State Law Preemption

FMC Corporation v. Holliday, 498 U.S. 52 (1990).

The issue before the Court was whether a state law precluding subrogation (reimbursement) of health care benefits paid by health insurers of ERISA health benefit plans out of third party settlements applied to a self-insured plan.  The Court held that ERISA pre-empted the application of the state law as applied to the self insured plan.

The daughter of an employee who was the member of a health care plan provided and paid for by his employer (self-funded, not insured by an insurance company) and was injured in an auto accident.  The self funded plan paid health care benefits.  The employee settled an auto accident claim on behalf of his daughter.  While that suit was pending the self-funded plan sought declaratory judgment in federal court that it was entitled to reimbursement through its subrogation rights in the plan despite the state law outlawing such subrogation rights. 

To decide the issue, the Court had to interpret the pre-emption language of the ERISA statute.  The Court summarized that statute as follows:

"Except as provided in subsection (b) of this section [the saving clause], the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." § 514(a), as set forth in 29 U.S.C. § 1144(a) (preemption clause).

"Except as provided in subparagraph (B) [the deemer clause], nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities."§ 514(b)(2)(A), as set forth in 29 U.S.C. § 1144(b)(2)(A) (saving clause).

"Neither an employee benefit plan . . . nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies." § 514(b)(2)(B), as set forth in 29 U.S.C. § 1144(b)(2)(B) (deemer clause).

The Court found that the state anti-subrogation law ‘relates to’ an employee benefit plan within the meaning of the first (preemption) clause cited above.  So it would be pre-empted under that provision unless it is a law that regulates insurance, banking or securities within the meaning of the second (savings) clause cited above.  The Court found that the state anti-subrogation law does regulate insurance and is therefore saved from pre-emption under the savings clause.  But plans that are self-funded cannot be ‘deemed’ to be insurers, under the third (deemer clause) cited above, so self funded plans are not subject to insurance regulations saved under clause two.  This plan was self-funded.  The Court therefore held that it cannot be deemed to be an insurer and therefore the state anti-subrogation law, though saved from pre-emption under the second clause as applied to insurers of ERISA regulated, employer sponsored health plans.  “[T]he saving clause retains the independent effect of protecting state insurance regulation of insurance contracts purchased by employee benefit plans.” 

Here is the breakdown of how pre-emption operates in these scenarios:

“State laws that directly regulate insurance are "saved" but do not reach self-funded employee benefit plans because the plans may not be deemed to be insurance companies, other insurers, or engaged in the business of insurance for purposes of such state laws. On the other hand, employee benefit plans that are insured are subject to indirect state insurance regulation. An insurance company that insures a plan remains an insurer for purposes of state laws "purporting to regulate insurance" after application of the deemer clause. The insurance company is therefore not relieved from state insurance regulation. The ERISA plan is consequently bound by state insurance regulations insofar as they apply to the plan's insurer.”  (Id. at 61)

Lavery v. Restoration, 2018 WL 1524398 (D.Mass.)

Lavery v. Restoration, 2018 WL 1524398 (D.Mass.) plaintiff/employee sought damages from his defendant/employer which he alleged wrongly classified him as an independent contractor.  Among other damages he sought the value of benefits from an ERISA governed benefits plan due him had he been classified as an employee.  Defendant/employer moved to dismiss that count as preempted by ERISA.  ERISA preempts state laws that ‘relate to’ ERISA plans.  Under Supreme Court and 1st Circuit law, state laws relate to ERISA if (1) they mandate benefit structures, (2) bind an administrator to a particular choice or (3) provide an alternate enforcement mechanism.  This case concerned whether the Massachusetts independent contractor law and wage law provide an alternate enforcement mechanism in this instance.  The court analyzed the case as coming under the 1st circuit’s decision in Hampers, in which the court found that an employee’s claim that he should have been included in a benefit plan was preempted because it would have to evaluate or interpret the terms of the ERISA-governed plan.  Plaintiff here argued that his case was different because the wrongful act here was the decision to classify him as an independent contractor, not a decision not to enroll him in a benefits plan.  The Court found for defendant/employer, following dicta in Hampers that ERISA preempts state law causes of action for damages where the damages must be calculated using the terms of the ERISA plan.  The court stated it was bound by precedent without a particularly compelling reason not to follow it, and therefore rejected Plaintiff’s argument that that cannot be right because as other circuits have pointed out it would leave participants without a remedy.

Weddle v. LINA, 2018 WL 2376358.

Plaintiff whose benefits were terminated after insurer scheduled a number of IMEs when Plaintiff could not attend, including one when she was visiting her dying father, included a state law claim for intentional infliction of emotional distress along with her claim to reinstate ERISA benefits and for attorney’s fees.  ERISA supersedes, or ‘preempts,’ state law causes of action that ‘relate to’ an employee benefit plan.  To make this determination, courts evaluate whether a court must evaluate or interpret the terms of the ERISA-regulated plan in order to determine the outcome of the state law claim.  The court looked at two ways that the insurer’s actions could have inflicted emotional distress.  The first was that it terminated and refused to reinstate her benefits knowing it would cause her emotional distress.  To make this decision a court would have to evaluate whether the insurer had a legitimate basis for terminating benefits, which would require interpreting and applying the terms of the plan.  The court found this theory was preempted.  But the other way to view the claim was that the insurer inflicted emotional distress when it scheduled the IMEs at times it knew she could not attend, including at a time her father was dying.  To determine whether this action caused emotional distress would not require any interpretation of the ERISA benefit plan.  The court therefore found it was not preempted by ERISA.  But the court went on to decide that this behavior by the plan, even if true, would not rise to the level of ‘extreme and outrageous conduct’ that would be ‘utterly intolerable in a civilized society,’ which is what constitutes intentional infliction of emotional distress under state law.  The magistrate judge (magistrates sometimes write decision that are recommendations, which the judge must adopt or not) therefore recommended that the judge dismiss the state law claim for intentional infliction of emotional distress.