Health Net 2007 Annual Report Download - page 136

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
current and former Health Net associates. The restoration process was complex, time consuming and expensive
as it involved dealing with over 14 billion pages of documents. Health Net was unable to complete the project by
the deadline and the District Court denied additional time to complete the project. The project was completed two
months after the deadline.
The May 5 Order also set forth certain findings regarding plaintiffs’ argument that the “crime-fraud”
exception to the attorney-client privilege should be applied to certain documents for which Health Net claimed a
privilege. In this ruling, the District Court made preliminary findings that a showing of a possible crime or fraud
was made. The review of privileged documents under the “crime-fraud” exception was assigned by the District
Court to the Magistrate Judge, who was to review the documents and make a recommendation to the District
Court. On January 22, 2007, the Magistrate Judge made a recommendation that the assertion of privilege for a
number of the documents was vitiated by the crime-fraud exception. Health Net has appealed this ruling to the
District Court. In June 2007, the District Court asked the Magistrate Judge to determine if Plaintiffs had
established a prima facie case that Health Net had committed a crime or fraud that would vitiate the attorney-
client privilege claimed for an additional set of Health Net documents. The Magistrate Judge so found and
referred the matter to a Special Master for further review. No determination has yet been made by the Special
Master.
On December 6, 2006, the District Court issued an opinion and order finding that Health Net’s conduct in
connection with the discovery process was sanctionable (December 6 Order). The District Court ordered a
number of sanctions against Health Net, including, but not limited to: striking a number of Health Net’s trial
exhibits and witnesses; deeming a number of facts to be established against Health Net; requiring Health Net to
pay for a discovery monitor to oversee the completion of discovery in these cases; ordering that a monetary
sanction be imposed upon Health Net once the District Court reviews Health Net’s financial records; ordering
Health Net to pay plaintiffs’ counsel’s fees and expenses associated with the sanctions motion and motions to
enforce the District Court’s discovery orders and re-deposing Health Net witnesses. In connection therewith, on
June 19, 2007, the District Court ordered Health Net to pay Plaintiffs’ counsel fees of $6,723,883, which were
paid on July 3, 2007; this amount was accrued for as of June 30, 2007. The District Court has not yet announced
what, if any, additional penalties will be imposed.
In its December 6, 2006 Order, the District Court also ordered that Health Net produce a large number of
privileged documents that were first discovered and revealed by Health Net as a result of the email backup tape
restoration effort discussed above. We appealed that order to the Third Circuit where it is still pending. Finally,
pursuant to the December 6 Order, the District Court appointed a Special Master to determine if we have
complied with all discovery orders. In her Report, the Special Master found, among other things, that: (1) “There
was no evidence of intentional or deliberate destruction of emails;” (2) “There is no evidence of destruction of
emails by any individual;” and (3) “There was no evidence of intentional, malicious or bad faith conduct.” As a
result of these findings, plaintiffs requested that the District Court accept the Special Master’s Report, but reject
the portion containing the above quotes. We have opposed the request that portions of the Report be expunged.
The Court has yet to rule on plaintiffs’ request.
Due to the developments in the McCoy/Wachtel cases during the fourth quarter of 2006, we recorded a
charge of $37.1 million representing our best estimate of future legal defense costs. No amount was recorded for
the probable loss of the claim, because at that time the probable loss of the claim could not be reasonably
estimated.
In August 2007, we engaged in mediation with the plaintiffs that resulted in an agreement in principle to
settle McCoy,Wachtel and Scharfman. A definitive settlement agreement has not yet been finalized. Once it is
finalized, the agreement will be subject to approval by the District Court. The material terms of our agreement in
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