Release and Covenant Not to Sue Bars Subsequent Class Action: Ninth Circuit Affirms Dismissal of Putative Class Action

A recent decision from the United States Court of Appeals for the Ninth Circuit demonstrates that properly drafted covenants not to sue are needed in settlement agreements, notice documents and the final judgments to achieve class action defendants’ goals of final resolution.  In a lengthy published opinion, the Ninth Circuit affirmed recently the dismissal of a subsequent putative class action that was barred by the covenant not to sue in a prior class action settlement.  Skilstaf, Inc. v. CVS Caremark Corp., Case No. 10-15338, 2012 U.S. App. LEXIS 2561 (9th Cir. Cal. Feb. 9, 2012).

In the prior litigation Plaintiff (an Alabama payroll service company that self-funds a prescription drug plan for its employees) was a member of a class action that was resolved through a settlement that was approved by a Massachusetts district court.  New England Carpenters Health Benefits Fund v. First DataBank, Inc. & McKesson Corp., Civil Action No. 05-11148-PBS (D. Mass).  The Massachusetts class consisted of, among others, third-party payors — such as insurance companies, self-insured employers and union health and benefit plans — which made reimbursements for consumer purchases of certain prescription drugs.  Defendants in the Massachusetts case were McKesson Corporation, a wholesale prescription drug distributor that also owns pharmacy-related businesses, and First DataBank, a publisher of information about prescription drugs to retail pharmacies and other purchasers.  Plaintiffs in the Massachusetts case alleged that wholesalers (like McKesson) sold prescription drugs to retail pharmacies and other purchasers, and the pharmacies in turn marked up the price in selling the drugs to consumers.  The Massachusetts complaint alleges that the third-party payors and the individual consumers paid improperly inflated prices for many brand-named prescription drugs based upon the average wholesale prices published by First DataBank.

In March 2008, after three years of litigation, the Massachusetts court certified a third-party payor and consumer class.  McKesson later agreed to settle the lawsuit for $350 million, consisting of $288 million to the class net of fees and expenses.  The Massachusetts settlement included a provision that released all claims against defendants.  The settlement agreement also contained a covenant not to sue that stated that class members agreed “that they shall not hereafter seek to establish liability against any Released Party or any other person seeking to establish liability based, in whole or in part, on any of the Released Claims.”

The class was provided notice of the settlement, which set out the covenant not to sue.  The notice, however, did not emphasize that class members were giving up claims against “any other person” along with claims against McKesson and affiliated entities.  In fact, the “What am I giving up?” language included a “plain language” explanation that stated that class members were giving up claims against McKesson, but was silent as to other parties.

Prior to the final approval of the Massachusetts settlement, Skilstaf filed a class action complaint in the United States District Court for the Northern District of California.  The California complaint asserted claims on behalf of the same putative class bound by the Massachusetts settlement and sought damages based, in large part, on the same facts alleged in the Massachusetts case.  The only difference between the Massachusetts settlement and the California case was that Skilstaf named the pharmacies as defendants.

At the same time, Skilstaf appeared through counsel in the Massachusetts case and objected to the settlement because of the vagueness in the release and the covenant not to sue.  The Massachusetts district court approved the settlement, over Skilstaf’s objection, but allowed Skilstaf another opportunity to opt-out of the class.  Skilstaf did not opt-out of the class.

After the approval of the Massachusetts settlement and the entry of final judgment, the defendant pharmacies moved to dismiss the California class action complaint, arguing that the terms of the settlement precluded a subsequent lawsuit against “any other person,” which included the pharmacies.  The Northern District of California agreed, holding that the covenant not to sue in the Massachusetts settlement precluded the subsequent lawsuit, enforcing the settlement terms on Skilstaf.  The Ninth Circuit affirmed, holding that enforcing the judgment and settlement agreement against Skilstaf, including the covenant not to sue, does not violate Skilstaf’s due process rights.  Skilstaf had full notice of the settlement (including the “or any other person” provision) when it objected to the Massachusetts settlement and decided not to opt-out of the settlement (despite being given the second opportunity).

Notably, however, the Ninth Circuit refused to decide whether another putative class member (who did not object to the settlement) would be bound to the settlement and who would be precluded from bringing a subsequent lawsuit.  The Ninth Circuit stated that “[i]f a member of the putative class files another suit against the retail pharmacies on its own behalf or as the named plaintiff on behalf of a class, [then] the question of the enforceability of the covenant not to sue as to such a party and claims will be before the court.”

We will pay attention to the case to see whether non-objecting class members attempt to bring class action lawsuits and challenge the enforceability of the covenant not to sue.

Class action lawsuits can create distraction and enormous expense, and risk-averse defendants often settle such litigation (often at great expense).  To achieve the defendants’ goal of final resolution, however, requires carefully-drafted settlement documents (including settlement agreements, notice documents and proposed final approval orders).  This case is yet another reminder that thorough and comprehensively-drafted settlement documents are imperative to assure finality and continuing enforcement by subsequent courts.

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Posted by Brian Wright
Business Litigation
February 24, 2012