Keeping Tabs on the Ninth Circuit
April 15, 2022 - This Week at the Ninth

This Week at the Ninth: Short Swings and Medicare Advantage

This Week at the Ninth: Short Swings and Medicare Advantage

This week, the Ninth Circuit addresses short-swing transactions involving board-approved stock option grants and considers the preemptive scope of the Medicare Act.


The Court holds that state corporate law determines the requisite board “approval” required to satisfy the SEC’s rule exempting board-approved transactions from the prohibition on short swing insider trading.

The panel: Judge Bybee, Bea, and Christen, with Judge Bea writing the opinion.

Key Highlight: “A board of directors certainly differs from a ‘committee of the board of directors’ and from an individual director. But a board of directors does not cease to be a board of directors if a member is absent or non-voting any more than the United States Senate ceases to be the United States Senate if a Senator is absent or non-voting.”

Background: CytoDyn granted its CEO, Nader Pourhassen, stock options giving him the right to purchase CytoDyn shares. Four of CytoDyn’s five board members were present at the meeting in which that award was approved, and three voted in favor. Within six months of that grant, Pourhassen exercised his options and then sold the purchased stock. In response, certain individual shareholders of CytoDyn brought suit against Pourhassen, alleging that he violated Section 16(b) of the 1934 Securities Echange Act, which prohibits insiders from buying and selling company securities within a six-month period. 15 U.S.C. § 78p(b). The district court granted Pourhassen’s motion to dismiss on the ground that the transaction had been approved by CytoDyn’s board.

Result: The Ninth Circuit affirmed. As the Court explained, while Section 16(b) imposes strict liability for all corporate insiders’ short-swing transactions, Congress authorized the SEC to exempt certain transactions from this broad prohibition. SEC Rule 16b-3(d) exempts transactions involving “an acquisition from the issuer” if it is, among other things, “approved by the board of directors of the issuer.” That condition was met, the Court concluded, so long as the Board’s approval was consistent with the corporation’s bylaws and the governing corporate (here, Delaware) law—and not, as the plaintiffs contended, only where every member of the Board approved the transaction.  

The Court explained that Rule 16b-3(d)’s use of the word “approval,” “does not inherently require unanimity, a supermajority, a particular quorum, or any other specific steps.” Its reference to “board of directors,” likewise, simply meant the corporation’s “governing body,” whether or not every member of that body was present or in agreement. And here, the Court continued, state law filled in any “gaps” in the federal rule by specifying “procedures that a corporate board must follow to ‘approve’ corporate decisions.”

The Court rejected the plaintiffs’ reliance on the preamble to the SEC rulemaking, which had referenced the approval of the “full board.” The Court explained that such a preamble is not controlling, and that in any event the SEC used the phrase simply to distinguish between the board of the directors and a committee of the board. Federal court and state decisions using the phrase “full board” were similarly inapposite. Finally, the Court dismissed plaintiffs’ argument this interpretation of Rule 16b-3(d) would create a “loophole” by making the exemption turn on “form”: while Delaware law allowed majority approval at a meeting in which a quorum of the directors was present, it would have required unanimity if the board had instead provided written approval. That, the Court held, was no “loophole”: “The distinction that Delaware draws between board approval at a meeting and board approval by written consent is, as they say, not a bug but a feature.”


The Court holds that the Medicare Act preempts state law claims related to benefits under a Medicare Advantage plan.

Panel: Judges Wallace, Collins, and Rakoff (S.D.N.Y.), with Judge Wallace writing the opinion.

Key Highlight: “Here, because the standards established under Part C expressly prescribe the relevant duties of MA plans with respect to when expedited treatment is required and what timeframes apply, those standards ‘supersede’ any state law duty that would impose obligations on MA plans on that same subject.”

Background: Under Part C of the Title XVIII of the Social Security Act (SSA)—better known as the Medicare Act—beneficiaries can enroll in a Medicare Advantage (MA) plan and receive Medicare benefits through private companies rather than the government. Defendant SelectHealth is a private health insurance benefits organization that administers MA plans.

After he was diagnosed with pulmonary fibrosis in 2014, Philip Aylward enrolled in a MA plan through SelectHealth. His plan covered “medically necessary” care and outlined the process by which SelectHealth made coverage decisions. Over the next few years, Mr. Aylward received care at hospital facilities across the country. SelectHealth approved Mr. Aylward’s request for a single lung transplant from one hospital, but denied his preauthorization request for duplicate services at another hospital. Mr. Aylward appealed that decision and SelectHealth ultimately approved additional testing and consultation. Mr. Aylward passed away in October 2016.

Following her husband’s death, Plaintiff Naomi Aylward filed suit against SelectHealth, asserting various state law tort claims based on SelectHealth’s processing of her husband’s request for treatment. The district court granted summary judgment in favor of SelectHealth.

Result: The Ninth Circuit affirmed. First, the Court considered whether Mrs. Aylward’s claims needed to be exhausted through the Medicare Act’s administrative review process. The SSA requires enrollees to pursue claims for benefits through all levels of administrative review, including the MA organization’s internal processes, an administrative law judge, and eventually the Medicare Appeals Council. But enrollees cannot be subject to an exhaustion requirement if no administrative remedies are available. Here, Mrs. Aylward was not disputing SelectHealth’s ultimate decision; rather, she argued that her husband should have received medical services sooner than he did. The Court concluded that Mrs. Aylward’s claims do not have an available administrative remedy, and therefore are not subject to the Medicare Act’s exhaustion requirement.

Second, the Court addressed whether the Medicare Act’s express preemption provision preempts Mrs. Aylward’s state law claims. The Court focused on two claims in particular: (1) that SelectHealth allegedly failed to process Mr. Aylward’s appeal in a timely fashion; and (2) that SelectHealth allegedly failed to properly investigate his preauthorization request for additional consultation and testing. The Court concluded that the Medicare Act expressly preempts the first claim because federal regulations provide specific standards for how MA organizations should process expedited requests. The same held true for the second claim.  As the Court reasoned, the “second asserted duty is essentially identical to her first alleged duty: a duty to process the claim for benefits, and receive a favorable decision, more quickly.”