legal advice should not be at its lowest
when complex legal obligations are at their highest. Although
this problem arises whenever the fiduciary exception applies to
an ERISA fiduciary, its undesirability should counsel against
overzealous extension of the exception.
Second, an expansive and uncertain attorney-client
privilege for insurer-fiduciaries will cause insurers to reevaluate
28
their relationships with ERISA plans. Some may choose to
cease providing insurance for benefit plans altogether. Others
may increase their charges for ERISA-regulated customers to
reflect the added risk that they may lose their ability to obtain
confidential legal advice. Perhaps others will simply decline to
fully inform their attorneys of all relevant facts. None of these
outcomes is desirable for ERISA beneficiaries. These concerns,
of course, are merely variations of ones that have been rejected
by courts regarding the fiduciary exception as applied to
trustees, corporate managers, and ERISA plan administrators.
They are, however, thumbs on the scale and help to tip the
balance.
We remind the parties that, although the fiduciary
exception is not applicable here, not every communication
between Health Net and its attorneys is necessarily privileged.
Other limitations and exceptions to the attorney-client privilege
still apply. For instance, the communications must be for legal,
not business purposes. Moreover, even when attorney-client
communications are privileged, the privilege runs only to the
communications themselves, not the underlying information
communicated. Upjohn, 449 U.S. at 395. Thus, our holding
today forecloses only a means of discovering information;
alternate paths of discovery are not closed.
IV. Conclusion
The District Court erred in applying the fiduciary
exception to the Health Net defendants and consequently erred
in ordering the production of privileged documents. We will
therefore vacate the District Court’s order of May 12, 2006,
29
insofar as it requires the production of documents contained in
Privilege Logs 1-11 that the Special Master determined would
be privileged as attorney-client communications in the absence
of any applicable fiduciary exception, and we will remand this
case to the District Court for further proceedings.
30