Attorney fee deal ‘a red flag’ for collusion, federal judge says

Federal Judge William H. Alsup refused to bless a deal to resolve a class action between UnitedHealthcare Insurance and patients who claimed the insurer improperly denied claims to cover liposuction to treat a chronic health condition, pointing to a "red flag indicating a potentially collusive settlement."

"Sadly, this is another class settlement proposal in which class counsel get vast amounts of cash but the class members get merely a cosmetic settlement," Alsup wrote in his order issued in San Francisco on Tuesday.

Mary Caldwell sued UnitedHealthcare after it denied her claim for a liposuction to treat lipedema, a chronic condition that results in the buildup of fat in the legs and arms. The insurer has maintained that the surgery is an unproven treatment for the condition.

In a settlement reached in July less than a month before the trial was scheduled to start, UnitedHealthcare agreed to change its policy position to cover liposuction for people suffering from lipedema if certain undisclosed criteria are met. The deal allowed class members whose claims for surgery were previously denied to have their requests reviewed again and for people who paid out of pocket to submit new claims for reimbursement.

Under the deal, the insurer said it would not contest an award of $875,000 in fees.

But Alsup, in an order denying preliminary approval of the settlement, rejected the deal because of the clear sailing agreement for attorney fees. He said that such agreements, which are when a defendant provides for the payment of fees separate from class funds, have been held by the 9th U.S. Circuit Court of Appeals to be an indicator that an inappropriate settlement was reached.

Clear sailing agreements, the judge found, carry the risk of "enabling a defendant to pay class counsel excessive fees and costs in exchange for counsel accepting an unfair settlement on behalf of the class." He noted that he used to have a standing order disfavoring any deal that contains an agreement over attorney fees.

"This violation stands out as a sore thumb and a red flag," he wrote.

Alsup also concluded that the settlement is unfair to class members because it's impossible to know if they will qualify under the new criteria and that existing medical records suggest "some potentially deserving class members will not meet the criteria."

Responding to both sides stating that more information is needed to definitively determine eligibility, the judge found that plaintiffs should not "bear the burden of righting an improper denial."

He added, "United does not even agree to affirmatively request the additional information needed for reprocessing prior denials of class members still covered by United or to work with physicians of denied class members."

The settlement waived all damages claims with the exception of a fund for out-of-pocket expenses. Caldwell v. UnitedHealthcare Insurance Co., CV19-02861 (N.D. Cal., filed May 23, 2019).

"The court sees such a large fee for the attorneys, little benefit to the class members, and substantial downsides to the class -- namely, that class members are forced to accept the new medical criteria and cannot challenge them and that potentially deserving class members will be excluded," Alsup wrote.

The class was represented by Gianelli & Morris, while UnitedHealthcare was represented by Hogan Lovells US LLP. Attorneys for neither firm responded to requests for comment.