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In the first Eastern District of Pennsylvania decision to recognize and apply a “mediation privilege” under federal common law, U.S. Magistrate Judge Charles B. Smith has ordered 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:

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