Health Net 2010 Annual Report Download - page 53

plans to AmCareco, Inc. (“AmCareco”). We retained a minority interest in the three plans after the sale.
Thereafter, the three plans became known as AmCare of Louisiana (“AmCare-LA”), AmCare of Oklahoma
(“AmCare-OK”) and AmCare of Texas (“AmCare-TX”). In 2002, three years after the sale of the plans to
AmCareco, each of the AmCare plans was placed under state oversight and ultimately into receivership. The
receivers for each of the AmCare plans filed suit against us contending 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 to fail and ultimately be placed into
receivership.
On June 16, 2005, a consolidated 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 AmCare-TX were tried before a jury and
the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same
proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict
against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million
in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million
and $45.5 million, respectively, and entered judgments against us in those amounts.
The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on
July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims and awarded $9.5
million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK,
respectively. The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive
damages. We thereafter appealed both judgments, and the receivers for AmCare-LA and AmCare-OK each
appealed the orders denying them attorneys’ fees and punitive damages.
On December 30, 2008, the Court of Appeal issued its judgment on each of the appeals. It reversed in their
entirety the trial court’s judgments in favor of the AmCare-TX and AmCare-OK receivers, and entered judgment
in our favor against those receivers, finding that the receivers’ claims failed as a matter of law. As a result, those
receivers’ cross appeals were rendered moot. The Court of Appeal also reversed the trial court judgment in favor
of the AmCare-LA receiver, with the exception of a single breach of contract claim, on which it entered
judgment in favor of the AmCare-LA receiver in the amount of $2 million. On January 14, 2009, the three
receivers filed a request for rehearing by the Court of Appeal. On February 13, 2009, the Court of Appeal denied
the request for a rehearing. Following the Court of Appeal’s denial of the requests for rehearing, each of the
receivers filed applications for a writ with the Louisiana Supreme Court. On December 18, 2009, the Louisiana
Supreme Court granted the receivers’ writs, and oral argument was held on March 16, 2010.
In light of the original trial court judgments against us, on November 3, 2006, we filed a complaint in the
U.S. District Court for the Middle District of Louisiana and simultaneously filed an identical suit in the 19th
Judicial District Court in East Baton Rouge Parish seeking to nullify the three judgments that were rendered
against us on the grounds of ill practice which resulted in the judgments entered. We have alleged that the
judgments and other prejudicial rulings rendered in these cases were the result of impermissible ex parté contacts
between the receivers, their counsel and the trial court during the course of the litigation. Preliminary motions
and exceptions have been filed by the receivers for AmCare-TX, AmCare-OK and AmCare-LA seeking
dismissal of our claim for nullification on various grounds. The federal judge dismissed our federal complaint
and we appealed to the U.S. Fifth Circuit Court of Appeals. On July 8, 2008, the Fifth Circuit issued an opinion
affirming the district court’s dismissal of the federal complaint, albeit on different legal grounds from those
relied upon by the district court. The state court nullity action has been stayed pending the resolution of our
jurisdictional appeal in the federal action and has remained stayed during the pendency of the appeal of the
underlying judgments.
We intend to vigorously defend ourselves against the claims brought in these matters; however, these
proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome,
including the outcome of appeals, cannot be predicted at this time. It is possible that in a particular quarter or
annual period our financial condition, results of operations, cash flow and/or liquidity could be materially and
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