The opinion of the court was delivered by: Hochberg, District Judge
Plaintiff-beneficiaries have sued their health care insurance providers under ERISA 29 U.S.C. § 1001 et seq. for breach of fiduciary duty and other wrongs connected to the way in which Health Net*fn1 reimburses out-of-network claims.
This opinion calls upon the Court to decide the Defendants' objections to the Special Master's rulings on privilege, including the fiduciary exception thereto, and to decide the corollary issue in Defendant Health Net Inc.'s motion for summary judgment claiming that it is not an ERISA fiduciary. In their appeal of the Special Master, the Health Net Defendants challenge a series of findings regarding documents they have claimed are protected from production by either attorney-client or work product privilege. In particular, Defendants object to the Special Master's conclusion that a fiduciary exception to the attorney-client privilege applies to Defendants' claims of privilege. In its summary judgment motion, Health Net, Inc. claims that it is not a fiduciary under ERISA for health benefit plans administered by its subsidiaries.
I. Defendant's Objections to Special Master's Report and Recommendation Factual and Procedural Background
The Special Master has reviewed 11 of the initial 13 logs produced by Defendants in this litigation.*fn2 Defendants claim that over 4,000 of the documents listed in their first 11 logs are protected from disclosure to Plaintiffs by the attorney-client privilege and work product doctrines. On June 24, 2005, the Court appointed a Special Master in this case for the purpose of "considering all claims of privilege and work product protection that have been asserted over documents listed on defendants' privilege log and for such other matters as the Court may refer to the Special Master." The June 24, 2005 Order directed that the Special Master "shall make findings of fact and conclusions of law with respect to the matters presented by the parties and shall report same to the United States District Judge."
The Special Master asked the parties to address the threshold issue of whether Defendants' claims of privilege and work product protection could be pierced by the fiduciary exception. After considering the parties' briefs on the applicable legal standards, the Special Master issued an Interim Opinion and Order on August 1, 2005 (the "Interim Opinion") concluding that: (1) the fiduciary exception, which excludes from the protection of the attorney-client privilege those communications between a fiduciary and its attorneys relating to fiduciary matters, is a recognized doctrine that applies in this case; (2) Plaintiffs bear the burden to demonstrate the applicability of the fiduciary exception; (3) Plaintiffs are not required to satisfy an additional "good cause" requirement; (4) Plaintiffs have established the applicability of the fiduciary exception; (5) Defendants' documents exclusively pertaining to the establishment, amendment, modification or termination of their ERISA plans are immune from the fiduciary exception (i.e. they fall within the "settlor function exception" to the fiduciary exception); and (6) Defendants' documents that pertain solely to their civil or criminal liability are likewise immune from the fiduciary exception (i.e. they fall within the "liability exception" to the fiduciary exception).
The parties submitted additional briefing, following the Interim Opinion, in order to further clarify their positions on how the privileges and exceptions should be applied to the facts of this case and to the specific communications presented to the Special Master for in camera review. Plaintiffs argued that communications between the Defendants and their attorneys about members' benefits determinations were fiduciary in nature and thus subject to disclosure under the fiduciary exception. Plaintiffs' major claim in this litigation is that Defendants, in violation of N.J.S.A. § 11:21-17.13,*fn3 and as an undisclosed misrepresentation to beneficiaries of large group plans, selected outdated data to determine Usual and Customary ("UCR") charges, resulting in beneficiaries absorbing a higher cost for medical treatment and/or services.*fn4 Plaintiffs argued that Defendants function as fiduciaries when they decide which UCR data to use, and "how and when to apply the databases, what versions, what percentiles, what exceptions will apply [and] whether other reductions will be made in combination or in lieu of the database," and thus such communications should fall within the fiduciary exception and be produced.
The Special Master considered the additional briefing and instituted the following analytical framework for his review of the documents. First, he found that Plaintiffs had waived the right to challenge the fiduciary exception as applied to documents withheld pursuant to the work product doctrine; thus where the work product doctrine was properly asserted, the Special Master recommended that such communications not be produced. Next, if the attorney-client privilege was asserted as to a particular communication (and the work product doctrine did not apply) the Special Master reviewed the communication to determine whether the claim of privilege was proper. If the communication did not meet the requirements of the attorney-client privilege, the Special Master recommended it be produced.
If the attorney-client privilege did apply, the Special Master next reviewed the communication to determine if the fiduciary exception would apply. If the fiduciary exception did not apply, the communication was immune from production because there was no reason to pierce the proper invocation of the attorney-client privilege. Where the Special Master determined that the fiduciary exception did apply to a communication, he continued his in camera inspection to determine if the communication was protected from disclosure under either the settlor and/or the liability exceptions. Documents relating to wholesale changes to plan design were generally deemed to fall within the settlor exception and were protected from disclosure. Likewise, communications exclusively pertaining to settlement and/or consent orders entered into between Defendants and governmental and/or regulatory agencies, as well as Defendants' responses to discovery requests in this litigation, were deemed to fall within the liability exception and were consequently exempt from disclosure. Documents that were generally not protected from disclosure under either exception included those regarding UCR data used for reimbursement and other management issues related to an inquiry or investigation of the propriety of using old UCR data, documents referring to Defendants' lobbying efforts or responding to compliance issues, and those that pertained to inquiries or investigations by governmental or regulatory agencies.
Where the Special Master determined that neither the settlor nor liability exception applied to a particular fiduciary communication, he recommended that it be produced because there was no bar to the fiduciary exception piercing the attorney-client privilege.
The Special Master reviewed 3,060 documents in 10 privilege logs. He reported his findings to the Court in his October 18, 2005 Report and Recommendation ("R&R") and attached several voluminous charts detailing his analysis of each document reviewed in camera.
On November 3, 2005, several weeks after the Special Master filed his R&R, Defendants produced an additional privilege log ("Log 11") containing 953 privilege entries. On November 7th, Magistrate Judge Shwartz ordered the Special Master to conduct an expedited review of certain entries from the new log before this Court resumed its Rule 37/Integrity hearing on November 15, and asked the Special Master to complete his full review of Log 11 by December 20, 2005. The Special Master completed his initial review on November 14th and his entire review on December 13, 2005, consistent with the framework and protocols outlined above. Defendants filed timely objections to all three of the Special Master's reports and this Court has consolidated the objections for review.*fn5
Federal Rule of Civil Procedure 53 sets forth the standards for this Court to apply in its review of the Special Master's Report and Recommendation. Under Fed. R. Civ. P. 53, the Court decides all objections to the Special Master's findings of fact and conclusions of law under the de novo standard of review. Fed. R. Civ. P. 53(g)(3) and (g)(4). This Court may set aside the Special Master's ruling on procedural matters upon an abuse of discretion standard of review.
C. Discussion Applicability of the Fiduciary Exception
The attorney-client privilege protects communications between a client and an attorney made in confidence for the purpose of obtaining or providing legal advice. See United States v. Moscony, 927 F.2d 742, 751 (3d Cir. 1991) (privilege protects from disclosure communications made by client to lawyer in furtherance of representation); United States v. Amerada Hess Corp., 619 F.2d 980, 986 (3d Cir. 1980) (privilege also applies to communications from lawyer to client). The attorney-client privilege is the oldest privilege recognized under the common law, but it is not absolute. The Third Circuit has recognized that "because the privilege obstructs the search for truth and because its benefits are, at best, 'indirect and speculative,' it must be 'strictly confined within the narrowest possible limits consistent with the logic of its principle.'" In re Grand Jury Investigation, 599 F.2d 1225, 1235 (3d Cir. 1979) (quoting 9 Wigmore on Evidence § 2291 at 554 (McNaughton rev. 1961)).
The fiduciary exception to the attorney-client privilege, as it has developed in federal courts around the country, excludes from the protection of the privilege those communications between a fiduciary and its attorneys that relate to fiduciary matters. Courts have explained that a fiduciary cannot claim an exclusive privilege to certain communications with counsel because, as a representative for its beneficiaries, the fiduciary is not the real client in the sense that it is personally being served by its attorney. Cobell v. Norton ("Cobell II"), 212 F.R.D. 24, 27 (D.D.C. 2002) (citing Washington-Baltimore Newspaper Guild, Local 35 v. Washington Star Co., 543 F. Supp. 906, 909 (D.D.C. 1982)). Under this reasoning, the fiduciary's and beneficiaries' interests are aligned with respect to certain communications, and the beneficiaries are thus entitled to review those communications.
The Court of Appeals for the Third Circuit has yet to decide whether to apply the fiduciary exception. See Depenbrock v. Cigna Corp., 389 F.3d 78 (3d Cir. 2004) (finding it unnecessary to reach question of whether fiduciary exception applies because other issues on appeal dispensed of case); see also Arcuri v. Trump Taj Mahal Assoc., 154 F.R.D. 97, 106 (D.N.J. 1994) (recognizing that the Third Circuit had not yet addressed the question of fiduciary exception). Defendants argue that the Special Master was wrong to adopt a fiduciary exception to the attorney-client privilege in the absence of precedent in this circuit.
Although the Third Circuit has not spoken on the issue, other circuit courts have uniformly recognized the existence of a fiduciary exception in a variety of settings. See In re Lindsey, 148 F.3d 1110, 1112 (D.C. Cir. 1998) (describing as "widely followed" the principle that "corporate officers are not always entitled to assert [attorney-client] privilegeswithin the corporation" in order to keep communications confidential from shareholders in litigation); Becher v. Long Island Lighting Co. ("LILCO"), 129 F.3d 268, 272 (2d Cir. 1997) (explaining that the fiduciary exception disables a fiduciary "from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration"); Wildbur v. ARCO Chemical Co., 974 F.2d 631, 645 (5th Cir. 1992) ("[A]n ERISA fiduciary cannot assert the attorney-client privilege against a plan beneficiary about legal advice dealing with plan administration."); Fausek v. White, 965 F.2d 126, 132-33 (6th Cir. 1992) (where corporation owed fiduciary duties to minority-shareholder plaintiffs, it could not prevent disclosure to plaintiffs of information relating to plaintiffs' investments); Bland v. Fiatallis North Am. Inc., 401 F.3d 779, 787-88 (7th Cir. 2005) (applying the fiduciary exception and explaining that "the attorney-client privilege should not be used as a shield to prevent disclosure of information relevant to an alleged breach of fiduciary duty"); United States v. Mett, 178 F.3d 1058, 1062 (9th Cir. 1999) (noting that the Ninth Circuit "has joined a number of other courts in recognizing a 'fiduciary exception' to the attorney-client privilege"); Cox v. Adm'r U.S. Steel & Carnegie, 17 F.3d 1386, 1415-16 (11th Cir. 1994) (recognizing the fiduciary exception described in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), but declining to decide whether it applies to disputes between a union and its members).
Similarly, the fiduciary exception "has been recognized and applied a number of times in the District of New Jersey and the Eastern District of Pennsylvania." Acruri, 154 F.R.D. at 106 (citing Dome Petroleum Ltd. v. Employers Mut. Liab. Ins. Co., 131 F.R.D. 63 (D.N.J. 1990); In re Sunrise Sec. Litig., 130 F.R.D. 560 (E.D. Pa. 1989); Boswell v. Int'l Bhd. of Elec. Workers, 1981 WL 271888 (D.N.J. 1981); Cohen v. Uniroyal, 80 F.R.D. 480 (E.D. Pa. 1978); Valente v. PepsiCo, 68 F.R.D. 361 (D. Del. 1975)); see alsoIn re Unisys Corp. Retiree Med. Benefits ERISA Litig., 1994 WL 6883, *3 (E.D. Pa. 1994) (recognizing that the fiduciary exception applies to ERISA cases); Moskowitz v. Lopp, 128 F.R.D. 624, 637 (E.D. Pa. 1989) (finding that ...