IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE UNITEDHEALTH GROUP, ) Consolidated
INC. SECTION 220 LITIGATION ) C.A. No. 2017-0681-TMR
MEMORANDUM OPINION
Date Submitted: February 16, 2018
Date Decided: February 28, 2018
Nathan A. Cook, GRANT & EISENHOFER P.A., Wilmington, Delaware; Jeroen
van Kwawegen, Christopher J. Orrico, and David MacIsaac, BERNSTEIN
LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Norman
Berman, Nathaniel L. Orenstein, and Mark A. Delaney, BERMAN TABACCO,
Boston, Massachusetts; Jessica Zeldin and Bradford P. deLeeuw, ROSENTHAL,
MONHAIT & GODDESS, P.A.; Attorneys for Plaintiffs.
R. Judson Scaggs, Jr., Lauren Neal Bennett, and Jason Z. Miller, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for
Defendant UnitedHealth Group, Inc.
MONTGOMERY-REEVES, Vice Chancellor.
This case involves a demand to inspect the books and records of a health care
company that allegedly overbilled Medicare. The plaintiffs seek to inspect
numerous books and records of the company in order to investigate: (1)
mismanagement or misconduct; (2) possible breaches of fiduciary duties; and (3) the
independence and disinterest of the board. The demand draws from a complaint in
a qui tam action that contains evidence obtained by the federal government after a
five-year investigation, including depositions from twenty of the defendant’s
employees and the defendant’s production of over 600,000 documents. The
defendant argues that the plaintiffs are not entitled to inspection because they do not
have a credible basis to infer wrongdoing or mismanagement based solely on the
allegations in the qui tam action. The defendant also avers that the challenged
activities are not illegal. Finally, the defendant argues that even if there is a credible
basis to infer wrongdoing or mismanagement occurred, the scope of the inspection
demand is too broad.
For the reasons stated in this memorandum opinion, I hold that the plaintiffs’
demand states a proper purpose and a credible basis from which a court can infer
that wrongdoing or mismanagement may have occurred, entitling them to inspect
certain books and records. The plaintiffs have shown that some, but not all, of the
books and records they request are necessary to investigate their proper purpose.
1
I. BACKGROUND
The facts in this opinion reflect my findings based on the parties’ briefing,
104 documentary exhibits, and trial held on January 9, 2018. I grant the evidence
the weight and credibility that I find it deserves.1
A. The Parties and Relevant Non-Parties
Plaintiffs Amalgamated Bank,2 Coral Springs Police Officers’ Retirement
Plan (“Coral Springs”), and Central Laborers Pension Fund (“Central Laborers”)
(collectively, “Plaintiffs”) have been stockholders of UnitedHealth Group Inc.
(“UnitedHealth” or the “Company”) since approximately May 27, 2005, January 1,
2006, and May 9, 2006, respectively.3
Defendant UnitedHealth is a Delaware corporation headquartered in
Minnetonka, Minnesota.4 UnitedHealth is the largest Medicare Advantage
1
Citations to the trial transcript are in the form “Tr. #.” Plaintiff Exhibits are cited as
“PX #,” and Defendant Exhibits are cited as “DX #.” Facts drawn from the Pre-
Trial Stipulation are cited as “PTS ¶ #,” and facts drawn from the Proposed Order
are cited as “PTO ¶ #.”
2
As Trustee for the LongView LargeCap 500 Index Fund, the LongView LargeCap
500 Index Veba Fund, the LongView Quantitative LargeCap Fund, the LongView
Quant LargeCap Equity-Veba Fund, LongView LargeCap 1000 Growth Index
Fund, and the LongView Broad Market 3000 Index Fund.
3
PTS ¶¶ 1, 3; PX 17 at 5; PX 18 at 7.
4
PX 18 at 7.
2
Organization, or Medicare beneficiary, in the United States, providing health and
well-being services to individuals age fifty and older in all fifty states.5
Non-party Stephen Hemsley is the CEO and a member of UnitedHealth’s
board of directors.6
Non-party WellMed Medical Management, Inc. (“WellMed”) is a large
physician-owned practice management company operating in Texas and Florida. In
2011, UnitedHealth acquired WellMed.7
Non-party Ingenix, Inc. (“Ingenix”) is a direct subsidiary of UnitedHealth and
provides data services for the Company, including submitting claims to Medicare.8
B. The Medicare Advantage Program
The Center for Medicare & Medicaid Services (“Medicare”) is the
administrator of the federal Medicare program, which provides Medicare benefits to
elderly and disabled individuals.9 The Medicare Advantage Program includes a
provision that allows Medicare beneficiaries to enroll in managed healthcare
5
Id. at 2–3, 7.
6
Id. at 5.
7
PX 8 at 13–14.
8
PX 6 at 11; PX 8 at 11.
9
PX 8 at 2; PX 18 at 2.
3
insurance plans that are owned and operated by private organizations.10 These
private organizations are called Medicare Advantage Organizations.11 Medicare
pays UnitedHealth and other Medicare Advantage Organizations fixed monthly
amounts for each enrollee based on various “risk adjustment data.”12 These data are
comprised of medical diagnosis codes that each enrollee receives, and the data
fluctuate based on the severity of the diagnosis.13 Medicare pays an additional fee
for enrollees who receive specific and more serious diagnoses.14 The adjustments
are intended to ensure that Medicare Advantage Organizations such as UnitedHealth
are paid more for those enrollees expected to incur higher healthcare costs and less
for healthier enrollees expected to incur lower costs.15
All Medicare Advantage Organizations, including UnitedHealth, submit
diagnosis codes with the risk adjustment data of the beneficiaries to Medicare for
payment.16 These diagnosis codes are created from the beneficiaries’ medical
10
PX 8 at 2.
11
Id.
12
PX 18 at 3.
13
Id.; Pls.’ Opening Br. 4.
14
PX 8 at 3; Pls.’ Opening Br. 4.
15
PX 8 at 3.
16
Id.
4
encounters, such as hospital stays and office visits.17 In general, the more numerous
and severe the conditions, the higher the risk score for the beneficiary, and the larger
the payout to the Medicare Advantage Organization.18 The Medicare Advantage
Program requires each Medicare Advantage Organization to submit diagnosis codes
that are “unambiguously” supported by information included in the beneficiaries’
medical records.19 Medicare requires Medicare Advantage Organizations to delete
previously submitted codes that are either unsupported by the medical records or
invalid diagnoses.20
C. The Qui Tam Action
In July 2017, Benjamin Poehling, former Director of Finance at
UnitedHealthcare Medicare & Retirement UnitedHealth, a UnitedHealth subsidiary,
filed a qui tam action (the “Poehling Complaint”) against UnitedHealth.21 He
alleged that since at least 2006, the Company has violated the False Claims Act22 by
17
Id.
18
Id.
19
Id.
20
Id. at 20; PX 18 at 3, 29.
21
PX 6 at 1, 8; PX 8 at 8.
22
Under the False Claims Act, a certification is false when the Medicare Advantage
Organization has actual knowledge of the falsity of the risk adjustment data or
5
improperly “upcoding” risk adjustment data and failing to delete incorrect diagnosis
codes, which resulted in overpayments from Medicare.23 Shortly after, the
Department of Justice (the “DOJ”) intervened in that action, United States ex rel.
Poehling v. UnitedHealth Group, Inc. (the “Qui Tam Action”),24 alleging that since
at least 2005, despite repeat warnings, UnitedHealth has violated both Medicare
regulations25 and the False Claims Act.26 The DOJ based its allegations on a five-
year investigation that included depositions of twenty UnitedHealth employees and
UnitedHealth’s production of over 600,000 documents, including the Company’s
demonstrates either reckless disregard or deliberate ignorance of the truth or falsity
of the data. PX 18 at 4; see 31 U.S.C. § 3729.
23
PX 6 at 4–6.
24
No. CV 16-08697-MWF (SSx). The defendants in that action filed a motion to
dismiss. Poehling, No. CV 16-08697-MWF (SSx) (Feb. 12, 2018). The United
States District Court for the Central District of California (the “Federal District
Court”) denied defendants’ motion as to the First Claim for Relief (violation of the
reverse false claims provision of the False Claims Act), Fifth Claim for Relief
(unjust enrichment), and Sixth Claim for Relief (payment by mistake). Id. The
United States Government also intervened in another qui tam action, United States
ex rel. Swoben v. Secure Horizons, No. CV 09-5013 JFW (JEMx), which has since
been dismissed. PX 10 at 1; PX 18 at 2, 4; DX 22 at 10–11.
25
Medicare regulation 42 C.F.R. § 422.504 requires each Medicare Advantage
Organization, as a condition of receiving payment, to “certify (based on best
knowledge and belief) that the [risk adjustment] data it submits are . . . accurate,
complete and truthful.” PX 18 at 3 (quoting 42 C.F.R. § 422.504(l)(2)).
26
PX 8 at 2–7; PX 18 at 2, 4.
6
internal emails, letters, audit reports, charts, attestations, policies, presentation
materials, and memoranda.27 Based on this evidence collected, Plaintiffs allege that
Defendant overbilled Medicare by “hundreds of millions – and likely billions of
dollars.”28
Plaintiffs assert that Defendant engaged in upcoding risk adjustment data by
deliberately leaving diagnosis codes regardless of whether an enrollee actually had
or was treated for that diagnosis in order to receive additional payment from
Medicare.29 Plaintiffs claim UnitedHealth conducted upcoding primarily through its
chart review program (the “Chart Review Program”), patient assessment forms (the
“Patient Assessment Forms”), and doctor incentives.30 For support, Plaintiffs point
to the DOJ’s allegations (the “DOJ Complaint”) in the Qui Tam Action as well as
the voluminous documents and testimony cited and attached to the DOJ Complaint.31
A few examples include:
Testimony from UnitedHealth’s Vice President of Finance that in 2006,
UnitedHealth implemented the Chart Review Program designed to
27
PX 1 at 3; PX 8 at 27, 32, 34, 35, 49, 70; Pls.’ Reply Br. 1.
28
PX 18 at 4–5.
29
Pls.’ Opening Br. 8.
30
Id.
31
Id. at 31–32.
7
determine if the physicians’ medical records supported the diagnoses
that they reported to UnitedHealth, which revealed inaccurate data.32
Testimony, audit reports, presentations, training guides, and email
communications that revealed provider-reported diagnoses were
invalid; in some cases, approximately thirty percent of the codes were
invalid.33
Memoranda that showed the Chart Review Program was originally
designed to “look both ways,”34 but because UnitedHealth would
recover upwards of $450 in revenue per every $30 spent on a specific
chart review, the diagnoses coders tasked with finding and deleting
false codes were told to “look one way” in order to increase these
payments.35
Evidence that UnitedHealth created the Patient Assessment Forms, a
program created to identify chronic conditions coded less frequently
than their prevalence rates would indicate.36 The program was designed
to encourage doctors to enter codes for patients that were at all eligible
for the diagnosis code.37 UnitedHealth only distributed the Patient
Assessment Forms to providers who were eligible for Medicare
payments.
Evidence that UnitedHealth entered into “gainsharing” agreements,
which gave doctors incentive payments based on the revenues that
32
PX 8 at 26, 31.
33
Id. at 31–33.
34
Id. at 34.
35
PX 6 at 34; PX 8 at 40–49; PX 12 at 13.
36
PX 6 at 34–35.
37
Id. at 35.
8
UnitedHealth received from Medicare for treating those doctors’
patients.38
Testimony that internal audit programs revealed “faulty coding.” When
UnitedHealth employees found codes unsupported by actual diagnoses,
they were told that UnitedHealth “did not have the resources [to remove
or delete them]” before the final submission deadline.39
A presentation that showed thirty-two percent of diagnosis codes under
review were not supported by the beneficiaries’ medical records.40
Testimony that in 2010, UnitedHealth implemented risk adjustment
coding and compliance reviews (the “RACCR Program”), a program
designed to meet Medicare requirements of submitting accurate risk
adjustment data.41 This program revealed that more than forty percent
of diagnosis codes were invalid.42
Evidence that UnitedHealth excluded certain providers from the
RACCR Program in order to reduce the number of deleted codes.43
Evidence that the RACCR Program found diagnoses codes not
supported by the medical records, but UnitedHealth did not always
delete them.44
38
PX 8 at 64–65.
39
Id. at 31–32.
40
Id. at 32.
41
Id. at 37.
42
Id. at 38.
43
Id. at 65–66.
44
Id. at 67–68.
9
Plaintiffs’ also allege that UnitedHealth, through its subsidiaries, WellMed
and Ingenix, caused other Medicare Advantage Organizations to submit false risk
adjustment claims.45 In particular, WellMed and Ingenix allegedly pursued contracts
with other Medicare Advantage Organizations that were designed to assist other
Medicare Advantage Organizations in submitting false risk adjustment claims.46
Examples of evidence supporting these allegations include:
Testimony that UnitedHealth created WellMed’s subsidiary, DataRap,
a processing system that identified, processed, and submitted diagnosis
codes for Medicare payment, in order to maximize its risk adjustment
submissions without regard to their accuracy or eligibility. 47
Testimony that WellMed’s practice was not to delete incorrect
diagnosis codes from prior years.48
Testimony that WellMed claimed Medicare payments for diagnoses
codes it identified as fraudulent.49
Evidence that WellMed set up at least two health plans to use DataRap
for the purpose of submitting fraudulent diagnoses codes.50
45
Pls.’ Opening Br. 13.
46
PX 8 at 32; Pls.’ Opening Br. 13.
47
PX 6 at 62.
48
Id. at 63.
49
Id.
50
Id. at 64.
10
Evidence that a Medicare Advantage Organization in Dallas, Texas
paid WellMed a fee based almost entirely on the increase in
UnitedHealth’s risk score year after year.51
Evidence that, as a selling point to other Medicare Advantage
Organizations for its risk adjustment services, Ingenix would
emphasize that more than thirty percent of provider-reported diagnoses
were unsupported by the beneficiaries’ medical records.52
Emails from compliance personnel at Ingenix that acknowledged
UnitedHealth risked having to return Medicare payments if it alerted
Medicare of payments it received based on diagnoses that were not
validated by beneficiaries’ medical records.53
Further, Plaintiffs claim there is a credible basis to infer that at least ten senior
executives and directors had actual knowledge of UnitedHealth’s “widespread and
systematic corporate misconduct.”54 Some evidentiary examples to support this
claim include:
Reports given in mid-2010 to executives that showed risk adjustment
data was over forty percent inaccurate in California and Texas because
the “diagnoses were not supported by the beneficiaries’ medical records
or were uncertain or unconfirmed diagnoses.”55
51
Id. at 26.
52
PX 8 at 32.
53
Id. at 33.
54
PX 1 at 2; PX 17 at 4, 9–10; PX 18 at 4, 8, 20; Pls.’ Opening Br. 2, 20.
55
PX 8 at 36; PX 18 at 12.
11
A report given in June 2010 to Hemsley, the CEO and a board member,
and other members of the executive team that identified compliance as
an important issue of immediate concern.56 This report showed that
UnitedHealth knew Medicare Advantage Organizations were liable
under the False Claims Act for reporting and refunding overpayments
in an untimely manner.
A presentation given in November 2011 to Hemsley that noted, “the
medical record is the ‘source of truth’ and that looking at this ‘source
of truth’ had a negative revenue impact because comparing provider-
reported diagnoses with the information in the providers’ medical
records resulted in having to delete some of their diagnoses.”57
A report given in October 2012 to executives, including the CFO of
UnitedHealth, that showed over thirty-three percent of diagnoses
reviewed were unsupported by the beneficiaries’ medical records, even
though the coded inputs received two separate reviews for accuracy. 58
Testimony that executives knew the Medicare advantage claims did not
always match the medical record documentation.59
A presentation to executives that indicated “‘[p]rovider coding is highly
inaccurate and incomplete’ and that ‘more than 30% of coded
conditions are not supported by [Medicare] validation findings.’”60
56
PX 8 at 36.
57
Id. at 46–47.
58
Id. at 54–55.
59
PX 10 at 20; PX 18 at 12.
60
PX 8 at 30; PX 10 at 20–21; PX 18 at 12 (quoting DOJ Compl. ¶ 93).
12
Plaintiffs argue that senior executives and members of the board either
encouraged or deliberately failed to address the scheme to improperly increase
Medicare payments.61 Examples of evidence underlying this argument include:
An email from the CFO of UnitedHealth’s Medical Advantage that
acknowledged “vasculatory disease opportunities, screening
opportunities, etc with huge $ opportunities.”62 In that email, he
encouraged employees to “turn on the gas!” in order to increase revenue
opportunities.63
Evidence that executives knew that UnitedHealth would not delete or
otherwise report to Medicare at least 100,000 invalid diagnoses in 2011
and 2012 encounters.64
Evidence that UnitedHealth liberalized its coding policies to enable
coders to identify more diagnoses when it did not achieve its expected
return on investment from 2012 chart reviews.65
A presentation given to executives that revealed UnitedHealthcare
Medicare & Retirement would miss its 2014 target budget by half a
billion dollars.66 As a result, executives, including Hemsley, terminated
audit programs that UnitedHealth had implemented in order to improve
the accuracy of risk adjustment data. By terminating these programs,
UnitedHealth could “cut the $500 million miss by $250 million by . . .
61
Pls.’ Opening Br. 20–22.
62
PX 8 at 30; PX 14 at 2.
63
PX 14 at 2.
64
PX 8 at 56, 62.
65
Id. at 43.
66
Id. at 57.
13
not deleting the provider-reported diagnoses invalidated by its chart
reviews.”67
A document that showed Hemsley and other executives knew that
terminating these audit programs would enable UnitedHealth to achieve
massive financial benefit in the second quarter 2014 earnings.68
D. Procedural History
On July 17, 2017, Plaintiff Amalgamated Bank sent a books and records
inspection demand to UnitedHealth.69 On July 27, 2017, Plaintiff Central Laborers
sent a books and records inspection demand to UnitedHealth.70 On August 7, 2017,
Plaintiff Coral Springs sent a books and records inspection demand to
UnitedHealth.71 On August 3, 2017, UnitedHealth rejected Central Laborers’
demand.72 On August 8, 2017, UnitedHealth rejected Amalgamated Bank’s
demand.73 On August 14, 2017, UnitedHealth rejected Coral Spring’s demand.74
67
Id. at 58.
68
Id. at 62.
69
PX 1 at 1.
70
PX 3 at 1.
71
PX 2 at 1.
72
PX 34.
73
PX 35.
74
PX 36.
14
On September 25, 2017, Amalgamated Bank filed a complaint pursuant to 8 Del. C.
§ 220 against UnitedHealth.75 The next day, Plaintiffs Coral Springs and Central
Laborers filed a complaint against UnitedHealth pursuant to 8 Del. C. § 220.76 On
October 11, 2017, this Court consolidated the Amalgamated Bank and the Coral
Springs and Central Labors actions. This Court held trial on January 9, 2018. On
January 31, 2018, Plaintiffs filed a letter to the Court attaching the federal district
court’s tentative ruling on UnitedHealth’s motion to dismiss the Qui Tam Action.
On February 2, 2018, Defendant also filed a letter urging the Court not to consider
the tentative ruling in its decision. On February 13, 2018, Plaintiffs filed another
letter attaching the federal court’s final ruling, which denied UnitedHealth’s motion
to dismiss on three counts and granted the motion on three counts, with leave to
amend. On February 16, 2018, Defendant filed a letter responding to Plaintiffs’
letter and exhibit, urging the Court not to consider the final ruling in its decision.
II. ANALYSIS
Under Section 220 of Delaware General Corporation Law, stockholders of a
Delaware Corporation have the right to inspect the books and records of a company
75
PX 17 at 1.
76
PX 18 at 1.
15
for any proper purpose.77 A proper purpose includes “a purpose reasonably related
to such person’s interest as a stockholder.”78 “[A] stockholder has the burden of
proof to demonstrate a proper purpose by a preponderance of the evidence.”79
“It is well established that a stockholder’s desire to investigate wrongdoing or
mismanagement constitutes a ‘proper purpose.’”80 The stockholder is not, however,
“required to prove by a preponderance of the evidence that waste and
[mis]management are actually occurring.”81 Instead, a plaintiff who seeks to
investigate wrongdoing or mismanagement must also show “‘some evidence’ to
suggest a ‘credible basis’ from which a court can infer that mismanagement, waste
or wrongdoing may have occurred.”82 The “‘credible basis’ standard sets the lowest
possible burden of proof.”83 The credible basis standard can be satisfied through
77
8 Del. C. § 220.
78
8 Del. C. § 220(b).
79
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).
80
Id.
81
Id. at 123 (quoting Thomas & Betts Corp. v. Leviton Mfg. Co. Inc., 681 A.2d 1026,
1031 (Del. 1996)).
82
Id. at 118.
83
Id. at 123.
16
“documents, logic, testimony or otherwise.”84 “The trial court may rely on
‘circumstantial evidence,’” and “[h]earsay statements may be considered, provided
they are sufficiently reliable.”85
Plaintiffs seek to inspect books and records of the Company in order to
investigate: (1) mismanagement by the directors and/or officers of UnitedHealth; (2)
the possibility of breaches of fiduciary duty by directors and/or officers of
UnitedHealth and its subsidiaries, including without limitation, Ingenix and
WellMed; and (3) the independence and disinterest of the board of directors,
including whether a pre-suit demand is necessary or would be excused before
commencing any derivative action on behalf of the Company.86
84
Id.
85
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 778 (Del. Ch. 2016) (citing Wal–
Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1273
(Del. 2014); Thomas & Betts, 681 A.2d at 1032–33; Marmon v. Arbinet–
Thexchange, Inc., 2004 WL936512, at *4 (Del. Ch. Apr. 28, 2004); Skoglund v.
Ormand Indus., Inc., 372 A.2d 204, 208–13 (Del. Ch. 1976)).
86
PX 1 at 2; PX 2 at 1–2; PX 3 at 1–2. Plaintiff Amalgamated Bank also listed the
following purposes for investigation: “[t]o communicate with other stockholders
regarding their investments in UnitedHealth;” “[t]o determine whether to organize
a ‘vote no’ campaign against directors who may have behaved recklessly,
negligently, or disloyally;” and “[t]o determine whether to seek an audience with
the Board to discuss corporate governance reforms regarding the Company’s
diagnostic coding and risk adjustment programs.” PX 1 at 2; PX 17 at 19. Aside
from mentioning them in their consolidated pre-trial brief, Plaintiffs make no
distinguishing arguments regarding the treatment of these additional purposes for
investigation. Pls.’ Opening Br. 26.
17
Defendant here does not identify any deficiencies in the form and manner of
the demand or challenge that a desire to investigate corporate wrongdoing is a proper
purpose. Instead, Defendant argues that Plaintiffs cannot rely solely on the
allegations in the Qui Tam Action as evidence to suggest a credible basis from which
a court can infer that wrongdoing or mismanagement may have occurred.87
Defendant further argues that there is no credible basis for investigation because the
alleged conduct is not illegal.88 Defendant also avers the scope of the request is too
broad.89 I address each in turn.
A. Plaintiffs Have Shown a Credible Basis to Infer Wrongdoing
Defendant argues that Plaintiffs fail to state a credible basis to infer
wrongdoing or mismanagement sufficient to warrant further investigation. In
particular, Defendant asserts under Graulich v. Dell Inc.90 that Plaintiffs cannot rely
exclusively on a complaint that has not been found to state a viable claim as evidence
of a credible basis of wrongdoing.91 This challenge fails. While a complaint alone
87
Def.’s Answering Br. 18–20.
88
Id. at 18–19, 22.
89
Id. at 29–30.
90
2011 WL 1843813 (Del. Ch. May 16, 2011).
91
Tr. 79–81, 85; PX 34 at 1–2; PX 35 at 2; PX 36 at 2. At trial, Defendant argued that
I should await a decision from the Federal District Court on the defendants’ motion
to dismiss the Qui Tam Action because if dispositive, granting books and records
18
may not show a credible basis, the DOJ Complaint includes documents and
testimony provided by Defendant and Defendant’s employees.92 The allegations in
the Qui Tam Action are based on depositions from twenty of Defendant’s employees
and Defendant’s production of over 600,000 documents after the DOJ conducted a
five-year investigation. Defendant does not contest that the Company provided this
information to the DOJ.
The DOJ Complaint includes references to, and quotations from, the
Company’s internal emails, letters, audit reports, charts, attestations, policies,
presentation materials, and memoranda. These documents suggest that Defendant’s
senior executives, including Hemsley, were involved in meetings and presentations
that revealed the codes submitted to Medicare for reimbursement were inaccurate.
when another court dismissed the relied upon complaint would be a waste of
resources. Tr. 81, 93–95, 134. After that court denied the motion—in part—
Defendant now asserts that I should not consider the ruling as a basis for my decision
in this action. Def.’s Letter 1–2 (Feb. 6, 2018). The Federal District Court’s ruling
in the Qui Tam Action does not alter my holding.
92
This Court has held that a plaintiff fails to state a credible basis for the Court to infer
wrongdoing when the plaintiff relies solely on the fact that others have sued the
company. Graulich, 2011 WL 1843813, at *5 n.49. This case, however, is
distinguishable. Here, Plaintiffs provide detailed allegations of wrongdoing,
including testimony from numerous employees and several documents
demonstrating the board’s knowledge of inaccurate billing practices. PX 8 at 25–
74; PX 17 at 4. Simply because the testimony and documents are available in a
complaint does not forbid the Court from examining them to determine if there
exists an inference of wrongdoing.
19
The evidence also suggests that Defendant did not engage in steps to correct the
inaccuracies or alert Medicare of the previous payments it received based on faulty
coding. Instead, the Company removed audit programs designed to catch
inaccuracies, such as the Chart Review Program, in order to avoid missing a $250
million payout from Medicare for 2014. The documents uncovered by the DOJ’s
lengthy investigation, coupled with the sworn testimony and statements of
Defendant’s own management, are enough to meet the “lowest possible burden of
proof” in Delaware law.93 Therefore, even if a complaint alone is insufficient,
Defendant cannot escape the testimony and documents that demonstrate a credible
basis for this Court to infer possible wrongdoing or mismanagement simply because
they are referenced in a complaint.
Defendant further asserts that the DOJ Complaint cannot show a credible basis
for wrongdoing or mismanagement because the underlying conduct is not illegal or
fraudulent.94 These are merits-based defenses that require I analyze the strengths
and weaknesses of the underlying Qui Tam Action and potential derivative claims.
This Court has repeatedly stated that a Section 220 proceeding does not warrant a
93
Seinfeld, 909 A.2d at 123.
94
Tr. 134; PX 34 at 1–2; PX 35 at 2; PX 36 at 2; Def.’s Answering Br. 18–19, 22, 26.
20
trial on the merits of underlying claims.95 Indeed, as this Court noted, “the Delaware
Supreme Court has made it clear that the public policy of this State is to encourage
stockholders to utilize Section 220 before filing a derivative action . . . in order to
meet the heightened pleading requirements . . . applicable to such actions.”96 I
decline Defendant’s invitation to make merit-based determinations on whether
Defendant’s behavior is actually wrongful or violates the law. Plaintiffs have
alleged facts sufficient to infer that Defendant may have violated Medicare
regulations and the False Claims Act by overcharging Medicare. Thus, Plaintiffs
have stated a credible basis sufficient to warrant inspection.
95
E.g., Lavin v. W. Corp., 2017 WL 6728702, at *1 (Del. Ch. Dec. 29, 2017) (“Any
contrary finding would invite defendants improperly to draw the court into
adjudicating merits defenses to potential underlying claims in order to defeat
otherwise properly supported Section 220 demands.”); Okla. Firefighters Pension
& Ret. Sys. v. Citigroup Inc., 2014 WL 5351345, at *6 (Del. Ch. Sept. 30, 2014)
(“Although Citigroup disclaims any effort to turn this proceeding into a trial on the
merits of Plaintiffs possible derivative claims, Citigroup essentially seeks that result
by implying that Plaintiff must have specific, tangible evidence that Citigroup’s
Board or senior management was complicit in the fraud at Banamex. That argument
ignores the inferences that this Court can—and must—draw under the credible basis
standard, and would discourage the very behavior this Court has sought to
encourage among would-be derivative or class plaintiffs.”); LAMPERS, 2007 WL
2896540, at *12 (rejecting, in a Section 220 proceeding, that no springloading ever
occurred because “by raising such a defense, Countrywide seeks to litigate the
ultimate issue in a possible future derivative suit that might eventually be filed by
LAMPERS. This is neither the time nor the procedural setting to address that
issue.”).
96
Freund v. Lucent Techs., 2003 WL 139766, at *4 (Del. Ch. 2003) (emphasis added).
21
B. Plaintiffs are Entitled to Some, But Not All, of the Books and Records
They Seek
Finding Plaintiffs are entitled to books and records, I turn to the scope of
inspection. Plaintiffs seek the following documents from 2005 to the present: (1)
board and committee meeting documents; (2) meeting preparation materials; (3)
company policy and procedures; (4) internal investigation materials; (5) board
materials concerning director disinterestedness and independence; (6) copies of
documents referenced in the Qui Tam Action;97 and (7) communications of five
senior-level officers.98 Within each category, Plaintiffs demand documents related
to the following topics: (1) “Defendant’s filing of, or failure to fix previously
submitted, false claims to [Medicare] seeking risk adjustment payments;” (2)
“Defendant’s initiatives to increase revenues through risk adjustment submissions;”
(3) “Defendant’s initiatives to identify erroneous risk adjustments;” and (4)
97
In addition to the corporate records referenced in the civil actions, in their opening
brief, Plaintiffs also request the records that “UnitedHealth has provided to the
government and any other stockholders who have made Section 220 requests.” Pls.’
Opening Br. 39. Plaintiffs appear to have abandoned their request for all of the
records that UnitedHealth has provided to the government in their reply brief. Pls.’
Reply Br. 11–12. But, if I have misread Plaintiffs’ position, the request is denied.
As to the request for documents related to other UnitedHealth stockholders who
have made Section 220 requests, Defendant represented there are none. Def.’s
Answering Br. 41.
98
Tr. 34; PX 1 at 1; PX 2 at 22; PX 3 at 22; PX 18 at 15–18. At trial, Plaintiffs limited
the temporal scope for communications to 2010 to the present. Tr. 55–56.
22
“Defendant’s compliance, or lack thereof, with any regulations or laws relating to
detecting or preventing the filing of, or failing to fix previously submitted, false
claims to [Medicare] seeking risk adjustment payments.”99
The stockholder may only inspect what is “necessary and essential to
accomplish the stated, proper purpose.”100 “Documents are ‘necessary and essential’
pursuant to a Section 220 demand if they address the ‘crux of the shareholder’s
purpose’ and if that information ‘is unavailable from another source.’”101 “[T]he
burden of proof is always on the party seeking inspection to establish that each
category of the books and records requested is essential and sufficient to the
stockholder’s stated purpose.”102 The Court of Chancery must “tailor the inspection
to the stockholder’s stated purpose.”103 “[W]here a [Section] 220 claim is based on
alleged corporate wrongdoing, and assuming the allegation is meritorious, the
99
PTO ¶ 2.
100
Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).
101
Wal–Mart, 95 A.3d at 1271 (quoting Espinoza v. Hewlett–Packard Co., 32 A.3d
365, 371–72 (Del. 2011)).
102
Thomas & Betts, 681 A.2d at 1035.
103
Yahoo! Inc., 132 A.3d at 787 (quoting Sec. First Corp. v. U.S. Die Casting & Dev.
Co., 687 A.2d 563, 569 (Del. 1997)).
23
stockholder should be given enough information to effectively address the
problem.”104
First, at trial, Defendant did not dispute Plaintiffs’ entitlement to written
materials for board and committee meetings of the Company and its subsidiaries,
WellMed and Ingenix.105 Written materials may include minutes, notices, agendas,
exhibits, board books, reports, and presentations. Written materials do not include
draft minutes. Plaintiffs’ request to inspect the written materials produced for board
and committee meetings is granted.
Second, Plaintiffs have shown meeting preparation materials are necessary for
the purpose of their inspection. This includes memoranda, outlines, scripts, notes,
and talking points used for board or committee meetings. Plaintiffs, however, seek
preparation materials over a twelve-year period.106 Given the vast time period,
Defendant makes a reasonable request that Plaintiffs identify meetings from which
Plaintiffs request preparation materials.107 While Plaintiffs are entitled to
preparation materials, they are limited by Defendant’s request.
104
Saito, 806 A.2d at 115.
105
Tr. 99.
106
Pls.’ Opening Br. 50.
107
Tr. 102.
24
Third, at trial, Defendant conceded policies and procedures are appropriate
books and records for Plaintiffs’ stated purpose.108 Thus, they are granted.
Fourth, Defendant represented at trial that the board has not conducted any
internal investigation related to this matter.109 Thus, this request is denied.
Fifth, for documents relating to director disinterestedness and independence,
Plaintiffs request books and records used in the director nomination process as well
as disclosure and questionnaire files. At trial, Defendant agreed that both requests
are appropriate in a Section 220 action.110 Therefore, Plaintiffs are entitled to such
documents.
Sixth, while Defendant argued at trial that Plaintiffs’ request for documents
referenced in the Poehling Complaint and the DOJ Complaint was “wholly
unmanageable,” it recommended that Plaintiffs provide a list detailing which
documents Plaintiffs seek from the complaints.111 Plaintiffs agreed to produce this
108
Tr. 105:20–24 (“Policies and procedures, yes, they exist. They exist with respect to
officer attestations, chart review programs. If Your Honor would rule in their favor,
that level of policy and procedure would be appropriate.”).
109
Id. at 106.
110
Id. at 107–08.
111
Id. at 113–14.
25
list.112 Therefore, I grant the request with the parameters the parties negotiated
during trial.
Seventh, and finally, Plaintiffs request officer communications, including
emails, with respect to the alleged misconduct identified in the demands. Unlike the
production of other books and records, email communications are generally “the
exception rather than the rule.”113 “Unlike in plenary discovery, where the
responding party bears the burden of limiting its scope, the burden in a Section 220
proceeding is on the party seeking production. Moreover, the court must tailor the
production order to balance the interests of the stockholder and the corporation.”114
While Plaintiffs narrowed the scope of this request to (1) five senior-level officers,
(2) documents that have already been collected from the Qui Tam Action, and (3) an
eight-year period rather than a twelve-year period,115 they have not established that
the email communications are necessary for their proper purpose. Plaintiffs rely
primarily on Wal–Mart Stores, Inc. v. Indiana Electric Workers Pension Trust Fund
112
Id. at 131–32.
113
PX 22 at 109; Citigroup Inc., 2014 WL 5351345, Tr. at 109; see Yahoo! Inc., 132
A.3d at 790 (“The starting point—and often the ending point—for a sufficient
inspection will be board level documents evidencing the directors’ decisions and
deliberations, as well as the materials that the directors received and considered.”).
114
Yahoo! Inc., 132 A.3d at 789 (citation omitted).
115
Tr. 44, 55–56.
26
IBEW and Amalgamated Bank v. Yahoo! Inc. as support for their demand to inspect
emails.116 But this case is distinguishable from both Wal–Mart and Yahoo!. In both
Wal–Mart and Yahoo!, the plaintiffs were granted officer-level communications
because the plaintiffs carried their burden of showing why board-level documents
alone would not be sufficient for their stated purposes.117 Here, Plaintiffs have not
done so. Evidence does not suggest that the board was unaware of the upcoding
scheme. In fact, Plaintiffs are alleging that members of the Company’s board
deliberately took steps to further the fraudulent scheme.118
Furthermore, given the amount of information Plaintiffs are receiving, they
have not shown why additional communications of five custodians across an eight-
year span is necessary for their investigation. In particular, Plaintiffs will receive all
of the written materials for board and committee meetings, meeting preparation
materials that they identify, policies and procedures, and disclosure and
questionnaire files related to director disinterestedness and independence.
Additionally, Plaintiffs will receive all of the documents referenced in the Poehling
Complaint and the DOJ Complaint, which include email communications. They
116
Pls.’ Opening Br. 43 n.133–34, 44 n.138.
117
Wal–Mart, 95 A.3d at 1272–73; Yahoo! Inc., 132 A.3d at 792.
118
Pls.’ Opening Br. 1–2.
27
have not met their burden of showing that additional email communications from
these particular officers are necessary to their investigation.
At trial, Defendant conceded that the twelve-year date range “would be
appropriate in light of the length -- the long period of time covered by the allegations
in the complaint.”119 Therefore, of the books and records granted above, Plaintiffs
are entitled to documents from 2005 to the present.
Defendant requests that any production be subject to a reasonable
confidentiality order and incorporated by reference into any future derivative
complaint.120 Plaintiffs did not contest this in their briefing or at trial. This request
is granted.
III. CONCLUSION
For the aforementioned reasons, I grant Plaintiffs demand to inspect the books
and records detailed above subject to the incorporation-by-reference doctrine and
confidentiality order. Parties shall submit a conforming order within ten days.
IT IS SO ORDERED.
119
Tr. 109.
120
Def.’s Answering Br. 44.
28
In Re UnitedHealth Group, Inc. Section 220 Litigation
Combined Opinion