For the time being, trial lawyers are celebrating the recent 2nd Circuit decision in Wurtz v. Rawlings Co., LLC, 2014 WL 3746801 (2nd Cir. 2014), which on July 31st, held that a class action suit seeking to enjoin three defendants from seeking reimbursement of benefits paid under fully-insured health plans based on New York’s anti-subrogation law (§ 5-335) was not preempted by ERISA. The putative class action suit was brought in state court by participants in ERISA-governed fully-insured health plans against plan providers and subrogation vendors, seeking compensatory and punitive damages, restitution, attorney’s fees, and declaratory and injunctive relief in relation to the defendants’ allegedly improper enforcement of claims and liens for reimbursement. The defendants removed the case to federal court where the district court granted the defendants’ motion to dismiss under Rule 12(b)(6) for failure to state a claim based on ERISA preemption. The 2nd Circuit unanimously vacated the district court decision and remanded. It held that the plaintiffs’ claims did not satisfy the Davila test for being subject to complete ERISA preemption, which would have conferred federal subject-matter jurisdiction. Aetna Health Inc. v. Davila, 542 U.S. 200 (2004) (“Davila test”). They stated that federal jurisdiction existed under the Class Action Fairness Act (“CAFA”). 28 U.S.C. § 1332(d). The 2nd Circuit also held that § 5–335 – a New York anti-subrogation statute – is “saved” from conflict preemption under ERISA as a law that “regulates insurance.” As a result of this decision, the class action suit against the three companies pursuing subrogation on behalf of fully-insured plans will go forward. The final word on these issues, however, will likely rest with the U.S. Supreme Court.
In February 2012, Meghan Wurtz and a number of other plan beneficiaries filed a class action against several insurers and subrogation vendors alleging that the defendants had improperly enforced subrogation liens and reimbursement claims for benefits paid pursuant to various fully-insured ERISA plans. Namely, the plaintiffs argued that § 5-335 precluded the plans’ subrogation claims and that the statute was not preempted by ERISA because it is a state law that “regulates insurance” under ERISA’s savings clause. The district court disagreed, noting that § 5-335, as it existed at the time, was not specifically directed at entities engaged in insurance and explaining that the statute’s “restriction on an entity’s subrogation and reimbursement rights as to a beneficiary’s settlement with a third party will apply, regardless of whether the entity asserting such rights is an insurer, and regardless of whether the benefits at issue constitute insurance.” Wurtz v. Rawlings Co., LLC, 933 F.Supp.2d 480 (E.D.N.Y., March 28, 2013), vacated and remanded by Wurtz v. Rawlings Co., LLC, 2014 WL 3746801 (2nd Cir. 2014). Plaintiffs initially filed suit in state court seeking, among other things, to enjoin defendants from obtaining reimbursement of medical benefits from the plaintiffs’ tort settlements. Defendants removed this action to the Eastern District of New York where the district court granted defendants’ motion to dismiss under Rule 12(b)(6) for failure to state a claim on the basis that plaintiffs’ claims were subject to both “complete” and “express” preemption under ERISA. The defendants appealed to the 2nd Circuit Court of Appeals.
2nd Circuit Decision
The 2nd Circuit vacated the district court’s decision and remanded the case back to that court, but did not remand the case back to state court. It held that:
- The defendants established federal subject matter jurisdiction, not under ERISA, but under CAFA;
- Section 5-335 fell within ERISA’s savings clause and was not preempted; and
- There was no complete preemption under § 502(a) because the plaintiffs’ claims failed under the two-part Davila test for complete preemption under ERISA.
The 2nd Circuit’s holding that there was no complete preemption under § 502(a) largely parted ways with previous decisions in the 3rd, 4th, and 5th Circuits and sided with the 9th Circuit. See Arana v. Ochsner Health Plan, 338 F.3d 433, 438 (5th Cir. 2003)(en banc) (holding that a claim under a Louisiana anti-subrogation statute could be characterized as a claim under ERISA § 502(a)(1)(B) because the plaintiff’s “benefits are under something of a cloud, for [the insurer] is asserting a right to be reimbursed for the benefits it has paid to his account”); Singh v. Prudential Health Care Plan, Inc., 335 F.3d 278, 291–92 (4th Cir. 2003) (holding a claim under a Maryland anti-subrogation statute to be completely preempted); Levine v. United Healthcare Corp., 402 F.3d 156, 163 (3rd Cir. 2005) (following Arana and Singh). It recognized that its decision conflicts with these other circuits in cases involving similar anti-subrogation cases, albeit decided before the Davila decision. The 2nd Circuit defended its decision by stating that the logic of Arana, Singh, and Levine would expand complete preemption to encompass state laws that regulate insurance and that do not impermissibly expand the exclusive remedies provided by ERISA. Therefore, they were more persuaded by the reasoning of the 9th Circuit decision which was decided after Davila. In Marin General Hospital v. Modesto & Empire Traction Co., 581 F.3d 941 (9th Cir. 2009), a hospital sued an ERISA-plan administrator in state court based on breach of an oral contract to cover 90% of an ERISA-participant’s expenses, and the administrator removed to federal court, arguing that the claims were completely preempted. The 9th Circuit held that the claim failed the first part of the Davila test because the hospital did not contend that it is owed this additional amount because it is owed under the patient’s ERISA plan. Rather, it claimed this amount precisely because it was not owed under the patient’s ERISA plan. The claims also failed the second part of the Davila test in that they implicated the independent legal duty of state contract law.
The Wurtz decision has already led to confusion and disagreement with regard to its breadth and significance. Many trial lawyers, media, and consumer advocates are claiming that § 5-335 now bars subrogation and reimbursement of both fully-insured and self-funded ERISA plans in New York and that this decision will have far-reaching ramifications in cases elsewhere involving state anti-subrogation statutes. The truth, however, is that the holding will apply only to fully-insured plans which have always been susceptible to state anti-subrogation legislation. The confusion regarding this decision lies in the confusing role that preemption plays in the ERISA framework. A clear understanding of ERISA preemption helps us see the true import of the decision through all of the smoke.
In 1974, ERISA established national standards for the administration of private pension plans and employee welfare benefit plans. It preempts any state law related to “any employee benefit plan”, but it doesn’t preempt state laws that “regulate insurance.” Laws are considered to “regulate insurance” if they are “specifically directed” toward “entities engaged in insurance” and “substantially affect the risk pooling arrangement between the insurer and the insured.” It is important to know that there are two types of preemption under ERISA – complete preemption and conflict preemption. Much of the confusion about how ERISA preemption operates stems from a lack of understanding about the differences between “complete” preemption and “conflict” preemption (also known as “traditional” preemption). Both types of preemption can arise when ERISA claims are involved and both were involved in the Wurtz decision.
Complete Preemption Under ERISA § 502(a)
Complete preemption is a narrow doctrine limited to claims that seek “to recover benefits due a beneficiary under the terms of the plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B) (also known as a “§ 502(a) cause of action”); Warner v. Ford Motor Co., 46 F.3d 531, 534 (6th Cir. 1995). Preemption occurs where, as with ERISA, Congress’ intent in enacting a statutory scheme is to supplant state law completely and create federal jurisdiction under 28 U.S.C. § 1331. Such claims must be brought in federal court and can be removed from state court. In 1987, the U.S. Supreme Court looked to Congressional intent and found that the legislative history revealed Congress’ intent to displace state law actions falling within § 502(a)(1)(B). Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987). Later, the Supreme Court case of Aetna Health, Inc. v. Davila, established a two-part test to determine if a claim is completely preempted by ERISA:
Claims are completely preempted by ERISA if they are brought (i) by “an individual [who] at some point in time, could have brought his claim under ERISA § 502(a)(1)(B),” and (ii) under circumstances in which “there is no other independent legal duty that is implicated by a defendant’s actions.” Davila, supra.
State law claims are completely preempted only if both parts of this test are satisfied. The 2nd Circuit in Wurtz determined that the plaintiff’s claims under § 5-335 satisfied neither part of the Davila test. However, they found federal subject matter jurisdiction under the CAFA.
Conflict Preemption Under ERISA § 514
ERISA also expressly preempts any state law related to “any employee benefit plan.” It excludes from preemption those laws that “regulate insurance.” Laws “regulate insurance” under the clause if they are “specifically directed” toward “entities engaged in insurance” and “substantially affect the risk pooling arrangement between the insurer and the insured.” Conflict preemption is broader than complete preemption, arises out of § 514(b) (29. U.S.C. § 1144(b)) of ERISA, and applies when a state anti-subrogation statute conflicts directly with the terms of a plan. It operates as a defense to state claims that “relate to any employee benefit plan” under 29 U.S.C. § 1144, but is not grounds for removal. Sonoco Products Co. v. Physicians Health Plan, Inc., 338 F.3d 366, 371 (4th Cir. 2003). Conflict preemption under § 1144 does not provide a basis for federal jurisdiction. Rather, it provides a defense to a state law claim that may be asserted in state court. Conflict preemption provides that state remedies or statutes which are not permitted by ERISA, exceed ERISA remedies, or conflict with ERISA-plan terms, are disallowed and “preempted.” Conflict preemption can be asserted as a defense seeking dismissal of a state court action. Darcangelo v. Verizon Communications, Inc., 292 F.3d 181 (4th Cir. 2002). Because conflict preemption is a defense to a state cause of action, it does not appear on the face of the plaintiff’s complaint and cannot provide a basis for removal to federal court.
The three clauses that constitute the mumbo-jumbo at the root of so much confusion with regard to ERISA conflict preemption are the following:
Preemption Clause – 29 U.S.C. § 1144(a) (1988). All state law is preempted insofar as it “relates” to employee benefit plans.
Saving Clause – 29 U.S.C. § 1144(b)(2)(A) (2000). “Saves” from preemption those state laws which regulate insurance.
Deemer Clause – 29 U.S.C. § 1144(b)(2)(B) (2000). Prevents states from “opting out” of federal preemption of employee benefit law by “deeming” plans to be the subject of the saving clause. States may not deem self-funded employee benefit plans to be insurance companies or engaged in business of insurance for purposes of direct state regulation.
The “Preemption Clause” establishes as an area of exclusive federal concern the subject of every state law that “relates to” a plan. The “Saving Clause” returns to the State the power to enforce state laws which “regulate insurance,” except as provided in the “Deemer Clause,” under which a plan may not be “deemed” an insurer for the purpose of state laws “purporting to regulate” insurance companies or contracts. The 2nd Circuit held that because § 5-335 is specifically directed toward insurers and substantially affected risk pooling between insurers and insureds, it was saved from preemption because it is a law that “regulates insurance.” It should be noted that § 5-335 was amended on November 13, 2013, after the cause of action in this case accrued. The amendment replaced references to “a benefit provider” with “an insurer,” and the amendment applied retroactively to claims brought on or after November 12, 2009. See 2013 N.Y. Sess. Laws Ch. 516 (codified at N.Y. Gen. Oblig. Law § 5–335). The 2nd Circuit stated that “the changes enacted by the New York legislature do not affect our analysis.”
New York’s Anti-Subrogation Statute – § 5-335
Section 5-335 is a New York state anti-subrogation statute which states that a personal injury settlement automatically excludes compensation for the cost of health care services or other losses that “are obligated to be paid or reimbursed” by a benefit provider. The statute also states that the benefit provider has no “right of subrogation or reimbursement against” the settling plaintiff. This statute conflicts with the terms of the fully-insured health plans involved in this case, which provide for subrogation and/or reimbursement.
The U.S. Supreme Court will likely grant certiorari in this matter because of the stark differences between the federal circuits. The notion that the new Wurtz decision extends conflict preemption of § 5-335 to both fully-insured and self-insured ERISA plans defies a clear reading of the decision and existing law. The ERISA plans made the basis of that decision were fully-insured plans. The court didn’t even discuss the application of ERISA’s Deemer Clause, which would prevent preemption of § 5-335 when a self-funded ERISA plan is involved. Not only was § 5-335 amended after the cause of action in this case accrued, the legislature seems to have made it clear that their amendment was designed to fit the statute within the Savings Clause, and the Assembly Bill amending the statute expressly mentions “insured employee benefit plan[s]” and states that “this law is specifically directed toward entities engaged in providing health insurance.” 2013 NY A.B. 7828 (NS). Terms like “health benefit plan” and “employee benefit plan” were replaced with “insurance company” in the new statute. So even to the extent that § 5-335 is “saved” from preemption, it’s extremely unlikely that it will apply to a fully self-insured ERISA plan.
New York remains an anti-subrogation state because the trial lawyers’ lobby is having its way with the legislature, which has bent over backwards every step of the way to destroy the important subrogation and reimbursement rights of health plans. The aggressive pursuit and protection of subrogation and reimbursement rights in that state is the only antidote. We remain hopeful that the U.S. Supreme Court will reverse the 2nd Circuit’s Wurtz decision if and when they grant certiorari in this case.
If you should have questions regarding this article or subrogation in general, please contact Gary Wickert at firstname.lastname@example.org.