Antitrust Law Daily Wrap Up, ANTITRUST—EDMich: Sherman Act Settlement Was Not “Disgorgement” Precluding Coverage Under Insurance Policy, (Mar 15, 2013)

By Tobias J. Gillett, J.D., LL.M.

An insurance company must provide indemnification coverage to a hospital for funds paid to settle a Sherman Act Section 1 lawsuit, because the relief sought by the nurse plaintiffs in the lawsuit was not a disgorgement remedy for which the insurance policy denied coverage, the federal district court in Detroit has ruled (William Beaumont Hospital v. Federal Insurance Co., March 13, 2013, Rosen, G.).

On June 15, 2007, a class of registered nurses (RNs) filed their third amended complaint against various Detroit-area hospitals, and named William Beaumont Hospital (WBH) as a defendant for the first time. The RNs alleged that the hospitals had conspired “to depress the compensation levels of registered nurses,” and that they shared compensation information in a manner that “suppressed competition among Detroit-area hospitals in the compensation of RN employees,” in violation of Section 1 of the Sherman Act. The RNs sought to “recover for the compensation properly earned by RNs employed at Detroit-area hospitals but unlawfully retained by such hospitals.”

WBH had an insurance policy through Federal Insurance Company that provided coverage for losses sustained from legal claims that WBH became obligated to pay, including antitrust claims. The policy contained an endorsement providing that the definition of “loss” would not “include disgorgement by any Insured or any amount reimbursed by any Insured Person” with respect to claims “based upon, arising from or in consequence of profit, remuneration or advantage to which an Insured was not legally entitled.”

On March 20, 2012, WBH and the RNs entered into a settlement agreement requiring WBH to pay $11,342,904 into a settlement fund. In a previous “Defense Agreement,” Federal agreed to pay the covered percentage of WBH’s defense costs, subject to a reservation of its right to seek reimbursement if those costs were determined to be unavailable under the policy. Federal also agreed to pay the covered percentage of the settlement fund, subject to its right to recover the amount paid to the extent the settlement was not a covered loss under the insurance policy. The present decision addressed whether Federal had an obligation to defend WBH and provide indemnity coverage.

Federal contended that the RNs’ antitrust claims were, at least in part, “based upon, arising from or in consequence of profit, remuneration, or advantage to which [the defendant hospitals] w[ere] not legally entitled,” and that the relief the RNs sought contained at least an element of “disgorgement and/or restitutionary relief.” Therefore, Federal was not obliged to pay any portion of the settlement amount that was properly characterized as “disgorgement and/or restitutionary relief.” Federal based this argument on passages from the RNs’ complaint in which they stated that they sought compensation “unlawfully retained” by the hospitals, and that they had “suffered substantial economic harm in the form of lost compensation.”

The court rejected the argument that the references to “lost” and “unlawfully retained” compensation meant that the policy provision denying coverage for “disgorgement” applied to deny WBH coverage. The loss limitation applied only to claims “based upon, arising from or in consequence of profit, remuneration or advantage to which an Insured was not legally entitled.” However, a claim under Section 1 of the Sherman Act was a claim alleging “an agreement with anti-competitive effects that injures the plaintiff,” and would not require a plaintiff to show that a defendant obtained a “profit, remuneration or advantage to which [it] was not legally entitled.”

Even if the limited definition of “loss” applied, however, it would only deny WBH coverage if the RNs sought “disgorgement” relief. Although the reference to “unlawfully retained” compensation might be “viewed as alluding to notions of disgorgement,” the RNs’ prayer for relief did not include any request for disgorgement. The prayer for relief did include a request for “such other relief deemed proper to this Court,” but interpreting that request as including disgorgement “would run afoul of both the record and the principles of antitrust law,” in that Sherman Act damages should be viewed as compensation for “loss sustained by reason of tortious or proscribed acts,” in the court’s view.

Moreover, the RNs’ complaint sought a recovery based on the difference between the RNs’ actual earnings and the amount they could have received in the absence of the hospitals’ conspiracy, rather than on any ill-gotten gains the hospitals might have obtained. Further, the settlement provided for distribution of the settlement amount based on a percentage of the total wages paid by WBH to the RNs during the relevant period, not on any profit or financial advantage gained by WBH. The record of the antitrust litigation did not “evidence any ‘disgorgement’ by [WBH] that would be excluded from the term ‘loss,’” according to the court.

The court also rejected Federal’s argument, based on the Seventh Circuit’s 2001 decision in Level 3 Communications, Inc. v. Federal Insurance Co., 272 F.3d 908, that “coverage for restitution or disgorgement is uninsurable as a matter of public policy.” The court initially observed that the policy already excluded coverage for disgorgement, “without the need for any sort of judicial construction.” Moreover, Federal failed to cite any case holding that disgorgement was not insurable under Michigan law, or adopting an “’interpretive principle’ of the sort applied in Level 3 Communications.”

Even if it did apply, the “interpretive principle” in Level 3 Communications would not bar coverage for WBH, in the court’s view. In Level 3 Communications, the underlying lawsuit involved a claim that the insured had “obtained the plaintiffs’ company on false pretenses.” The plaintiffs sought to rescind the transaction and to recover the value of the plaintiffs’ shares, a remedy the court in that case considered “restitutionary in character.” In the present case, however, the RNs sought “ordinary compensatory damages” for alleged Sherman Act violations.

Furthermore, the court observed that “it would be problematic and contradictory to offer coverage” for the Sherman Act claim, “but then to withhold coverage for the damages resulting from such a claim.” The court concluded, however, that it did not have to address the “concern of illusory coverage,” because it had concluded that the RNs were not seeking disgorgement.

The court also rejected Federal’s contention that the court should not resolve the case as a matter of law on WBH’s motion for judgment on the pleadings. Although WBH alleged that the RNs had not “requested and do not advance any theory of ‘disgorgement,’” and Federal expressly denied that statement, the dispute amounted to “a legal question properly addressed by the court,” rather than a factual conflict.

In addition, discovery requests propounded by Federal did not evidence factual issues that could not be resolved on the record. A request that WBH characterize the relief sought by the RNs was a question of law, not an issue of fact. Federal did not show how a request for details about the terms of the settlement agreement would “give rise to issues of fact” precluding resolution of the dispute as a matter of law. Finally, a request for information about the method through which the settlement agreement would be distributed did not preclude judgment as a matter of law, because Federal did not demonstrate how the distribution method “could somehow convert a compensatory remedy into a disgorgement of hospital profits.”

The case is No. 11-15528.

Attorneys: Keefe A. Brooks (Brooks Wilkins Sharkey & Turco, PLLC) for William Beaumont Hospital. Daniel J. Layden (Hangley Aronchick Segal Puling & Schiller) for Federal Insurance Co.

Companies: William Beaumont Hospital; Federal Insurance Co.

Cases: Antitrust MichiganNews