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In the first Eastern District decision to recognize and apply a “mediation privilege” under federal common law, U.S. Magistrate Judge Charles B. Smith has ordered the plaintiffs’ lawyers in a healthcare antitrust case to return mediation documents they obtained in discovery from a third party. “As almost all 50 states have elected to protect confidential mediation proceedings to facilitate settlement of cases, our refusal to recognize a similar federal privilege would frustrate their efforts to establish an expectation of privacy,” Smith wrote in his 15-page opinion in Chester County Hospital v. Independence Blue Cross. In the suit, CCH alleges that IBC and its subsidiaries “used anti-competitive tactics and agreements to amass and secure monopoly and monopsony power in the sale of health benefits and in the purchase of hospital services.” About 75 percent of the populace in the Philadelphia area is insured by IBC and its subsidiaries, the suit alleges, including most of CCH’s patients. “Rather than acting in the best interests of consumers and the community the hospital serves, the defendants have abused their monopoly and monopsony power by unconscionably suppressing reimbursement to the hospital while at the same time forcing consumers and employers to pay higher premiums,” the suit alleges. But IBC responded with counterclaims, alleging that CCH filed the suit 19 months into a five-year contract because it was hoping to cut a better deal. CCH claims in its suit that it lost $8.5 million in 2001 for care provided to IBC members. But IBC alleges in its counterclaim that CCH’s current financial woes are the result of an overly ambitious expansion plan. The discovery dispute arose when CCH’s lawyers — Lewis R. Olshin, Wayne A. Mack and J. Manly Parks of Duane Morris — obtained documents from the Blue Cross and Blue Shield Association that related to a prior dispute between IBC and BCBSA. Among the documents were several “position papers” that IBC had created for use in a mediation with BCBSA. The prior dispute related to the “BlueCard.Program,” a national provider network that guarantees access to medical services for its subscribers from providers in another Blue Plan local network. The dispute between IBC and BCBSA centered on a change in the access fee that a “host plan” can charge a “home plan” for using its provider network. Under the terms of IBC’s license agreement with the BCBSA, the dispute triggered a mandatory mediation clause. Smith found that the mediation agreement provided that the proceedings were confidential and required both sides to execute a “stipulation of confidentiality,” which prohibited “future use of settlement offers, all position papers or other statements furnished to the selected mediators, and the decision or recommendations in any mediation proceeding.” The agreement also said that the mediation documents were to be returned or destroyed at the conclusion of the proceedings, Smith found. In December 2002, CCH served a document subpoena on BCBSA which responded by producing documents that included IBC’s position papers in the mediation. Asserting the mediation privilege IBC’s lawyers — Thomas A. Leonard, Paul S. Diamond, William J. Leonard, William K. Pelosi and H. David Seidman of Obermayer Rebmann Maxwell & Hippel — asked Smith to issue an order compelling BCBSA to return the documents and certify the destruction of any electronic or other copies of those documents. They also asked that CCH be precluded from using them in any litigation. But CCH’s lawyers argued that the mediation privilege should not be recognized, and even if it were, it should not apply to protect IBC’s position papers. They also argued that IBC had waived the right to invoke the privilege and that the “crime-fraud exception” precluded its application. Smith found that the question of whether to recognize a privilege is governed by Federal Rule of Evidence 501 and the U.S. Supreme Court’s 1996 decision in Jaffee v. Redmond,which established a four-prong test for determining the applicability of federal common law evidentiary privileges. Under Jaffee, Smith found, judges must consider whether: The asserted privilege is “rooted in the imperative need for confidence and trust.” The privilege would serve public ends. The evidentiary detriment caused by an exercise of the privilege is modest. Denial of the federal privilege would frustrate a parallel privilege adopted by the states. Smith found that all four factors weighed in favor of recognizing and applying the privilege. CCH’s lawyers argued that IBC couldn’t satisfy the first prong of the test because the BlueCard mediation was not grounded in the type of confidence and trust that applies to legitimate efforts to seek settlement through a candid assessment of the relative positions of IBC and the BCBSA. Since neither the BCBSA nor IBC sought compromise by candidly assessing the relative strengths and weaknesses of their case, they said, the communications do not justify the use of the mediation privilege. Smith disagreed, saying “the participants in the BlueCard mediation engaged in the dispute resolution process with the understanding that their communications would be confidential. To now look in hindsight and revoke that confidentiality simply because the actual communications were not as forthcoming as they could have been would be to create an uncertainty in the application of privilege. Such actions would, in turn, have a chilling effect on other mediations.” CCH also argued that no public interest would be served by applying the mediation privilege because the BlueCard mediation focused solely on a private contractual dispute between IBC and BCBSA and the level of the fee IBC would be paid, not on any issue of public importance. But Smith found that the plaintiffs’ lawyers misunderstood the nature of the “public interest” inquiry. “The relevant question is whether protecting the typeof communications implicated by the privilege would serve the public interest,” Smith wrote. “The actual subject matter of the communications is of no moment and has no bearing on the public interest inquiry.” A ruling adopting the plaintiff’s logic, Smith said, “would obliterate the application of the mediation privilege in most civil matters wherein the parties seek to remedy a private dispute, rather than right a public wrong.” Instead, Smith found that the proper question was not whether the BlueCard mediation served the public interest, but “whether the practice of protecting mediation communications furthered that interest.” Smith concluded that it did. “With the increase in the amount of litigation, the federal courts necessarily suffer from a backlog of cases. Mediation alleviates some of the congestion by allowing speedy resolution of many of these matters,” Smith wrote. “The accompanying mediation privilege facilitates and promotes the use of such alternative dispute resolution and allows the voluntary conciliation, compromise and resolution of civil actions.” The third prong of the Jaffeetest was also satisfied, Smith found, because if IBC had not been assured of confidentiality during the mediation, “it is unclear whether such admissions would have ever been made.” As a result, Smith said, “plaintiff should not be able to, on one hand, benefit from admissions made under the pretext of confidentiality, while, on the other hand, asserting that the confidentiality that prompted such admissions should not exist.” CCH challenged the fourth prong by arguing that Illinois law applied to the BlueCard mediation and that Illinois law provides that mediation communications are privileged only when made in the context of state-sponsored mediation. But Smith found that the specific provisions of Illinois law were irrelevant when deciding whether to recognize a federal common law mediation privilege. Since every state but Delaware has recognized a mediation privilege, Smith said, “It is the uniformity among the states in recognizing the worth of a mediation privilege, not the particulars of one state’s statute, which counsels our decision whether to recognize a federal mediation privilege.” (Copies of the15-page opinion inChester County Hospital v. Independence Blue Cross , PICS No. 03-1794, are available fromThe Legal Intelligencer . Please call the Pennsylvania Instant Case Serviceat 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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