In In re UnitedHealth Group, Inc. Section 220 Litigation, Consolidated C.A. No. 2017-0681-TMR (Ch. Ct February 28, 2018) certain stockholders (“Plaintiffs”) of UnitedHealth Group, Inc. (“UnitedHealth”) sent a books and records inspection demand to UnitedHealth relying on a complaint in a type of whistleblower (qui tam) action alleging that UnitedHealth engaged in improper Medicare billing, United States ex rel. Poehling v. UnitedHealth Group, Inc. (the “Qui Tam Action”). The Qui Tam Action was based in part on a 5-year investigation by the US Department of Justice (“DOJ”) and included depositions of 20 of UnitedHealth’s employees and production by UnitedHealth of over 600,000 documents. Plaintiffs made their demand in order to investigate mismanagement or misconduct, possible breaches of fiduciary duties and the independence and disinterestedness of the board. UnitedHealth rejected the demand and a trial was held on January 9, 2018. UnitedHealth argued that Plaintiffs were not entitled to inspection of books and records because they lacked a credible basis to infer wrongdoing or mismanagement based on the Qui Tam Action and because the alleged activities of UnitedHealth were not illegal. The Court found that Plaintiffs’ demand stated a proper purpose and a credible basis from which a court could infer mismanagement or wrongdoing.
UnitedHealth is the largest Medicare beneficiary in the United States under the Medicare Advantage Program, which allows Medicare beneficiaries to enroll in plans operated by private organizations. As a Medicare Advantage Organization under this program, UnitedHealth receives fixed monthly payments from the Centers for Medicare & Medicaid Services (“Medicare”) for each enrollee based on medical diagnosis codes assigned to each enrollee by UnitedHealth and submitted to Medicare. Additional fees are paid based on more numerous or serious diagnosis codes. The diagnosis codes are required to be unambiguously supported by the enrollee’s medical records. The Qui Tam Action alleged that UnitedHealth violated the False Claims Act and Medicare regulations by improperly “upcoding” diagnosis codes and failing to delete incorrect diagnosis codes, which resulted in substantial overpayments by Medicare to UnitedHealth. Plaintiffs pointed to numerous documents and testimony from the Qui Tam Action in support of their inspection demand.
Pursuant to Section 220 of the Delaware General Corporation Law, stockholders have a right to inspect books and records of a company for any proper purpose. A proper purpose is one reasonably related to their interest as a stockholder. The Court explained that the desire to investigate wrongdoing or mismanagement constitutes a proper purpose, but that a plaintiff seeking to investigate must show “some evidence” to suggest a “credible basis” from which a court could infer mismanagement or wrongdoing, which sets the lowest possible burden of proof. The Court explained that although Plaintiffs could not rely on a complaint alone to support a credible basis, the evidence in the Qui Tam Action, including documents and testimony provided by UnitedHealth to DOJ, supported the finding of a credible basis. The Court then explained that Section 220 does not require a determination of the merits of underlying claims and thus declined to make a determination as to whether UnitedHealth’s conduct was illegal or fraudulent in order to determine whether Plaintiffs stated a credible basis for inspection.
The Court ruled that the Plaintiffs were entitled to inspect a substantial portion of the demanded books and records, but certain aspects of the demand were too broad. The Court noted that stockholders may demand only what is necessary and essential to accomplish the purpose of the investigation. The Court granted Plaintiffs’ inspection demand with respect to written materials produced for board and committee meetings, preparation materials for certain board and committee meetings, policies and procedures, books and records used in the director nomination process, and certain documents referenced in the Qui Tam Action. The Court denied Plaintiffs’ demand for internal investigation materials because there was no such investigation and for officer communications, including emails, because review of officer communications is an exception to the rule, and the Plaintiffs’ failed to show why board-level documents would not be sufficient for their purpose.