Ninth Circuit Revives Insurance Class Action Against AARP

PASADENA, Calif. (CN) — Unable to dodge allegations that it bilked senior citizens for millions of dollars in health insurance premiums, AARP must return to federal court to address the charges, the Ninth Circuit ruled Wednesday, reversing and remanding dismissal of the class action.

The three-judge panel found that lead plaintiff Jerald Friedman adequately pleaded that that nation’s largest senior citizen lobby “transacts” and “solicits” insurance without a license, and that it tricked members into thinking that a roughly 5 percent fee it adds to their insurance bills is a permissible “royalty,” though it actually is an illegal insurance commission.

“Friedman has met the not especially onerous burden imposed at the pleading stage of alleging facts, making it plausible that AARP transacts insurance by collecting commissions from its members who purchase UnitedHealth’s Medigap policy,” Senior Second Circuit Judge Barrington Parker Jr. wrote for the panel, sitting by designation. “Friedman’s complaint should not have been dismissed.”

Friedman, a Medicare beneficiary, bought supplemental health insurance through a Medigap policy held by AARP and underwritten and sold by UnitedHealth, also a defendant.

Friedman sued AARP and UnitedHealth in January 2014, claiming that the fee is a commission charged on top of monthly premium charges, which AARP is not entitled to collect because it is not licensed to sell insurance in California. He said the conduct violates the California Insurance Code and state unfair competition laws.

AARP and UnitedHealth say the fee is a legal royalty payment made by UnitedHealth in exchange for using AARP’s intellectual property, such as its logo.

Under a joint venture agreement between AARP and UnitedHealth, AARP collects insurance premiums from members and remits them to UnitedHealth. In exchange, UnitedHealth allows AARP to invest the payments before remitting them. AARP deducts 4.95 percent of each dollar paid by UnitedHealth Medigap enrollees before handing over the rest of their premiums to UnitedHealth.

U.S. District Judge Dean Pregerson, in the Central District of California, dismissed the case in October 2014, finding that Friedman had not adequately alleged that AARP acted as an unlicensed insurance agent that is paid commissions on insurance sales.

Pregerson also found that Friedman failed to allege that AARP “solicits” insurance, because its website does not allow prospective insurance buyers to apply for or buy coverage.

The Ninth Circuit disagreed, in a 21-page opinion.

AARP and UnitedHealth argued that the fee is not a commission because UnitedHealth’s payment to AARP “is calculated as a percentage of all premiums paid in connection with the program, regardless of their source.”

But noting that Friedman alleged that anyone who wants to buy Medigap coverage from UnitedHealth must buy AARP’s plan and make payments to AARP, the appeals court ruled that there is “no ‘source’ other than through AARP for the premiums paid to UnitedHealth for Medigap coverage.”

“At the motion to dismiss stage, we conclude that Friedman has plausibly alleged this payment to be a ‘commission,’” Parker wrote.

Citing language from AARP’s own marketing materials: “This is a solicitation of insurance,” the unanimous panel ruled that Friedman’s claim should not have been dismissed.

When Pregerson dismissed the case, “The court’s primary rationale was that ‘none of those websites permits an individual to purchase insurance coverage or submit an application for insurance,’” Parker wrote. “We are not persuaded, however, that the ability (or lack of ability) to directly purchase or apply for insurance is dispositive,” Parker wrote. (Citation omitted.)

“Even if consumers cannot directly apply for or purchase insurance through AARP, Friedman has plausibly alleged that AARP’s marketing materials are designed to lead its members to contact UnitedHealth to consummate sales of insurance.”

Despite the ruling, AARP attorney Douglas Winter, of the firm Bryan Cave, was optimistic that AARP will fend off the allegations.

“While we are still reviewing the decision, we remain confident that AARP’s position will ultimately prevail,” he said in an email Thursday.

Ninth Circuit Judges Morgan Christen and Richard Tallman also sat on the panel.

Friedman is represented by Andrew Love of Robbins Geller Rudman & Dowd in San Francisco, and UnitedHealth by Brian Boyle of O’Melveny & Myers in Washington. Neither Love nor Boyle could be reached for comment Wednesday evening.