Health Net 2005 Annual Report Download - page 37

January 30, 2006. Plaintiffs and Health Net, Inc. filed a motion to strike Dr. Lumpkin’s brief. On February 6,
2006, Drs. Silverman and Calig filed an unopposed motion to dismiss their appeal. On February 9, 2006, the
Eleventh Circuit dismissed Dr. Stovall’s appeal because his notice of appeal was untimely. When all appeals
have been exhausted and the settlement agreement becomes effective, we anticipate that the settlement
agreement will result in the conclusion of substantially all pending provider track cases filed on behalf of
physicians.
We intend to defend ourselves vigorously in the Knecht, Solomon, Ashton and Freiberg litigation. These
proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot
be predicted at this time. It is possible that in a particular quarter or annual period our results of operations and
cash flow could be materially affected by an ultimate unfavorable resolution of these proceedings depending, in
part, upon the results of operations or cash flow for such period. However, at this time, management believes that
the ultimate outcome of these proceedings should not have a material adverse effect on our financial condition
and liquidity.
Lawsuits Relating to Sale of Businesses
AmCareco Litigation
We are a defendant in two related litigation matters pending in state courts in Louisiana and Texas, both of
which relate to claims asserted by three receivers overseeing the liquidation of health plans in Louisiana, Texas
and Oklahoma that were previously owned by our former wholly-owned subsidiary, Foundation Health
Corporation (FHC). In 1999, FHC sold its interest in these plans to AmCareco, Inc. (AmCareco). In 2002, three
years after the sale of the three health plans, the plans were placed under applicable state oversight and ultimately
placed into receivership later that year. The receivers for each of the plans later filed suit against certain of
AmCareco’s officers, directors and investors, AmCareco’s independent auditors and outside counsel, and us. The
plaintiffs contend that, among other things, we were responsible as a “controlling shareholder” of AmCareco
following the sale of the plans for post-acquisition misconduct by AmCareco and others that caused the three
health plans ultimately to be placed into receiverships.
On June 16, 2005, a trial of the claims asserted against us by the three receivers commenced in state court in
Baton Rouge, Louisiana. The claims of the receiver for the Texas plan (AmCare-TX) were tried before a
Louisiana jury and the claims of the receiver for the Louisiana plan (AmCare-LA) and the receiver for the
Oklahoma plan (AmCare-OK) were simultaneously tried before the Court. On June 30, 2005, the jury
considering the claims of AmCare-TX returned a $117 million verdict against us, consisting of $52.4 million in
compensatory damages and $65 million in punitive damages. The jury found us 85% at fault for the
compensatory damages based on the AmCare-TX receiver’s claims of breach of fiduciary duty, fraud, unfair or
deceptive acts or practices and conspiracy. Following the jury verdict, the AmCare-TX receiver asserted that, as
an alternative to the award of punitive damages, the Court could award up to three times the compensatory
damages awarded to the AmCare-TX receiver. We opposed that assertion. On August 2, 2005, the Court entered
judgment on the jury’s verdict in the AmCare-TX matter. In its judgment, the Court, among other things, reduced
the compensatory damage award to $44.5 million (which is 85% of the jury’s $52.4 million compensatory
damage award) and rejected the AmCare-TX receiver’s demand for a trebling of the compensatory damages. The
judgment also included the award of $65 million in punitive damages.
On August 12, 2005, after entry of judgment in the AmCare-TX claim, we filed post-trial motions with the
Court asking that the judgment be vacated or, alternatively, reduced. On August 19, 2005, the Court heard the
motions and granted us partial relief by reducing the compensatory damage award by an additional 15% (based
upon the fault of other individuals involved in the proceeding) and by reducing the punitive damage award by
30%. As a result of these reductions, the compensatory damages have been reduced to $36.7 million, and the
punitive damages have been reduced to $45.5 million. The Court signed the judgment reflecting these reductions
35