Delaware Court Of Chancery Rejects Challenge To Books And Records Demand, Holding That Evidence From Qui Tam Action Demonstrated “Credible Basis” From Which To Infer Wrongdoing
On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery granted stockholders’ Section 220 demand to inspect the books and records of UnitedHealth Group Inc. (“UnitedHealth”) in order to investigate allegedly fraudulent Medicare billing practices. In re UnitedHealth Group, Inc. Sec. 220 Litig., C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28, 2018). The Court held that plaintiffs could rely on evidence cited by the government in a qui tam complaint against UnitedHealth to demonstrate a “credible basis” from which to infer wrongdoing or mismanagement so as to justify authorizing the Section 220 demand in part.
Plaintiffs initiated their Section 220 proceeding after the former director of finance of a UnitedHealth subsidiary brought a qui tam action against UnitedHealth, alleging that UnitedHealth had fabricated or failed to correct erroneous diagnosis codes in order to increase payments from Medicare, in violation of both the False Claims Act and Medicare regulations. The Department of Justice (“DOJ”) intervened in the action and undertook an investigation in which it deposed twenty UnitedHealth employees and obtained production of over 600,000 documents. Relying on a federal district court ruling granting in part and denying in part UnitedHealth’s motion to dismiss the qui tam action, plaintiffs demanded to inspect UnitedHealth’s books and records in order to determine whether UnitedHealth executives and the board (i) engaged in “wrongdoing or mismanagement,” (ii) breached fiduciary duties, and (iii) failed to act independently and impartially.
UnitedHealth argued that plaintiffs could not rely solely on the DOJ’s complaint in the qui tam action as support for a credible basis of wrongdoing because no determination had been made as to whether the complaint “state[d] a viable claim.” While the Delaware Court of Chancery acknowledged that a single complaint usually would not be sufficient, it noted that the DOJ’s complaint relied on numerous documents (including emails, audit reports, and internal memoranda) and testimony, which Delaware courts have recognized can suffice to satisfy the credible basis standard. The Court found that the evidence suggested that UnitedHealth executives knew about irregular billing practices and deliberately failed to take action. The Court also rejected UnitedHealth’s argument that the company practices were not illegal, pointing out that Section 220 proceedings did not require the court to adjudicate the merits of potential claims. The Court did, however, limit the scope of the demand by denying plaintiffs’ request for email communications among certain officers, and instead permitting plaintiffs access to (i) “written materials for board and committee meetings;” (ii) materials produced in preparation for certain board and committee meetings; (iii) policies and procedures; and (iv) certain documents discussed in the DOJ’s complaint and the original qui tam complaint.