remanding to district court "to determine the operation and effect of the amended statute" and to "determine whether the case is moot"
How later courts described this case
- remanding to district court "to determine the operation and effect of the amended statute" and to "determine whether the case is moot"
- writing that “if an individual claims federal law immunizes him from state regulation, the [federal] court may issue an injunction upon finding the state regulatory actions preempted.”
- instructing that federal courts have an independent obligation to ensure subject matter jurisdiction
- remanding for a mootness determination where “intervening amendments to [a state] statute [may have] render[ed] th[e] litigation moot”
Written by the judges who cited it.
The opinion
In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 17‐1016
RESTORATION RISK RETENTION GROUP,
INC.,
Plaintiff‐Appellant,
v.
LAURA GUTIERREZ, Secretary,
Wisconsin Department of Safety and
Professional Services, et al.,
Defendants‐Appellees.
____________________
Appeal from the United States District Court for the
Western District of Wisconsin.
No. 3:16‐cv‐00296‐jdp — James D. Peterson, Chief Judge.
____________________
ARGUED SEPTEMBER 14, 2017 — DECIDED JANUARY 12, 2018
____________________
Before WOOD, Chief Judge, and RIPPLE and HAMILTON,
Circuit Judges.
RIPPLE, Circuit Judge. Restoration Risk Retention Group,
Inc. (“Restoration Risk”) brought this action seeking
injunctive and declaratory relief against the Secretary of the
Wisconsin Department of Safety and Professional Services
2 No. 17‐1016
(“WDSPS”), and the Trades Credentialing Unit (“TCU”) of
the WDSPS. Restoration Risk claims that TCU’s new
interpretation of a Wisconsin statute is incorrect or, in the
alternative, that the Liability Risk Retention Act (“LRRA”), 15
U.S.C. §§ 3901–3906, preempts the statute as interpreted by
TCU.
The district court denied Restoration Risk’s motions for a
preliminary injunction and for partial summary judgment. It
granted the defendants’ motion for partial judgment on the
pleadings. In doing so, the district court agreed with TCU’s
new interpretation of the Wisconsin statute, which effectively
barred Restoration Risk from operating in Wisconsin. It also
concluded that TCU’s interpretation was not preempted by
the LRRA.
After the parties stipulated to a voluntary dismissal
without prejudice of all remaining claims, the district court
entered a final judgment in favor of the defendants.
Restoration Risk timely filed this appeal.
For the reasons set forth in this opinion, we vacate the
district court’s judgment and remand the case so that the
district court can determine whether intervening
amendments to the Wisconsin statute render this litigation
moot.
No. 17‐1016 3
I
BACKGROUND
A.
We begin our analysis with a description of risk retention
groups (“RRGs”) and of the federal statutory scheme at issue
in this case.
A risk retention group is a form of insurance company; the
hallmark of such an entity is that it insures only its owners,
sometimes referred to as shareholders or members. See All. of
Nonprofits for Ins., Risk Retention Grp. v. Kipper, 712 F.3d 1316,
1319 n.1 (9th Cir. 2013).1 Risk retention groups grew in
popularity because, with the increase in product liability
litigation, some manufacturers struggled to find affordable
product liability insurance. Ophthalmic Mut. Ins. Co. v. Musser,
143 F.3d 1062, 1064 (7th Cir. 1998). Indeed, some
manufacturers had to choose between “unpalatable”
1 Specifically, a risk retention group (“RRG”) “is a group of similar
businesses with similar risk exposures, such as educational institutions or
building contractors, which create their own insurance company to
self‐insure their risks on a group basis.” U.S. Gov’t Accountability Office,
GAO‐05‐536, Risk Retention Groups: Common Regulatory Standards and
Greater Member Protections Are Needed 1 (2005). A risk retention group
provides its shareholder‐insureds with commercial liability insurance, as
opposed to commercial property insurance. See id. at 8 n.8; see also 15
U.S.C. § 3901(a)(2) (defining “liability”). Risk retention groups can offer
liability insurance at reduced rates because their shareholder‐insureds
have the ability to set their own rates “more closely tied to their own
claims experience.” U.S. Gov’t Accountability Office, GAO‐05‐536, at 8.
Additionally, risk retention groups are thought to encourage
shareholder‐insureds to practice strong risk‐management policies,
because in the event that a risk retention group is unable to pay claims, its
shareholder‐insureds have their own business assets at stake. Id.
4 No. 17‐1016
insurance options (such as premiums that amounted to “as
much as six percent of gross sales” or rates that rose
“twenty‐five fold in a single year”) or shutting their doors.
Home Warranty Corp. v. Caldwell, 777 F.2d 1455, 1463 (11th Cir.
1985).
To address this situation, Congress enacted the Products
Liability Risk Retention Act (“PLRRA”) to encourage and
permit “manufacturers to pool their resources into risk
retention groups to provide those members of the group with
insurance coverage.” Musser, 143 F.3d at 1064. Because
insurance regulation traditionally is left to the states, the
PLRRA explicitly preempted state laws that inhibited the
formation of risk retention groups. Congress later expanded
the PLRRA by enacting the Liability Risk Retention Act
(“LRRA”).
Under this statutory scheme, Congress sought to protect
the establishment of risk retention groups, to subject them
primarily to the regulatory requirements of their state of
incorporation, and to limit the ability of other states to impose
other unnecessarily burdensome regulations upon them. See
generally Wadsworth v. Allied Prof’ls Ins. Co., 748 F.3d 100, 103
(2d Cir. 2014). Congress sought to achieve these goals by
taking the following steps.
First, the statute preempts “any State law, rule, regulation,
or order to the extent that such law, rule, regulation or order
would … make unlawful, or regulate, directly or indirectly,
the operation of a risk retention group.” 15 U.S.C. § 3902(a).
We refer to this clause as the “preemption clause.”
Second, having exempted, in a general way, risk retention
groups from state regulation, the statute then restores state
No. 17‐1016 5
regulation in a manner calibrated to ensure the effectiveness
of these groups. The statute provides that a risk retention
group’s domiciliary, or chartering, state is the only state
allowed to regulate its formation and operation. Musser, 143
F.3d at 1064. The risk retention group must be “subject to that
state’s insurance regulatory laws, including adequate rules
and regulations allowing for complete financial examination
of all books and records, including but not limited to proof of
solvency.” Id. At that point, the risk retention group may
operate in any state. Id.
Third, the statute recognized that other states had
important, but limited, interests in imposing some regulation
on risk retention groups operating within their borders. The
statute accomplishes this goal by reserving certain regulatory
powers for nonchartering states by “saving” them from the
general preemption clause and giving nonchartering states
concurrent authority with chartering states for certain areas
of regulation. See 15 U.S.C. § 3905. Relevant to Restoration
Risk’s claims, the LRRA saves from preemption
nonchartering state laws that require risk retention groups
“to … demonstrate[e] financial responsibility where the State
has required a demonstration of financial responsibility as a
condition for obtaining a license or permit to undertake
specified activities.” 15 U.S.C. § 3905(d). We refer to this as the
“financial responsibility savings clause.”
To complicate matters, however, the seemingly finely
tuned allocation of authority is subject to an
antidiscrimination clause that prohibits states from
“otherwise[] discriminat[ing] against a risk retention group or
any of its members,” but does not exempt risk retention
groups from any laws that are generally applicable to
6 No. 17‐1016
individuals or corporations. 15 U.S.C. § 3902(a)(4). We refer to
this as the “antidiscrimination clause.”
B.
Restoration Risk is a risk retention group chartered in
Vermont. Its shareholder‐insureds are businesses that clean
and restore buildings after disasters such as floods and fires.
In Wisconsin, these businesses are categorized and regulated
as “dwelling contractors.” At the time this suit was filed,
Wisconsin required dwelling contractors to obtain an annual
certificate of financial responsibility from TCU, a requirement
they can satisfy with proof of a “policy of general liability
insurance issued by an insurer authorized to do business in
[Wisconsin].” Wis. Stat. Ann. § 101.654(2)(a) (West 2010).2
Since 2006, dwelling contractors in Wisconsin could meet this
state requirement by securing general liability insurance from
Restoration Risk, which was registered with the Wisconsin
Office of the Commissioner of Insurance (“OCI”). This
arrangement worked because TCU interpreted “insurer
authorized to do business in [Wisconsin]” to include risk
retention groups that registered with OCI in Wisconsin and
that qualified for federal regulation under the LRRA.3
2 Wisconsin Statutes section 101.654 is titled “Contractor certification;
education” and is in a subchapter of the Wisconsin Code titled “Family
Dwelling Code.” It does not use or define the term “dwelling contractor,”
but the parties are in agreement that the term is commonly used to refer
to contractors certified under section 101.654. We have chosen to use the
term in this opinion in accordance with the parties’ practice.
3 Apparently, OCI employed this interpretation until at least May 20, 2015,
even though TCU already had notified Restoration Risk that it was not in
No. 17‐1016 7
On April 30, 2015, TCU notified one of Restoration Risk’s
shareholder‐insureds that its application for dwelling
contractor status had been denied because Restoration Risk
had “not been authorized to do business in Wisconsin by the
Office of Insurance Commissioner.”4 TCU had changed its
position and now maintained that an insurer is not
“authorized to do business in [Wisconsin]” under the
meaning of section 101.654(2)(a) unless it has a Certificate of
Authority from OCI.5 Consequently, none of Restoration
Risk’s Wisconsin shareholder‐insureds could rely on
Restoration Risk to satisfy the state liability insurance
requirements under section 101.654(2)(a). Restoration Risk
contends that requiring its shareholder‐insureds to obtain a
compliance with the statute. The record contains an email from Dan
Schroeder, a Financial Examiner from OCI, assuring Restoration Risk that
it was authorized to provide insurance in Wisconsin:
Restoration RRG is under jurisdiction of the federal
Liability Risk Retention Act of 1986 (LRRA), which means
that the state of Wisconsin does not have the authority to
regulate them. These companies operate under a different
set of standards than a typical Wisconsin‐licensed
insurer. However, the company did submit all required
materials to be acknowledged by our state and, under the
LRRA, this gives them authority to write business in
Wisconsin.
R.3‐3.
4 R.3‐2.
5 R.33 at 4. As the district court noted, the parties were not clear about
what it means to have a Certificate of Authority from OCI. The district
court inferred “that it would require an insurer to submit, at least in part,
to Wisconsin’s insurance regulations.” Id.
8 No. 17‐1016
Certificate of Authority is an impermissible and
discriminatory regulation that is preempted by the LRRA. See
15 U.S.C. § 3902(a)(1). In response, Wisconsin contends that
the Certificate of Authority requirement is a financial
responsibility requirement that comes within the LRRA’s
financial responsibility savings clause and therefore is not
preempted. See 15 U.S.C. § 3905(d).
C.
Restoration Risk brought this action on May 6, 2016, and
moved for a preliminary injunction.6 The defendants moved
for partial judgment on the pleadings, and Restoration Risk
then moved for partial summary judgment on August 12,
2016. The district court, in the order before us today, resolved
all three of the motions. The district court first held that TCU’s
new interpretation of section 101.654(2)(a) is correct and
requires dwelling contractors in Wisconsin to be insured by
an entity with a Certificate of Authority from OCI. Second,
the district court rejected Restoration Risk’s claim that the
6 Specifically, Restoration Risk brought claims for declaratory and
injunctive relief. It alleged that TCU’s interpretation of
section 101.654(2)(a) was preempted by the LRRA and violated
Restoration Risk’s Fourteenth Amendment equal protection, procedural
due process, and substantive due process rights. Its equal protection claim
was based on a claim that section 101.654 discriminates against
out‐of‐state risk retention groups as a class. Its procedural due process
claim was based on what Restoration Risk called “TCU’s arbitrary denial”
of the certification it needed to operate in Wisconsin. R.1 at 17, ¶ 67.
Finally, Restoration Risk claimed that section 101.654 violates a liberty
interest in providing insurance coverage without a “legitimate state
interest.” Id. ¶¶ 69, 71.
No. 17‐1016 9
LRRA preempted the state statute. Notably, the court’s order
did not dispose of any of Restoration Risk’s constitutional
claims. At the district court’s recommendation, the parties
stipulated to the dismissal of those claims without prejudice.7
After the district court decision, Wisconsin amended
section 101.654 to give dwelling contractors the option of
obtaining insurance either, as was required previously, from
an insurer authorized to do business in Wisconsin, or from an
“insurer that is eligible to provide insurance as a surplus lines
insurer in one or more states.” 2017 Wis. Act 16 §§ 1f, 1g. The
defendants invited our attention to this amendment through
a Rule 28(j) letter. They suggest that the amendment might
have mooted the issues in this appeal, but that TCU needs
more information from Restoration Risk in order to ascertain
whether Restoration Risk qualifies under the new language.8
Restoration Risk declined to provide the defendants with that
information; it disagrees that the amendment moots the
issues on appeal.9
7 In its order, the district court recommended only that “the parties …
stipulate to dismissal of the constitutional claims.” R.33 at 13. The parties’
stipulation was that the claims be dismissed without prejudice. R.34.
8 App. R.30 at 1–2.
9 App. R.31.
10 No. 17‐1016
II
DISCUSSION
A.
Before we turn to the specifics of this case, we must pause
to examine the subject matter jurisdiction of the district court
as well as our own jurisdiction. We review a district court’s
determination that it had subject matter jurisdiction de novo.
Yassan v. J.P. Morgan Chase & Co., 708 F.3d 963, 967 (7th Cir.
2013). We have an independent obligation to ensure that both
the district court and this court have subject matter
jurisdiction even when neither the parties nor the district
court raised the issue. Id. at 967–68.
1.
We turn first to the jurisdiction of the district court. The
district court correctly determined that it had subject matter
jurisdiction “because the case raises questions of federal
law.”10 The district court’s jurisdiction here can be premised
on the statute conferring basic federal question jurisdiction on
the district courts, 28 U.S.C. § 1331. Several avenues lead us to
this conclusion.
a.
First, Restoration Risk’s complaint seeks injunctive and
declaratory relief from having to comply with the insurance
regulations of Wisconsin on the ground that the federal
10 R.33 at 4.
No. 17‐1016 11
statutory scheme has preempted those regulations. It is
well‐established that a party cannot proceed on federal
question jurisdiction by simply anticipating an affirmative
defense of preemption. See Rice v. Panchal, 65 F.3d 637, 639 (7th
Cir. 1995). But it is clear that Restoration Risk is doing
something much different. Rather than attempting to assert a
federal preemption defense, it is simply asserting a federal
right to operate within Wisconsin free from the restrictions of
state regulation, a right that it asserts is grounded in federal
law. It seeks an order from the district court requiring state
officials to permit it to operate unimpeded from state
regulation specifically forbidden by the federal regulatory
scheme. Such a claim is premised on a federal right and is
fully cognizable in the district court. Shaw v. Delta Air Lines,
Inc., 463 U.S. 85, 96 n.14 (1983). “[A]s we have long
recognized, if an individual claims federal law immunizes
him from state regulation, the [federal] court may issue an
injunction upon finding the state regulatory actions
preempted.” Armstrong v. Exceptional Child Ctr., Inc., 135 S. Ct.
1378, 1384 (2015). The district court’s authority in this respect
is based not on some implied right of action read into the
Supremacy Clause, but on Restoration Risk’s “ability to sue to
enjoin unconstitutional actions by state and federal officers.”
Id. This authority “is the creation of courts of equity and
reflects a long history of judicial review of illegal executive
action, tracing back to England.” Id.
The authority of the federal courts to grant such relief, of
course, can be limited by Congress. Indeed, in Armstrong, the
Supreme Court confirmed the general power of a court of
equity to act in such circumstances and concluded that
equitable jurisdiction to entertain such an action is “subject to
express and implied statutory limitations.” Id. at 1385.
12 No. 17‐1016
Specifically, it determined that, in enacting the Medicaid
statute, Congress implicitly foreclosed a court’s use of its
equity powers to enforce a state’s compliance with Medicaid’s
requirements. Id.
Here, in contrast to the Medicaid statute, the federal
statutory scheme does not contain, expressly or implicitly,
any intent by Congress to limit the traditional equity powers
of the federal courts to enjoin state interference with the
operation of federal law. Therefore, the impediment that
caused the Court to find a lack of federal jurisdiction in
Armstrong is not present here. Rather, we simply have a
complaint asserting that the defendant state officials have
impeded the right of Restoration Risk to conduct its business
under the federal regulatory scheme, which substantially
limits state regulatory authority in all but the chartering state.
Restoration Risk seeks relief from this state impediment by
the issuance of an injunction. It is well‐established that the
district court had subject matter jurisdiction to issue such an
order if it determined that the substantive merits of the
dispute warranted such relief. See Shaw, 463 U.S. at 96 n.14.
b.
The federal question jurisdiction of the district court can
be premised as well on a wholly independent ground. In its
operative complaint, Restoration Risk also set forth under 42
U.S.C. § 1983 substantive and procedural due process claims
and an equal protection claim.11 The parties later stipulated to
the dismissal of these claims. Despite their later dismissal, the
11 R.1 at 15–18.
No. 17‐1016 13
constitutional claims can still be a premise for federal
question jurisdiction unless one of two circumstances is
present: the federal claims were frivolous at the time they
were filed and therefore did not engage the jurisdiction of the
district court, or the claims were “immaterial and made solely
for the purpose of obtaining jurisdiction.” Bell v. Hood, 327
U.S. 678, 682–83 (1946); see also Steel Co. v. Citizens for a Better
Env’t, 523 U.S. 83, 89 (1998).
The first of these circumstances is present only when the
federal claim is “‘wholly,’ ‘obviously,’ or ‘plainly’
insubstantial or frivolous … ‘absolutely devoid of merit’ or
‘no longer open to discussion.’” Ricketts v. Midwest Nat’l Bank,
874 F.2d 1177, 1182 (7th Cir. 1989) (quoting Hagans v. Lavine,
415 U.S. 528, 536–39 (1974)). The standard for dismissing a
claim under this “substantiality doctrine,” and thus finding
that it cannot serve as the basis of federal question
jurisdiction, is “a rigorous one.” Id. (citing 13B Charles Alan
Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice
& Procedure, Jurisdiction § 3564 (2d ed. 1984)). We are not
deprived of jurisdiction so long as “there is any foundation of
plausibility to the federal claim.” Id. (quoting Wright, Miller
& Cooper § 3564). “A claim is insubstantial only if ‘its
unsoundness so clearly results from the previous decisions of
this court as to foreclose the subject and leave no room for the
inference that the questions sought to be raised can be the
subject of controversy.’” Roppo v. Travelers Commercial Ins. Co.,
869 F.3d 568, 587 (7th Cir. 2017) (quoting Hagans, 415 U.S. at
538).
To determine whether Restoration Risk’s constitutional
claims fail the “substantiality” test, we must examine whether
the allegations in Restoration Risk’s complaint are completely
14 No. 17‐1016
foreclosed by precedent. See id. Restoration Risk has alleged
that TCU lacked a rational basis or legitimate state interest for
its “preferential treatment of traditional commercial insurers
who are otherwise licensed and have authority to do business
in Wisconsin.”12 As a commercial and economic regulation,
section 101.654 is subject to rational basis review. See Armour
v. City of Indianapolis, 566 U.S. 673, 681 (2012). There is at least
some room for debate about whether Wisconsin’s decision to
treat non‐Wisconsin‐licensed risk retention groups differently
from Wisconsin‐licensed risk retention groups is rationally
related to a legitimate state interest. See Metro. Life Ins. Co. v.
Ward, 470 U.S. 869, 882–83 (1985) (finding that tax preference
for domestic insurance companies violated Equal Protection
Clause). Our precedent has not “settl[ed] the matter one way
or the other,” Hagans, 415 U.S. at 539; thus, regardless of how
a federal court eventually would have resolved
Restoration Risk’s constitutional claims, they are not so
frivolous as to deprive us of subject matter jurisdiction over
them.
The second situation in which a federal claim will not
engage the federal question jurisdiction of the district court is
when the federal claim is immaterial and brought solely for
purposes of engaging the district court’s jurisdiction. As the
record comes to us from the district court, we cannot say that
such a motive was operative here.
In conclusion, the district court had subject matter
jurisdiction because Restoration Risk was suing to enjoin state
officials’ allegedly unconstitutional enforcement of state law
12 R.1 at 16, ¶ 63; see also id. at 17, ¶ 71.
No. 17‐1016 15
and because it raised nonfrivolous due process and equal
protection claims.
2.
Our appellate jurisdiction is more straightforward. The
district court adjudicated fully count one of the operative
complaint, determining that the defendant’s interpretation of
the statutory language was correct and that the statute, as
interpreted, was not preempted by the federal statutory
scheme. The court then certified, under Federal Rule of Civil
Procedure 54(b), that there was no reasonable cause for a
delay in the appeal of that decision. We therefore have
jurisdiction of this appeal under 28 U.S.C. § 1291.13
B.
The next question that we must confront is whether the
recent amendment to section 101.654(2)(a) requires that we
remand this matter to the district court for a determination as
to whether the enactment of this amendment renders this
litigation moot.
On August 7, 2017, the defendants filed a Rule 28(j) letter
inviting our attention to the recent amendment to
13 In reply to our pre‐argument jurisdiction order, the parties agreed that,
if necessary to secure our jurisdiction, they would stipulate to the
dismissal with prejudice of the constitutional claims brought on counts
two, three, and four of the complaint. Because the district court certified
its decision on count one in accordance with Rule 54(b) of the Federal
Rules of Civil Procedure, such a stipulation is unnecessary. Therefore,
these counts remain in the case.
16 No. 17‐1016
section 101.654. This amendment gives dwelling contractors
an additional option for obtaining the required insurance
coverage. A dwelling contractor now can obtain a certificate
of financial responsibility by submitting proof of a general
liability insurance policy issued by either an “insurer
authorized to do business in [Wisconsin]” or an “insurer that
is eligible to provide insurance as a surplus lines insurer in one or
more states.” Wis. Stat. Ann. § 101.654(2)(a) (West Supp. 2017)
(emphasis added). In the defendants’ view, this amendment
permits Restoration Risk to qualify to provide coverage to
dwelling contractors if it submits proof that it “(1) is
‘domiciled in a United States jurisdiction,’ (2) is ‘authorized
to write the type of insurance’ ‘[i]n its domiciliary
jurisdiction,’ (3) maintains certain ‘minimum capital and
surplus requirements,’ and (4) provides its annual financial
statement.”14 The defendants submit that if Restoration Risk
qualifies under the new statute, this appeal is moot, because
Restoration Risk’s shareholder‐insureds will be able to rely on
Restoration Risk for their required insurance coverage. The
defendants further note, however, that they lack sufficient
information to ascertain whether Restoration Risk qualifies
under the amended statute. According to the defendants’
Rule 28(j) letter, either Restoration Risk or its shareholders can
submit the needed information to TCU. Neither has done so.
The defendants apparently asked Restoration Risk to submit
the required information before the defendants submitted
their Rule 28(j) letter. Restoration Risk declined to provide the
14 App. R.30 at 1 (alteration in original) (citation omitted).
No. 17‐1016 17
information.15
Albeit laconically, Restoration Risk submits in its reply
Rule 28(j) letter that the statutory amendment does not moot
the dispute because the disputed language, “authorized to do
business in [Wisconsin],” still appears in the statute.16
According to Restoration Risk, under the federal statutory
scheme, it need not prove that it can operate in one or more
states as a surplus lines insurer in order to do business in
Wisconsin. Restoration Risk appears to be concerned that
even under the amended statute, TCU might still impose
requirements that are preempted by the LRRA.
The import of the statutory amendment to this litigation is
a matter that ought to be determined in the first instance by
the district court. We cannot know whether section 101.654 is
preempted by the LRRA without a full understanding of how
the amended statute affects Restoration Risk’s operations in
Wisconsin. We believe it would be salutary for the district
court to determine the operation and effect of the amended
statute and whether it can fairly be characterized as a
legitimate effort to require a showing of financial
responsibility under the financial responsibility savings
clause. It would also be appropriate for the district court to
assess more fully the comparative burden imposed on
Restoration Risk by the amended statute as compared to the
prior version, and to develop a more comprehensive
understanding of Wisconsin’s pre‐2015 interpretation of the
statute, which apparently was acceptable to Restoration Risk.
Finally, on the basis of that factual development, the district
15 Id. at 2.
16 App. R.31 at 1.
18 No. 17‐1016
court should determine whether the case is moot.
Conclusion
Accordingly, we vacate the district court’s judgment and
remand this matter to the district court for further
consideration. The parties will bear their own costs in this
court.
VACATED and REMANDED