By Mark Casciari and Ian Morrison

Synopsis: Two Courts of Appeal reach opposite results on ERISA preemption, thus continuing the judicial quest for a definitive meaning of ERISA preemption. Stay tuned for more such decisions, and yet more Supreme Court preemption decisions.

The federal Employee Retirement Income Security Act (ERISA) has been effective, as a general matter, since 1974. Its section 514 preempts state laws that “relate to” ERISA plans. The United States Supreme Court has wrestled, in 18 cases, with how to define, and thus limit, “relate to,” as everything can be said to be related to everything else. Compounding matters is that section 514 lists specific exceptions to “relate to” preemption. It is our expectation that the Supreme Court will agree to hear more ERISA preemption cases in the future. See generally — here.

In the meantime, the Courts of Appeal continue to rule on the limits to ERISA preemption, often with opposite results.

In Rudel v. Hawai’i Management Alliance Ass’n, 2019 U.S. App. LEXIS 27371 (9th Cir. Sept. 11, 2019), an ERISA plan participant received ERISA medical plan benefits after a motorcycle accident. Plan terms allowed it to seek reimbursement from a third party tortfeasor, to the extent the tortfeasor paid general damages, up to the amount of the plan payout. The participant sued to clarify the plan’s reimbursement right, or lack thereof to be more precise, relying on a Hawai’i statute that invalidated general damage insurance reimbursement rights. The Ninth Circuit said that the state law “related to” an ERISA plan, but found no preemption, relying on the statutory exemption to ERISA preemption in favor of state laws that regulate insurance.

The Ninth Circuit found that the Hawai’i statute regulated insurance because it was directed at insurance reimbursement rights. The Court added that the state statute affected the risk pooling arrangement between the insurer and the insured by impacting the terms by which insurance providers must pay plan members.

In Dialysis Newco, Inc. v. Cmty. Health Sys. Grp. Health Plan, 2019 U.S. App. LEXIS 27418 (5th Cir. Sept. 11, 2019), however, the Court of Appeals for the Fifth Circuit found ERISA preemption. The ERISA medical plan at issue contained a valid anti-claim assignment provision. A third party health care provider sued to recover on what it claimed was a valid assignment of plan benefits, by relying on a state statute requiring plan administrators to honor assignments made to healthcare providers.

The Fifth Circuit found that the state statute “related to” the ERISA plan because it impacted a “central matter of plan administration” and interfered with “nationally uniform plan administration.” The Court said, because states could—and seemingly already do—impose different requirements on when such assignments would be honored, permitting one state law to govern the plan would interfere with nationally uniform plan administration.

These two cases show how the courts continue to grapple with the nearly infinite nuances of ERISA’s remarkably broad preemption provision. Given the historic interest of the Supreme Court on ERISA preemption, it is likely only a matter of time until this or a related ERISA preemption question is again before that Court. ERISA preemption is bound to get more interesting before it gets boring.

By Michael W. Stevens and Mark Casciari

Seyfarth synopsis: Arkansas has sought certiorari on the question of the ability of states under the ERISA preemption clause to regulate the rates charged by PBMs, and the Supreme Court has asked for the input of the Solicitor General on whether it should decide the issue..

In Rutledge v. Pharmaceutical Care Management Association, No. 18-540, the Supreme Court has again been asked to define the scope of ERISA preemption. Thirty-six states have passed legislation regulating the rates charged by PBMs. The issue is whether such state laws are preempted by ERISA.

PBMs are entities that manage prescription drug benefits. They operate by billing health plans for participant prescriptions and then reimbursing pharmacies on behalf of the plans.

In 2013, Arkansas enacting a law purporting to regulate PBMs, and amended the law in 2015. The statute created an appeals process through which pharmacies could challenge the reimbursement rates offered by PBMs. The stated goal of the law was to protect pharmacies against below-cost reimbursement. The law applied to both ERISA and non-ERISA health plans.

An Arkansas district court found the law preempted by ERISA and Medicare Part D. The Court of Appeals for the Eighth Circuit affirmed as to ERISA preemption, but reversed on Medicare Part D preemption.

The Eighth Circuit held that the Arkansas law included PBMs that cover ERISA plans, so the law “relate[d] to and has a connection with employee benefit plans,” and was therefore preempted. In its petition for certiorari, Arkansas argued that merely because the law included ERISA governed plans, in addition to non-ERISA plans, there should be no preemption: “If a law regulates a class of third-party administrators or claims processors whose customers merely include ERISA plans, it logically follows that the law does not act immediately and exclusively upon ERISA plans, and that the existence of ERISA plans is not essential to the law’s operation.” Pet. at 18 (emphasis in original).

The Circuits are split on whether ERISA preempts all regulation of PBMs (the D.C. and Eighth Circuits), or whether ERISA preempts no regulations of PBMs (the First Circuit). After Arkansas submitted its petition for certiorari, the Supreme Court has requested that the Solicitor General provide the position of the United States. The Solicitor General has not yet submitted his brief.

Stay tuned to this blog for further updates. If the Supreme Court grants certiorari in this case, it will likely affect the operation of PBMs, and further define the scope of ERISA preemption.

 

By Ronald Kramer, S. Bradley Perkins, and Michael W. Stevens

Seyfarth Synopsis: A provider that is not seeking benefits based upon an assignment of a patient’s claims under ERISA but instead is pursuing state law claims based solely on agreements and representations made directly by the insurer to the provider may survive attempts to remove the case on grounds of ERISA complete preemption.

Can an out-of-network health care provider bring state law claims in state court against an ERISA plan insurer and avoid removal of those claims to federal court pursuant to ERISA’s complete preemption? This issue is often litigated, and sometimes, such as in California Spine and Neurosurgery Institute v. Boston Scientific Corp., Case No. 18-CV-07610 (N.D. Cal. May 3, 2019), the answer is yes.

In Boston Scientific, an out-of-network provider brought breach of oral contract and promissory estoppel claims in state court against the insurer of an ERISA plan after the insurer refused to pay the $77,000 the provider had billed for surgical services. The provider claimed it had phoned the insurer prior to the surgery, and the carrier had offered “promises and information” that the insurer would pay. The insurer promptly removed to federal court on the grounds that the provider’s state law claims were completely preempted by ERISA § 502(a). The provider moved to remand, claiming there could be no preemption given it had no standing to bring an ERISA claim.

The Court applied the two-prong test set forth in Aetna Health Inc. v. Davila, 542 U.S. 200, 210 (2004), wherein a state law cause of action is completed preempted if (1) the plaintiff at some point in time could have brought the claim under ERISA § 502(a)(1)(B), and (2) there is no other independent legal duty that is implicated by the defendant’s actions. While a claim for benefits under ERISA § 502(a)(1)(B) may only be brought “by a participant or beneficiary,” the Ninth Circuit permits assignees to bring ERISA claims.

The Court focused on the first prong of Davila. The provider argued that, since it was not a participant or beneficiary, it could not have brought a 502(a)(1)(B) claim. After examining whether there was an assignment-in-fact (which would permit the provider to bring an ERISA claim), and determining there was not, the Court agreed with the provider that it could not have brought an ERISA claim. Because Davila is a conjunctive test, the Court stated that it was declining to examine the second prong regarding an independent legal duty, and found complete preemption unavailable.

Notably, although the Court stated that it was not examining the second prong of Davila, it spent considerable time analyzing the provider’s allegations that it was “owed additional money based on an oral contract [which] is a different obligation than a payment to a medical provider required under a patient’s ERISA plan.” The Court relied on the Ninth Circuit’s decision in Marin Gen Hosp. v. Modesto & Empire Traction Co., 581 F.3d 941 (9th Cir. 2009), a similar case involving a phone conversation between a provider and payor, to find complete preemption inapplicable and allowing the state law causes of action to proceed.

Boston Scientific is an important lesson that, while claims brought by providers as assignees of a patient’s rights under an ERISA plan generally are preempted, providers that bring state law claims based solely on their direct dealing with an insurer often can defeat attempts at removal to federal court based on complete ERISA preemption, especially where the provider disclaims an assignment. ERISA plan administrators and insurers would be well-advised to take care that any statements made to providers redundantly clarify that any payments would be subject to plan terms. Moreover, this case did not address conflict preemption under ERISA § 514(a), which provides insurers and health care plans with another avenue to defeat out-of-network providers’ claims. Stay tuned to this blog as future case law addressing the intricacies of ERISA preemption unfolds.

 

 

Seyfarth Synopsis: In an unpublished yet fascinating decision, the California Court of Appeal held that ERISA § 514 preempts state law causes of action premised on wrongful disclosure of protected private health information. Although not-binding as precedent, the decision is noteworthy to Plan sponsors and administrators because it demonstrates the expansive preclusive effect of federal law over state privacy and consumer protection statutes that impact ERISA benefit claims.

By Jonathan A. Braunstein and Michael W. Stevens

In an unpublished decision, the Fifth District of the California Court of Appeal held that ERISA Section 514 preempts state law causes of action for invasion of privacy and violations of unfair competition law arising from an underlying claim for ERISA plan benefits. See Weaver v. Healthcomp, Inc., No F075072, 2019 WL 151564.

Ms. Rose was a former employee of Harris Ranch Beef Company (Harris Ranch), and a participant in the Harris Farms Inc. Employee Health Care Plan (the plan), a self-insured ERISA employee health benefits plan for employees of Harris Farms and its related companies, including Harris Ranch. Harris Farms was the plan administrator and sponsor. HealthComp, Inc., was the plan’s third-party administrator; its services included case management.

In December 2011, Ms. Rose was diagnosed with liver failure; she needed a liver transplant and was placed the waiting list. Healthcomp assigned Rose a nurse case manager. Rose alleged the nurse case manager had Rose sign a form authorizing release of medical records, and the nurse case manager passed along to Rose’s employer medical information she received using the signed authorization. In December 2012, Harris Ranch terminated Rose’s employment, which Rose alleged occurred shortly after Harris Ranch received a report from the nurse case manager about Rose’s increased need for a liver transplant. Rose alleged defendant closed the nurse case management file after Rose’s termination but reopened it at Harris Ranch’s request after Rose filed a wrongful termination action against Harris Ranch. Defendant allegedly resumed accessing Rose’s medical records via the release and supplying her medical information to Harris Ranch.

The complaint alleged two causes of action: (1) invasion of privacy in violation of California Constitution, article I, section 1, and Civil Code section 56.20; and (2) unfair business practices in violation of California unfair competition law (Bus. & Prof. Code, § 17200 et seq.). Both causes of action were premised on defendants’ alleged improper disclosure or use of plaintiff’s personal health information. Defendants moved for summary judgment, asserting plaintiff’s two state law causes of action were preempted by ERISA section 514, 29 United States Code section 1144(a). Plaintiff opposed the motion. The trial court granted defendants’ motion and entered judgment in defendants’ favor. Plaintiff appealed.

The Court of Appeal affirmed. After engaging in an extensive analysis of ERISA preemption law, including the recent US Supreme Court decision in Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct. 936 (2016), the Court of Appeal concluded that where “a plaintiff asserts state law claims based on alleged misconduct that was within the scope of the conduct regulated by ERISA, including the privacy protections required to be included in ERISA group health plans, invoking state law remedies for that alleged misconduct constitutes an impermissible attempt to enforce ERISA privacy rights by means of an alternative enforcement mechanism . . . the state law provisions have an impermissible connection with ERISA plans and are therefore preempted” (emphasis added).

The Court of Appeal found that regardless of“[w]hether the plan administrator is ‘managing’ the fiscal health of the plan or ‘administering’ claims, California privacy laws, if not preempted, would limit what private health information could be disseminated.” The Court concluded [Plaintiff’s] attempt to distinguish use of protected health information for administrative, as opposed to management, purposes does not change the analysis of the preemption issue.”

Though unpublished, Weaver is notable. Privacy issues and concerns are hot button topics. This case will certainly not be the last to present questions as to the scope of federal preemption of state privacy and consumer protection laws. Indeed, California just recently enacted its broad and comprehensive Consumer Privacy Act of 2018, which legislation will soon go into effect. It is only a matter of time before that new law confronts federal preemption head on. Stay tuned!

By Ronald Kramer and Michael W. Stevens

Seyfarth Synopsis: Claims for benefits at termination may proceed as a breach of contract claim in state court, and avoid ERISA preemption, where the calculations are individualized, straightforward and do not implicate an ongoing administrative scheme.

Under a recent decision from the Central District of California, employers may not be able to invoke ERISA preemption and remove cases to federal courts where the benefits claims at issue are not “complex” and do not implicate administrative discretion.

In Amlani v. Baker’s Burgers, Inc., No. 17-02278, 2018 WL 354617 (C.D. Cal.), Plaintiff brought a breach of contract claim after his employment agreement was terminated by the Defendant. Plaintiff had worked with Defendant for almost 29 years, the first 18 of which were covered by a “handshake” agreement based on a percentage of sales. Id. at *1. In 2006, the parties entered into a written Employee Benefits Agreement, which specified certain benefits to be paid to the Plaintiff. In 2008, they subsequently entered a new Employment Agreement, which in relevant part, allegedly entitled Plaintiff to a longevity payment of “1.68 times [his] base salary and fringe benefits” after the vesting period. Id. at 2.

Defendant terminated Plaintiff, and Plaintiff brought a breach of contract suit in state court claiming he was entitled to certain severance benefits, as well as the longevity payment. Id. Defendant removed to federal court, asserting that Plaintiff’s claims were preempted by ERISA § 502(a)(1)(B). Id.

The Court proceeded to examine whether Plaintiff’s claims fell within the preemption analysis established by Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), which permits preemption where a claim could have been brought under §  502(a)(1)(B), and implicates no other legal duty.

The Court focused on the first half the inquiry: whether Plaintiff’s claims could have been brought under ERISA. To do so, the Court examined whether the agreement constituted a benefit plan covered by ERISA: “does the benefit package implicate an ongoing administrative scheme?” Id. at *3 (citing Delaye v. Agripac, Inc., 39 F.3d 235, 237 (9th Cir. 1994)).

Here, like in Delaye, the Court found no ongoing administrative scheme. The benefits did not apply to a larger group of employees and were relatively straightforward. The longevity severance payment involved a “one-time, individualized calculation,” id., to wit: multiplying the value of Plaintiff’s salary and benefits by 1.68. Nor did the other severance benefits at issue, which required ongoing payments, rise to an ongoing administrative scheme, because there was no “issue of employer discretion, but rather one of contract interpretation.” Id. at *4. The Court thus found no preemption, and remanded to state court.

Amlani reminds employers that where benefits packages are highly individualized, and do not implicate administrative schemes or discretion, claims by employees for breach may remain in state court.

 

By: Sam Schwartz-Fenwick and Jules Levenson

Seyfarth Synopsis: In a decision with wide ranging implications, the Ninth Circuit has ruled that a discretionary clause in an employer drafted plan document is subject to, and invalidated by, California’s insurance regulation banning discretionary clauses in insured plans.

In recent years a number of states have passed insurance regulations barring discretionary clauses in disability insurance policies in order to make it easier for participants to prevail on ERISA claims. A question that has dogged these regulations is the extent to which they are preempted by ERISA.  One particularly strong argument raised by employers is that even if a state insurance regulation can control an insurer-drafted plan document, basic principles of ERISA preemption preclude state law from invalidating any provision in an employer plan document.

The Ninth Circuit has now weighed in on this issue and in a victory for plaintiff, the Court of Appeals held that a state discretionary ban is not preempted by ERISA and properly extends to employer-drafted plans as long as the plan provides for insured benefits. Orzechowski v. Boeing Co. Non-Union Long Term Disab. Plan, No. 14-55919, ‑‑ F.3d –, 2017 WL 1947883 (9th Cir. May 11, 2017).

Orzechowski involved a denial of disability benefits. Defendant argued that the claim was subject to the highly deferential abuse of discretion review, as the employer drafted plan conferred discretion on the insurer (claim administrator) to decide claim.  The district court agreed. The district court further found that because the plan was in effect prior to the enactment of California’s discretionary clause ban, it was not covered by the ban.

The Court of Appeals reversed. The Court found the plan subject to the ban, because although the plan was in effect prior to the ban’s enactment, Plaintiff claimed benefits under an insurance policy that renewed (as defined by the statute) after the statute’s effective date.  Examining whether the plan was preempted by ERISA, the Court found that even though Boeing is not an insurance company, the law was directed to the insurance industry and, because the benefit at issuewas an insured benefit, all plan documents covering this benefit were subject to California state insurance regulations (including the discretionary ban).  Accordingly, the Court found the law valid as a regulation of insurance.  It thus remanded the claim for consideration under the de novo standard.

This case will likely have significant repercussions for plans in the context of benefits decisions, both in California and nationally. Absent reversal by an en banc panel of the Supreme Court, Not only will a significant number of decisions now be subject to de novo review in states in the Ninth Circuit, states considering banning discretionary clauses may be emboldened or spurred to action by this decision.  With fewer decisions afforded deference, a concomitant rise in litigation challenging benefits decisions is likely to follow.  Only time will reveal the exact extent of the impact.  Stay tuned.

 

By: Jon Braunstein and Nabeel Ahmad

In a recent decision, the Ninth Circuit Court of Appeals rejected a Plan participant’s attempt to extend California insurance law’s notice-prejudice rule to self-insured ERISA plans. Zagon v. Am. Airlines, Inc., 2015 BL 160778, 9th Cir., No. 13-55866 (5/21/15) (unpublished).

The pertinent case facts are these: Zagon, a former American Airlines flight attendant, filed suit in U.S. District Court for the Central District of California asserting a claim for long-term disability benefits against American Airlines, Inc. Long Term Disability Plan (the “Plan”). The Plan documents explicitly warned beneficiaries that the Plan would not, without exception, consider a claim filed beyond a one-year submission window. Ms. Zagon filed her claim several months late. The Plan moved for summary judgment, citing the untimely claim submission. In opposing the motion, Ms. Zagon argued that her claim was timely under California’s notice-prejudice rule. Under this rule, an insurer may not deny a claim solely due to an insured’s delayed notice of the claim, unless the delay caused the insurer substantial prejudice. The district court granted the Plan’s motion for summary judgment.

The Court of Appeals affirmed. The Court of Appeals explained ERISA’s primary interests in protecting contractually defined benefits and enforcing ERISA plans as written. The Court of Appeals determined that the Plan’s one-year claim submission deadline was reasonable and did not conflict with ERISA. While recognizing a general federal judicial duty to formulate federal common law to supplement the provisions and purposes of ERISA, the Court of Appeals found that no such judicial legislation was required.

The Court of Appeals reasoned that applying California’s notice-prejudice rule to Zagon’s claim would undermine, rather than effect, the statutory pattern Congress enacted. ERISA preempts all state laws that would otherwise govern employee-benefit plans except for those laws that govern insurance-based plans. California’s notice-prejudice rule is exclusively a creature of state insurance law. The Court of Appeals concluded that extending an insurance-based rule to uninsured plans, such as the Plan at issue, would defeat the distinction Congress made between insured and uninsured plans.

This case serves as a reminder that Congress explicitly made a distinction between insured plans and self-funded ERISA plans. With respect to the latter, ERISA generally trumps state insurance laws and courts may find claims by participants against ERISA plans rooted in state insurance laws to be preempted. Healthcare benefit litigation is on the rise. We expect to see more creative claims and lawsuits in the near future.

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By: Mark Casciari and Joy Sellstrom

Synopsis: HIPAA provides no federal cause of action, but alleged HIPAA violations may be remedied in state court under state negligence law.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) is a federal statute providing for confidentiality of medical records under certain circumstances. It is administered by the federal Department of Health and Human Services (HHS), which can extract substantial fines for non-compliance. Although HIPAA does not provide a private right to sue for HIPAA violations, employers should be aware that remedies for non-compliance are not necessarily limited to federal agency fines.

A recent decision out of the Arizona Court of Appeals makes this point. In Shepherd v. Costco Wholesale Corp., 246 Ariz. 470 (2019), petition for review pending, the plaintiff alleged that, after he cancelled one of two prescriptions with the pharmacy, he requested that his wife (with whom he was reconciling) pick up the live prescription, and that the pharmacy mistakenly gave both to the wife. Plaintiff alleged as well that the cancelled prescription was embarrassing in nature, and that the pharmacist joked about it with the wife. The wife thereafter divorced the plaintiff, and the plaintiff sued the pharmacist to recover damages under a variety of state law tort theories, including negligence based on a state law duty of care informed by HIPAA.

The trial court granted a motion to dismiss, and the plaintiff appealed.

The state intermediate appellate court upheld the dismissal of all counts in the complaint, save the negligence count.

The appellate court stated that, although the negligence claim did not arise under HIPAA, the parties agreed that the pharmacy owed the plaintiff a duty of care to act as a reasonably prudent pharmacist would under the circumstances. The court then found that the allegations in the complaint for wrongful disclosure of protected information were sufficient to survive a motion to dismiss, and allowed the case to enter discovery and perhaps trial phases.

It is noteworthy that the pharmacy argued that HIPAA preempted state law. The court rejected the preemption argument, reasoning that allowing state law claims in this context does not interfere with government enforcement actions authorized by HIPAA. The court stated: “[A]dditional state law remedies encourage compliance with HIPAA by providing further means for patients to recover for harm suffered due to non-compliance.” The court concluded: “[W]e hold HIPAA’s requirements may inform the standard of care in state-law negligence actions just as common industry practice may establish an alleged tortfeasor’s duty of care.”

Lastly, the court, with one judge dissenting, kept alive the related punitive damages claim. Arizona law places no cap on punitive damages, although the United States Constitution forbids excessive punitive damages.

The take-away is — alleged HIPAA violations may be remedied by state lawsuits in addition to HHS fines. Also, stay tuned to state court developments. As noted, a petition for review of the Shepherd intermediate appellate court decision is pending in the Arizona Supreme Court.

By Jonathan A. Braunstein and Michael W. Stevens

Seyfarth Synopsis: The Ninth Circuit Court of Appeals recently confirmed that ERISA preempts state insurance law bans on discretionary clauses  for self-funded ERISA plans.

The Ninth Circuit has weighed into the national debate over discretionary clauses in ERISA plans, holding that ERISA preempts a state-law ban on discretionary clauses for self-funded disability plans, but not for fully-insured plans. Williby v. Aetna Life Ins. Co., No. 15-56394, Aug. 15, 2019 (9th Cir.).

In Williby, an employee of The Boeing Company sought disability benefits.  Boeing provided its employees with a self-funded short-term disability program, administered by Aetna.  The plan included a so-called discretionary clause, providing Aetna with “full discretionary authority to determine all questions that may arise,” including determination of benefits eligibility and scope.  Discretionary clauses effectively make an administrator’s determinations subject to a higher standard of review (abuse of discretion), rather than a de novo review.

The employee sought short-term disability benefits, which Aetna granted in part but denied in part. The employee then sued, accusing Aetna of wrongful denial.  The trial court reviewed Aetna’s determination de novo, finding in part that Cal. Ins. Code § 10110.6 — a ban on discretionary clauses in life or disability insurance — prohibited application of a more stringent standard of review. The trial court then held that plaintiff was entitled to more benefits than what Aetna had originally granted. Aetna appealed.

The Ninth Circuit reversed and remanded. The Court ruled that ERISA preempted § 10110.6, as applied to the self-funded plan at issue. The Ninth Circuit focused its analysis on the difference between a fully-insured and a self-funded benefit plan.  The Court held that there “is a simple, bright-line rule: if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it. . . . Thus, for a self-funded disability plan like Boeing’s, the saving clause does not apply, and state insurance regulations operating on such a self-funded plan are preempted.”

The Court then held that, because § 10110.6 was preempted, Aetna’s decisions were entitled to an abuse of discretion standard, and remanded for further proceedings.

Thus, while the national battle over the force of state discretionary clause bans continues to be fought, self-funded plans in the Ninth Circuit can point to Williby as setting a clear and bright line limit on the interplay of state insurance regulations and ERISA. In the coming years,   we expect to see many more cases presenting ERISA preemption issues in the near future, as it remains a very hot-button and heavily litigated issue.  Stay tuned to this blog for further updates.