Due process argument prevails, hearing postponed in Colossus class action

By Michelle Massey, East Texas Bureau | Mar 19, 2008

TEXARKANA, Ark. -- At a hearing March 17 in the Arkansas Colossus class action, plaintiffs' attorneys were expected to argue that the crime-fraud exception to the attorney-client privilege would require public disclosure of an inadvertently disclosed document written between USAA's attorneys and employees.

TEXARKANA, Ark. -- At a hearing March 17 in the Arkansas Colossus class action, plaintiffs' attorneys were expected to argue that the crime-fraud exception to the attorney-client privilege would require public disclosure of an inadvertently disclosed document written between USAA's attorneys and employees.

The crime-fraud exception can render the attorney-client privilege moot when communications between an attorney and client are used to further a crime or fraud.

The defendants argued continuing with the hearing would violate their constitutional due process. The argument appeared to prevail over plaintiffs' arguments as Circuit Court Judge Kirk Johnson postponed the hearing until April 1.

Lead plaintiffs' attorney John Goodson filed the original class action complaint on Feb 7, 2005, against Computer Science Corporation's software Colossus, Insurance Services Office's software COA, Claim IQ Inc.'s software Injury IQ and those insurance companies which use that software.

The complaint alleges that the insurance companies that use these "cost containment" software programs are engaging in conspiracies to systematically undervalue bodily-injury claim settlements in an effort to profit at the expense of their insured.

The software companies and insurance companies describe the program as a way to provide consistent estimates of bodily-injury claims through the data inputs of insurance adjusters.

Using the data input, Colossus, COA and Injury IQ calculate a suggested value range for the claim settlement. Insurance adjusters state these calculations are only one of many factors an adjuster can use and do not replace the adjusters' education, training and experience.

The plaintiffs' attorneys requested the hearing for a ruling on whether the accidently produced USAA document should fall under the crime-fraud exception to the attorney-client privilege. Defendant USAA argues the privileged document was inadvertently disclosed and is not discoverable as it is protected communication.

In October, the court privately reviewed the document and held that the document was protected and had scheduled a final hearing on the issue for March 17.

The defendants contend that days before the recent hearing, plaintiffs changed their argument with an amended brief that included an additional 272 exhibits. Other defendants, who include ANPAC and State Auto, claimed they did not receive a copy of the plaintiffs' amended brief and protested the timing of the hearing.

The plaintiffs stated that it did not provide the briefs because a court ruling on the crime-fraud exception would affect only USAA.

While maintaining that the contested document is protected communication, defendant USAA also argued that holding this type of hearing before a ruling on the issue of class certification and other pending motions would be a violation of their constitutional due process.

Various defendants have filed numerous motions, such as motions to dismiss, motions to sever and motions on the issue of class certification that have lain dormant for more than two years, as Judge Johnson has refused to provide a ruling.

Although an Arkansas rule on class action states, "at an early practicable time after the commencement of an action brought as a class action, the court shall determine by order whether it is to be so maintained," both parties believe Judge Johnson justifies the lack of ruling with an Arkansas law that states, "the court may not inquire into the merits at the certification stage."

Defendant USAA argued that deciding on a crime-fraud exception to the attorney-client privilege is inquiring into the merits of the case – fraud.

Other defendants joined USAA arguing the urgent need for a ruling on class certification and the lack of plaintiffs' responses to discovery.

The Arkansas Rules of Civil Procedure allow for limited discovery and state that it may be a good reason for delaying the class certification decision. Judge Johnson has allowed both parties to request significant amounts of information from each other.

For example, recently the plaintiffs have asked the defendants to produce all related bodily-injury claim files from 1996. Defendants argue that with the numerous defendants and requested bodily-injury claim files, the production would result in hundreds of thousands of files at a cost of production in the millions.

In addition, the defendants argue that production costs are high due to federal privacy regulations over insurance companies that require attorneys to oversee the redaction of nonpublic information.

The defendants believe the extensive amount of discovery requests are efforts to force settlement and as evidence of their argument, many defendants have settled instead of facing the rising costs of producing information in an uncertified class action. However, pursuant to the judge's orders, the remaining defendants have produced millions of documents but according to the defendants, the plaintiffs' attorneys have not turned over one.

After arguing for more than an hour Monday, the judge held a brief recess and upon return announced April 1 as the next hearing date.

Judge Johnson told the plaintiffs to give the amended brief to the other defendants to allow for their response. Defendants maintain that the plaintiffs will continue attempts to publically release this document with thousands of other "privileged" documents to force the remaining defendants into settlement.

The suit faults the defendants for civil conspiracy, breach of contract, unjust enrichment, fraudulent concealment, and the breach of the covenant of good faith and fair dealing.

Seeking less than $75,000 per person, the plaintiffs are asking for a declaratory relief for defendants to cease the use of the named software, an injunctive relief for defendants to "disgorge ill gotten profits realized from their undervaluation of claims," and seek "restitution from defendants in an amount equal to the amount that should have been paid."

The lead plaintiffs' attorneys are John Goodson and Matt Keil of the Texarkana law firm Keil and Goodson. Other class counsel includes Oklahoma City attorneys, Reggie White, Jason Roselius, Simone Gosnell Fulmer, and Derrick Morton of the law firm of Whitten, Nelson, McGuire, Terry and Roselius, Durant, Oklahoma attorney Michael Burrage of the Burrage Law firm, and Texarkana attorney Michael Angelovich of the Nix, Patterson, and Roach law firm.

USAA is represented by Lynn Pruit of Mitchell, Williams, Selig, Gates & Woodyard in Little Rock; and attorneys from Schiff Hardin in Chicago and Fellers, Snider, Blankenship, Bailey & Tippens in Oklahoma City.

Case No.: CV-2005-0059-3.

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