A settlement of an antitrust lawsuit alleging that a group of hospitals conspired to underpay their nurses did not represent excluded “disgorgement” and therefore was not excluded from coverage under William Beaumont Hospital’s management liability insurance policy, according to a January 16, 2014 Sixth Circuit decision. The opinion will likely be of particular interest to policyholder advocates disputing insurers’ position that an amount for which insurance coverage is sought represents excluded disgorgement or restitution. A copy of the Sixth Circuit’s opinion can be found here.
In 2006, two nurses, neither of whom worked for Beaumont, filed a class action against eight Detroit-area hospitals including Beaumont, alleging that the hospitals had violated the Sherman Act by conspiring to depress nurses’ wages, and by exchanging information about nurses’ wages, which had the effect of depressing wages. The nurses, who sought to “recover for the compensation properly earned …but unlawfully retained by such hospitals,” claimed damages of over $1.8 billion. The trial court granted summary judgment on a portion of the nurses’ claims but allowed the claims that the hospitals had unlawfully shared information to proceed.
Beaumont submitted the nurses’ antitrust lawsuit as a claim under its management liability insurance policy. The policy expressly provided coverage for antitrust claims, at a stated “covered percentage” of 80 percent. The policy was amended by endorsement to include within the definition of “Loss” the “multiplied portion of any multiplied damages award.” The endorsement went on to provide with respect to a Claim “based upon, arising from or in consequence of profit, remuneration or advantage to which an Insured was not legally entitled,” that Loss “shall not include disgorgement by any Insured or any amount reimbursed by any Insured Person.”
Upon receipt of Beaumont’s claim, the insurer agreed, subject to a reservation of its rights under the policy, to advance eighty percent of the hospital’s defense costs (which came to about $3.4 million). The insurer also participated in discussions to settle the underlying claim. While the settlement negotiations were underway, Beaumont filed an action seeking a judicial declaration that the insurer was obligated to indemnify the hospital for any settlement amounts. The insurer counterclaimed, arguing that the settlement represented disgorgement and also that it did not represent a loss and therefore was not covered under the policy.
Beaumont ultimately settled with the nurses for approximately $11.3 million. Subject to a right of reimbursement, the insurer paid the hospital 80 percent of the settlement, or about $9 million. Both the hospital and the insurer continued to pursue their respective claims in the coverage action. The court in the coverage action granted Beaumont’s motion for judgment on the pleadings and dismissed the insurer’s counterclaim. The insurer appealed the lower court’s ruling to the Sixth Circuit.
The January 16 Opinion
In a January 16, 2014 opinion written by District Court Judge James G. Carr (sitting by designation) for a three-judge panel, the Sixth Circuit affirmed the lower court’s ruling on behalf of Beaumont and rejected the insurer’s argument that the settlement represented a “disgorgement” for which coverage is precluded under the policy and also rejected insurer’s argument that insuring the settlement amount would be against public policy.
The insurer had argued that the underlying complaint alleged that the hospital had gained nursing services at below-market compensation and that the settlement was disgorgement of the value of that advantage. In support of its position, the insurer relied on case law (including the Seventh Circuit’s 2001 opinion in Level 3 Communications Inc. v. Federal Insurance Company) holding that even amounts labeled as damages that are “restitutionary in character” are uninsurable.
The hospital, in turn, argued that disgorgement and restitution are distinct remedies, and that the policy explicitly excludes only disgorgement, and that in any event, the nurses sought only compensatory damages, not restitution or disgorgement. The hospital argued further that money unlawfully retained is not the same as money wrongfully acquired and that money paid to resolve a legal dispute is not necessarily a return of something to which the payor was not legally entitled in the first place.
The appellate court said that it found Beaumont’s arguments “convincing,” noting that though the insurer “used the terms disgorgement and restitution interchangeably,” the exclusionary clause on which the insurer sought to rely “itself specifically states that only disgorgement is not a covered loss.” The court observed that disgorgement and restitution are close “but not interchangeable.” Referring to a dictionary definition of “disgorge” meaning “to give up illicit or ill-gotten gains,” the Court said
We find that the hospital never gained possession of (or obtained or acquired) the nurses wages’ illicitly, unlawfully or unjustly. Rather, according to the nurses’ complaint, Beaumont retained the due, but unpaid, wages unlawfully. This is not a mere semantics. Retaining or withholding differs from obtaining or acquiring. The hospital could not have taken money from the nurses because it was never in their hands in the first place. While the hospital’s alleged actions are still illicit, there is no way for the hospital to give up its ill-gotten gains if they were never obtained from the nurses. Therefore, the damages Beaumont paid in settlement of the claim does [sic] not constitute disgorgement.
The court went on to note that the nature of the damages the nurses sought was purely in the form of compensatory damages for an antitrust violation, rather than a return of a wrongfully withheld amount.
The appellate court also rejected the insurer’s argument that coverage for the settlement was barred as a matter of public policy because (the insurer argued) payment of the settlement amount would permit the hospital to profit from its own wrongdoing by allowing it to transfer the cost of its wrongdoing to its insurer. The court found that the insurer had failed to show that the payment of the settlement would violate Michigan public policy, and rejected the insurer’s attempt to rely on Level 3 and other cases because these other cases, in which the insured unlawfully obtained something from the underlying plaintiff, are inapposite in this case where the hospital did not obtain anything from the nurses, bur rather allegedly unlawfully withheld compensation from them.
There are a variety of interesting things about this opinion, but for me the important thing is to focus on the nature of the claims being settled. The plaintiff class consisted nurses from eight different hospitals, not just from Beaumont. (Indeed, the two named plaintiffs who initiated the antitrust lawsuit didn’t even work at Beaumont). To me it doesn’t even make sense to say that the settlement represented either a disgorgement or restitution of unpaid wages, as Beaumont never owed any wages to the nurses at the other seven hospitals; therefore it could not have underpaid them, and the amount paid in settlement with them could not have represented either a disgorgement or restitution of underpaid wages as to those claimants.
The plaintiffs sought – and the settlement represented – a form of compensatory damages for the alleged conspiracy to suppress wages at all eight of the hospitals, not just at Beaumont, and the settlement represented damages for the alleged conspiracy to suppress wages at all eight hospitals. Viewed in that light, this decision is best understood as holding that a policy exclusion precluding coverage for disgorgement amounts does not exclude coverage for a settlement representing a compromise of a compensatory damages claim.
Just the same, policyholder-side advocates will be particularly interested in two aspects of the Court’s analysis of the disgorgement issue: first, that the difference between disgorgement and restitution is important, and that in the absence of an express policy preclusion of restitutionary amounts, a policy exclusion precluding coverage for disgorgement may not preclude coverage for restitution; and second, a policy exclusion of disgorgement amounts does not preclude coverage for amounts wrongfully withheld (as opposed to amounts that were wrongfully acquired).
The first of these two considerations may be particularly significant, as the question of whether or not a liability policy may provide coverage for restitutionary amounts is a frequently recurring issue. Many carriers take the position that coverage for restitutionary amounts is precluded. Policyholder advocates resisting this position may find value in the Court’s analysis that restitution is not the same of disgorgement and that a policy provision precluding coverage for disgorgement may not preclude coverage for restitutionary amounts.
However, carriers seeking to deny coverage for restitutionary amounts often rely on public policy arguments rather than just provisions of their policy. They argue that public policy prohibits coverage for the restitution of amounts wrongfully obtained. That is where the Court’s analysis of the difference between amounts that are wrongfully acquired and amounts that are wrongfully retained is instructive; while public policy may or may not preclude coverage for amounts that are wrongfully acquired, the same public policy arguments may not – at least according to the Sixth Circuit and at least under Michigan law — preclude coverage for amounts that are wrongfully retained.
One argument that carriers usually also assert when the try to deny coverage for restitutionary amounts is that the insured suffered “no Loss,” as the insured was simply restoring amounts to which it was not entitled in the first place. The Sixth Circuit did not address “no loss” argument in detail here. It may have been that the carrier did not emphasize this argument, as the nature of the nurses’ claims does not lend itself well to a “no loss” argument. The plaintiffs were not just suing Beaumont to force the hospital to pay the amount it had underpaid its own nurses; the plaintiffs were trying to collect damages from Beaumont to compensate nurses at all eight of the hospitals for suppressing wages. It can’t be said that Beaumont suffered “no loss” for paying compensatory damages to a class of nurse claimants from the eight hospitals, as its settlement with the class of nurses from the eight hospitals clearly represented something more than or different from the amount it has underpaid the nurses at its own hospital.
The Sixth Circuit’s decision in the Beaumont Hospital case is the latest in which a court has been willing to examine the true nature of the amount for which an insurer is arguing coverage is precluded because the amount represents a precluded disgorgement. As discussed here, in a June 11, 2013 opinion, the New York Court of Appeals held that Bear Stearns is not barred from seeking insurance coverage for a $160 million portion of an SEC enforcement action settlement labeled as “disgorgement,” where Bear Stearns’ customers rather than Bear Stearns itself profited from alleged misconduct. In both of these cases, the courts were willing to examine the nature of the amount for which coverage is sought, rather than simply accepting the insurer’s characterization of the amount as disgorgement for which coverage is precluded.
In trying to make use of the Sixth Circuit’s opinion, policyholder advocates will have to contend with the fact that the opinion was published with the designation “Not Recommended for Full Text Publication.” It is unclear what this designation could possibly be intended to mean. First of all, the full text of the opinion has been published on the Sixth Circuit’s website and is freely available to anyone in the world with Internet access. The opinion obviously has been published and the full text obviously is available, so the designation the court gave the opinion is a peculiar bit of flummery.
I am always concerned when an appellate court designates something as “not for publication” or otherwise as restricted in some way. At a minimum, by operation of the applicable appellate rules, the restricted designation has no effect on litigants’ ability to cite to the opinion, as under Fed. R. App. Proc. 32.1, a restricted publication designation is no constraint on parties’ rights to cite the opinion.
Given this rule, it makes me very uneasy that any court would still try to provide a restricted designation. I worry that when a court issues an opinion with a restricted designation that the designation represents some form of confession that the opinion is not their best work, as if they just don’t think it is good enough to be published. I worry that the designation says we didn’t work as hard on this opinion or maybe that we weren’t as thorough as we are on the opinions that are good enough to publish. I am not sure what courts think they are doing by putting a restricted designation on an opinion, but it is a questionable practice that in the age of the Internet really should be dropped.
In any event, in light of Fed. R. App. Proc. 32.1, litigants can cite to the Sixth Circuit’s opinion in the Beaumont Hospital case, but they will still have to figure out how to deal with the fact that the appellate court released the opinion with a restricted publication designation.
One final note. This case underscores a point I have made in prior posts on this site, which is that anttrust coverage is an important part fo the protection that is (or should be) provided by management liablity insurance. The underlying claim here underscores the diversity of kinds of disptes that might arise as antitrust claims. Unfortunately, many management liability policies contain antitrust exclusions, some of which can be quite broad. As I have emphasized in the past, there ought to be a strong preference in favor of insurance options that do not contain antitrust exclusions or that restrict antitrust coverage as little as possible.
Annals of Parenting: After our kids had returned to college following the recent holidays, I was cleaning out their car, and I found this in the trunk. I suppose there is that moment for every parent when they have to decide if they really want to know why their children had a papier-mâché Godzilla mask in the trunk of their car?