"A state is a market participant if it is purchasing or selling a product or service; in such cases, it can choose its contracting partners as if it were a private party and can choose to deal preferentially with in-state entities.”
How later courts described this case
- "A state is a market participant if it is purchasing or selling a product or service; in such cases, it can choose its contracting partners as if it were a private party and can choose to deal preferentially with in-state entities.”
- referring to OGB as “an executive branch state agency”
Written by the judges who cited it.
The opinion
Case: 08-30001 Document: 00511067206 Page: 1 Date Filed: 03/31/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 31, 2010
No. 08-30001 Charles R. Fulbruge III
Clerk
UNITED HEALTHCARE INSURANCE CO
Plaintiff - Intervenor Defendant-Appellee-Cross-Appellant
v.
ANGELE DAVIS, Commissioner
Defendant - Appellant-Cross-Appellee
v.
VANTAGE HEALTH PLAN, INC; PRESTON TAYLOR; GLORIA TAYLOR;
LEON PRICE; SHERRA FERTITTA HICKS,
Intervenor Plaintiffs - Appellants-Cross-Appellees
v.
HUMANA INSURANCE COMPANY; HUMANA HEALTH BENEFIT PLAN
OF LOUISIANA, INC,
Intervenor Defendants - Appellees-Cross-Appellants
----------------------------------------------
HUMANA INSURANCE COMPANY; HUMANA HEALTH BENEFIT PLAN
OF LOUISIANA, INC
Plaintiffs - Appellees-Cross-Appellants
v.
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No. 08-30001
ANGELE DAVIS; TOMMY D TEAGUE
Defendants - Appellants-Cross-Appellees
Appeals from the United States District Court
for the Middle District of Louisiana
Before JOLLY and DENNIS, Circuit Judges, and JORDAN, District Judge.*
E. GRADY JOLLY, Circuit Judge:
This appeal presents questions relating to the dormant Commerce Clause
and the Contract Clause of the United States Constitution. The district court
granted a permanent injunction enjoining the implementation of La. R.S. §
42:802.1 (“Act 479" or “the Act”), on the basis that it violated the dormant
Commerce Clause, because it effectively favored Louisiana insurance companies
in bidding for health insurance coverage for state employees. However, the
district court held that the Act did not violate the Contract Clause by interfering
with the plaintiffs’ contracts with the State. Thus everybody now appeals
something. Defendants, Angele Davis and Tommy D. Teague (the “State”),1 and
Intervenors, Vantage Health Plan (“Vantage”) and the Covered persons, appeal
the permanent injunction and the ruling on the dormant Commerce Clause.
Plaintiffs, United Healthcare Insurance Company (“UHC”) and Humana
Insurance Company (“Humana”), cross-appeal the district court’s holding that
the Act did not violate the Contract or Due Process Clauses. We conclude that
the district court erred on both issues. Because the State, by choosing with
whom it did business, was acting as a participant in—and not a regulator
*
District Judge of the Southern District of Mississippi, sitting by designation.
1
Tommy Teague is the CEO of the Office of Governmental Benefits and Angele Davis
is the Commissioner of Administration; both were sued in their official capacities.
2
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of—the insurance market, the Act fell within the market participant exception,
and the dormant Commerce Clause was therefore not a bar to its actions.
However, the Act was invalid, as applied, because it interfered with the
plaintiffs’ current contracts in violation of the Contract Clause. Accordingly, we
reverse the district court’s judgment in favor of the plaintiffs declaring the Act
invalid under the Commerce Clause, vacate the district court’s permanent
injunction enjoining implementation of the Act, and remand for further
proceedings not inconsistent with this opinion.
I.
The State of Louisiana offers health care to its employees and retirees and
their dependents (“enrollees”). The Office of Governmental Benefits (OGB), an
executive branch state agency, arranges for the coverage of the State’s enrollees
by contracting with health insurance companies; it also contributes
approximately 75% of the premiums for its enrollees. In the past, the OGB has
offered both self-funded/self-insured plans (those for which the OGB pays
benefits itself and carries the risk of the claims) and fully-funded/fully-insured
plans (those for which the insurance company pays the benefits and carries the
risk of the claims). In 2006, the OGB undertook actuarial studies that indicated
that the State would save significant costs by offering only self-insured plans
(with the exception of a fully-insured Medicare plan for state retirees).
Accordingly, in August of 2006 the OGB issued a Notice of Intent to Contract
(NIC) to several health insurance firms seeking Administrative Services Only
(ASO) contracts for its Exclusive Provider Organization (EPO) and HMO plans,
and an NIC for a Medicare Advantage plan (MAPD). After the bidding process,
OGB awarded an ASO contract to Humana for a self-insured HMO plan, and one
to UHC for a self-insured EPO plan. It also awarded a separate contract to
Humana to administer the MAPD plan. The ASO contracts were for one year
(July 2007–July 2008) but included an option exercisable by OGB for two one-
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year renewals. The Humana MAPD agreement was for three years, to terminate
in July 2010.
Incorporated into each final agreement were the contract itself, the NIC,
and the proposal submitted by the insurance company in response to the NIC.
Under the contracts, the insurance companies were to provide services including
enrolling participants, preparing and distributing informational materials to
participants, issuing identification cards, determining claim eligibility and
paying eligible claims, reviewing appeals and grievances, and reporting to the
OGB. Among other administrative responsibilities, the insurance companies
agreed to follow certain procedures for an annual enrollment period, the time
during which employees could select their plans for the year, change their
coverage, or add eligible dependents. The cost for the enrollment drive was to
be paid by the insurance companies. Other than payment for services, OGB’s
responsibilities included determining the eligibility of employees and regularly
updating the insurance company with eligibility changes (which occurred due to
an employee beginning or ending employment or acquiring a new spouse or
dependent). The insurance companies were to be paid on a fee-per-covered-
employee-per-month basis.
Vantage is a Louisiana HMO that in previous years had contracted with
OGB to offer a fully funded HMO to state employees in one region of the state.
When OGB decided to switch to only self-insured plans, Vantage did not submit
a bid in response to the NIC because it could not offer self-insured ASO services.
It wrote a letter to OGB requesting an NIC for a fully insured plan, but OGB
declined to issue one.
Act 479 was signed into law in July, 2007. The Act mandates that the
OGB solicit proposals in each region of the state from “Louisiana HMOs” and
that the OGB must contract with any Louisiana HMO in each region (up to
three) that submitted a “competitive” bid for a fully funded HMO plan. The Act
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No. 08-30001
defines a “Louisiana HMO” as one that
(1) Offers fully insured commercial and/or Medicare Advantage
products; (2) Is domiciled, licensed, and operating within the state;
(3) Maintains its primary corporate office and at least seventy
percent of its employees in the state; and (4) Maintains within the
state its core business functions which include utilization review
services, claim payment processes, customer service call centers,
enrollment services, information technology services, and provider
relations.
La. R.S. § 42:802.1. It was enacted shortly after the beginning of the 2007–2008
fiscal year (which runs from July to July) but became effective for that fiscal
year, and required that OGB hold an extraordinary enrollment period for the
2007-2008 year (in addition to the annual enrollment period that had already
been held pursuant to its UHC and Humana contracts). The Act does not
require the OGB “to utilize any insurance product that increases costs to the
plan of benefits as determined by the independent actuarial process,” but
requires that “the comparison shall be based on at least twelve months
experience beginning no earlier than January 1, 2008.”
On August 1, 2007, as required by the Act, the OGB issued an NIC for a
fully funded plan. The NIC was limited to Louisiana HMOs, though the Act did
not require that it be so limited. Vantage submitted a bid in response to the
NIC, but the parties never entered a contract. UHC and Humana filed federal
suits seeking declaratory and injunctive relief, challenging the Act under the
Commerce Clause, Contract Clause, and Due Process Clause of the federal
Constitution; their suits were consolidated in the district court. Vantage then
intervened, as did four individuals (the “Covered Individuals”). The district
court issued a Temporary Restraining Order (TRO) enjoining implementation
of the Act, stating that it likely violated the Contract Clause. On October 31,
2007, after a hearing, the Court granted UHC’s and Humana’s motions for a
permanent injunction, concluding that the Act violated the dormant Commerce
5
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No. 08-30001
Clause, but not the Contract or Due Process Clauses. Vantage and the Covered
Persons (“Intervenors”) filed a Motion for New Trial or to Alter or Amend
Judgment, which UHC and Humana opposed. The district court denied the
Intervenors’ motions. The Intervenors and the State now appeal the district
court’s determination that the Act violated the Commerce Clause. Humana and
UHC cross-appeal the court’s determination that the Act did not violate the
Contract or Due Process Clauses.
II.
We review the district court’s conclusions of constitutional law de novo,
and any subsidiary factual findings for clear error. Allstate Ins. Co. v. Abbot, 495
F.3d 151, 160 (5th Cir. 2007).
A.
We first address the plaintiffs’ appeal of the district court’s dormant
Commerce Clause holding.2 The Commerce Clause, U.S. Const. art. I, § 8, cl. 3,
grants Congress the authority to regulate commerce among the states; the
dormant Commerce Clause, which the Supreme Court has inferred from the text
of the clause, prevents a state from enacting regulations that discriminate
against out-of-state entities or burden interstate commerce. Granholm v. Heald,
544 U.S. 460, 472 (2005). The Supreme Court has recognized an exception,
however, when the state is acting as a market participant instead of as a market
regulator. Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 810 (1976). Courts
treat the question of whether the state is acting as a market participant as a
threshold question for dormant Commerce Clause analysis. White v. Mass.
Council of Constr. Employers, Inc., 460 U.S. 204, 210 (1983) (“Impact on out-of-
2
Although, as discussed in Part II.B. below, we conclude that the Act violates the
Contract Clause of the Constitution, the Contract Clause conclusion is time-sensitive because
the relevant contracts will expire soon after this opinion issues. Therefore, we address the
plaintiffs’ Commerce Clause challenge as well.
6
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No. 08-30001
state residents figures in the equation only after it is decided that the city is
regulating the market rather than participating in it, for only in the former case
need it be determined whether any burden on interstate commerce is permitted
by the Commerce Clause.”).
A state is a market participant if it is purchasing or selling a product or
service; in such cases, it can choose its contracting partners as if it were a
private party and can choose to deal preferentially with in-state entities.
Hughes, 426 U.S. at 809-10. A state may be acting as a market participant even
when the effects of its actions extend beyond the privity of its own contracts (for
instance, if it imposes conditions on the parties with whom it contracts) if it is
expending its own funds to enter the contract and the conditions it imposes
“cover[] a discrete, identifiable class of economic activity in which the [state] is
a major participant.” White, 460 U.S. at 211 n.7. In White, the mayor of Boston
issued an executive order requiring that all construction projects funded by the
city be performed by at least half Boston residents. Although the order
effectively imposed conditions on contracts between contractors and their
employees, the Court noted that “[e]veryone affected by the order is, in a
substantial if informal sense, ‘working for the city.’” Id. The Court
acknowledged that there were “some limits on a state or local government’s
ability to impose restrictions that reach beyond the immediate parties with
which the government transacts business,” but did not define those limits. Id.
Later cases have further defined the limits of the market participant
exception. The exception does not automatically apply simply because a state
participates in some way in the market it is otherwise regulating. For instance,
in Wyoming v. Oklahoma, 502 U.S. 437, 456 (1992), the Supreme Court
invalidated an Oklahoma statute that required that all Oklahoma electricity
plants use at least 10% Oklahoma coal; the Court acknowledged that the state
was a market participant in the coal market in that it purchased coal for its own
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No. 08-30001
plant, but held the statute was invalid because it also regulated private plants’
purchases. See also SSC Corp. v. Smithtown, 66 F.3d 502, 512 (2d Cir. 1995) (“A
state’s actions constitute ‘market participation’ only if a private party could have
engaged in the same actions.”). Thus, a state cannot regulate others in the
market in which it participates; the doctrine only protects the state’s
participation itself.
Further, a state does not act within the market participant exception when
its actions significantly affect markets other than the market in which it is a
participant by imposing conditions on parties with whom it contracts. That is,
the market participant exception does not allow a state to “impose conditions,
whether by statute, regulation, or contract, that have a substantial regulatory
effect outside of [the] particular market” in which it is a participant. South-
Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 97 (1984). In South-Central
Timber, Alaska attempted to sell timber subject to a requirement that the buyer
agree to process the timber in Alaska. The Court held that although Alaska was
acting as a seller in the timber market, its actions violated the dormant
Commerce Clause because it was not a participant in the “downstream” market
of timber processing. Id. at 95. The Court noted that Alaska’s processing
requirement went beyond normal commercial behavior, in that “the seller
usually has no say over, and no interest in, how the product is to be used after
the sale.” Id. at 96. See also Nat’l Foreign Trade Council v. Natsios, 181 F.3d
38, 64 (1st Cir. 1999) (“Under South-Central Timber, states may not use the
market participant exception to shield otherwise impermissible regulatory
behavior that goes beyond ordinary private market conduct.”). If the market
participant exception allowed a state to impose conditions in any market
tangentially related to the one in which the state participated, the Court noted,
the exception would have “the potential of swallowing up the rule” imposed by
the dormant Commerce Clause. South-Central Timber, 467 U.S. at 98.
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No. 08-30001
Here, the parties agree that Louisiana participates in the health insurance
market by using its own funds to pay for its enrollees’ insurance and to contract
with health insurance providers. UHC and Humana contend, and the district
court held,3 that the Act impermissibly goes beyond the health insurance market
and regulates downstream markets in customer call centers, IT services, claim
payment processing, and the other enumerated “core business functions” in
which Louisiana is not a participant, by requiring a “Louisiana HMO” to
maintain those business functions within the state.
We believe that the district court erred in its characterization and
conclude that the Act falls within the market participant exception. First, the
Act’s list of activities that must be performed in Louisiana does not constitute
“regulation” at all; rather, the list is merely a definition of the State’s preferred
contracting partners. Humana characterizes Louisiana’s requirements as
imposing conditions on out-of-state insurance companies by forcing them to
make significant changes in their operations in order to benefit from the Act.
We do not think, however, that the purpose or effect of the Act is to force
insurance companies to do anything at all. The in-state requirements are merely
a definition of the State’s preferred contracting partners. The Act does not
slightly suggest that, in making the definition so exclusive, the State seeks to
make national insurance companies relocate their administrative services into
Louisiana; to the contrary, the Act reflects an opposite legislative goal, that is,
to assure that OGB (in contracting for state employees’ insurance) would have
only to deal with home-grown companies like Vantage.4 Further, unlike in
3
The district court did not address the market participant exception in its original
ruling, but did so in its ruling on the Intervenors’ motion for a new trial.
4
The Seventh Circuit has rejected an argument similar to the plaintiffs’, upholding a
local business preference that gave local bidders a 2% advantage over nonlocal bidders. The
court noted that the plaintiff was “free to contract with other parties without being subject to
the local business preference,” and thus was not “required” to do anything by the regulation.
9
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South-Central Timber, where the state required a timber buyer “to deal with a
stranger to the contract after completion of the sale,” Louisiana’s requirements
apply only for the duration of the State’s contracts; that is, they apply only while
the State, as a participant in the market for insurance contracts, “retain[s] a
continuing proprietary interest in the subject of the contract.” South-Central
Timber, 467 U.S. at 96, 99. The Act’s definition of a “Louisiana HMO” simply
does not have characteristics of a regulation.5
Second, the Act does not have a regulatory effect on a market downstream
from the market in which the State participates. The only markets affected by
the Act are those for services that the contracts explicitly require the insurance
companies to perform; they are the very “administrative services” of the
Administrative Services Only contracts. Each of the “core business functions”
listed in the Act is expressly referenced in the contracts or in the NIC. In South-
Central Timber, Alaska argued that it participated in the “processed timber
market” by selling timber that would later be processed; however, it
“acknowledge[d] that it participate[d] in no way in the actual processing.” South-
Central Timber, 467 U.S. at 98 (emphasis added). Here, Louisiana does
participate directly in the markets for call centers, IT services, claims
processing, and other administrative services: it has contracted to purchase
J.F. Shea Co. v. Chicago, 992 F.2d 745, 748 (7th Cir. 1993).
5
We would not allow a state to use a purported “definition” to impose de facto
regulation that would violate the dormant Commerce Clause. For instance, if in South-Central
Timber Alaska had said that it would only do business with “in-state” purchasers, and had
defined “in-state” purchasers as those that processed timber within Alaska, the Supreme
Court easily would have seen through the state’s wording and struck down the law as an
improper regulation of conduct. Different phrasing would not have allowed Alaska to avoid
the fact that it was fundamentally requiring timber purchasers to act in a certain way and
that its requirement significantly impacted a market in which the state did not participate.
Here, on the other hand, the fundamental nature of the Act’s requirement is as a definition;
no party (other than the OGB) will change its behavior because of it.
10
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No. 08-30001
those services from Humana and UHC. The “downstream market” doctrine is
therefore inapposite.
Accordingly, we conclude that the Act falls within the market participant
exception and does not violate the dormant Commerce Clause.
B.
We turn now to UHC and Humana’s cross-appeal. As we have earlier
indicated, the district court held that the Act violated the dormant Commerce
Clause, but that it did not violate the Contract Clause. Now that we have
revived the Act under the dormant Commerce Clause, we must determine
whether it also survives under the Contract Clause.
The Contract Clause prohibits states from passing any law that “impair[s]
the Obligations of Contracts.” U.S. Const. art. I, § 10. To determine whether a
state law has impaired its own contractual obligations for the purposes of the
Clause, we apply the Supreme Court’s three-step analysis. First, we must
determine whether the law substantially impaired a contractual relationship
with the state.6 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244
(1978). Second, if so, we examine the state’s asserted justification for the
impairment, which must be a significant and legitimate public purpose. Third,
if the public purpose is adequate, we ask whether the challenged law was
“reasonably necessary” to achieve the purpose. Id. at 412-13. We do not defer
completely to the legislature’s judgment because of the possibility that the state
is acting in its own self interest regarding the contract. U.S. Trust Co. v. New
Jersey, 431 U.S. 1, 25-26 (1977).
6
Our analysis assumes, as the parties do, that the relevant contract is with the state.
The standard is different when the state law interferes with purely private contracts (which
would be the case if the Act interfered with the contracts between the insurance companies
and their enrollees).
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1.
An important consideration in our substantial impairment analysis is the
extent to which the law upsets the reasonable expectations the parties had at
the time of contracting, regarding the specific contractual rights the state’s
action allegedly impairs.7 Lipscomb v. Columbus Mun. Separate Sch. Dist., 269
F.3d 494, 506 (5th Cir. 2001). “[L]aws which subsist at the time and place of the
making of a contract . . . enter into and form part of it,” U.S. Trust, 431 U.S. at
19 n.17, but the court also “should consider the expectations of the parties with
respect to changes in the law.” Lipscomb, 269 F.3d at 504. “[T]otal destruction
of contractual expectations is not necessary for a finding of substantial
impairment.” Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459
U.S. 400, 412 (1983). However, a law that “technically alter[s] an obligation of
a contract” does not substantially impair it if the alteration merely “restrict[s]
a party to those gains reasonably to be expected from the contract.” City of El
Paso v. Simmons, 379 U.S. 497, 515 (1965). To determine whether an
impairment was substantial, the Supreme Court has considered “factors that
reflect the high value the Framers placed on the protection of private contracts,”
namely, the parties’ entitlement to rely on rights and obligations set by the
contract so that they can “order their personal and business affairs according to
7
The State relies on Charles River Bridge v. Warren Bridge, 36 U.S. 420 (1837), to
argue that the subject obligations in state contracts must have been explicit in order to find
a violation of the Contract Clause. But in Charles River Bridge, the Court’s analysis was not
based on the Contract Clause; it was based on the unmistakability doctrine; that is, the rule
that “in grants by the public, nothing passes by implication.” Id. at 546. More recently, the
Court has held that the unmistakability doctrine is not applicable to “humdrum supply
contracts,” which do not implicate limitations on sovereign authority. United States v. Winstar
Corp., 518 U.S. 839, 880 (1996). A state cannot “bargain away” its police power, and therefore
the Contract Clause is inapplicable if the contract “surrender[s] an essential attribute of [the
state’s] sovereignty.” Lipscomb, 269 F.3d at 505. But the contracts here were for run-of-the-
mill administrative services for a limited duration; the State’s primary responsibility was
financial, and the State does not contend that the contracts limited its sovereign authority.
Charles River Bridge and the unmistakability doctrine are therefore inapposite.
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their particular needs and interests.” Allied Structural Steel, 438 U.S. at 245.
In Allied Structural Steel, the Court found that the state had impaired a private
contract when it “superimposed pension obligations upon the company
conspicuously beyond those that it had voluntarily agreed to undertake.” Id. at
240. The Court considered that the parties “had no reason to anticipate” the new
obligations, that they had relied on their previously contracted obligations for
ten years, and that the challenged law “chang[ed] the company’s obligations in
an area where the element of reliance was vital—the funding of a pension plan.”
Id. at 246.
Courts look to terms of the contract to determine the parties’ reasonable
expectations, including whether the risk of a change in the law was
contemplated at the time of contracting. Energy Reserves Group, 459 U.S. at
414-16. In Energy Reserves Group, the Court upheld a Kansas statute imposing
price controls on natural gas. The Court considered that not only was the
natural gas market heavily regulated at the time the parties entered the
contract, but the contract itself included terms that adjusted for changes in gas
price regulation, so the parties must have known that their “contractual rights
were subject to alteration by state price regulation.” Id. at 415-16.
Here, the district court gave two reasons for its conclusion that the Act did
not violate the Contract Clause. We conclude that its first reason—that the
contracts were terminable at will by OGB—does not prevent a finding of contract
impairment. The court seemed to assume, without explanation, that the power
to terminate the contracts at will necessarily includes the lesser power to impair
those contracts, and that therefore these contractual powers meant that OGB
could modify its obligations and those of the plaintiffs without violating the
Contract Clause. However, neither the district court nor the parties point to any
authority that supports the proposition that the power to terminate a contract
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No. 08-30001
enfolds the power to impair it for the purposes of the Contract Clause.8 Because
the Act did not terminate the contract, as the OGB had reserved the right to do,
but instead made the plaintiffs’ obligations more onerous, the termination
clauses do not save the State from Contract Clause scrutiny.
Second, the district court found that no provision of the contracts
guarantees exclusivity to any of the plaintiffs and thus concluded that the
State’s allowing additional plan options, in a new bidding process, could not
impair any right or obligation under such contracts. The plaintiffs contend that
the contracts’ lack of “exclusivity” is irrelevant in determining whether these
contracts were impaired. It may be true, they argue, that each plaintiff knew
that it would not be the only carrier with an ASO contract and that enrollees
would choose between four types of plans; however, both parties expected, and
were effectively assured, that the number of plans would be limited to those in
the 2007 NICs. Instead, the Act introduced the possibility that enrollees would
choose from five or more plans, up to nearly thirty. This increase of available
choices would have the effect of decreasing each company’s number of enrollees.
Further, the plaintiffs point out that the court did not address the plaintiffs’
showing that the addition of an extraordinary enrollment period imposed
unexpected costs associated with the process of conducting a new enrollment
drive. In short, the plaintiffs conclude, the district court’s reliance on the lack
of exclusivity in the plaintiffs’ contracts is legally insufficient for its
determination that UHC and Humana’s contracts were not substantially
impaired by the Act.
8
The only case cited by Vantage for that proposition, Dartmouth College v. Woodward,
17 U.S. 518, 712 (1819), actually only held that the state legislature could not take away
powers granted in the state’s corporate charter for Dartmouth, which the court determined
was a contract, when the power to do so was not reserved in the grant.
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We agree that the district court erred in its analysis of the Contract
Clause. Our review of the record indicates that the Act impairs Humana’s and
UHC’s contracts in two substantial ways.9 First, the record does in fact establish
that, in conjunction with the NICs, the contracts effectively assured that no new
plans would become available for the 2007–2008 year. This contractual
expectation is further demonstrated by the Louisiana Attorney General opinion
issued in response to a request from Vantage: “OGB is bound by the terms of the
NIC” and “any contract that falls within the scope of the NIC must be awarded
according to the terms of the NIC.” Op. No. 07-0063. The AG does not opine
whether an NIC for a fully insured HMO would fall within the scope of the
earlier ASO NIC, but OGB itself determined that it would, and consequently
OGB could not lawfully solicit bids for fully insured HMO plans for the
2007–2008 year without breaching its contracts.10
We thus can see that UHC, Humana, and the State, that is, the parties to
the contracts, all had the same understanding as to the effect of the contracts
and the NIC. They understood that the type and number of plans available to
enrollees for that year would be limited to those sought in the NIC. This
understanding is bolstered by the State’s confirmation in a formal Q&A
session—prior to the letting of the contract—that no fully funded plans would
be offered alongside the self-funded plans. The plaintiffs relied on that
expectation when they calculated their bids and signed contracts, all with the
understanding that once the bids were let, the competition for enrollees would
9
Because of the delay between the Act’s original enactment and this opinion, the effect
of lifting the district court’s injunction at this point would be slightly different from the effect
of the Act if it had been implemented in 2007. However, because the relevant contracts have
been extended and are in effect for several more months, we conclude that the Act continues
to substantially impair those contracts.
10
OGB stated at the time that any contract for a fully-insured HMO Plan would
“provide the very services sought in the [August 2006] NIC.” Further, the OGB considered the
Act an attempt to “circumvent” its contracts with the plaintiffs.
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No. 08-30001
be between four plans: one EPO, one PPO (administered by the state), one HMO,
and one Medicare plan (for retirees).11 Unlike in Energy Reserves Group, nothing
in the contracts indicates that the parties understood that there was a possibility
that the landscape of plan options was subject to change.12 See Energy Reserves
Group, 459 U.S. at 414-16.
Second, the Act interferes with Humana’s and UHC’s contracts by
mandating an unexpected and extraordinary enrollment period in the middle of
the contract year. The contracts and the NIC provide for a single annual
enrollment period and list the insurance companies’ obligations regarding the
enrollment drive. But the Act mandates an additional “extraordinary”
enrollment period to allow enrollees to choose any new plan options offered by
Louisiana HMOs. The insurance companies had accounted for the cost of one
enrollment drive in their bids (estimated as approximately $300,000); thus,
paying for another, unexpected enrollment drive would offset their expected
returns from the contracts in a way that was not foreseeable when the contracts
began.
These impairments are substantial and disrupt the purpose of the
contracts at issue here; that is, to allow the parties to rely on their contractual
expectations of approximate numbers of enrollees and the approximate expense
of administering the plans. By entering into contracts with the OGB the
plaintiffs specifically intended to foreclose the risks of undergoing an additional
enrollment period and having to compete for enrollees with unexpected
11
Humana explains the importance of that expectation: the resulting loss of enrollees
would lower the companies’ revenue from the contracts because the insurance companies are
paid per enrollee, and providers in Humana’s plan network will terminate or renegotiate their
contracts with Humana based on the lower number of participants in the plan.
12
Vantage and the State rely on contractual provisions allowing for changes in the
number of enrollees to argue that the plaintiffs foresaw a possible loss of enrollees. These
provisions, however, only reflect the relatively small shifts in enrollees that occur when
employees change jobs or acquire new family members.
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additional plans. Avoiding these risks allowed the companies to plan for the
year ahead financially, and to enter into other agreements (for instance, with
providers in their networks). The Act’s spoiling of the parties’ contractual
expectations regarding these risks is the type of impairment that the Contract
Clause prohibits. See Allied Structural Steel, 438 U.S. at 245.
2.
Because we have concluded that the Act substantially impaired UHC’s and
Humana’s contracts, we must next examine whether the impairment was
justified. The district court did not address the second and third prongs of the
Contract Clause analysis because it concluded that the plaintiffs failed to meet
the first prong of the test. The record before us, however, is sufficient to allow
us to conclude as a matter of law that the State lacked adequate justification for
the Act. We therefore need not reach the third prong of the analysis (whether
the impairment was reasonably necessary), and we conclude that the Act
violates the Contract Clause.13
To justify impairing a contract with the state, the law’s public purpose
must be one that implicates the state’s police power, such as by remedying a
“broad and general” social problem. Lipscomb, 269 F.3d at 504-05. Providing
a benefit to a narrow group or special interest is insufficient justification. Id.
To this point: In Allied Structural Steel, the challenged Minnesota law was
enacted when a division of a large motor company closed its Minnesota plant and
attempted to terminate its pension plan, which would have financially harmed
its terminated employees in that state. 438 U.S. at 247-48. The statute imposed
13
See also Matter of Tex. Extrusion Corp., 844 F.2d 1142, 1156 (5th Cir. 1988)
(“Although the district court did not reach the merits of appellants' challenge of the order
approving the Disclosure Statement, considerations of judicial economy convince us to address
these issues in this appeal.”). The pull of judicial economy is especially strong here because
delaying a decision on the merits would not permit the parties to adjust their behavior
according to our decision by the time their annual contracts are arranged in April.
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a “pension funding charge” on certain, narrowly defined employers who
terminated their pension plan or closed a Minnesota office. Id. at 238. The
Court noted that the statute applied only to very few employers, and only in very
rare situations, and concluded that the law “can hardly be characterized . . . as
one enacted to protect a broad societal interest rather than a narrow class.” Id.
at 249.
Justifications for contractual impairments that the Supreme Court has
found to be acceptable have been exercises of the state’s sovereign authority to
protect its citizens and prevent abuses of its contracts. See, e.g., Home Building
& Loan Ass’n v. Blaisdell, 290 U.S. 398, 445 (1934) (upholding a statute altering
the terms of mortgages in response to “an economic emergency which threatened
the loss of homes and lands which furnish those in possession the necessary
shelter and means of subsistence”); Energy Reserves Group, 459 U.S. at 416-17
(“Kansas has exercised its police power to protect consumers from the escalation
of natural gas prices caused by deregulation.”); City of El Paso, 379 U.S. at 511-
14 (upholding a statute that rescinded prior contracts when the statute’s purpose
was to remedy widespread abuse of those contracts ).
In this case, the record indisputably demonstrates that the Act is narrowly
focused on benefitting in-state HMOs (indeed, a specific one) and is not a broad
exercise of the State’s police power. The representative who drafted the bill met
only with the President and CEO of Vantage for input. The law applies only to
a narrow class of HMOs that operate almost entirely within Louisiana. OGB
noted in a veto letter to the governor that “the legislature has neither formulated
nor articulated a statement of public policy” on the bill. The Act was proposed
in response to the OGB’s decision to stop offering a fully insured HMO, and,
more directly, in response to the failure of Vantage’s efforts to convince the OGB
to offer it a contract.
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Given the State’s burden to justify its impairment of its own contracts,
from the face of the Act, the events surrounding its enactment, and from its
effect we cannot accept the State’s assertions about justifications other than
economic protectionism. The district court concluded (in its Commerce Clause
analysis) that the Act was enacted for economic protectionism purposes. The
State has failed to meet its burden to produce evidence supporting any other
justification. Further, any impairment to the plaintiffs’ contracts was caused by
the timing of the implementation of the Act’s requirements, which were to be
effective while the plaintiffs’ contracts were still in effect. The State has not
made any effort to explain or justify this timing. Cf. Pension Benefit Guar. Corp.
v. R.A. Gray & Co., 467 U.S. 717, 733 (1984). In sum, we conclude that the Act
violates the Contract Clause insofar as it is effective during the course of the
plaintiffs’ contracts.14
C.
The plaintiffs’ substantive due process claim mirrors their Contract Clause
argument; they argue that the Act interfered with substantially the same rights
in the contract that it impaired for purposes of the Contract Clause. Because we
have concluded that the Act is void under the Contract Clause, we will not
address the Due Process claim.
III.
For these reasons, we conclude that the Act does not violate the dormant
Commerce Clause. The Act, as applied to the contracts before us, does violate
the Contract Clause and therefore is invalid as applied. The judgment of the
district court declaring Act 479 to be unconstitutional as a violation of the
Commerce Clause is REVERSED and the judgment of the district court
14
Although the point is obvious, we should note that our holding concerning the
Contract Clause does not address the effect of the Act on any contracts except those before us
today.
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permanently enjoining the implementation of Act 479 is VACATED. We
REMAND for further proceedings not inconsistent with this opinion.
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DENNIS, Circuit Judge, concurring in part, dissenting in part:
I concur in the majority’s conclusion that Act 479 (the “Act”) is
unconstitutional because it violates the Contracts Clause of the United States
Constitution. I respectfully dissent, however, from the majority’s decision that
the Act does not violate the Constitution’s dormant Commerce Clause.
The Act, on its face, explicitly discriminates against out-of-state health
care insurers in order to protect in-state insurers from interstate commerce
competition. The Act, in effect, erects a barrier to the sale of health care
insurance in Louisiana by non-Louisiana health care insurers which seek to
engage in interstate commerce in Louisiana. The state and the defendants have
failed to show that the Act advances a legitimate local purpose that cannot be
adequately served by reasonable nondiscriminatory alternatives. Therefore, the
Act is facially invalid under the dormant Commerce Clause. Moreover, contrary
to the majority’s decision, the Act is not exempt from dormant Commerce Clause
scrutiny under the market participant exception, because it interferes with the
natural functioning of the interstate market through prohibition and
burdensome regulation. Accordingly, under the Supreme Court’s teachings, the
district court’s judgment striking the Act as infringing upon the dormant
Commerce Clause should be affirmed.
I.
The district court correctly determined that Act 479 violates the dormant
Commerce Clause because it facially and effectively discriminates against Non-
“Louisiana HMOs” that seek to engage in interstate commerce in Louisiana and
the state has failed to demonstrate, or even allege, that it has no other means to
advance a legitimate local interest.
The Supreme Court’s decisions establish “that the Commerce Clause not
only grants Congress the authority to regulate commerce among the States, but
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also directly limits the power of States to discriminate against interstate
commerce.” New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273 (1988). This
“negative” or “dormant” aspect of the Commerce Clause prohibits “‘economic
protectionism—that is, regulatory measures designed to benefit in-state
economic interests by burdening out-of-state competitors.’” Dep’t of Revenue of
Ky. v. Davis, 128 S. Ct. 1801, 1808 (2008) (quoting New Energy Co., 486 U.S. at
273-74); see also Granholm v. Heald, 544 U.S. 460, 472 (2005) (“[S]tate laws
violate the Commerce Clause if they mandate ‘differential treatment of in-state
and out-of-state economic interests that benefits the former and burdens the
latter.’” (quoting Or. Waste Sys. Inc. v. Dep’t of Envtl. Quality of Or., 511 U.S. 93,
99 (1994))). As a result, “[a] discriminatory law is ‘virtually per se invalid.’”
Davis, 128 S. Ct. at 1808 (quoting Or. Waste Sys., 511 U.S. at 99 (1994)). State
statutes that discriminate against interstate commerce “are routinely struck
down unless the discrimination is demonstrably justified by a valid” public
purpose, “unrelated to economic protectionism.” New Energy Co., 486 U.S. at 274
(citations omitted).
“This rule is essential to the foundations of the Union.” Granholm, 544
U.S. at 472. The dormant Commerce Clause “effectuate[s] the Framers’ purpose
to ‘prevent a State from retreating into the economic isolation’ ‘that had plagued
relations among the Colonies and later among the States under the Articles of
Confederation.’” Davis, 128 S. Ct. at 1808 (quoting Fulton Corp. v. Faulkner, 516
U.S. 325, 330 (1996) and Hughes v. Oklahoma, 441 U.S. 322, 325-26 (1979))
(other citations and alterations omitted). “The history of our Commerce Clause
jurisprudence has shown that even the smallest scale discrimination can
interfere with the project of our Federal Union.” Camps Newfound/Owatonna,
Inc. v. Town of Harrison, Me., 520 U.S. 564, 595 (1997).
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Act 479 violates the dormant Commerce Clause because on its face it
discriminates against out-of-state HMOs by granting competitive advantages to
“Louisiana HMOs”: (1) the Act requires the state Office of Group Benefits
(“OGB”) to solicit bids from “Louisiana HMOs,” or “home-grown” HMOs,1 La.
Rev. Stat. Ann. § 42:802.1(A); (2) the Act further requires the OGB to offer up
to three “competitive” insurance plans from “Louisiana HMOs” to state
employees in each of nine in-state regions, id.; but (3) the Act does not require
the OGB to solicit or offer state employees any plans issued by out-of-state
HMOs, id.
Act 479 defines a “Louisiana HMO” as an insurer which: (1) offers
fully-insured insurance products; (2) “[i]s domiciled, licensed, and operating
within the state”; (3) “[m]aintains its primary corporate office and at least
seventy percent [(70%)] of its employees in the state”; and (4) “[m]aintain[s],
within the state, its core business functions which include utilization review
services, claim payment processes, customer service call centers, enrollment
services, information technology services, and provider relations.” La. Rev. Stat.
Ann. § 42:802.1(C). Thus, to take advantage of the competitive advantages Act
479 grants “Louisiana HMOs,” an out-of-state insurance company must become
a “Louisiana HMO” by meeting all of the foregoing criteria, including changing
its domicile to Louisiana, moving its primary corporate office to Louisiana, hiring
or relocating seventy percent (70%) of its employees so they are Louisiana
residents, and relocating and maintaining all of its listed core business functions
in Louisiana.
In this manner, the Act provides competitive advantages to “Louisiana
HMOs” and reciprocal disadvantages to out-of-state HMOs. Unlike “Louisiana
1
Majority Op. 9.
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HMOs,” outsiders must incur extra overhead costs just to stay up to date on the
state’s bidding and solicitation processes, as the OGB is not obliged to keep them
informed of when bidding is occurring or the contents of any solicitation.
Moreover, because the Act requires the OGB to accept virtually any competitive
bid by a “Louisiana HMO,” but does not oblige it to accept any bid from a Non-
“Louisiana HMO,” an out-of-state HMO’s cost-benefit analysis may prohibit it
from competing with “Louisiana HMOs.” As the district court suggested, an
out-of-state HMO’s direct competition with a “Louisiana HMO” is a “vain and
useless act” because Act 479 requires that up to three competitive bids by
“Louisiana HMOs” within each in-state region must be accepted,
notwithstanding bids by Non-“Louisiana HMOs.” The Act guarantees that an
outsider’s doing business in Louisiana is more risky and expensive and less
profitable than the same business run by a “Louisiana HMO” in seeking to
capture the same market.
Thus, Act 479 makes it virtually impossible for a Non-“Louisiana HMO”
engaging in national, regional or multistate interstate business to compete with
“Louisiana HMOs” in Louisiana. It is essential to companies doing business on
a national or regional basis to achieve economies of scale by centralizing their
core business functions or contractually outsourcing them to other interstate
trading partners. For such a company to become a “Louisiana HMO,” and
thereby to become competitive with “home-grown” “Louisiana HMOs,” would
require it to drastically change its corporate mission and structure, abandon
achieved economies of scale and sever contractual relations with its interstate
trading partners. In effect, Act 479 dictates that an out-of-state insurance
company engaged in interstate commerce on a national or regional basis simply
cannot compete on an equal footing with “Louisiana HMOs.”
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It is the Supreme Court’s concern about the “economic protectionism” of
state laws like Act 479, viz., “regulatory measures designed to benefit in-state
economic interests by burdening out-of-state competitors,” that has driven “[t]he
modern law of what has come to be called the dormant Commerce Clause.”
Davis, 128 S. Ct. at 1808. As the Supreme Court has specifically declared, a state
violates the dormant Commerce Clause when it “require[s] an out-of -state firm
‘to become a resident in order to compete on equal terms’” with in-state firms.
Granholm, 544 U.S. at 475 (quoting Halliburton Oil Well Cementing Co. v. Reily,
373 U.S. 64, 72 (1963)).
Because Act 479 is discriminatory both on its face and in effect, “the
virtually per se rule of invalidity provides the proper legal standard here, not the
Pike [v. Bruce Church, Inc.] balancing test.” Or. Waste Sys., 511 U.S. at 100. See
also Pike, 397 U.S. 137, 142 (1970).2 As a result, the Act must be invalidated
unless defendants can “‘sho[w] that it advances a legitimate local purpose that
cannot be adequately served by reasonable nondiscriminatory alternatives.’” Or.
Waste Sys., 511 U.S. at 100-01 (1994) (alteration in original) (quoting New
Energy Co., 486 U.S. at 278) (citing Chemical Waste Mgmt., Inc. v. Hunt, 504
U.S. 334, 342-43 (1992)). Thus, the Supreme Court requires “that justifications
for discriminatory restrictions on commerce pass the ‘strictest scrutiny.’” Or.
Waste Sys., 511 U.S. at 101 (quoting Oklahoma, 441 U.S. at 337). “The State’s
burden of justification is so heavy that ‘facial discrimination by itself may be a
fatal defect.’” Or. Waste Sys., 511 U.S. at 101 (quoting Oklahoma, 441 U.S. at
2
“Where the statute regulates even-handedly to effectuate a legitimate local public
interest, and its effects on interstate commerce are only incidental, it will be upheld unless the
burden imposed on such commerce is clearly excessive in relation to the putative local
benefits.” Pike, 397 U.S. at 142.
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337) (citing Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 406-07 (1984) and
Maryland v. Louisiana, 451 U.S. 725, 759-760 (1981)).
Here, the state advances three justifications for the enactment of Act 479
and its discrimination against Non-“Louisiana HMOs” engaging in interstate
commerce with the state, viz., “to provide State enrollees with more health care
options,” to decrease costs and to “provide consistent health care benefits to
State enrollees throughout the state.” Preston Taylor et al. Br. 22; Tommy D.
Teague & Angele Davis Br. 19; Vantage Health Plan, Inc. Br. 28. Providing state
employees and retirees with additional, competitively priced health care options
and consistent benefits are certainly legitimate local purposes, but the state has
not shown or even suggested why these purposes could not be adequately served
by reasonable nondiscriminatory alternatives. Because the state has offered no
legitimate reason for Act 479 to discriminate against Non-“Louisiana HMOs” or
to prevent or hinder them from engaging in interstate business in Louisiana on
an equal basis with “Louisiana HMOs,” the Act is facially invalid under the
dormant or negative Commerce Clause.
II.
Act 479 should not be held to be immune from the limitations of the
dormant Commerce Clause under the market participant exception. By Act 479,
Louisiana regulates the interstate commerce activities of out-of-state
Non-“Louisiana HMOs” by heavily burdening their competition with “Louisiana
HMOs” for state contracts unless they become “Louisiana HMOs”; that is, unless
they abandon their interstate, national, and regional operations based on
economies of scale and become intra-state insurers with their bases of operations
exclusively in Louisiana. Because the state through Act 479 thus interferes with
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the natural functioning of the interstate market by acting as a regulator and
prohibitor of interstate insurance business, and not merely as an ordinary
purchaser of insurance would act, it is not exempt from the limitations of the
dormant Commerce Clause under the market participant exception.
In recognizing the market participant exception, the Supreme Court in
Hughes v. Alexandria Scrap Corp. emphasized that the exception would not
permit a state to “interfere[] with the natural functioning of the interstate
market either through prohibition or through burdensome regulation.” 426 U.S.
794, 806 (1976). To explain the exception, the Alexandria Scrap Court surveyed
a number of cases in which it had found that states had unconstitutionally
burdened interstate commerce through either prohibition or regulation:
In the most recent of those cases, Pike v. Bruce Church, [a] burden
was found to be imposed by an Arizona requirement that fresh fruit
grown in the State be packed there before shipment interstate. The
requirement prohibited the interstate shipment of fruit in bulk, no
matter what the market demand for such shipments. In H. P. Hood
& Sons v. Du Mond, 336 U.S. 525 (1949), a New York official denied
a license to a milk distributor who wanted to open a new plant at
which to receive raw milk from New York farmers for immediate
shipment to Boston. The denial blocked a potential increase in the
interstate movement of raw milk. Appellee also relies upon Toomer
v. Witsell, 334 U.S. 385 (1948), in which this Court found interstate
commerce in raw shrimp to be burdened by a South Carolina
requirement that shrimp boats fishing off its coast dock in South
Carolina and pack and pay taxes on their catches before
transporting them interstate. The requirement increased the cost of
shipping such shrimp interstate. In Foster-Fountain Packing Co. v.
Haydel, 278 U.S. 1, 49 (1928), a Louisiana statute forbade export of
Louisiana shrimp until they had been shelled a[nd] beheaded, thus
impeding the natural flow of freshly caught shrimp to canners in
other States. Both Shafer v. Farmers Grain Co., 268 U.S. 189 (1925),
and Lemke v. Farmers Grain Co., 258 U.S. 50 (1922), involved
efforts by North Dakota to regulate and thus disrupt the interstate
market in grain by imposing burdensome regulations upon and
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controlling the profit margin of corporations that purchased grain
in State for shipment and sale outside the State. And in
Pennsylvania v. West Virginia, 262 U.S. 553 (1923), the Court found
a burden upon the established interstate commerce in natural gas
when a new West Virginia statute required domestic producers to
supply all domestic needs before piping the surplus, if any, to other
States.
Alexandria Scrap, 426 U.S. at 805-06. “The common thread of all these cases,”
the Court said, “is that the State interfered with the natural functioning of the
interstate market either through prohibition or through burdensome regulation.”
Id. at 806. Further, the Court in Alexandria Scrap strongly reaffirmed that the
dormant Commerce Clause “principle makes suspect any attempt by a State to
restrict or regulate the flow of commerce out of the State. The same principle, of
course, makes equally suspect a State’s similar effort to block or to regulate the
flow of commerce into the State.” Id. at 808 n.17 (citing as “[s]ee, [e].g.,” Baldwin
v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935); Dean Milk Co. v. Madison, 340 U.S.
349 (1951); and Polar Ice Cream & Creamery Co. v. Andrews, 375 U.S. 361
(1964), and as “[s]ee generally” Great A&P Tea Co. v. Cottrell, 424 U.S. 366
(1976)).
Louisiana and the majority, in refusing to recognize that Act 479 facially
runs afoul of this near century of precedents, struggle mightily to analogize the
instant case to White v. Massachusetts Council of Construction Employers, Inc.,
460 U.S. 204 (1983), and to distinguish it from the Court’s most elaborate market
participant analysis in South-Central Timber Development, Inc. v. Wunnicke, 467
U.S. 82 (1984) (plurality opinion of White, J.). But neither of these cases can
properly be invoked to shield Act 479 from the rigorous scrutiny called for by the
dormant Commerce Clause.
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In White, the Supreme Court upheld against a dormant Commerce Clause
challenge a mayoral order that required, for construction projects funded by the
city, that at least half of contractors’ workforces be Boston residents. The order
placed no other demands relevant to the Commerce Clause on the contractors
seeking to do business with the city. See White, 460 U.S. at 205-06 & n.1. The
Court explained that unlike prior unconstitutional statutes, the mayoral order
did not “‘attempt to force virtually all businesses that benefit in some way from
the economic ripple effect’” of the city’s construction contracts “‘to bias their
employment practices in favor of the [city’s] residents.’” Id. at 211 & n.7
(alteration in original) (quoting Hicklin v. Orbeck, 437 U.S. 518, 531 (1978)).
However, in contrast with the mayoral order in White, Act 479 not only requires
that out-of-state HMOs must employ seventy percent (70%) Louisiana workers,
it also “attempt[s] to govern the private, separate economic relationships of
[Non-“Louisiana HMOs” and their] trading partners.” South-Central Timber, 467
U.S. at 99. Act 479 demands that, to be competitive, out-of-state insurers must
become “Louisiana HMOs” by becoming domiciled in Louisiana, relocating their
bases of operations there, and altering their internal structure and operations so
as to become vertically integrated, having all of their core business functions in
Louisiana, thereby abandoning their centralized national or regional operations,
interstate outsourcing and economies of scale.
Further, in White the Court explained that “there are some limits on a state
or local government’s ability to impose restrictions that reach beyond the
immediate parties with which the government transacts business,” but the Court
declared it unnecessary “to define those limits” in that case because “[e]veryone
affected by the order [was], in a substantial if informal sense, ‘working for the
city.’” 460 U.S. at 211 n.7. See also South-Central Timber, 467 U.S. at 95 (“The
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fact that the employees were ‘working for the city’ was ‘crucial’ to the
market-participant analysis in White.” (quoting United Bldg. & Constr. Trades
Council v. Mayor of Camden, 465 U.S. 208, 219 (1984))); Nat’l Foreign Trade
Council v. Natsios, 181 F.3d 38, 63 (1st Cir. 1999) (White “did not involve an
attempt by Boston to require all contractors with the city to employ Boston
residents in all of their other projects, a situation more akin to this case. Here,
Massachusetts is attempting to impose on companies with which it does business
conditions that apply to activities not even remotely connected to such companies’
interactions with Massachusetts.”).
Act 479’s regulatory impact affects more than just the state’s contracts with
HMOs. It significantly interferes with the natural functioning of the interstate
insurance market by imposing restrictions upon out-of-state companies seeking
to do business in Louisiana. Further, under Act 479, those restrictions can be
alleviated only by transforming out-of-state companies into “Louisiana HMOs”
with the relocation of their domiciles, base of operations, seventy percent (70%)
of their workforce, and all of their core business functions to Louisiana. Thus, Act
479 reaches beyond the parties’ privity in state insurance contracts to also
regulate out-of-state insurers’ relationships with their non-Louisiana employees,
their non-Louisiana corporate affiliates, and their non-Louisiana trading
partners handling their outsourced core business functions.
Finally, the majority’s attempt to distinguish South-Central Timber—the
Supreme Court’s most detailed articulation of the market participation
exception—is unsuccessful. In fact, South-Central Timber is closely analogous to
the present case and demonstrates that the market participant exception cannot
salvage Act 479 because it impermissibly regulates interstate markets in which
Louisiana is not a participant.
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In South-Central Timber the Supreme Court held that the state of Alaska,
as a seller of timber, could not require that timber from state lands be processed
within the state before being exported. 467 U.S. at 84. The Court recognized that
Alaska was a market participant with respect to selling timber, but found that
its statute was unconstitutional because the state was not participating in other
aspects of the timber industry, such as processing. Id. at 98. The Court explained
that while Alaska could “choos[e] its own trading partners,” it could not
“attempt[] to govern the private, separate economic relationships of its trading
partners.” Id. at 99. Such conduct was an impermissible effort to alter the
“vertical” structure of the industry. Id. at 98. The Court emphasized that “the
[market-participant] doctrine is not carte blanche to impose any conditions that
the State has the economic power to dictate, and does not validate any
requirement merely because the State imposes it upon someone with whom it is
in contractual privity.” Id. at 97. Instead, the test for whether the state is a
market participant is “whether [the state] is acting as an ordinary market
participant would act.” Nat’l Foreign Trade Council, 181 F.3d at 65 (emphasis
added).
Contrary to the majority’s protestations, as in South-Central Timber, Act
479 impermissibly “attempt[s] to govern the private, separate economic
relationships of its trading partners.” 467 U.S. at 99. Act 479 dictates that to
compete on an even playing field with “Louisiana HMOs,” Non-“Louisiana
HMOs” must change the location at which they maintain their utilization review
services, claim payment processes, customer service call centers, enrollment
services, information technology services, and provider relations, all of which, in
this modern economy, are likely outsourced to third parties. Thus, Act 479
reaches outside the market in which the state participates and attempts to
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regulate and interfere with markets and relationships in which the state does not
participate, viz., the relationships and markets between Non-“Louisiana HMOs”
and their third party trading partners, such as information technology services
companies. Thus, the Act also attempts to alter the vertical structure of Non-
“Louisiana HMOs” by requiring them to incorporate and relocate core business
functions to Louisiana.
An “ordinary” market participant is concerned with the price and quality
of the product and services purchased, rather than with having a company’s
trading partners located within a particular state. See South-Central Timber, 467
U.S. at 98 (“[S]imply as a matter of intuition a state market participant has a
greater interest as a ‘private trader’ in the immediate transaction than it has in
what its purchaser does with the goods after the State no longer has an interest
in them.”). One insurance company witness testified, and we can take judicial
notice, that national and regional insurers create economies of scale by
centralizing or outsourcing many of their services, which results in lowering the
cost of insurance. Accordingly, Act 479’s mandate that Non-“Louisiana HMOs”
reconstitute themselves and their trading partners as integrated intra-state
entities in order to compete fairly with “Louisiana HMOs” for the state’s business
demonstrates that the state is not acting as an ordinary market participant. The
Supreme Court has clearly “reject[ed] the contention that a State’s action as a
market regulator may be upheld against Commerce Clause challenge on the
ground that the State could achieve the same end” if it were a market participant
in each of the affected markets. Id. at 98-99.
“The limit of the market-participant doctrine must be that it allows a State
to impose burdens on commerce within the market in which it is a participant,
but allows it to go no further. The State may not impose conditions, whether by
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Case: 08-30001 Document: 00511067206 Page: 33 Date Filed: 03/31/2010
No. 08-30001
statute, regulation, or contract, that have a substantial regulatory effect outside
of that particular market.” South-Central Timber, 467 U.S. at 98. Moreover, the
“market” in which the state is participating must be “narrowly defined,” or the
market participant exception will erode the dormant Commerce Clause. Id. at 99.
Thus, Louisiana can impose conditions on its purchase of insurance that an
ordinary market participant would, so long as the “insurance market” which the
conditions affect is narrowly defined. But it cannot by statute impose conditions
that have a substantial regulatory effect outside of that particular market. By Act
479, Louisiana goes beyond participating in a market as would an ordinary
purchaser of insurance. Rather, Act 479 imposes conditions that have
substantial, even prohibitive, regulatory effects outside of the market in which
the state participates as an insurance purchaser. Act 479 requires out-of-state
insurers, in order to fairly compete for the state’s business, to relocate their
domiciles, operating bases, workforces, and core business functions in Louisiana.
These statutory effects would interfere with and regulate the insurers’
relationships and markets with their third-party trading partners in interstate
commerce. Consequently, Louisiana’s actions under Act 479 having such
regulatory effects are not entitled to the market participant exception from the
dormant Commerce Clause.
For these reasons, in my view, the judgment of the district court holding
Act 479 invalid as a violation of the dormant Commerce Clause should be
affirmed.
33