Sixth Circuit Court of Appeals upholds Varnum win in precedent-setting case

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 The Varnum legal team on Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, left to right: Perrin Rynders, Kyle Konwinski, Laura Harner, Ben Anderson, Aaron Phelps, and Steve MacGuidwin

PHOTO COURTESY OF VARNUM

By Cynthia Price
Legal News

Among the many issues that figured into the recent Sixth Circuit Court of Appeals decision to uphold the U.S. Court for the Eastern District of Michigan’s ruling in Hi-Lex Controls, Inc. vs. Blue Cross Blue Shield of Michigan is at least one that is likely to have broad repercussions.

And that is certainly a good reason that the Department of Labor (DOL) saw fit to get involved with the case, submitting an amicus brief and

sending a lawyer to the Sixth Circuit hearing.

The issue most likely to set a precedent for the future concerns the circumstances that allow a six-year versus three-year statute of limitations under ERISA, or the Employee Retire-

ment Income Security Act of 1974.

The DOL’s Robin Springberg Parry appeared before the Sixth Circuit on March 19 to argue the department’s position, alongside a team of Varnum attorneys: partners Perrin Rynders and Aaron M. Phelps, and associate Stephen F. MacGuidwin.

Associates Kyle Konwinski and Ben Anderson and paralegal Laura Harner filled out the team representing Hi-Lex Controls, Inc., Hi-Lex America, Inc., and Hi-Lex Corporation Health and Welfare Benefit Plan (collectively, Hi-Lex).

The heart of the matter is simple: Blue Cross Blue Shield of Michigan (BCBSM) had a practice of adding marked-up fees to hospital claims made by Hi-Lex employees without revealing them to the companies as fees. Making the hidden fees look as if they were not separate from the claim dollars had the effect of allowing BCBSM to appear more competitive to companies seeking a plan.

If BCBSM is considered a fiduciary for ERISA purposes, as the lawsuit brought by Hi-Lex claimed, BCBSM was arguably engaged in self-dealing.

Judge Victoria A. Roberts of the Eastern District U.S. Court agreed that BCBSM fit the definition of fiduciary and found BCBSM to have breached its fiduciary duties, as stated in ERISA?406(b)(1): “A fiduciary with respect to a plan shall not— (1) deal with the assets of the plan in his own interest or for his own account...”

The lawsuit asked for full re-

imbursement of the fees in question since the practice began in 1994, and Judge Roberts of the Eastern District U.S. Court ruled that BCBSM had to pay Hi-Lex $6.1 million, including interest.

BCBSM appealed, and on May 14, a Sixth Circuit Court of Appeals panel consisting of Eugene E. Siler, Jr., Damon Keith, and John M. Rogers upheld the district court’s ruling.

The contentious issue regarding the statute of limitations on bringing suit concerns the ERISA provision that, in cases of fraud or concealment, the statute of limitations is six years from the time such fraud or concealment is discovered.

Hi-Lex officials discovered the practice in 2007 based on a change in BCBSM reporting, and the lawsuit was brought in 2011, so that distinction was critical.

The Department of Labor amicus brief put the situation this way:

“ERISA section 413 provides that where participants and the Secretary  [of Labor] have been prevented from discovering fiduciary breaches via ‘fraud or concealment,’ they may sue within six years after they discover the breach. The district court correctly read section 413 to give independent meaning to both terms disjunctively, rather than requiring both fraud and additional concealment of the fraud.  This approach respects the text of the statute and the ordinary meaning of the terms ‘fraud’ and ‘concealment.’ It also is consistent with Supreme Court and Sixth Circuit holdings that material omissions by fiduciaries are fraud, and that self-concealing fraud by fiduciaries, without additional concealment efforts, delays the running of a claim. The district court correctly found that Blue Cross's deceptive conduct kept Hi-Lex from discovering the claim before 2007, and therefore the suit is timely.”

The District Court had already agreed with Varnum’s similar argument, and the Sixth Circuit opinion, written by Judge Siler, affirmed.

Varnum’s Steve MacGuidwin says, “By choosing to ‘publish’ its decision in the appeal, the Sixth Circuit has indicated that this case sets the precedent on these legal issues for future cases.” That applies to both the statute of limitations question and the boundaries around what constitutes fraud, both of which were discussed in depth in the Sixth Circuit opinion.

In the District Court, the dispute centered on whether BCBSM had actually acted fraudulently, according to MacGuidwin, although the statute of limitations issue as well as if BCBSM actually fit the definition of “fiduciary” figured prominently. The BCBSM attorneys, who came from the Bodman firm in Detroit, argued that language in the provider’s agreement with Hi-Lex which read, ““Your hospital claims cost reflects certain charges for provider network access, contingency, and other subsidies as appropriate,” should have made it clear, but the courts ruled that the agreement language was insufficient, both before and after it was modified somewhat in 2002. The Sixth Circuit opinion called it “opaque and misleading.” In addition, the fees did not appear as a separate line item in reports BCBSM made to Hi-Lex.

Varnum attorneys had uncovered internal memos that indicated BCBSM intentionally hid the fees, and in particular did so to gain an advantage over their competition.

The multi-generational Varnum team worked collaboratively every step of the way, brainstorming strategy and dividing tasks. “That made us think more critically about our case at the beginning, so when it came to trial, we already had a clear vision of what we wanted to present to the court,” MacGuidwin says.

In fact, he adds, the team even took steps to minimize potential communication problems caused by characteristics of their particular age groups, based on a general presentation Varnum arranged for all its attorneys.

After the Sixth Circuit decision, Perrin Rynders, who led the team, said,“We are very happy that the judgment was affirmed.”

And well they might be, because Varnum has no fewer than 35 additional cases in different stages of litigation before the Eastern District, some of which were stayed awaiting the results of the appeal. The team expects that the court’s decision will expedite at least some of those cases.

And there is another outcome which should have a broadly positive effect even for those not involved in the suits: apparently, BCBSM has stopped the practice of concealing fees in the “hospital claims” category, as of 2012.