(In Employee Welfare Benefit Plan Cases)
By David G Wirtes, Jr and Stewart Springer
INTRODUCTION
In 1987, Delores Holmes was diagnosed with a life-threatening liver disorder which required a transplant to save her life. UCLA Medical Center telephoned Holme's insurer, Pacific Mutual Insurance Company, to confirm coverage for the operation. After Pacific Mutual confirmed coverage, a liver was located amd surgery was ordered. Before operatng, UCLA called once again to confirm coverage with Pacific Mutual. This time, Pacific Mutual denied coverage.
Without coverage, Ms. Holmes' liver operation was postponed and she died in the interim.
Unbelieveably, in a subsequent lawsuit against Pacific Mutual, Ms. Holmes' survivors were completely denied any remedy for fraud because such claims were deemed preempted by the Employer's Retirement Income Securtity Ace (ERISA) 29 U.S.C., Section 1001. et. seq.
Unfortunately, scenarios like this occur with alarming frequency all over the United States. ERISA wields a venerable death blow to traditional notions of justice and fair play in the context of group insurance claims. ERISA preemption totally strips a deserving plaintiff of all state law remedies, including the right to trial by jury. and literally discards the centuries of common law which define the rights and obligations of insureds and insurance companies. Until very recently, ERISA preemption meant that group insurers could deny claims with impunity without any threat of extracontractual and/or punitive damages. The sixteen-year path of appellate decisions construing ERISA's preemption clause is littered with torturous examples of wrongdoing deemed insulated by ERISA's cloak.
Fortunately, there are ways to avoid the devastating effects of ERISA preemption in certain cases. In fact. there is a surprisingly large group of cases - cases against group insurers and their agents - which were never intended to be subject to ERISA preemption. In order to avoid preemption, however. plaintiff's counsel must be aware of numerous statutory and regulatory exceptions to ERISA preemption as well as the additional exceptions found in the countless case decisions constming ERISAts preemption provisions.
This article attempts to indentify and articulate the statutory, administrative, and other exceptions to ERISA preemption. In addition, this article suggests ways of avoiding federal removal jurisdiction predicated on ERISA preemption by application of the well-pleaded complaint rule This article also discusses the emerging body of case law which recogonizes that extra-contractual and punitive damages may be recovered even if a case is preempted by ERISA. While attempt has been made to discuss each broad category of exceptions. the plethora of case decisions on each subjectmake it impossibie to include detailed discussion of every case.
For the reader's convenience. topics are discussed in the following order: (1) the types of group insurance plans subject to ERISA; (2) the important disffnction between employee 'benefits. and employee benefit "plans; (3) plans which are statutorily excepted from ERISA preemption: (4) plans which are excepted from ERISA preemption through regulations promulgated by the Department of Labor; (5) specific state law claims found to be outside ERISA's preemption clause (such as fraud in the inducement); (6) whether a claim is 'saved" from preemption; (7) recovering extra-contractual and punitive damages in those cases where preemption cannot be avoided; and. (8) avoiding federal removal jurisdiction through application of the well-pleaded complaint rule
ERISA'S PREEMPTION CIAUSE
ERISAs broad preemption provision reads:
"Except as provided in subsection (b) of this section, the provisions of this (title) shall supercede any and all state laws in so far as they may now or hereafter relate to any employee benefit plan described in Section 1003(b) of this title"
Although this provision has been interpreted very broadly, a "state law" must "relate to" an "employee benefit plan" before it will be preempted by ERISA. As will be demonstrated below, each term in ERISA's preemption clause may provide an avenue for avoiding preemption.
EMPLOYEE BENEFIT PLANS
Before ERISA preemption becomes an issue in a case, one must first establish that ERISA is somehow implicated in the case. If ERISA is not implicated, there is no need to worry about preemption.
The primary objective of ERISA was to create a uniform body of laws regulating employer-provided and employee-organization-provided "benefit plans." Although ERISA regulates more than just employer-provided group insurance plans, the following pages focus upon the question of when and under what circumstances ERISA preemption extends to group insurance plans. To deterrnine whether a given employee benefit plan is subject to ERISA, one must first look to the broad definition given by the statute. The statute provides:
"[A]ny plan, fund, or program...by...established or maintained by an employer or an employee organization, or by both, to the extent that such plan, fund or program was established or is maintained for the purpse of providing for its participants or their beneficiaries, though the poruchase of insurance or otherwise medical, surgical, hospital care or benefits, or beneifts in the event of sicness, accident, disability, death..."
In short. employee benefit plans (purchased or self-funded by employer and/or employee organizations} which provide employees with medical, surgical, hospital care or benefits, or benefits in the event of sickness, accident, disability, death are typically subject to ERISA. However, making the threshold determination of whether ERISA "plan" exists is not as clear cut as it might appear.
IS THERE A PLAN?
The Eveventh Circuit, like the others, has interpreted the term "plan, fund or program" very liberally. In Donovan v Dillingham, 688 F2d 1367 (11th Cir. 1982) the court held that an ERISA plan, fund, or program exists if:
"[F]rom the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing and procedures for receiving benefits."
Despite this broad language, the Eleventh Circuit has recognized that establishing a plan involves more than a simple decision by an employer lor employee organization) to extend benefits to employees." If the employer distributes pamphlets or papers (such as a summary of benefits) which state that a plan is an ERISA plan. This would constitute evidence that an ERISA plan exists. However, it is not necessary for an employer to comply with the requirements that a plan be in writing in order for ERISA to apply.
Ultimately, whether a plan exists is a question of fact, which depends upon: (1) whether certain Department of Labor regulatory criteria are met, (2) whether the parties intended to create or participate in a pian, (3) whether the facts presented by the case implicate the sorts of concems which Congress intended to regulate, like the presence of trust funds,''and (4) whether the employer actually participates in the administration of benefits.''These issues are discussed in more detail in other sections, infra.
A recent illustration of the plan. requirement is found in Sayble v. Blue Cross. 208 Cal. App. 3d 1991, 256 Cal. Rptr. 820 (Ct. App. 1989). In Sayble, a California appellate court held that whether an ERISA "plan". existed depends upon the extent to which an employer is involved in administration of the plan. Even though the employer paid insurance premiums over several years, absent administrative participation. the court concluded there was no plan and, accordingly, no ERISA preemption. Other courts have reached similar conclusions.
In short, if a "plan" does not exist. the statutes and regulations concerning ERISA do not apply, and the preemption clause never operates. In determining whether a "plan" exists, there are numerous statutory and regulatory provisions which must be consulted.
STATUTORY EXCEPTIONS
ERISA itself excludes no less than five different types of plans from its coverage One must turn to 29 U.S.C., § 1003 entitled "Coverage" to determine if any of the statutory exceptions are applicable. The statute provides: (b) The provisions of this title shall not apply to any employee benefit plan if -
(1) Such plan is a governmental plan (as defined in section 3(32) [29 U.S.C., § 1002(32)];
(2) Such plan is a church plan (as defined in section 3(33) [29 U.S.C., § 1002(33)] with respect to which no election has been made under section 410(d) of the Internal Revenue Code of 1986 [29 U.S.C., § 410(d)];
(3) Such plan is maintained solely for the purpose of complying with applicable workmen's compensation laws or unemployment compensation or disability insurance laws;
(4) Such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresidential aliens; or
(5) Such plan is an excess benefit plan (as defined in section 3(36) [29 U.S.C., § 1002(36)] and is unfunded.
The statutory exceptions are not self-explanatory. One must look to the definitions' section of the Act. For example. If one is dealing with a plan that appears to be either a 'church plan' or a 'government plan. he would need to consult the definition section. This will insure that the plan fits squarely within the statutory exception.
Very little case law exists interpreting the statutory exceptions. The Alabama Supreme Court addressed the "governmental plan" exception in the case of Harbor Ins. Co. v. Blackwelder. In that case, a self-funded insurance plan purchased by an association of colleges was held not to meet the "governmental plan" exception because it was not established by an agency or instumentatlity of the state. However, in Silvera v. Mutual Life Insurance Company, 884 F2d 452 (9th Cir. 1989), the court found a group health policy purchased by a city was a "governmental plan" and exempt from ERISA. Other plans meeting the "governmental plan" exception include plans established by a school district and a municipal transportation authority, as well as plans established pursuant to the Railroad Retirement Act and plans established pursuant to collective bargaining agreements between public employers and public employees.
With respect to plans maintained outside the U.S. for the benefit of nonresident aliens, one court has found that a plan controlled by a Canadian corporation was exempt from ERISA preemption since less than 30 of the 1,668 covered employees were U.S. Citizens.
As one can see. there has been very little case law concerning these statutory exceptions. Nonetheless, these exceptions provide complete avoidance of ERISAs preemptive effects. If these statutory exceptions are not available in a given case. the exceptions promulgated by the Department of Labor should be considered.
REGULATORY EXCEPTIONS
As mentioned, there are several exceptions to ERISA preemption which are practically unknown. These exceptions are borne out of regulations promulgated by the Department of Labor. These regulations exempt a long list of employment benefits from preemption. For instance, overtime pay." holiday premiums," temporary disability pay, vacation pay, active military duty pay and, pay during jury duty are excluded from the terms employee welfare benefit plan. and welfare plan. Similarly, maintenance by the employer of on-premises facilities for recreation, dining, and minor first aid are excluded. In addition, holiday gifts, employee discounts for articles sold by the employer, and maintenance of remembrance and strike funds are deemed not to be the type welfare benefits regulated by the Act.
Regulations with respect to employee pension benefit plans provide that certain severance pay plans, bonus programs and specified individual retirement accounts made available for employees (but not sponsored, administered nor contributed to by the employer) are not "plans" within the meaning of the Act.
The regulations also provide that no ERISA plan will be found when no employees are provided benefits So, theoretically, if only members of a partnership are Insured under an ERISA plan, their claims should fall outside the scope of preemption. This is especially the case if the partners are husband and wife. As one court has specifically recognized, "A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership."
Most important are the regulations which define when certain group and group-type insurance programs are deemed not to be "employee welfare benefit plans" or "welfare plans." 29 C.F.R., § 2510.3-1(j) provides:
Certain Group or group-type insurance programs. For purposes of title I of the Act and this chapter. the terms 'employee welfare benefit plan' and 'welfare plan' shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which:
"(1) No contributions are made by an employer or employee organization;
"(2) Participation (sic) the program is completely voluntary for employee or members;
"(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and,
"(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program. other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.
This regulation provides fertile ground for destroying the myth that ERISA is implicated in every employer-provided group health benefit case.
In Kidder v. H&B Marine, Inc. 932 F.2d 347 (5th Cir 1991), the court held that an employer's payment of group health policy premiums on behalf of employees was substantial evidence under ERISA that an "employee welfare benefit plan" existed even though payment of premiums alone was not sufficient to create such a plan. Notably, the court recognized that the presence of all four of the regulatory criteria would be sufficient to disqualify a plan from being considered an ERISA plan.
Similarly, the Fifth Circuit in Gahn v. Allstate Life Ins. Co. 926 F.2d 1449 (5th Cir. 1991) recognized that the regulations were a safe-harbor provision proscribed by the Secretary of Labor to determine whether an employer has "established or maintained" an employee benefit plan covered by ERISA. In the event each of the four regulatory criteria are not met, then the court must decide whether from the surrounding circumstances, a reasonable person [could] ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits. If so, the employer has established or maintained an employee welfare benefit plan that is covered by ERISA.
The First Circuit apparently takes a different approach. In Wickman v Northwestern National Ins. Co., 908 F.2d 1077 (1st Cir. 1990). the court interpreted Taggart as recognizing that ERISA is not intended to cover situations where the employer merely 'advertises' insurance, and then makes voluntary deductions from employees' paychecks. Likewise. the Seventh Circuit in Brundange-Peterson v CompCare Health Svs. Ins. Corp., 877 F.2d 509 (7th Cir 1989), noted that an employer may engage in "such steps as distributing advertising brochures from insurance providers, or answering questions of its employees concerning insurance, or even deducting the insurance premiums from its employees' paychecks and remitting them to the insurers," without creating an ERISA plan.
However, in Cote v. Dunham Life Ins. Co., 754 F.Supp 18 (D. Conn 1991), the court found that an employer's execution of a "participating employer's application," which required a certain percentage of employee participation and made the employer responsible for payroll deductions and remittances. made the employer more than a mere advertiser Hence, the court held the group insurance policy within the scope of ERISA coverage.
In Foxworth v. Dunham Life Ins. Co., 745 FSupp 1227 (S.D. Miss 1990), an employer was deemed to have created a qualified welfare plan simply because the employer had allowed the insurer to do more than just advertise The employer had actively sought out the program and chose the particular option to be offered to its employees By these actions, the employer was deemed to have endorsed the program.
In Terry v. Protective Life Ins. Co., 717 F.Supp 1203 (S.D. Miss 1989), the court, noting that the removing defendant bore the burden of proving that the employer's conduct fell outside the safe-harbor provisions, found that the defendant failed to prove that the plaintiff's employer had done anything more than purchased a group policy of insurance. Since the purchasing employer neither owned, controlled, administered, or assumed responsibility for the policy or its benefits, the case fell outside the ERISA.
In rejecting an insurer's motion for summary judgment on the issue of the existence of an ERISA plan, the court in Ellington v. Metropolitan Life Ins. Co., 969 FSupp. 1237 (S.D.lnd. 1988), again imposed the burden of proof on the insurer. In finding that questions of fact existed. the court observed that the employer had apparently done no more than act as an advertiser within the meaning of the regulations. This case is particularly important for its survey of other decisions which have analyzed the regulations.
In Baucom v. Pilot Life Ins. Co., 674 F.Supp 1175 (N.D.N.C. 1987), participants in a retirement plan established by an association of professional golfers were deemed not to be part of an ERISA plan since the various members of the association did not share a sufficient commonality of interests and the purported plan was not shown to have been established or maintained by the association. Importantly, the court noted that whether a group has 'established or maintained' a plan will generally be determined by the extent of involvement with plan administration. However, the court also recognized that pursuant to the regulations, mere endorsement' may be considered enough to 'establish an ERISA plan.'
In Hamberlin v. VIP Insurance Trust, 434 F.Supp 1196 (D. Ariz 1977), the employers had no voice in the management or operation of a multiple employer trust and they contributed no funds on behalf of the employees. The court further found that the so-called 'plan' was purely an entrepreneurial plan put together by defendants to protect business commissions. and was put together in an effort to escape direct supervision and auditing by the state insurance department. Ultimately, the court concluded that this arrangement was no more of an ERISA plan than any other insurance policy sold to employees. "
Finally, in Wayne Chemical Inc. v. Columbus Agency Serv. Corp., 426 F.Supp 316(N.D. Ind 1977), the court held that a plan fell outside of the safe-harbor provisions where the employer paid the premiums and made contributions on behalf of the employees. However, the court acknowledged that an employer must "intend" to 'establish or maintain a plan.' The court was particularly concerned with whether the employer ever knew the consequences of its involvement with the purported plan.
So, in addition to the statutory exceptions, attention must be paid to the regulations when deciding if an ERISA 'plan' is at issue in the client's case.' If these exceptions do not apply and a plan is clearly subject to ERISA, the next thing to consider is whether the specific claim made by the client is embraced by ERISA's preemption clause.
STATE LAW CLAIMS OUTSIDE ERISA
As noted above, unless a state law 'relates to' an employee welfare benefit plan, it is not embraced by ERISA's preemption clause. Therefore, one must determine whether a state law 'relates to' a plan.
The United States Supreme Court in Shaw v. Delta Airlines, Inc., 463 U.S. 85 (1987), held that a state law 'relates to' an employee benefit plan, 'in the normal sense of the phrase. if it has a connection with or reference to such a plan."' In Pilot Life Ins. Co. v. Dedeaux. 481 U.S. 41 (1987), claims for bad faith and fraud in the inducement under Mississippi law were found to 'relate to' an employee benefit plan. The Eleventh Circuit has reached the same conclusions with respect to Alabama's bad faith and fraud laws.
Although the "relates to" language has been given a broad interpretation, some laws affect employee benefit plans too tenuously to "relate to" an ERISA plan for purposes of preemption. In Howard v. Parisian. Inc.. 807 F.2d 1560 (11th Cir. 1987), the Eleventh Circuit noted "admittedly some state laws affect employee benefit plans too tenuously to be fairly characterized as relating to an employee benefit plan. This was the conclusion reached by the Alabama Supreme Court in HealthAmerica v Menton. 551 So 2d 235 (Ala 198) cert. denied, 110 S Ct. 1166 (1990); reh' g denied 110 S. Ct. 1840 (1990). In Menton. the Alabama Supreme Court held that a fraud in the inducement claim did not "relate to" the administration of benefits and was not preempted In so holding, the Alabama Supreme Court first distinguished the holding of the U S Supreme Court in Pilot Life v. Dedeaux, supra:
"Although the complaint in Pilot Life contained a count for 'fraud in the inducement,' the opinion makes it unmistakably clear that the only claims he pursued were claims seeking damages for improperly processing his claims for benefits under an ERISA-regulated plan."
The court then ruled:
"In this case, Menton does not claim improper processing of a claim. nor any benefits under the terms of the plan. To the contrary. he claims he was fraudulently induced to drop his existing coverage by misrepresentations made by the defendants to him prior to his becoming a member of the HealthAmerican Plan."
Hence, a claim for fraud in the inducement in Alabama will not be preempted by ERISA if one remains in state court. If a case is not timely removed from state court or is remanded, back from federal to state court in Alabama. the plaintiff's claim for 'fraud in the inducement' will definitely survive preemption.
Perhaps the most important recent decision from Alabama's courts in the a realm of ERISA preemption was rendered by Judge Butler in Martin v. Pate, 749 F.Supp 242 (S.D. Ala. 1990), affm'd (on other grounds), sub nom., 934 F.2d 1265 (11th Cir 1991). Martin post dates the Eleventh Circuit's "fraud in the inducement" decisions in Farlow and Mullenix (in which the Eleventh Circuit held that fraud in the inducement claims were preempted). In Martin, Judge Butler unequivocally concluded that a claim for fraud in the inducement to become an ERISA plan member is not preempted.
Judge Butler distinguished the Pilot Life decision concerning fraud in the inducement with surgical precision:
"This court does not view Martin's fraud claim as based on improper processing of his claim for benefits and thus Pilot Life is not controlling."
Judge Butler reasoned that Martin was not making a claim as a beneficiary under a plan. Rather, he found that Martin was claiming he was fraudulently induced to become a beneficiary under a plan. Judge Butler concluded that "the better reasoned and more persuasive" authorities hold that fraud in the inducement claims were not preempted.
Obviously. the affirmance of the Martin opinion represents a significant shift in the Eleventh Circuit's stance on preemption. Arguably, Pate changes the law of the Eleventh Circuit. At the very least, Martin provides plaintiffs with an argument that fraud in the inducement should survive preemption even in federal district court.
Other courts have grappled with the question of whether claims for fraud in the inducement should be preempted. For the plaintiff's attorneys in Alabama, this theory is now perhaps the safest means for avoiding preemption.
Another line of cases involving the "relate to" issue concerns claims growing out of wrongful discharge. In Howard v. Parisian. Inc., 807 F.2d 1560 (11th Cir. 1987), the plaintiff was terminated after he was involved in an automobile accident causing severe injuries. The plaintiff's insurance coverage ceased six months after termination. The plaintiff claimed bad faith, refusal to pay, outrageous conduct, and intentional infliction of emotional distress. The court held the plaintiff was seeking compensation for termination of health care benefits, and that his state law claims were preempted.
However, in Clark v. Clark and Coats, Inc., 865 F.2d 1237 (11th Cir. 1989), the plaintiff claimed he was terminated from his employment to prevent him from collecting certain pension benefits. The plaintiff also claimed his termination was carried out in a cruel and harsh manner intended to inflict severe emotional distress. The court held the plaintiff's law claim for emotional distress was not 'related to' an employee benefit plan and was therefore not preempted. The judges reasoned there was no nexus between the allegedly tortious conduct and an ERISA covered plan. Numerous other cases have been reported which address the "relate to" issue.
Lastly. it is critical that a claim "relate to" an ERISA plan, not just to ERISA benefits. In Fort Halifax Packing Co. v. Coyne, 482 U.S. 1(1987), the United States Supreme Court held that ERISA was intended to regulate employee benefit plans, not just employee benefits.
Congress intended preemption to afford employers the advantages of a uniform set of administrative procedures governed by a single set of regulations. This concern only arises. however, with respect to benefits whose provision by nature requires an ongoing administrative program to meet the employer's obligation. It is for this reason that Congress preempted state laws relating to plans rather than simply to benefits.
In short, ERISA does not preempt claims that simply "relate to" ERISA benefits, but claims that "relate to" an ERISA plan.
If, after a preliminary evaluation, the attorney is satisfied that the client's complaint concerns "benefits" which are part of a "plan" and that the state laws ordinarily available to seek recourse for the complaint are "related to" administration of such "benefit plan," the attorney might still avoid preemption by resort to the savings clause.
SAVINGS CLAUSE
"Still this statutory maze would not be complete without mentioning laws which are exempt from ERISA preemption.
ERISA's preemption clause expressly excludes certain state laws from preemption. The preemption clause begins: Except as provided in subsection (b) referenced to is 29 U.S.C. 1144(b)(2)(A) which is commonly known as the "savings" clause. Among the state laws "saved" from ERISA preemption are those state laws which "regulate insurance." The savings clause language provides:
"(b)(2)(A) Except as provided in subparagraph (B), nothing in this title shall be construed to exempt or relieve any person from any law of any state which regulates insurance, banking. or securities."
In Pilot Life v. Dedeaux, 481 U.S. 41, 48-49 (1987), the United States Supreme Court set out the test to determine if a law is saved from preemption as a law that regulates insurance.
"First, we took what guidance was available from a 'commonsense view' of the language of the saving clause itself [citations omitted]. Second, we made use of the case law interpreting the phrase 'business of insurance' under the McCarron-Ferguson Act.... in interpreting the saving clause. Three criteria have been used to determine whether a practice falls under the 'business of insurance for purposes of the McCarron-Ferguson Act:
"First, whether the practice has the effect of transforming or spreading a policyholder's risk, second, whether the practice is an integral part of the policy relationship between the insurer and the insured, and third, whether the practice is limited to entities within the insurance industry." [citations omitted]
Under this test. it is not always clear what laws "regulate insurance." In Dedeaux, supra for example. the Court refused to recognize Mississippi's law of bad faith as a law that "regulated insurance." Alabama's law of bad faith has likewise been held preempted and not saved.
Many courts across the country have grappled with the savings clause. Metropolitan Life Ins. Co. v. Massachusetts. 471 U.S. 724 (1985) was the first important case dealing with the savings clause. In Metropolitan Life. the Supreme Court held that a state law requiring that specific mental health benefits be extended to Massachusetts residents covered by general health insurance policies was saved from preemption.
However numerous state laws which would at first appear to regulate insurance have failed to survive analysis. For example. in Juckett v. Beechman Home Improvement Prod. Inc., 684 F.Supp. 448 (N.D. Tex. 1988) a Texas insurance statute which allowed a penalty and attorneys' fees for delayed payment of valid claims was held preempted. Likewise a Tennessee statute imposing additional liability for bad faith refusal to pay claims promptly was held not saved from preemption. Boudra v. Humana Health Ins. Co. of Florida, 730 F.Supp. 1432 (N.D. Tenn. 1990). A colorado statute imposing a duty of good faith and fair dealing and prohibiting delay or denial of payments without reasonable basis was held preempted in Denette v. Life of Indiana Ins. Co.. 693 F.Supp. 959 (D. Colo. 1988).
The Eleventh Circuit has made some pivotal decisions regarding the saving clause. For example. the court found a Florida statute allowing a civil action for wrongful death benefits was not saved in Anschultz v. Connecticut General Life Ins. Co.. 850 F2d 1467 (11th Cir. 1988). The court held the statute was not a law that "regulated insurance "
Alabama's "twisting" statute has been the focus of some debate under the savings clause analysis. The Alabama twisting statute states:
"No person shall make or issue or cause to be made or issued, any written or oral statement misrepresenting or making misleading incomplete comparisons as to the terms, conditions or benefits contained in any policy for the purpose of inducing or attempting to induce, the policyholder to lapse, forfeit, surrender, retain, exchange or convert any insurance policy.
In a footnote in Farlow v. Union Cent. Life Ins. Co. 874 F.2d 791 (11th Cir 1989), the Eleventh Circuit chose not to address whether Alabama's twisting statute was saved from preemption. The Farlows contended the twisting statute created a private cause of action. The court held no private cause of action existed under Alabama's twisting statute. Thus, the court never reached the savings clause issue. However. one should compare HealthAmerica v. Menton, supra, where the Alabama Supreme Court did conclude that Alabama's twisting statute would be saved. And, in Butler v. Fringe Benefits Plans, Inc., 701 F.Supp 807 (N.D. Ala. 1990) the court inicates the twisting statute is not "related to" a plan and would not be preempted. Further, the court seems to indicate the twisting statute would be saved.
EXTRA-CONTRACTUAL DAMAGES UNDER ERISA
If ERISA preemption cannot be avoided, a client might still be entitled to recover extra-contractual damages pursuant to the holdings of several recent decisions.
Prior to the United States Supreme Court's decision in IngersollRand v McLendon. 111 S.Ct. 478 (1990), ERISA had been interpreted as not allowing punitive or extra-contractual damages or a trial by jury. Hence, the ultimate weapons of enforcement were eliminated by judicial interpretation of the Act. Fortunately, new law is evolving.
The United States Supreme Court in Firestone Tire & Rubber Co. v. Bruch, 109 S.Ct. 948 (1989) and IngersollRand Co. v. McLendon, 111 S.Ct. 478 (1990), while again cryptically encoding its messages, seems to have finally come to recognize that ERISA was intended to protect employees rather than allow insurers to get away with punishing them. Firestone recognized that plan fiduciaries conduct should be evaluated under trust principles and that actions challenging the denial of benefits based upon plan interpretations would be reviewed under a de novo standard of review. Ingersoll-Rand apparently echoed the late Judge Robert Vance's view in Kane v. Aetna Life Ins. Co., 893 F.2d 1283 (11th Cir. 1990), cert. denied. Aetna Life Ins. Co. v. Kane, 111 S.Ct. 232 (1990), that the federal courts have the power to fashion remedies outside the narrow statutory limits of the Act. Specifically, Ingersoll-Rand for the first time recognized that extra-contractual and/or punitive damages could be awarded in an ERISA-based action in the appropriate circumstances.
The Alabama Supreme Court has confirmed that it will protect Alabamians in these situations. In Haywood v. Russell Corp.. No. 89- 1647 (AIa., May 24. 1991), the court found state court jurisdiction for an ERISA fraud claim and expressly sanctioned the award of extra-contractual and punitive damages commensurate with the degree of wrong.
Judge William Acker Jr. from the Northern District of Alabama and Judge Daniel H. Thomas from the Southern District of Alabama have championed the rights of the individual victims in several recent ERISA preemption decisions. Judge Acker has recognized a right to trial by jury in an ERISA subrogation case. Blue Cross & Blue Shield of Ala. v Lewis, 753 F.Supp 345(N.D. Ala. 1990). He also concluded that Powell v. Blue Cross & Blue Shield of Ala., [No.. 88-1342], (Ala., Dec 28, 1990) ("the full recovery rule") applies to an insured health care plan's subrogation claim under ERISA, Blue Cross & Blue Shield of Ala. v Lewis, 754 F.Supp 849 (N.D. Ala. 1991). Judge Thomas sanctioned the award of $50,000.00 in extra-contractual damages for emotional distress and humiliation caused by and administrator's arbitrary and capricious denial of a health benefits claim in McRae v. Seafarers' Welfare Plan, 726 F.Shupp. 817 (S.D. Ala. 1989).
The forgoing delineation of recent cases should not cause the plaintiff's attorney to celebrate, yet. Despite deliverance of the Ingersoll-Rand decision, the Eleventh Circuit Court of Appeals has again rejected the view that extra-contractual damages are available in the ERISA sphere with its decision reversing Judge Thomas' extra-contractual damages award. McRae v. Seafarers' Welfare Plan, 920 F.2d 819, 821, N 7 (11th Cir. 1991)
Since the law concerning the scope of available remedies in ERISA cases is currently so uncertain, plaintiff's attorneys must carefully explore all available means for avoiding implication of ERISA in the first instance. It must not be forgotten that ERISA preemption is an affirmative defense which must be pled and proven.
AVOIDING REMOVAL AND THE WELL-PLEADED COMPLAINT RULE
What can a plaintiff's attorney do when a defendant removes a case to federal court on the pretense that ERISA preemption creates federal removal jurisdiction? Does the fact that the case is subject to ERISA mean that federal courts automatically have removal jurisdiction? NO!
First of all. ERISA provides for concurrent state and federal court jurisdiction to hear certain claims. Hence, a determination that a controversy would properly be adjudicated under ERISA's remedial provisions does not necessarily mean that federal courts have exclusive jurisdiction to hear and decide the controversy. The distinction lies in the difference between federal preemption and federal jurisdiction.
In Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987), the Supreme Court held that defendants are permitted to remove state court complaints under ERISA only when two conditions are satisfied: (1) ERISA preempts the claim and (2) the plaintiff's state-law claim seeks relief within the scope of ERISA's civil enforcement provisions. In Taylor, the plaintiff brought an action in state court against a former employer and its insurance carrier. claiming he had been wrongfully denied disability benefits. The defendants removed the suit to federal court claiming that the plaintiff's claims were preempted by ERISA. In reversing the decision of the court of appeals, the Supreme Court found that Congress clearly intended ERISA to preempt the substance of plaintiff's claims and intended the federal courts to have exclusive jurisdiction over such claims. However, under Taylor, even a preempted claim should be remanded where the plaintiff's state-law claim does not, on its face, seek relief afforded by ERISA's statutory remedial scheme.'' Hence, the second tier of the Taylor test provides an avenue for avoiding removal. The method is the well-pleaded complaint rule. This method depends on the plaintiff's attorney's skill in drafting his original complaint for relief.
An example of recognition of the well-pleaded complaint rule used in concert with the mandate of Taylor is found in the decision of Allstate Ins. Co v 65 Security Plan, 879 F2d 90 (3d Cir 1989). In 65 Plan. the insured was covered by both an automobile insurance policy and an employer's benefits program. Thereafter. the insured was injured in an automobile accident and his automobile insurer brought an action seeking a declaration that it was not primarily liable for the insured's medical expenses. The automobile insurer also alleged that it was entitled to indemnification for payments it had made.
Defendants removed on the basis of ERISA preemption. After summary judgment was granted, plaintiff appealed and the Third Circuit reversed holding that removal was improvident under 28 U.S.C. 1441. The court found that since the plaintiff had filed a well pleaded complaint which alleged a contract claim against the insured and which sought indemnification from the insured's other insurance carrier relying exclusively on state law in support of its claims. the action fell outside the scope of ERISA's civil enforcement provisions. Further the court found that since ERISA does not authorize suits brought by insurance carriers. it could not be concluded that ERISA necessarily preempted the entire claim.
In Belasco v. W.K.P. Wilson & Sons Inc., 833 F.2d 277 (11th Cir. 1987) the plaintiffs brought a state action against an insurer and others based upon claims for medical and surgical benefits. The insurer removed the case to federal court. The plaintiffs' motions to remand were denied as were the defendants' motions for summary judgment on the ground that ERISA preempted the plaintiffs' claims. The district court permitted an ,nterlocutory appeal of the grant of summary judgment The Eleventh Circuit held that the insurance policies at issue were an employee benefit plan within the meaning of ERISA and thus that plaintiff's state law claims were preempted. With respect to the removal issue, the Eleventh Circuit noted that removal is permitted if the plaintiffs' well-pleaded complaint raises federal issues. Therefore, following Taylor, the court found ERISA preemption of claims seeking benefits under an ERISA employee benefit plan.
In Brown v. Connecticut General Life Ins Co., 934 F.2d 1193 (11th Cir 1991), the court recognized for the first time the concept of "super preemption." The court declared that in the field of ERISA, where Congress has indicated an intent to completely preempt the entire field. any civil complaint raising this select group of claims is necessarily federal in character: 'The effect of this exception is to convert what would ordinarily be a state claim into a claim arising under the laws of the United States." The Eleventh Circuit named this pervasive preemptive consequence 'super preemption.' The court indicated that super preemption will occur:
"As . . . ERISA 'completely preempt[s]' the area of employment benefit plans and thus converts state law claims into federal claims when the state law claim is preempted by ERISA. and also falls within the scope of the civil enforcement section of ERISA."
Hence, since the plaintiff in Brown sought recovery as a potential beneficiary under a life insurance policy, the claim was deemed preempted by ERISA. Moreover. since the benefits she sought fell within the civil enforcement section of ERISA, the second requirement for 'super preemption' was also met. Accordingly, the claim was convened into a federal claim, properly removable under 28 U.S.C. § 1441(b).
The benefit of careful pleading under the well pleaded complaint doctrine is seen in two recent decisions for the United States District Court for the Northern District of Alabama. In Wright v Sterling Investors Life Ins. Co.. 747 FSupp. 653 (N.D. Ala. 1990), Judge Acker cited Allstate Ins. Co. v. The 65 Security Plan, 879 F.2d 90 (3rd Cir. 1989) with approval:
"The [plaintiff's] original state court complaint. copy of which was properly attached to the notice of removal. nowhere mentioned ERISA nor does it allege facts which, on their face. bring the controversy under ERISA. Where the state court complaint falls on its face to indicate the existence of a federal question. the mere conclusory allegation by the removing parties in their notice of removal that the complaint involves application of the Employee's Retirement Income Security Act of 1974 does not 'make it so'; does not create ERISA preemption; and does not create a federal question."
Judge Acker noted that it was incumbent on the removing party to cite to facts which demonstrate preemption, i.e., the actual existence of an ERISA-related claim. Absent allegations of fact, there will be no presumption that the court has original federal question jurisdiction under the Act. Hence. in Wright, the action was remanded to state court.
Similarly, in Bryant v. Blue Cross & Blue Shield of Ala., 751 F.Supp. 968 (N.D. 1990). Judge Acker remanded a case to state court where the original complaint alleged 'a garden variety Alabama fraud perpetrated by Blue Cross.' Judge Acker premised his decision on the well pleaded complaint rule and noted the following:
"[T]here are a number of unexplored factual matters which bear on whether ERISA actually applies to this controversy. A removal based on the existence of a federal question must allege all facts essential to the existence of that federal question. The existence of a federal question can not be left to mere speculation. [Citations Deleted]. In other words, even if Blue Cross' post-removal affidavit can be considered by the court, Blue Cross has not adequately demonstrated a factual basis for ERISA's application. It still leaves crucial 'i's' undotted and 't's' uncrossed."
Numerous other courts have enforced the well-pleaded complaint rule. In McDonough v. Blue Cross of Northeastern Pennsylvania, 131 F.R.D 467 (W.D. Pa. 1990), the district court recognized that the well-pleaded complaint rule remains in effect even when faced with an ERISA preemption defense: "[I]n other words, simply because a state law claim is subject to a preemption defense does not somehow convert the state law claim into a federal question within the meaning of 28 U.S.C. § 1331. In Whitman v. Raley's Inc, 886 F.2d 1177 (9th Cir 1989), the court noted the distinction between the "jurisdictional issue of whether 'complete preemption' exists" and the substantive inquiry of "whether a 'preemption defense' may be established."
The jurisdictional question concerning 'complete preemption' centers on whether it was the intent of Congress to make the cause of action a federal cause of action and removable despite the fact that the plaintiff's complaint identifies only state claims. The latter inquiry, concerning a 'preemption defense' is a substantive inquiry as to whether a legal defense exists. This would be a matter for trial by a court having jurisdiction. The possible existence of a 'preemption defense' does not justify removal.
Defendants will often times argue that their removal papers create the "federal question" justifying invocation of federal court jurisdiction. However, several cases denote that the district court should look no further than plaintiff's complaint in assessing preliminary matters such as jurisdiction.
It must always be remembered that ERISA preemption is only a defense to otherwise viable common law claims. Thus, removing defendants will bear the burden of proving the federal court properly has jurisdiction. If the attorney desires to pursue a state court action premised, for example, upon a fraud in the inducement theory, he should take care to avoid the use of any language in the complaint which could be determined to create federal question jurisdiction under the Act. Because of the well-pleaded complaint rule, a complaint which fails to establish federal question jurisdiction on its face will ordinarily justify the grant of a motion to remand to state court. Of course, an order of remand from federal court to state court is deemed interlocutory and therefore not reviewable.
Given the recent decisions from the United States Supreme Court the Eleventh Circuit Court of Appeals and from the Alabama Supreme Court in Haywood, supra, it is abundantly clear that our courts will regularly conclude that ERISA preempts controversies concerning welfare benefit plans. However. the well-pleaded complaint rule remains viable when the relief sought is outside that available under ERISA's remedial scheme And, at least in the case of fraud in the inducement claims, there is ample authority from this circuit and others to justify state court prosecution of such cases.
CONCLUSION
While Ingersoll-Rand and Haywood appear to have given plaintiffs some reason for optimism in the face of years of ERISA cloaked tyranny, avoiding ERISA preemption will remain a top priority for Alabama's plaintiff's attorneys - at least until the Eleventh Circuit Court of Appeals indicates a significant change in its views.
