Health Net 2007 Annual Report Download - page 41

Item 3. Legal Proceedings.
Class Action Litigation
McCoy v. Health Net, Inc. et al, Wachtel v. Health Net, Inc., et al and Scharfman, et al v. Health Net, Inc.,
et al.
These three lawsuits are styled as nationwide class actions. McCoy and Wachtel 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 the Employee Retirement Income Security Act of 1974 (ERISA) in connection with various
practices related to the reimbursement of claims for services provided by out-of-network (ONET) providers.
Plaintiffs seek relief in the form of payment of additional benefits, injunctive and other equitable relief, and
attorneys’ fees.
In September 2006, the District Court in McCoy/Wachtel certified 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 billed charges from 1995 through August 31, 2004. Class notices were
mailed and published in various newspapers at the beginning of July 2007.
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. and Health Net Life
Insurance Co. captioned Scharfman, et al. v. Health Net, Inc., et al., 05-CV-00301 (FSH)(PS) (United States
District Court for the District of New Jersey). On March 12, 2007, the Scharfman complaint was amended to add
McCoy and Wachtel as named plaintiffs and to add a non-ERISA claim. The Scharfman complaint now alleges
both ERISA and Racketeer Influenced and Corrupt Organizations Act (RICO) claims based on conduct similar to
that alleged in McCoy/Wachtel. The alleged claims in Scharfman run from September 1, 2004 until the present.
Plaintiffs in the Scharfman action seek relief in the form of payment of additional benefits, civil penalties,
restitution, compensatory, and consequential damages, treble damages, prejudgment interest and costs, attorney’s
fees and injunctive and other equitable relief. On April 10, 2007, we filed a motion to dismiss all counts of that
complaint, which is pending. On July 25, 2007, the Magistrate issued her recommendations to the Court on this
motion, recommending denying the motion to dismiss with respect to the ERISA claims, granting the motion to
dismiss with respect to the State RICO claims, and dismissing the federal RICO claims with leave to file an
amended complaint and a direction to file a RICO case statement.
In the McCoy/Wachtel actions, 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.
While the sanctions proceedings were progressing, the District Court and the Magistrate Judge overseeing
discovery entered a number of orders relating, inter alia, to production of documents. In an order dated May 5,
2006 (May 5 Order), the District Court ordered the restoration, search and review of backed-up emails of 59
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.
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