:: 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.

The Hospital responded with a letter stating that “[p]er your contract this claim should be paid at 90% of total charges.” MBAMD denied that it had such a contract with the Hospital and refused to make additional payment.  When further payment was not forthcoming, the hospital sued in state court asserting various state law remedies.

Removal, Remand & Motion To Dismiss

The plan removed the suit to federal district court on the ground that ERISA completely preempted the Hospital’s claims.

The Hospital moved to remand to state court, arguing that it alleged only state-law claims in its complaint, and that these claims were not completely preempted under ERISA.

Defendants moved to dismiss, arguing that ERISA preempted the Hospital’s state-law claims and that the Hospital failed to allege any cognizable claims under ERISA.

District Court Rules For Plan

 The court denied the Hospital’s motion to remand and dismissed its complaint.   The court concluded that the Hospital’s only remedy was under § 502(a)(1)(B), and that the Hospital’s complaint failed to sufficiently allege a cause of action under that subsection.  The court granted the Hospital leave to amend.

The Hospital’s amended complaint, like its first complaint, alleged only state-law claims. The Hospital again moved for remand to state court, and defendants moved to dismiss. The court dismissed the complaint and entered judgment for the defendants.

Appeal To The Ninth Circuit

On appeal, the Ninth Circuit framed the issue this way:

        The question in this case is 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. Removal was proper only if the Hospital’s claims are completely pre-empted. The existence of subject matter jurisdiction is a question of law that we review de novo. Nike, Inc. v. Comercial Iberica de Exclusivas Deportivas, S.A., 20 F.3d 987, 990 (9th Cir. 1994). The burden of establishing federal subject matter jurisdiction falls on the party invoking removal. Toumajian v. Frailey, 135 F.3d 648, 652 (9th Cir. 1998).

The Two-Prong Davilia Test

The Court evaluated the issue through the lens of the Aetna Health Inc. v. Davila, 542 U.S. 200 (2004) two-prong test:

 In order to determine whether an asserted state-law cause of action comes within the scope of § 502(a)(1)(B), the Court formulated a two-prong test.

Under Davila, a state-law cause of action is completely preempted if (1) “an individual, at some point in time, could have brought [the] claim under ERISA § 502(a)(1)(B),” and (2) “where there is no other independent legal duty that is implicated by a defendant’s actions.” Id.

First Prong

The Court finds that the hospital’s claims are not preempted under the first prong using circular reasoning.   In effect, the Court says that, since the state law claim could not be brought under ERISA, the claims are not preempted by ERISA. 

The Hospital’s complaint relies on California state law to allege breach of an implied contract, breach of an oral contract, negligent misrepresentation, quantum meruit, and estoppel. All of these claims arise out of the telephone conversation in which MBAMD allegedly agreed to pay 90% of the patient’s hospital charges. MBAMD has already paid the Hospital part of the patient’s charges. That payment was made to the Hospital in its capacity as an assignee of the patient’s rights under his ERISA plan.

The Hospital is now seeking additional payment, in an amount necessary to bring the total payment up to 90% of its charges.  The Hospital does not contend that it is owed this additional amount because it is owed under the patient’s ERISA plan. Quite the opposite. The Hospital is claiming this amount precisely because it is not owed under the patient’s ERISA plan.

Second Prong

The Court’s continues along this line of reasoning in addressing the second prong of the Davilia test, stating:

The question under the second prong of Davila is whether “there is no other independent legal duty that is implicated by a defendant’s actions.” 542 U.S. at 210. If there is some other independent legal duty beyond that imposed by an ERISA plan, a claim based on that duty is not completely preempted under § 502(a)(1)(B).  . . .

In this suit now before us, the Hospital asserts state-law claims. These claims do not rely on, and are independent of, any duty under an ERISA plan.

Assignee Status Irrelevant

The Court did not view the assignee status of the hospital as bearing on the issue.   The Defendants asserted that the assignment placed the hospital in the same posture as a participant:

   [D]efendants argue that because the Hospital was assigned the patient’s rights to payment under his ERISA plan, it was prevented from seeking additional payment under state law. That is, they argue that because the Hospital could have brought a suit under § 502(a)(1)(B) for payments owed to the patient by virtue of the terms of the ERISA plan, this is the only suit the Hospital could bring.

The Court rejected an argument based on the assignment stating:

We conclude that the Hospital’s state-law claims based on its alleged oral contract with MBAMD were not brought, and could not have been brought, under § 502(a)(1)(B). Therefore, the Hospital’s state-law claims do not satisfy the first prong of Davila.

Note:  The Court found precedent for its decision in Cedars-Sinai Medical Center v. National League of Postmasters of the United States, 497 F.3d 972 (9th Cir. 2007). In that case, the Cedars-Sinai Medical Center (”Cedars-Sinai”) brought a state-law action against the administrator of a federal employees’ benefit plan alleging, inter alia, breach of contract and negligent misrepresentation in connection with partial reimbursement of claims for medical treatment.

 FEHBA and ERISA are different federal statutes, but their preemption provisions are analytically similar. . .Indeed, our opinion in Cedars-Sinai was based almost entirely on cases decided under ERISA.  We reversed the decision of the district court, holding that Cedars-Sinai’s state-law claims were not completely preempted.

As in Cedars-Sinai and in this case, the plaintiff brought suit in state court relying, inter alia, on state-law claims of breach of contract and negligent misrepresentation. Since those claims were pursued “not as an assignee of a purported ERISA beneficiary, but as an independent entity claiming damages,” Cedars-Sinai, 497 F.3d at 978 (quotations omitted), we held that they were not completely preempted.

Assignment Issue – Previous cases in this context have been reluctant to reject the significance of an assignment, so the Ninth Circuit opinion claims new ground for health care providers.  Compare, e.g., Cooper Hosp. University Medical Center v. Seafarers Health and Health and Benefits Plan, — F.Supp.2d —-, 2007 WL 2331928 (D.N.J.) (August 17, 2007) where the court expressly noted the absence of assignment in reaching its decision:

Because the record is completely devoid of any evidence of an assignment, the Court holds that Cooper Hospital lacks standing to sue under 29 U.S.C. § 1332(a); its claims are not completely preempted by ERISA; and this Court lacks subject matter jurisdiction. Accordingly, this case will be remanded to state court and the motions for summary judgment dismissed as moot.

Furthermore, the Third Circuit noted the absence of evidence of an assignment in the influential opinion in Pascack Valley Hosp., Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393, 396 (3d Cir.2004). (Thus, the Court stated that the significance of an assignment was an issue that the Court did not have to decide.)

Conflict v. Complete Preemption- This analysis is really the key to this line of provider cases with Davilia operating as the catalyst for a retrenchment of complete preemption.  The Ninth Circuit states:

A party seeking removal based on federal question jurisdiction must show either that the state-law causes of action are completely preempted by § 502(a) of ERISA, or that some other basis exists for federal question jurisdiction. If a complaint alleges only state-law claims, and if these claims are entirely encompassed by § 502(a), that complaint is converted from “an ordinary state common law complaint into one stating a federal claim for purposes of the well-pleaded complaint rule.” Metro. Life, 481 U.S. at 65 66.

But “if the doctrine of complete preemption does not apply, even if the defendant has a defense of `conflict preemption’ within the meaning of [§ 514(a)] because the plaintiff `s claims `relate to’ an ERISA plan, the district court [is] without subject matter jurisdiction[.]” Toumajian, 135 F.3d at 655.

A case cannot be removed based on conflict preemption.  So the question is: are the state law claims encompassed by ERISA as a disguished claim for benefits?  The Ninth Circuit says no:

The two-prong test of Davila is in the conjunctive. A state-law cause of action is preempted by § 502(a)(1)(B) only if both prongs of the test are satisfied. In the case before us, neither is satisfied. First, the Hospital could not have brought its state-law claim under § 502(a)(1)(B) of ERISA. Second, the Hospital seeks to remedy violations of legal duties that are independent of ERISA. The Hospital’s state court suit is therefore not completely preempted by § 502(a)(1)(B).

See also -  :: Hospital State Law Claims Against Aetna HMO & PPO Plans Remanded To State Court ; :: Third Circuit Remands Health Care Provider’s Reimbursement Litigation To State Court ; :: Participant Benefit Assignments Do Not Foreclose Hospital’s State Law Claims Against Health Plan ; :: Provider Claims Against Aetna Remanded To State Court: A Suggested Checklist of Removal Factors ; :: Beach Erosion On The ERISA Waterfront  and Lone Star OBGYN v. Aetna  (August 18, 2009) (permitting, inter alia, claims under state prompt pay statute).

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