The Supreme Court last week denied a writ of certiorari to review the Sixth Circuit’s rejection of class certification for a group of self-insured health plans alleging that their plan administrator charged them improper fees.

In Pipefitters Local 636 Insurance Fund v. Blue Cross Blue Shield of Michigan, No. 09-2607 (Aug. 12, 2011), the Sixth Circuit Court of Appeals reversed the district court’s decision to certify the class, which would have consisted of between 550 to 875 self-insured plans that entered into Administrative Services Contracts (“ASC’s”) with Blue Cross Blue Shield of Michigan (“BCBSM”). These services included payment of claims, for which the plans would reimburse BCBSM. The named plaintiff, a multi-employer trust fund, sued BCBSM for breach of fiduciary duty based on BCBSM’s collection of so-called “other than group” (OTG) fees that it retained from the plaintiff’s assets and those of the class members to subsidize the cost of providing Medigap coverage to senior citizens. The plaintiff claimed these OTG fees violated Michigan law and thus constituted a breach of fiduciary duty under ERISA.

In addition to criticizing the district court’s failure to conduct a “rigorous analysis” of the certification issue (declining to follow the magistrate’s recommendation to deny certification, the judge granted it without opinion and with little elaboration), the Sixth Circuit took issue with the court’s finding that a class action was a “superior” mode of adjudication. A judge must make this finding before certifying a class action under Federal Rule of Civil Procedure 23(b)(3), in addition to finding that the general Rule 23(a) prerequisites of numerosity, commonality, typicality, and adequacy are met. The district court found that superiority was satisfied because each class member’s claim turned on the legality of the OTG fees. Yet the Sixth Circuit, agreeing with the magistrate’s report and recommendation, found that the district court ignored the “critical, factual threshold issue specific to each and every class member of whether BCBSM was acting as an ERISA fiduciary in each individual, contractual relationship with each plan member when it imposed the OTG fee.” This would require the district court to “conduct individualized inquiries into the ASC terms and funding arrangements of each ASC customer” – a factor which the Sixth Circuit held, as a matter of law, precluded certifying the class under Rule 23(b)(3).

The three-judge panel of the Sixth Circuit split 2-1 in reversing the district court’s certification order. A dissenting judge argued that the court should have remanded for a determination of whether the Administrative Services Contracts were indeed dissimilar enough to require the sort of individualized proceedings envisioned by the majority.

In addition to certifying the class under Rule 23(b)(3) – the typical avenue for class actions seeking money damages and also the strictest test to meet – the district court also granted certification under Rule 23(b)(1)(A), which allows for certification when individual lawsuits would present a risk of creating “incompatible standards of conduct” for the defendant. The Sixth Circuit held this decision to be error as well because there was no evidence indicating that inconsistent results of individual lawsuits would impair BCBSM’s ability to pursue a “uniform continuing course of conduct.” (As an aside, it seems that inconsistent judgments as to the legality of the OTG fee could, in theory, present a risk of creating incompatible standards of conduct – i.e. one court holds BCBSM can keep charging the fee while another court holds it must stop. The Sixth Circuit, unfortunately, did not elaborate on its reasoning here.)

The Supreme Court’s denial of review in the Pipefitters case comes on the heels of the Second Circuit’s decision in Nationwide Life Ins. Co. v. Haddock, No. 10-4237-cv (Feb. 6, 2012). I discussed this case and its general implications in more detail in a previous post on Employee Benefits Law Report. In Haddock, another breach of fiduciary duty action brought by plan trustees against a service provider for improper fees, the Second Circuit held that the class could not be certified as one seeking declaratory or injunctive relief under Rule 23(b)(2) – a popular avenue due to its more relaxed requirements as compared to Rule 23(b)(3) – because the class claims would require “non-incidental, individualized proceedings for monetary awards.” As my previous blog explains, Haddock is a game-changer for ERISA class action litigation because it all but removes Rule 23(b)(2) as an option for certification. I posed the unanswered question in that blog of whether courts would be any more liberal in applying Rule 23(b)(3) to grant class certification in ERISA cases. Now, with the solidification of Pipefitters as Sixth Circuit precedent, it appears that, at least for self-insured plans pursuing breach of fiduciary duty claims against service providers, the quest for class certification under 23(b)(3) will be no easy ride, either. In most such actions, class members will face the same key threshold hurdle of establishing that the service provider was a fiduciary exerting control over plan assets. Under Pipefitters, unless the service provider uses a boilerplate form contract with each class member, this threshold factual issue will defeat certification as a matter of law.