In the recent decision of In re UnitedHealth Group, Inc. Section 220 Litig., C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28, 2018), the Court of Chancery granted plaintiff’s Section 220 demand. The Court found that allegations raised in a complaint filed by the U.S. Department of Justice (“DOJ”) against the Defendant corporation, UnitedHealth Group, Inc. (“UnitedHealth”) established a credible basis to infer wrongdoing or mismanagement based on the allegations in the qui tam action, when such allegations were sufficiently supported by documentation and testimony.
In 2017, a qui tam action was filed against UnitedHealth under the False Claims Act for alleged pervasive practice of defrauding Medicare. In the complaint, UnitedHealth was accused of “up-coding” patient risk data and failing to delete incorrect diagnoses, resulting in overpayments from Medicare. The DOJ intervened in the action, alleging that since at least 2005, despite repeat warnings, UnitedHealth has violated both Medicare regulations and the False Claims Act.
Several stockholders of UnitedHealth filed an action under Section 220 of the DGCL in the Court of Chancery to investigate: (i) mismanagement by the D&Os of UnitedHealth, (ii) possible breaches of fiduciary duties by the D&Os, and (iii) the independence of the board of directors, including whether pre-suit demand would be futile.
The Court of Chancery granted the plaintiffs’ books and records request, based upon the extensive allegations raised by the DOJ in the qui tam action against UnitedHealth. The Court distinguished this from Graulich v. Dell, Inc., 2011 WL 1843813 (Del. Ch. May 16, 2011), which held that a plaintiff cannot rely exclusively on a complaint that has not been found to state a viable claim as evidence
of a credible basis of wrongdoing. Here, the Court found that the complaint filed by the DOJ was heavily supported by documents and testimony, including depositions from twenty of Defendant’s employees and Defendant’s production of over 600,000 documents after the DOJ conducted a five-year investigation.
While Vice Chancellor Montgomery-Reeves generally ruled in favor of the plaintiff stockholders, their request for email communications from certain high-level executives of the company was denied. The Court found that “email communications are more the exception than the rule” in a Section 220 action.
Key Takeaway: This decisions demonstrates that the Court may take into account allegations raised in a separate complaint to determine whether there is a credible basis to infer wrongdoing or mismanagement, when such complaint is supported by sufficient and extensive supporting documents and testimony.