:: Plaintiff’s State Law Claims Based Upon Benefit Promises Avert Preemption

In sum, Mr. Lapham’s state law claims arise from legal duties independent from the ERISA plans and seek to recover damages in the form of severance pay or lost opportunities, not ERISA benefits per se. The claims do not challenge the administration of the Benefit Plans or seek to impose new duties on plan administrators.


Rather, the claims turn on the Defendants’ representations and promises made to Mr. Lapham before he became an Accenture employee and enrolled in the Benefit Plans. . . . Under these circumstances, the Court finds that Mr. Lapham’s state law claims do not “relate to” an ERISA plan and, accordingly, are not preempted by ERISA Section 514(a).


Lapham v. Accenture, LLP, 2016 U.S. Dist. LEXIS 154680 * (D.N.J. Nov. 8, 2016)


If an employer offers a benefits arrangement to a prospective employee and later denies benefit claims based on plan eligibilty requirements, could the employee assert state law claims or would ERISA preempt them?  That was the issue addressed in this opinion.

The plaintiff asserted ERISA benefit claims but also asserted state law claims in the alternative.  Thes claims included state law causes of action for fraud, breach of contract,, breach of the covenant of good faith and fair dealing, and promissory estoppel.

In opposition to the defendants’ motion to dismiss, he argued that these state law claims are not preempted by ERISA because they arose from duties generated independent of any ERISA plans, such as the terms of his employment as set forth in the original offer of employment.

Rather than interpreting ERISA plans, he argued, the Court need only consider the defendants’ representations and promises to him before his employment and whether those representations and promises were ultimately false or breached.  Importantly, he also asserted claims for damages in the form of lost severance pay and lost opportunities — not ERISA benefits.

The Court navigated the channel between ERISA preemptive entanglement and permissible state law claims by reference to the guidance in Nat’l Sec. Sys., Inc. v. Iola, 700 F.3d 65, 82 (3d Cir. 2012).  That case in turn drew ujpon  Aetna Health Inc. v. Davila, 542 U.S. 200 (2004).

The Court noted that:

In Iola, the Third Circuit considered whether state law fraud claims were expressly preempted by ERISA. In doing so, the court distinguished between alleged misrepresentations made after the ERISA plan’s adoption and alleged misrepresentations made prior to the ERISA plan’s adoption in an effort to induce participation in the ERISA plan. Iola, 700 F.3d at 84-85. The Third Circuit found that the misrepresentations made after the plaintiffs adopted the ERISA plan were preempted as they had “a connection with” the ERISA plans in question . . .

The Court held that the plaintiff’s state law claims were not preempted, observing that a state law claim may have an independent legal basis “even if an ERISA plan is a factual predicate in the case.”

Note:  The Court also cited with approval a Sixth Circuit opinion, Thurman v. Pfizer, 484 F.3d 855 (2007), which is an excellent resource for the proposition “that employers who misrepresent certain benefits provided by ERISA-governed plans to prospective employees cannot later use preemption as an end-run around liability for fraudulent or innocent misrepresentations.”

Practice Pointer – Key elements to the successful avoidance of ERISA preemption were state law claims that:

  • arose from legal duties independent from the ERISA plans
  • sought to recover damages in the form of severance pay or lost opportunities, not ERISA benefits per se.
  • did not challenge the administration of the Benefit Plans
  • did not seek to impose new duties on plan administrators




:: District Court Applies Discretionary Clause Ban To ERISA Self Funded Plan

For these reasons, the Court concludes that section 10110.6 applies to self-funded plans in the same way it applies to insured plans and effectively bars the Court from applying the abuse of discretion standard of review. The Court will therefore review Aetna’s decision on a de novo basis.

Thomas v. Aetna Life Ins. Co., No. 215-CV-01112-JAM-KJN, 2016 WL 4368110, at *7 (E.D. Cal. Aug. 15, 2016)

This opinion addresses two issues: first, the adequacy of the plan document’s delegation of discretionary authority to the claims administrator and, second, whether state law prohibiting discretionary clauses may apply to a self funded ERISA plan.

In a poorly reasoned opinion, the district court reached the wrong conclusion on both issues.  The mistake in the ERISA preemption analysis is the most troubling. In fact, this is at least the second time that a California district court has incorrectly applied a state law regulation to a self funded ERISA plan.

Delegation of Authority

The plaintiff (Thomas) argues that:

. . . the abuse of discretion standard would be inappropriate here because Aetna was never unambiguously granted discretion by the Benefits Committee. Thomas concedes that the Benefits Committee was granted discretion for its determination of whether Thomas was disabled but contends that “there is no language in the Plan granting Aetna discretion and Defendants have not cited anything evidencing that the Benefits Committee expressly delegated its discretion to Aetna.”

In short, while the plan grants the “Benefits Committee” discretionary authority, it does not grant that authority to the claims administrator (Aetna) – and, significantly, the Benefits Committee never delegated its authority to Aetna.  This argument should be viewed in context of the historical and prevailing ERISA jurisprudence that ERISA plan terms must be in writing and enforced accordingly.

Inexplicably, the Court rules against the plaintiff on the issue, finding that, “[r]ead as a whole, the Plan sufficiently delegates the Plan Administrator’s discretionary authority to Aetna.”  (emphasis supplied).

ERISA Preemption

The Court then turned its attention to the ERISA preemption issue.  The Court saw the issue as merely one of whether the state law ban conflicted with ERISA’s administrative scheme.

. . . the Ninth Circuit has concluded that state laws that bar discretionary clauses (such as section 10110.6) are not preempted by ERISA because they do not “authorize any form of relief in state courts nor serve as an alternative enforcement mechanism outside of ERISA’s civil enforcement provisions.” Standard Ins. Co., 584 F.3d at 846 [Standard Ins. Co. v. Morrison, 584 F.3d 837, 846 (9th Cir. 2009)] (rejecting claim that ERISA preempted a policy implemented by the Montana insurance commissioner of disapproving any insurance contract containing a discretionary clause).

On this view,  state law bans on discretionary clauses “merely force [ ] ERISA suits to proceed with their default standard of review,” which is de novo, and therefore do not “duplicate, supplement, or supplant the ERISA remedy.”

The Problem With the Court’s Reasoning

The problem with the Court’s reasoning lies in its careless reading of Ninth Circuit authority, i.e., the Standard Ins. Co. v. Morrison opinion.

That opinion involved two arguments, each of which would have been fatal to the application of the discretionary clause ban.   The Court ignored the first argument in Morrison which involved application of ERISA’s savings clause and went straight to the second argument of whether the law conflicted with ERISA remedies.

Let’s review the first argument as presented in Morrison.  The Ninth Circuit opinion began by asking:
Is Commissioner Morrison’s practice of denying approval to insurance forms with discretionary clauses preempted by ERISA? Here, no one disputes that Commissioner Morrison’s practice “relate[s] to any [covered] employee benefit plan.” 29 U.S.C. § 1144(a). It is thus preempted unless preserved by the savings clause.
Only after resolving this issue in favor of applying the savings clause did the Ninth Circuit reach the second argument.  And the second argument was essentially advancing an exception to the savings clause –
We decline to create an additional exception from the savings clause here. Like the regulatory scheme in Rush Prudential, the Commissioner’s practice “provides no new cause of action under state law and authorizes no new form of ultimate relief.” Id. at 379, 122 S.Ct. 2151. The Rush Prudential court emphasized that the scheme in that case “does not enlarge the claim beyond the benefits available” and does not grant relief other than “what ERISA authorizes in a suit for benefits under § 1132(a).” Id. Neither does the Commissioner’s practice.

Standard Ins. Co. v. Morrison, 584 F.3d 837, 848 (9th Cir. 2009)

By failing to appreciate the significance of the self funded status of the plan, the Court reached the wrong result.   Without benefit of the savings clause (which could not apply since it only extends to laws regulating the business of insurance), the state law discretionary ban is preempted since it relates to an ERISA plan.

Note – The Court appears to have relied in part on the decision by another district court which also reached the wrong conclusion on this issue:

During the hearing, however, Defendants conceded that the only court that has directly addressed the issue of whether the application of section 10110.6 to self-funded plans is preempted by ERISA concluded that there is no preemption. Williby v. AETNA Life Insurance Company, 2015 WL 5145499, *5 (C.D. Cal. Aug. 31, 2015).1 The defendant in Williby argued just as Defendants argue in this case “that the insurance code does not apply because (1) the STD benefits are self-funded … and (2) Aetna is granted discretion by the Plan, which is not an insurance policy, and thus, not regulated by the insurance code.” Id. at *5. The Williby court rejected this argument.

Thomas v. Aetna Life Ins. Co., No. 215CV01112JAMKJN, 2016 WL 4368110, at *6 (E.D. Cal. Aug. 15, 2016)

Deemer Clause – Since the overarching issue here is the application of state insurance law to self funded ERISA plans, note that states may not treat self funded plans as “insurance” so as to avoid ERISA preemption:

We read the deemer clause to exempt self-funded ERISA plans from state laws that “regulat[e] insurance” within the meaning of the saving clause. By forbidding States to deem employee benefit plans “to be an insurance company or other insurer … or to be engaged in the business of insurance,” the deemer clause relieves plans from state laws “purporting to regulate insurance.” As a result, self-funded ERISA plans are exempt from state regulation insofar as that regulation “relate[s] to” the plans.

FMC Corp. v. Holliday, 498 U.S. 52, 61, 111 S. Ct. 403, 409, 112 L. Ed. 2d 356 (1990)






:: Severance Arrangement Constitutes ERISA Plan – Factor Analysis of Plan Status

The dispositive issue in this case is whether Plaintiff’s state-law claims are preempted by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. and thus subject to the sixty-day appeal period.

Gordon v. AstraZeneca AB, No. 4:16-CV-40042-TSH, 2016 WL 4212250, at *2 (D. Mass. Aug. 9, 2016)

This case involves a preliminary issue of whether a severance pay arrangement is an ERISA plan.  If so, the plaintiff’s state law claims would be preempted – and even more significantly, the failure to appeal the denial of benefits gives rise to the defense of failure to exhaust administrative remedies.

Was the arrangement an ERISA plan?

Severance pay arrangements require a careful examination of the facts underlying the benefit obligations.  The Court turned to the seminal cases for guidance, noting:

“[A]n employee benefit may be considered a plan for purposes of ERISA only if it involves the undertaking of continuing administrative and financial obligations by the employer to the behoof of employees or their beneficiaries.” Belanger v. WymanGordon Co., 71 F.3d 451, 454 (1st Cir.1995) (citing Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 12, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987); District of Columbia v. Greater Wash. Bd. of Trade, 506 U.S. 125, 130 n. 2, 113 S.Ct. 580, 121 L.Ed.2d 513 (1992)).

When evaluating whether a given program falls under ERISA, the court looks to “the nature and extent of an employer’s benefit obligations.” O’Connor v. Commonwealth Gas Co., 251 F.3d 262, 266–67 (1st Cir.2001) (quoting Rodowicz v. Mass. Mut. Life Ins. Co., 192 F.3d 162, 170, amended by 195 F.3d 65 (1st Cir.1999)).

So the project of evaluating whether a plan exists becomes a “fact-intensive inquiry specific to each case” with no “authoritative checklist” that settles the question.
The Court finds that the arrangement constitutes an ERISA plan . . .
The reasons:
  1. the severance payment was only available to “eligible” employees, and one of the criteria for eligibility was that the employee cannot have been terminated “for cause.”
  2. the Plan granted discretion to the administrator to construe its terms, including the definition of “notice of termination,” which was the purported basis for benefits denial
  3. other benefits under the Plan—post-termination medical, dental, life insurance, and employee assistance—are the types of ongoing benefit payments that constitute a typical ERISA plan
  4. both the Plan and the Plan Summary contained clear statements of intent that this is an ERISA plan.

Note that #1 and #2 support the argument that the plan involved discretion which is factor indicating ERISA plan status.

The court finds the state law claims preempted . . .
Having found the existence of an ERISA plan, it was a short step for the Court to arrive at the conclusion that the plaintiff’s state law claims were preempted.  In short, the Court held that the Plaintiff sought to enforce the terms of the Plan through state-law causes of action—precisely the type of alternative enforcement that ERISA prohibits.
The Supreme Court has “identified three categories of state laws that ‘relate to’ ERISA plans” for purposes of preemption: “(1) state laws that ‘mandate [ ] employee benefit structures or their administration,’ (2) state laws that ‘bind plan administrators to [a] particular choice,’ and (3) state law causes of action that provide ‘alternative enforcement mechanisms’ to ERISA’s enforcement regime.” Id. at 51 (quoting New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645, 658–59, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995)).
The third category applies to the state law causes of action in this case. “[I]n order to assess whether the state law cause of action is an alternative enforcement mechanism, [the court] must ‘look beyond the face of the complaint’ and determine the real nature of the claim ‘regardless of plaintiff’s … characterization.’ ” Id. (quoting Danca v. Private Health Care Sys., Inc., 185 F.3d 1, 5 (1st Cir.1999)).
. . . and that the Plaintiff failed to exhaust administrative remedies.
Regardless of the issue of whether an ERISA plan exists, the possibility that it might requires careful attention to the procedural aspects of ERISA appeals as set forth in the applicable documents.  Here, the Plaintiff did not appeal the initial denial of his claim.  The Court refused to accept his argument that an appeal would have been futile.
“blanket assertion[s], unsupported by any facts, [are] insufficient to call the futility exception into play.” Id. at 63. To show futility, the employee must produce evidence to show that the administrative review would have been futile. See id.; Drinkwater, 846 F.2d at 826. Plaintiff’s blanket statement about the inadequacy of the appeals procedure is insufficient to satisfy this requirement.
In sum, I find that Plaintiff’s state-law claims are preempted by ERISA and that he has failed to exhaust his administrative remedies.

Note:  Although the Court eschews the use of authoritative checklists, it does in fact quote opinions that do, more or less, provide a checklist for determining whether an ERISA plan exists.  For example:

Factors indicating no plan –
  • a benefits package that consists primarily of a non-discretionary, one-time, lump-sum benefit
  • voluntary termination program offering one-time lump-sum or incremental severance benefit was not ERISA plan
Factors indicating existence of a plan —
  • whether “the time period [was] prolonged, individualized decisions [were] required, and at least one of the criteria [was] far from mechanical.”
  • whether the payments are ongoing;
  • whether the employer’s obligation is triggered by the occurrence of a particular contingency;
  • whether the plan administrator has discretionary functions;
  • whether the plan contains a detailed claims procedure; and
  • whether the plan states that it is governed by ERISA.

Bottom line – A “one-shot, take-it-or-leave-it incentive” payment—the administration and application of is purely mechanical is not an ERISA plan.  As the arrangement increases in complexity and discretion, it will to that extent move on the spectrum toward ERISA plan status.

:: State Court Lien Adjudication Claim Subject to Removal and ERISA Preemption

This case arises from Defendant Hawaii Management Alliance Association’s (“HMAA”) lien for $400,779.70 of the medical expenses it paid pursuant to Plaintiff Randy Rudel’s (“Plaintiff” or “Rudel”) HMAA benefit plan (the “Plan”) after Rudel was injured in a motorcycle crash.

According to HMAA, the Plan entitles HMAA to reimbursement in light of Rudel’s $1,500,000 third-party tort settlement related to the motorcycle crash.   Rudel initiated a state-court action to determine the validity of HMAA’s lien . . . HMAA removed the Petition to this court asserting that this matter is completely preempted by [ERISA]

Rudel v. Hawaii Mgmt. All. Ass’n, No. CV 15-00539 JMS-RLP, 2016 WL 4083320, at *1 (D. Haw. Aug. 1, 2016)

This case is quite similar to another recent case,  Noetzel v. Hawaii Med. Serv. Ass’n, 2016 WL 4033099 (D. Haw. July 27, 2016).   [Analyzed here]  As in that case, the question is whether an ERISA plan participant may avoid ERISA’s preemptive provisions by filing a state court petition to adjudicate a health plan’s reimbursement provisions.

Two Prong Test

The Court turned to the now familiar two prong test set forth in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004) for deciding whether a state-law cause of action is completely preempted by ERISA. A state law claim is preempted if: (1) the plaintiff “could have brought his claim under ERISA § 502(a)(1)(B)”; and (2) “there is no other independent legal duty that is implicated by a defendant’s actions.” Davila, 542 U.S. at 210.


Could Rudel have brought his claim under ERISA § 502(a)(1)(B)? That question sums up the first issue since the challenge in state court could really be construed as a claim for benefits undiminished by the offsetting reimbursement claim.

Section 502(a)(1)(B) provides that a Plan participant or beneficiary may bring a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a).

Rudel argues that it is “patently clear” his Petition is brought pursuant to Hawaii state law instead of ERISA. According to Rudel, ERISA § 502(a)(1)(B) does not apply because the Petition does not seek to recover benefits under the terms of the Plan. Rather, Rudel argues, the Petition only seeks to keep benefits already provided by HMAA.

Rudel misses the point. “Focusing on how a claim is pled risks missing the critical inquiry as to whether ‘an individual, at some point in time could have brought his claim under ERISA § 502(a).’ ” Noetzel, 2016 WL 1698264, at *11 (citing Davila, 542 U.S. at 210).Here, HMAA’s lien places Rudel’s benefits “ ‘under something of a cloud.’ ” Id. at *9 (citing Arana v. Ochsner Health Plan, 338 F.3d 433, 438 (5th Cir. 2003) (en banc)). Rudel’s Petition seeks to remove the “cloud” by obtaining “recovery of the entire benefit provided by [HMAA], as opposed to the benefit minus the amount to be reimbursed to [HMAA].”

The essence of the Petition, therefore, is that “although the benefits have already been paid, [Rudel] has not fully ‘recovered them because [he] has not obtained the benefits free and clear of [HMAA’s] claims.” Id. (quoting Arana, 338 F.3d at 438).The fact that HMAA has “already provided the benefits to [Rudel] as opposed to having denied them in the first instance, does not change the nature of [his] claim[s], which, for all intents and purposes, seek[ ] to establish [his] entitlement to ERISA benefits.” Id.

(emphasis added)

# 2

Does state law impose an independent legal duty?  This is the second prong issue.  The Court concluded that it did not.

The Court noted that:

. . . [s]tate law legal duties are not independent of ERISA where interpretation of the terms of the benefit plan forms an essential part of the claim, and legal liability can exist only because of the defendant’s administration of ERISA-regulated benefit plans.” Id. at *13 (citing Davila, 542 U.S. at 213) (some quotations, alterations, and citations omitted).

And the Court found that interpretation of plan terms formed an “essential part” of  state law Petition.  Furthermore,

Rudel’s Petition is dependent on ERISA because Rudel “would have no claim in the absence of the ERISA Plan itself.” Id. That is, Rudel’s Petition is challenging the validity of the Plan’s request for reimbursement, and “legal liability can exist only because of the defendant’s administration of ERISA-regulated benefit plans.” Noetzel, 2016 WL 1698264, at *13. Ultimately, any legal duty HMAA might have “is entirely dependent on the ERISA Plan.” Id. at *14.

Thus, the state law claim was properly removed to federal court and preempted by ERISA.

Note:   A conflict in the federal courts exists on the first prong query.  The Court noted that:
In reaching this conclusion, the court is well aware that Wurtz v. Rawlings Co., LLC, 761 F.3d 232 (2d Cir. 2014) –– the case the F&R relied upon in finding that Rudel’s claim was not within the scope of § 502(a)(1)(B) –– “is the only decision cited to the court which interpreted and analyzed” Davila’s two-prong test.
But the court finds Wurtz unpersuasive because it “flouts the direction in Davila to examine the essence of a claim in determining whether it is completely preempted by § 502(a).” Noetzel, 2016 WL 1698264, at *10. As such, the court finds that the first prong of Davila is satisfied.

 Rudel v. Hawaii Mgmt. All. Ass’n, No. CV 15-00539 JMS-RLP, 2016 WL 4083320, at *2 (D. Haw. Aug. 1, 2016)



:: No Fault Carrier’s Claim Defeated By Health Plan’s ERISA Defense

When Timothy Van Camp (“Van Camp”) suffered injuries in a motor vehicle accident, he was insured by both Appellant Farm Bureau General Insurance Company of Michigan (“Farm Bureau”), a no-fault auto insurer, and an ERISA1 plan administered by Appellee Blue Cross Blue Shield of Michigan (“BCBSM”).

BCBSM contends that its Plan does not cover the medical services received by Van Camp because those services were not medically necessary. Although Farm Bureau had not yet paid for Van Camp’s medical bills, Farm Bureau brought an action under federal common law and, in the alternative, under ERISA § 502(a). Farm Bureau sought a declaration of coverage and reimbursement or recoupment from BCBSM for the cost of Van Camp’s medical care.

The district court dismissed Farm Bureau’s claims. Because Farm Bureau has no standing to bring a claim under federal common law or ERISA § 502(a), we affirm.

FARM BUREAU GENERAL INSURANCE COMPANY OF MICHIGAN, Plaintiff-Appellant, v. BLUE CROSS BLUE SHIELD OF MICHIGAN, Defendant-Appellee., No. 15-2323, 2016 WL 3924243, at *1 (6th Cir. July 21, 2016)

Farm Bureau first filed in state court.  Blue Cross removed the case to federal court on the grounds that the claims related to an ERISA plan.

No Fault Carrier Argues

Farm Bureau amended its complaint to seek:

(1) a declaratory judgment stating that BCBSM is first in priority to reimburse Van Camp’s medical claims,

(2) recoupment from BCBSM under federal common law for the payments that Farm Bureau made toward Van Camp’s medical claims, and

(3) as an alternative to its first two claims, equitable subrogation to the remedies available to Van Camp as a Plan participant or beneficiary under ERISA §§ 502(a)(1)(B) and 502(a)(3) (codified at 29 U.S.C. §§ 1132(a)(1)(B) and 1132(a)(3)).

Health Plan Responds

Blue Cross filed a motion to dismiss, asserting:

(1)  the dispute between the parties was an ERISA denial-of-benefits action under § 502(a)(1)(B), not a priority dispute governed by federal common law or an action for equitable subrogation under § 502(a)(3),

(2)  Farm Bureau lacked standing to bring an ERISA denial-of-benefits action because Farm Bureau had not paid Van Camp’s claims and, thus, was not a subrogee, and

(3)  even if Farm Bureau were a subrogee, Farm Bureau had failed to exhaust its administrative remedies prior to filing suit.

The Court Rules In Favor of Health Plan

Farm Bureau’s federal-common-law claim fails because it lacked standing to bring its claims. (See #2 above)

 The fact that Farm Bureau, a non-participant, non-beneficiary, and non-assignee, has no standing to assert a claim under ERISA § 502(a)(1)(B), is not evidence of an interstice. It is evidence of Congress’ intention to prohibit all but a narrow range of potential plaintiffs from bringing suit under § 502(a). What Farm Bureau sees as an interstice is, in reality, a deliberate limitation. The Court utilizes federal common law to fill inadvertent gaps, not to open avenues for relief that Congress intentionally closed. The Court declines to circumvent the clear wording of § 502(a).

Farm Bureau cannot bring a claim under federal common law to recoup the amount denied by the Plan when the ERISA provision that specifically provides for the recovery of denied benefits—§ 502(a)(1)(B)—would prohibit Farm Bureau’s claim.

Note:  The Court distinguished other cases relied on by Farm Bureau, stating that:

Here, by contrast, there is no coordination-of-benefits dispute. (Appellant Br. at vi.) And more fundamentally, there is no interstice in ERISA’s coverage. An ERISA provision—§ 502(a)(1)(B)—already addresses disputes over denial of benefits, see Weiner, 108 F.3d at 92, and Farm Bureau has no standing to bring a claim under that section because it is not a participant, beneficiary, or assignee, see 29 U.S.C. § 1132(a)(1)(B).

These cases were Prudential Property and Casualty Insurance v. Delfield Company Group Health Plan and Auto Owners Insurance Company v. Thorn Apple Valley, Inc.—who were permitted to bring federal-common-law claims purportedly because they failed to fall within any of the plaintiff categories elucidated in ERISA § 502(a).

In a nutshell:

We permitted the plaintiffs in Thorn Apple Valley and Delfield to bring claims under federal common law because their claims required the court to interpret conflicting coordination-of-benefit clauses. See Delfield, 187 F.3d 637 (Table), 1999 WL 617992, at *3; Thorn Apple Valley, 31 F.3d at 374. This Court relies on federal common law when addressing coordination-of-benefits disputes because neither ERISA nor any other federal statute “addresses the resolution of [a] conflict between [coordination-of-benefits] clauses.” Thorn Apple Valley, 31 F.3d at 374.

:: ERISA Preemption of Subrogation Challenges – Characterization of The Complaint (Part 2)

Mr. Cox contends that his state law employment claims are not removable to federal court. [Filing No. 14.] Mr. Cox emphasizes that his Statement of Claims “clarified that it is not his intention to assert a claim under ERISA § 502 for benefits per se.” Instead, Mr. Cox seeks damages from what he contends was his misclassification as an independent contractor.

Mr. Cox emphasizes that he “does not seek actual plan benefits in this case; rather, he seeks damages based in part on the value of such benefits that would have and should have been provided for him had he been properly classified during his working relationship with Defendants.”

Cox v. Gannett Co., Inc., 2016 WL 1425525, at *3 (S.D. Ind. Apr. 12, 2016)

The district court in Elizabeth Noetzel v. Hawaii Medical Service Association criticized the Second Circuit’s opinion in Wurtz v. Rawlings Co., LLC for failing to look at what the participant’s claim “really” is about. (See discussion in :: ERISA Preemption of Subrogation Challenges – A Conflict of Opinions (Part 1)).

In Cox v. Gannett Co., Inc., the district court provides an example how, in the ERISA removal and preemption context, the words chosen in the complaint and in briefing are of great importance.

The Davila Preemption Test

To set the stage, recall the two requirements for preemption stated in Aetna Health Inc. v. Davila, 542 U.S. 200, 210 (2004).

“[I]f an individual, at some point in time, could have brought his claim under ERISA [civil enforcement provision] § 502(a)(1)(B), and where there is no other independent legal duty that is implicated by a defendant’s actions, then the individual’s cause of action is completely pre-empted by ERISA § 502(a)(1)(B).”’

Colorable Claim Under ERISA

In Cox, the plaintiff, treated as an independent contractor, but arguing he met the definition of an “employee”,  brought state law employment law claims against his employer.  He also sought the value of lost benefits through state law remedies.

To avoid preemption, he argued he “is not now and never was a participant or beneficiary in the ERISA plan” at issue because he was characterized as an independent contractor.  To the contrary, the court held that his allegations in the complaint were sufficient to make a colorable claim that he was a “participant” under ERISA for purposes of a civil enforcement action.

No Independent Legal Duty

To avoid preemption he emphasized that he did not seek the benefits per se – just the value of the benefits.

Mr. Cox appears to argue that because he brings state law claims for Defendants’ alleged violations under various Indiana statutes unrelated to ERISA benefits—specifically, a failure to pay overtime claim, an unlawful deduction from wages claim, and a violation of Indiana’s wage payment statute—ERISA preemption does not apply to his action. Mr. Cox ignores, however, that he specifically requests employment benefits through his common law claims for fraud and unjust enrichment.

The court rejected this argument and held that since the plaintiff pointed to no other independent legal duty implicated by Defendants’ actions with regard to his claim for unpaid benefits under those common law theories, his argument regarding the second requirement of ERISA preemption failed as well.

Seventh Circuit Authority

In the prior post, we noted that Blackburn v. Sundstrand Corp., 115 F.3d 493 (7th Cir.1997) and Speciale v. Seybold, 147 F.3d 612 (7th Cir.1998) presented a sort of odd set of cases in the ERISA subrogation line of authorities.  In those two cases, the ERISA fiduciaries lost in their effort to convert a state law issue into a federal preemption case.

Yet in Cox, the district court cited Seybold in support of its removal and preemption of state law claims.  “Complete preemption permits ‘recharacterization’ of a plaintiff’s state law claim as a federal claim so that removal is proper.” Speciale v. Seybold, 147 F.3d 612, 615 (7th Cir. 1998).  So how should one view the Seventh Circuit cases in this context?

The Seventh Circuit makes a distinction between a challenge to ERISA subrogation and a state law action to apportion settlement or recovery proceeds.  The Court notes that “both of these earlier cases we held that a petition to apportion claims to a settlement fund between an ERISA plan subrogation claim and other lienholders was not preempted by ERISA’s civil enforcement provision and the allocation of the funds was a matter for determination in the state court.” Hart v. Wal-Mart Stores, Inc. Associates’ Health & Welfare Plan, 360 F.3d 674, 676 (7th Cir. 2004).

Note – Is the Seventh Circuit’s distinction persuasive?  Have federal courts in the Seventh Circuit retreated from this position?  These are questions we will take up in the next post.



:: ERISA Preemption of Subrogation Challenges – A Conflict of Opinions (Part 1)

In viewing Noetzel’s claim as not completely preempted by ERISA § 502(a), the F & R relied almost exclusively on Wurtz v. Rawlings Co., LLC, 761 F.3d 232 (2d Cir. 2014).  Wurtz represents the minority view that a challenge to an ERISA plan administrator’s right to subrogation or reimbursement falls outside the scope of ERISA § 502(a). While this court would not hesitate to adopt a minority position if convinced it was the better-reasoned approach, this court identifies problems that preclude the adoption of the reasoning in Wurtz.

Elizabeth Noetzel v. Hawaii Medical Service Association,  — F.Supp.3d —-2016 WL 1698264  (D. Hawai’i, April 27, 2016)
The district court surveys the opposing points of view on the question of whether a plan participant’s challenge to an ERISA plan’s reimbursement rights should be construed as a claim cognizable under ERISA § 502(a).   The court sides with the majority view that a plan participant’s assertion of state law remedies in this context is essentially a claim for benefits and thus within the scope of ERISA § 502(a).  As a result, the claims are preempted.
Problems With Wurtz Holding
Relying on Wurtz v. Rawlings Co., LLC, 761 F.3d 232 (2d Cir. 2014),, the magistrate judge had concluded otherwise.  In rejecting the finding and recommendation, the district court stated that the Second Circuit’s decision in Wurtz flouted the Supreme Court’s holding in Aetna Health Inc. v. Davila, 542 U.S. 200, 210 (2004).
Wurtz flouts the direction in Davila to examine the essence of a claim in determining whether it is completely preempted by ERISA § 502(a). That is, Davila counsels the court not to accept claims at face value. “[D]istinguishing between pre-empted and non-pre-empted claims based on the particular label affixed to them would elevate form over substance and allow parties to evade the pre-emptive scope of ERISA simply by relabeling their contract claims as [state law] claims.” 542 U.S. at 214.
In addition, Wurtz “conflicts directly with governing Ninth Circuit precedent.”
In the Ninth Circuit, “[p]reemption under ERISA section 502(a) is not affected by [section 514(b)(2)(A) as a state regulation of insurance].”  Cleghorn [v. Blue Shield of California], 408 F.3d at 1227. Cleghorn provides: “A state cause of action that would fall within the scope of this scheme of remedies [in § 502(a) ] is preempted as conflicting with the intended exclusivity of the ERISA remedial scheme, even if those causes of action would not necessarily be preempted by section 514(a).” Id. at 1225 (citing Davila, 542 U.S. at 214 n.4).
The problem with Wurtz, in a nutshell then, is that (1) it fails to look at what the participant’s claim “really” is about and (2) it subordinates Section 502(a) claims preemption to the savings clause (an outcome rejected by the majority).
Survey of Opposing Opinions
The district court noted that the Ninth Circuit has not yet addressed the issue of whether a challenge to an ERISA plan provider’s reimbursement claim falls within the scope of ERISA § 502(a)(1)(B).
This occasioned the survey of other circuits that have addressed the question.
As against Wurtz, the court reviewed the opinions in Wirth v. Aetna U.S. Healthcare, 469 F.3d 305 (3d Cir. 2006); Levine v. United Healthcare Corp., 402 F.3d 156 (3d Cir. 2005), cert. denied, 2005 WL 3144545 (U.S. Nov. 28, 2005)(No. 05–387); Arana v. Ochsner Health Plan, 338 F.3d 433 (5th Cir. 2003)(en banc); Singh v. Prudential Health Care Plan, Inc., 335 F.3d 278 (4th Cir. 2003).
Although Arana, Singh, Levine, and Wirth did not apply the Davila test, they nonetheless provide useful guidance to the extent they addressed the exact question that the first prong of Davila requires this court to address, namely, whether a claim challenging a request for reimbursement for benefits already provided falls within the scope of § 502(a).
Note:  The Seventh Circuit may be in a middle category, depending on how one interprets  opinions in Blackburn v. Sundstrand Corp., 115 F.3d 493 (7th Cir.1997) and Speciale v. Seybold, 147 F.3d 612 (7th Cir.1998).  See, :: ERISA Preemption of Subrogation Challenges – Characterization of The Complaint (Part 2)

:: District Court Holds Plaintiff’s State Law Claims Preempted

This court does not agree that Plaintiff’s negligence cause of action nor his bad faith cause of action is directed specifically towards entities engaged in insurance. With regard to the bad faith claim in particular, all contracts—not just those pertaining to insurance—in South Carolina contain an implied covenant of good faith and fair dealing, the breach of which can give rise to a common law cause of action. Adams v. G.J. Creel & Sons, 465 S.E.2d 84, 85 (S.C. 1995).

Finally, this court does not find persuasive Plaintiff’s argument that his causes of action, because they “tell [insurers and insureds] what bargains are acceptable,” (ECF No.16 at 11), “substantially” affect the risk pooling arrangement between the insurer and insured. Kentucky Ass’n of Health Plans, Inc., 538 U.S. at 342.

Hendrix v. Res. Real Estate Mgmt., Inc., No. 3:15-CV-01173-JMC, 2016 WL 1045739, at *8 (D.S.C. Mar. 16, 2016)

This case presented a dispute over denied benefits provided under a group insurance policy.  The plaintiff filed several state law claims and marshaled various theories in an attempt to avoid ERISA preemption.

Savings clause argument (29 U.S.C. § 1144(b)(2)(A))

Plaintiff argued that his state law causes of action for bad faith, attorneys’ fees, and negligence and recklessness survived ERISA preemption under the savings clause as applied in Unum Life Insurance Co. of America v. Ward, 526 U.S. 358 (1999).  (The Unum cased involved California’s notice-prejudice rule, under which insurer must show that it was prejudiced by untimely proof of claim before it can avoid liability.)

. . . rejected by the Court

Plaintiff’s state law causes of action, even if one could find that they “regulate insurance,” do not survive ERISA preemption under Unum Life Insurance Co. of America v. Ward, 526 U.S. 358 (1999). See Aetna Health Inc. v. Davila, Aetna health Inc., 542 U.S. 200, 208 (2004) (“Under ordinary principles of conflict pre-emption…even a state law that can arguably be characterized as ‘regulating insurance’ will be preempted if it provides a separate vehicle to assert a claim for benefits outside of, or in addition to, ERISA’s remedial scheme.”).

And neither are Plaintiff’s claims saved from ERISA preemption under Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329, 342 (2003). This is because this court is not persuaded by Plaintiff’s argument that from a “common sense view,” the laws from which his state causes of action spring regulate insurance and substantially affect risk pooling.

Fraudulent procurement argument

The Plaintiff also argued that his bad faith failure to pay, negligence and recklessness, and liability for attorneys’ fees should not be preempted by ERISA because of fraudulent procurement, citing Coyne & Delany Co. v. Selman, 98 F.3d 1457, 1469 (4th Cir. 1996).

The Court rejected this argument as well.

Because all of Plaintiff’s causes of action seek benefits—not insurance—under the plan, this court furthermore does not accept Plaintiff’s argument that ERISA preemption is not appropriate here because some of the state law claims involve “fraudulent act[s] in the procurement of an insurance policy.”

Regulatory exception argument

In cases of limited employer involvement, an insurance arrangement may be excluded from ERISA.  The Plaintiff argued this position, but since the employer paid the premiums and showed other involvement, the Court held the exceptions inapplicable.

29 C.F.R. § 2510.3-1(j) does not shield Plaintiff’s claims from ERISA coverage here because he does not satisfy all of the regulatory conditions, as he is required to do so for these exceptions to apply. See, e.g., Hansen v. Continental Ins. Co., 940 F.2d 971 (5th Cir. 1991) (“Group insurance plans which meet each of these [29 C.F.R. § 2510.3-1(j)] criteria are excluded from ERISA coverage.”); Vazquez v. Paul Revere Life Ins. Co., 289 F. Supp. 2d 727 (E.D. Va. 2001).

In sum, this court concludes that ERISA governs Plaintiff’s claims here and furthermore preempts them. Removal therefore was proper.

Note:  The Court applied the Fourth Circuit test for preemption stated in Sonoco Prod. Co. v. Physicians Health Plan, Inc., 338 F.3d 366, 372 (4th Cir. 2003):

(1) the plaintiff must have standing under [ERISA] § 502(a) to pursue its claim; (2) its claim must fall[ ] within the scope of an ERISA provision that [it] can enforce via § 502(a); and (3) the claim must not be capable of resolution without an interpretation of the contract governed by federal law, i.e., an ERISA-governed employee benefit plan.


:: Concurrent Jurisdiction Applies In ERISA Dispute

 The threshold issue is whether state courts have jurisdiction to determine the  ERISA status of a plan. The Eighth Circuit directly considered this  question and determined that both state and federal courts have the power to  determine ERISA status. Int’l  Ass’n of Entrepreneurs of Am. v. Angoff, 58 F.3d 1266, 1269 (8th Cir.  1995).  The court  reasoned that because the law was silent on whether states have the power to  decide ERISA status the default rule should apply: “[u]nless instructed  otherwise by Congress, state and federal courts have equal power to decide  federal questions.” Id.

Although the Ninth  Circuit has not addressed this specific issue, it has held that “state courts  amply are able to determine whether a state statute or order is preempted by  ERISA.” Delta  Dental Plan of California, Inc. v. Mendoza, 139 F.3d 1289, 1296-97 (9th Cir.  1998) disapproved of on other grounds by Green  v. City of Tucson, 255 F.3d 1086 (9th Cir. 2001). Other courts that have  addressed this issue have found that both federal and state courts have  jurisdiction to decide the status of an ERISA plan. See Weiner  v. Blue Cross & Blue Shield of Maryland, Inc., 925 F.2d 81, 83 (4th Cir.  1991); Browning  Corp. Int’l v. Lee, 624 F. Supp. 555, 557 (N.D. Tex. 1986). Many courts  have also assumed concurrent jurisdiction to decide ERISA plan status  without specifically addressing the issue. See, e.g., Marshall  v. Bankers Life & Cas. Co., 2 Cal. 4th 1045, 1052-54, 10 Cal. Rptr. 2d  72, 832 P.2d 573 (1992).

Knapp v. Cardinale, 2013 U.S. Dist. LEXIS 98644 (N.D. Cal. July 15, 2013)

Although ERISA issues are typically resolved in federal court, this is not always the case.  Aside from occasional benefit claims disputes (where there is concurrent jurisdiction by statute), questions of preemption frequently arise in state courts as well.

In a recent district court case, the court explored questions of concurrent jurisdiction.  The underlying facts are somewhat curious.

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:: ERISA Preemption Notes After PCMA v. District Of Columbia

The Supreme Court has not prescribed a standard for determining whether a state law sufficiently constrains an EBP’s decision-making in an area of ERISA concern that the law is pre-empted, but it has indicated a law that “bind[s] plan administrators to any particular choice” is pre-empted. Travelers, 514 U.S. at 659. We need go no further: Sections 48-832.01(a), (b)(1), and (d) bind plan administrators because the “choice” they leave an EBP between self administration and third-party administration of pharmaceutical benefits is in reality no choice at all.

For most if not all EBPs, internal administration of beneficiaries’ pharmaceutical benefits is a practical impossibility because it would mean forgoing the economies of scale, purchasing leverage, and network of pharmacies only a PBM can offer.  By imposing requirements upon third-party service providers that administer pharmaceutical benefits for an EBP, §§ 48-832.01(a), (b)(1), and (d) “function as a regulation of an ERISA plan itself.” Travelers, 514 U.S. at 659. Because these provisions also regulate an area of ERISA concern, they are pre-empted.

Pharm. Care Mgmt. Ass’n v. District of Columbia, 2010 U.S. App. LEXIS 13991 (D.C. Cir. July 9, 2010)

The decision by the D.C. Circuit in PCMA v. D.C. touches on issues that at first glance appear somewhat remote in the average benefits practice, but I think readers will find some useful analysis in the opinion.

On the big picture, the Court of Appeals found that a substantial part of the District’s  law regulating pharmacy benefit mangers (Access Rx Act of 2004, D.C. Code § 48-832.01 et seq.) was preempted.   Some contractual provisions that could be waived by benefit plans survived the preemption challenge.   Additional argument remains for consideration on remand, so the case will likely be around for a while yet.

On a decidedly less rarefied level, we find development of some recurring themes that arise in everyday concerns about which claims are preempted and why.    Of course, in the PCMA case, the key theme was state law preemption.

A state law “relates to” an EBP “if it [1] has a connection with or [2] reference to such a plan.” Egelhoff v. Egelhoff, 532 U.S. 141, 147, 121 S. Ct. 1322, 149 L. Ed. 2d 264 (2001) (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97, 103 S. Ct. 2890, 77 L. Ed. 2d 490 (1983)).

The PCMA argued that Title II of the law intruded on plan administration.   As such, the law would be preempted if it had an impermissible effect upon employee benefit plans.   Bypassing the discussion of these legally freighted terms, I think the District’s defense of the statute is really more interesting for my purposes.

The District found itself inconveniently stuck with the fact that its law regulating PBM’s impinged plan benefit administration.  (The law imposes fiduciary responsibilities, disclosure of rebates and pass through of discounts, among other things.)

This point had to be admitted.

The District does not deny the administration of employee benefits is an area of core ERISA concern or that PBMs administer benefits on behalf of EBPs; indeed at oral argument  it conceded as much.

The District sought refuge in case law suggesting that garden variety breach of contract of malpractice claims are not preempted:

Rather, the District argues the various provisions of Title II nonetheless fall within the scope of state law the Congress did not intend to pre-empt with ERISA because they do not regulate “relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries.

The District points to no support for this limitation upon pre-emption either in ERISA itself or in any Supreme Court case interpreting it. Instead, the District relies upon decisions of other circuits holding ERISA did not pre-empt breach of contract or professional malpractice claims against third-parties who provided services to an EBP.

This argument failed, as the preceding excerpt would suggest.

The Court says that the District read too much into the cases it relied upon.   A law affecting the  “relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries is a concern – but that is not a touchstone for preemption.

As the PCMA points out, in none of the cases cited by the District did the state law regulate a third party who administered employee benefits on behalf of a plan. Those cases therefore suggest only that the relationship among ERISA entities is an area of ERISA concern, not that the objective of uniformity in plan administration is for some reason inapplicable simply because a plan has contracted with a third party to provide administrative services.

Given the restrictions the law would impose on plan administrators in their dealings with PBM’s, the Court found an impermissible effect on ERISA plan administration and held Title II preempted.

Note: The non-preempted state law claims relied upon by analogy in the opinion are quite important for benefit practitioners in the prosecution or defense of negligence and contractual cases against plan administrators and other service providers.

A case by a participant against a service provider has at least two strikes against it – #1 the traditional ERISA entities are involved – and #2 the case will likely consist of complaints about administration issues.    Here the Court’s observation distinguishing the cited authorities is of interest:

Indeed, dicta in two cases central to the District’s argument   suggest a state law regulating a third party’s performance of administrative functions on behalf of a plan could be pre-empted. See Gerosa v. Savasta & Co., 329 F.3d 317, 324 (2d Cir. 2003) (noting that although courts are “reluctant to find that Congress intended to preempt state laws that do not affect the relationships among [ERISA entities]” they have “typically” held ERISA pre-empts “state laws that would tend to control or supersede central ERISA functions–such as state laws affecting the determination of eligibility for benefits, amounts of benefits, or means of securing unpaid benefits”); Airparts Co. v. Custom Benefit Servs. of Austin, 28 F.3d 1062, 1066 (10th Cir. 1994) (holding claims for negligence, indemnity, and common-law fraud not pre-empted where defendant “was simply an outside consultant which did not directly perform any administrative act vis-a-vis the plan”).

Furthermore, when actually confronted with a malpractice claim challenging a third party’s performance of administrative services on behalf of a plan, the Third Circuit held the claim was pre-empted by ERISA. See Kollman v. Hewitt Assocs., 487 F.3d 139, 148 (2007) (holding ERISA pre-empts malpractice claim  against non-fiduciary service provider responsible for plan administration; goal of uniformity reflected in ERISA is “equally applicable to agents of employers … who undertake and perform administrative duties for and on behalf of ERISA plans”).

Note, however,  that the plaintiff in Kollman was a plan participant. (#1 above)  Compare: Custer v. Sweeney, 89 F.3d 1156, 1167 (4th Cir. 1996) (trustee’s state law legal malpractice claim against an ERISA plan’s attorney not subject to ERISA preemption), where trustee was plaintiff.

What Is Plan Administration? From the opinion:

Plan administration includes “determining the eligibility of claimants, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payments, and keeping  appropriate records in order to comply with applicable reporting requirements.” Fort Halifax, 482 U.S. at 9.

Voluntary Provisions Prevail – It was not all downside for the District:

The District’s point is well-taken with regard to the usage pass back provision, § 48-832.01(b)(2), because it expressly provides that it “does not prohibit the covered entity from agreeing by contract to compensate the [PBM] by returning a portion of the benefit or payment,” and with regard to § 48-832.01(c), which requires disclosure (and imposes a corresponding duty of confidentiality) only “[u]pon request by a covered entity.” Those provisions are in essence voluntary provisions for the covered entity.

Circuit Conflict – As the Court observed:

This holding differs from that of the First Circuit in Rowe, which held no part of a nearly identical Maine statute was pre-empted by ERISA. See 429 F.3d at 303. In our view the uniform administrative scheme encouraged by ERISA includes  plan administrative functions performed by a third party on behalf of an EBP.

See also :: PBM’s Prevail In Controversy Over ERISA Preemption Of Disclosure Legislation

:: Health Care Providers’ RICO Claims “Reversed Preempted”

Plaintiffs argue that Medical Mutual, in its processing of insurance claims, violated the federal RICO statute. Specifically, Plaintiffs allege that Medical Mutual “acted to delay, diminish and deny payment of . . . lawful claims of patient-insureds as submitted by out-of-network health providers . . . through a scheme or artifice, utilizing the U.S. Mail and demonstrating a specific intent to defraud the patient-insureds and out-of-network health-care providers.” (Compl. P 51.). . . .

Defendants contend, and the district court agreed, that Riverview’s RICO claims are reverse preempted in accordance with the McCarran-Ferguson Act. Plaintiffs argue that McCarran-Ferguson does not apply to its RICO claims

Riverview Health Inst. Llc v. Medical Mut. of Ohio, 2010 FED App. 0097P (6th Cir.) (6th Cir. Ohio 2010)

This recent unpublished Sixth Circuit opinion applies reverse preemption to defeat the RICO claims of out of network health care providers.

The health care providers advanced seven claims for relief:

(1) conspiracy to violate 18 U.S.C. § 1962(a) in violation of 18 U.S.C. § 1962(d) (RICO);
(2) violation of 18 U.S.C. § 1962(c)(RICO);
(3) conspiracy to violate 18 U.S.C. § 1962(c) in violation of 18 U.S.C. § 1962(d)(RICO);
(4) denial of benefits under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132(a)(1)(B);
(5) state-based breach of contract;
(6) state-based common-law fraud; and
(7) state-based tortious interference with business relationships.

Gravamen Of Complaint

The gravamen of the complaint was that Medical Mutual:

  • “acted to delay, diminish and deny payment of . . . lawful claims of patient-insureds as submitted by out-of-network health providers
  • acted unlawfully and inaccurately to underestimate and reduce the [‘usual, customary and reasonable’] amounts due to out-of-network health providers
  • and inappropriately bundled provider services and procedures through scheme or artifice

The district court granted a motion to dismiss, agreeing withe the Defendants that the Plaintiffs’ RICO claims were reversed preempted by the McCarran-Ferguson Act. The other claims were dismissed without prejudice.

The Sixth Circuit panel agreed with the district court that the RICO claims were reversed preempted.

The McCarran-Ferguson Act

The McCarran-Ferguson Act states that “[t]he business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” 15 U.S.C. § 1012(a). In the health plan context, the reverse preemption of RICO is triggered when RICO would invade the province of state insurance laws. This is because the McCarran-Ferguson Act declares that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” Id. § 1012(b).

Ohio Insurance Law

The Court held that the application of federal RICO would impair Ohio’s insurance regulatory scheme. The Plaintiff’s complaint essentially involved the payment of claims and that issue was subject to insurance department authority.

The conduct at the heart of Plaintiffs’ complaint implicates Ohio’s law regarding payment of claims and the Ohio Department of Insurance is charged with administering the applicable state law. In this case, Plaintiffs have no common law remedy or private right of action. The state RICO statute is inapplicable and the damages available pursuant to federal RICO would far exceed the damages contemplated by the Ohio legislature when enacting its insurance regulatory scheme.

Moreover, the State of Ohio has filed a brief as amicus curiae in support of Defendants, arguing that the imposition of the federal RICO statute will impair Ohio’s ability to detect insurance fraud and reverse preemption will not prevent insurers from using state or federal RICO to combat fraud. Accordingly, Plaintiffs’ RICO claims are reverse preempted by the McCarran-Ferguson Act and we, therefore, affirm the district court’s dismissal of Plaintiffs’ RICO claims.

Thus the RICO claims were reversed preempted.

Note: The Court applied several factor-based tests in reaching its conclusions.

Three Factor Reverse Preemption Test – Determining whether the reverse preemption applies involves three questions:

[#1] we must decide “whether the federal statute at issue ‘specifically relates to the business of insurance.'” . . . If it does, then the McCarran-Ferguson Act, by its own terms, does not permit reverse preemption. (Neither party disputed that RICO does not specifically relate to the business of insurance.)

[#2]. . . “whether the state statute at issue was enacted . . . for the purpose of regulating the business of insurance” and

[#3] “whether the application of the federal statute would invalidate, impair, or supersede the state statute.”

Three Factor “Business Of Insurance” Inquiry – The Court applied a a three factor test set forth in Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119 (1982) to determine whether an activity is part of the “business of insurance” (#2 above):

(1) “whether the practice has the effect of transferring or spreading a policyholder’s risk,”

(2) “whether the practice is an integral part of the policy relationship between the insurer and the insured,” and

(3) “whether the practice is limited to entities within the insurance industry.”

Seven Factor “Impairment Test – The Court applied the seven factor test articulated by the Supreme Court in Humana Inc. v. Forsyth, 525 U.S. 299 (1999) on the question of impairment (#3 above).  (There the Court held that a federal statute that “proscribes the same conduct as state law, but provides materially different remedies” did not “impair” state law under the McCarran-Ferguson Act.)

The factors are:

(1) the availability of a private right of action under the state insurance scheme;
(2) the availability of a state common law remedy;
(3) the possibility that other state statutes provide the basis for suit;
(4) the availability of punitive damages;
(5) whether the damages available under the state insurance scheme could exceed the damages recoverable under RICO, even taking into account RICO’s treble damages provision;
(6) the absence of a position by the State regarding any interest in state policy or the administrative scheme; and
(7) the fact that insurers have relied on RICO to eliminate insurance fraud.

Estoppel Claim – The Plaintiff’s estoppel claim involves an interesting discussion of anti-assignment clauses and warrants careful review by health care providers and their counsel.  I will likely review that issue in a separate post.

See also –:: “Reverse Preemption” Rejected: The Emergence of RICO Claims In Lieu Of ERISA Claims; :: Sixth Circuit Rejects Reverse Preemption Of RICO Claims

:: Eleventh Circuit Applies Supreme Court’s Davila Test To Health Care Providers’ “Hybrid” Claims

While similar to the Butero test, Davila refines Butero by inquiring about the existence of a separate legal duty, which is not a consideration under Butero.

Moreover, a number of other circuits have recognized Davila’s two-part test as the proper test for complete preemption under ERISA . . . In accordance with the Supreme Court’s directive, we too apply Davila.

Conn. State Dental Ass’n v. Anthem Health Plans, Inc., 2009 U.S. App. LEXIS 28773 (11th Cir. Fla. Dec. 30, 2009)

 This recent 11th Circuit opinion applies the two-part analysis required under Aetna Health Inc. v. Davila, 542 U.S. 200 (2004) to health care providers’ allegations in a class action complaint. The now familiar Davila test requires two inquiries: (1) whether the plaintiff could have brought its claim under § 502(a); and (2) whether no other legal duty supports the plaintiff’s claim. 

On the facts before it in this case, the Court held that several of the providers’ claims were completely preempted under this test.

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:: Health Care Provider’s Tort Claims Preempted Under Fifth Circuit ERISA Jurisprudence

The Court did not suggest that all tort claims are completely preempted by ERISA wherever there is an assignment of patient benefits, only that Plaintiffs’ claims in this case were so preempted under controlling Fifth Circuit law. See Transitional Hosps. Corp. v. Blue Cross & Blue Shield of Tex., Inc., 164 F.3d 952, 954 (5th Cir. 1999).

Quality Dialysis One LP v. Aetna Life Ins. Co., 2009 U.S. Dist. LEXIS 115498 (S.D. Tex. Dec. 10, 2009)

In this opinion out of the Southern District of Texas, the Court finds the health care provider’s claims for reimbursement preempted where the provider sued the health plan asserting “tort claims flowing from the direct communications and business relationship between the parties.” 

The presence of an assignment of benefits and the absence of claims based upon a managed care contract contributed largely to the plan’s successful defense.

The Facts

The facts are adequately summarized in the following excerpt:

Quality Dialysis is a home hemodialysis provider that serviced patients covered by health insurance and employee welfare benefit plans that Aetna administered. Beginning in September 2006, Plaintiffs allege that Aetna began to systematically deny Quality Dialysis’ claims for payment and demanded a refund for claims already paid in excess of one million dollars.

Quality Dialysis further contends that Aetna attempted to persuade patients using Quality Dialysis’ services to switch to a competitor’s home hemodialysis service. Finally, Quality Dialysis alleges that the unpaid insurance claims and Aetna’s request for a refund on past claims caused it to lose an opportunity to sell its business to an unnamed prospective purchaser.

 No Managed Care Contractual Claims

The case was first filed in state court and thereafter removed to federal court based upon ERISA complete preemption of the plaintiff’s claims.  The Court denied the plaintiff’s motion to remand, and in the opinion under discussion here, denied a motion for reconsideration.

The Court observes that:

In its motion for reconsideration, Quality Dialysis argues that the Court failed to “distinguish the true nature of the separate, independent tort causes of action raised by Plaintiffs[,] which only arise out of the independent business relationship between an insurer (Aetna) and medical provider (Quality Dialysis).” (Doc. 39 at 1.)  Quality Dialysis concedes that it “does not bring a breach of contract action arising out of a managed care agreement . . . .” (Id. at 2.) This is important because there was no managed care contract between the Plaintiffs and Defendants in this case.

Claims Based Upon Tort Theories

The Court viewed the plaintiff’s claims as essentially tort claims that emulated a claim for benefits under the plan.  Such claims are of course subject to ERISA complete preemption. 

The Court makes this point as follows:

. . . Quality Dialysis brings “tort claims flowing from the direct communications and business relationship between the parties.” (Id.) The Court, however, determined that it is precisely these tort claims that are preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C. §§ 1001-1461.

Effect Of Assignment

The plaintiffs claimed that the Court had overemphasized the effect of an assignment of benefits.

Plaintiffs further express concern that the Court’s ruling “would shield every insurance company from its  independent torts committed against medical providers, no matter how egregious, if the medical provider obtains an assignment of benefits from the patient.”

But the Court rejected this claim as fallacious, stating:

The Court did not suggest that all tort claims are completely preempted by ERISA wherever there is an assignment of patient benefits, only that Plaintiffs’ claims in this case were so preempted under controlling Fifth Circuit law. See Transitional Hosps. Corp. v. Blue Cross & Blue Shield of Tex., Inc., 164 F.3d 952, 954 (5th Cir. 1999).

Thus, the motion for reconsideration was denied.

Note:  This opinion is rather short.  It nonetheless provides a pithy distinction between provider cases brought outside of managed care agreements and those that may articulate an independent contractual duty that may potentially survive preemption.

Procedural Point – The Court notes that the Rule 60 motion is inferior to a timely Rule 59(e) motion.  That is a distinction also worth noting.

  Although Plaintiffs fails to expressly invoke the provision governing motions for reconsideration, such motions are generally considered cognizable under either Federal Rule of Civil Procedure 59(e), as motions “to alter or amend judgment,” or under Rule 60(b), as motions for “relief from judgment.” Lavespere v. Niagara Mach. & Tool Works, 910 F.2d 167, 173 (5th Cir. 1990). “Under which Rule the motion falls turns on the time at which the motion is served.

 If the motion is served within ten days of the rendition of judgment, the motion falls under Rule 59(e); if it is served after that time, it falls under Rule 60(b).” Id. (citing Harcon Barge Co. v. D & G Boat Rentals, 784 F.2d 665, 667 (5th Cir.1986) (en banc)). Because Plaintiffs brought their motion for reconsideration more than ten days from entry of judgment, reconsideration can only be given within the stricter limitations of Rule 60(b).

Earlier Opinion – As noted above, the present opinion was in the context of a motion for reconsideration.  More insight on the Court’s reasoning may be gleaned from this excerpt from the prior opinion:

Finally, Quality Dialysis alleges the common law torts of negligence, negligent misrepresentation, and interference with existing contracts and business relations. Quality Dialysis argues that it is a third-party health care provider and therefore that Memorial Hosp. Sys. v. Northbrook, 904 F.2d 236 (5th Cir. 1990) controls. In that case, the Fifth Circuit held that a claim of deceptive practice under Texas Insurance Code for misrepresentation of the coverage status of an employee’s spouse was not preempted by ERISA, where the hospital providing treatment was a third-party health care provider. While “ERISA does not preempt state law when the state-law claim is brought by an independent, third-party health care provider . . . against an insurer for its negligent misrepresentation regarding the existence of health care coverage[,] . . . state-law claims for breach of fiduciary duty, negligence, equitable estoppel, breach of contract, and fraud are preempted by ERISA when the [health care provider] seeks to recover benefits owed under the plan to a plan participant   who has assigned her right to benefits to the [health care provider].” Transitional Hosps. Corp. v. Blue Cross & Blue Shield of Tex., Inc., 164 F.3d 952, 954 (5th Cir. 1999) Hosps. Corp. v. Blue Cross & Blue Shield of Tex., Inc., 164 F.3d 952, 954 (5th Cir. 1999) (internal citations omitted). Here, Quality Dialysis is a health care provider holding an assignment of ERISA plan benefits.

In Davila, the Supreme Court confronted state claims against HMOs for negligence “in the handling of coverage decisions” under their benefit plans. 542 U.S. at 204. The Court held that such claims were completely preempted by ERISA despite any violation of state law because “interpretation of the terms of [plaintiffs’] benefit plans form[ed] an essential part of their [state law] claim.” Id. at 213. Quality Dialysis, as an assignee of patients’ plan benefits, could have brought suit under ERISA § 502(a). Because Plaintiffs’ state law causes of action and common law torts arising from unpaid and underpaid insurance claims in plans administered by Aetna are preempted by ERISA, the Court finds federal question jurisdiction present as to these claims.

Quality Dialysis One LP v. Aetna Life Ins. Co., 2009 U.S. Dist. LEXIS 89672 (S.D. Tex. Sept. 29, 2009)

Other Fifth Circuit Authority –  The provider reimbursement case law in the Fifth Circuit has been quite influential.  Here are some important cases in Fifth Circuit jurisprudence in this context:

Hermann Hosp. v. MEBA Medical & Benefits Plan, 845 F.2d 1286, 1290 (5th Cir. 1988)(Hermann I).

Memorial Hosp. System. V. Northbrook Life Ins. Co., 904 F.2d 236, 243-46 (5th Cir. 1990).

Hermann Hosp. v. MEBA Medical & Benefits Plan, 959 F.2d 569 (5th Cir.1992) (Hermann II ).

Cypress Fairbanks Med. Center, Inc. v. Pan-American Life Ins. Co., 110 F.3d 280 (5th Cir.), cert. denied, 139 L. Ed. 2d 110, 118 S. Ct. 167 (1997).

Transitional Hosps. Corp. v. Blue Cross & Blue Shield, Inc., 164 F.3d 952 (5th Cir. Tex. 1999).

Abilene Reg’l Med. Ctr. v. United Indus. Workers Health & Benefits Plan, 41 Employee Benefits Cas. (BNA) 1098 (5th Cir. Tex. Mar. 6, 2007)

:: Discrimination Claims Or Benefit Claims? The ERISA Preemption Divide

“It is not the label placed on a state law claim that determines whether it is preempted, but whether in essence such a claim is for the recovery of an ERISA plan benefit.”

Lockett v. Marsh United States, 2009 FED App. 0759N (6th Cir.) (6th Cir. Ohio Dec. 3, 2009) (citing, Peters v. Lincoln Elec. Co., 285 F.3d 456 (6th Cir. 2002)

This recent unpublished decision from the Sixth Circuit draws on prior authority in that Circuit on the question of when employment law claims tread too closely to ERISA’s domain and thus are preempted by the broad reach of that statutory regime.  In this case, the plaintiff sued on state law theories of discrimination and retaliation but the facts she alleged were found tilted toward a claim for severance benefits which in turn warranted preemption.

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:: Defensive ERISA Preemption Inadequate To Sustain Removal Of Subrogation Dispute

Following an automobile accident, Plaintiffs Richard and Pamela Cottrill filed suit in the Court of Common Pleas of Perry County against Allstate Insurance Company (“Allstate”) and Blue Cross Blue Shield of Michigan (“Blue Cross”). In addition to seeking damages against Allstate, Plaintiffs asked the court to declare the rights and obligations of the parties to the two insurance contracts.

Blue Cross removed the case to federal court, alleging that Plaintiffs’ claim against Blue Cross was completely preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”). This matter is currently before the Court on Plaintiffs’ motion to remand the case to state court.

Cottrill v. Allstate Ins. Co., 2009 U.S. Dist. LEXIS 101518 (S.D. Ohio Oct. 30, 2009)

Cottrill reveals how complex ERISA subrogation and reimbursement issues remain notwithstanding two relatively recent Supreme Court opinions addressing the scope of these remedies.

In this opinion, the district court holds that the group health insurer improperly removed the reimbursement dispute to federal court.  In its opinion the court provides perspective on complete versus conflict preemption in the context of ERISA plan reimbursement claims.

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:: Ninth Circuit Holds That ERISA Does Not Preempt Hospital’s State Law Claims

We consider in this case whether § 502(a)(1)(B) of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1132(a)(1)(B), completely preempts a state-law action for breach of contract, negligent misrepresentation, quantum meruit and estoppel. Because the state-law claims could not be pursued under § 502(a)(1)(B), and because they rely on legal duties that are independent from duties under any benefit plan established under ERISA, we hold that they are not completely preempted. Because the claims are not completely preempted under § 502(a)(1)(B), there is no federal question subject matter jurisdiction in federal court. Removal from state court was therefore improper.

Marin General Hospital v. Modesto & Empire Traction Company, No. 07-16518 (9th Cir. 9/10/2009) (9th Cir., 2009)

In Marin General Hospital v. Modesto, the Ninth Circuit had to determine whether the Hospital’s state-law claims are completely preempted under § 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B), and thus whether the case was properly removed from state to federal court.

The Facts

The issue arose out of a familiar scenario. 

 According to its complaint, Marin General Hospital (“the Hospital”) telephoned the Medical Benefits Administrators of M.D., Inc., (“MBAMD”) on April 8, 2004, to confirm that a prospective patient had health insurance through an ERISA plan provided by his employer, Modesto & Empire Traction Co. (“Modesto”). MBAMD was the administrator of Modesto’s plan.

According to the complaint, MBAMD orally verified the patient’s coverage, authorized treatment, and agreed to cover 90% of the patient’s medical expenses at the Hospital.

The Hospital performed lumbar fusion surgery on the patient and submitted a bill for $178,926.54.   The plan paid the Hospital $46,655.54 as full payment.

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:: First Circuit Requires Abstention Where State Proceedings Have Begun

As the district court correctly noted, ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.” 29 U.S.C. § 1144(a); Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 91 (1983). ERISA, however, does not preempt other federal laws, such as the ADA. See 29 U.S.C. § 1144(d) (“[N]othing in this subchapter shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States.”) . . .

Colonial v Medley, Nos. 08-2332, 08-2379 (1st Cir.) (July 8, 2009)

Colonial v. Medley addresses when it is appropropriate for a district court to abstain from jurisdiction over a case in which state court proceedings have been instituted on facts which leave the question of preemption in doubt.   Jonathan M. Feigenbaum, of  Phillips & Angley, Boston,  MA, a careful observer of First Circuit ERISA cases, passed this opinion along to me today which I greatly appreciate.

The Facts

The plaintiff, Cauldron, had filed a claim against a short term diability carrier and also filed a charge with the Massachusetts Commission Against Discrimination (“MCAD”).  The central issue was a provision in the policy that excluded psychiatric or psychological conditions.

Federal v. State Proceedings

The carrier and the plaintiff’s employer filed an action in U.S. district court seeking declaratoryjudgement that Calderon’s state law claims were preempted by ERISA.  The plaintiff and MCAD filed motions to dismiss under the Younger abstention doctrine.  The  district court denied the motions and enjoined further proceedings by MCAD pending proceedings in the federal case.

The First Circuit Weighs In

Enjoining state court proceedings is a pretty drastic measure.  The First Circuit ruled that the district court overstepped its bounds.

As a matter of comity, federal courts are required to abstain from enjoining ongoing state court proceedings absent extraordinary circumstances. Younger, 401 U.S. at 43–47 (addressing state criminal prosecutions) . .  [W]e conclude that the principles set forth in Younger required the district court to abstain in deference to the state proceeding already underway.

Note: The Younger doctrine elements are as follows:

Under Younger, a federal court must abstain “if (1) there is an ongoing state judicial proceeding involving the federal plaintiff that (2) implicates important state interests and (3) provides an adequate opportunity for the federal plaintiff to assert his federal claims.” Id. at 77 (citing Middlesex County Ethics Comm. v. Garden State Bar Ass’n, 457 U.S. 423 (1982)).

Exception – In the case at bar, the district court found the elements satisfied, but applied an “exception”.   The First Circuit noted that abstention may not be appropriate:

“if the federal plaintiff will ‘suffer irreparable injury’ absent equitable relief

which might be proved by

a showing that the challenged state statute is ‘flagrantly and patently violative of express constitutional prohibitions.’”

which, in turn, in turn, gave rise to the view that

a “facially conclusive” claim of preemption may likewise be “sufficient to render abstention inappropriate.”

And a substantial part of the opinion addresses that point, i.e., whether the preemption of the state law claims was so clear as to fit within that exception.

Legal Questions – The First Circuit noted that “the existence of a question of first impression regarding the ADA’s applicability to Calderon’s claims preclude[d] preemption from being facially conclusive, and requires the district court to abstain under Younger”.

And Factual Issues – The Court also noted that, though  it “need not address whether the existence of a factual dispute as to the ERISA status of Colonial’s STD plan required the district court  either to make a factual determination or abstain under Younger”, nonetheless,

the record shows Calderon presented evidence sufficient to raise a factual dispute as to whether the STD plan she purchased from Colonial was governed by ERISA, or would instead find refuge in the “safe harbor” regulation under which the Secretary of Labor chose to exempt from ERISA certain group insurance programs where the employer is only minimally  involved in providing the coverage. See 29 C.F.R. § 2510.3-1(j).

Thus, the Court noted:

Because Younger prohibits a district court from addressing the merits of the parties’ claims unless preemption is facially conclusive, and ERISA preemption requires that the plan at issue be covered by ERISA, the plan’s ERISA status would have to be “facially conclusive.” See Local Union No. 12004, 377 F.3d at 78. At this juncture, we have substantial doubts as to whether such was the case in this instance.

All in all, a very interesting case which is worth consideration where ERISA preemption is at issue, particularly at the divide where disability claims overlap with ERISA claims.

:: State Law Claims Against “Non-Fiduciary Service Providers” Avert Preemption

Here, plaintiffs’ claims regarding defendants’ alleged post-plan misfeasance are not preempted. As in Paulsen, plaintiffs’ state law claims run to non-fiduciary service providers and do not relate to the plan, its administration, or its benefits.  The  plan is a life insurance plan that the parties admitted at hearing is still in operation and will provide benefits to beneficiaries in the event of  Hausmann’s death. While plaintiffs obtained the plan in part because the contributions could be tax deductible, those deductions are not a “benefit” of the plan itself.

Additionally, the IRS treatment of the tax deductions is unrelated to the administration of the plan because it was something that plaintiffs reported on their own tax filings. Accordingly, as in Marks, the state law claims have only a tenuous connection to the plan, do not affect an ERISA relationship, and do not require interpretation of the plan to adjudicate the matter.

Hausmann v. Union Bank of Cal., 2009 U.S. Dist. LEXIS 39074 (C.D. Cal. May 8, 2009)

This district court opinion describes a set of facts which touch on several features of an ERISA plan but which, based upon the claim at bar, did not sufficient engage plan administration so as to warrant preemption.  The dispute centered on representations and resulting expectations about the performance of a plan designed to meet the requirements of IRS Section 412(i).   

The Facts

The Plaintiffs wanted to obtain retirement planning and life insurance.   They met with an advisor at Union Bank of California Investment Services who put them in contact with an account executive at Hartford.  The Plaintiffs were steered toward a Section 412(i) plan. 

From the opinion: 

Plaintiffs were enticed to purchase this plan because they believed that the entire amount they contributed to the plan would be tax deductible. Plaintiffs allege that at all relevant times, [the advisors] represented that the Internal Revenue Service (“IRS”) had pre-approved this type of retirement plan. In August of 2003, plaintiffs entered into contracts and purchased the plan. 

Unfortunately, however, the IRS also took an interest in this type of plan: 

In early 2004, the IRS issued two revenue rulings that the type of 412(i) plan plaintiffs had purchased needed to be listed on tax returns as a “listed transaction.” Plaintiffs did not do so. In August 2006, the IRS notified plaintiffs that they would be audited. The IRS has not made a final decision in the matter, but plaintiffs could be subjected to hundreds of thousands of dollars in fines.

The Allegations

The Plaintiffs alleged that the defendants knew “prior to the activation of plaintiffs’ plan” that the validity of these types of plans was “very much in question.” They further alleged that the defendants induced them to sign the plan nonetheless “because they had already invested money in those types of plans and would also receive a large commission, which was not disclosed.” Finally, the Plaintiffs alleged that after the IRS issued its revenue rulings defendants failed to notify them of the rulings and a “safe harbor” the IRS offered because defendants wanted to continue to profit from the plan.

The State Court Claims

The Plaintiffs filed suit in state court against the bank, the insurance company and the advisors, alleging (1) negligence; (2) breach of fiduciary duty; (3) fraud; (4) negligent misrepresentation; and (5) unfair competition under California Business and Professions Code § 17200.  

The case was removed to federal district court based upon a claim of federal question jurisdiction.

 Motions For Summary Judgment

The jurisdictional issue arose in the context of motions for summary judgment filed by the defendants.  

The district court was clearly influenced by the recent Ninth Circuit opinion in Paulsen v. CNF, Inc., 559 F.3d 1061, 1081 (9th Cir. 2009).  

 In that case, the Ninth Circuit left open a possible state law claim by employees against a consulting firm that provided advice to plan fiduciaries. 

ERISA contains, in section 502(a), a comprehensive scheme of civil remedies. Paulsen, 559 F.3d at 1084. Paulsen held that employees’ state law damages claim for professional negligence in valuing the benefit liabilities of the prospective plan was not conflict preempted.

Here, plaintiffs request special and compensatory damages related to their state law  claims. As Paulsen explained, these damages are unrelated to the plan and are not conflict-preempted.

The district court also found influential two other opinions, one from the Fifth Circuit and one from the Sixth:
While other circuits do not apply the “relationship test” per se, they have found that state law claims similar to those at issue in Paulsen are not preempted. See, e.g., E.I. Dupont De Nemours & Co. v. Sawyer, 517 F.3d 785, 800 (5th Cir. 2008); Marks v. Newcourt Credit Group, 342 F.3d 444, 453 (6th Cir. 2003).


[5th Circuit]  In Dupont, the Fifth Circuit held that the plaintiffs’ fraud and fraudulent inducement claims were not preempted because to prevail, “the employees need not prove that any aspect of Dupont’s administration of the employees’ ERISA plan was improper. The claims only relate to misrepresentations that Dupont is alleged to have made about its intentions to sell [a subsidiary].” Dupont, 517 F.3d at 800.  The Dupont court added that “the employees’ allegation that Dupont fraudulently induced them to transfer to [the subsidiary] does not affect an area of their relationship that is comprehensively regulated by ERISA.” Id.

[Sixth Circuit] Similarly, the Sixth Circuit in Marks found that the plaintiffs’ fraud and misrepresentation and breach of contract claims were not preempted to the extent that they had a tenuous effect on the plan. 342 F.3d at 453. Marks explained that plaintiff alleged that “without cause, [defendant] significantly altered his duties and reduced his compensation” and that the claim could proceed because it could constitute a breach of contract irrespective of the plan. Id.; see also Samaritan Health Ctr. v. Simplicity Health Care Plan, 459 F. Supp. 2d 786, 797-98 (E.D. Wis. 2006) (holding that breach of contract claim is not preempted because the claim did not rely on an interpretation of the medical plan documents).

Post-Plan Misfeasance Claims Not Preempted

The court’s reasoning turned in large part on its finding that the service providers were not ERISA fiduciaries.

As in Paulsen, plaintiffs’ state law claims run to non-fiduciary service providers and do not relate to the plan, its administration, or its benefits. The  plan is a life insurance plan that the parties admitted at hearing is still in operation and will provide benefits to beneficiaries in the event of Hausmann’s death. While plaintiffs obtained the plan in part because the contributions could be tax deductible, those deductions are not a “benefit” of the plan itself. Additionally, the IRS treatment of the tax deductions is unrelated to the administration of the plan because it was something that plaintiffs reported on their own tax filings. Accordingly, as in Marks, the state law claims have only a tenuous connection to the plan, do not affect an ERISA relationship, and do not require interpretation of the plan to adjudicate the matter.

Claims Based Upon Non-Disclosure Of Commissions Not Preempted

Likewise, the service provider status of the defendants spoiled their defense of preemption.

Defendants’ reliance on Rutledge to argue that failure to disclose the commissions is preempted is unpersuasive. In Rutledge, there was preemption because the compensation at issue affected an ERISA relationship, and the court distinguished similar claims against service providers held to be non-preempted. 201 F.3d at 1222. 

The issue appears to have been a somewhat closer call, however, as the court compared two contrary opinions in reaching its conclusion: 

The Rutledge plaintiffs sued a non-ERISA fiduciary attorney for charging excessive fees. Id. 2 The court found that the allegation of excessive fees implicated the “prohibited transaction”  provision under ERISA, 29 U.S.C. § 1106, triggering preemption. Id. In doing so, the Rutledge court distinguished Arizona State Carpenters, which involved non-ERISA fiduciaries where the claims were not preempted because they did not involve “excessive fees” claims, but, rather claims related to the failure to notify the trustees of defaults on interest and principal payments on investments. Id. (citing Ariz. State Carpenters Pension Trust Fund v. Citibank, 125 F.3d 715, 724 (9th Cir. 1997)). 

In Arizona State Carpenters, the court explained that as a non-fiduciary service provider, the defendant’s relationship with the plaintiff was “no different than that between Citibank and any of its customers.” 125 F.3d at 724. Here, defendants are non-fiduciary service providers and plaintiffs’ claim is not for excessive fees but for failure to disclose a commission. 3 (FAC P 51.) Arguably, this falls between the commercial relationships in Arizona Carpenters and Rutledge, but defendants provide no explanation of how the failure to disclose commissions is a prohibited transaction under 29 U.S.C. § 1106, nor is it listed in the text of the statute as a prohibited transaction. Given that defendants  do not demonstrate ERISA’s applicability on this point, and that there are no ERISA claims in the complaint, the failure-to-disclose-commission allegation is insufficient to constitute the complete preemption required to confer jurisdiction.

Based upon the foregoing, the court held that the  plaintiffs’ state law claims were not expressly preempted by ERISA “because they are tenuous to the plan and do not effect an ERISA relationship.”

Note:  While not determinative, how claims are initially framed against service providers does have some effect.  The inclusion of ERISA causes of action will predispose a court to view the plaintiff’s case as implicating plan administration, for obvious reasons. Consider this statement by the district court:

In Chasan, the court found preemption because the case included ERISA causes of action, which is in part why the court so held. 2007 WL 173927 at *7-8. To the contrary, in Berry II, another case on which defendants rely and that is factually similar, the court found that there was no ERISA preemption because the claims related to the tax consequences of the insurance policies used to fund the plans and not the merits of the plans themselves. Berry v. Indianapolis Life Ins. Co., 08-cv-248, 2009 WL 636531, at *5 (N.D. Tex. Mar. 11, 2009). The Berry II court also found no preemption because defendants did not demonstrate that analysis of the claims would involve an evaluation of the plan itself. Id.

Additional Factors – In addition to non-fiduciary status of the defendants, the opinion highlights two other factors that may be influential in a preemption dispute (1) is the relationship one implicating the service provider/prohibited transaction rules and (2) is the relationship one indistinguishable from a commercial relationship the defendant might have with any other customer.

:: ERISA Plan Stands Down In “Overpayments” Dispute With Providers

Following an outcry from physicians and discussions with the Medical Assn. of Georgia, one of Atlanta’s largest employers has temporarily halted work by a company it hired to seek supposed overpayments from doctors.

Earlier this year, Georgia-Pacific authorized Franklin, Tenn.-based Health Research Insights to send 1,100 letters to doctors in Atlanta, Savannah, Ga., and Brunswick, Ga., on what it called a “pilot basis” to solicit repayment for medical claims the company believes were overpaid.

Company stops tapping physicians for “overpayments”, Amednews.com (by Emily Berry) (May 11, 2009)

The drama between a company called  “Health Research Insights” and Georgia physicians has reached an anti-climatic conclusion after protests by physicians and the Georgia Medical Association.  The article cited above is accompanied by another background piece which gives further detail.

The article recites alleged claims by HRI against physicians for “overpayments” which are apparently derived from a computer analysis of provider claims for reimbursement.

Here’s the interesting ERISA angle:

What makes HRI’s effort different from the kind of payback attempts physicians might be accustomed to is HRI’s claim — not yet legally countered — that plans operating under ERISA law aren’t limited by the constraints many states put on insurers, particularly in how far back in time they can go to reclaim payment.

(from Amednews.com)

Let’s put the preemption issue aside for a moment (though I think that issue is more nuanced that HRI appears to claim).  Instead, let’s take a look a the implicit assumption that the plan can make the claim for reimbursement “back in time.”

A plan fiduciary could proceed under 1132(a)(3) against a defendant, but it is always an interesting question as to what relief can be asserted under that provision.  “Appropriate equitable relief” is the delimiting feature of such claims – and that storied phrase has quite a history of controversy.

Are the claims for overpayment limited to instances where a specifically identifiable res exists?  That appears to be clear enough fromGreat West v. Knudson.   (The Sereboff eschewing of “tracing” rules did not abrogate this requirement when properly understood.)  The in the case of old provider reimbursements, going back years, I am quite skeptical of how the ERISA claim would work for the plan.

Evidently, the issue remains viable since Georgia is not the only arena in which these claims are being asserted.  I will reserve for another post some avenues that a plan might advance other than an (a)(3) claim, as well as my reservations about the scope of preemption claimed by the plans under the argument as I understand it from the Amednews.com article.  

Very good coverage of this issue in that publication, by the way, and I have bookmarked the site so that I can follow future developments.

:: Health Care Provider’s Equitable Estoppel Claims Dismissed As Contrary to Plan’s MAC Provisions

According to the express language of the Plan, “Billed charges [“the amount a Provider charges for services rendered”] may be different from the amount that [Blue Cross] determines to be the Maximum Allowable Charge for services.”

Regency Hosp. of Cincinnati v. Blue Cross Blue Shield of Tenn., 2009 U.S. Dist. LEXIS 37111 (S.D. Ohio May 1, 2009)

This provider reimbursement case illustrates several hazards for the health care provider that warrant careful attention.

First, as always, “verification” calls are always less valuable than they first appear. Verification of what? (Rarely will you find a verification of “payment”).

Second, the language of assurance can be complex. In this case, as the excerpt reveals, a promise to pay the “maximum allowable charge” is far less of a commitment that it may appear.

Third, estoppel will be unavailable in most cases to backstop errors – at least where plan language is clear enough (and the plan administrator will get a pass in many cases based upon a discretionary clause).

The Facts

Regency, a provider of long term acute care hospital services, became embroiled in a dispute over a purported verification of eligibility or coverage, or both – the opinion is ambigous on this point.

The patient, Fogelson,  was insured under a health plan issued by Blue Cross to Fogelson’s employer.  Prior to her admission, Regency telephoned Blue Cross “to verify Fogelson’s coverage” and “to pre-certify her treatment.”

Regency alleged that a Blue Cross representative “confirmed Fogelson’s eligibility.”  Later, Regency again called Blue Cross to “verify Fogelson’s coverage”, and Regency alleges that Blue Cross again “confirmed Fogelson’s eligibility”. Relying on this information, Regency provided services to Fogelson “without arranging alternate payment provisions from her.”

This Call Is Being Recorded

An interesting aspect of this case is that the conversations were recorded and the recordings used as evidence.

Resolution of this case is eased considerably due to the existence of a tape recording of the conversation between the parties where Blue Cross’s representations about coverage are expressly memorialized. The recording eliminates any genuine issue of material fact. And the tape recording entirely disproves Regency’s claims and affirms Blue Cross’s defense.

As the recording of the conversation between Blue Cross and Regency reflects, Regency asked if it would receive “usual and customary rates,” i.e., “UCR” rates, and, in response, Blue Cross expressly told Regency that “the Plan pays Maximum Allowable Charge rates.” In that same call, Blue Cross also expressly told Regency that there was a maximum lifetime benefit of $ 1,000,000.

The Litigation

Regency filed a state law action alleged breach of implied contract and estoppel.  Blue Cross removed the case and moved for summary judgment.  At the time the case was resolved, Regency had not amended its complaint to state a case for equitable estoppel under ERISA common law principles, but the Court removed any doubt that Regency had no estoppel case under state or federal law.

The Case For Preemption

Blue Cross argued that Regency’s state law claims are pre-empted by ERISA.  Moreve, Blue Cross contended that Regency could not assert a breach of contract claim and has not pled a cognizable claim for equitable estoppel.

The Court agreed.

Negligent Misrepresentation Claim Rejected

Regency attempted a circumvention of the preemption argument by contending that it did not bring its claims seeking to enforce the terms and conditions of any health benefit plan.  Rather, Regency argued, it based its claim for recovery of its damages for detrimental reliance based upon the words and actions of Blue Cross.

Regency maintains that “ERISA does not preempt state law when the state law claim is brought by an independent, third-party health care provider (such as a hospital) against an insurer for its negligent misrepresentation regarding the existence of health care coverage.” See Miami Valley Hospital v. Community Ins. Co., 2006 WL 2252669 *7 (S.D. Ohio, August 7, 2006) (Rose, J.) (quoting Transitional Hosps. Corp. v. Blue Cross & Blue Shield of Tex., Inc., 164 F.3d 952, 954 (5th Cir. 1999)).

The Court rejected this argument, stating that:

However, Transitional Hospital also held that “a hospital’s state-law claims for breach of fiduciary duty, negligence, equitable estoppel, breach of contract and fraud are preempted by ERISA when the hospital seeks to recover benefits owed under the plan to a plan participant who has assigned her rights to benefits to the hospital.” See Transitional Hosps., 164 F.3d at 954 (emphasis added).

Moreover, the Sixth Circuit has also held that ERISA preempts such estoppel and breach of contract claims. In Cromwell v. Equicor-Equitable HCA Corp., 944 F.2d 1272 (6th Cir. 1991), the Sixth Circuit stated that “ERISA preempts state law and state law claims that “relate to” any employee benefit plan as that term is defined therein.” Cromwell, 944 F.2d at 1275 (citing 29 U.S.C. Sec. 1 144(a) and Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)). As such, the Sixth Circuit has specifically stated that equitable estoppel and promissory estoppel are expressly preempted. Cromwell, 944 F.2d at 1276.

ERISA Estoppel Principles Unavailing
Regency asserted that even if its state law claims were preempted by ERISA, it could maintain an estoppel claim under ERISA. The Court also rejected this argument since the plan language was not ambiguous.
Equitable estoppel under ERISA is not available to override the clear terms of plan documents. Sprague v. General Motors Corp., 133 F.3d 388, 404 (6th Cir. 1998) (en banc). “(A)lthough equitable estoppel may a viable theory in ERISA cases, principles of estoppel cannot be applied to vary the terms of unambiguous plan documents; estoppel can only be invoked in the context of ambiguous plan provisions.” Putney v. Medical Mutual of Ohio, ILL Fed. Appx. 803, 807 (6th Cir. 2004) (citing Sprague, 133 F.3d at 404).
“Consequently, a claimant must plead plan ambiguity in this Circuit to state a claim for estoppel relative to an ERISA claim for benefits.” Marks v. Newcourt Credit Group, Inc., 342 F.3d 444, 456 (6th Cir. 2003).
The Plan Language Was Not Ambiguous
The Court observed that Regency did not assert that plan language was ambiguous, nor that equitable estoppel should apply to assist with the interpretation of the Plan language.
Thus, absent some pleading that the Plan language itself is ambiguous and requires interpretation, the Court finds that Regency fails to plead a threshold element of ERISA-based equitable estoppel.
Note: The elements of equitable estoppel in the Sixth Circuit are:
(1) a representation of fact made with gross negligence or fraudulent intent; (2) made by a party aware of the true facts;  (3) intended to induce reliance or reasonably believed to be so intended; where the party asserting the estoppel is (4) unaware of the true facts; and (5) reasonably or justifiably relies on the representation to his detriment. Trustees of the Mich. Labors’ Health Care Fund v. Gibbons, 209 F.3d 587, 591 (6th Cir. 2007).
The court observed that Sixth Circuit authority holds that reliance will seldom be considered reasonable if counter to the express terms of the plan.
From the opinion, one can see that an allegation of ambiguity is necessary to properly state a claim for equitable estoppel.
Diagnostic Grouping Rates –The language of MAC can be foreign to the provider but it is an important language to learn.
On the first bill of $ 29,078.81, $ 23,022.33 was disallowed for inclusion within the Maximum Allowable Charge because, pursuant to the Plan, the charge exceeded the Diagnosis Related  Grouping Rate. This disallowance left an allowed amount of $ 6,056.48. After deducting Ms. Fogelson’s $ 200 co-pay, Blue Cross properly paid 100% of the $ 5,856.48 balance.
On the second bill of $ 213,648.07, $ 190,401.69 was disallowed for inclusion within the Maximum Allowable Charge because, pursuant to the Plan, the charge exceeded the Diagnosis Related Grouping Rate. This disallowance left an allowed amount of $ 23,246.38. After deducting Ms. Fogelson’s $ 200 co-pay, and $ 3,902.40 in co-insurance, 2 Blue Cross properly paid 100% of the $ 19.143.98 balance.
The opinion is attached to the new case thread on erisaboard.com.

:: Strategic Decisions In Pleading (And Defending) Provider Reimbursement Claims – A Case Study

St. Luke’s may amend within thirty days. If St. Luke’s amends to assert an ERISA claim, the personal jurisdiction issue is far simpler.  “[U]nder ERISA’s nationwide service of process provision,” 29 U.S.C. § 1132(e)(2), “[a] court may exercise personal jurisdiction over the defendant if it determines that the defendant has sufficient ties to the United States.” . . . Because BCBSLA has sufficient contacts with the United States, this court would have personal jurisdiction if St. Luke’s were to amend to assert claims under ERISA.

St. Luke’s Episcopal Hosp. v. La. Health Serv. & Indem. Co., 2009 U.S. Dist. LEXIS 388 (S.D. Tex. Jan. 6, 2009) (citations omitted)

This recent opinion from the Southern District of Texas provides an excellent insight into the strategic decisions involved in provider reimbursement litigation. In the final analysis, the provider’s attempt to assert state law remedies in state court against the Blue Cross defendant failed for want of jurisdiction. All was not lost, however, since the ruling left open the avenue for an amended complaint stating a claim under ERISA on principles of derivative standing (via assignment of benefits).

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:: District Court Adopts Agency Principles Deeming Employer Agent Of Insurance Carrier

In Ward v. Management Analysis Co. Employee Disability Benefit Plan, the Ninth Circuit cited with approval a decision under California law finding an agency relationship where an employer administers a group insurance policy while under the control and direction of the insurer. According to the Elfstrom rule, a dispositive factor is proof that the employer participated in the administration of the insurance policy and performed insurance tasks delegated by the insurer.  . . . . . . after reviewing the parties’ papers and carefully considering the arguments presented therein, the court adopts the Elfstrom approach to the employer-insurer agency question.

Thrall v. Prudential Ins. Co. of Am., 2008 U.S. Dist. LEXIS 98902 (December 5, 2008) (internal citations omitted)

The Thrall opinion’s patina of historical retrospective on prior Ninth Circuit authority veils the court’s remarkable decision to elevate state law notions of insurance law over uniformity in ERISA plan administration.  The principal issue – when may an employer be deemed an agent of the insurance carrier for purposes of notice of a change in beneficiaries.

In a prior Ninth Circuit case, Ward v. Management Analysis Co. Employee Disability Benefit Plan, the Ninth Circuit applied a rule derived from Elfstrom v. New York Life Ins. Co., 67 Cal.2d 503, 63 Cal. Rptr. 35, 432 P.2d 731 (1967)).

According to the Elfstrom rule, a dispositive factor is proof that the employer participated in the administration of the insurance policy and performed insurance tasks delegated by the insurer. Id. at 1283.

That rule did not stand.

On appeal, the Supreme Court reversed and held that ERISA preempted the Elfstrom rule recognized by the Ninth Circuit. UNUM Life Ins. Co. of Am. v. Ward (Ward II), 526 U.S. 358, 378, 119 S. Ct. 1380, 143 L. Ed. 2d 462 (1999). The Supreme Court did not articulate a federal common law agency rule to replace the preempted state law.

The Facts Before The Court

Fast forward to the facts in Thrall. The decedent had changed beneficiaries of his life insurance benefits from his four children to his wife.  The parties stipulated the facts:

1. The insured initially designated his four children as beneficiaries under the life insurance policy.

2. At a later point, the insured substantially complied with the policy provisions requiring him to provide notice to KPMG of a change of beneficiary (stipulated fact). This notice indicated that the insured was changing the beneficiary to Plaintiff.

3. In a letter dated March 29, 2002, KPMG acknowledged receiving the beneficiary change form.

4. The insured died on October 19, 2002.

5. On November 21, 2002, Defendant tendered the benefits under the policy to the insured’s four children according to the beneficiary forms supplied by KPMG (stipulated fact).

6. On that date, Defendant did not have actual notice of the change of beneficiary to Plaintiff (stipulated fact).

The Issue

The issue boiled down to this – if KPMG, the decedent’s employer, was an agent for the carrier, then the plaintiff wins.  If not, the carrier wins.

The Court held for the plaintiff.  In view of the Ward decision, you may ask how this could be.

Federal Common Law

The answer lies in the use of federal common law.   The concept may appear technical, but when applied with vigor, it liberates the court from the shackles of the procrustean bed of statutory constraints.

Congress has given federal courts the responsibility to promulgate federal common law where ERISA preempts state law. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S. Ct. 948, 103 L. Ed. 2d 80 (1989); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56, 107 S. Ct. 1549, 95 L. Ed. 2d 39 (1987); Menhorn v. Firestone Tire & Rubber Co., 738 F.2d 1496, 1499 (9th Cir. 1984) (“Congress realized that the bare terms, however detailed, of these statutory provisions would not be sufficient to establish a comprehensive regulatory scheme. It accordingly empowered the courts to develop … a body of federal common law governing employee benefit plans.”).

The Federal Common Law At Work

And so the district court went to work constructing a new rule:

None of the traditional factors that would caution against adopting this agency rule as a matter of federal common law under ERISA are applicable here. See Steinberg v. Mikkelsen, 901 F.Supp. 1433, 1438 (E.D.Wis. 1995) (identifying these factors as whether the federal common law is consistent with ERISA policy, whether it will impact the actuarial soundness of the plan, and whether the court would effectively be fashioning a new ERISA remedy by adopting the rule).

In adopting a rule deeming employers the agent of the carrier, the court noted that:

This holding is consistent with ERISA policy because it protects the interests of employees and beneficiaries under benefit plans when significant administrative duties are delegated to the employer and the employee has little knowledge or control over the employer’s actions. Such a rule also provides insurers an incentive to monitor and direct the ongoing administration of benefit plans. See Kobold v. Aetna U.S. Healthcare, Inc., 258 F.Supp.2d 1317, 1324 (M.D.Fla. 2003).

This rule will not affect the actuarial soundness of the plan. See Steinberg, 901 F.Supp. at 1439 (holding that agency rule creating liability against insurer providing group life insurance will not affect its actuarial soundness) (citing Black v. TIC Inv. Corp., 900 F.2d 112, 114-15 (7th Cir. 1990)). Neither does the rule fashion a new ERISA remedy, as it simply allows a beneficiary to receive benefits under a plan from the insurer. Id. at 1439.

Note: This view, if widely adopted, would substantially change the ERISA plan landscape.  In this instance, the issue was beneficiary designation.  But consider the wider implications.

If an employer accepts premiums for an employee that is deemed ineligible by the carrier, perhaps the carrier is nonetheless bound to pay benefits if the indicia of agency are present.  If an employer accepts premiums and then fails to remit them, perhaps the coverage is in force nonetheless.  (See this thread on ERISAboard.com in that context.)   In fact, many exclusions presently available to insurance carriers could be undercut if the employer’s conduct is imputed to the carrier.

The decision is an unwarranted extension of the federal common law, but to the extent it has influence, it can dramatically unseat expectations of uniform plan administration under the auspices of ERISA preemption.

:: Disclaimer Shields Claims Administrator From Mispresentation Claims

Tenet alleges that it provided approximately $ 241,000 worth of medical services to Sylvester based on UniCare’s representation that Sylvester was covered under the Plan.

. . .  Pursuant to the Managed Care Agreement, UniCare paid Tenet $ 132,827.34, the negotiated payment under the agreement, on July 27, 2005.  On August 5, 2005, Sheltering Arms informed UniCare that Sylvester had been terminated from employment on May 11, 2005, and that her benefits under the Plan terminated on June 1, 2005.

In September 2005, UniCare notified Tenet that it was requesting a refund of the claim payment under the terms of the Managed Care Agreement because Sylvester’s benefits had terminated prior to her admission to the Hospital.

Tenet Healthcare Ltd. v. UniCare Health Plans of Tex., Inc., 2008 U.S. Dist. LEXIS 96324 (S.D. Tex. Nov. 26, 2008)

For some reason it seems that Texas has more than its share of interesting health care provider reimbursement disputes.  More than one landmark decision has been handed down in the Lone Star state, including of course the venerable Hermann Hosp. v. MEBA Medical and Benefits Plan, 959 F.2d 569, 576 (5th Cir. 1992) and its progeny.

This recent case out of the Southern District is one that the payer community can chalk up as a win.

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:: Discovery Responses Do Not Support Removal & ERISA Preemption

In the case at bar, Plaintiff is no longer  a participant in Defendant’s ERISA plan and he does not allege a wrongful withholding of benefits.  . . . Plaintiff does not claim that Defendant promised him continued participation in an ERISA plan. Plaintiff stated at his deposition that he thought that Defendant was at least partially motivated to fire him in order to avoid paying him higher pension benefits, which he would have accrued had he continued to work for Defendant.  However, Plaintiff’s statement does not automatically give rise to ERISA preemption.

Black v. Lear, 2008 U.S. Dist. LEXIS 86985 ( E.D. Mich. Oct. 28, 2008)

Plaintiffs walk a fine line when asserting claims under the ADA and state wrongful discharge laws.  This recent district court opinion exemplifies a successful avoidance of ERISA preemption, but not without the trouble of removal and remand.

The problem lies in the natural consequence of termination.  Aside from loss of wages and compensation benefits, the plaitntiff will lose participation in employee benefit plans.  If that becomes an important aspect of the case, the defendant should remove the case as more properly stating an ERISA Section 510 claim.

The trade is not an even one.   ERISA will preempt state law claims while offering in return a weapon with less range, less punch and prone to frequent operator error.

The Snare Is Laid

The motion practice associated with removal of claims offers a journey through one of the last remaining wilderness preserves where trial by ambush may be robustly pursued.  The stakes are high on either side.  If the defendant does not remove within 30 days, the right is lost.  If the plaintiff inadvertently triggers removal, then the complaint is restated as a set of ERISA claims which, as noted above, have inherent limitations.

In this instance, the parties began stalking the issue in depositions.

On July 24, 2008, Defendant deposed Plaintiff. (Def.’s Br. 1). During the deposition Defendant asked Plaintiff whether he claimed that Defendant terminated him to avoid paying him higher pension benefits. (Black Dep. 94-95). Plaintiff answered: “Seems reasonable, yes, to assume that. I don’t know why Lear terminated me. I worked 35 years for the company.” (Id. at 95).

When Defendant asked Plaintiff a second time whether he claimed that he was fired to prevent him from earning higher pension benefits, Plaintiff responded, “That’s right.” (Id.at 98). Defendant followed up by asking Plaintiff if he knew of any facts that support his claim. (Id.) Plaintiff answered, “The only fact I know is that I’m not working there anymore.” Defendant pressed Plaintiff for other facts and Plaintiff said, “And I won’t accrue those benefits.”

In addition, the defendant developed the issue somewhat further by a set of requests for admissions directed a eliciting admissions as to the nature of claims asserted:

The second request asked Plaintiff to admit whether he alleges that Defendant intentionally terminated his employment with the purpose to deprive him of benefits under the Lear Corporation Pension Plan. (Id.) Plaintiff responded: “Denied, such may or may not have been the sole basis. The Complaint alleges multiple basis [sic] for Plaintiff’s termination.” (Id.)

The Claims Evaluated

The defendant having acquired all that could be adduced on the issue, then turned to federal court for an assessment of the results. The plaintiff filed a motion to remand.  The issue was then joined on whether the plaintiff had, in effect, plead an ERISA Section 510 claim.

The district court framed the issue with reference to the key Supreme Court opinion –

In Metropolitan Life Insurance, the United States Supreme Court held that ERISA preempts state common law claims when the action is to recover benefits, enforce rights, or clarify future benefits under an ERISA plan. 481 U.S. at 63-64.

– and then dialed in the applicable Sixth Circuit authority:

In accordance  with Metropolitan Life Insurance, the Sixth Circuit held in Peters v. Lincoln Electric Company, 285 F.3d 456, 467 (2002), that ERISA completely preempted the plaintiff’s state law breach of promise claim because the plaintiff asserted that the defendant breached a promise to continue his participation in an ERISA regulated benefit plan. In Peters, the plaintiff filed a complaint against his former employer alleging age discrimination, breach of contract, detrimental reliance and breach of public policy. Id. at 464.

During the plaintiff’s deposition, the defendant asked the plaintiff a series of questions designed to uncover the specific “unbroken promises” for which the plaintiff sought relief. Id. The plaintiff testified that one of the promises he sued to enforce was the defendant’s promise to continue his participation in its supplemental executive pension plan. Id. at 466.

The Facts Differ

The district court found the Peters case distinguishable.  In the court’s view, the plaintiff had avoided the preemption trip wire and thus was entitled to return to state court.

In the case at bar, Plaintiff is no longer a participant in Defendant’s ERISA plan and he does not allege a wrongful withholding of benefits. See Sears, 884 F.Supp. at 1131-32. Moreover, unlike in Peters, Plaintiff does not claim that Defendant promised him continued participation in an ERISA plan. 285 F.3d at 468. Plaintiff stated at his deposition that he thought that Defendant was at least partially motivated to fire him in order to avoid paying him higher pension benefits, which he would have accrued had he continued to work for Defendant. (Black’s Dep. 95, 98).

However, Plaintiff’s statement does not automatically give rise to ERISA preemption. Plaintiff’s wrongful discharge and age discrimination claims may give rise to an award of damages based on the value of the increased pension benefits Plaintiff would have received if he was not terminated, but he is only seeking the value of the employment he lost, not the benefits themselves. See Morningstar, 662 F.Supp. at 557. The gravamen of Plaintiff’s complaint is his claim that he was discharged in violation of his employment contract, against public policy and as a result of age discrimination. Plaintiff assures the Court that he is not asserting a purposeful deprivation  of benefits claim. (Plaintiff’s Br. 4).

Because the essence of Plaintiff’s state law claims are not for the recovery of an ERISA plan benefit, and Plaintiff only seeks to recovery the value of the benefits he lost as a consequence of his termination, there is no ERISA cause of action. Defendant, therefore, has failed to show that subject matter jurisdiction lies with this Court, and this matter must be remanded to the Wayne County Circuit Court.

Note: The case gives a good discussion of the line of demarcation.  The issue turns on the facts, so analogy to caselaw can be difficult.  This excerpt probably offers the most important guidance that may be gleaned from the opinion and, for that reason, I’ll quote the entire passage:

Both the Sixth Circuit and courts in the Eastern District of Michigan have held that a plaintiff’s state sex, age and race employment discrimination claims are not preempted when the action is merely peripherally related to the ERISA plan in question. See Wright, 262 F.3d at 613 (“‘[e]ven if an action refers to a plan, . . . the action will not relate to the plan for preemption purposes when the action only peripherally affects the plan.” (quoting Crabbs v. Copperweld Tubing Products Company, 114 F.3d 85 (6th Cir. 1997)); Yageman v. Vista Maria, Sisters of the Good Shepherd, 767 F.Supp. 144, 145 (E.D. Mich. 1991)  (Duggan, J.) (holding that plaintiff’s loss of pension benefits was a mere consequence of, and not a motivating factor behind, his termination and, therefore, no ERISA action existed); Sears v. Chrysler Corp., 884 F.Supp. 1125, 1131-32 (E.D. Mich. 1995) (Rosen, J.) (holding that a former employee, who sought to recover the value of the benefits she would have received under the ERISA plan, is not a plan participant and cannot state a § 1132(a)(1)(B) ERISA claim); Morningstar v. Meijer, Inc., 662 F.Supp. 555, 556-57 (E.D. Mich. 1987) (Churchill, J.) (concluding that the plaintiff’s state law claim for breach of employment contract was not preempted when the plaintiff was not a plan participant, did not allege that the defendant fired her to prevent her benefits from vesting, to keep her from exercising rights under the plan or for any other improper purpose, and only sought to recover the value of the benefits).

Thus, in instances where a plaintiff is not a plan participant and is not alleging a wrongful withholding of benefits but seeks damages for the loss of ERISA benefits, an ERISA cause of action does not exist, and removal is improper.

See also – For more on Section 510, see :: Sixth Circuit Permits Claims Under Tolle Rule But Finds Wrong Without Remedy

For more on the timing and factual issues attending ERISA removal, see :: Challenge To Factual Basis Set Forth In Removal Notice Rejected

:: Ninth Circuit Panel Gives Go Ahead To S.F. Employer Spending Requirements

In July 2006, the San Francisco Board of Supervisors unanimously passed the San Francisco Health Care Security Ordinance, and the mayor signed it into law. The Ordinance is codified at Sections 14.1 to 14.8 of the City and County of San Francisco Administrative Code. The Ordinance has two primary components: the Health Access Plan (“HAP”), and the employer spending requirements. The HAP is a City-administered health care program. It went into effect in the summer of 2007.

In funding the HAP, the City “prioritize[s] services for low and moderate income persons.” S.F. Admin. Code § 14.2(d) (2007). According to the City’s web page, as of August 9, 2008, 27,395 persons had enrolled in the HAP. Persons who already have health insurance or who live outside of San Francisco are not eligible for the HAP. Instead, such persons may be entitled to establish medical reimbursement accounts with the City.

As we will explain in detail below, the Ordinance also requires all covered employers to make a certain level of health care expenditures on behalf of their covered employees. The Association does not challenge the HAP. It challenges only the employer spending requirement.

Golden Gate Rest. Ass’n v. City & County of San Francisco, 2008 U.S. App. LEXIS 20574 (9th Cir. Cal. Sept. 30, 2008)

The Ninth Circuit took a novel step in upholding a San Francisco health care ordinance.  A local restaurant association challenged the law and the dispute expanded to include various intervenors and, on appeal, amici, including the Secretary of Labor.

What follows is a summary of the proceedings.

The Procedural History

The opinion succinctly relates the procedural history as follows:

The Association filed a complaint against the City on November 8, 2006, asking the district court to declare that ERISA preempts the employer spending requirements, and seeking a permanent injunction against enforcement of the provisions of the Ordinance relating to those requirements. The San Francisco Central Labor Council, Service Employees International Union (SEIU) Local 1021, SEIU United Healthcare Workers-West,  [*5] and UNITE-HERE! Local 2 (collectively, “Intervenors”), successfully moved to intervene as defendants.

On April 2, 2007, the City deferred implementation of the employer spending requirements until January 1, 2008. On July 13, 2007, the parties filed cross-motions for summary judgment. On December 26, 2007, the district court entered judgment for the Association, concluding that ERISA preempts the employer spending requirements. See Golden Gate Rest. Ass’n, 535 F. Supp. 2d at 979-80.

On December 27, 2007, the City and Intervenors asked the district court to stay its judgment pending appeal. The district court denied the motion. On January 9, 2008, this court filed a published order granting the City’s motion for a stay of the district court’s judgment pending resolution of the City’s appeal. Golden Gate, 512 F.3d at 1127. Since that date, covered employers have been required to make quarterly health care expenditures.

On February 7, 2008, the Association filed an application with Justice Kennedy, as Circuit Justice for the Ninth Circuit, for an order vacating our stay of the district court’s judgment. On February 21, after receiving the City’s response, Justice Kennedy denied the application.  [*6] The United States Secretary of Labor subsequently filed an amicus brief in this court in support of the Association.

On April 17, 2008, we heard oral argument on the merits of the City’s appeal. We now reverse the judgment of the district court and remand with instructions to enter summary judgment in favor of the City and Intervenors.

Summary Of Holdings

1. The Court Begins With A Presumption Against Preemption Of State Law

a. We begin by noting that state and local laws enjoy a presumption against preemption when they “clearly operate[ ] in a field that has been traditionally occupied by the States.” (citing De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806, 814 (1997) (internal quotation marks omitted).

b.  The presumption against preemption applies in ERISA cases. “[N]othing in the language of [ERISA] or the context of its passage indicates that Congress chose to displace  [*18] general health care regulation, which historically has been a matter of local concern.” (citing N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 661 (1995)).

c. The field in which the Ordinance operates is the provision of health care services to persons with low or moderate incomes. State and local governments have traditionally provided health care services to such persons.

2. The City-Payment Option Does Not Create an ERISA “Plan”, De Facto Or Otherwise

a.  ERISA is concerned with “benefit plans,” rather than simply “benefits,” because “[o]nly ‘plans’ involve administrative activity potentially subject to employer abuse.” (citing, Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 16 (1987)).

b.  Under the Ordinance, employers make the payments on a regular periodic basis and calculate those payments based on the number of hours worked by the employee. Further, employers make the payments on a regular basis from their general assets.

c.  For employers who choose to make payments to the City, their obligation ceases as soon as they make the required payments.

d. The Ordinance does not guarantees that a certain level or kind of “intended benefits” will be provided by the HAP, or that a particular group of “intended . . . beneficiaries” will be included in the HAP.

e. Thus, the administrative burden on the covered employers does not create an ERISA plan and the no plan is created on the view that ‘a reasonable person could ascertain the intended benefits, beneficiaries, source of financing, and procedures for receiving benefits.

3.  The HAP Is Not An ERISA Plan

a. The first element of an employee welfare benefit plan is the existence of a “plan, fund or program.” Patelco Credit Union, 262 F.3d at 907.

b. The HAP, administered by the City, is not an ERISA plan but rather, a government entitlement program  available to low- and moderate-income residents of San Francisco, regardless of employment status.

c.  Since the City, rather than the employer, establishes and maintains the HAP, and the City is free to change the kind and level of benefits as it sees fit, the HAP does not meet the requirements for existence of a plan.

4.  The Ordinance Does Not Relate To ERISA Plans

a.  The purpose of ERISA’s preemption provision is to “ensure[ ] that the administrative practices of a benefit plan will be governed by only a single set of regulations.”

b. New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645, 655 (1995), the Court acknowledged the difficulty of interpreting § 514(a) and narrowed ERISA preemption.

c. In this light, we employ a “holistic analysis guided by congressional intent.” (citing Dishman v. UNUM Life Ins. Co. of Am., 269 F.3d 974, 981 n.15 (9th Cir. 2001).

d. The Ordinance does not require any employer to adopt an ERISA plan or other health plan. Nor does it require any employer to provide specific benefits through an existing ERISA plan or other health plan.

e.  Any employer covered by the Ordinance may fully discharge its expenditure obligations by making the required level of employee health care expenditures, whether those expenditures are made in whole or in part to an ERISA plan, or in whole or in part to the City.

f.  The Ordinance does not “bind[ ] ERISA plan administrators to a particular choice of rules” for determining plan eligibility or entitlement to particular benefits.

g. The Ordinance does not impose on plan administrators any “administrative [or] financial burden of complying with conflicting directives” relating  to benefits law. (citing Ingersoll-Rand Co., 498 U.S. at 142.)

h.  Thus, the Ordinance thus preserves ERISA’s “uniform regulatory regime.”

5.  The Ordinance Does Not Refer To ERISA Plans

a. To determine whether a law has a forbidden “reference to” ERISA plans, we ask whether (1) the law “acts immediately and exclusively upon ERISA plans,” or (2) “the existence of ERISA plans is essential to the law’s operation.” (citing Dillingham, 519 U.S. at 325.)

b. Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825 (1988) upheld those aspects of the state statute that did “not single out or specially mention ERISA plans of any kind,” even though they would potentially subject ERISA plans to “substantial administrative burdens and costs.” Id. at 831.

c. District of Columbia v. Greater Washington Board of Trade (“Greater Washington”), 506 U.S. 125 (1992) is distinguishable.

d. Under the ordinance in Greater Washington, obligations were measured by reference to the level  [*49] of benefits provided by the ERISA plan to the employee.

e. Under the Ordinance in our case, by contrast, an employer’s obligations to the City are measured by reference to the payments provided by the employer to an ERISA plan or to another entity specified in the Ordinance, including the City. The employer calculates its required payments based on the hours worked by its employees, rather than on the value or nature of the benefits available to ERISA plan participants.

f. Thus, unlike the ordinance in Greater Washington, the Ordinance in this case is not determined, in the words of § 514(a), by “reference to” an ERISA plan.

g.  Rather, the case is conceptually similar to a prevailing wage case.  Here, as in WSB Electric, employers need not have any  ERISA plan at all; and if they do have such a plan, they need not make any changes to it.

h.  Where a law is fully functional even in the absence of a single ERISA plan, as it was in WSB Electric and as it is in this case, it does not make an impermissible reference to ERISA plans. Cf. Travelers Ins. Co., 514 U.S. at 656 (“The surcharges are imposed upon patients and HMO’s, regardless of whether the commercial coverage or membership, respectively, is ultimately secured by an ERISA plan, private purchase, or otherwise, with the consequence that the surcharge statutes cannot be said to make ‘reference to’ ERISA plans in any manner.”).

6. Retail Industry Leaders Association v. Fielder, 475 F.3d 180, 183 (4th Cir. 2007) Is Consistent With This Holding.

a.  In stark contrast to the Maryland law in Fielder, the City-payment option under the San Francisco Ordinance offers employers a meaningful alternative that allows them to preserve the existing structure of their ERISA plans.

b.  If an employer elects to pay the City, that employer’s employees are eligible for free or discounted enrollment in the HAP, or for medical reimbursement accounts. In contrast to the Maryland law, the San Francisco Ordinance provides tangible benefits to employees when their employers choose to pay the City rather than to establish or alter ERISA plans.

c.  In its motion for summary judgment, the Association provided no evidence to demonstrate that San Francisco employers are, in practical fact, compelled to alter or establish ERISA plans rather than to make payments to the City.

d. Because the City-payment option offers San Francisco employers a realistic alternative to creating or altering ERISA plans, the Ordinance does not “effectively mandate[ ] that employers structure their employee healthcare plans to provide a certain level of benefits.”

Note: The Ordinance follows the advice developed by state coalitions in recent years as to how best to design a pay or play health care reform bill in view the risk of ERISA preemption.  In fact, a comparison of the opinion with white papers on the issue is quite instructive.

The Required Expenditure – The expenditure varies based upon employer size:

The Ordinance sets the required health care expenditure for employers based on the Ordinance’s “health care expenditure rate.” Id. §§ 14.1(b)(8), 14.3(a). For-profit employers with between twenty and ninety-nine employees and non-profit employers with fifty or more employees must make health care expenditures at a rate of $ 1.17 per hour. For-profit employers with one hundred or more employees must make expenditures at a rate of $ 1.76 per hour. See City & County of San Francisco, Office of Labor Standards Enforcement, Regulations Implementing the Employer Spending Requirement of the San Francisco Health Care Security Ordinance (“ESR”), Reg. 5.2(A) (2007).  Under the Ordinance, “[t]he required health care expenditure for a covered employer shall be calculated by multiplying the total number of hours paid for each of its covered employees during  the quarter . . . by the applicable health care expenditure rate.” S.F. Admin. Code § 14.3(a).

So, it’s something like this:  #hrs paid x #covered ee’s x surcharge rate = required expenditure.

Satisfying The Requirement – The regulations provide several options for satisfying the requirement, including a payment to the City, which will then entitle the employees to care under the HAP.  As for self-funded plans:

The Ordinance includes a special provision for employers with self-insured health plans. An employer providing “health coverage to some or all of its covered employees through a self-funded/self-insured plan” will “comply with the spending requirement . . . if the preceding year’s average expenditure rate per employee meets or exceeds the applicable   expenditure rate” for the employer. ESR Reg. 6.2(B)(2). Such employers do not need to keep track of their actual expenditures for each employee.

The Employer Categories – There are five categories of employers under the Ordinance.

First are employers that have no ERISA plans (“No Coverage Employers”).

Second are employers that have ERISA plans for all employees, and that spend at least as much as the Ordinance’s required health care expenditure per employee (“Full High Coverage Employers”).

Third are employers that have ERISA plans for some, but not all, employees, and that spend at least as much as the Ordinance’s required health care expenditure per employee for employees under the ERISA plan (“Selective High Coverage Employers”).

Fourth are employers that have ERISA plans for all employees, but that spend less than the Ordinance’s required health care expenditure per employee (“Full Low Coverage Employers”).

Fifth are employers that have ERISA plans for some, but not all, employees, and that spend less than the Ordinance’s required health care expenditure per employee for employees under the ERISA plan (“Selective Low Coverage Employers”).

The Big Picture – The Court’s perpective was principally shaped the these observations:

We make two observations about the Ordinance. First, the Ordinance does not require employers to establish their own ERISA plans or to  make any changes to any existing ERISA plans. Employers may choose to make up the difference between their existing health care expenditures and the minimum expenditures required by the Ordinance either by altering existing ERISA plans or by establishing new ERISA plans. However, they need not do so. The City-payment option allows employers to make payments directly to the City, if they so choose, without requiring them to establish, or to alter existing, ERISA plans. If employers choose to pay the City, the employees for whom those payments are made are entitled to receive either discounted enrollment in the HAP or medical reimbursement accounts with the City.

Second, the Ordinance is not concerned with the nature of the health care benefits an employer provides its employees. It is only concerned with the dollar amount of the payments an employer makes toward the provision of such benefits. An employer can satisfy its spending requirements by paying the City; it can satisfy those requirements by funding exclusively preventive care; it can satisfy those requirements by setting up an on-site clinic and reimbursing employees for the purchase of over-the-counter medications; or it can  [*16] satisfy those requirements in some other manner, such as funding a traditional ERISA plan. The Ordinance does not look beyond the dollar amount spent, and it does not evaluate benefits derived from those dollars.

Additional Commentary – Additional discussion will appear in subsequent posts.  For now, those following the story will find a useful contrast in Prof. Ed Zelinsky’s previous comments on the bill (with whom I agree).

:: Sixth Circuit Applies Trilogy Of Supreme Court ERISA Cases In Upholding State Law

Far from announcing a brave new line for ascertaining ERISA preemption, the post-1997 cases show only a willingness to place more emphasis on the presumption against preemption and on the underlying purposes of the ERISA statute–both of which give the States wider, but hardly unreviewable, berth in regulating the area. The last thing, indeed, that a purpose-driven approach to statutory construction guarantees is clarity. The key effect of permitting judges to generalize from the purposes of a statute, as opposed to just its text, is to give them more rather than less discretion in construing a law’s scope.

Associated Builders & Contrs. v. Mich. Dep’t of Labor & Econ. Growth, 2008 U.S. App. LEXIS 19569 (6th Cir. 2008)

The Sixth Circuit opinion in Associated Builders candidly discusses the shortcomings of the intentionalist model of statutory construction while also providing important comment on the Court’s understanding of several seminal Surpreme Court preemption cases.

The Issue

At issue was a longstanding injunction against the enforcement of Michigan’s statutory requirements on the training and supervision of apprentice electricians. Did ERISA preemption enforcement of the statutes?

ERISA Section 3(1) defines an “employee welfare benefit plan” as:

“Any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants . . . (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds or prepaid legal services . . . .” 29 U.S.C. § 1002(1) (emphasis added).

A Little Background On The Issue

The Supreme Court took a look at this preemption issue in Cal. Div. of Labor Stds. Enforcement v. Dillingham Constr., N.A., 519 U.S. 316, 323 (U.S. 1997). That case involved a statute similar to Michigan’s, and since it held the key to resolving the Sixth Circuit case, it’s worth a quick review.

Under both the Davis-Bacon Act and California’s prevailing wage law, public works contractors may pay less than the prevailing journeyman wage to apprentices in apprenticeship programs that meet standards promulgated under the National Apprenticeship Act, 29 U.S.C.S. § 50; 29 C.F.R. § 29.5(b)(5) (1996); Cal. Lab. Code § 1777.5 (1997).

Now, an apprenticeship program could be sponsored by an individual employer, an individual labor union, a group of employers, a group of labor organizations, or by a joint management-labor venture.

So, #1 if an employer’s plan qualified under ERISA Section 3(1) (see above), and #2 if the California statute required payment of a prevailing wage on public works projects, could the plan sponsor object that ERISA preempted the state law?

A Little More Background

The employer appeared to have a good shot at the issue in Dillingham given the many preemption cases where the Supreme Court had found that state laws impermissibly burdened ERISA plans.

But the tide was turning in the late 1990’s. New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995) had sounded the clarion call.

The Court observed:

A law that does not refer to ERISA plans may yet be pre-empted if it has a “connection with” ERISA plans. Two Terms ago, we recognized that an “uncritical literalism” in applying this standard offered scant utility in determining Congress’ intent as to the extent of § 514(a)’s reach. Travelers, 514 U.S. at 656. Rather, to determine whether a state law has the forbidden connection, we look both to “the objectives of the ERISA statute as a guide to the scope of the state law that Congress understood would survive,” ibid., as well as to the nature of the effect of the state law on ERISA plans, 514 U.S. at 658-659.

The Travelers Analogy

So much in law is accomplished by analogy. Here, the Court in Dillingham held that the case was more like Travelers than like other cases were state statutes were preempted.

Like New York’s surcharge requirement, the apprenticeship portion of the prevailing wage statute does not bind ERISA plans to anything. No apprenticeship program is required by California law to meet California’s standards. . .

The effect of the prevailing wage statute on ERISA-covered apprenticeship programs in California is substantially similar to the effect of New York law on ERISA plans choosing whether to provide health insurance benefits in New York through the Blues, or through a commercial carrier. The prevailing wage statute alters the incentives, but does not dictate the choices, facing ERISA plans. In this regard, it is “no different from myriad state laws in areas traditionally subject to local regulation, which Congress could not possibly have intended to eliminate.”

Back To The Present

With that background, the issue before the Sixth Circuit was really fairly simple to resolve. The state had waited quite a few years to ask that the injunction against enforcement of the statutes be dissolved, and that delay had to be addressed (and it was, favorably to the state).

There was, however, a distinction that had to be considered. Unlike the statute in Dillingham, which merely offered an incentive to some apprenticeship programs, Michigan’s statute imposes requirements on all apprenticeship programs, the so-called ratio and equivalency requirements. (see Note below for more detail)

So the Michigan statute did mandate something. Would this be a significant difference?

Checklist Of Preemption Factors

No, said the Sixth Circuit. The Court’s reasoning provides helpful development of the post-Traveler’s limitations on preemption.

#1 States have long regulated apprenticeship standards and training or that this topic of regulation falls well within their traditional police powers.

#2 The policies underlying the ratio and equivalency rules-the safety of electrical apprentices and appropriate standards of electrical apprenticeship-are “quite remote from the areas with which ERISA is expressly concerned.”

#3 What triggers ERISA’s potential application to these laws is not the existence of an apprenticeship training program, but the existence of a separate fund to support the training program. Yet the allegedly preempted laws concern substantive apprenticeship training standards, not matters directly related to the fund, prompting us to wonder why Congress would want the States’ public-safety authority to regulate substantive apprenticeship training standards to turn on how those plans are financed.

#4 On the preemption theory, ERISA would prevent the States from regulating the safety of apprentices and the standards of electrical apprenticeship, even though ERISA does not regulate these matters either.

#5 Were it otherwise, ERISA might preempt all sorts of laws of general applicability that affect ERISA plans, a view that would preempt a slew of state laws regulating not just apprenticeship standards but also the medical profession, day care centers and the practice of law.

#6 Other courts have held likewise. See, Willmar Elec. Serv. v. Cooke, 212 F.3d 533 (10th Cir. Colo. 2000) and Wright Elec., Inc. v. Minn. State Bd. of Elec., 322 F.3d 1025, 1031 (8th Cir. Minn. 2003).

Note: The Sixth Circuit noted a contrary opinion, Minnesota Chapter of Associated Builders and Contractors, Inc. v. Minnesota Department of Public Safety, 267 F.3d 807 (8th Cir. 2001), where the Eighth Circuit held that ERISA preempts a Minnesota statute that resembles Michigan’s.

Little “Bright-Line” Guidance – In addressing the delay in the request that the injunction be dissolved, the Court stated that:

. . . while one could imagine a State responding more quickly to these changes in the law than Michigan did, there are practical reasons for excusing the delay. The district court issued the underlying injunction in 1992, and the first Supreme Court decisions suggesting a new way of viewing ERISA preemption cases came in 1997 when the Court decided Travelers, De Buono and Dillingham. But even the most sophisticated reader of ERISA case law could not claim with a straight face that a red light on regulating apprentice training before 1992 suddenly became green after 1997. In construing the “relate to” scope of preemption, the pre-1992 cases are as context-specific and as short on bright-line guidance as the post-1997 cases.

Ratio and Equivalency Requirements. The ratio requirement provides that all apprentice electricians working in Michigan must register with the State’s electrical administrative board and that the ratio of electrical journeymen or master electricians to registered-apprentice electricians at a job site must be one-to-one. The equivalency requirement provides that all apprentice electricians working in the State must participate in a training program approved by the board–i.e., a program with requirements “equivalent” to those imposed by the U.S. Department of Labor Bureau of Apprenticeship and Training.

Scalia’s Explanation Of Preemption Curtailment – From his concurring opinion in Dillingham:

I think it would greatly assist our function of clarifying the law if we simply acknowledged that our first take on this statute was wrong; that the “relate to” clause of the pre-emption provision is meant, not to set forth a test for pre-emption, but rather to identify the field in which ordinary field pre-emption applies–namely, the field of laws regulating “employee benefit plan[s] described in section 1003(a) of this title and not exempt under section 1003(b) of this title,” 29 U.S.C. § 1144(a).

Our new approach to ERISA pre-emption is set forth in John Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86, 99, 126 L. Ed. 2d 524, 114 S. Ct. 517 (1993): “We discern no solid basis for believing that Congress, when it designed ERISA, intended fundamentally to alter traditional pre-emption analysis.” I think it accurately describes our current ERISA jurisprudence to say that we apply ordinary field pre-emption, and, of course, ordinary conflict pre-emption. See generally Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 248, 78 L. Ed. 2d 443, 104 S. Ct. 615 (1984) (explaining general principles of field and conflict pre-emption); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 91 L. Ed. 1447, 67 S. Ct. 1146 (1947) (field pre-emption); Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143, 10 L. Ed. 2d 248, 83 S. Ct. 1210 (1963) (conflict pre-emption). Nothing more mysterious than that; and except as establishing that, “relates to” is irrelevant.

:: ERISA Preemption Defense Lost By Waiver

Rule 8(c) of the Federal Rules of Civil procedure states that “[i]n pleading to a preceding pleading, a party shall set forth affirmatively … any … matter constituting an avoidance or affirmative defense.” Where such affirmative defenses are not pled in the response to a pleading they are typically held to be waived and cannot be introduced into litigation at any later stage. Federal preemption under ERISA has been viewed by many courts to constitute just such an affirmative defense under Rule 8(c). Old Line Life Ins. Co. of America v. Garcia, 2007 WL 4126516 (E.D.Mich.) (November 19, 2007)

The navigation of procedural hurdles in asserting ERISA preemption defenses poses a more complex task than often assumed. Aside from the issues of whether a case is removable and the procedural requirements attending proper removal based upon federal question jurisdiction, a recent district court case reminds us that the ERISA preemption defense may simply be waived altogether under Fed. R. Civ. P. 8(c).

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:: Slimming Down The ERISA Fiduciary Profile – Good Or Bad For ERISA Claims Administrators?

BCBSM may not inform self-insured plans that it has negotiated lower hospital rates for its BCN than its traditional and PPO products. However when the plans decide whether to contract with BCBSM for one of its products, they have received from BCBSM detailed information regarding the hospital rates that the plans will be obligated to pay, the discounts BCBSM has negotiated for the particular health care product from the hospital’s normal rates, and the anticipated annual cost of health care coverage for the plan. If an entity then selects a BCBSM product for its plan, BCBSM is not breaching its fiduciary duties to the plan when it subsequently processes and pays hospital claims at the rates the entity agreed to pay when it contracted with BCBSM. Deluca v. Blue Cross Blue Shield of Mich., Slip Copy, 2007 WL 3203131 (E.D.Mich.) (October 31, 2007)

In Deluca v. Blue Cross Blue Shield of Mich., the district court faced the question of what fiduciary duty, if any, BCBS owed to self-funded plans in negotiating reimbursement rates with providers. According to the facts, “BCBSM negotiated lower hospital rates for the [Blue Cross Network] in exchange for higher rates for its traditional open access and PPO products.”

Did BCBS violate fiduciary duties in doing so? As noted below, these victories may be Pyhrric in that plaintiffs gain state law causes of action through the federal courts’ persistent pruning of ERISA fiduciary status.

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:: Managed Care Contract Gives Rise to “Independent Legal Duty” Which Survives ERISA Preemption

As in Pascack Valley Hospital and Anesthesia Care Associates, the crux of the parties’ dispute in this case arises from the terms of a contract-the Hospital Agreement-that is independent of the ERISA patients’ plans; the ERISA patients are not parties to the Hospital Agreement; and parties dispute the level, rate, or amount of payment, not the right to payment. Northeast does not challenge Aetna’s benefits determinations under the patients’ ERISA plans. Nor does Northeast challenge the scope of the plans’ coverage. Northeast Hosp. Authority v. Aetna Health Inc., Slip Copy, 2007 WL 3036835 (S.D.Tex.) (October 17, 2007)

Framing the issue in this way, the United States District Court in Northeast Hosp. Authority v. Aetna Health Inc. ultimately added another decision to growing list of cases in which managed care contracts permit payment disputes between provider and health plan to survive ERISA preeemption. The contours of a successful argument for provider reimbursement are taken from the outline of critical factors set forth in AETNA Health, Inc. V. Davila 542 U.S. 200 (2004).

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:: Contractual Agreements To Provide Benefits Escape ERISA Preemption

Drawing all inferences in favor of Plaintiff, the 2001 Agreement contractually obligated ABN to provide Cantor the same benefits post-agreement that he had previously received, both in consideration for settlement of outstanding claims and as an inducement for him to leave full-time employment with ABN. Cantor’s entitlement to the benefits does not, therefore, “derive[ ] entirely from the particular rights and obligations established by the benefit plans,” but rather from the 2001 Agreement. That the method selected for providing those benefits was modification of an existing ERISA plan does not alter the independent nature of the obligation. Cantor v. American Banknote Corp., 2007 WL 3084966 (S.D.N.Y.) (October 22, 2007)

From a complicated set of facts involving two bankruptcy proceedings, a principle emerges from a recent New York case that provides an interesting perspective on when ERISA should preempt claims based upon contractual obligations to obtain insurance coverage.

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:: Ninth Circuit Applies “Time Of Death” Rule For Evaluating ERISA Participant Status Of Deceased Employee

In order to answer the questions before us we must first identify the relevant time for determining whether Miller was a “participant .” We have repeatedly held that whether a living party is a “participant” or “beneficiary” is determined as of the time the lawsuit is filed. . . . However, we have never identified the applicable time for evaluating the claims of a decedent’s estate and beneficiaries. Miller v. Rite Aid Corp., — F.3d —- 2007 WL 2948900 (C.A.9 (Or.)) (October 11, 2007)

In Miller v. Rite Aid Corp., the Ninth Circuit addressed the scope of ERISA preemption where the participant died before commencement of litigation. The case presents the interesting question, previously discussed on this site, where an employer has promised benefits only to find that the anticipated insurance coverage for the benefits is unavailable at the point of claim.

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:: Contribution Among ERISA Fiduciaries? – The Eighth Circuit Weighs In On the Issue

The first issue raised on appeal is whether the “federal common law of rights and obligations under ERISA-regulated plans,” Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987), should provide that an ERISA fiduciary found liable for violating its obligations under the statute may bring an action for contribution against another fiduciary that allegedly bears some responsibility for the violations. We conclude that there is no right of contribution under ERISA. Travelers Cas. and Sur. Co. of America v. IADA Services, Inc., — F.3d —-, 2007 WL 2317374 (C.A.8 (Iowa)) (August 15, 2007)

Say an employer has to pay substantial sums in restitution and civil penalties for a fiduciary breach that it contends was caused, all or in part, by its third party administrator. Does ERISA provide a remedy? Most employers would probably think so – but this recent Eighth Circuit decision holds otherwise.

The case presents one of those tri-fold considerations frequently found in the ERISA context – (1) what is an equitable result, (2) what does ERISA require, and (3) to the extent ERISA is vague or silent on the issue, what is the policy that best serves ERISA’s purposes.

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:: Ninth Circuit Reaffirms Holding That Health Care Provider’s Non-Derivative State Law Claims Are Not ERISA Preempted

We decline PBP Health’s invitation to adopt St. Mary’s Hospital’s reasoning as law of this circuit. St. Mary’s Hospital is contrary to our holding in The Meadows, 47 F.3d at 1009-11 (holding that third-party claims that do not involve assigned rights to benefits do not “relate to” ERISA and, consequently, are not preempted by ERISA), and does not recognize that FEHBA’s implementing regulations state that preemption applies to only “covered individuals” and those “acting on behalf of a covered individual and … have the covered individual’s specific written consent to pursue payment of the disputed claim,” 5 C.F.R. §§ 890.101, 890.105.

Cedars-Sinai Medical Center v. National League of Postmasters of U .S. — F.3d —-, 2007 WL 2284349 (C.A.9 (Cal.)) (August 10, 2007)

Cedars-Sinai involved a preemption argument based upon the Federal Employee Health Benefits Act or “FEHBA”. Since FEHBA and ERISA have similar preemption provisions, however, the case has value for ERISA practitioners. The Court observed that:

Because there is no Ninth Circuit authority discussing FEHBA pre-emption issues involving the claims of a third-party health care provider, we may look to analogous cases involving the application of ERISA’s pre-emption provision. See Botsford, 314 F.3d at 393-94 (recognizing that FEHBA’s preemption provision “closely resembles ERISA’s express pre-emption provision, and precedent interpreting the ERISA provision thus provides authority for cases involving the FEHBA provision”).

The Facts

Cedars-Sinai, a non-profit California hospital submitted claims totaling $742,217.93 to PBP Health, an administrator of is a federal health benefit plan (“the Plan”). (The Plan was created pursuant to FEHBA, which authorizes the U.S. Office of Personnel Management (“OPM”) to contract with insurance carriers to provide health benefits for federal employees.)

The Plan paid only $168,947.44.

When Cedars-Sinai sued the Plan in state court on various state law theories, the plan removed the case to federal district court. There, the Plan prevailed on its argument that ERISA preempted the provider’s claims. The carrier appealed.

A Review of Precedent

The Ninth Circuit took pains to review the case law originating with Memorial Hospital System v. Northbrook Life Insurance Co., 904 F.2d 236 (5th Cir.1990). In that case, the Fifth Circuit held that a health care provider’s “non-derivative claims”, i.e., claims not asserted as an assignee of plan benefits, were not preempted.

Preempted clams, observed the Fifth Circuit, typically fell in the following categories:

(1) the state law claims address areas of exclusive federal concern, such as the right to receive benefits under the terms of an ERISA plan; and (2) the claims directly affect the relationship among the traditional ERISA entities-the employer, the plan and its fiduciaries, and the participants and beneficiaries.

Applying this test, Firth Circuit held that the provider’s non-derivative claims were not preempted because those claims did not fit into either category.

The Memorial Health Factors Applied In The Ninth Circuit

The Ninth Circuit noted its prior approval of Memorial Health in The Meadows v. Employers Health Insurance Corp., 47 F.3d 1006 (9th Cir.1995). In The Meadows, noted the court,

We recognized that ERISA preempts the state claims of a provider suing as an assignee of the beneficiary’s rights to benefits under an ERISA plan. See The Meadows, 47 F.3d at 1008 (citing Misic v. Bldg. Servs. Employees Health & Welfare Trust, 789 F.2d 1374, 1378 (9th Cir.1986)). However, we held that ERISA does not preempt “claims by a third-party who sues an ERISA plan not as an assignee of a purported ERISA beneficiary, but as an independent entity claiming damages,” id., because such claims do not “relate” to ERISA preemption, id. at 1009.

The Ninth Circuit expressly rejected the reasoning in St. Mary’s Hospital v. Carefirst of Maryland, Inc., 192 F.Supp.2d 384 (D.Md.2002), relied on by the district court in holding for the defendant.

PBP Health contends that we should adopt the reasoning in St. Mary’s Hospital v. Carefirst of Maryland, Inc., 192 F.Supp.2d 384 (D.Md.2002), a case relied on by district court in the decision below. In St. Mary’s Hospital, the plaintiff hospital brought suit against a health insurer for several claims, including breach of contract based on the insurer’s refusal to reimburse the plaintiff for services provided to plan enrollees. The plaintiff argued that preemption was inappropriate because the plaintiff was a health care provider; it was not a plan enrollee, nor did it have an assignment of rights from the enrollee. . . . The court recognized that this was a novel situation in the Fourth Circuit but disagreed with the plaintiff. Instead, the court found that the plaintiff’s claims were preempted because the “nature” of its claims “implicated the terms and provisions” of the FEHBA plan. Id. at 389. The court also noted that “[t]o allow state contract law to decide the matter would disrupt the national uniformity of coverage for federal employees intended by Congress in enacting [the] FEHBA.” Id.

In reversing the district court, the Ninth Circuit stated that it declined the defendant’s invitation to adopt St. Mary’s Hospital’s reasoning as law of this circuit as it is contrary to the Ninth Circuit holding in The Meadows.

Note: The Ninth Circuit opinion clarifies its position on provider claims. Third-party claims that do not involve assigned rights to benefits do not “relate to” ERISA and, consequently, are not preempted by ERISA.

Additional Authority – The Court also noted favorably another district court opinion on the issue, stating:

Finally, Cedars-Sinai cites to Hoag Memorial Hospital v. Managed Care Administrators, 820 F.Supp. 1232 (C.D. Cal 1993). In Hoag, the plaintiff hospital brought an action against the defendant employer and the employer’s benefit plan, seeking recovery of fees for treatment for one of the defendant’s employees. See id. at 1233. The defendants had made representations to the plaintiff that the employee was covered, but later stated that an exclusion applied to deny coverage. . . . The plaintiff sued because the plan refused to reimburse it for any treatment. . . . It is this Court’s opinion that ERISA’s preemption provision was intended to preclude the latter, not the former.”). The district court’s holding in Hoag that third-party claims that do not involve assigned rights to benefits are not preempted by FEHBA is persuasive and bolsters Cedars-Sinai’s position that its claims for reimbursement are not preempted.

:: Plan’s Statement of Participant Rights Did Not Waive Plan’s Right To Removal

Plaintiff argues defendant waived its right to removal by virtue of the following language contained in the underlying [ERISA] policy: “If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or Federal court.” Plaintiff further argues the contract should be interpreted such that plaintiff’s choice to have this matter adjudicated in state court “cannot be taken away.” Payne. v. Hartford Life and Acc. Ins. Co., Slip Copy, 2007 WL 2262942 (W.D.La) (August 03, 2007)

This case presents a somewhat novel argument that the defendant plan administrator waived federal jurisdiction by including language in the summary plan description which could be interpreted as giving the plaintiff a choice of state or federal court. The issue arose in the context of a motion to remand following the defendant disability carrier’s removal of the plaintiff’s state law case to federal court.

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:: Fourth Circuit Holds Plaintiff Has Standing To Sue, State Law Claims ERISA Preempted

Considering ERISA’s objectives set forth in 29 U.S.C.A. § 1001(b), the Supreme Court has explained that Congress intended ERISA to preempt at least three categories of state law: (1) laws that “mandate[ ] employee benefit structures or their administration”; (2) laws that bind employers or plan administrators to particular choices or preclude uniform administrative practice; and (3) “laws providing alternate enforcement mechanisms” for employees to obtain ERISA plan benefits. . . . A key feature of these categories of laws is that they “implicate the relations among the traditional ERISA plan entities.” . . . . In sum, the district court did not err in ruling that ERISA preempts Appellants’ state-law claims without first establishing NEL’s fiduciary status with respect to each function it served in its relationship with the Plan. Because Appellants’ state-law claims merely repackage Ruffin’s ERISA claim, they are preempted by ERISA. Wilmington Shipping Co. v. New England Life Ins. Co., — F.3d —-, 2007 WL 2216008, (C.A.4 (N.C.)) (August 3 2007)

Wilmington Shipping Co., a pension benefits case, provides a helpful analysis of ERISA preemption from the Fourth Circuit’s point of view. In the court of its ruling, the Fourth Circuit also had occasion to rule on a standing issue as it pertained to terminated plans.

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:: TPA Assessed Fees And Costs For Improper Removal Of Employer’s State Law Claims

This Court finds that based on the allegations of the Complaint, Defendant had no objective reasonable basis for removal. In light the facts alleged in the Complaint and case law, Defendant’s removal attempt was objectively improper. . . . There is not enough room here to list the growing number of cases in which some defendant has stretched beyond all reason the concept of “super-preemption” by using his “super-imagination” to find a remote connection to ERISA.”) Taylor Chevrolet, Inc. v. Medical Mut. Services, LLC, Slip Copy, 2007 WL 2206567 (S.D.Ohio) (July 30, 2007)

Following a successful motion to remand, an employer prevailed on a motion for attorneys’ fees and costs. The primary case wherein the district court held that the employer’s state law claims against its third party administrator were not preempted is Taylor Chevrolet, Inc. v. Medical Mut. Services, LLC, Slip Copy, 2007 WL 1452618 (S.D.Ohio) (May 15, 2007)

The essential holding in that case was that:

Since the employer was asserting claims against its TPA for monetary losses allegedly caused by the TPA’s acts or omissions, the district court observed that the employer was “attempting to recover for an independent harm that it suffered”. The court stated:

it is undisputed that the relevant beneficiaries of the plan were fully covered and have suffered no injury because of Plaintiff’s own losses. Thus, Plaintiff is not asserting its claims in its fiduciary capacity on behalf of beneficiaries or participants. Rather, Plaintiff is seeking to enforce its own rights under a separate, distinct contract that it had with Defendant. As a result, Plaintiff is not acting as an ERISA fiduciary with respect to its claims against Defendant.

See,:: Employer’s Suit Against Health Plan TPA Is Not Preempted By ERISA

In this most recent development the TPA has been assessed attorneys’ fees and costs under 28 U.S.C.A. § 1447(c).

The Standard For An Award Under 28 U.S.C. § 1447(c)

The court reviewed the standard for imposing the statute as follows:

28 U.S.C. § 1447(c) provides that “[a]n order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal. A decision to award attorney’s fees is “within the sound discretion of the district court.” Bartholomew v. Town of Collierville, Tenn., 409 F.3d 684, 686 (6th Cir.2005) (quoting Wrenn v. Gould, 808 F .2d 493, 504 (6th Cir.1987)). In deciding whether to award attorney’s fees, this Court must ask whether the removing party had an objectively reasonable basis for removal in light of the factual allegations of the complaint. Bartholomew, 409 F.3d at 687 (stating that the Court is to “focus on the objective propriety of the removal attempt”). Thus, “[a]bsent unusual circumstances, attorney’s fees should not be awarded under § 1447(c) when the removing party has an objectively reasonable basis for removal.” Martin v. Franklin Capital Corp., 546 U.S. 132 (2005). Conversely, an award of fees is appropriate where the defendant’s attempt to remove the action is not fairly supportable, or where there has been some finding of fault with the defendant’s decision to remove. See Bartholomew, 409 F.3d at 687; see also Martin, 546 U.S. at 134 (stating that “where no objectively reasonable basis exists, fees should be awarded”).

Factors Affecting Decision

In finding that the TPA had no objective reasonable basis for removal, the court noted the following:

  • Plaintiff was seeking to enforce its own rights under a separate, distinct contract that it had with Defendant, to wit, loss of interest on an overpayment as well as a reimbursement of medical expenses that its stop-loss insurer refused to pay.
  • None of Plaintiff’s claims were based on the ERISA – the Plaintiff’s complaint did not cite to ERISA, nor did the claims asserted justify a reasonable belief that the claims were preempted.
  • The complaint showed that the Plaintiff was neither a participant nor beneficiary under the ERISA plan, nor was it asserting its claims in its fiduciary capacity on behalf of beneficiaries or participants.
  • The Plaintiff is attempting to recover for an independent harm that it allegedly suffered arising out of a distinct, separate contract with Defendant.

Therefore, the court held that imposition of fees and costs was appropriate.

Note: This issue was reviewed previously in :: The Hazards Of Improper Removal of State Law Cases To Federal Court

See also – :: Challenge To Factual Basis Set Forth In Removal Notice Rejected; :: Provider Claims Against Aetna Remanded To State Court: A Suggested Checklist of Removal Factors

28 U.S.C. § 1447(c) – The statute provides that:

(c) A motion to remand the case on the basis of any defect other than lack of subject matter jurisdiction must be made within 30 days after the filing of the notice of removal under section 1446(a). If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded. An order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal. A certified copy of the order of remand shall be mailed by the clerk to the clerk of the State court. The State court may thereupon proceed with such case.

:: State Law Claims Against ERISA Fiduciary Escape ERISA Preemption

. . . Plaintiff alleges that the insurance investigators “attacked Mr. Barker’s credibility and suggested that he was lying about his illnesses” and asked “belittling questions” in an effort to “shame Mr. Barker into returning to work.”. . . Plaintiff alleges that Defendant directly harassed and shamed him about his disability in what Plaintiff describes as several humiliating phone calls. . . . To be sure, an insurer’s right to inquire about a customer’s entitlement to benefits does not extend to intentional and calculated humiliation and belittlement. See, Barker v. The Hartford Life and Acc. Ins. Co., Slip Copy, 2007 WL 2192298 (N.D.Tex.) (July 31, 2007)

With that prologue, the United States District Court in Barker v. The Hartford Life and Acc. Ins. Co. allowed a long term disability plan participant’s state law claims of intentional infliction of emotional distress to go forward against Hartford, the insurance carrier.

The case reveals a possible gap in ERISA preemption of state law claims which merits careful consideration by plan administrators and claimants alike. The case provides some useful authority on another important issue, that of when an ERISA claim accrues for purposes of the applicable statute of limitations. On this point, the court endorsed a recent Third Circuit view enforcing a conservative view on claims accrual.

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:: Retail Industry Leaders Association Takes Out Another “Pay Or Play” Mandate Through ERISA Preemption Challenge

The United States District Court for the Eastern District of New York handed down another victory for the Retail Industry Leaders Association. In this decision, filed July 14, 2007, the district court ruled that ERISA preempted the Suffolk County, New York Fair Share Act. The reasoning of the opinion essentially follows that in Retail Industry Leaders Association v. Fielder, — F.3d —-, 2007 WL 102157, C.A.4 (Md.) (January 17, 2007)

From the RILA press release:

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:: Failure To Follow Plan Procedures By Plan Participant Defeats Provider’s Reimbursement Rights

The Court is also cognizant of UMC’s concern that, by denying payment based on an enrollee’s failure to follow procedures under their health plan, the risk of non-payment will be transferred to the hospital. Yet this argument assumes that UMC will be left with no recourse. To the contrary, UMC can step into the shoes of the patient/enrollees and sue under an assignment of benefits. Such a suit would, without question, be preempted by ERISA, and for this reason, UMC argues that it would be an enormous business burden to require it to seek payment in this way. This Court, though, is bound by the laws enacted by Congress and while it can interpret these laws, it cannot displace them. Fresno Community Hosp. and Medical Center v. Souza, Slip Copy, 2007 WL 1994056 (E.D.Cal.) (Feb. 27, 2007)

This case stands for the proposition that health care providers have no recourse against ERISA health plans that deny coverage based upon a patient’s failure to follow procedures required under the plan. The provider’s only recourse is to pursue claims as an assignee and, as such, will be subject to the same requirements as the plan participant.

The Facts

In this case a hospital (“UMC”) entered into a contract with Blue Cross of California (the “Blue Cross Contract”) pursuant to which it agreed to provide services to participants in signatory health plans. Teamsters was a Payor signatory to the Blue Cross Contract.

Delta Health Systems was the third party administrator.

UMC was not paid for services rendered to two Teamsters plan participants and filed suit. UMC sued Teamsters alleging that it did not pay for services rendered. The complaint set forth causes of action for breach of contract, quantum meruit and negligent misrepresentation. Further, the complaint contained claims of intentional interference with contractual relations against Delta based on the allegation that Delta convinced Teamsters to withhold payment on the pretext that they could do so pending the completion and delivery of certain forms.

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:: MEWA Loses Preemption Case Against Texas Department of Insurance

This appeal requires us to interpret a particular provision of ERISA for the first time. In doing so, we focus on the statutory requirement that the instant employee welfare benefit plan must be “fully insured” in order for certain state regulation to be preempted by federal law. Custom Rail Employer Welfare Trust Fund v. Geeslin, — F.3d —-, 2007 WL 1830729 (C.A.5 (Tex.)) (June 27, 2007)

As noted in the MEWA series on this site, no multiple employer welfare arrangement (“MEWA”) is completely exempt from State regulation. In this case, the Fifth Circuit Court of Appeals addressed claims by a MEWA that its insurance arrangements made it a “fully insured” MEWA.

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:: Preparing A Case For Provider Reimbursement – A Due Diligence Checklist

The law governing health care provider reimbursements, assignments, and managed care agreements continues to present one of the most dynamic topics in the ERISA field. A number of the issues raised in recent controversies may be usefully summarized in a topical list.

The evaluation begins with the assumption that applicability of ERISA preemption doctrines (complete or conflict preemption) is the first and often decisive legal issue bearing on whether the provider will be successful or not.

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:: Hospital State Law Claims Against Aetna HMO & PPO Plans Remanded To State Court

Because of plaintiff’s managed care contracts with the defendants, plaintiff has the right to assert independent causes of action regardless of its status as an assignee. Put another way, the mere fact of an assignment does not result in complete preemption of the plaintiff’s claim if it asserts a cause of action outside its right to recover as an assignee. Memorial Hermann Hosp. System v. Aetna Health Inc, Slip Copy, 2007 WL 1701901 (S.D.Tex.) (June 11, 2007)

The recent case, Memorial Hermann Hosp. System v. Aetna Health Inc., represents an interesting trend in provider reimbursement cases against ERISA plans. That a provider takes an assignment of benefits as a routine business practice does not necessarily limit the provider’s remedies to those available under ERISA.

The case developed in this way:

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:: Employee Is “Participant” In ERISA Plan Even Though Never Enrolled

In her original complaint, Smith claimed that she was promised that, upon her employment, she would “immediately receive … individual medical insurance coverage … through a comprehensive group medical insurance and benefits policy provided by Blue Cross and Blue Shield.” Smith further alleged that she was not properly enrolled in the group health plan and, as a result, “suffered the lack of having the benefits of group medical insurance….” Based on these allegations, Smith claimed that Defendants were liable under two theories: (1) breach of a duty of good faith regarding “the group medical insurance coverage which was provided to [Defendants’] employees”; and (2) tortious interference with contractual rights by “improperly interfer[ing] with Smith’s rights regarding her group medical insurance benefits which she was promised but unable to be properly enrolled….” Smith v. Wynfield Dev. Co., Inc., Slip Copy, 2007 WL 1654149, C.A.11 (Ga.) (June 08, 2007) (unpublished)

This decision illustrates once again the importance of “participant” status when ERISA preemption defenses are at issue. The employee was never enrolled in her employer’s group health plan. In fact, that was the gravamen of her claim. Her claims were nonetheless sufficiently related to the plan that they were preempted by ERISA.

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:: Employer’s Suit Against Health Plan TPA Is Not Preempted By ERISA

The Sixth Circuit has concluded that an employer’s claims against a third party administrator and a stop-loss insurer for its employees’ benefit plan are not completely preempted. Michigan Affiliated Healthcare Sys v. CC Sys Corp. of Michigan, 139 F.3d 546, 550 (6th Cir.1998). In Michigan Affliated Healthcare Sys, the employer covered a participant’s procedure under their partially self-funded medical plan that exceeded the employer’s insurance coverage over the individual. Id. at 548. When the employer submitted the claim to its stop-loss insurance carrier, the stop-loss insurance carrier denied coverage for the excess amount based on the terms of their policy. Id. The employer then brought suit in state court against the claims administrator for the plan and the stop-loss insurance carrier to recover reimbursement of the medical expenses that the employer paid. Id. The Sixth Circuit held that the employer’s claims were not completely preempted because the employer was proceeding on a breach of contract action and not on behalf of a beneficiary. Id. at 550; see also Toumajian v. Frailey, 135 F.3d 648, 656 (9th Cir.1988) (concluding that employer was not seeking relief on behalf of ERISA plan when employer was attempting to recover for the harm that employer suffered from its accountant’s malfeasance). Taylor Chevrolet, Inc. v. Medical Mut. Services, LLC, Slip Copy, 2007 WL 1452618 (S.D.Ohio) (May 15, 2007) (citing Michigan Affiliated Healthcare Sys v. CC Sys Corp. of Michigan, 139 F.3d 546, 550 (6th Cir.1998))

Third party administrators often successfully turn to ERISA preemption as a defense when confronted by claims by plan participants. This defense works less effectively when the plaintiff is an employer-client. Taylor Chevrolet, Inc. v. Medical Mutual Services illustrates why.

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:: Fiduciaries’ Attorney Malpractice Claims Are Not Preempted By ERISA

Initially, although Defendants do not raise the issue, the malpractice cause of action is not preempted by ERISA ( see Gerosa v. Savasta & Co. Inc., 329 F3d 317, 323 [2nd Cir2003], cert. denied 540 U.S. 967, 1074 [2003]; Airparts Company, Inc. v. Custom Benefit Services of Austin, Inc., 28 F3d 1062, 1066-67 [10th Cir1994]; Painters of Phila. Dist. Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146, 1153 n. 7 [3rd Cir1989] ). HSBC Bank USA v. Bond, Schoeneck and King, PLLC, — N.Y.S.2d —-, 2007 WL 1585538 (N.Y.Sup.), 2007 N.Y. Slip Op. 27227 (June 4, 2007)

In this ESOP litigation, the plaintiffs, having settled fiduciary litigation with plan participants (see Beam v. HSBC Bank USA, 2003 WL 22087589 – hereinafter the “Beam litigation”), sued legal counsel involved in ESOP transactions on various theories. The case provides insight on viable theories of recovery as between fiduciaries and non-fiduciary services providers. Although a state court decision, the judge handles the ERISA issues as thoroughly and ably as any federal district court.

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:: State Health Care Reform Versus ERISA Preemption

Mr. Chairman, I understand that one of your specific aims in holding today’s hearing is to examine the Employee Retirement Income Security Act (ERISA), its potential impact on the ability of states to implement initiatives to expand health insurance coverage, and whether some form of ERISA waivers may be appropriate in this regard.

This is indeed a timely point of interest given the recent legal challenge to Maryland’s “Fair Share Health Care Fund Act” based on ERISA preemption and the growing momentum in many states to engage in similar efforts. In that vein, I want to note that our bill specifically allows for state plans approved by Congress under the Act to seek “exceptions to otherwise applicable federal statutes, regulations, and policies,” such as and including ERISA. Testimony of U.S. Rep. John F. Tierney (MA-06) before the House Education and Labor Committee, Subcommittee on Health, Employment, Labor, and Pensions May 22, 2007

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:: Employer Malpractice Claims Against Service Providers

Preemption under § 514(a) covers “any and all State laws” that “relate to” an ERISA plan. 29 U.S.C. § 1144(a). What is the implication of that provision for employers that assert state law claims, such as negligence or mispresentation, against service providers to their ERISA plans?

The recent case, Kollman v. Hewitt Associates, LLC, — F.3d —-, 2007 WL 1394503 (May 14, 2007), discussed on this site yesterday, included a holding that the plan participant’s state law malpractice claim against a service provider (actuarial consultants) was preempted by ERISA. While that outcome was predictable, it must be distinguished from a long line of cases holding that negligence claims by employers against non-fiduciary service providers are not preempted.

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:: Reluctant Massachusetts Tax Collector Has Good Reasons

Taxpayers are bearing a larger share of the cost of the expansion of healthcare coverage than expected because the state has not yet collected a penny from businesses that do not help insure their workers. Penalties on those businesses were expected to bring in $95 million this fiscal year and $76 million next year, according to the Legislature’s estimates when the bill was signed into law a year ago. “Mass. Has Yet to Collect Fees From Firms for Healthcare”, The Boston Globe (May 10, 2007)

The Massachusetts taxpayers bought into a much bigger financial obligation than they were told.

Here’s what the deal was supposed to be.

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:: Plaintiff’s Misrepresentation Claims Survive Preemption Challenge

. . . Pfizer’s alleged misrepresentations induced Thurman to accept employment and become a member of its pension plan. Just as in other cases, the crux of the matter is the nature of the remedies that Thurman requests. For this reason, to the extent that his claims are based on the expectation damages that Thurman requested in his complaint (i.e., the difference between the benefits promised and the benefits to which he was entitled), they are clearly preempted. However, Thurman’s state-law claims for other benefits lost in reliance on the alleged misrepresentation-for example, decreased wages, moving expenses, and forfeited stock options-have such a “ ‘tenuous, remote or peripheral’ effect on the plan” that they are not preempted. Thurman v. Pfizer, Inc., — F.3d —-, 2007 WL 1324889 C.A.6 (Mich.) (May 08, 2007)

In this case, an employee of Pfizer, Dr. Thurman, filed suit alleging that Pfizer misrepresented the monthly pension to which he would be entitled after five years of employment with the company.

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:: Maryland Bows To ERISA’s Preeminence

After very careful and thorough consideration, the Office of the Attorney General will not seek review before the Supreme Court on the Fair Share Health Care Act. Statement of Maryland Attorney General.

In a previous article on this site, the Fourth Circuit decision in Retail Industry Leaders Association v. Fielder has been reviewed. See, :: Retail Industry Leaders Association v. Fielder: Case of Preemption Over Federalism Now the Maryland Attorney General has thrown in the towel.

Good retrospective comment can be found on several sites. For example, The Jurist, Stephen Roseberg’s ERISA blog and Paul M. Secunda’s article on Workplace Prof Blog. The Maryland legislation was dead on arrival and, like several similar initiatives, evokes the obvious question – why? Not why were the proposals DOA – that should have been clear from a cursory review of the ERISA preemption precedent. Rather, why did the public officials not undertake more legal analysis before drafting the legislation? In any event, absent Congressional intervention, odds are in favor of several more preemption decisions within the next year involving health initiatives contrived with little regard to ERISA’s preemptive force. See, e.g., :: California’s Universal Health Coverage Proposal Unveiled; and Pennsylvania Business Journal article “Does the proposed 3% tax on employers violate ERISA?”