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December 13, 2005.

ZEV AND LINDA WACHTEL, et al., Plaintiffs,
GUARDIAN LIFE INS. CO., et al., Defendants. RENEE McCOY, individually and on behalf of all others similarly situated, Plaintiffs, v. HEALTH NET, INC., HEALTH NET OF THE NORTHEAST, INC., and HEALTH NET OF NEW JERSEY, INC. Defendants.

The opinion of the court was delivered by: FAITH HOCHBERG, District Judge


This Matter comes before the Court upon Defendants' Appeal of Magistrate Judge Shwartz's February 16, 2005 Order granting Plaintiffs' application for sanctions.*fn1 This Court has reviewed Magistrate Judge Shwartz's Order and oral Opinion dated February 16, 2005 and her Order dated March 1, 2005, and has reviewed the written submissions of the parties pursuant to Fed.R.Civ.P. 78.

I. History of Discovery Violations Prior to Imposition of Sanctions

  Judge Shwartz noted in her February 16, 2005 oral opinion ("February 16 Opinion") that Defendants had been on notice since the fall of 2003 that they were to produce investigative information regarding the Health Net entities' out-of-network activities. See February 16 Opinion at 6-7. The history of orders reveals the continuous effort of the Magistrate Judge to effect compliance with discovery. On November 5, 2003, Judge Shwartz ordered production of all "documents reflecting investigations of Healthnet Northeast by insurance regulators" and made compliance with her order a "continuing obligation." On November 13, 2003, Judge Shwartz ordered defendants to "identify an individual who can certify whether or not there are any past or current investigation by state regulators regarding defendant's use of outdated UCR or HIAA data, and shall provide such a certification no later than November 26, 2003." On November 18, 2003, Judge Shwartz ordered "that all discovery demands in the McCoy case are to be responded to by Healthnet of New Jersey, Healthnet of the Northeast and Healthnet, Inc.," making clear that Health Net entities on both coasts were responsible for producing regulatory investigative information.

  On January 13, 2004, Judge Shwartz ordered that "Defendant Healthnet shall identify an individual who can certify whether or not there are any past or current investigations by state regulators regarding the defendant's use of outdated UCR or HIAA data, and shall provide such a certification." Eight months later, in August of 2004, after a phone conference where Plaintiffs expressed frustration that Healthnet, Inc. had not produced documents in compliance with the Court's earlier orders, Judge Shwartz again made clear to the parties that all discovery demands were to be propounded and responded to by all Health Net entities regardless of geographic location. See August 18, 2004 Order at 1.

  On September 22, 2004, Plaintiffs served their fourth discovery request, which sought documents from all Health Net entities regarding "any insurance department or consumer service bureau inquiries as to Health Net claims processing, ONET services, failure to pay claims timely, or with interest; or appeals handling." Defendants objected to this request, citing their appeal of this Court's class certification decision as a reason for not producing western Health Net plan discovery. See Def.'s 02/07/05 Ltr. to Judge Shwartz at 5 (citing Exhibit 5, Def.'s 12/03/04 Ltr. to Plaintiffs at 3). A pending appeal is no basis to refuse to produce discovery.

  On December 13, 2004, the parties appeared before Judge Shwartz to discuss outstanding discovery issues and Health Net disclosed to the Court, for the first time, the existence of a California regulatory inquiry involving a Health Net plan in that state. See 12/13/04 Tr. at 49-50. Plaintiffs told the Court that, despite all the prior orders, discovery had not been produced about the California investigation. Id. Judge Shwartz stated that "[t]he Court ordered long ago the production of investigative materials" and had reminded counsel to remind its client of its ongoing responsibilities for production. Id. at 68.

  On December 17, 2004, over a year after she first ordered Health Net to produce investigative information regarding its out-of-network activities, Judge Shwartz issued the Order which eventually lead to Plaintiffs' request for sanctions and Judge Shwartz's February 16 Opinion granting that request.

  II. Magistrate Judge Shwartz's February 16, 2005 Opinion and Order

  Judge Shwartz's February 16 Opinion comprehensively summarized the factual and procedural background leading to the finding that Health Net violated her December 17, 2004 Discovery Order ("December 17 Order") requiring it to produce documents relating to any regulatory investigations of Health Net's out-of-network activities. The February 16 Opinion further articulated the foundation and authority for ordering the sanctions set forth in the Order. The relevant factual and legal elements of the February 16 Opinion are summarized below and a copy of the Magistrate Judge's February 16 Order is attached to this opinion.

  Magistrate Judge Shwartz's December 17, 2004 Order required Health Net to:
(a) produce all documents that relate to the New Jersey, New York, Connecticut, California, and Arizona regulators' past or ongoing investigations of the Health Net entities handling of out-of-network activities, including but not limited to documents disclosed by the Health Net entities to the regulators, documents provided by the regulators to the Health Net entities, materials disseminated to beneficiaries as part of the investigation(s), market conduct examinations, calculation of reimbursement (if applicable), amounts of restitution paid to the beneficiaries (if applicable); and talking points, on a rolling basis with all production to be completed no later than January 10, 2005 and (b) certify no later than January 10, 2005 that the Health Net entities have produced all responsive documents.
Judge Shwartz's December 17, 2004 Order at 2. At a hearing on December 13, 2004, Judge Shwartz clarified her reasons for requiring production of the investigatory documents on a rolling basis:
[w]ith respect to the western plans, I'm also requiring ongoing investigation and I'm going to tell you why, because it appears when the plaintiffs get documents, and based on those documents do whatever investigative efforts they engage in, they seem to recover documents that weren't produced by the client. And I'm not guessing at that, that's what's been presented on more than one occasion to the Court, and for that reason, I'm requiring ongoing production on a rolling basis of the California investigation as well, and even though it wasn't prior to the court order [sic], because I don't want to face you all on January 10th to only learn that on January 11th there are more documents that were not produced that the client has failed to turn over. So I'm requiring the production on a rolling basis of the investigative documents, and I think it's already been identified by plaintiffs to the defendants of what they are looking for.
February 16 Opinion at 5:5-21 (quoting December 13, 2004 transcript at 68:22-69:13). Despite Judge Shwartz's Order, Health Net did not produce documents relating to the California state investigation until January 28, 2005.

  Judge Shwartz ordered Health Net to appear on February 7, 2005 for an evidentiary hearing into alleged non-compliance,*fn2 where Heath Net was required to "produce witnesses, including clients and counsel with knowledge of any efforts, communications, or decisions related to compliance with the directives in the Orders." During an eight-hour hearing, Judge Shwartz took testimony from Franklin Tom, an attorney and employee of Health Net, and William Helvistine, an attorney for outside counsel Epstein, Becker & Green.

  Health Net argued that its January 28, 2005 production of the California investigation documents did not violate the December 17 Order, citing the following reasons: (1) that the delay in production was due to the lack of clarity in the discovery order as to the meaning of the term "rolling basis"; (2) that Health Net was pursuing a stay of the Order requiring discovery; and (3) that Plaintiffs' counsel consented to an extension of the document production.

  Citing Fed.R.Civ.P. 37, Judge Shwartz rejected Health Net's arguments and found that Health Net and its counsel had violated the December 17 Order, noting that "defendants have been under a continuing obligation to provide discovery concerning the investigations by state regulators of the Health Net entities regardless of geographic location." Id. at 8:8-12. Judge Shwartz considered the authority granted to her under Rule 37 to sanction counsel and parties who fail to provide discovery as required under the discovery rules or the Order of the Court. Id. at 13:22-14:5. She further considered Third Circuit law granting the Court broad discretion as to the type and degree of sanctions it can impose and ...

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