UnitedHealth Group Incorporated, petitioner, Appellant, vs. State of Minnesota, by Lori Swanson, Respondent.Annotate this Case
This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480 A. 08, subd. 3 (2006).
STATE OF MINNESOTA
COURT OF APPEALS
UnitedHealth Group Incorporated, petitioner,
State of Minnesota, by Lori Swanson,
Filed December 4, 2007
Ramsey County District Court
File No. C3-06-006128
Marianne D. Short, Peter W. Carter, Thomas P. Swigert, Katie C. Pfeifer, Gretchen A. Agee, Dorsey & Whitney, LLP, 50 South Sixth Street, Suite 1500, Minneapolis, MN 55402-1498 (for appellant)
Lori Swanson, Attorney General, Michael J. VanSelow, Deputy Attorney General, Jennifer L. DeKarske, Assistant Attorney General, 1800 Bremer Tower, 445 Minnesota Street, St. Paul, MN 55101-2134 (for respondent)
Considered and decided by Wright, Presiding Judge; Shumaker, Judge; and Halbrooks, Judge.U N P U B L I S H E D O P I N I O N
Respondent Attorney General served appellant UnitedHealth Group, Inc. with a civil investigative demand (CID) for pre-complaint discovery based on appellant's possible violation of five state statutes. Appellant moved the district court for a protective order to quash respondent's CID. The district court denied appellant's motion, and this appeal followed. Because appellant's alleged activities fall within one of the five statutes, the district court did not err in denying appellant's motion. We affirm.
In March 2006, an article in The Wall Street Journal raised questions about appellant's stock-option practices. Charles Ferelle & James Bandler, The Perfect Payday, Wall St. J., Mar. 18, 2006, at A1. The article explained that a stock-option recipient has the right to buy company stock at a set price, and that many companies set the option price at the stock's current market value on the date of the grant. Appellant was one of several companies, according to the article, that allowed its chief executive officer (CEO) to "backdate" his stock options to a day when the company's stock price was below current market value. From 1997 to 2001, appellant's CEO was reportedly granted options backdated to when the company's stock was at its lowest priceresulting in over $700 million in unexercised stock options. The article explained that backdating is problematic because the recipient tends to make a lot of money when later exercising the option, which translates into extra compensation and company costs. A company that does not account for these costs, according to the article, may have overstated profits. The article also noted that backdating could lead to securities fraud allegations if the practice runs contrary to the company's shareholder-approved stock-option plan.
Since the article was published, appellant's stock-option practices have been scrutinized by local and national media. Appellant has been investigated by federal regulatory agencies and congressional committees. Appellant is defending against derivative shareholder complaints and putative class actions in both federal and state courts. And appellant is conducting an internal review of its stock-option program and an independent investigation into the issues raised by its shareholders. During this time, respondent's office received numerous citizen complaints about appellant's reported backdating activities.
In June 2006, respondent served appellant with a CID pursuant to Minn. Stat. § 8.31. Appellant moved for a protective order under Minn. R. Civ. P. 26.03 to quash respondent's CID for failure to specify sufficient legal grounds. In response, respondent served appellant with an amended CID. The parties agreed to substitute the amended CID as the basis for appellant's ongoing motion.
Respondent asserted in the amended CID that it had reasonable grounds to believe that appellant violated one or more of the following laws: "Minn. Stat. §§ 80 A. 03 (Minnesota Securities Act); 302 A. 251 and 302 A. 409 (Minnesota Business Corporation Act); 325 F. 67 (False Statements in Advertising Act); 325 F. 69 (Consumer Fraud Act); and 325D.44 (Deceptive Trade Practices Act)." Respondent further stated that it had reasonable grounds to believe that appellant deceived and defrauded the state and its citizens:
[Appellant] has engaged in unlawful, deceptive, and fraudulent practices in connection with the sale of its securities to Minnesota citizens and the State of Minnesota, as well as in connection with its director and executive pay practices, including by allowing its CEO and other executives and directors to fraudulently and illegally backdate the price at which they purchased [appellant's] stock.
Respondent's amended CID directed appellant to answer interrogatories and produce documents dating back to January 1, 1997, including (1) director and officer compensation plans and employment agreements; (2) all employee stock-option plans; (3) board of director and compensation committee meeting minutes; (4) any proposed or implemented changes made to policies and financial statements based on stock-option criticism; and (5) all documents, disclosed and received, from any past or ongoing external and internal investigations arising from compensation or stock-option criticism.
On October 5, 2006, the district court denied appellant's motion for a protective order that would quash respondent's CID. Although the court properly cited section 8.31 as the principal controlling authority, it failed to provide any analysis regarding how that authority applies here or which statutes are implicated by respondent's allegations. Ordinarily it would be appropriate to remand for particular findings or more specific reasons for the ruling, but the parties have provided a sufficient record to allow us to determine the propriety of the court's order.
On appeal, appellant contends that respondent has limited authority under section 8.31 to issue a CID for pre-complaint discovery. Appellant argues that respondent does not have power to investigate here for two reasons. First, because the CID included two statutes, the Minnesota Securities Act and the Minnesota Business Corporation Act, that are not listed under and do not fall within the scope of section 8.31. Second, because respondent does not have reasonable grounds to believe appellant has violated the Minnesota False Statements in Advertising Act, the Minnesota Consumer Fraud Act, or the Minnesota Deceptive Trade Practices Act.
D E C I S I O N
Statutory construction is a question of law that this court reviews de novo. Brookfield Trade Ctr., Inc. v. County of Ramsey, 584 N.W.2d 390, 393 (Minn. 1998). This court is not bound by a district court's decision on a purely legal issue. Modrow v. JP Foodservice, Inc., 656 N.W.2d 389, 393 (Minn. 2003) (citation omitted). This court should consider, however, the district court's broad discretion in fashioning protective orders. Star Tribune v. Minn. Twins P'ship, 659 N.W.2d 287, 293 (Minn. App. 2003) (citing Erickson v. MacArthur, 414 N.W.2d 406, 409 (Minn. 1987)). When reviewing mixed questions of law and fact, this court corrects erroneous applications of the law, but is mindful of the district court's discretion in its findings of fact and ultimate conclusions. Maxfield v. Maxfield, 452 N.W.2d 219, 221 (Minn. 1990).
Section 8.31 directs respondent to investigate state law violations "respecting unfair, discriminatory, and other unlawful practices in business, commerce, or trade." Minn. Stat. § 8.31, subd. 1 (2006). Respondent is also "specifically, but not exclusively," directed to investigate suspected offenses against certain consumer-protection laws, including
the Nonprofit Corporation Act . . . , the Act Against Unfair Discrimination and Competition . . . , the Unlawful Trade Practices Act . . . , the Antitrust Act . . . , laws against false or fraudulent advertising, the antidiscrimination acts . . . , the act against monopolization of food products . . . , the act regulating telephone advertising services . . . , the Prevention of Consumer Fraud Act . . . , and [statutes] regulating currency exchanges . . . .
Id. According to this language, respondent enjoys a broad investigatory mandate. But there are limitations on respondent's power. "The scope of the inquiry [commenced by issuing the CID] must be within the authority of the Attorney General, the information requested must be reasonably relevant, and the demand for documents not too indefinite." Minn. Twins P'ship v. State by Hatch, 592 N.W.2d 847, 851 (Minn. 1999) (quotation omitted).
The CID recipient may move the district court for a protective order under the Minnesota Rules of Civil Procedure, as appellant did below. Minn. Stat. § 8.31, subd. 2 (2006). Rule 26.03 provides that "for good cause shown . . . [the district court] may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense." Minn. R. Civ. P. 26.03. The district court has broad discretion to decide whether the CID recipient carried its burden to show sufficient good cause. Star Tribune, 659 N.W.2d at 293-94 (concluding that the district court properly considered the protective order's effect on the disclosure of government documents to the public). Appellant has not pursued this argument before this court.
Additionally, respondent is empowered to investigate "[w]hen the attorney general has information providing a reasonable ground to believe that any person has violated, or is about to violate, any of the laws of this state referred to in subdivision 1." Minn. Stat. § 8.31, subd. 2 (emphasis added). To meet this standard, respondent need only show that "on the basis of information the attorney general already has, that it is reasonable for the investigation to continue." Kohn v. State by Humphrey, 336 N.W.2d 292, 296 (Minn. 1983). In Kohn, the attorney general provided sufficient reasonable grounds in an affidavit summarizing over 100 customer complaints made to its office and to the state's Better Business Bureau. Id. at 294-95.
Even if respondent has shown reason to investigate, a CID is nevertheless invalid if the attorney general lacks authority to prosecute the suspected violations. See Minn. Twins P'ship, 592 N.W.2d at 856 ("Because as a matter of law the Attorney General is precluded from prosecuting the Twins on these [federal] antitrust allegations, the district court erred when it issued an order compelling compliance with the CIDs."); cf. State by Hatch v. Am. Family Mut. Ins. Co., 609 N.W.2d 1, 4 (Minn. App. 2000) (holding that the attorney general may pursue alleged violations by insurance companies under section 8.31 because the commissioner's power to enforce state insurance laws is not exclusive), review denied (Minn. June 13, 2000).
We agree with the parties that the CID is valid if respondent (1) has reasonable grounds to believe that appellant's alleged backdating activities violated any one of the five statutes listed in the CID, and (2) has statutory authority to prosecute that violation. On this basis, we hold that respondent has authority to demand pre-complaint discovery of appellant with respect to the Minnesota False Statements in Advertisement Act. We decline to extend our holding beyond the scope of this act. Accordingly, respondent may only discover information that is demonstrably relevant to this violation. Our holding does not indicate that appellant's alleged backdating activities violate any other statute listed in respondent's CID or under section 8.31.
The Minnesota False Statements in Advertisement Act (MFSAA) prohibits a corporation from advertising to the public "any material assertion, representation, or statement of fact which is untrue, deceptive, or misleading." Minn. Stat. § 325 F. 67 (2006). For the corporation's activities to fall within the MFSAA, it must intend "to sell or in anywise dispose of . . . securities, . . . directly or indirectly, to the public, for sale or distribution," or intend "to induce the public in any manner to enter into any obligation relating thereto, . . . or any interest therein." Id. The MFSAA applies when the corporation "cause[s], directly or indirectly, to be made, published, disseminated, circulated, or placed before the public . . . an advertisement of any sort regarding . . . securities, . . . for use, consumption, purchase, or sale." Id. The MFSAA directs the attorney general to enforce and prosecute any violations. Id.
Respondent contends that appellant's shareholders suffered substantial harm from appellant's stock-option program, in part, because appellant's filings and statements "advertised" inaccurate reflections of its actual earnings. Appellant first argues that no advertisements are at issue here, because its securities filings, proxy statements, and public statements are disseminated according to federal requirements and are not meant to induce any action by the public.
Although the MFSAA does not define "advertisement," it does provide a litany of ways an advertisement can be placed before the public. Minn. Stat. § 325 F. 67 (identifying "a newspaper or other publication, or . . . book, notice, handbill, poster, bill, label, price tag, circular, pamphlet, program, or letter, or over any radio or television station, or in any other way"). Because "advertisement" is not explicitly defined, we give the term its plain, ordinary meaning: "[t]o make public announcement of," and "[t]o call the attention of the public to a product or business." The American Heritage Dictionary 26 (3d ed. 1992); see also Tschimperle v. Aetna Cas. & Sur. Co., 529 N.W.2d 421, 425 (Minn. App. 1995) (stating that because the liability policy did not define "advertising activities," the term should be given its plain, ordinary meaning), review denied (Minn. May 31, 1995). We also look to the Minnesota administrative rule that defines "advertising" within the context of securities regulation as "proxy statements and reports to shareholders . . . [and] sales literature . . . prepared in conformity with . . . the filing requirements of . . . the SEC." Minn. R. 2875.0540 (2005). That appellant is legally required to disseminate certain documents does not change the fact that appellant is also directly or indirectly making a public announcement regarding its activities. To the extent that the public relies on appellant's financial statements, press releases, and periodic filings to decide whether to buy or sell appellant's stock, we conclude that these documents are advertisements under the MFSAA.
Appellant further argues that it is not a securities dealer or otherwise in the business of selling stock, so the MFSAA does not apply to its activities.
Securities dealers are presumably (and literally) the most "direct" sellers of appellant's stock, and therefore, the most direct advertisers. But securities dealers must rely completely on appellant's assertions and representations as to its financial condition. Unlike commercial advertiserswho can employ creative filters to "spin" their clients' products and servicessecurities dealers act more like conduits that channel corporate information directly to the public. Appellant, as the sole source of corporate information passed to its stockholders, is at least an indirect advertiser of its financial health and value. Furthermore, and contrary to its contention, appellant is not only in the business of selling health insurance. As a publicly traded company, appellant also engages in practices that induce the public to purchase its stock. We conclude that appellant's activities fall within the combined reach of sections 325 F. 67 and 8.31.
Because appellant, at least indirectly, publicly disseminated materials that are advertisements within the ambit of the MFSAA, and in light of the low "reasonable grounds" hurdle set forth in Kohn, 336 N.W.2d at 296, we hold that respondent's pre-complaint investigation may continue. We further hold that respondent's demand for discovery must be confined to only that information demonstrably related to false advertising within the scope of Minn. Stat. § 325 F. 67.
 Appellant has not argued, and we do not question, that appellant's stock-option program falls within the meaning of "securities" used in the MFSAA. "Security" is ordinarily defined to include "stock certificate or bond." American Heritage Dictionary 1632 (3d ed. 1992); see also Black's Law Dictionary 1384 (8th ed. 2004) (defining "security" as "[a]n instrument that evidences the holder's ownership rights in a firm (e.g., a stock)").