## Facts

- Highmark, Inc. (Highmark) was a Pennsylvania nonprofit corporation operating both a hospital plan and a professional health-services plan under Blue Cross/Blue Shield licenses.
- From 2005–2009, Highmark earned net profits exceeding $1.2 billion, largely from for-profit subsidiaries and investment activity.
- Over the same period, Highmark paid about $58 million in compensation to its top 12 executives, including significant bonuses tied to profitability.
- Highmark retained the remaining profits and invested them in its for-profit subsidiaries and investment portfolio.
- As a health insurer, Highmark’s investments and capital levels were regulated and monitored by the Pennsylvania Department of Insurance.
- The Insurance Department concluded that Highmark’s capital levels during 2005–2009 were appropriate, sufficient, and not inefficient.
- The Insurance Department also concluded that executive compensation paid from 2004–2008 was reasonable.
- Herman Wooden and Thomas Logan, former Highmark members, sued Highmark under Pennsylvania’s Nonprofit Corporation Law of 1988 (NCL), alleging unlawful accumulation of excess profits and unlawful distribution of profits to officers through profit-based compensation.

## Issues

1. Did the plaintiffs have standing under the NCL, as former members, to bring claims challenging Highmark’s surplus and executive compensation?
2. Did Highmark violate the NCL by earning and retaining profits during 2005–2009 that were not “incidental” to its nonprofit purposes?
3. Did Highmark violate the NCL’s prohibition on distributing income or profits to members, directors, or officers by paying executives profit-based bonuses as part of compensation?

## Decision

- The Court of Common Pleas of Philadelphia County granted Highmark’s motion for summary judgment and denied the plaintiffs’ motion for partial summary judgment.
- The trial court treated the plaintiffs as having standing to litigate the NCL claims, but ruled against them on the merits.
- The court held that Highmark’s accumulation and retention of surplus, in light of the record and the insurer regulatory framework, did not violate the NCL’s limitation allowing only incidental profits.
- The court held that the challenged executive compensation, including profit-based bonuses, did not amount to an unlawful “distribution” of profits to officers under the NCL.
- The court gave significant weight to the Pennsylvania Insurance Department’s findings that Highmark’s capital levels were appropriate and that executive compensation was reasonable.

## Legal Principles

- A Pennsylvania nonprofit corporation may earn profits in connection with its activities; the NCL’s “incidental profits” concept is not applied as a simple numerical cap based only on the size of earnings or reserves.
- For a regulated insurer, agency findings regarding capital adequacy and reserve efficiency are strong evidence bearing on whether retained surplus is improper under nonprofit law.
- Payments to officers for services may be lawful compensation; compensation does not become a prohibited “distribution” merely because it includes bonus components that reference financial results.
- Summary judgment is proper where the record shows no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law on the statutory claims asserted.

## Conclusion

The Philadelphia Court of Common Pleas entered summary judgment for Highmark, rejecting NCL-based claims that Highmark’s 2005–2009 profits and retained surplus were non-incidental or unlawful and that profit-based executive bonuses were prohibited distributions, relying heavily on the insurer’s regulatory setting and the Pennsylvania Insurance Department’s determinations that capital levels were appropriate and executive compensation was reasonable.


Wooden v. Highmark, Inc., 2013 Phila. Ct. Com. Pl. LEXIS 547 (2013)