June 8, 2017, Trial News
Ninth Circuit revives class action against AARP
Diane M. Zhang
The Ninth Circuit has allowed a class action against AARP to proceed, holding that the plaintiff stated a plausible claim that the association violated California’s Unfair Competition Law by soliciting insurance without a license and misleading the public by withholding the fact that member payments for health insurance included a commission.
The Ninth Circuit has allowed a class action against AARP to proceed, holding that the plaintiff stated a plausible claim that the association violated California’s Unfair Competition Law (UCL) by soliciting insurance without a license and misleading the public by withholding the fact that member payments for health insurance included a commission. (Friedman v. AARP, Inc., 2017 WL 1657553 (9th Cir. May 3, 2017).)
Jerald Friedman, a Medicare beneficiary, purchased Medigap insurance: supplemental private health insurance that covers costs not covered by Medicare. He purchased it through a group Medigap policy held by AARP and underwritten and sold by UnitedHealth Care Insurance Co. (UnitedHealth). AARP, which is not licensed to provide insurance coverage, is a dominant figure in the Medigap market—about one third of Medigap policyholders are enrolled in AARP’s program.
AARP and UnitedHealth have a joint venture agreement that requires individuals who want to purchase Medigap coverage from UnitedHealth to do so through AARP’s group policy. Under this agreement, AARP collects insurance premiums from its members and can invest the money—as well as retain 4.95 percent of each dollar paid by Medigap enrollees—before remitting the proper fees to UnitedHealth. The agreement terms refer to the 4.95 percent retention rate as a “allowance.” AARP has also characterized it as a royalty paid in exchange for UnitedHealth’s use of AARP’s intellectual property, such as the organization’s logo. AARP also has an agreement with a subsidiary trust that obligates the association to actively solicit membership participation in the Medigap plan, which it does through websites and television commercials.
Friedman alleged that AARP concealed the fact that the royalty was actually an insurance commission collected on top of the premium paid to UnitedHealth—and that the money AARP retained was money he and other UnitedHealth Medigap enrollees might not have paid otherwise. He filed a putative class action alleging violations of the UCL. Because AARP actively solicited insurance and received a commission from UnitedHealth, Friedman argued, the nonprofit unlawfully transacted insurance without a license in violation of the California Insurance Code—an unfair business practice under California law.
The defendants moved to dismiss under Rule 12(b)(6), arguing that the plaintiff had not plausibly alleged that AARP acted improperly as an unlicensed insurance agent. The district court agreed, holding that the agreement between AARP and UnitedHealth was “consistent with [a] permissible arrangement.” Noting that the joint venture agreement did not characterize the 4.95 percent fee as a commission, the court held that the plaintiff failed to plausibly plead that it in fact was one. The court also disagreed with Friedman’s allegations that AARP actively solicited insurance, stating that the organization’s marketing materials did not permit individuals to either purchase insurance through AARP or apply for insurance. Friedman appealed.
The relevant California statute at issue is the UCL, which prohibits “unfair competition,” defined as any “unlawful, unfair or fraudulent business act or practice.” As the Ninth Circuit noted, “[b]ecause the statute is written in the disjunctive, it is violated if a defendant violates any of the unlawful, unfair or fraudulent prongs.” Friedman alleged that AARP violated §1631 of the California Insurance Code, which states that a person “shall not solicit, negotiate, or effect contracts of insurance . . . unless the person holds a valid license from the commission authorizing the person to act in that capacity.”
The Ninth Circuit examined AARP’s alleged violations of the California Insurance Code through both the UCL’s “unlawful” and “unfair or fraudulent” prongs. First, the court addressed Friedman’s allegations that AARP unlawfully transacted insurance by charging a commission to its members.
The California Insurance Code does not define “commission,” but attorney Stuart Davidson of Boca Raton, Fla., who represented the plaintiff, explained that he believes the 4.95 percent fee to be a commission—and thus unlawful in California.
“In Wayne v. Staples, Inc. (37 Cal. Rptr. 3d 544 (2006)), a California appeals court concluded that the imposition of an additional percentage fee as part of the gross premium charged to the insured, whether imposed directly or indirectly, is a ‘commission’ within the meaning of the California Insurance Code,” he said. “Our allegation is that the fee siphoned off Medigap member contributions by AARP is, in reality, a disguised commission that only a licensed insurance producer can receive under the California Insurance Code.”
The Ninth Circuit agreed, ruling that Friedman plausibly alleged this payment to be a commission despite the defendants’ arguments to the contrary. While the defendants argued that it was not a commission because the payment was calculated as a percentage of all premiums paid in connection with UnitedHealth’s Medigap coverage—regardless of their source—the court pointed out that the only source was through AARP because of its exclusive joint venture agreement that all individuals who wish to purchase UnitedHealth Medigap insurance do so through AARP.
Davidson also emphasized the fee’s history. “For years, the payment to AARP was defined by AARP itself as an ‘administrative allowance,'” he said. “It was not until AARP got in trouble with the IRS that it conveniently re-termed the ‘allowance’ as a ‘royalty’ for its ‘sponsorship’ of the Medigap health plan. Now, despite the fact that the AARP trust agreement mandates that AARP conduct significant business operations relating to the Medigap plan—including, importantly, soliciting new members, promoting and advertising the plan, and collecting and remitting billions of dollars in premiums—AARP says that this is all being done for free, and that the ‘royalty’ is only for sponsorship of the plan.”
The Ninth Circuit also held that the plaintiff had plausibly pleaded that AARP “solicited” insurance in violation of California law. Citing the fact that AARP’s marketing materials stated in bold font: “This is a solicitation of insurance,” the court also looked to AARP’s contractual obligation to solicit member participation in the Medigap group plan. While the district court found that the complaint failed to adequately allege solicitation because none of the AARP websites permitted anyone to purchase insurance—and because neither AARP nor its affiliates were the insurer—the Ninth Circuit found its reasoning unpersuasive. “We are not persuaded, however,” Judge Barrington Parker wrote, “that the ability (or lack of ability) to directly purchase or apply for insurance is dispositive.”
Last, the court turned to the “fraudulent” and “unfair” prongs of the UCL—here, the representative plaintiff must show that the public is likely to be deceived by the practice. Here, the Ninth Circuit held, Friedman had plausibly alleged that members of the public are likely to be deceived into paying AARP’s additional 4.95 percent fee because AARP had not characterized it as a commission collected on top of the premium. Although the defendants argued that Friedman failed to allege deception, the court pointed to an AARP Medigap disclaimer that specifically stated the premiums were used to pay expenses incurred by the AARP Trust in connection with the insurance programs. Thus, AARP had not told its members that, in reality, the payments included money in addition to the expense payment. Therefore, Friedman plausibly alleged that he had been induced to purchase Medigap through AARP rather than from another insurer that did not charge unlawful commissions.
“We allege that the money siphoned off Medigap member contributions by AARP is an illegal payment and must be returned to the insureds,” Davidson said. “It is clear that the AARP fee is money [charged] on top of the premiums needed for UnitedHealth to bind Medigap insurance coverage. Mr. Friedman and the class paid more for their AARP Medigap policy because of AARP and UnitedHealth’s wrongdoing. This is especially true since all Medigap policies across carriers contain identical terms set by the federal government—the only real differentiating factor between Medigap policies with different carriers is the price.”