Eighth Circuit upholds settlement over health care coverage

Jessica M. Karmasek May 8, 2012, 12:55pm

ST. LOUIS (Legal Newsline) - A federal appeals court has upheld a settlement agreement between the city of Omaha and a class of city firefighters, police officers, civilian employees and their unions over health care coverage.

The U.S. Court of Appeals for the Eighth Circuit on Monday affirmed the U.S. District Court for the District of Nebraska's approval of the agreement.

The Eighth Circuit disagreed with appellant James Conrad Zalewski, who served as counsel for a group of 64 retired Omaha city firefighters and their families.

Zalewski appealed the district court's approval of the agreement, arguing that the court abused its discretion in "failing to properly apply and interpret" Fed. R. Civ. P. 23 to "adequately address the conflict of interest" resulting from the same class counsel representing both active and retired employees.

Omaha's city council, facing a severe long-term financial crisis due to the rising cost of health care benefits for its employees, passed an ordinance in May 2010 requiring retirees to pay premiums for health care calculated as a percentage of their city pension. The ordinance also reduced the number of health care plans to three -- one for police, one for firefighters and one for civilians.

Prior to the ordinance, various collective bargaining agreements and laws required the city to offer 34 different benefit plans to active and retired employees. Under those plans, 84 percent of retirees paid no premium for health care coverage for themselves or their dependents.

Also under the ordinance, beginning July 1, 2010, retirees would receive the same health care benefits as active employees.

The city estimated the move would reduce its annual administrative fees by $419,400, reduce other yearly administrative costs by $473,000, and bring in more than $3 million per year in premium payments from retirees.

The day the ordinance passed, four labor organizations and four individual retirees -- collectively, the plaintiffs -- filed a nine-count declaratory judgment action against the city, Mayor Jim Suttle and the members of the city council, seeking to enjoin them from enforcing the ordinance.

The plaintiffs sought class certification for all active and retired city employees who received health benefits from the city.

The city answered, asserting various affirmative defenses and counterclaims.

In June 2010, the district court entered a preliminary injunction enjoining the city from enforcing the ordinance. Later that month, it permitted five retired firefighters, represented by Omaha attorney Maynard H. Weinberg, to intervene.

The next month, the district court certified the proposed class under Rule 23(b)(3) and adopted three subclasses identified by the plaintiffs in their complaint.

The court did not enter any specific findings on the need for separate counsel for the identified subclasses.

In August 2010, on the morning the trial was scheduled to begin, the city, the plaintiffs and the intervenors announced they had reached a tentative class-wide settlement.

In October 2010, the district court approved notice of the settlement and ordered the parties to provide the class with notice of the agreement.

Of the 10,286 class members, only 17 opted out -- five of whom were retirees. Only 4 percent of the class objected to the proposed settlement, including Zalewski.

In January 2011, the district court approved the settlement agreement with some administrative modifications. Months later, in April, it entered a final consent decree, again finding that the agreement was "fair, reasonable and adequate."

Chief Judge William Jay Riley, who authored the Eighth Circuit's opinion, described the case as "relatively straightforward."

"Rather than binding the retirees to a mandatory settlement and resolving 'their legal rights... regardless of either their consent, or... their express wish to the contrary,' the district court provided two opportunities for the retirees to opt out of the case -- once before the parties settled, and once after the parties explained the settlement terms to the class," Riley wrote in the court's 14-page ruling.

The Eighth Circuit explained that the interests of the active and retired city employees "aligned in many significant ways."

"The conflicts appellant describes are far from the 'extraordinarily various' injuries that sharply divided the interests of present and future asbestos claim holders in attempting to allocate the limited funds available in Amchem and Ortiz," Riley wrote.

"Indeed, as prospective retirees, the active employees shared an interest in protecting retiree rights."

As if that wasn't enough, the Eighth Circuit noted that the district court also allowed five retired firefighters to intervene -- with separate counsel -- and participate in the settlement negotiations.

"Those negotiations yielded significant safeguards built into the settlement agreement that the district court reasonably found adequate to protect the retirees from a future potential conflict, including a retiree representative during collective bargaining and a detailed arbitration process," Riley wrote.

As for its approval of the settlement agreement, the Eighth Circuit said the district court was "well within its discretion."

"Appellant's argument to the contrary essentially boils down to his belief that compromise was unnecessary because he would have prevailed at trial," Riley explained. "Appellant ignores the substantial risk the plaintiffs would not prevail and the city would enforce the ordinance, dramatically changing the retirees' health benefits."

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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