Health Net 2006 Annual Report Download - page 133

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12—Commitments and Contingencies
Legal Proceedings
Class Action Lawsuits
McCoy v. Health Net, Inc. et al., and Wachtel v. Guardian Life Insurance Co.
These two lawsuits are styled as nationwide class actions and are pending in the United States District Court
for the District of New Jersey on behalf of a class of subscribers in a number of our large and small employer
group plans. The Wachtel complaint initially was filed as a single plaintiff case in New Jersey State court on
July 23, 2001. Subsequently, we removed the Wachtel complaint to federal court, and plaintiffs amended their
complaint to assert claims on behalf of a class of subscribers in small employer group plans in New Jersey on
December 4, 2001. The McCoy complaint was filed on April 23, 2003 and asserts claims on behalf of a
nationwide class of Health Net subscribers. These two cases have been consolidated for purposes of trial.
Plaintiffs allege that Health Net, Inc., Health Net of the Northeast, Inc. and Health Net of New Jersey, Inc.
violated ERISA in connection with various practices related to the reimbursement of claims for services provided
by out-of-network providers. Plaintiffs seek relief in the form of payment of benefits, injunctive and other
equitable relief, and attorneys’ fees.
During 2001 and 2002, the parties filed and argued various motions and engaged in limited discovery. On
April 23, 2003, plaintiffs filed a motion for class certification seeking to certify nationwide classes of Health Net
subscribers. On August 5, 2004, the District Court granted plaintiffs’ motion for class certification and issued an
order (the “Class Certification Order”) certifying two nationwide classes of Health Net subscribers who received
medical services or supplies from an out-of-network provider and to whom the defendants paid less than the
providers’ actual charge during the period from 1997 to 2004. Health Net appealed the Class Certification Order
to the Court of Appeals for the Third Circuit. On June 30, 2006, the Third Circuit ruled in Health Net’s favor on
the appeal. The Third Circuit held that the District Court’s class certification opinion failed to properly define the
claims, issues and defenses to be treated on a class basis. The Third Circuit thus vacated the certification order
and remanded the case to the District Court for further proceedings. In September 2006, the District Court
certified the same classes but limited them to the resolution of 19 legal issues. Health Net requested permission
from the Third Circuit to appeal this second certification but the Third Circuit denied the request. In December
2006, Health Net asked the Third Circuit to reconsider its denial. That motion for reconsideration was denied.
The District Court has ordered that the notice to the classes be mailed forthwith and that Health Net pay the cost
of such notice.
On January 13, 2005, counsel for the plaintiffs in the McCoy/Wachtel actions filed a separate class action
against Health Net, Inc., Health Net of the Northeast, Inc., Health Net of New York, Inc., Health Net Life
Insurance Co., and Health Net of California, Inc. captioned Scharfman v. Health Net, Inc., 05-CV-00301
(FSH)(PS) (United States District Court for the District of New Jersey) on behalf of the same parties who would
have been added to the McCoy/Wachtel action as additional class representatives had the District Court granted
the plaintiffs’ motion for leave to amend their complaint in that action. This new action contains similar
allegations to those made by the plaintiffs in the McCoy/Wachtel action. It is not yet clear if this case will be
subsumed into the McCoy/Wachtel action.
On August 9, 2005, plaintiffs filed a motion with the District Court seeking sanctions against us for a variety
of alleged misconduct, discovery abuses and fraud on the District Court. The District Court held twelve days of
hearings on plaintiffs’ sanctions motion between October 2005 and March 2006. During the course of the
hearings, and in their post-hearings submissions, plaintiffs also alleged that some of Health Net’s witnesses
engaged in perjury and obstruction of justice. Health Net denied all such allegations. On December 6, 2006, the
District Court issued an opinion and order finding that Health Net’s conduct was sanctionable. The District Court
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