By Mark Casciari and Kathleen Cahill Slaught

Seyfarth Synopsis:  A recent panel decision from the Ninth Circuit rejects an ERISA preemption argument that a Seattle ordinance regulating private sector health care should be nullified in order to safeguard the ERISA administrative scheme.

On March 17, 2021, a three judge panel of the Court of Appeals for the Ninth Circuit found that ERISA did not preempt a provision in the Seattle Municipal Code that mandates hotel employers and ancillary hotel businesses to provide money directly to designated employees, or to include those employees in the employer’s health benefits plan.  If the employer provides self-insured health benefits, that plan ordinarily would be protected from state laws intruding on its administration, under the broad ERISA preemption clause that nullifies state and local laws that “relate to” ERISA plans.

This case is captioned — The ERISA Industry Committee v. City of Seattle, No. 20-35472.

The three panel judges reasoned that the Seattle ordinance was not preempted by relying on the  Ninth Circuit decision in Golden Gate Rest. Ass’n v. City & Cnty. of San Francisco, 546 F.3d 639 (2008).  The panel said that the Seattle ordinance does not “relate to” any ERISA plan, in accord with Golden Gate, because the employer may fully discharge its expenditure obligations by making the required level of employee health care expenditures to a third party, here the employees directly.  The decision was unsigned (per curiam).

There are a number of interesting aspects to the Seattle decision.

First, the panel labeled the decision as an unpublished Memorandum.  Circuit Rule 36-3(a) states that unpublished Memoranda are not precedent.  The panel thus limited the impact of its decision, which is unfortunate given a conflict in the circuits (noted below).

Second, the Ninth Circuit panel made no mention of the conflict between Golden Gate and Retail Indus. v. Fielder, 475 F.3d 180 (4th Cir. 2007).  In Fielder, the Court of Appeals for the Fourth Circuit ruled that a Maryland law that required large employers to spend at least 8% of their total payrolls on employee health insurance costs or pay the shortfall to the state was preempted by ERISA.  The court reasoned that the Maryland law was preempted because it “effectively” required employers in Maryland to restructure their ERISA plans, and thus conflicted with ERISA’s goal of permitting uniform nationwide administration of those plans.

Third, the Ninth Circuit panel applied a presumption “against” ERISA preemption.  By contrast, a recent (unanimous) ERISA preemption decision of the Supreme Court, Rutledge v. Pharmaceutical Care Management Assn., discussed in a previous blog post, makes no reference to any such presumption.

Fourth, the Ninth Circuit panel seems to apply field preemption concepts set forth in Justice Thomas’s concurring opinion in Rutledge.  That test can be explained by asking whether a provision in ERISA governs the same matter as the state law, and thus could replace it.  ERISA, of course, does not regulate direct payments to employees. This construct of preemption appears to narrow the ERISA preemption standard now applied by a solid majority of the Supreme Court.

We live in an age of state experimentation with matters arguably regulated by ERISA.  Expect to see more such experimentation and more litigation to defend the federal scheme in ERISA.

By: Mark Casciari, Ben Conley, and Michael W. Stevens

Seyfarth Synopsis: The Supreme Court unanimously upheld Act 900, an Arkansas law regulating Pharmacy Benefit Managers (PBMs).  The opinion could be used as a framework for states to attempt to indirectly regulate ERISA plans via statutes or regulations that affect plan costs.

Background

We previously addressed the Supreme Court’s consideration of Rutledge v. PCMA, which featured a pharmaceutical industry group’s challenge to Arkansas Act 900.  The Act (a) regulated the price PBMs paid for certain prescription drugs, (b) created an appeal process whereby pharmacies could challenge a PBM’s rate of reimbursement, and (c) permitted pharmacies to decline to sell drugs at reimbursement rates below acquisition cost.  As noted in our prior posts, PCMA (as supported by many amicus briefs from ERISA groups) argued that the law “relate[s] to an employee benefit plan” and, insofar as it applies to self-funded ERISA plans is preempted and thus impermissible.  These ERISA groups argued that piecemeal state regulation undermines a central purpose of ERISA:  to create one national private sector benefit plan jurisprudence, resulting in administrative savings and ultimately more plan benefits.

Holding

In an 8-0 Opinion (Justice Amy Coney Barrett not participating), the Court unanimously ruled in favor of Arkansas.  The Court found that, while the Act can be said to be connected to increased plan costs and operational inefficiencies, “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”  The Court added:  “[C]ost uniformity was almost certainly not an object of pre-emption.”  Finally, the Court said that ERISA plans are not essential to the Act’s operation, meaning that it has no exclusive reference to ERISA plans.

Justice Thomas alone concurred in the Opinion.  He continued his disagreement with the Court’s ERISA preemption “connection with or reference to” standard.  He would replace that standard with one that addresses whether any ERISA provision governs the same matter as the state law, and has a “meaningful,” presumably direct, relationship to the plan in light of ERISA’s text.

Implications for ERISA Plan Sponsors

The Court’s Opinion could be problematic for ERISA plan sponsors, who typically prefer a uniform administrative scheme across state lines.  Many PBM agreements contain provisions permitting PBMs to charge additional fees or limit the scope of their services where states impose more restrictive regulations or guidelines.  The Opinion will embolden states and localities to be more aggressive in their regulation of pharmacy benefits.  We should expect these jurisdictions to argue that, after Rutledge, there is no preemption because they are simply regulating plan costs.

In any event, Rutledge leaves open the possibility that preemption will apply if the cost regulation is “so acute that it will effectively dictate plan choices.”  And, state law that provides a cause of action or additional state remedies for claims allowed by ERISA, or directly amends ERISA plan terms or the ERISA scheme that governs plan administration, remain preempted.

Stay tuned to this blog for further updates on this important issue of benefit plan administration.

 

By: Jules Levenson and Mark Casciari

Seyfarth Synopsis: As the Supreme Court prepares to hear oral arguments on a key case that could have major ramifications on the scope of ERISA preemption, two recent case developments show just how important the high court’s decision will be.

Regular blog readers are familiar with Rutledge v. Pharmaceutical Care Management Association, (No. 18-540), in which the Supreme Court has agreed to hear Arkansas’s challenge to a decision by the Court of Appeals for the Eighth Circuit holding that ERISA preempts an Arkansas law regulating prescription drug reimbursement. Merits briefing is now complete and oral argument is set for October 6, 2020. Our prior posts on Rutledge appear here and here.

The Supreme Court’s decision in Rutledge will have resounding implications on ERISA plans. fiduciaries and administrators. Not only are state laws regulating pharmaceutical benefits (the subject matter of Rutledge) widespread, states have also taken to regulating a host of other benefit matters, presenting high hurdles for multi-state employers, fiduciaries and administrators seeking to establish uniform nationwide procedures.

So the precise location of where the Supreme Court draws the line on preemption will likely cause ripple effects well beyond pharmaceutical benefits. And the Court’s line-drawing reasoning is important given that the statute preempts all state laws “relating” to employee benefit plans regulated by ERISA.

Two recent case developments underscore Rutledge’s importance, both in the pharmaceutical benefits realm and beyond.

First, this month, the Eighth Circuit held that a North Dakota law regulating pharmaceutical benefits is preempted by ERISA because the law’s “provisions apply to plans subject to ERISA regulation and therefore the law cannot function irrespective of any ERISA plan.” Pharm. Care Mgmt. Ass’n v. Tufte, No. 18-2926, 2020 WL 4554980, at *1 (8th Cir. Aug. 7, 2020) (internal quotation marks omitted). The Court relied on its prior decisions (including Rutledge) striking down similar laws.

Additionally, in another case (just filed this month in the U.S. District Court for the District of New Jersey), an employer trade association is alleging that New Jersey’s WARN Act expansion requiring mandatory severance payments for certain employees is preempted by ERISA. The ERISA Industry Comm. v. Angelo, No. 20-cv-10094 (D.N.J. Aug. 6, 2020). The plaintiff contends that the severance obligation requires the creation of a benefit plan that has ongoing administrative obligations and requires the use of discretion in determining benefit eligibility. The plaintiff alleges that this sort of plan would be governed by ERISA and therefore that the New Jersey law impermissibly “relates” to an ERISA plan. The plaintiff also alleges that the New Jersey law creates the sort of state-by-state regulatory patchwork that ERISA was designed to avoid.

Stay tuned to see how Rutledge is orally argued and decided.

Seyfarth synopsis: The Supreme Court has just granted certiorari in a case regarding the question of whether ERISA preempts state efforts to regulate Pharmacy Benefit Managers (PBMs). The decision will have important implications as the broad ERISA preemption doctrine will become further defined.

The Supreme Court just granted certiorari in Rutledge v. Pharmaceutical Care Management Association, No. 18-540. A full description of the case is available here, but in summary, Arkansas enacted a law purporting to regulate PBMs, governing the conduct of third party administrators and claims processors for both ERISA and non-ERISA pharmaceutical plans. The law created an appeals process by which pharmacies could challenge reimbursement rates offered by PBMs, with the stated goal of protecting pharmacies against below-cost reimbursement.

The Court of Appeals for the Eighth Circuit found that ERISA preempts the law. Arkansas had tried to argue that merely because ERISA-governed plans are included, preemption should not be automatic, as the law targets third party administrators. The Eighth Circuit rejected this contention, finding that the law “relate[d] to and has a connection with employee benefit plans,” and was therefore preempted.`

In granting certiorari, the Supreme Court is poised to resolve a conflict over PBM regulation. The D.C. and Eighth Circuits hold that all PBM regulation is preempted, while the First Circuit holds that none is preempted.

Thus, the legality of PMB regulation by the states is likely to be resolved.

The decision in Rutledge also, hopefully, will clarify the scope of ERISA preemption by adding to over fifteen Supreme Court decisions on what it means for a state law to “relate to” an ERISA plan. The meaning of “relate to” is important because, in our era of political gridlock in Congress, some states would like to legislate expansively in the employee benefits space.

Seyfarth will pay close attention to the decision in Rutledge. Stay tuned.

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.