The Delaware Supreme Court recently affirmed a decision by the Delaware Court of Chancery addressing a plaintiff’s ability to acquire key documents from a defendant company based on allegations against that company in an ancillary False Claims Act (FCA) complaint.  See UnitedHealth Group Incorporated v. Amalgamated Bank as Tr. for Longview Largecap 500 Index Fund, 2018 WL (Del.).

The Underlying FCA Allegations

In two separate federal districts, UnitedHealth Group Incorporated (United) faced unsealed, factually similar FCA complaints brought by two different relators. See United States ex rel. Swoben v. Secure Horizons, No. CV 09-5013 (C.D. Cal.) (Swoben Action); United States ex rel. Poehling v. UnitedHealth Group, Inc., No. CV 16-08697 (W.D.N.Y.) (Poehling Action). (The Swoben and Poehling Actions previously were discussed here, here, here and here.)

 Both relators alleged that United engaged in a scheme whereby it overbilled Medicare through the use of improper diagnostic codes that were not supported by patients’ medical charts and failed to reimburse Medicare once learning of improper diagnostic coding. After its investigation, the government filed complaints in intervention in both the Swoben and Poehling Actions.

Based on the government’s complaints, several shareholders of United brought suit under Delaware law (8 Del. C. § 220) seeking corporate books and records from United relating to the fraud alleged in the government’s complaints. To inspect corporate books and records under Delaware law, a plaintiff must show, among other things, “a proper purpose for conducting the inspection.” One “proper purpose” for an inspection of books and records is “to investigate wrongdoing or mismanagement,” but that purpose must be supported by a “credible basis” to infer possible wrongdoing or mismanagement warranting further investigation.

Before the Delaware Chancery Court

The shareholders’ action against United asserted that, under Delaware law, shareholders possessed a right to review United’s documents because the FCA complaints provided a credible basis to infer potential corporate wrongdoing within United. United opposed the shareholders’ claim for documents, asserting that allegations contained in an FCA complaint – without more – were insufficient to demonstrate potential corporate wrongdoing requiring disclosure of corporate documents.

While the shareholders’ action was pending before the Delaware Chancery Court, the Swoben Action was dismissed in its entirety for failure to state a claim. Shortly thereafter, the Delaware Chancery Court held a one-day trial on the merits of shareholders’ action. Following the trial but before a decision was rendered, the Poehling Action also was dismissed, but only in part, with a “reverse” FCA claim and claims for unjust enrichment and payment by mistake surviving.

The Delaware Chancery Court ruled that the shareholders’ reliance on the government’s complaints in intervention established a “credible basis” to sustain an action for United’s books and records. According to the court, “while a complaint alone may not show a credible basis,” the government’s FCA complaints also contained references to documents and testimony obtained during the government’s investigation. Those additional documents and testimony sufficiently distinguished the government’s FCA complaints from a typical complaint: “[E]ven if a complaint alone is insufficient, [United] cannot escape the testimony and documents that demonstrate a credible basis for this Court to infer possible wrongdoing or mismanagement simply because they are referenced in a complaint.”

Whether a Court Can Infer Wrongdoing Sufficient to Require Corporate Disclosure Based Solely on Allegations in an FCA Complaint

 On appeal before the Delaware Supreme Court, United first argues that the Delaware Chancery Court erred by finding a credible basis of potential wrongdoing based only on the Swoben and Poehling FCA complaints. Interestingly, United appeared to concede that the two complaints sufficiently demonstrated that the underlying conduct occurred. United, however, disputed the court’s conclusion that the complaints showed that the alleged conduct was wrongful because the Swoben action was dismissed in its entirety for failing to state a claim and, at the time of the court’s decision, no decision had been rendered on the Poehling allegations. In addition, United argued that public policy should not allow a stockholder “to force a Delaware corporation to expend substantial resources providing books and records to investigate derivative claims against directors and officers” based solely on allegations contained in a complaint.

In response, the shareholders contended that the court had more than sufficient evidence to find a credible basis to infer wrongdoing. The shareholders referenced United’s memoranda, presentations, employees’ testimony, internal procedures and policies contained in the government’s FCA complaints. The shareholders argued that, in the face of this evidence, United was simply trying to litigate the merits of the Swoben and Poehling Actions, which shareholders need not do to receive United’s corporate documents.

Whether Documents and Testimony Characterized in an FCA Complaint Can Provide a Credible Basis to Infer Wrongdoing

As to the Delaware Chancery Court’s reliance on citations to documents and testimony contained in the government’s FCA complaints, United maintained that characterizations of documents and testimony in a complaint were insufficient to establish a credible basis of potential corporate wrongdoing. According to United, mere descriptions of evidence, without the underlying documents, did not provide a credible basis to establish corporate wrongdoing. Underscoring its argument, United observed that the shareholders sought the very documents and testimony cited by the government in its FCA complaints. That is, the shareholders were attempting to establish a credible basis of potential corporate wrongdoing through the very documents their action sought to obtain.

In response, the shareholders argued that hearsay evidence is an acceptable method of showing potential corporate wrongdoing. Because reliance on hearsay is permitted and the court concluded that the government’s FCA complaints were “reliable,” the shareholders argued that the court properly relied on the allegations contained in the FCA complaints.

With the Delaware Supreme Court Decision Issued, What’s Next?

Only two days after hearing oral argument, the Delaware Supreme Court issued a short order affirming the Chancery Court’s decision without further substantive analysis. In light of that ruling, corporate entities organized under Delaware law and facing an FCA complaint should be prepared to face significant requests for corporate documentation based on the FCA litigation. Moreover, this ruling begs the question whether a relator may file an FCA complaint (even without much or any insider knowledge) and then use that complaint under Delaware law as a means of obtaining discovery from the corporate defendant to bolster the complaint. In the context of FCA cases, courts typically have disfavored relators’ attempts to shore up otherwise deficient allegations through discovery obtained in the FCA action. Nevertheless, relators could attempt to use “corporate discovery” under Delaware law as an end-run around such rulings. At least based on the Chancery Court’s opinion and analysis, however, the court appeared to give weight to the fact that the government had filed complaints in intervention in the Swoben and Poehling Actions after investigating the allegations and obtaining substantial documentation and testimony. Delaware courts may not grant the same credence to a qui tam complaint filed without the benefit of a government investigation.

In addition, although documents produced in response to a Freedom of Information Act request have been held to constitute public disclosures on which qui tam allegations cannot be based, it is not clear that corporate documents produced under Delaware law would be deemed public disclosures under the FCA.

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