The opinion of the court was delivered by: Hon. Faith S. Hochberg, U.S.D.J.
Plaintiff-beneficiaries have sued their healthcare 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 ("ONET") claims. After a lengthy pattern of repeated and gross non-compliance with discovery emerged, exacerbated by representations to the Court that began to ring hollow, this Court granted a motion by Plaintiffs for a Hearing Under the Inherent Power of the Court to Preserve the Integrity of the Judicial Process and Under Federal Rule of Civil Procedure 37 ("Rule 37/Integrity Hearing"). This Court held eleven days of evidentiary hearings between October 2005 and March 2006 about, inter alia, whether Defendants were compliant with Court orders to retain, search, and produce e-mail and other electronic documents and candid in their representations to the Magistrate Judge and this Court about their restitution to beneficiaries. This Court has reviewed the extensive briefing submitted by both parties as well as the parties' proposed findings of fact and conclusions of law.*fn2
This opinion and related order rule upon Plaintiffs' motion for entry of default and for a discovery monitor; Plaintiffs' applications to strike documents submitted by Defendants as summary judgment and trial exhibits; Magistrate Judge Shwartz's Report and Recommendation that sanctions be considered for Defendants' failure to produce emails during discovery and for Defendants' decision to stop restoring and producing emails;*fn3 Defendants' appeal of Magistrate Judge Shwartz's December 28, 2005 Order;*fn4 Plaintiffs' several motions to strike Defendants' privilege logs numbers 12 through 53;*fn5 Defendants' several motions to strike Plaintiffs' January 2, 2006 filing*fn6 and other filings;*fn7 and Plaintiffs' motion to supplement the Rule 37 findings, for summary judgment, and for sanctions.*fn8
The Wachtel and McCoy cases are two of the oldest on this Court's docket. The litigation has been fierce and without respite, through several changes of defense counsel. The docket sheet is 81 pages with 73 motions, 219 briefs, and 152 other applications to the Court. In sum, it gives new meaning to the term "scorched earth" litigation tactics. This litigation began more than five years ago and many of the events at issue in this Rule 37/Integrity Hearing go back even further.*fn9 This Court is extremely reluctant to sanction parties or counsel. Unfortunately, Health Net's repeated and unabated discovery abuses and lack of candor leave this Court no other choice in order to protect the integrity of the judicial process, remedy the prejudice suffered by Plaintiffs, punish the wrongdoers, and accord a measure of relief to the other parties and counsel in this case. When the abuses are as extreme as they are in this case, to refrain from sanctions is unfair to the parties who conduct themselves according to the rules.
Rule 37 of the Federal Rules of Civil Procedure governs sanctions against a party who fails to provide discovery as required by the discovery rules or a court order. The Court must analyze whether the defalcation is by the party, the attorney, or both. Rule 37 sanctions are available to the district court "not merely to penalize those whose conduct may be deemed to warrant such a sanction, but to deter those who might be tempted to such conduct in the absence of such a deterrent." Nat'l Hockey League v. Metro. Hockey Club, 427 U.S. 639, 643 (1976). The Court has broad discretion regarding the type and degree of sanctions it can impose, see Coca-Cola Bottling Co. of Shreveport, Inc. v. Coca-Cola Co., 110 F.R.D. 363, 367 (D. Del. 1986) (citing Nat'l Hockey League, 427 U.S. at 642), but the sanctions must be just and related to the claims at issue. Estate of Spear v. Comm'r of Internal Revenue Serv., 41 F.3d 103, 109 (3d Cir. 1994) (citing Ins. Corp. of Ireland v. Compagnie Des Bauxites, 456 U.S. 694, 707 (1982)). Rule 37(b)(2) specifically provides for several sanctions, including discretion to deem facts as established, barevidence, strike or dismiss pleadings, enter a default judgment, and find a party in contempt.
The Court also has inherent power to police litigant misconduct and impose sanctions on those who abuse the judicial process. See Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991). These inherent powers exist in addition to the formal rules and legislative dictates designed to assist district courts in their truth-seeking process. See id. at 46; see also Republic of Philippines v. Westinghouse Elec. Corp., 43 F.3d 65, 73 (3d Cir. 1995) (noting that, under Chambers, the Federal Rules of Civil Procedure and Congressional statutes do not exhaust the district courts' power to control misbehaving litigants). These powers include investigating whether a fraud has been committed upon the court and assessing attorneys' fees when a party has acted in bad faith. See Chambers, 501 U.S. at 44-46.
III. Findings of Fact*fn10
A. Health Net's Lack of Candor to the Magistrate Judge and this Court concerning its Restitutions to the New Jersey Department of Banking and Insurance ("NJDOBI")
Health Net's strategy to limit the scope of its disclosures to NJ-DOBI about its use of outdated data to calculate the UCR*fn11 for medical bill reimbursements led inexorably to discovery abuses and lack of candor in this case.*fn12 Health Net's small group employer plans in New Jersey are subject to state regulations requiring that Health Net must use the most recent data in calculating the UCR for certain services performed by ONET providers.*fn13 Large group plans are governed by contractual language that does not expressly permit outdated data to be used for UCR.*fn14 In its Northeast plans, Health Net bases its UCR determinations on a nationwide database, known as the Health Insurance Association of America ("HIAA") or Prevailing Healthcare Charges System ("PHCS") database.*fn15 The database is updated at least annually, but the insurer has the responsibility for loading the data. Health Net did not use the database in its updated form for several years at issue in this case. Thus, old costs were used to calculate current reimbursements.
Health Net's lack of candor to this Court and to Magistrate Judge Shwartz concerning its NJDOBI restitutions includes: (1) asserting in its answers to interrogatories, affidavits, briefs, pleadings, and motions that it was in "strict compliance" with all New Jersey regulations without disclosing the existence of a NJ-DOBI investigation into its violation of New Jersey regulations; (2) violating Magistrate Judge Shwartz's July 23, 2003 Order by failing to disclose until the day of this Court's November 20, 2003 Preliminary Injunction hearing that Health Net's use of outdated data in calculating UCR extended back to 1999 (rather than mid-2001 as had been represented to NJDOBI); (3) falsely representing to this Court at the Preliminary Injunction hearing, in order to avoid the imposition of injunctive relief, that it had reached a "Second Restitution" with NJ-DOBI based upon nothing more than a vague seven minute phone call between General Counsel of HNNE Paul Dominianni, Esq. and NJ-DOBI that took place a mere hour before the court hearing, which did not in fact reach an agreement for a Second Restitution; (4) failing to proceed to pay the promised Second Restitution despite repeated representations to the Court that the Second Restitution was in progress; and (5) submitting a false and misleading certification from Paul Dominianni, Esq. to Magistrate Judge Shwartz, in response to her December 17, 2004 Order, that blamed the failure to accomplish the Second Restitution on the many steps needed to complete the task and on "inadequate continuity of work flow and personnel" without mentioning that, in fact, no steps had been taken to commence such restitution prior to Magistrate Judge Shwartz's Order and omitting to state that the calculations had already been made two years earlier. The number of instances and the extent of Health Net's lack of candor concerning its restitutions to NJ-DOBI, described in more detail below, will not be tolerated and justify sanctions against Health Net. Health Net has been represented by three separate law firms at various stages of this case, and the pervasive misconduct, as more fully described below, was consistent throughout all stages. From the lengthy pattern of misconduct, the Court concludes that Health Net, through its own in-house counsel and top executives, was responsible for many of the egregious actions in this case.
Health Net's "First Restitution" to NJ-DOBI*fn16 was the result of a December 23, 2002 Consent Order between Health Net and NJ-DOBI. The restitution was not disclosed when answers to interrogatories, affidavits, briefs, pleadings, and motions stated that Health Net was in "strict compliance" with all New Jersey regulations. Health Net also withheld relevant documents from Plaintiffs in order to cover-up the fact that it had used outdated UCR data beginning as early as 1999, rather than the mid-2001 date that had been represented to NJ-DOBI by Health Net's high ranking executives as the start date of the use of outdated data.
At an October 4, 2002 meeting, Health Net, through Vice President and Plan Counsel for HNNJ Eileen O'Donnell, Esq. and General Manager for Health Net in Pennsylvania and New Jersey, Dr. Joseph Singer, represented to NJ-DOBI officials that the use of outdated UCR data began systemically in July 2001 and continued through October 2002. Health Net told NJ-DOBI that it would identify the number of claims that were improperly processed and the financial value of those claims. NJ-DOBI, through its enforcement chief, Mr. Lee Barry, directed Health Net to reprocess claims that had been paid using outdated data and to reimburse members.
However, corporate officers at the highest levels within Health Net then knew that the systemic use of outdated data had actually begun in June 1999, and not in mid-July 2001, as had been represented to NJ-DOBI.*fn17 Nor was it just recently discovered, as was represented to this Court at the November 2003 hearing. At an internal Health Net meeting in October 2002, the subject of "HIAA Fee Schedule Change" arose and the participants discussed how to "go forth and sin no more," "wash away the sins of the past" with regard to using outdated data, and estimate the financial impact of these "sins." While central to Plaintiffs' case and properly sought in discovery, neither the document just quoted nor thousands of pages of germane documents were ever produced in discovery that would have revealed the misrepresentation to NJ-DOBI. They came to light only after this Court convened the Rule 37 Hearing and itself asked probing questions that finally elicited them. Despite the Magistrate Judge's numerous orders to produce such highly relevant discovery, Health Net willfully did not do so.
October 2000. In the summer of 2001, in an effort to lower its costs and increase its profits, Health Net again reverted to using backdated 1998 HIAA data to compute UCR, beginning what became euphemistically called the "rollback" period. Operations Alert #493 directed that as of July 31, 2001, all ONET claims would be reimbursed based on the 1998 HIAA fee schedule for UCR. If the claims processors could not find a particular procedure in the 1998 version of the fee schedule, they were instructed to look in later-released schedules and if the procedure was not listed in any designated schedule, the procedure would be priced at a mere 35% of the provider's billed charge. Shortly after the "rollback" went into effect, Jay Gellert, the CEO of Health Net, Inc., wrote a letter to all plan Chief Executive Officers and Chief Financial Officers, including HNNE Chief Executive Officer Barry Averill and HNNE Chief Financial Officer Pennell Hamilton, directing Health Net's Eastern plans to find $8 million in additional savings for the third and fourth quarters of 2001. In response, Pennell Hamilton projected that HNNE would be saving $2.8 million in the second half of 2001 as a result of the "implementation of 1998 HIAA UCR pricing."
Despite extensive top-level corporate knowledge of the use of outdated data prior to July 2001, Health Net did not disclose to NJ-DOBI any liability from 1999 through June 2001, cutting in half its period of liability. This decision led to the discovery abuses in the instant litigation, which appear calculated to avoid revealing that Health Net's 2002 Consent Order with NJ-DOBI rested upon misinformation. The 2002 Consent Order with NJ-DOBI required Health Net to provide proof of its compliance, including a list of the affected members and the amount of refund due to each member. Although Health Net computer programmers had created a file including use of outdated data to process claims going back to 1999, the spreadsheet that Health Net provided to NJ-DOBI only covered the period from July 2001 to October 2002, and the discovery in this case was obfuscated to make it look as if Health Net had only discovered its half-truths to NJ-DOBI on the eve of this Court's November 2003 Preliminary Injunction hearing, when in fact Health Net had known it all along.
Plaintiffs first learned of the NJ-DOBI investigation on February 5, 2003, when Renee McCoy, the named Plaintiff in the second case, saw a newspaper article about it. At a court conference in the Wachtel matter on February 13, 2003, Plaintiffs questioned why Health Net did not disclose to Plaintiffs' counsel the existence of the NJ-DOBI investigation, which directly affected Plaintiffs. They also questioned the candor of Health Net's answers to interrogatories, affidavits, briefs, motions, and pleadings where Health Net represented that it was in compliance with the New Jersey regulations. Health Net's counsel explained that "It was a case of Health Net's left hand not knowing what the right hand was doing."
Once Plaintiffs and this Court learned about the NJ-DOBI investigation, Health Net continued to withhold highly relevant documents. Plaintiffs filed the McCoy matter on April 22, 2003, alleging that Health Net breached its fiduciary duties and violated the terms of its contract with large group members by using outdated data to calculate ONET reimbursements. In numerous discovery demands and Court orders, Health Net was repeatedly required to produce discovery about its disclosures to NJ-DOBI.*fn18
Plaintiffs sought discovery related to Eileen O'Donnell's December 12, 2002 letter to NJ-DOBI.*fn19 Even though the Information Systems ("IS") department calculations and HIAA Group e-mails from 2002 described above were responsive to these Orders and to Plaintiffs' discovery demands, Health Net did not produce such documents to Plaintiffs, which would have revealed its failure to disclose to NJ-DOBI its use of outdated data as early as 1999. Ms. O'Donnell testified, both at this Court's Preliminary Injunction hearing in 2003 and during the Rule 37/Integrity Hearing, that she only learned about the use of outdated data extending back to 1999 when she was working on the Wachtel matter in November 2003. This Court does not make credibility findings at this time as to such testimony, although documents and e-mails in evidence suggest that Ms. O'Donnell was present at discussions where her Health Net superiors discussed the lack of timely HIAA data and the possibility of liability for claims as early as 1999.*fn20
This Court need not decide Ms. O'Donnell's credibility because it is absolutely clear that her superiors, such as CFO Pennell Hamilton, did know that the outdated data was used far earlier than July 2001. And those superiors also knew that Ms. O'Donnell was representing to NJ-DOBI that the onset of liability was in July 2001. Thus, the Health Net entities knew that their corporate representations to NJDOBI were misleading. Full compliance with discovery would have revealed that.
2. The "Second Restitution"
Health Net exacerbated its lack of candor to this Court and discovery misconduct to Plaintiffs in events surrounding the promised "Second Restitution." The "Second Restitution" is a term coined by the parties to refer to Health Net's representation to this Court at the Preliminary Injunction hearing on November 20, 2003 that Health Net had reached an agreement with NJ-DOBI to repay claims improperly processed between June 1999 and July 2001.*fn21 Testimony at the Rule 37 Hearing revealed that this Court's subsequent decision to hold a Preliminary Injunction hearing on November 20, 2003 caused a flurry of concern within Health Net. On November 20, 2003, about an hour before the Preliminary Injunction hearing commenced, HNNE General Counsel Dominianni placed a call to Lee Barry, Esq. at NJ-DOBI. The phone lines connected for seven minutes, including the time necessary for a secretary to get Mr. Barry on the line. Thus, the conversation was extremely short. Mr. Dominianni testified that he told Mr. Barry that Health Net had "a problem" from January 1, 1999 to July 2001; that the company intended to resolve it; that Mr. Barry concurred; and that an agreement to make the "Second Restitution" was formed. Mr. Barry testified that nothing substantive was disclosed by Health Net during the short call; that there was no representation by Mr. Dominianni about any further restitution; and that no agreement of any kind was made in the very short phone call. Significantly, Mr. Dominianni made no follow-up letter, e-mail, nor conversation of any kind to discuss, confirm, or conclude any agreement of any kind with NJ-DOBI, a large administrative agency of the State of New Jersey. This Court finds that no agreement to make a "Second Restitution" was made between Health Net and NJ-DOBI.
Within a few hours of this phone call, McCarter & English partner John Pendleton, Esq. assured this Court at the Preliminary Injunction hearing that no injunctive relief was necessary because Health Net had agreed to a "Second Restitution" with NJ-DOBI for the earlier period of outdated data. Mr. Pendleton stated: "Health Net has since gone back to the New Jersey department, and there may be either an amendment to the consent order, or a separate -- there is no investigation. We made disclosure that there are -- we've discovered that in 1999 we hadn't paid, and so we're going to rectify that, that's about a $528,000 restitution program that we'll make to small group people in New Jersey." Ms. O'Donnell testified on November 20, 2003 that "we have gone back to the department [NJ-DOBI] to say that we have uncovered other errors and that we would propose, and they accepted our plan of remediation." Pendleton testified that he made these representations based on Dominianni, Esq.'s phone call an hour earlier. O'Donnell later testified at the Rule 37 Hearing that she was told what to say by Pendleton.
Shortly after the November 2003 hearing, Health Net submitted an affidavit by CFO Pennell Hamilton dated January 15, 2004. He averred, under oath, that "as soon as representatives of Health Net of New Jersey, Inc. understood that Health Net of New Jersey, Inc. did not load the 1999 PHCS database and that it did not update the PHCS database within 60 days of receipt of the database, these representatives went to the New Jersey Department of Banking and Insurance ('NJ-DOBI') and notified the Department of this issue." Documents never produced in discovery (and only revealed upon inquiry of this Court during the Rule 37 hearing) show that Mr. Hamilton himself knew that Health Net had used outdated data in 1999 for UCR-based reimbursements at the very time that Ms. O'Donnell was making representations to NJ-DOBI that the use of outdated data began in July 2001. No notification was made to NJ-DOBI "as soon as" the dereliction was understood by Health Net's CFO. The Hamilton affidavit was false.
During the year following the November 20, 2003 hearing, Health Net submitted briefs and letters claiming that the Second Restitution was "in the process" of being carried out. However, there is no evidence, during the entire year after the November 20, 2003 hearing, that any "process" for carrying out the Second Restitution ever took place. Outside counsel knew that. Inside counsel knew that. And Health Net knew that. At the Rule 37 Integrity Hearing, Mr. Dominianni testified vaguely that he "reached out" to several unidentified "IT people" at Health Net but that he never received any work product from those individuals and did nothing. This pattern of non-action continued for over a year. In an attempt to explain this inaction by Health Net to effectuate the promised Second Restitution, Dominianni, Esq. testified that "at the time [he] thought there was some chance that Mr. Barry may follow up and some chance that he may not." He further testified that he did not follow up with Mr. Barry to confirm or memorialize any agreement.*fn22 Outside counsel at McCarter & English repeatedly asked the client's inside general counsel to do something to honor the representations being made to this Court. Yet Heath Net did not communicate further with NJ-DOBI for more than a year nor did it ever commence a process for making a Second Restitution. Then the alarm went off.
On December 10, 2004, Plaintiffs wrote to the Court expressing their frustration and disbelief at the amount of time it was taking to commence the Second Restitution. On December 13, 2004, Magistrate Judge Shwartz began a series of conferences with the parties regarding various discovery matters and about the progress, or lack thereof, of the Second Restitution. The Court issued an Order demanding an explanation for why, over a year after it was promised in this Court's hearing, the Second Restitution had still not happened. Mr. Dominianni and others within HNNE then sprang into action for the first time. On December 14, 2004, a day after the first conference with Magistrate Judge Shwartz, Dominianni began a project brief to identify ONET claims that were paid at outdated HIAA fee schedules in New Jersey between January 1, 1999 and June 30, 2001; to recalculate the payments at the updated HIAA fee schedule; and to issue refund checks to members. The project brief required the identification of all claims-including the original, reprocessed, and refund amounts-by Friday, December 17, 2004, just three days later. In other words, the job was short and could be done in just three days.
In an effort to make it appear that the Second Restitution had been underway all along, Mr. Dominianni submitted an affidavit to this Court on January 4, 2005, blaming the failure to accomplish the Second Restitution on the great amount of work needed to complete the task and on "inadequate continuity of work flow and personnel." The affidavit failed to state that no work had been done to commence the restitution for over a year until Magistrate Judge Shwartz demanded an explanation. The affidavit also failed to state that by the date of the affidavit, Mr. Dominianni knew that the "work," i.e. the calculations for the Second Restitution, had already been done two years earlier. This Court finds that Mr. Dominianni's Certification was misleading. Outside counsel Pendleton, whose firm submitted the affidavit to this Court, testified that it was misleading. In explaining its own role in submitting the misleading affidavit, McCarter & English stated that its role was merely as "scrivener."
Throughout this litigation, Defendants have employed an obstructionist approach to discovery. A great proportion of the problem originated with the client; however, counsel in certain instances also exacerbated the problem. Despite numerous specific Court Orders, Health Net never produced thousands and thousands of pages of relevant and responsive documents within the three-year-long discovery period. Many of these documents are highly relevant to the knowledge of key personnel at Health Net about the company's use of the outdated data described above. Yet, these documents appeared for the first time more than a year after the close of discovery, and only after this Court demanded them during the Rule 37/Integrity Hearing. Others appeared as Defendants' proposed trial exhibits and as exhibits to Defendants' summary judgment motions even though they had never been produced to Plaintiffs in discovery. Health Net did not even search for many documents until it decided to look for them for its own use at trial and for its defense at the Rule 37 Hearing. Despite repeated document demands, repeated court orders to produce, and repeated assurances that all appropriate e-mails were being produced, thousands of Health Net's employees' e-mails were never searched. Many others were lost permanently due to Health Net's e-mail retention/non-retention practices, which were only disclosed to the Court after the conclusion of the Rule 37/Integrity hearing. These practices were never disclosed to the Magistrate Judge who supervised discovery for over three years.*fn23 These non-compliant and deceptive discovery tactics caused Plaintiffs to waste huge sums of time and money conducting numerous depositions of Health Net witnesses without the benefit of their e-mails and other documents relevant to each deponent. Such a vast amount of discovery now needs to be redone that the task is virtually impossible.
What follows is a selected summary of discovery abuses that came to light as a result of the Rule 37/Integrity hearing.
1. Non-Production of Documents Responsive to Plaintiffs' Requests
Throughout the course of the Rule 37/Integrity hearing, Defendants produced documents for the first time that were never produced during the three-year-long discovery period in response to Plaintiffs' document demands and pursuant to court orders. As late as November 2006, thousands of pages emerged that were not produced in discovery. Many documents related to individuals whom Plaintiffs had already deposed years earlier. The vast majority of the documents that were not produced had been properly requested by Plaintiffs.
Non-production was the rule rather than the exception in this case. As of November 17, 2003, after document requests by Plaintiffs in both the McCoy and Wachtel matters, Health Net had produced under 7,000 pages of discovery and specifically represented to the Court that it had produced all relevant documents. In fact, thousands of pages of documents were never produced during discovery. January 10, 2005 was the final deadline for document discovery (set by Magistrate Judge Shwartz after Health Net requested 15 extensions of the discovery deadline.)*fn24 Over 12,000 pages of documents never produced in discovery were offered in support of Defendants' Summary Judgment Motions. These documents had been demanded by Plaintiffs but never disclosed during the discovery period. Approximately 8,000 pages of never-produced documents were designated as trial exhibits. These, too, were properly within the scope of Plaintiffs' document demands. Defendants did not alert Plaintiffs or the Court about these 20,000 pages of never-produced discovery despite Plaintiffs' repeated entreaties asking whether Defendants' production was complete and seeking a certification of completeness of production pursuant to Magistrate Judge Shwartz's December 17, 2004 Order. Motions to compel were regularly made by Plaintiffs, using Magistrate Judge Shwartz's specific method pursuant to the Local Rules of this District. Health Net's argument that motions to compel were not made is specious.
Health Net's process for responding to discovery requests was utterly inadequate, relying on an in-house paralegal also responsible for approximately 60 other cases. Testimony at the Rule 37/Integrity Hearing revealed that when Health Net received document requests from Plaintiffs, it did not disseminate a comprehensive notice to employees who could reasonably be anticipated to possess responsive documents. Instead, Health Net directed its outside counsel to work with HNNE's local paralegal who would approach selected individuals about certain specific documents pursuant to instructions from Health Net's outside counsel.*fn25 Once he asked these specific individuals for specified documents, the paralegal generally did not follow up with them to see if they had further responsive documents unless specifically instructed to do so by outside counsel or by the senior litigation counsel for Health Net, Inc. Nor did the paralegal attempt to identify other employees with responsive documents. Health Net relied on the specified business people within the company to search and turn over whatever documents they thought were responsive, without verifying that the searches were sufficient. The process, in sum, was one of looking for selected specific documents by a specific person rather than all responsive documents from all Health Net employees who had such documents. Many of these specific employee-conducted searches managed to exclude inculpatory documents that were highly germane to Plaintiffs' requests.*fn26 Similarly, in February and March of 2003, Plaintiffs requested the complete file related to the NJ-DOBI Investigation, including but not limited to correspondence between Health Net and NJ-DOBI.*fn27
Although these documents should have been produced to Plaintiffs in May 2003, they were not produced and first came to light in September 2005 as a result of the Rule 37 hearing. Plaintiffs' request also should have yielded Ms. O'Donnell's e-mails about the First Restitution, including internal e-mails on the topic, but Health Net did not produce them even remotely comprehensively. Magistrate Judge Shwartz's July 23, 2003 Order reinforced this by ordering Health Net to disclose "all emails containing information related to the HIAA issue and Consent Order." Still, many of the emails covered by Plaintiffs' request and ...