SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
November 5, 1998
Date of Report (Date of earliest event reported): (October 29, 1998)
RIGHTCHOICE MANAGED CARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
MISSOURI
(State or Other Jurisdiction of Incorporation)
1-13248 43-1674052
(Commission File Number) (I.R.S. Employer Identification No.)
1831 Chestnut Street, St. Louis, Missouri 63103-2275
(Address of principal executive offices) (Zip Code)
314-923-4444
(Registrant's telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Items 1. Changes in Control of Registrant.
Not applicable.
Item 2. Acquisition or Disposition of Assets.
Not applicable.
Item 3. Bankruptcy or Receivership.
Not applicable.
Item 4. Changes in Registrant's Certifying Account.
Not applicable.
Item 5. Other Events.
On October 29, 1998, the Circuit Court of Cole County,
Missouri (the "Court"), in the case styled Blue Cross and Blue
Shield of Missouri, a Missouri nonprofit corporation v. Jay
Angoff, in his official capacity as the Director of the Missouri
Department of Insurance, and the Missouri Department of
Insurance, and Jeremiah W. (Jay) Nixon, in his official capacity
as the Attorney General of the State of Missouri, Cause No. CV196-
0619CC, issued an Order (the "October 29 Order") providing for,
among other things, the appointment of Robert G. Russell as
Receiver/Custodian pendente lite to, among other things, take
exclusive possession and control of all of the issued and
outstanding shares of the Registrant's Class B Common Stock, all
of which is owned by the Registrant's parent corporation Blue
Cross and Blue Shield of Missouri.
The Registrant's Form 8-K filed with the Securities Exchange
Commission on November 2, 1998 included as Exhibits the
Registrant's press release concerning the October 29 Order and a
copy of the October 29 Order and is incorporated herein by
reference.
On November 2, 1998, Blue Cross and Blue Shield of Missouri
filed its Motion to Vacate Order and its Memorandum in Support of
Motion to Vacate in response to the October 29 Order. The Motion
to Vacate Order is attached as Exhibit 99(a) hereto and is
incorporated herein by reference. The Memorandum in Support of
Motion to Vacate is attached as Exhibit 99(b) hereto and is
incorporated herein by reference.
On November 2, 1998, the Blue Cross and Blue Shield
Association filed a complaint against the Registrant, Blue Cross
and Blue Shield of Missouri, and the Registrant's subsidiaries in
the United States District Court for the Northern District of
Illinois alleging inter alia service mark infringement and breach
of license agreements as a result of the Registrant's continued
use of the Blue Cross and Blue Shield service marks following the
issuance of the October 29 Order. The complaint is attached as
Exhibit 99(c) hereto and is incorporated herein by reference.
On November 4, 1998, the Court issued an Order (the
"November 4 Order") setting aside the October 29 Order and
declaring it to be void ab initio. A copy of the November 4 Order
is attached hereto as Exhibit 99(d) and is incorporated herein by
reference. On November 4, 1998, the Court also issued an Order
(the "Special Master Order") appointing Robert G. Russell as
special master for the purpose of collecting and analyzing
information related to the Settlement Agreement, dated September
20, 1998, by and among Jeremiah W. "Jay" Nixon, Attorney General
of the State of Missouri, the Department of Insurance of the
State of Missouri and its Director, Jay B. Angoff, Blue Cross and
Blue Shield of Missouri, and the Registrant. A copy of the
Special Master Order is attached as Exhibit 99(e) and is
incorporated herein by reference.
The Registrant's Press Release, dated November 5, 1998,
announcing its earnings for the quarter ended September 30, 1998
is attached as Exhibit 99(f) hereto and is incorporated herein by
reference.
Item 6. Resignations of Registrant's Directors.
Not applicable.
Item 7. Financial Statements
Pro Forma Financial Statements and Exhibits.
(a) - (b) Not applicable.
(c) Exhibits Required by Item 601 of Regulation S-K:
99(a) Motion to Vacate Order.
99(b) Memorandum in Support of Motion to Vacate.
99(c) Complaint of Blue Cross and Blue Shield
Association.
99(d) Order of the Circuit Court of Cole
County, Missouri, dated November 4, 1998.
99(e) Order of the Circuit Court of Cole County,
Missouri, dated November 4, 1998.
99(f) Press Release of Registrant, dated November
5, 1998.
Item 8. Change in Fiscal Year.
Not applicable.
Item 9. Sales of Equity Securities Pursuant to Regulation S.
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: November 5, 1998
RIGHTCHOICE MANAGED CARE, INC.
By: /s/ Sandra A. Van Trease
Sandra A. Van Trease
Chief Financial Officer,
Executive Vice President and
Chief Operating Officer
EXHIBIT INDEX
Exhibit No. Description
99(a) Motion to Vacate Order.
99(b) Memorandum in Support of Motion to Vacate.
99(c) Complaint of Blue Cross and Blue Shield Association.
99(d) Order, dated November 4, 1998, issued by the
Circuit Court of Cole County,
Missouri (the "Court"), in the case styled
Blue Cross and Blue Shield of Missouri, a
Missouri nonprofit corporation v. Jay Angoff,
in his official capacity as the Director of
the Missouri Department of Insurance, and the
Missouri Department of Insurance, and
Jeremiah W. (Jay) Nixon, in his official
capacity as the Attorney General of the State
of Missouri, Cause No. CV196-0619CC.
99(e) Order, dated November 4, 1998,
issued by the Circuit Court of Cole County,
Missouri (the "Court"), in the case styled
Blue Cross and Blue Shield of Missouri, a
Missouri nonprofit corporation v. Jay Angoff,
in his official capacity as the Director of
the Missouri Department of Insurance, and the
Missouri Department of Insurance, and
Jeremiah W. (Jay) Nixon, in his official
capacity as the Attorney General of the State
of Missouri, Cause No. CV196-0619CC.
99(f) Press Release of RightCHOICE Managed Care,
Inc., dated November 5, 1998.
EXHIBIT 99(a)
IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI
BLUE CROSS AND BLUE SHIELD )
OF MISSOURI, )
a Missouri nonprofit corporation, )
)
Plaintiff, )
)
vs. ) Case No. CV196-619CC
) Division 1
JAY ANGOFF, in his official capacity )
as the Director of the Missouri Department )
of Insurance, )
)
and )
)
the MISSOURI DEPARTMENT OF )
INSURANCE, )
)
and )
)
JEREMIAH W. (JAY) NIXON, in his )
official capacity as the Attorney General )
of the State of Missouri, )
)
Defendants. )
MOTION TO VACATE ORDER
COMES NOW Plaintiff Blue Cross and Blue Shield of Missouri
("Blue Cross"), and moves that the Court vacate its order of
October 29, 1998 and declare it to be void ab initio. In support
of its Motion, Plaintiff states:
(1) The Court lacked jurisdiction to enter the order of
October 29, because the underlying judgments that it seeks to
enforce, those entered December 30, 1996, remain on appeal.
Plaintiff's Application for Transfer is pending in the Supreme
Court of Missouri. The appellate mandate has not yet issued, and
in the absence of the mandate, the Court has no jurisdiction to
take further action in the case.
(2) The order was entered without notice and an opportunity
to be heard in violation of Blue Cross' rights to due process of
law under the Constitutions of the United States and the State of
Missouri.
(3) The order was entered in the absence of any evidence
whatever to demonstrate the necessity for appointment of a
receiver or custodian under governing legal standards. A
receiver or custodian pendente lite may be appointed by a Court
only on a showing of emergency circumstances, such as the
imminent dissipation of assets or other threatened immediate
irreparable harm, so as to warrant the taking of that drastic
action. There is no evidence whatever that such circumstances
are present here. The recitation of facts related to the
proposed Settlement Agreement contained in the Court's order does
not suggest the existence of any possibility of irreparable harm.
(4) The Order is in fact frustrating rather than serving
its stated purpose of preserving the value of the assets of Blue
Cross pending further proceedings in this action. The stated
purpose of the order is to preserve for the benefit of the
ultimate recipient of the assets of Blue Cross and Blue Shield of
Missouri its "non-profit assets". The Court defines the non-
profit assets of Blue Cross to be: (a) Blue Cross' 80% of the
outstanding stock of RightCHOICE Managed Care, Inc., a publicly
traded company, (b) the sum of $175,000, which is to be paid to
the Missouri Foundation for Health pursuant to a settlement
agreement signed between the parties on September 20, 1998, and
(c) such other or different assets as the Court might later
determine to be "non-profit assets."
(5) The actual effect of the Court's order has not been to
preserve the status quo and the value of the nonprofit assets.
Rather, the effect of the Court's order has been to disrupt the
status quo and diminish the value of the assets. Among the most
valuable of Blue Cross' assets are the license agreements between
Blue Cross and Blue Shield of Missouri and the national Blue
Cross and Blue Shield Association. The Association owns the
names and marks, and licenses their use to local plans. Blue
Cross has two agreements with the Association, one permitting use
of the Blue Cross name and service mark, and the other permitting
use of the Blue Shield name and mark. RightCHOICE is a related
affiliated licensee, whose right to use the names and marks is
derivative of the rights of Blue Cross. Both the Blue Cross and
the Blue Shield agreements provide for automatic termination on
appointment of a receiver or custodian of all or part of a
licensed plan's assets. The Association has informed Blue Cross
of its position that both Blue Cross' and RightCHOICE's rights to
use the Blue names and marks terminated on entry of the October
29, 1998 order, and that it intends to take those steps necessary
to prevent what it contends is the unlicensed continued use by
Blue Cross and RightCHOICE of the names and marks.
(6) The language of each license agreement imposes a
contractual obligation on the part of Blue Cross to pay a fee of
$25 per licensed member on termination. This penalty, at the
current membership levels of Blue Cross and RightCHOICE (should
it be found to be due) would be approximately $20,000,000.
(7) The Court's order has further disrupted the status quo
and impaired the value of Blue Cross and RightCHOICE, in that
termination of the license agreements would stop Blue Cross and
RightCHOICE from offering, renewing, underwriting or
administering any health care plans using the Blue Cross and Blue
Shield names and marks. Under the license agreements, Blue Cross
and RightCHOICE are further required, within fifteen days after
license termination, to notify all individual and group
customers, providers, brokers and agents of products or services
sold, marketed, underwritten or administered by Blue Cross or
RightCHOICE of an address of an alternate carrier from whom they
can secure "Blue Cross" coverage. The order therefore presents a
serious risk of erosion of the customer base of Blue Cross and
RightCHOICE.
(8) Loss of the licenses seriously impairs the value of
RightCHOICE, more than 80% of which is owned by Blue Cross, both
by reason of the potential loss of the right to use the names and
service marks and because of possible effects on RightCHOICE's
credit arrangements. RightCHOICE is a party to a loan agreement
covering approximately $45 million of outstanding indebtedness of
RightCHOICE, including its line of credit for working capital and
other purposes. The loan is secured by the stock in HealthLink,
Inc., one of the most valuable assets of RightCHOICE, and so of
Blue Cross. The lenders have informed RightCHOICE of their
position that termination of the license agreements is an event
of default under the loan agreement, entitling them to pursue all
remedies, including accelerating the maturity date and requiring
immediate payment in full.
(9) At such time as the Court is again vested with
jurisdiction of this case, the Court will have the opportunity to
enter such order as is appropriate at that time to achieve the
objectives of the October 29 order: preserving the status quo
pending consideration of the Motion to Approve Settlement and
insuring that the Court is fully informed and adequately advised
about the legal and financial terms and effects thereof.
(10) Blue Cross therefore moves for entry of an order in the
form attached hereto as Exhibit A.
(11) A memorandum of law is filed in support hereof.
WHEREFORE, for the reasons stated, Plaintiff Blue Cross and
Blue Shield of Missouri moves to vacate the order of October 29,
1998 .
LEWIS, RICE & FINGERSH, L.C.
By__/s/ Richard A. Ahrens
Richard A. Ahrens, #24757
John J. Riffle, #30578
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
(314) 444-7600
Attorneys for Plaintiff
Blue Cross and Blue Shield of Missouri
CERTIFICATE OF SERVICE
This is to certify that the foregoing was served on each
party in the manner described, this 2d day of November, 1998:
Director of Insurance HAND DELIVERY
Missouri Department of Insurance
301 West High Street
Jefferson City, MO 65102
Eleanor Hamburger U.S. MAIL
Jeanne Finberg
Consumers Union of U.S., Inc.
West Coast Regional Office
1535 Mission Street
San Francisco, CA 94103
Richard G. Callahan HAND DELIVERY
Dori J. Drummond
Missouri Department of Insurance
301 West High Street, Room 630
Jefferson City, MO 65102-0690
Patrick H. Cantilo, P.C. U.S. MAIL
Bryan R. Newcombe
Pierre J. Riou
Cantilo, Maisel & Hubbard, L.L.P.
111 Congress Avenue, Suite 1700
Austin, TX 78701
Marshall Wilson HAND DELIVERY
Paul Wilson
Counsel for Jeremiah W. (Jay) Nixon, Attorney General
P.O. Box 899
Supreme Court Building
Jefferson City, MO 65102
Richard S. Brownlee, III U.S.MAIL
Hendren & Andrae
235 East High Street
Jefferson City, MO 65102
Stuart R. Berkowitz U.S.MAIL
Platke and Berkowitz
520 N. Skinker
St. Louis, MO 63130
Irving Achtenberg U.S.MAIL
Achtenberg and Achtenberg, P.C.
4901 Main Street
Kansas City, MO 64112
Ann B. Lever U.S.MAIL
Joel D. Ferber
Legal Services of Eastern Missouri
4232 Forest Park Avenue
St. Louis, MO 63108
Dale C. Doerhoff, Esq. HAND DELIVERY
Cook Vetter Doerhoff & Landwehr
231 Madison Street
Jefferson City, MO 65101
James W. Gallaher, Esq. HAND DELIVERY
Carson & Coil, P.C.
515 East High Street
Jefferson City, MO 65102
_____/s/ Ricahrd A. Ahrens___________________
IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI
BLUE CROSS AND BLUE SHIELD )
OF MISSOURI, )
a Missouri nonprofit corporation, )
)
Plaintiff, )
)
vs. ) Case No. CV196-619CC
)
JAY ANGOFF, in his official capacity )
as the Director of the Missouri Department )
of Insurance, )
)
and )
)
the MISSOURI DEPARTMENT OF )
INSURANCE, )
)
and )
)
JEREMIAH W. (JAY) NIXON, in his )
official capacity as the Attorney General )
of the State of Missouri, )
)
Defendants. )
ORDER
On application by Plaintiff, the Court finding that the
Court's Order of October 29, 1998 was entered in the absence of
jurisdiction, that order is vacated and declared to be void ab
initio.
SO ORDERED:
THOMAS J. BROWN III, JUDGE
DATE: ____________________________________
Exhibit A
EXHIBIT 99(b)
IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI
BLUE CROSS AND BLUE SHIELD )
OF MISSOURI, )
a Missouri nonprofit corporation, )
)
Plaintiff, )
)
vs. ) Case No. CV196-619CC
) Division 1
JAY ANGOFF, in his official capacity )
as the Director of the Missouri Department )
of Insurance, )
)
and )
)
the MISSOURI DEPARTMENT OF )
INSURANCE, )
)
and )
)
JEREMIAH W. (JAY) NIXON, in his )
official capacity as the Attorney General )
of the State of Missouri, )
)
Defendants. )
MEMORANDUM IN SUPPORT OF MOTION TO VACATE
Introduction
On October 29, 1998, without notice to the parties or
request by any party, and with this action still on appeal, the
Court issued its order appointing a Receiver/Custodian pendente
lite. The Receiver/Custodian is charged with the duty of
receiving the certificates representing the stock in RightCHOICE
Managed Care, Inc. that is owned by plaintiff Blue Cross and Blue
Shield of Missouri. The Receiver/Custodian is to turn those
stock certificates over to the Clerk of the Court. Blue Cross is
directed to provide the Court with extensive information within
thirty days. The Court has announced its intention to schedule a
hearing on the appointment of a permanent Receiver or Custodian.
Blue Cross respectfully suggests that the October 29 order
should be vacated. If it stands, the order will have the effect
of thwarting rather than achieving its stated purpose: preserving
the asset value of Blue Cross and Blue Shield of Missouri pending
further proceedings in this case, including the Court's
consideration of a proposed settlement of this action agreed to
by all parties. There is ample legal basis to vacate the order
as void ab initio, because it was entered in the absence of
jurisdiction, without due process, and in the absence of any
evidence warranting the appointment of a receiver pendente lite.
ARGUMENT
I. THE COURT'S ORDER HAS HAD AND WILL HAVE MATERIAL ADVERSE
EFFECTS ON THE VALUE OF BLUE CROSS AND OF RIGHTCHOICE.
Blue Cross is a party to license agreements with the Blue
Cross and Blue Shield Association, the national organization
which licenses use of the Blue Cross and Blue Shield names and
service marks.(1) The terms of Blue Cross's license agreements are
not unique to Blue Cross Blue Shield of Missouri. The license
agreements of all other Blue Cross and Blue Shield plans contain
substantially the same terms.
RightCHOICE is a controlled affiliate licensee of Blue
Cross. RightCHOICE's licenses state that RightCHOICE's rights to
use the names and marks terminate immediately in the event Blue
Cross ceases to be a licensee. RightCHOICE and Blue Cross use
the names and marks in connection with their business of offering
health care plans and related services in their licensed
territory.
Paragraph 15(a) of each license agreement provides as
follows:
15.(a) This Agreement shall automatically
terminate upon the occurrence of any of the following
events: . . . (vii) a trustee, interim trustee,
receiver or other custodian for any of the Plan's [Blue
Cross'] or BCBSA's [the Association's] property or
business is appointed, . . ..
Thus, the express language of the license agreements
provides for automatic termination upon entry of an order
appointing a receiver or custodian. The Court's order of
October 29 is such an order, and the Association has informed
Blue Cross that it takes the position the Blue Cross licenses
have terminated.
The consequences of termination are specified in
Paragraph 15(d) of the license agreements. Section 15(d)(iii)
provides that Blue Cross and RightCHOICE are jointly liable for
payment to the Association of $25 per licensed enrollee. All
persons receiving coverage under any benefit plan that uses the
Blue Cross or Blue Shield names or marks is a licensed enrollee.
The great majority of the insured lives covered by both Blue
Cross and RightCHOICE and their affiliates are licensed
enrollees. Blue Cross last computed this penalty as of
December 31, 1997. The penalty as of that date would have been
$20,970,300. The number of licensed enrollees has not changed
materially since that date, so that it is anticipated that the
Association might seek recovery in excess of $20 million.
If the Association's position that the licenses have
terminated is sustained and it follows its past practice in
similar situations, its next step will be to conduct a bidding
process among existing Blue plans for the right to serve the 85
county area formerly licensed to Blue Cross and RightCHOICE.
Presumably, the highest bidder, which more than likely would NOT
be the only other Missouri-based Blue plan, would acquire those
rights.
Blue Cross has reason to believe that the Association will
take all steps it deems necessary to prevent it from continued
use of the names and marks. This may include institution of
proceedings to enjoin Blue Cross from using the names and marks.
Inability to use the names and marks would result in material
adverse consequences. Blue Cross and RightCHOICE would no longer
be able to offer existing Blue Cross and Blue Shield products or
renew existing Blue Cross and Blue Shield benefit plans. A
significant majority of their marketing currently revolves around
the use of the names and marks. Many profitable products with
name recognition in the community use the names and marks in the
product name. All provider directories, promotional materials,
subscriber agreements, explanation of benefit forms and payment
forms bear the Blue Cross and Blue Shield names and marks. The
inevitable disruption will cause severe harm to the business and
business prospects of both Blue Cross and RightCHOICE. It could
not come at a worse time. The months of October, November and
December are the most important months for managed care companies
because a high percentage of the business is sold or renewed
during these months.
Moreover, under paragraph 15(d) of the license agreements,
Blue Cross is required, within fifteen days of termination of the
licenses, to notify all individual and group customers,
providers, brokers, and agents of products or services sold,
marketed, underwritten or administered by Blue Cross or
RightCHOICE. This notice must contain instructions for obtaining
alternate products licensed by the Association. This notice must
be sent by first class mail in a form approved by the
Association. Loss of the names and marks would in all
probability cause many subscribers and groups to terminate their
contracts with RightCHOICE and Blue Cross, and secure coverage
elsewhere, whether from another Blue plan or otherwise.
Termination of the license agreements would also result in
immediate termination of Blue Cross' participation in the
national Blue Card program, which permits enrollees of any Blue
plan in the United States to obtain coverage through any other
Blue plan. Termination would also jeopardize the significant
benefits that Blue Cross receives as a result of its
participation in national accounts secured by other Blue Cross
plans and the Federal Employee Program, which covers federal
employees throughout the country. These accounts and the Blue
Card program together represented 122,764 enrollees as of
September 30, 1998, and year-to-date gross premium revenue of
approximately $65 million through September 30, 1998.
In recent years, the Blue Cross and Blue Shield Association
has had to deal with a number of situations in which conditions
occurred that might constitute grounds for automatic termination
of its license agreements. It has become increasingly more
assertive in taking the position that termination is automatic,
and that it will not engage in conduct that would reinstitute
licenses on a temporary basis or waive the termination. In Blue
Cross and Blue Shield Mutual of Ohio v. Blue Cross and Blue
Shield Association, 110 F.3d 318 (6th Cir. 1997), for example,
the Association took the position that the license of the Ohio
Blue plan had terminated because a proceeding seeking appointment
of a receiver had continued for more than sixty days, thus
triggering an automatic termination provision comparable to that
present in the license here. The Ohio Blue plan went to Court
seeking an injunction to prohibit termination of the license.
The Association resisted, the injunction was denied, and the
license was terminated. The Association sold the license to
another plan. Notwithstanding the potential material adverse
effects alleged by Blue Cross Blue Shield of Ohio, the Court
refused to protect the first Plan's license because it found
there was no "serious, substantial, difficult or doubtful
question" that the national association would prevail on the
merits of the question whether the license had in fact
terminated. 110 F.3d at 334.
The court's order here has affected RightCHOICE's credit
arrangements as well. The loan agreement covering RightCHOICE's
line of credit and other major indebtedness provides that events
of default occur (i) upon termination of the license agreements,
and (ii) at such time as Blue Cross ceases to own at lest 51% of
the combined voting power of RightCHOICE. The lenders have taken
the position that events of default have occurred under both
provisions, and that they have the right to pursue all remedies
under the loan agreement, including acceleration of the
outstanding indebtedness of approximately $43 million.
RightCHOICE is attempting to solve the immediate problem by
negotiation of a standstill agreement.
The net effect of the Court's action, then, might well be to
effect what the order sought to avoid: a significant reduction in
the value of the nonprofit assets that will ultimately be set
aside for the benefit of the proper beneficiaries of Blue Cross.
II. THE COURT LACKS JURISDICTION TO TAKE THE ACTION TAKEN ABSENT
ISSUANCE OF THE MANDATE OF THE COURT OF APPEALS.
The order of October 29 is the Court's first step in the
further proceedings that were contemplated at the time it entered
its judgments of December 30, 1996. In those judgments, the
Court found that Blue Cross had violated its statutory purposes
under R.S.Mo. Chapter 354 as a health services corporation and
under Chapter 355 R.S.Mo. as a nonprofit corporation. The Court
reserved for further proceedings, following exhaustion of appeals
in this case, the question of what remedy was appropriate in
consequence of those adjudicated violations.
Blue Cross timely appealed from those judgments. On August
4, 1998, the Missouri Court of Appeals for the Western District
entered its opinion affirming the judgment below. Blue Cross
timely filed a Motion for Rehearing and Application for Transfer,
which in turn were denied in the Missouri Court of Appeals. On
October 7, 1998, Blue Cross filed its Application for Transfer in
the Supreme Court of Missouri. That Application for Transfer
remains pending. The effect of the pendency of the Application
for Transfer has been to defer issuance of the mandate of the
Court of Appeals.
The effect of the appeal has been to divest the Court of
jurisdiction to proceed further in this action. It is
fundamental that the pendency of an appeal divests the trial
court of further jurisdiction in the case; in particular, the
trial court may take no further action that is dependent upon the
outcome of proceedings in the appellate court. State ex rel.
Hermann v. Green, 76 S.W.2d 432 (Mo.App.St.L 1934). Jurisdiction
remains in the appellate court until such time as the mandate
issues. After a case has been appealed, no proceedings can be
had in the lower court until there has been filed in that court,
or at least issued, a mandate. The mandate denotes the judgment,
or judgment and order issued by the appellate court. State ex
rel McGrew Coal Co. v. Ragland, 97 S.W.2d 113, 339 Mo. 452 (Mo.
1936). It is the issuance of the mandate that revests
jurisdiction in the trial court. Durwood v. Dubinsky, 361 S.W.2d
779 (Mo. 1962). The decision of the appellate court is
considered final only at the time the mandate is issued. Meierer
v. Meierer, 876 S.W.2d 36 (Mo.App. W.D. 1994).
In its order of October 29, the Court appointed a
Receiver/Custodian pendente lite, and commenced the process by
which it is to determine what remedy will be put in place in this
case. Until the mandate issues, the appellate courts will not
have conclusively determined that the Court's judgments of
December 30, 1996 shall be affirmed. Nonetheless, the Court has
directed Blue Cross to commence the process of providing
information, in the form of detailed financial statements and
accountings of transactions between Blue Cross and RightCHOICE.
These further proceedings are void in the absence of
jurisdiction. A judgment entered in the absence of jurisdiction
is void ab initio. State ex rel Voigts v. City of Pleasant
Valley, 453 S.W. 2d 700 (Mo.App. K.C. 1970); A.T. Knopf, Inc. v.
Richardson, 674 S.W.2d 174 (Mo.App. 1984). A void order may be
vacated at any time.
Blue Cross has chosen to pursue its full appellate remedies
in seeking review of the Court's judgments of December 30, 1996.
Those judgments have effects, not just in these proceedings, but
in other proceedings as well. There is pending, in the Circuit
Court for the City of St. Louis, a purported class action brought
on behalf of Anthony Sarkis and James Hacking, purported
representatives of a class of 1994 Blue Cross subscribers.(2) The
Sarkis plaintiffs claim, as do the Attorney General and the
Department of Insurance in this action, that the 1994
reorganization and BlueCross' subsequent operations were
unlawful. The Sarkis plaintiffs claim that the appropriate
parties to obtain redress for that unlawfulness are the
subscribers. If the Sarkis damages litigation goes forward, Blue
Cross anticipates that the plaintiffs there will argue that the
December 30, 1996 judgments have res judicata or collateral
estoppel effects on the issues decided thereby. To avoid those
potential collateral effects of the judgment, as well as its
effects in the case at bar, Blue Cross deemed it necessary to
pursue all of its appellate remedies, and has done so. This was
done with the full knowledge of the other parties to the
Settlement Agreement, who of course reserved the right to contest
any filings made by Blue Cross in the appellate courts. The
parties are also using the intervening time to finalize their
detailed motion for approval of the Settlement Agreement, which
will be filed immediately on issuance of the mandate.
The necessity of Blue Cross taking action to pursue its
appellate remedies has led to a situation where this Court has
not yet acquired jurisdiction, so that the parties may not
formally move for approval of the settlement in this Court. (The
parties furnished the Settlement Agreement to the Court, for the
Court's information, immediately after the Agreement was signed
and made public). The parties expect to present their motion
immediately when this Court is revested with jurisdiction. In
the interim, however, the Court has no jurisdiction and any order
it enters by way of further proceedings pursuant to its judgments
of December 30, 1996 is void. The October 29 order clearly falls
within that category. It should be vacated for voidness.
III. THE OCTOBER 29 ORDER WAS ENTERED WITHOUT NOTICE OR AN
OPPORTUNITY TO BE HEARD, AND SO IS VOID AB INITIO.
The order of October 29 is void for a second reason. Any
order that is entered without notice and an opportunity to be
heard is void for lack of fundamental due process, under both the
Fourteenth Amendment of the Constitution of the United States and
the Due Process Clause of the Constitution of the State of
Missouri, Article I, Section 10.
It is fundamental that an order entered without notice and
an opportunity to be heard is void. The requirement of notice
and an opportunity to be heard is no mere formality but is "the
very foundation stone of our procedure." Around the World
Importing, Inc. v. Mercantile Trust Co., 771 S.W.2d 919, 921 n.1
(Mo.App.W.D. 1989), citing Gladden v. Kansas City, 411 S.W.2d 228
(Mo. 1967) and Hoppe v. St. Louis Public Service Co., 235 S.W. 2d
347, 350 (Mo.banc 1951). An order entered without such notice is
void and a nullity. Henningsen v. Independent Petro Chemical
Corporation, 875 S.W. 2d 117, 119 (Mo.App. E.D. 1994).
In Nottebaum v. Leckie, 31 F.2d 556, 559 (3rd Cir. 1929), it
was held that the appointment of a receiver without notice to and
knowledge of the defendant until the receiver takes possession of
the property was a violation of the due process clause of the
United States Constitution. Nottebaum was cited with approval in
State ex rel. Kopke v. Mulloy, 43 S.W.2d 806, 810 (Mo. 1931).
There are limited exigent circumstances in which a court may
act without giving notice and an opportunity to be heard. As
shown in Part III below, there are no circumstances here which
remotely approach that threshold. Rather, the Court has entered
an order which has substantially affected the contract and
property rights of the parties, without first affording them an
opportunity to be heard. The order is therefore void ab initio
for lack of due process.
IV. THE ORDER IS VOID BECAUSE IT WAS ENTERED IN THE ABSENCE OF
ANY SHOWING OF THE CIRCUMSTANCES SUFFICIENT TO SUSTAIN
APPOINTMENT OF A RECEIVER OR A CUSTODIAN PENDENTE LITE.
The standards for appointment of a receiver or custodian
pendente lite are well established. The appointment of a
receiver pendente lite without notice, and before giving the
adverse party an opportunity to be heard, is a drastic action and
may be justified:
in, and only in, an extreme and exceptional case, in
which there is a great emergency and an imperious and
most stringent necessity for an immediate appointment,
as where the adverse party is out of the jurisdiction
of the court or cannot be found and served with notice,
or, for some other reason, it is absolutely and
imperatively necessary for the court to interfere,
before the lapse of the time required to give notice
and afford a hearing, to prevent loss, waste,
destruction, irreparable injury, or the defeat of the
petitioner's rights, or the giving of notice would
jeopardize the delivery, safety, custody or control of
the property over which the receivership is to be
extended, and the rights of the complaining party may
be amply and sufficiently protected in no other way, or
by no other remedy, such as a temporary injunction or
restraining order. (Emphasis added).
State ex rel. Schoenfelder v. Owen, 152 S.W.2d 60, 65 (Mo. 1941),
citing State ex rel. Kopke v. Mulloy, 329 Mo. 1, 43 S.W.2d 806,
810 (1931); State ex rel. International Finance Corporation v.
Southern, 51 S.W.2d 121, 122 (Mo.App. 1932); Pesch v. Boswell, 84
S.W.2d 151, 152 (Mo.App. 1935. See also State ex rel. Chemical
Dynamics, Inc. v. Luten, 581 S.W.2d 921, 924 (Mo.App. 1979).
The Owen court stated the only exceptions to the rule
requiring prior notice and hearing before appointment of a
receiver pendente lite as follows: "First, where the defendants
are non-residents, or conceal themselves to prevent service of
notice; and, second, where irreparable injury will probably ensue
if the property is not brought into court at once, and before
notice can be served." Owen, 152 S.W.2d at 65, citing Mulloy, 43
S.W.2d at 810.
The appointment of a receiver in violation of this rule of
law is "illegal, void and unenforceable and affords ground for
prohibition." Owen, 152 S.W.2d at 65; Mulloy, 43 S.W.2d at 810.
Prohibition has been granted in cases where trial courts have
appointed receivers pendente lite without prior notice and
hearing. E.g., Mulloy, 43 S.W.2d at 812-13; International
Finance Corporation, 51 S.W.2d at 122; Owen, 152 S.W.2d at 64.
See also Pesch, 84 S.W.2d at 153 (reversing trial court's refusal
to vacate order appointing receiver, Court of Appeals held that
trial court exceeded its authority in appointing a receiver
without notice where there was no showing of an imperative
necessity or a great emergency); Luten, 581 S.W.2d at 924 (trial
court's determination that a receiver was necessary to "protect
the rights of ALL the parties" was not of such an urgent posture
and great emergency that it justified the failure to accord the
parties the requisite notice and hearing). (Emphasis in
original)).
The Court's order of October 29 is bereft of any evidence
suggesting that exigent circumstances requiring the drastic
action taken are present. Most of the concerns described by the
Court in its order of October 29 are concerns that relate to the
terms of the Settlement Agreement. That Settlement Agreement is
expressly contingent upon entry of an order of approval by the
Court. The terms of the Settlement Agreement could have no
effect whatever absent such approval. Thus, the "looming issue"
of divestiture of the non-profit assets from the present
enterprise can be fully and adequately resolved in the connection
with proceedings on the forthcoming Motion for Approval of the
Settlement Agreement.
The only statement in the Court's order that attempts to
show an immediate need for appointment of a Receiver or Custodian
is the statement that, "the Court finds that it is not in the
public interest to have the Blue Cross/RightCHOICE management
controlling the non-profit assets while the settlement agreement
is under review." The Court does not identify any fact to
support this conclusion. The "non-profit assets" are not about
to be dissipated. If it is the Court's concern that Blue Cross
might sell its RightCHOICE stock during the pendency of this
proceeding without notice to or approval by the Court, the
Court's concern is unfounded. Rather, the proposed Settlement
Agreement, obligating Blue Cross, if the conditions precedent are
satisfied, to deliver that stock for the benefit of the
Foundation, would preclude exactly this result.
The Court's order is silent on what other form of
dissipation of assets might occur. Elsewhere in its order, the
Court makes reference to stock options. Only one employee has
ever exercised his RightCHOICE stock options. That employee, on
departure from the company in August of this year, exercised his
vested right to buy 1,426 shares and immediately resold them.
His total gain was $633.25.
Under RightCHOICE's stock option plan, options not exercised
within ninety days following termination of employment are
cancelled. For that reason, many of the former officers and
employees of RightCHOICE now hold no stock options, and have
never exercised any options. That is true of Roy Heimburger, who
was CEO of Blue Cross at the time RightCHOICE was created.
All outstanding RightCHOICE stock options were issued at
exercise prices in excess of the present per share stock price.
Blue Cross will demonstrate that stock options have been granted
in reasonable amounts consistent with industry norms, and that
they are designed to increase the asset value of Blue Cross
rather than diminish it. Nonetheless, to avoid exposing the post-
settlement RightCHOICE to claims for breach of contract, it was
necessary to include in the settlement documents provisions for
survival of the stock options.
The Court expresses concern that the same management
responsible for the 1994 reorganization remains in control. This
ignores the fact that at the senior executive level there have
been significant changes since that time, and that the Settlement
Agreement manifests an intention to take Blue Cross in a
direction different from that which was followed in 1994. These
changes include the appointment of a new President who had no
involvement whatsoever in the 1994 reorganization of Blue Cross.
The Court's concern that the negotiations leading up to the
Settlement Agreement were not conducted at arm's length is
unfounded, as those who participated in those protracted and
difficult negotiations can attest. The negotiations began in
late 1997, with the settlement framework publicly announced in
April 1998. The agreements were only finalized and signed on
September 20. In addition to their counsel in the case at bar,
both the Department of Insurance and the Attorney General were
represented and advised by able outside counsel (the
Sonnenschein, Nath & Rosenthal firm for the Attorney General and
Cantilo, Maisel & Hubbard, L.L.P. for the Department). The
Attorney General and the Department of Insurance throughout the
negotiations advocated terms that would maximize the value to be
received by the Missouri Foundation for Health as the ultimate
non-profit beneficiary of Blue Cross. Throughout, the Attorney
General sought the input of the public interest groups that have
participated in this litigation as amici curiae, and most, if not
all, of the concerns raised by those groups have been directly
addressed in the Settlement Agreement.
The Court's concern that the Settlement Agreement might not
be subject to full scrutiny because no party before the Court
will take a position opposed to it is unfounded. The Court
expresses concern about the absence of a party "willing to take
an adversarial role." It is not surprising that, in a case where
a settlement has been reached as the result of intense arm's
length bargaining among all parties, all parties will then be
before the Court as proponents of their settlement. The parties
have always anticipated that the settlement approval process will
be conducted in public, with ample publicity and full notice to
all interested parties. Any party with standing to object will
have the full opportunity to do so and to come before the Court
and argue that the settlement ought not to be implemented. Even
absent objection, the Court has full authority to appoint such
counsel and experts as are necessary to advise the Court on the
issues.
The Court has concluded, based on its reading of the
Settlement Agreement and supporting documents, that there are a
number of provisions that give cause for concern about the
fairness of the settlement. While those concerns are best
addressed in the context of a Motion for Approval of Settlement
Agreement, further explanation at this point will serve to
demonstrate that nothing in the terms of the Settlement Agreement
sustains an inference that the Agreement is so one-sided as to
warrant appointment of a receiver or custodian.
Valuation
A primary concern of the Court is the issue of valuation.
It is apparently the concern of the Court that the settlement
unduly favors RightCHOICE over Blue Cross (or the Foundation) on
valuation issues. The Court states that when RightCHOICE was
organized in 1994 "Blue Cross transferred the bulk of its
business to Right Choice in exchange for which Blue Cross
received 80% of Right Choice's stock." (Order at 2). The
consideration received by Blue Cross for the assets transferred
to RightCHOICE in 1994 was in fact 100% of RightCHOICE's stock.
Thereafter, RightCHOICE sold a slightly less than 20% interest in
itself to public shareholders, who paid fair value for their
shares in the open market. RightCHOICE netted more than $30
million from the sale, so that Blue Cross' 80% ownership interest
after the initial public offering was at least equal in value to
the 100% of RightCHOICE that it owned before the offering.
The Court appears to have concluded that the $175,000 in
cash to be received by the Foundation in the settlement
transaction is intended as compensation for "the lucrative
insurance business transferred to RightCHOICE." (Order at 3).
This misconstrues the role of the $175,000 cash payment.
The $175,000 is simply intended to provide cash to the
Foundation to meet its initial need for cash. Immediately
following consummation of the settlement transactions, as the
Settlement Agreement contemplates, the Foundation can and will
begin the process of orderly sale of shares on the open market to
raise cash.
The Court asserts that none of the parties will offer
evidence of the fair market value of RightCHOICE. To the
contrary, Blue Cross is prepared to offer evidence on the
valuation issue. The parties are also fully prepared to address
any opinions provided by A.G.Edwards on that issue. They are
prepared to demonstrate to the Court that the value to be
received by the Foundation more than meets any applicable legal
standard.
Concerns about Sale of the Company and the Protection of
Management
The Court questions certain provisions of the Settlement
Agreement that limit the ability of the Foundation to vote the
shares to be received, out of concern that those provisions are
intended to preserve incumbent management and avoid a sale of
RightCHOICE rather than serve the public interest. The purpose
of the questioned provisions is not to preserve the jobs of
incumbent management, but to preserve the Blue Cross and Blue
Shield licenses and maximize any value received on the sale of
RightCHOICE shares.
The Blue Cross and Blue Shield License Agreements under
which RightCHOICE would operate after implementation of the
proposed settlement would restrict the percentage of the stock of
RightCHOICE that may be owned by any one individual or
institution. These provisions are not unique to RightCHOICE.
The license agreements of all other for profit Blue Cross and
Blue Shield plans contain the same ownership restrictions. All
parties to the settlement negotiations deemed preservation of the
licenses sufficiently important to warrant compliance with the
Association's ownership restrictions, so those restrictions have
been incorporated into the Articles of Incorporation and Bylaws
of the post-settlement RightCHOICE.
The Association's restrictions are designed to preserve the
licensee's independence from any control or influence by any
particular economic interest or other special interest that might
impair the licensee's ability to (i) exercise independent
judgment as to the programs that will best meet the needs of the
communities in the areas for which it is responsible, or
(ii) function as an integral part of a unique system that depends
upon the cooperative efforts of independent members to provide
Blue Cross/Blue Shield coverage on a nationwide basis. The
restrictions will be contained in Article VII of the Certificate
of Incorporation of post-settlement RightCHOICE (See Settlement
Agreement, Exhibit C), and will prevent any noninstitutional
investor from owning 5% or more of the voting power of
RightCHOICE, any institutional investor from owning 10% or more
of the voting power, and any investor of any sort from owning 20%
or more of the equity securities of RightCHOICE.
The Association is willing to waive the ownership
restrictions as to the Health Foundation(3) if certain conditions
are satisfied. One such condition requires that all voting
shares of post-settlement RightCHOICE owned by the Foundation
must be subject to a voting trust acceptable to the Association.
The settlement documents were designed to accommodate the
Association's concerns in this regard and nothing more. The
voting trust is modeled after the voting trust approved by the
Association in connection with the conversion of the California
Blue Cross Plan.
The Court's concern that these restrictions somehow would
offer RightCHOICE incumbent management long-term job security is
unfounded. The Court asks, "Are the same people who diverted
Blue Cross from its non-profit purposes seeking to preserve their
power and position from the inside while making it appear on the
outside if there will be a substantial divestiture of control?"
The simple answer to this question is "no." As noted above,
there have been significant changes at the upper management level
since 1994. Moreover, protecting the jobs of current management
is not the motivation for the Settlement Agreement, and the
agreement offers no such guarantees.
The Foundation's shares are only subject to the voting trust
as long as they are owned by the Foundation. The day after the
settlement closes, the Foundation could exercise its demand
registration rights and commence the sale into the public markets
through underwritten public offerings of shares sufficient to
reduce the Foundation's stake in RightCHOICE below 50%. At that
point, the public shareholders would control the RightCHOICE
Board and RightCHOICE management would be subject to the same
risk of termination as the management of any publicly held
company. Thus, management is willing to bet their continued
employment on their continued performance.
The Court concludes that sections 5.04 and 5.05 of the
proposed voting trust and would "freeze the Foundation out of any
meaningful role in the sale of the [new RightCHOICE] stock."
(Order at 2). This ignores the fact that, at the insistence of
the Attorney General and the Department of Insurance, the voting
trust provides that the trustee is obligated to vote the shares
as directed by the Foundation on any transaction that would
result in a change of control of RightCHOICE. (See section 4.03(c),
Bates No. 000307). As long as the Foundation owns more than 50%
of the total shares outstanding, this provision gives the
Foundation a veto right over any sale of RightCHOICE. A right of
veto is a "meaningful" role.
The settlement documents divide control over any sale of
post-settlement RightCHOICE in the manner in which the charters
of many publicly held companies do. Purchase offers must be
approved by the Board of Directors of the company, and
recommended to the shareholders for approval. The shareholders
then have the ultimate right to approve or disapprove the
proposed transaction. Management's current compensation
arrangements are designed to reward them for a successful sale of
the company, as is customary in publicly traded companies.
Experience shows, and Blue Cross will prove, that all of these
provisions are designed to maximize shareholder value.
The Court assumes that the voting trustee will be controlled
by RightCHOICE. In fact, the initial trustee will be approved by
both RightCHOICE and the Foundation, and must meet a number of
qualifications designed to insure financial strength and
independence (see section 8.05, Bates No. 000312). The Attorney
General and the Department of Insurance required these
provisions.
Selection of Foundation Board Members
The Court expresses concern that the initial members of the
Foundation's Board will be appointed by elected officials.
(Order at 5). To avoid any possible criticism that Board members
might not be qualified or might be unduly subject to political
influence, the proposed Bylaws for the Foundation contain
detailed provisions governing the qualifications of the
Foundation's directors, including the initial appointees. (See
Article 4.2.4 of the Bylaws, Bates No. 000039). For example,
each director must possess expertise in one or more areas
directly relevant to the Health Foundation's purposes: provision
of health care, asset management and investment strategy,
philanthropic administration or public health care. No director
may be an officer, agent, employee or independent contractor of
any governmental authority whatsoever, whether federal, state or
local. Subsequent directors will be elected by the existing
Board from among those persons nominated by a Community Advisory
Committee. The Community Advisory Committee will itself be
jointly appointed by the Governor and the Attorney General, after
consultation with "community representatives from the communities
to be served" by the Health Foundation (See Bylaws, Exhibit B to
Settlement Agreement, Article 5.1.5, Bates 000044). The
Community Advisory Committee will nominate five (5) candidates
for each vacancy. In arriving at its nominations, the Community
Advisory Committee must follow a process and apply selection
criteria set forth in Section 5.1.5 of the Bylaws.
In negotiating the Settlement Agreement, the parties had no
interest in a process by which Foundation directors were selected
under a process of "politics as usual." The parties recognized
that such a process would not be in the public interest, and
would be no more palatable to the Court than to them. It was for
that reason that the foregoing criteria for directors were
established. To that same end, the Attorney General has begun a
search for qualified directors willing to serve in the event that
the settlement receives court approval. It is the expectation of
the parties that at the time the Settlement Agreement is
presented to the Court for approval, they will be able to inform
the Court of the identity of at least some of the initial
directors, and so persuade the Court that the selection of
qualified directors will not be a problem.
Release Issues
This is a settlement. Settlements customarily involve
releases. Whether the releases to be given are fair and
reasonable as part of the overall settlement can only be
determined after a hearing on the motion for approval of the
settlement. The presence of releases alone, however, should
hardly give rise to concern that the settlement is inherently
unfair.
The Court expresses surprise that releases are being given
to the Attorney General and the Department of Insurance. Blue
Cross was asked by outside counsel to the Department of Insurance
for releases and agreed to give them. In light of the fact that
a principal purpose of this settlement is to end the adversarial
relationship that has existed between Blue Cross and RightCHOICE
on one hand and its regulators on the other, it is not surprising
that such releases should be given.
The Court suggests that the settlement should be "closely
scrutinized by independent experts and weighed by persons with no
stake in the agreement." Blue Cross fully agrees. There will be
ample opportunity to conduct that process during the course of
proceedings on a Motion for Approval of the Settlement Agreement.
These concerns afford no reason for appointment of a Receiver
pendente lite.
V. PRESERVATION OF THE ASSETS OF BLUE CROSS AND CAREFUL REVIEW
OF THE SETTLEMENT CAN BE ACCOMPLISHED WITHOUT APPOINTMENT OF
A RECEIVER/CUSTODIAN.
As stated, Blue Cross welcomes review of the Settlement
Agreement. Blue Cross welcomes the opportunity, at the
appropriate time, to present to such financial and legal advisers
as the Court might select full information about the settlement
and its terms. It is Blue Cross' objective, just as it is the
Court's, to realize the maximum value for the appropriate
recipient of the assets. The first step in this process, and a
necessary step to restore the value of those assets, is a
declaration that the October 29 order is void ab initio.
CONCLUSION
For the reasons stated, the Motion to Vacate should be
granted.
LEWIS, RICE & FINGERSH, L.C.
By /s/ Richard A. Ahrens
John J. Riffle, #30578
Richard A. Ahrens, #24757
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
(314) 444-7600
Attorneys for Plaintiff
Blue Cross and Blue Shield of Missouri
CERTIFICATE OF SERVICE
This is to certify that the foregoing was sent via U.S.
First Class mail, this /s/2d day of November, 1998, to:
A. W. McPherson HAND DELIVERY
Acting Director of Insurance
Missouri Department of Insurance
301 West High Street
Jefferson City, MO 65102
Eleanor Hamburger U.S. MAIL
Jeanne Finberg
Consumers Union of U.S., Inc.
West Coast Regional Office
1535 Mission Street
San Francisco, CA 94103
Richard G. Callahan HAND DELIVERY
Dori J. Drummond
Missouri Department of Insurance
301 West High Street, Room 630
Jefferson City, MO 65102-0690
Patrick H. Cantilo, P.C. U.S. MAIL
Bryan R. Newcombe
Pierre J. Riou
Cantilo, Maisel & Hubbard, L.L.P.
111 Congress Avenue, Suite 1700
Austin, TX 78701
Marshall Wilson HAND DELIVERY
Bennett C. Rushkoff
Paul Wilson
Counsel for Jeremiah W. (Jay) Nixon, Attorney General
P.O. Box 899
Supreme Court Building
Jefferson City, MO 65102
Richard S. Brownlee, III U.S. MAIL
Hendren & Andrae
235 East High Street
Jefferson City, MO 65102
Stuart R. Berkowitz U.S. MAIL
Platke and Berkowitz
520 N. Skinker
St. Louis, MO 63130
Irving Achtenberg U.S. MAIL
Achtenberg and Achtenberg, P.C.
4901 Main Street
Kansas City, MO 64112
Ann B. Lever U.S. MAIL
Joel D. Ferber
Legal Services of Eastern Missouri
4232 Forest Park Avenue
St. Louis, MO 63108
Robert G. Russell, Esq. U.S. MAIL
Wesner, Kempton, Russell and Dominique
114 East 5th Street
Sedalia, MO 65302
Dale C. Doerhoff, Esq. HAND DELIVERY
Cook Vetter Doerhoff & Landwehr
231 Madison Street
Jefferson City, MO 65101
James W. Gallaher, Esq. HAND DELIVERY
Carson & Coil, P.C.
515 East High Street
Jefferson City, MO 65102
/s/ Richard A. Ahrens
(1) There are two separate license agreements, one for the
Blue Cross names and marks and one for the Blue Shield names and
marks. The Blue Cross license agreement is Exhibit 1 hereto.
The terms are identical.
(2) That Circuit Court has very recently entered its order
dismissing that action for lack of standing, but has not yet
entered a judgment denominated as such disposing of the case.
Sarkis' counsel has stated an intention to file postjudgment
motions.
(3) The Association had expressed its willingness to waive the
restrictions prior to the Court's order of October 29. Blue
Cross is unaware what effect the order might have had on the
Association's position on the waiver question.
BLUE CROSS LICENSE AGREEMENT
This agreement by and between Blue Cross and Blue Shield
Association ("BCBSA") and The Blue Cross Plan, known as Blue Cross and
Blue Shield of Missouri (the "Plan").
Preamble
WHEREAS, the Plan and/or its predecessor(s) in interest
(collectively the "Plan") had the right to use the BLUE CROSS and BLUE
CROSS Design service marks (collectively the "Licensed Marks") for
health care plans in its service area, which was essentially local in
nature;
WHEREAS, the Plan was desirous of assuring nationwide protection
of the Licensed Marks, maintaining uniform quality controls among
Plans, facilitating the provision of cost effective health care
services to the public and otherwise benefiting the public;
WHEREAS, to better attain such ends, the Plan and the predecessor
of BCBSA in 1972 simultaneously executed the BCA License Agreement(s)
and the Ownership Agreement; and
WHEREAS, BCBSA and the Plan desire to supercede said Agreement(s)
to reflect their current practices and to assure the continued
integrity of the Licensed Marks and of the BLUE CROSS system;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
Agreement
1. BCBSA hereby grants to the Plan, upon the terms and
conditions of this License Agreement, the right to use BLUE CROSS in
its trade and/or corporate name (the "Licensed Name"), and the right to
use the Licensed Marks, in the sale, marketing and administration of
health care plans and related services in the Service Area set forth
and defined in paragraph 5 below. As used herein, health care plans
and related services shall include acting as a nonprofit health care
plan, a for-profit health care plan, or mutual health insurer operating
on a not-for-profit or for-profit basis, under state law; financing
access to health care services; providing health care management and
administration; administering, but not underwriting, non-health
portions of Worker's Compensation insurance; and delivering health care
services.
2. The Plan may use the Licensed Marks and Name in connection
with the offering of: a) health care plans and related services in the
Service Area through Controlled Affiliates, provided that each such
Controlled Affiliate is separately licensed to use the Licensed Marks
and Name under the terms and conditions contained in the Agreement
attached as Exhibit 1 hereto (the "Controlled Affiliate License
Agreement") and: b) insurance coverages offered by life insurers under
the applicable law in the Service Area, other than those which the Plan
may offer in its own name, provided through Controlled Affiliates,
provided that each such Controlled Affiliate is separately licensed to
use the Licensed Marks and Name under the terms and conditions
contained in the Agreement attached as Exhibit 1A hereto (the
"Controlled Affiliate License Agreement Applicable to Life Insurance
Companies") and further provided that the offering of such services
does not and will not dilute or tarnish the unique value of the
Licensed Marks and Name; and c) administration and underwriting of
Workers' Compensation Insurance Controlled Affiliates, provided that
each such Controlled Affiliate is separately licensed to use the
Licensed Marks and Name under the terms and conditions contained in the
Agreement attached as Exhibit 1 hereto (the "Controlled Affiliate
License.") With respect to any HMO previously sublicensed as provided
in a License Addendum between BCBSA and the Plan, the Plan shall have
one (1) year from the date hereof to obtain execution of the direct
license required herein. As used herein, a Controlled Affiliate is
defined as an entity organized and operated in such a manner that it is
subject to the bona fide control of a Plan or Plans and, if the entity
meets the standards of subparagraph B but not subparagraph A of this
paragraph, the entity, its owners, and persons with authority to select
or appoint members or board members, other than a Plan or Plans, have
received written approval of BCBSA. Absent written approval by BCBSA
of an alternative method of control, bona fide control shall mean:
A. The legal authority, directly or indirectly through
wholly-owned subsidiaries: (a) to select members of the Controlled
Affiliate's governing body having not less than 51% voting control
thereof, (b) to exercise operational control with respect to the
governance thereof; and (c) to prevent any change in its articles of
incorporation, bylaws or other governing documents deemed
inappropriate. In addition, a Plan or Plans shall own at least 51% of
any for-profit Controlled Affiliate; or
B. The legal authority directly or indirectly through
wholly-owned subsidiaries (a) to select members of the Controlled
Affiliate's governing body having not less than 50% voting control; (b)
the legal ability to prevent any change in the articles of
incorporation, bylaws or other establishing or governing documents of
the Controlled Affiliate with which it does not concur; (c) at least
equal control over the operations of the Controlled Affiliate; and (d)
to concur before the Controlled Affiliate can:
Amended as of November 20, 1997
1. Change its legal and/or trade name;
2. Change the geographic area in which it operates;
3. Change the types of businesses in which it engages;
4. Create, or become liable for by way of guarantee,
any indebtedness, other than indebtedness arising in the
ordinary course of business;
5. Sell any assets, except for sales in the ordinary
course of business or sales of equipment no longer
useful or being replaced;
6. Make any loans or advances except in the ordinary
course of business;
7. Enter into any arrangement or agreement with any
party directly or indirectly affiliated with any of the
owners of the Controlled Affiliate or persons or
entities with the authority to select or appoint members
or board members of the Controlled Affiliate, other than
the Plan or Plans (excluding owners of stock holdings of
under 5% in a publicly traded Controlled Affiliate);
8. Conduct any business other than under the Licensed
Marks and Name;
9. Take any action that Plan or BCBSA reasonably
believes will adversely affect the Licensed Marks or
Names.
Amended as of November 20, 1997
3. The Plan may engage in activities not required by BCBSA to be
directly licensed through Controlled Affiliates and may indicate its
relationship thereto by use of the Licensed Name as a tag line,
provided that the engaging in such activities does not and will not
dilute or tarnish the unique value of the Licensed Marks and Name and
further provided that such tag line use is not in a manner likely to
cause confusion or mistake. Consistent with the avoidance of confusion
or mistake, each tag line use of the Plan's Licensed Name: (a) shall
be in the style and manner specified by BCBSA from time-to-time;
(b) shall not include the design service marks; (c) shall not be in a
manner to import more than the Plan's mere ownership of the Controlled
Affiliate; and (d) shall be restricted to the Service Area. No rights
are hereby created in any Controlled Affiliate to use the Licensed Name
in its own name or otherwise. At least annually, the Plan shall
provide BCBSA with representative samples of each such use of its
Licensed Name pursuant to the foregoing conditions.
4. The Plan recognizes the importance of a comprehensive
national network of independent BCBSA licensees which are committed to
strengthening the Licensed Marks and Name. The Plan further recognizes
that its actions within its Service Area may affect the value of the
Licensed Marks and Name nationwide. The Plan agrees (a) to maintain in
good standing its membership in BCBSA; (b) promptly to pay its dues to
BCBSA, said dues to represent the royalties for this License Agreement;
(c) materially to comply with all applicable laws; (d) to comply with
the Membership Standards Applicable to Regular Members of BCBSA, a
current copy of which is attached as Exhibit 2 hereto; and
(e) reasonably to permit BCBSA, upon a written, good faith request and
during reasonable business hours, to inspect the Plan's books and
records necessary to ascertain compliance herewith. As to other Plans
and third parties, BCBSA shall maintain the confidentiality of all
documents and information furnished by the Plan pursuant hereto, or
pursuant to the Membership Standards, and clearly designated by the
Plan as containing proprietary information of the Plan.
5. The rights hereby granted are exclusive to the Plan within
the geographical area(s) served by the Plan on June 30, 1972, and/or as
to which the Plan has been granted a subsequent license, which is
hereby defined as the "Service Area," except that BCBSA reserves the
right to use the Licensed Marks in said Service Area, and except to the
extent that said Service Area may overlap areas served by one or more
other licensed Blue Shield Plans as of said date or subsequent license,
as to which overlapping areas the rights hereby granted are
nonexclusive as to such other Plan or Plans only.
Amended as of November 20, 1997
6. Except as expressly provided by BCBSA with respect to
National Accounts, Government Programs and certain other necessary and
collateral uses, the current rules and regulations governing which are
attached as Exhibit 3 and Exhibit 4 hereto, or as expressly provided
herein, the Plan may not use the Licensed Marks and Name outside the
Service Area or in connection with other goods and services nor may the
Plan use the Licensed Marks or Name in a manner which is intended to
transfer in the Service Area the goodwill associated therewith to
another mark or name. Nothing herein shall be construed to prevent the
Plan from engaging in lawful activity anywhere under other marks and
names not confusingly similar to the Licensed Marks and Name, provided
that engaging in such activity does and will not dilute or tarnish the
unique value of the Licensed Marks and Name.
7. The Plan agrees that it will display the Licensed Marks and
Name only in such form, style and manner as shall be specifically
prescribed by BCBSA from time-to-time in regulations of general
application in order to prevent impairment of the distinctiveness of
the Licensed Marks and Name and the goodwill pertaining thereto. The
Plan shall cause to appear on all materials on or in connection with
which the Licensed Marks or Name are used such legends, markings and
notices as BCBSA may reasonably request in order to give appropriate
notice of service mark or other proprietary rights therein or
pertaining thereto.
8. BCBSA agrees that: (a) it will not grant any other license
effective during the term of this License Agreement for the use of the
Licensed Marks or Name which is inconsistent with the rights granted to
the Plan hereunder; and (b) it will not itself use the Licensed Marks
in derogation of the rights of the Plan or in a manner to deprive the
Plan of the full benefits of this License Agreement. The Plan agrees
that it will not attack the title of BCBSA in and to the Licensed Marks
or Name or attack the validity of the Licensed Marks or of this License
Agreement. The Plan further agrees that all use by it of the Licensed
Marks and Name or any similar mark or name shall inure to the benefit
of BCBSA, and the Plan shall cooperate with BCBSA in effectuating the
assignment to BCBSA of any service mark or trademark registrations of
the Licensed Marks or any similar mark or name held by the Plan or a
Controlled Affiliate of the Plan, all or any portion of which
registration consists of the Licensed Marks.
9. (a). Should the Plan fail to comply with the provisions of
paragraphs 2-4, 6, 7 and/or 12, and not cure such failure within thirty
(30) days of receiving written notice thereof (or commence curing such
failure within such thirty day period and continue diligent efforts to
complete the curing of such failure if such curing cannot reasonably be
completed within such thirty day period), BCBSA shall have the right to
issue a notice that the Plan is in a state of noncompliance. Except as
to the termination of a Plan's License Agreement or the merger of two
or more Plans, disputes as to noncompliance, and all other disputes
between or among BCBSA, the Plan, other Plans and/or Controlled
Affiliates, shall be submitted promptly to mediation and mandatory
dispute resolution pursuant to the rules and regulations of BCBSA, a
current copy of which is attached as Exhibit 5 hereto, and shall be
timely presented and resolved. The mandatory dispute resolution panel
shall have authority to issue orders for specific performance and
assess monetary penalties. If a state of noncompliance as aforesaid is
undisputed by the Plan or is found to exist by a mandatory dispute
resolution panel and is uncured as provided above, BCBSA shall have the
right to seek judicial enforcement of the License Agreement. Except,
however, as provided in paragraphs 9(d)(iii) and 15(a)(i)-(viii) below,
no Plan's license to use the Licensed Marks and Name may be finally
terminated for any reason without the affirmative vote of three-fourths
of the Plans and three-fourths of the total then current weighted vote
of all the Plans.
(b). Notwithstanding any other provision of this License
Agreement, a Plan's license to use the Licensed Marks and Name may be
forthwith terminated by the affirmative vote of three-fourths of the
Plans and three-fourths of the total then current weighted vote of all
the Plans at a special meeting expressly called by BCBSA for the
purpose on ten (10) days written notice for: (i) failure to comply
with any minimum capital or liquidity requirement under the Membership
Standard on Financial Responsibility; or (ii) impending financial
insolvency; or (iii) the pendency of any action instituted against the
Plan seeking its dissolution or liquidation or its assets or seeking
appointment of a trustee, interim trustee, receiver or other custodian
for any of its property or business or seeking the declaration or
establishment of a trust for any of its property of business, unless
this License Agreement has been earlier terminated under
paragraph 15(a); or (iv) such other reason as is determined in good
faith immediately and irreparably to threaten the integrity and
reputation of BCBSA, the Plans and/or the Licensed Marks.
(c). To the extent not otherwise provided therein, neither:
(i) the Membership Standards Applicable to Regular Members of BCBSA;
nor (ii) the rules and regulations governing National Accounts,
Government Programs and certain other uses; nor (iii) the rules and
regulations governing mediation and mandatory dispute resolution, may
be amended unless and until each such amendment is first adopted by the
affirmative vote of three-fourths of the Plans and of three-fourths of
the total then current weighted vote of all the Plans.
Amended as of November 20, 1997
9. (d). The Plan may operate as a for-profit company on the
following conditions:
(i) The Plan shall discharge all responsibilities which it has to
the Association and to other Plans by virtue of this Agreement and the
Plan's membership in BCBSA.
(ii) The Plan shall not use the licensed Marks and Name, or any
derivative thereof, as part of its legal name or any symbol used to
identify the Plan in any securities market. The Plan shall use the
licensed Marks and Name as part of its trade name within its service
area for the sale, marketing and administration of health care and
related services in the service area.
(iii) The Plan's license to use the Licensed Marks and Name
shall automatically terminate effective: (a) thirty days after the
Plan knows, or there is an SEC filing indicating that, any
Institutional Investor, has become the Beneficial Owner of securities
representing 10% or more of the voting power of the Plan ("Excess
Institutional Voters), unless such Excess Institutional Voter shall
cease to be an Excess Institutional Voter prior to such automatic
termination becoming effective; (b) thirty days after the Plan knows,
or there is an SEC filing indicating that, any Noninstitutional
Investor has become the Beneficial Owner of securities representing 5%
or more of the voting power of the Plan ("Excess Noninstitutional
Voter") unless such Excess Noninstitutional Voter shall cease to be an
Excess Noninstitutional Voter prior to such automatic termination
becoming effective; (c) thirty days after the Plan knows, or there is
an SEC filing indicating that, any Person has become the Beneficial
Owner of 20% or more of the Plan's then outstanding common stock or
other equity securities which (either by themselves or in combination)
represent an ownership interest of 20% or more pursuant to
determinations made under paragraph 9(d)(iv) below ("Excess Owner"),
unless such Excess Owner shall cease to be an Excess Owner prior to
such automatic termination becoming effective; (d) ten business days
after individuals who at the time the Plan went public constituted the
Board of Directors of the Plan (together with any new directors whose
election to the Board was approved by a vote of 2/3 of the directors
then still in office who were directors at the time the Plan went
public or whose election or nomination was previously so approved) (the
"Continuing Directors") cease for any reason to constitute a majority
of the Board of Directors; or (e) ten business days after the Plan
consolidates with or merges with or into any person or conveys,
assigns, transfers or sells all or substantially all of its assets to
any person other than a merger in which the Plan is the surviving
entity and immediately after which merger, no person is an Excess
Institutional Voter, an Excess Noninstitutional Voter or an Excess
Owner: provided that, if requested by the affected Plan in a writing
received by BCBSA prior to such automatic termination becoming
effective, the provisions of this paragraph 9(d)(iii) may be waived, in
whole or in part,
Amended as of September 17, 1997
upon the affirmative vote of a majority of the disinterested Plans and
a majority of the total then current weighted vote of the disinterested
Plans. Any waiver so granted may be conditioned upon such additional
requirements (including but not limited to imposing new and independent
grounds for termination of this License) as shall be approved by the
affirmative vote of a majority of the disinterested Plans and a
majority of the total then current weighted vote of the disinterested
Plans. If a timely waiver request is received, no automatic
termination shall become effective until the later of (1) the
conclusion of the applicable time period specified in
paragraphs 9(d)(ii)(a)-(d) above, or (2) the conclusion of the first
Member Plan meeting after receipt of such a waiver request.
In the event that the Plan's license to use the Licensed Marks and Name
is terminated pursuant to this Paragraph 9(d)(iii), the license may be
reinstated in BCBSA's sole discretion if, within 30 days of the date of
such termination, the Plan demonstrates that the Person referred to in
clause (a), (b) or (c) of the preceding paragraph is no longer an
Excess Institutional Voter, an Excess Noninstitutional Voter or an
Excess Owner.
(iv) The Plan shall not issue any class or series of security
other than (i) shares of common stock having identical terms or options
or derivatives of such common stock, (ii) non-voting, non-convertible
debt securities or (iii) such other securities as the Plan may approve,
provided that BCBSA receives notice at least thirty days prior to the
issuance of such securities, including a description of the terms for
such securities, and BCBSA shall have the authority to determine how
such other securities will be counted in determining whether any Person
is an Excess Institutional Voter, Excess Noninstitutional, Voter or an
Excess Owner.
(v) For purposes of paragraph 9(d)(iii), the following
definitions shall apply:
(a) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as
amended and in effect on November 17, 1993 (the "Exchange Act").
(b) A Person shall be deemed the "Beneficial Owner" of and
shall be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or
indirectly;
Amended as of September 17, 1997
(ii) which such Person or any of such Person's
Affiliates or Associates has (A) the right to acquire
(whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement. arrangement
or understanding, or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise; or
(B) the right to vote pursuant to any agreement, arrangement
or understanding; provided, however, that a Person shall not
be deemed the Beneficial Owner of or to beneficially own, any
security if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable proxy
or consent given to such Person in response to a public proxy
or consent solicitation made pursuant to, and in accordance
with, the applicable rules and regulations promulgated under
the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or
successor report): or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or
Associate thereof) with which such Person (or any of such
Person's Affiliates or Associates) has any agreement,
arrangement or understanding (other than customary agreements
with and between underwriters and selling group members with
respect to a bona fide public offering of securities)
relating to the acquisition, holding, voting (except to the
extent contemplated by the proviso to (b)(ii)(B) above) or
disposing of any securities of the Plan.
Notwithstanding anything in this definition of Beneficial
Ownership to the contrary, the phrase "then outstanding,"
when used with reference to a Person's Beneficial Ownership
of securities of the Plan, shall mean the number of such
securities then issued and outstanding together with the
number of such securities not then actually issued and
outstanding which such Person would be deemed to own
beneficially hereunder.
(c) A Person shall be deemed an "Institutional Investors" if
(but only if) such Person (i) is an entity or group identified in
the SEC's Rule 13d-1(b)(1) (ii) as constituted on June 1, 1997,
and (ii) every filing made by such Person with the SEC under
Regulation 13D-G (or any successor Regulation) with respect to
such Person's Beneficial Ownership of Plan securities shall have
contained a certification identical to the one required by item 10
of SEC Schedule 13G as constituted on June 1, 1997.
Amended as of September 17, 1997
(d) Noninstitutional Investor" means any Person who is not
an Institutional Investor.
(e) "Person" shall mean any individual, firm, partnership.
corporation, trust association, joint venture or other entity, and
shall include any successor (by merger or otherwise) of such
entity.
Amended as of September 17,1997
10. This License Agreement shall remain in effect: (a) until
terminated as provided herein; or (b) until this and all such other
License Agreements are terminated by the affirmative vote of
three-fourths of the Plans and three-fourths of the total then current
weighted vote of all the Plans; or (c) until termination of the
aforesaid Ownership Agreement; or (d) until terminated by the Plan upon
six (6) months written notice to BCBSA.
11. Except as otherwise provided in paragraph 15 below or by the
affirmative vote of three-fourths of the Plans and three-fourths of the
total then current weighted vote of all the Plans, or unless this and
all such other License Agreements are simultaneously terminated by
force of law, the termination of this License Agreement for any reason
whatsoever shall cause the reversion to BCBSA of all rights in and to
the Licensed Marks and Name, and the Plan agrees that it will promptly
discontinue all use of the Licensed Marks and Name, will not use them
thereafter, and will promptly, upon written notice from BCBSA, change
its corporate name so as to eliminate the Licensed Name therefrom.
12. The license hereby granted to Plan to use the Licensed Marks
and Name is and shall be personal to the Plan so licensed and shall not
be assignable by any act of the Plan, directly or indirectly, without
the written consent of BCBSA. Said license shall not be assignable by
operation of law, nor shall Plan mortgage or part with possession or
control of this license or any right hereunder, and the Plan shall have
no right to grant any sublicensee to use the Licensed Marks and Name.
13. BCBSA shall maintain appropriate service mark registrations
of the Licensed Marks and BCBSA shall take such lawful steps and
proceedings as may be necessary or proper to prevent use of the
Licensed Marks by any person who is not authorized to use the same.
Any actions or proceedings undertaken by BCBSA under the provisions of
this paragraph shall be at BCBSA's sole cost and expense. BCBSA shall
have the sole right to determine whether or not any legal action shall
be taken on account of unauthorized use of the Licensed Marks, such
right not to be unreasonably exercised. The Plan shall report any
unlawful usage of the Licensed Marks to BCBSA in writing and agrees,
free of charge, to cooperate fully with BCBSA's program of enforcing
and protecting the service mark rights, trade name rights and other
rights in the Licensed Marks.
14. The Plan hereby agrees to save, defend, Indemnify and hold
BCBSA and any other Plan(s) harmless from and against all claims,
damages, liabilities and costs of every kind, nature and description
which may arise exclusively and directly as a result of the activities
of the Plan. BCBSA hereby agrees to save, defend, indemnify and hold
the Plan and any other Plan(s) harmless from and against all claims
damages, liabilities and costs of every kind, nature and description
which may arise exclusively and directly as a result of the activities
of BCBSA.
15. (a). This Agreement shall automatically terminate upon the
occurrence of any of the following events: (i) a voluntary petition
shall be filed by the Plan or by BCBSA seeking bankruptcy,
reorganization, arrangement with creditors or other relief under the
bankruptcy laws of the United States or any other law governing
insolvency or debtor relief, or (ii) an involuntary petition or
proceeding shall be filed against the Plan or BCBSA seeking bankruptcy,
reorganization, arrangement with creditors or other relief under the
bankruptcy laws of the United States or any other law governing
insolvency or debtor relief and such petition or proceeding is
consented to or acquiesced in by the Plan or BCBSA or is not dismissed
within sixty (60) days of the date upon which the petition or other
document commencing the proceeding is served upon the Plan or BCBSA
respectively, or (iii) an order for relief is entered against the Plan
or BCBSA in any case under the bankruptcy laws of the United States, or
the Plan or BCBSA is adjudged bankrupt or insolvent (as that term is
defined in the Uniform Commercial Code as enacted in the state of
Illinois) by any court of competent jurisdiction, or (iv) the Plan or
BCBSA makes a general assignment of its assets for the benefit of
creditors, or (v) the Department of Insurance or other regulatory
agency assumes control of the Plan or delinquency proceedings
(voluntary or involuntary) are instituted, or (vi) an action is brought
by the Plan or BCBSA seeking its dissolution or liquidation of its
assets or seeking the appointment of a trustee, interim trustee,
receiver or other custodian for any of its property or business, or
(vii) an action is instituted by any governmental entity or officer
against the Plan or BCBSA seeking its dissolution or liquidation of its
assets or seeking appointment of a trustee, interim trustee, receiver
or other custodian for any of its property or business and such action
is consented to or acquiesced in by the Plan or BCBSA or is not
dismissed within one hundred thirty (130) days of the date upon which
the pleading or other document commencing the action is served upon the
Plan or BCBSA respectively, provided that if the action is stayed or
its prosecution is enjoined, the one hundred thirty (130) day period is
tolled for the duration of the stay or injunction, and provided
further, that the Association's Board of Directors may toll or extend
the 130 day period at any time prior to its expiration, or (viii) a
trustee, interim trustee, receiver or other custodian for any of the
Plan's or BCBSA's property or business is appointed, or (ix) the Plan
shall fail to pay its dues and shall not cure such failure within
thirty (30) days of receiving written notice thereof. Notwithstanding
any other provision of this Agreement, a declaration or a request for
declaration of the existence of a trust over any of the Plan's or
BCBSA's property or business shall not in itself be deemed to
constitute or seek appointment of a trustee, interim trustee, receiver
or other custodian for purposes of subparagraphs 15(a)(vii) and (viii)
of this Agreement.
Amended November 20, 1997
(b). BCBSA, or the Plans (as provided and in addition to the
rights conferred in Paragraph 10(b) above), may terminate this
Agreement immediately upon written notice upon the occurrence of
either of the following events: (a) the Plan or BCBSA becomes
insolvent (as that term is defined in the Uniform Commercial Code
enacted in the state of Illinois), or (b) any final judgment
against the Plan or BCBSA remains unsatisfied or unbonded of
record for a period of sixty (60) days or longer.
(c). If this License Agreement is terminated as to BCBSA for
any reason stated in subparagraphs 15(a) and (b) above, the
ownership of the Licensed Marks shall revert to each of the Plans
as provided in the Ownership Agreement.
(d). Upon termination of this License Agreement or any
Controlled Affiliate License Agreement of a Larger Controlled
Affiliate, as defined in Exhibit 1 to this License Agreement:
(i) The terminated entity shall send a notice through
the U.S. mails, with first class postage affixed, to all
individual and group customers, providers, brokers and agents
of products or services sold marketed, underwritten or
administered by the terminated entity or its Controlled
Affiliates under the Licensed Marks and Name. The form and
content of the notice shall be specified by BCBSA and shall,
at a minimum, notify the recipient of the termination of the
license, the consequences thereof, and instructions for
obtaining alternate products or services licensed by BCBSA.
This notice shall be mailed within 15 days after termination
or, if termination is pursuant to paragraph 10(d) of this
Agreement, within 15 days after the written notice to BCBSA
described in paragraph 10(d).
(ii) The terminated entity shall deliver to BCBSA within
five days of a request by BCBSA a listing of national
accounts in which the terminated entity is involved (in a
Control, Participating or Servicing capacity), identifying
the national account and the terminated entity's role
therein. For those accounts where the terminated entity is
the Control Plan, the Plan must also indicate the
Participating and Servicing Plans in the national account
syndicate.
Amended as of September 19, 1996
(iii) Unless the cause of termination is an event stated
in paragraph 15(a) or (b) above respecting BCBSA, the Plan
and its Licensed Controlled Affiliates shall be jointly
liable for payment to BCBSA of an amount equal to $25
multiplied by the number of Licensed Enrollees of the
terminated entity and its Licensed Controlled Affiliates;
provided that if any other Plan is permitted by BCBSA to use
marks or names licensed by BCBSA in the Service Area
established by this Agreement, the payment shall be
multiplied by a fraction, the numerator of which is the
number of Licensed Enrollees of the terminated entity and its
Licensed Controlled Affiliates and the denominator of which
is the total number of Licensed Enrollees in the Service
Area. Licensed Enrollee means each and every person and
covered dependent who is enrolled as an individual or member
of a group receiving products or services sold, marketed or
administered under marks or names licensed by BCBSA as
determined at the earlier of (a) the end of the last fiscal
year of the terminated entity which ended prior to
termination or (b) the fiscal year which ended before any
transactions causing the termination began. Notwithstanding
the foregoing, the amount payable pursuant to this
subparagraph (d)(iii) shall be due only to the extent that,
in BCBSA's opinion, it does not cause the net worth of the
Plan to fall below 100% of the capital benchmark formula or
its equivalent under any successor formula, as set forth in
the applicable financial responsibility standards established
by BCBSA, measured as of the date of termination and adjusted
for the value of any transactions not made in the ordinary
course of business.
(iv) BCBSA shall have the right to audit the books and
records of the terminated entity and its Licensed Controlled
Affiliates to verify compliance with this paragraph 15(d).
Amended as of September 19, 1996
(v) As to a breach of 15 (d) (i), (ii), (iii) or (iv), the
parties agree that the obligations are immediately
enforceable in a court of competent jurisdiction. As to a
breach of 15 (d) (i), (ii) or (iv) by the Plan, the parties
agree there is no adequate remedy at law and BCBSA is
entitled to obtain specific performance.
(e). BCBSA shall be entitled to enjoin the Plan or any
related party in a court of competent jurisdiction from entry into
any transaction which would result in a termination of this
License Agreement unless the License Agreement has been terminated
pursuant to paragraph 10(d) of this Agreement upon the required
six (6) month written notice.
(f). BCBSA acknowledges that it is not the owner of assets of
the Plan.
16. This Agreement supersedes any and all other agreements
between the parties with respect to the subject matter herein, and
contains all of the covenants and agreements of the parties as to the
licensing of the Licensed Marks and Name. This Agreement may be
amended only by the affirmative vote of three-fourths of the Plans and
three-fourths of the total then current weighted vote of all the Plans
as officially recorded by the BCBSA Corporate Secretary.
17. If any provision or any part of any provision of this
Agreement is judicially declared unlawful, each and every other
provision, or any part of any provision, shall continue in full force
and effect notwithstanding such judicial declaration.
18. No waiver by BCBSA or the Plan of any breach or default in
performance on the part of BCBSA or the Plan or any other licensee of
any of the terms, covenants or conditions of this Agreement shall
constitute a waiver of any subsequent breach or default in performance
of said terms, covenants or conditions.
19a. All notices provided for hereunder shall be in writing and
shall be sent in duplicate by regular mail to BCBSA or the Plan at the
address currently published for each by BCBSA and shall be marked
respectively to the attention of the President and, if any, the General
Counsel, of BCBSA or the Plan.
19b. Except as provided in paragraphs 9(b), 9(d)(iii), 15(a), and
15(b) above, this Agreement may be terminated for a breach only upon
at least 30 days written notice to the Plan advising of the specific
matters at issue and granting the Plan an opportunity to be heard and
to present its response to the Member Plans.
Amended as of November 20, 1997
20. Nothing herein contained shall be construed to constitute the
parties hereto as partners or joint venturers, or either as the agent
of the other, and Plan shall have no right to bind or obligate BCBSA in
any way, nor shall it represent that it has any right to do so. BCBSA
shall have no liability to third parties with respect to any aspect of
the business, activities, operations, products, or services of the
Plan.
21. This Agreement shall be governed, construed and interpreted
in accordance with the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have caused this License Agreement to
be executed, effective as of the date of last signature written below.
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By /s/ Mark A. Orloff
Title /s/ Vice President
Date /s/ 3/23/98
BLUE CROSS AND BLUE SHIELD OF MISSOURI
By /s/ John A. O'Rourke
Title President
Date March 20, 1998
EXHIBIT 1
BLUE CROSS
CONTROLLED AFFILIATE LICENSE AGREEMENT
This Agreement by and among Blue Cross and Blue Shield Association
("BCBSA") and ___________ ("Controlled Affiliate"), a Controlled
Affiliate of the Blue Cross Plan(s), known as ____________("Plan"),
which is also a Party signatory hereto.
WHEREAS, BCBSA is the owner of the BLUE CROSS and BLUE CROSS
Design service marks;
WHEREAS, Plan and Controlled Affiliate desire that the latter be
entitled to use the BLUE CROSS and BLUE CROSS Design service marks
(collectively the "Licensed Marks") as service marks and be entitled to
use the term BLUE CROSS in a trade name ("Licensed Name");
NOW THEREFORE, in consideration of the foregoing and the mutual
agreements hereinafter set forth and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. GRANT OF LICENSE
Subject to the terms and conditions of this Agreement, BCBSA
hereby grants to Controlled Affiliate the right to use the Licensed
Marks and Name in connection with, and only in connection with:
(i) health care plans and related services and administering the
non-health portion of workers' compensation insurance, and
(ii) underwriting the indemnity portion of workers' compensation
insurance, provided that Controlled Affiliate's total premium revenue
comprises less than 15 percent of the sponsoring Plan's net
subscription revenue.
This grant of rights is non-exclusive and is limited to the Service
Area served by the Plan. Controlled Affiliate may not use the Licensed
Marks and Name in its legal name and may use the Licensed Marks and
Name in its Trade Name only with the prior consent of BCBSA.
2. QUALITY CONTROL
A. Controlled Affiliate agrees to use the Licensed Marks and
Name only in connection with the licensed services and further agrees
to be bound by the conditions regarding quality control shown in
attached Exhibit A as they may be amended by BCBSA from time-to-time.
B. Controlled Affiliate agrees to comply with all applicable
federal, state and local laws.
C. Controlled Affiliate agrees that it will provide on an annual
basis (or more often if reasonably required by Plan or by BCBSA) a
report or reports to Plan and BCBSA demonstrating Controlled
Affiliate's compliance with the requirements of this Agreement
including but not limited to the quality control provisions of this
paragraph and the attached Exhibit A.
D. Controlled Affiliate agrees that Plan and/or BCBSA may, from
time-to-time, upon reasonable notice, review and inspect the manner and
method of Controlled Affiliate's rendering of service and use of the
Licensed Marks and Name.
E. As used herein, a Controlled Affiliate is defined as an
entity organized and operated in such a manner, that it meets the
following requirements:
(1) If the Plan has 50 percent of the voting control of the Controlled
Affiliate:
(a) the Plan must have the legal ability to prevent any change in
the articles of incorporation, bylaws or other establishing or
governing documents of the Controlled Affiliate with which it does
not concur;
(b) the Plan must have at least equal control over the operations
of the Controlled Affiliate;
(c) the Plan must concur in writing before the Controlled
Affiliate can:
(i) change its legal and/or trade names;
(ii) change the geographic area in which it operates;
(iii) change the fundamental type(s) of business in which
it engages;
(iv) create, or become liable for by way of guarantee, any
indebtedness, other than indebtedness arising in the
ordinary course of business;
(v) sell any assets, except for sales in the ordinary course
of business or sales of equipment no longer useful or
being replaced;
(vi) make any loans or advances except in the ordinary course
of business;
(vii) enter into any arrangement or agreement with any
party directly or indirectly affiliated with any of the
owners or persons or entities with the authority to
select or appoint members or board members of the
Controlled Affiliate, other than the Plan or Plans
(excluding owners of stock holdings of under 5% in a
publicly traded Controlled Affiliate);
(viii) conduct any business other than under the Licensed
Marks and Name;
(ix) take any action that Plan or BCBSA reasonably believes
will adversely affect the Licensed Marks and Name.
(2) If the Plan has more than 50 percent voting control of the
Controlled Affiliate:
(a) the Plan must have the legal ability to prevent any change in
the articles of incorporation, bylaws or other establishing or
governing documents of the Controlled Affiliate with which it
does not concur;
(b) the Plan must have control over the policy and operations of
the Controlled Affiliate.
3. SERVICE MARK USE
A. Controlled Affiliate recognizes the importance of a
comprehensive national network of independent BCBSA licensees which are
committed to strengthening the Licensed Marks and Name. The Controlled
Affiliate further recognizes that its actions within its Service Area
may affect the value of the Licensed Marks and Name nationwide.
B. Controlled Affiliate shall at all times make proper service
mark use of the Licensed Marks and Name, including but not limited to
use of such symbols or words as BCBSA shall specify to protect the
Licensed Marks and Name and shall comply with such rules (generally
applicable to Controlled Affiliates licensed to use the Licensed Marks
and Name) relative to service mark use, as are issued from time-to-time
by BCBSA. Controlled Affiliate recognizes and agrees that all use of
the Licensed Marks and Name by Controlled Affiliate shall inure to the
benefit of BCBSA.
C. Controlled Affiliate may not directly or indirectly use the
Licensed Marks and Name in a manner that transfers or is intended to
transfer in the Service Area the goodwill associated therewith to
another mark or name, nor may Controlled Affiliate engage in activity
that may dilute or tarnish the unique value of the Licensed Marks and
Name.
D. If Controlled Affiliate meets the standards of 2E(1) but not
2E(2) above and any of Controlled Affiliate's advertising or
promotional material is reasonably determined by BCBSA and/or the Plan
to be in contravention of rules and regulations governing the use of
the Licensed Marks and Name, Controlled Affiliate shall for ninety (90)
days thereafter obtain prior approval from BCBSA of advertising and
promotional efforts using the Licensed Marks and Name, approval or
disapproval thereof to be forthcoming within five (5) business days of
receipt of same by BCBSA or its designee. In all advertising and
promotional efforts, Controlled Affiliate shall observe the Service
Area limitations applicable to Plan.
E. Controlled Affiliate shall use its best efforts in the
Service Area to promote and build the value of the Licensed Marks and
Name.
4. SUBLICENSING AND ASSIGNMENT
Controlled Affiliate shall not, directly or indirectly,
sublicense,. transfer, hypothecate, sell, encumber or mortgage, by
operation of law or otherwise, the rights granted hereunder and any
such act shall be voidable at the sole option of Plan or BCBSA. This
Agreement and all rights and duties hereunder are personal to
Controlled Affiliate.
5. INFRINGEMENT
Controlled Affiliate shall promptly notify Plan and Plan shall
promptly notify BCBSA of any suspected acts of infringement, unfair
competition or passing off that may occur in relation to the Licensed
Marks and Name. Controlled Affiliate shall not be entitled to require
Plan or BCBSA to take any actions or institute any proceedings to
prevent infringement, unfair competition or passing off by third
parties. Controlled Affiliate agrees to render to Plan and BCBSA,
without charge, all reasonable assistance in connection with any matter
pertaining to the protection of the Licensed Marks and Name by BCBSA.
6. LIABILITY INDEMNIFICATION
Controlled Affiliate and Plan hereby agree to save, defend,
indemnify and hold BCBSA harmless from and against all claims, damages,
liabilities and costs of every kind, nature and description (except
those arising solely as a result of BCBSA's negligence) that may arise
as a result of or related to Controlled Affiliate's rendering of
services under the Licensed Marks and Name.
7. LICENSE TERM
A. Except as otherwise provided herein, the license granted by
this Agreement shall remain in effect for a period of one (1) year and
shall be automatically extended for additional one (1) year periods
unless terminated pursuant to the provisions herein.
B. This Agreement and all of Controlled Affiliate's rights
hereunder shall immediately terminate without any further action by any
party or entity in the event that Plan ceases to be authorized to use
the Licensed Marks and Name.
C. Notwithstanding any other provision of this Agreement, this
license to use the Licensed Marks and Name may be forthwith terminated
by the Plan or the affirmative vote of the majority of the Board of
Directors of BCBSA present and voting at a special meeting expressly
called by BCBSA for the purpose on ten (10) days written notice for:
(1) failure to comply with any applicable minimum capital or liquidity
requirement under the quality control standards of this Agreement; or
(2) failure to comply with the "Organization and Governance" quality
control standard of this Agreement; or (3) impending financial
insolvency; or (4) for a Smaller Controlled Affiliate (as defined in
Exhibit A), failure to comply with any of the
applicable requirements of Standards 2, 3, 4, 5 or 7 of attached
Exhibit A; or (5) the pendency of any action instituted against the
Controlled Affiliate seeking its dissolution or liquidation of its
assets or seeking appointment of a trustee, interim trustee, receiver
or other custodian for any of its property or business or seeking the
declaration or establishment of a trust for any of its property or
business, unless this Controlled Affiliate License Agreement has been
earlier terminated under paragraph 7(e); or (6) failure by a Controlled
Affiliate that meets the standards of 2E(1) but not 2E(2) above to
obtain BCBSA's written consent to a change in the identity of any
owner, in the extent of ownership, or in the identity of any person or
entity with the authority to select or appoint members or board
members, provided that as to publicly traded Affiliates this provision
shall apply only if the change affects a person or entity that owns at
least 5% of the Affiliate's stock before or after the change; or (7)
such other reason as is determined in good faith immediately and
irreparably to threaten the integrity and reputation of BCBSA, the
Plans, any other licensee including Controlled Affiliate and/or the
Licensed Marks and Name.
D. Except as otherwise provided in Paragraphs 7(B), 7(C) or 7(E)
herein, should Controlled Affiliate fail to comply with the provisions
of this Agreement and not cure such failure within thirty (30) days of
receiving written notice thereof (or commence a cure within such shiny
day period and continue diligent efforts to complete the cure if such
curing cannot reasonably be completed within such thirty day period)
BCBSA or the Plan shall have the right to issue a notice that the
Controlled Affiliate is in a state of noncompliance. If a state of
noncompliance as aforesaid is undisputed by the Controlled Affiliate or
is found to exist by a mandatory dispute resolution panel and is
uncured as provided above, BCBSA shall have the right to seek judicial
enforcement of the Agreement or to issue a notice of termination
thereof. Notwithstanding any other provisions of this Agreement, any
disputes as to the termination of this License pursuant to
Paragraphs 7(B), 7(C) or 7(E) of this Agreement shall not be subject to
mediation and mandatory dispute resolution. All other disputes between
BCBSA, the Plan and/or Controlled Affiliate shall be submitted promptly
to mediation and mandatory dispute resolution. The mandatory dispute
resolution panel shall have authority to issue orders for specific
performance and assess monetary penalties. Except, however, as
provided in Paragraphs 7(B) and 7(E) of this Agreement, this license to
use the Licensed Marks and Name may not be finally terminated for any
reason without the affirmative vote of a majority of the present and
voting members of the Board of Directors of BCBSA.
E. This Agreement and all of Controlled Affiliate's rights
hereunder shall immediately terminate without any further action by any
party or entity in the event that:
(1) Controlled Affiliate shall no longer comply with item 2(E)
above;
(2) Appropriate dues, royalties and other payments for Controlled
Affiliate pursuant to paragraph 9 hereof, which are the royalties for
this License Agreement, are more than sixty (60) days in arrears to
BCBSA; or
(3) Any of the following events occur: (i) a voluntary petition
shall be filed by Controlled Affiliate seeking bankruptcy,
reorganization, arrangement with creditors or other relief under the
bankruptcy laws of the United States or any other law governing insolvency or
debtor relief, or (ii) an involuntary petition or proceeding shall be
filed against Controlled Affiliate seeking bankruptcy, reorganization,
arrangement with creditors or other relief under the bankruptcy laws of
the United States or any other law governing insolvency or debtor
relief and such petition or proceeding is consented to or acquiesced in
by Controlled Affiliate or is not dismissed within sixty (60) days of
the date upon which the petition or other document commencing the
proceeding is served upon the Controlled Affiliate, or (iii) an order
for relief is entered against Controlled Affiliate in any case under
the bankruptcy laws of the United States, or Controlled Affiliate is
adjudged bankrupt or insolvent as those terms are defined in the
Uniform Commercial Code as enacted in the State of Illinois by any
court of competent jurisdiction, or (iv) Controlled Affiliate makes a
general assignment of its assets for the benefit of creditors, or
(v) the Department of Insurance or other regulatory agency assumes
control of Controlled Affiliate or delinquency proceedings (voluntary
or involuntary) are instituted, or (vi) an action is brought by
Controlled Affiliate seeking its dissolution or liquidation of its
assets or seeking the appointment of a trustee, interim trustee,
receiver or other custodian for any of its property or business, or
(vii) an action is instituted by any governmental entity or officer
against Controlled Affiliate seeking its dissolution or liquidation of
its assets or seeking the appointment of a trustee, interim trustee
receiver or other custodian for any of its property or business and
such action is consented to or acquiesced in by Controlled Affiliate or
is not dismissed within one hundred thirty (130) days of the date upon
which the pleading or other document commencing the action is served
upon the Controlled Affiliate, provided that if the action is stayed or
its prosecution is enjoined, the one hundred thirty (130) day period is
tolled for the duration of the stay or injunction, an provided further,
that the Association's Board of Directors may toll or extend the 130
day period at any time prior to its expiration, or (viii) a trustee,
interim trustee, receiver or other custodian for any of Controlled
Affiliate's property or business is appointed. Notwithstanding any
other provision of this Agreement, a declaration or a request for
declaration of the existence of a trust over any of the Plan's or
BCBSA's property or business shall not in itself be deemed to
constitute or seek appointment of a trustee, interim trustee, receiver
or other custodian for purposes of subparagraphs 7(e)(3)(vii) and
(viii) of this Agreement.
F. Upon termination of this Agreement for cause or otherwise,
Controlled Affiliate agrees that it shall immediately discontinue all
use of the Licensed Marks and Name, including any use in its trade
name.
G. Upon termination of this Agreement, Controlled Affiliate
shall immediately notify all of its customers that it is no longer a
licensee of BCBSA and, if directed by the Association's Board of
Directors, shall provide instruction on how the customer can contact
BCBSA or a designated licensee to obtain further information on
securing coverage. The notification required by this paragraph shall
be in writing and in a form approved by BCBSA. The BCBSA shall have
the right to audit the terminated entity's books and records to verify
compliance with this paragraph.
H. In the event this Agreement terminates pursuant to 7(b)
hereof, or in the event the Controlled Affiliate is a Larger Controlled
Affiliate (as defined in Exhibit A), upon termination of this
Agreement, the provisions of Paragraph 7.G. shall not apply and the
following provisions shall apply:
(1) The Controlled Affiliate shall send a notice through the U.S.
mails, with first class postage affixed, to all individual and group
customers, providers, brokers and agents of products or services sold,
marketed, underwritten or administered by the Controlled Affiliate
under the Licensed Marks and Name. The form and content of the notice
shall be specified by BCBSA and shall, at a minimum, notify the
recipient of the termination of the license, the consequences thereof,
and instructions for obtaining alternate products or services licensed
by BCBSA. This notice shall be mailed within 15 days after
termination.
(2) The Controlled Affiliate shall deliver to BCBSA within five
days of a request by BCBSA a listing of national accounts in which the
Controlled Affiliate is involved (in a control, participating or
servicing capacity), identifying the national account and the
Controlled Affiliate's role therein.
(3) Unless the cause of termination is an event respecting BCBSA
stated in paragraph 15(a) or (b) of the Plan's license agreement with
BCBSA to use the Licensed Marks and Name, the Controlled Affiliate, the
Plan, and any other Licensed Controlled Affiliates of the Plan shall be
jointly liable for payment to BCBSA of an amount equal to $25
multiplied by the number of Licensed Enrollees of the Controlled
Affiliate; provided that if any other Plan is permitted by BCBSA to use
marks or names licensed by BCBSA in the Service Area established by
this Agreement, the payment shall be multiplied by a fraction, the
numerator of which is the number of Licensed Enrollees of the
Controlled Affiliate, the Plan, and any other Licensed Controlled
Affiliates and the denominator of which is the total number of Licensed
Enrollees in the Service Area. Licensed Enrollee means each and every
person and covered dependent who is enrolled as an individual or member
of a group receiving products or services sold, marketed or
administered under marks or names licensed by BCBSA as determined at
the earlier of (i) the end of the last fiscal year of the terminated
entity which ended prior to termination or (ii) the fiscal year which
ended before any transactions causing the termination began.
Notwithstanding the foregoing, the amount payable pursuant to this
subparagraph H. (3) shall be due only to the extent that, in BCBSA's
opinion, it does not cause the net worth of the Controlled Affiliate,
the Plan or any other Licensed Controlled Affiliates of the Plan to
fall below 100% of the capital benchmark formula, or its equivalent
under any successor formula, as set forth in the applicable financial
responsibility standards established by BCBSA measured as of the date
of termination, and adjusted for the value of any transactions not made
in the ordinary course of business.
(4) BCBSA shall have the right to audit the books and records of
the Controlled Affiliate, the Plan, and any other Licensed Controlled
Affiliates of the Plan to verity compliance with this paragraph 7.H.
(5) As to a breach of 7.H.(1), (2), (3) or (4), the parties agree
that the obligations are immediately enforceable in a court of
competent jurisdiction. As to a breach of 7.H.(1), (2) or (4) by the
Controlled Affiliate, the parties agree there is no adequate remedy at
law and BCBSA is entitled to obtain specific performance.
I. In the event the Controlled Affiliate is a Smaller Controlled
Affiliate (as defined in Exhibit A), the Controlled Affiliate agrees to
be jointly liable for the amount described in H.3. hereof upon
termination of the BCBSA license agreement of any Larger Controlled
Affiliate of the Plan.
J. BCBSA shall be entitled to enjoin the Controlled Affiliate or
any related party in a court of competent jurisdiction from entry into
any transaction which would result in a termination of this Agreement
unless the Plan's license from BCBSA to use the Licensed Marks and
Names has been terminated pursuant to 10(d) of the Plan's license
agreement upon the required 6 month written notice.
K. BCBSA acknowledges that it is not the owner of assets of the
Controlled Affiliate.
L. In the event that the Plan has more than 50 percent voting
control of the Controlled Affiliate under Paragraph 2(E)(2) above and
is a Larger Controlled Affiliate (as defined in Exhibit A), then the
vote called for in Paragraphs 7(C) and 7(D) above shall require the
affirmative vote of three-fourths of the Blue Cross Plans which are
Regular Members of BCBSA and three-fourths of the total then current
weighted vote of all the Blue Cross Plans which are Regular Member
Plans of BCBSA.
8. DISPUTE RESOLUTION
The parties agree that any disputes between them or between or
among either of them and one or more Plans or Controlled Affiliates of
Plans that use in any manner the Blue Cross and Blue Shield Marks and
Name are subject to the Mediation and Mandatory Dispute Resolution
process attached to and made a part of Plan's License from BCBSA to use
the Licensed Marks and Name as Exhibits 5, 5A and 5B as amended from
time-to-time, which documents are incorporated herein by reference as
though fully set forth herein.
9. LICENSE FEE
Controlled Affiliate will pay to BCBSA a fee for this License
determined pursuant to the formula(s) set forth in Exhibit B.
10. JOINT VENTURE
Nothing contained in the Agreement shall be construed as creating
a joint venture, partnership, agency or employment relationship between
Plan and Controlled Affiliate or between either and BCBSA.
11. NOTICES AND CORRESPONDENCE
Notices regarding the subject matter of this Agreement or breach
or termination thereof shall be in writing and shall be addressed in
duplicate to the last known address of each other party, marked
respectively to the attention of its President and, if any, its General
Counsel.
12. COMPLETE AGREEMENT
This Agreement contains the complete understandings of the parties
in relation to the subject matter hereof. This Agreement may only be
amended by the affirmative vote of three-fourths of the Plans and
three-fourths of the total then current weighted rote of all the Plans
as officially recorded by the BCBSA Corporate Secretary.
13. SEVERABILITY
If any term of this Agreement is held to be unlawful by a court of
competent jurisdiction, such findings shall in no way affect the
remaining obligations of the parties hereunder and the court may
substitute a lawful term or condition for any unlawful term or
condition so long as the effect of such substitution is to provide the
parties with the benefits of this Agreement.
14. NONWAIVER
No waiver by BCBSA of any breach or default in performance on the
part of Controlled Affiliate or any other licensee of any of the terms,
covenants or conditions of this Agreement shall constitute a waiver of
any subsequent breach or default in performance of said terms,
covenants or conditions.
THIS PAGE IS INTENTIONALLY BLANK.
15. GOVERNING LAW
This Agreement shall be governed by. and construed and interpreted
in accordance with, the laws of the State of Illinois.
16. HEADINGS
The headings inserted in this agreement are for convenience only
and shall hare no bearing on the interpretation hereof.
IN WITNESS WHEREOF, the panics have caused this License Agreement
to be executed and effective as of the date of last signature written
below.
Controlled Affiliate:
By:
Date:
Plan:
By:
Date:
BLUE CROSS AND BLUE SHIELD ASSOCIATION
By:
Date:
EXHIBIT 99(c)
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BLUE CROSS AND BLUE SHIELD )
ASSOCIATION, )
)
Plaintiff, )
)
v. )
)
BLUE CROSS AND BLUE SHIELD OF )
MISSOURI; RIGHT CHOICE MANAGED )
CARE, INC., d/b/a ALLIANCE BLUE CROSS ) Case No. ____________
AND BLUE SHIELD; HMO MISSOURI, INC. )
d/b/a BLUE CHOICE; and HEALTHY )
ALLIANCE LIFE INSURANCE COMPANY, )
d/b/a ALLIANCE BLUE CROSS AND BLUE )
SHIELD, )
)
Defendants. )
________________________________________)
COMPLAINT
The Blue Cross and Blue Shield Association (the
"Association" or "BCBSA"), by its attorneys, for its Complaint
against the defendants, states as follows:
General Allegations
1. The Association seeks to enforce its rights under the Lanham
Act and under the Association's service mark license agreements
with defendant Blue Cross and Blue Shield of Missouri ("BCBSMO")
and three of BCBSMO's subsidiaries. BCBSMO and the other
defendants were licensed to use the association's well-known BLUE
CROSS (registered trademark) and BLUE SHIELD (registered trademark)
names and service marks (the "Blue Marks") in connection with the
sale of health care plans and related services. Pursuant to their
terms, the license agreements automatically terminated upon the appointment
of a receiver or other custodian over the business and property of
BCBSMO pursuant to an Order of the Circuit Court of Cole County,
Missouri, dated October 29, 1998. The Order was issued in
unrelated litigation not involving the Association. The
continued use of the Blue Marks by BCBSMO and the other
defendants is a violation of the Lanham Act and a breach of the
license agreements. The Association brings this Complaint for
equitable and monetary relief.
Jurisdiction and Venue
2. This Court has subject matter jurisdiction over these
claims: (a) as to the service mark infringement claims, under 28
U.S.C. section 1331, 28 U.S.C. section 1338(a), and 15 U.S.C. section 1121; (b)
as to the breach of contract claim, under 28 U.S.C. section 1367, because
it arises out of the same events and transactions that are
subject of the service mark infringement claim; and (c) over both
claims under 28 U.S.C. section 1332 because the parties are diverse in
citizenship and the amount in controversy, exclusive of interest
or costs, exceeds $75,000.
3. This Court has personal jurisdiction over the defendants
because each defendant transacts business, does business, is
found, has committed acts, and has breached contractual
relationships to be performed in the State of Illinois.
4. Venue is proper in this Court under 28 U.S.C. section 1391.
The Parties
5. The Association is a not-for-profit membership corporation,
organized and existing under the laws of the State of Illinois
and having its principal place of business at 225 North Michigan
Avenue, Chicago, Illinois, 60601. The Association's fifty-three
regular members are insurance companies (the "Blue Plans") that
offer services and products licensed under the Blue Marks.
6. The Association owns the Blue Marks. The Association
licenses the Blue Marks to the Blue Plans for use in providing
health care plans and related services. The Blue Marks are among
the most widely recognized service marks in the United States.
The Blue Marks include marks federally registered in the
Association's name with the United States Patent and Trademark
Office, and the Association owns those federal service mark and
trademark registrations, many of which have become incontestable
pursuant to 15 U.S.C. section 1065.
7. Defendant Blue Cross and Blue Shield of Missouri is a
Missouri corporation with its principal place of business at 1831
Chestnut Street, St. Louis, Missouri, 63103.
8. Defendant Right Choice Managed Care, Inc. d/b/a Alliance
Blue Cross and Blue Shield ("Right Choice") is a subsidiary of
BCBSMO and is a Missouri corporation with its principal place of
business at 1831 Chestnut Street, St. Louis, Missouri, 63103.
9. Defendant HMO Missouri, Inc. d/b/a Blue Choice ("HMO
Missouri") is a subsidiary of BCBSMO and is a Missouri
corporation with its principal place of business at 1831 Chestnut
Street, St. Louis, Missouri, 63103.
10. Defendant Healthy Alliance Life Insurance Company d/b/a
Alliance Blue Cross and Blue Shield ("Healthy Alliance") is a
subsidiary of BCBSMO and is a Missouri corporation with its
principal place of business at 1831 Chestnut Street, St. Louis,
Missouri, 63103.
The Association and the Blue Marks
11. The Association and the Blue Plans have a long and
distinguished history of providing affordable health-care
coverage in the United States. The Blue Marks have symbolized
widely available insurance for hospital and medical care for more
than sixty years. As owner and licensor of the Blue Marks, the
Association performs many functions benefiting the Blue Plans and
their nationwide system of health-care coverage. The Blue Marks
identify the Blue Plans as members of the national Blue Cross and
Blue Shield system. They also identify the quality standards met
by the services and products offered by Blue Plans and indicate
that the Association's system-wide programs will be available to
all customers.
The Blue Cross and Blue Shield License Agreements
12. The Association's Bylaws expressly provide that the
Association shall "protect the Blue Cross and Blue Shield service
marks." Central to the Association's protection of the Blue
Marks are its service mark license agreements. BCBSMO is bound
by the Blue Cross and Blue Shield License Agreements (the
""License Agreements"), which are substantially identical to each
other. BCBSMO and the Association are parties to the License
Agreements. The Association enforces numerous rules and
regulations under the License Agreements designed to enhance the
Blue Marks' reputation. BCBSMO executed License Agreements with
the Association that, pursuant to their terms, were subsequently
amended. Copies of the License Agreements currently in effect
are attached as Exhibit A (Blue Cross) and Exhibit B (Blue
Shield) to this Complaint and are incorporated by reference as if
fully set forth herein.
13. Right Choice and HMO Missouri are each bound by a Blue Cross
Controlled Affiliate License Agreement and a Blue Shield
Controlled Affiliate License Agreement (collectively the
"Controlled Affiliate License Agreements"), which are
substantially identical to each other. The Association and
BCBSMO are also parties to each of those Controlled Affiliate
License Agreements. Right Choice and HMO Missouri executed
Controlled Affiliate License Agreements with the Association
that, pursuant to their terms, were subsequently amended. Copies
of the Controlled Affiliate License Agreements currently in
effect are attached as exhibit 1 to the License Agreements that
are attached as Exhibits A (Blue Cross) and B (Blue Shield) to
this Complaint and are incorporated by reference as if fully set
forth herein.
14. Healthy Alliance is bound by a Blue Cross Controlled
Affiliate License Agreement Applicable to Life Insurance
Companies and a Blue Shield Controlled Affiliate License
Agreement Applicable to Life Insurance Companies (collectively
the "Life Insurance Agreements"), which are substantially
identical to each other. The Association and BCBSMO are also
parties to each of those Life Insurance Agreements. Healthy
Alliance executed Life Insurance Agreements with the Association
that, pursuant to their terms, were subsequently amended. Copies
of the Life Insurance Agreements currently in effect are attached
as exhibit 1A to the License Agreements that are attached as
Exhibits A (Blue Cross) and B (Blue Shield) to this Complaint and
are incorporated by reference as if fully set forth herein.
15. The License Agreements, Controlled Affiliate License
Agreements, and Life Insurance Agreements each expressly provide
that they are to be governed, construed, and interpreted in
accordance with the laws of the State of Illinois.
16. The License Agreements are designed to "assur[e] nationwide
protection of the Licensed Marks.and to assure the continued
integrity of the Licensed marks and of the BLUE CROSS [and BLUE
SHIELD] System." The License Agreements provide that each Blue
Plan "agrees that it will not attack the title of BCBSA in and to
the Licensed Marks and Name or attack the validity of the
Licensed Marks or of this License Agreement." The License
Agreements further provide that "all use of the Licensed Marks
and Name or any similar mark or name shall inure to the benefit
of BCBSA.." The controlled Affiliate License Agreements contain
similar provisions.
17. Pursuant to the License Agreements, the Association
vigorously polices uses of the Blue Marks. The Association
conducts a periodic service mark review of its licensees' use of
the Blue Marks. The Association also vigorously monitors its
licensees' financial condition. Each Blue Plan and its licensed
Controlled Affiliates provide quarterly reports to the
Association that include comprehensive financial and enrollment
data, among other things. The License Agreements also require
that each Blue Plan and Controlled Affiliate participate in the
Association's various and extensive national programs.
18. The Association administers the license agreements through
its staff at its Chicago, Illinois, headquarters. The
Association's licensees, including (formerly) the defendants,
regularly communicate and interact with the Association and its
Chicago headquarters concerning, among other things, the
activities described in the preceding paragraph. The
Association's licensees, including (formerly) the defendants,
frequently send representatives to Chicago for business related
to those activities and are in regular contact with the
Association at its Chicago offices by telephone, mail, delivery,
and other means.
19. The License Agreements contain specific provisions regarding
their termination. Among other termination provisions,
paragraph 15(a)(viii) of the License Agreements provides: "This
Agreement shall automatically terminate on the occurrence of any
of the following events: . . . (viii) a trustee, interim
trustee, receiver or other custodian for any of the Plan's . . .
property or business is appointed. . . ." As the United States
Court of Appeals for the Sixth Circuit has recently held, the
automatic termination provisions are "perfectly consistent with a
regimen designed to defend the Blue marks and the nationwide Blue
system against control by, or entanglement with, outsiders."
Blue Cross & Blue Shield Mutual of Ohio v. Blue Cross & Blue
Shield Association, 110 F.3d 318, 326 (6th Cir. 1997).
20. As the License Agreements provide in paragraph 11, the
termination of the License Agreements "shall cause the reversion
to BCBSA of all rights in and to the Licensed Marks and
Name. . . ." As the License Agreements further provide in
paragraph 11, upon a termination "the Plan agrees that it will
promptly discontinue all use of the Licensed Marks and Name, will
not use them thereafter, and will promptly, upon written notice
from BCBSA, change its corporate name so as to eliminate the
Licensed Name therefrom."
21. The Controlled Affiliate License Agreements also contain
automatic termination provisions. Paragraph 7.B of the
Controlled Affiliate License Agreements provides: "This
Agreement and all of Controlled Affiliate's rights hereunder
shall immediately terminate without any further action by any
party or entity in the event that Plan ceases to be authorized to
use the Licensed Marks and Name." The Controlled Affiliate
License Agreements also provide in paragraph 7.F that, upon a
termination "for cause or otherwise, Controlled Affiliate agrees
that it shall immediately discontinue all use of the Licensed
Marks and Name, including any use in its trade name."
22. The Life Insurance Agreements also contain automatic
termination provisions. Paragraph 7.B of the Life Insurance
Agreements provides: "This Agreement and all of Controlled
Affiliate's rights hereunder shall immediately terminate without
any further action by any party or entity in the event that:
. . . Plan ceases to be authorized to use the Licensed
Marks. . . ." The Life Insurance Agreements also provide that,
"[u]pon termination of this Agreement for cause or otherwise,
Controlled Affiliate agrees that it shall immediately discontinue
all use of the Licensed Marks, including any use in its trade
name."
The Automatic Termination
23. BCBSMO has been involved in a lawsuit with the Attorney
General of the State of Missouri and the Missouri Department of
Insurance. In that lawsuit, the Circuit Court of Cole County,
Missouri, entered an Order dated October 29, 1998, appointing a
receiver/custodian over substantial portions of the business or
property of BCBSMO. See, Order, Blue Cross Blue Shield of
Missouri v. Jay Angoff, et al., No. CV196-0619CC (Circuit Court
Cole County, Missouri, Oct. 29, 1998) (the "Receivership Order").
A copy of the Receivership Order is attached as Exhibit C to this
Complaint and is incorporated by reference as if fully set forth
herein.
24. As a result of the Receivership Order: (a) the License
Agreements between the Association and BCBSMO automatically
terminated, pursuant to paragraph 15(a)(viii) of those
Agreements; (b) the Controlled Affiliate License Agreements
between and among the Association, Right Choice, and BCBSMO
automatically terminated, pursuant to paragraph 7.B of those
Agreements; (c) the Controlled Affiliate License Agreements
between and among the Association, HMO Missouri, and BCBSMO
automatically terminated, pursuant to paragraph 7.B. of those
Agreements; and (d) the Life Insurance Agreements between and
among the Association, Healthy Alliance, and BCBSMO automatically
terminated, pursuant to paragraph 7(B) of those Agreements.
25. BCBSMO has publicly acknowledged that its licenses have
automatically terminated as a consequence of the Receivership
Order.
26. The Association has informed BCBSMO and other defendants of
the termination of the licenses. A copy of the Association's
letter to them is attached as Exhibit D to this Complaint and is
incorporated by reference as if fully set forth herein.
Count I
Service Mark Infringement
27. Paragraphs 1-26 above are incorporated by reference as if
fully set forth herein.
28. Each of the defendants is using the Blue Marks in commerce
without the consent of the registrant in connection with the
sale, offering for sale, distribution, or advertising of services
in connection with which such use is likely to cause confusion or
mistake or to deceive in violation of Section 32(1) of the
Trademark Act of 1946 (the "Lanham Act'), 15 U.S.C. section 1114(1).
29. The Association has been damaged by the infringement in an
amount to be determined at trial.
30. Absent an injunction against the defendants, the Association
will suffer irreparable harm. The balance of the equities and
the public interest also favor issuance of an injunction.
Count II
Breach of License Agreements
31. Paragraphs 1-30 above are incorporated by reference as if
fully set forth herein.
32. Pursuant to their respective license agreements, BCBSMO and
the other defendants are obligated to fulfill termination
conditions, including but not limited to the following: they are
obligated to cease all use of the Blue Marks and to change their
corporate names and trade names, if any, to eliminate all
reference to the licensed names; they are obligated to provide
appropriate notice to their customers that they are no longer
licensees; they are (except for Healthy Alliance) obligated to
pay a termination fee of $25 per licensed enrollee; and they are
obligated to fulfill other specific conditions enumerated in
their agreements.
33. Each of the defendants continues to use the Blue Marks in
violation of their respective license agreements with the
Association and otherwise is in breach of the agreements.
34. The Association has been damaged by the defendants' conduct
in an amount in excess of $75,000, exclusive of interest and
costs, to be determined at trial. Further, the value of an
injunction to the Association against the defendants exceeds
$75,000, and an injunction would also require the defendants to
forego conduct that is worth more than $75,000 to each of them.
Prayer for Relief
WHEREFORE, the Association respectfully requests that this
Court enter judgment in the Association's favor on both Counts
and:
(A) Preliminarily and thereafter permanently enjoin each of
the defendants from infringing the Blue Marks;
(B) Order the defendants, and anyone acting in concert with
them, forthwith to destroy all labels, signs, prints, packages,
wrappers, receptacles, advertisements, cards, and all plates,
molds, matrices, and similar devices for making or reproducing
the same, that bear the Blue Marks in any way;
(C) Order an accounting and an award of damages against all
defendants;
(D) Grant costs of this suit and reasonable attorneys'
fees; and
(E) Grant such other and additional relief as this Court
deems equitable and just.
Respectfully submitted:
BLUE CROSS AND BLUE SHIELD
ASSOCIATION
By: /s/
One of its attorneys
Chester T. Kamin (01388657) Roger G. Wilson
Darryl M. Bradford (03126874) Mark A. Orloff
John J. Hamill (06217530) BLUE CROSS AND BLUE SHIELD
Amy R. Skaggs (06243905) ASSOCIATION
JENNER & BLOCK 225 North Michigan Avenue
One IBM Plaza Chicago, Illinois 60601
Chicago, Illinois 60611 (312) 297-6000
(312) 222-9350
Dated: November 2, 1998
EXHIBIT 99(d)
IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI
BLUE CROSS AND BLUE SHIELD )
OF MISSOURI )
a Nonprofit Corporation, )
)
Plaintiff, )
)
vs. ) Case No. CV196-0619CC
)
JAY ANGOFF, Director, )
Missouri Department of Insurance, and )
)
JEREMIAH W. (JAY) NIXON, )
Attorney General of State of Missouri, )
)
Defendants. )
ORDER
Now on this 4th day of November, 1998, the Court's Order
dated October 29, 1998, is hereby set aside and for naught held
and is declared to be void ab initio.
/S/ Thomas J. Brown, III
THOMAS J. BROWN III, JUDGE
EXHIBIT 99(e)
IN THE CIRCUIT COURT OF COLE COUNTY, MISSOURI
BLUE CROSS AND BLUE SHIELD )
OF MISSOURI, )
a Missouri nonprofit corporation, )
)
Plaintiff, )
)
vs. ) Case No. CV196-619CC
)
JAY ANGOFF, in his official capacity )
as the Director of the Missouri Department )
of Insurance, )
)
and )
)
the MISSOURI DEPARTMENT OF )
INSURANCE, )
)
and )
)
JEREMIAH W. (JAY) NIXON, in his )
official capacity as the Attorney General )
of the State of Missouri, )
)
Defendants. )
ORDER
On agreement by the parties, the Court orders as follows:
1. Robert G. Russell is appointed Special Master for the
purpose of collecting and analyzing information related to the
Settlement Agreement of September 20, 1998. The parties are to
prepare a proposed order of appointment pursuant to Missouri
Supreme Court Rule 68.01 for submission to the Court by Friday,
November 6, 1998.
2. The Special Master will have authority to retain
Dale C. Doerhoff and James W. Gallaher as counsel to the Special
Master and to employ such financial advisors as are approved by
the Court. Costs of Special Master, counsel and financial
advisor are to be taxed as costs of
suit.
3. The stay of proceedings ordered on December 20, 1996,
remains in effect pending receipt of the appellate mandate in
this case or, after notice to all parties, further order of this
Court except that the Special Master may proceed immediately with
the process of collection and analysis of information related to
the Settlement Agreement of September 20, 1998.
/s/ Thomas J. Brown, III
JUDGE
Dated: 11/4/98
EXHIBIT 99(f)
RIGHTCHOICE MANAGED CARE, INC. LETTERHEAD
For Further Information:
Clara Kinner (314) 923-6268
Deb Wiethop (314) 923-4767
RIGHTCHOICE REPORTS THIRD QUARTER NET PROFIT
Circuit Court Voids October 29 Order
ST. LOUIS, Nov. 5, 1998-RightCHOICE Managed Care, Inc.
(NYSE: RIT) today reported a net profit for the third
quarter of 1998 on continuing growth in revenues and
controlled overhead. RightCHOICE had revenues of $189.8
million for the three months ended Sept. 30, 1998, up 5.2
percent from $180.5 million in the same period one year ago.
Net income for the third quarter of 1998 was $515,000, or 3
cents per share, compared with a net loss of $3.5 million,
or 19 cents per share, in the same period last year,
excluding the third quarter 1997 provision for the Missouri
Consolidated Health Care Plan (MCHCP) and a relocation
charge. The company's pre-tax operating loss of $2.6
million in the third quarter of 1998 improved over a pre-tax
operating loss of $8.5 million in the third quarter of 1997,
excluding the MCHCP provision and relocation charge. (The
pre-tax charge for MCHCP taken in the third quarter of 1997
was $29.5 million, which amounted to a net loss of $19.2
million or $1.03 per share on an after-tax basis.)
For the nine months ended Sept. 30, 1998, RightCHOICE
reported net income of $2.7 million, or 14 cents per share,
compared with net income of $2.2 million, or 12 cents per
share, for the same period last year, excluding the MCHCP
charge and non-recurring charges such as the relocation.
"We are pleased to see year-over-year improvement,
which we attribute to higher premiums and controlled general
and administrative expenses," said John A. O'Rourke,
chairman, president and chief executive officer. "Our
operating loss widened sequentially
for the reasons we shared in our second quarter earnings
report, most notably increases in medical expense trends and
the company's seasonal trends."
- More -
Increases in premiums and fees contributed to higher
total revenues, despite lower underwritten membership, as
the company continues its strategy of right pricing. Premium
revenue increased 5.2 percent to $172.2 million in the third
quarter of 1998, from $163.7 million in the same period a
year ago. Fees and other income, primarily from HealthLink
and other self-funded membership, increased 4.9 percent over
the same period in 1997. Additionally, flat general and
administrative (G&A) expense contributed to improved
operating results in the third quarter of 1998 as compared
to the third quarter of 1997.
Higher medical costs and utilization increased health
care services expenses by 3.2 percent, to $146.2 million
from $141.7 million in the same period last year. The third
quarter medical loss ratio (MLR) decreased to 84.9 percent
from 86.5 percent in the same period last year. For the nine
months of 1998, the MLR was 83.7 percent, compared with 84.4
percent in the same period last year.
SETTLEMENT AGREEMENT UPDATE
On Sept. 20, 1998, RightCHOICE and its parent company,
Blue Cross and Blue Shield of Missouri (BCBSMo), along with
the Missouri Attorney General and the Missouri Department of
Insurance, announced a settlement agreement for the
resolution of litigation and regulatory issues pending
against the company and its parent. If approved by the
court and consummated in accordance with its terms, the
settlement will resolve all outstanding litigation and
regulatory issues with the state and create a charitable
foundation that would be managed by an independent board of
directors.
On Oct. 29, 1998, Cole County Circuit Judge Thomas
Brown III issued an order that named a temporary
receiver/custodian for the shares of RightCHOICE stock owned
by BCBSMo. The court took the action "on its own motion"
and cited concerns about the fairness of the settlement,
alleged conflicts of interest and the need for an
independent examination of the proposed settlement agreement
and related issues. The order did not constitute the
appointment of a receiver/custodian over the operations of
either RightCHOICE or Blue Cross.
On Nov. 4, 1998, the Circuit Court voided ab initio, or
"from the beginning," its Oct. 29 order appointing a
temporary receiver/custodian for the Blue Cross and Blue
Shield of Missouri shares of RightCHOICE stock.
- More -
The court acknowledged that the effect of the Oct. 29
order on the Blue Cross and Blue Shield license was
unintended, and consistent with the court's desire to
preserve the value of RightCHOICE stock and other non-profit
assets, the court appointed a special master to advise the
court and review the proposed settlement. The special
master will be advised by attorneys and financial advisers.
The effect of the court's Nov. 4 action voided the Oct.
29 order as if it never existed. Accordingly, the company
believes that the Blue Cross and Blue Shield license
agreements continue uninterrupted in full force and effect,
and the company continues in compliance with its credit
facility covenants. The special master has expressed his
interest in ensuring that the company continue its business
in the normal course during his review.
STRATEGIC REALIGNMENT TO CONTROL G&A EXPENSES
The company announced today a strategic realignment of
business operations to control overall G&A expenses going
into 1999. By reducing personnel and other administrative
expenses, the company plans to offset anticipated 1999
increases in non-cash items, such as depreciation and
amortization, as well as investments in promising business
areas that include participation in the Health Care
Financing Administration's new Medicare+Choice program in
the St. Louis area for 1999 and further expansion of the
HealthLink network in regions outside Missouri.
The realignment plan calls for the reduction by mid-
1999 of approximately 135 positions, or 7.5 percent of the
company's workforce. The first phase of the plan eliminated
23 percent of the positions immediately, with an additional
26 percent of the positions to be eliminated by the end of
the year. The remaining positions will be eliminated by
June 1999, through strategic reductions and attrition,
offset to a small degree by positions added in the growing
business areas referenced above.
Other elements of the realignment plan include
reductions in key G&A cost areas, including the use of
outside consultants; changes in employee health care
benefits; software costs; and travel, entertainment and
other expenses.
The company will record a $900,000 charge in the fourth
quarter of 1998 related to anticipated realignment expenses.
- More -
"For us to remain competitive, we must invest in our
business strengths and keep our administrative costs in
check," O'Rourke stated. "Unfortunately, the realignment
also meant the loss of jobs within some of the areas we're
streamlining. We're providing those employees with
severance, outplacement assistance and other support. We
have strived for a realignment that minimizes the impact on
our members and health care providers, and positions
RightCHOICE to grow."
The company reduced the G&A expense ratio to 20.3
percent of revenues in the third quarter of 1998, compared
with 22.0 percent in the same period last year, as general
and administrative expenses, including depreciation and
amortization, were generally flat at $38.5 million compared
with $39.8 million in the same period of 1997. G&A includes
both general overhead and investments in ongoing corporate
initiatives, such as the multi-year plan for improving
information and operating systems and programming to
accommodate the year 2000. The G&A expense ratio for the
first nine months of 1998 was 20.8 percent compared with
22.5 percent in the comparable period last year.
"Our continuing focus on administrative costs follows
on our success in reducing G&A, both on a comparative year-
to-year basis, and sequentially throughout 1998," O'Rourke
said.
Excluding depreciation and amortization, the adjusted
G&A ratio also decreased to 17.7 percent for the third
quarter of 1998 from 19.1 percent in the same period of
1997. The adjusted G&A ratio for the first nine months of
1998 was 18.3 percent compared with 19.5 percent for the
same period last year.
MEMBERSHIP
Overall membership increased 8.8 percent from third
quarter 1997 to third quarter 1998, with growth primarily
from HealthLink. Underwritten membership at Sept. 30, 1998,
decreased to 471,000 members from 496,000 members at Sept.
30, 1997, or 5.1 percent. Approximately 45 percent of the
decrease came from underwritten membership reductions in the
Alliance preferred provider organization (PPO) program. The
company also saw decreases in the point-of-service (POS) and
health maintenance organization (HMO) programs.
- More -
The company's right pricing strategy has continued to
be generally accepted in the market. The focus of the
strategy is to improve the medical loss ratio of under-
performing groups, or alternatively exit those books of
business.
OUTLOOK
The company's performance outlook for the full year 1998
remains:
Average annual premium revenue growth rate per member
per month in the 9 percent to 10 percent range.
Medical cost per member per month trend increase in the
7 percent to 9 percent range, and an MLR in the mid-80s for
the year.
Maintaining the G&A expense ratio in the low 20s,
inclusive of non-cash amortization expense for corporate
initiatives and year 2000 programming expenses.
"A number of our 1998 initiatives are proving to be
quite successful, and will position RightCHOICE for
increased competitiveness, growth and profitability in
1999," O'Rourke stated. "By streamlining our emerging
markets group, we created a more efficient sales process and
higher close rates for small groups; our proposal activity
in the strategic/middle market group is at a two-year high,
and has already resulted in a number of key employers
selecting our programs over our competitors for January 1
enrollment; our national BlueCard PPO program has positioned
us solidly with large groups and our service improvements on
BlueCard and other national accounts have garnered `best
practices' recognition at a national level within the
BlueCard system; we completed all documentation and the
required site visit from the National Committee for Quality
Assurance (NCQA) and anticipate hearing about possible HMO
accreditation during the first quarter of 1999."
Addressing the challenges of escalating health care
costs, O'Rourke noted that the company's three-tier pharmacy
benefit program has achieved 20 percent penetration of
underwritten members through the end of the third quarter.
Continuing conversion and new enrollment to that drug
benefit program, changes in the administration of pre-
certification requirements and other provider contracting
activity should contribute to keeping the medical cost trend
at projected levels.
- More -
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995. Estimates and other statements
set forth herein that are not historical facts are forward-
looking statements that involve risks and uncertainties.
These risks and uncertainties include, but are not limited to:
the possibility that court approval of the final settlement
agreement, referenced above, that would resolve the
outstanding litigation and regulatory issues between the state
and RightCHOICE would not be obtained, or if obtained, could
include conditions that are not acceptable to the parties; the
possibility that all remaining contingencies and conditions to
the parties' obligations to effect the proposed settlement
transaction would not be met or otherwise satisfied;
governmental and regulatory action or legislation; pending
litigation; actions by the Blue Cross and Blue Shield
Association relating to the license to use the Blue Cross and
Blue Shield names, trademarks and service marks; market
competition and consolidation; escalating health care costs;
dependence on sales to individuals; recontracting efforts and
potential of non-renewal of subscriber and provider
agreements; voting control by the parent company; variability
of operating results and stock price; and additional factors
and other risks detailed in the company's Securities and
Exchange Commission filings.
RightCHOICE Managed Care Inc. and its parent company,
Blue Cross and Blue Shield of Missouri, are the largest
providers of health care benefits in Missouri.
# # #
FINANCIAL TABLES FOLLOW
RightCHOICE Managed Care, Inc.
Consolidated Financial and Operating Results
(Unaudited; amounts in thousands except shares, per share and
operating data)
THREE MONTHS ENDED
SEPTEMBER 30, 1998 1997
Premium revenues:
Alliance PPO $ 48,583 $ 48,038
AllianceChoice POS 38,356 32,687
HMO (includes other POS) 49,604 46,515
Medicare supplement 23,568 24,064
Managed indemnity 1,669 2,682
Other specialty services 10,432 9,740
Total premium revenues 172,212 163,726
Fees and other income 17,592 16,766
Total revenues 189,804 180,492
Operating expenses:
Health care services 146,209 141,669
Commissions 7,637 7,524
General and administrative 33,647 34,539
Depreciation and amortization 4,891 5,243
Charge for loss reserves 0 29,510
Charges for relocation 0 74
Total operating expenses 192,384 218,559
Operating loss (2,580) (38,067)
Investment income, net:
Interest and dividends 3,174 4,262
Realized gains, net 1,888 524
Total investment income, net 5,062 4,786
Interest expense (1,100) (1,056)
Other expense (104) (185)
Income tax expense (benefit) 763 (11,766)
Net income (loss) $ 515 $ (22,756)
Basic and diluted earnings (loss)
per share $ 0.03 $ (1.22)
Weighted average common shares 18,672,000 18,672,000
OPERATING DATA:
Membership at end of period
Underwritten:
Alliance PPO 141,297 152,502
AllianceChoice POS 128,712 130,773
HMO (includes other POS) 138,736 142,126
Medicare supplement 58,752 63,469
Managed indemnity 3,499 7,515
Self-funded:
PPO 45,445 90,137
HMO 12,235 13,471
ASO (includes HealthLink):
Workers' Compensation 432,786 340,222
Other ASO 1,130,068 982,915
Total 2,091,530 1,923,130
Medical loss ratio 84.9% 86.5%
G&A ratio 20.3% 22.0%
Adjusted G&A ratio (excluding
depreciation and amortization) 17.7% 19.1%
AS OF SEPTEMBER 30, 1998 1997
Book value per share $ 7.76 $ 7.79
Tangible book value per share $ 3.73 $ 3.42
NOTE: Health care services expense includes credit for
amortization of the September 1997 provision for losses on a
single contract.
RightCHOICE Managed Care, Inc.
Consolidated Financial and Operating Results
(Unaudited; amounts in thousands except shares, per share and
operating data)
NINE MONTHS ENDED
SEPTEMBER 30, 1998 1997
Premium revenues:
Alliance PPO $ 143,716 $ 150,102
AllianceChoice POS 112,099 90,517
HMO (includes other POS) 153,750 133,277
Medicare supplement 71,816 73,522
Managed indemnity 6,335 9,949
Other specialty services 31,855 28,347
Total premium revenues 519,571 485,714
Fees and other income 53,903 47,241
Total revenues 573,474 532,955
Operating expenses:
Health care services 435,037 410,126
Commissions 23,707 21,879
General and administrative 105,071 104,092
Depreciation and amortization 14,103 15,645
Charge for loss reserves 0 29,510
Charges for relocation 0 2,970
Total operating expenses 577,918 584,222
Operating loss (4,444) (51,267)
Investment income, net:
Interest and dividends 10,831 12,008
Realized gains, net 2,587 16,584
Total investment income, net 13,418 28,592
Interest expense (3,376) (3,378)
Other expense, net (130) (488)
Income tax expense (benefit) 2,783 (7,668)
Net income (loss) $ 2,685 $ (18,873)
Basic and diluted earnings (loss)
per share $ 0.14 $ (1.01)
Weighted average common shares 18,672,000 18,673,000
OPERATING DATA:
Medical loss ratio 83.7% 84.4%
G&A ratio 20.8% 22.5%
Adjusted G&A ratio (excluding
depreciation and amortization) 18.3% 19.5%
NOTE: Health care services expense includes credit for
amortization of the September 1997 provision for losses on a
single contract.
####
