The opinion of the court was delivered by: GRIESA
On May 2, 1983 the Second Circuit reversed and remanded this court's approval of the settlement in this action and approval of counsel fees. Malchman v. Davis, 706 F.2d 426 (2d Cir. 1983).
Upon reconsideration in light of the remand, the court determines that the settlement is fair and reasonable and that plaintiffs' counsel are entitled to attorneys' fees and disbursements of $2.325 million.
The background facts are well summarized in the Court of Appeals opinion as follows:
This litigation and the companion state court action, Conway v. Davis, No. 10535/76 (N.Y.Sup.Ct., N.Y.Cty.), principally arise from the relationship between Leonard Davis and various corporate entities owned or controlled by him and two nonprofit organizations of elderly persons, the National Retired Teachers Association (NRTA) and the American Association of Retired Persons (AARP).
Dr. Ethel Percy Andrus, a retired California high school principal, founded the NRTA in 1947 to promote the interests of retired teachers. In 1956, at Dr. Andrus's request, insurance broker Leonard Davis persuaded a national insurance company to underwrite a voluntary group health insurance program for the members of NRTA. In 1958, again with Davis's help, Dr. Andrus formed the AARP to serve the interests of Americans over 55 years old. AARP offered voluntary group health insurance to its members similar to NRTA's. Since their founding, the two associations have attracted millions of members and presently have, between them, over 13 million members throughout the United States. Meanwhile, davis formed the companies that in time became Colonial Penn Group (CPG) to underwrite health insurance policies in group plans and to provide other services to the associations' members. From 1958 on Davis and his companies managed the AARP and NRTA insurance plans. The associations encouraged their members to purchase insurance, travel and other products and services exclusively through Davis-controlled entities, including insurance subsidiaries, group travel companies, and employment agencies. Davis's entities, moreover, had the exclusive right to advertise in the associations' publications and were permitted to do so at what appears to be substantially less than the fair market value of such advertising. CPG also maintained the membership lists of the associations in its computers.
As AARP and NRTA grew, so did Colonial Penn and its various subsidiaries, its total revenues being $171 million in 1972 and $445 million in 1976. The AARP/NRTA health insurance plans generated over $261 million in premiums in 1977. As of January 1, 1976, CPG led 929 major United States corporations in profitability with a five-year average annual return on capital of 33.5% a figure nearly double the profitability of either IBM or Xerox and three times greater than the median return of 11.3% for the entire insurance industry.
This litigation was commenced initially in Supreme Court, New York County on May 4, 1976. The complaint was filed on behalf of Frieda Lederer as representative of the class of AARP members who had purchased group health insurance from CPG on AARP's recommendation. At a subsequent time, Frieda Lederer died and other named plaintiffs were added. The suit was against CPG, Davis and other defendants. The complaint sought injunctive relief only and no damages. The original counsel for plaintiffs was the law firm then known as Kaufman, Taylor, Kimmel & Miller (presently Kaufman Malchman & Kirby). Defendants promptly moved to dismiss the complaint. While the motion was pending, the firm then known as Shea, Gould, Clemenko & Casey (now Shea & Gould) appeared as co-counsel for plaintiff. The original complaint was dismissed upon consent with leave to replead. An amended complaint was filed in the state court action in July 1977. Gerta Conway was named as an additional plaintiff, and the state court action thereafter carried the name Conway v. Davis. The amended complaint alleged that defendants had committed fraud and breach of fiduciary duty in arranging with CPG for group health insurance and other services to be offered to AARP members. The amended complaint alleged that AARP had entered into improper arrangements with CPG, and had failed to select independently a group health insurance carrier and purveyors of other services which would be recommended by AARP.
In October 1977 Lederer and Conway, joined by Nathan Malchman, commenced the federal court action. It was brought as a class action under the federal antitrust laws. The class, as described in the complaint, consisted of the insurance-buying members of AARP. The federal action was basically the same as the state action, except that the federal action was based on the antitrust theory.
Between November 1977 and May 1978 there was motion practice in the state court action. Defendants' attempt to dismiss the action was unsuccessful, and defendants served their answers in the state court action in June 1978.
Discovery commenced in the state action on June 12, 1978 when defendants served interrogatories and document requests. In July 1978 plaintiffs served document requests. In response to the mutual document requests, plaintiffs produced over 4,000 pages of documents and defendants produced over 100,000 pages of documents, of which plaintiffs made copies of over 65,000 pages.
Plaintiffs also filed lengthy answers to interrogatories.
The parties chose, for good and sufficient reason, to conduct almost all their discovery in the state court action. It is easy to understand why this was so. The litigation originated in the state court. Moreover, motion practice directed to the sufficiency of the complaint was completed early in the proceedings. There was no question of the jurisdiction of the state court over the fraud and breach of fiduciary duty claims, as there was in the federal court action, where subject-matter jurisdiction was seriously challenged, as will be described in later in this opinion. In any event, it was understood that the state court discovery would be used in the federal court action.
Depositions in the state court action commenced in January 1979. Plaintiffs deposed fourteen persons. Defendants deposed four persons. These depositions were conducted through mid-May 1980. There were sixty-six days of testimony resulting in 11,850 pages of transcript. There were numerous disputes during the discovery resulting in applications to the state court.
Plaintiffs moved in the state court action on January 8, 1979 for an order certifying the class. Defendnts objected on the ground that they had not completed discovery of the adequacy of the representatives. On February 15, 1979 it was stipulated in the state court action to withdraw the motion for class certification until further discovery had been cocmpleted.
To return to the federal action, on August 11, 1978 a motion was filed to dismiss the federal complaint on the grounds that the action was barred by § 2(b) of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), and that plaintiffs lacked standing to assert the antitrust claims. Extensive briefs were filed on this motion. The questions presented were of considerable difficulty. The court requested further submissions and stipulations of fact. This additional work was completed in April 1980.
By the spring of 1980 serious settlement negotiations were taking place.One immediate result of this was that on June 16, 1980 the parties requested the federal court to withhold decision of plaintiffs' motion to dismiss.
The following events relating to the ultimate settlement of the action occurred. In February 1979 AARP and NRTA both passed a series of resolutions which provided for the discontinuance of their endorsement of certain CPG products other than group health insurance, and authorized a study of health insurance programs to determine whether the Associations' arrangement for group health insurance with CPG should continue after the then current term expired in June 1981.
In January 1980 the Associations decided to initiate a competitive bidding process to determine who would underwrite the group health insurance programs after June 1981. On September 1, 1980 the Associations signed an agreement with CPG. At least one of the purposes of this agreement was to provide for the transition from CPG to another insurer in the event that CPG was not selected for the health insurance programs commencing in July 1981. The agreement provided in detail for transitional arrangements in the event a new carrier was chosen and provided for uninterrupted coverage for insured Association members. It also provided that CPG would transfer the custody and maintenance of the Associations' membership lists to the Associations.
Another feature of the September 1, 1980 agreement was that CPG would pay the Associations a total of $6,866,664 and would spend not less than $4.5 million to promote membership in the Associations for the period through June 30, 1981.
A Stipulation of Settlement regarding the state and federal actions was entered into on November 3, 1980. This is the settlement agreement which is before the court. The stipulation provided that:
1. The Associations would not enter into a contract with any insurance carrier to underwrite their group health insurance programs for the period from July 1, 1981 except through he request for proposals procedure initiated in early 1980.
2. The selectionof any group health insurance carrier would be made by the boards of directors of the Associations in consultation with the trustees of the AARP and NRTA insurance plans. The boards of directors would consider, among other factors, premiumlevels, claim service and marketing abilities which would be most advantageous for the members of the Association.
3. The trustees of the insurance plans would serve for periods not exceeding six years and would be solely responsible to the boards of directors of the Associations.
4. The Associations would accept advertising for their magazines and news bulletins from any party at the prevailing rate schedule, subject to limitations which the boards of directors of the Associations might impose with regard to the appropriateness of the subject matter. Such limitations could not restrict advertising to the products and services of one advertiser.
5. Not later than July 1, 1981 the Associations would obtain new data processing and new membership promotion services, previously provided by CPG.
6. Honorary Presidents (one of whom is Leonard Davis) would attend board of directors and executive committee meetings only upon specific invitation, and would not attend any meeting at which the endorsement of any product or service by the Associations was to be considered.
7. No officer or director of CPG, other than the current Honorary Presidents, would be permitted to attend any board of directors or executive committee meeting except upon special invitation and for the limited purpose of presenting information.
8. No officer or director of CPG, other than the current Honorary Presidents, would hold any position in the Association.
9. In the event that the boards of directors of the Associations determined to endorse or recommend products or services in addition to group health insurance, the Associations would not limit their endorsements solely to the products and services of one vendor.
These provisions to some extent confirmed the resolutions of February 1979 and other steps by the Associations leading up to the agreement of September 1, 1980. To some extent the Stipulation went further, as in the provisions ensuring the independence of the Associations from CPG influence. However, it is obvious that the vigorous prosecution of these lawsuits was the principal cause, if not the sole cause, of the revisions in practices carried out by the Associations commencing in February 1979.
The Stipulation of Settlement contains certain additional terms relating to the disposition of the litigation. It was agreed that the plaintiff class would be expanded from insurance-buying members of AARP to all persons who were members of AARP or NRTA as of November 1, 1980. This agreement was to apply to both the state and federal actions.NRTA was to be added as a defendant in both actions. Plaintiffs' counsel were to apply to the state court for fees and disbursements not exceeding $2.325 million, the first $1 million of which was to be paid 90% by CPG and 10% by the Associations, the excess over $1 million was to be paid 70% by CPG and 30% by the Associations.The agreement provided that defendants could withdraw from the settlement if more than 10,000 class members opted out of the class and sought monetary relief.
The Stipulation of Settlement contains a broad provision barring claims by members of the class, either on behalf of the class or derivativelyon behalf of the associations.
In the state action, Peter Johnson was appointed referee to report on the fairness of the settlement agreement. Referee Johnson held hearings commencing in January 1981 and continuing through April 1981. On May 27, 1981 the referee filed his report recommending approval of the settlement and recommending an award of fee and disbursements of $2.325 million. The justice who will rule on the matter in the state court is Justice Israel Rubin. The matter is still under submission before him.
On June 19, 1981 the federal district court entered an order conditionally certifying the class as described in the Stipulation of Settlement. Notice of hearing on the settlement and fee application was given. Hearings were held, resulting in the ruling and judgment approving the settlement and approving the award of fee and disbursements in the amount of $2.325 million. The judgment was entered on September 10, 1982. This led ...