Petition for Writ of Certiorari — Kanne v. Connecticut General Life Insurance
Supreme Court brief1989
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IN THE
SUPREME COURT
OF THE UNITED STATES
October Term, 1988
CONNECTICUT GENERAL
LIFE INS. CO.,
Respondent.
ee
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
LEONARD SACKS
15915 Ventura Boulevard
Suite 304
Encino, California 91436
(818) 906-7200
Attorney for Petitioners
THEODORE KANNE and
Vol. I of I BEATRIZ KANNE,
Lorraine Mitchell - Legal Briefs
732 E. WASHINGTON BOULEVARD
LOS ANGELES, CALIFORNIA 90021
TELEPHONE (213) 747-5631
CONTENTS REPRODUCED FROM FURNISHED PRETYPED COPY.
QUESTIONS PRESENTED
l. Does the Employee Retirement
Income Security Act (ERISA), 29 U.S.C.
Section 1081, et seq., bar plaintiffs
from securing State law remedies afforded
by a State law which regulates insurance,
as defined in the ERISA saving clause, 29
U.S.C. Section 1144(b)(2)(A) ("...nothing
in this subchapter shall be construed to
exempt or relieve any person from any law
of any State which regulates
insurance...")? [1]
2a. What are the criteria which
will establish that an insurance
This issue is currently before
this Court on a Petition for Writ of
Certiorari in at least one other case we
know of: Commercial Life Ins. Co. v.
Superior Court (Juliano) 47 Cal.3d 473,
764 P.2d 1859 (1988), petition filed
March 15, 1989, Docket No. 88-1530. As
will be seen below (Section EI infra),
there will doubtless eventually be
numerous other petitions to this Court
presenting the same issue.
i
arrangement is an "employee benefit plan"
subject to ERISA, under 29 U.S.C. Section
1003, where, as here, there was no formal
written plan? [2]
2. The importance of this question
and the necessity for its resolution by
this Court have been conceded by David L.
Bacon, Esq., and Adams, Duque &
Hazeltine, Esqs., counsel for the
respondent herein, Connecticut General
Life Ins. Co. Said counsel have recently
filed a petition for Writ of Certiorari
in this Court in Pacific Mutual Life Ins.
Co. v. Turnbow, Docket No. 88-1546. That
case presents the very same question of
the criteria necessary to establish an
“employee benefit plan" subject to ERISA
(see Petition in Pacific Mutual Life Ins.
Co. v. Turnbow, "Questions Presented,” at
p. 1). In their Petition, Messrs. Bacon
and Adams, Duque & Hazeltine state that
there is "An Increasingly Significant
Circuit Split," on this question "And
Wide-Spread Division And Error In The
Lower Courts, Which Can Only Be Resolved
By This Court” (Pacific Mutual Life
Petition, Point II, p. 16 [emphasis
added]. See also, id. at pp. 19, 26).
It is safe to predict that there
will eventually be numerous other
petitions filed in this Court raising
this issue, in view of the uncertainty
surrounding the issue of the
circumstances when an insurance
arrangement constitutes an "employee
(Continued on next page)
ii
Ds Where, as here, the insureds'
direct employer had not established or
maintained an employee benefit plan
subject to ERISA, as defined by 29 U.S.C.
Section 1883(a), is such a plan
established by the activities of a "group
Or association of employers," pursuant to
29 U.S.C. Section 1002(5), where there is
no evidence that the purported employer
association in question was in fact a
group Or association of homogeneous,
related employers and no evidence that
the insured's direct employer had any
benefit plan" subject to ERISA (see Point
EII, infra).
The issue of the criteria necessary
to establish an “employee benefit plan"
subject to ERISA is one of the issues now
pending before this Court in Commonwealth
v. Morash, 482 Mass. 287, 552 N.E.2d 4089,
cert. granted, October 3, 1988, 1809 S.Ct.
53.
iii
voice in the management of the purported
employer association? [3]
3. The petitioners herein are
plaintiffs-appellees THEODORE KANNE and
BEATRIZ KANNE, who were insured under a
group insurance policy issued by
respondent, CONNECTICUT GENERAL LIFE
INSURANCE COMPANY, defendant-appellant in
the Court below. The KANNES' and
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY are the only parties to these
proceedings.
iv
es)
ie 2)
4
b
G) ®
THE ISSUE OF WHETHER ERISA
PREEMPTS STATE LAW REMEDIES
PROVIDED BY A STATE LAW REG-
ULATING INSURANCE IS AN ISSUE
OF WIDE-SPREAD IMPORTANCE;
IT IS URGENT THAT THIS COURT
RESOLVE THIS ISSUE.
THE ISSUE OF THE ELEMENTS
NECESSARY TO ESTABLISH THAT
AN INSURANCE ARRANGEMENT IS
AN “EMPLOYEE BENEFIT PLAN"
SUBJECT TO ERISA IS AN ISSUE
OF WIDE-SPREAD IMPORTANCE
WHICH HAS NEVER BEEN RULED
ON BY THIS COURT.
40
CONCLUSION
APPENDIX [Under Separate Cover -
Volume II of IT]
vi
=
TABLE OF AUTHORITIES
Cases Page
Anschultz v. Conn. General Life
Ine. CO<,s
850 F.2d 1467 (llth Cir. 1988) 30
Baucom v. Pilot Life Ins. Co.,
674 F.Supp. 1175 (M.D.N.C. 1987) 48
Commercial Life Ins. Co. v. Superior
Court (Juliano) (1988)
47 Cal.3d 473, 764 P.2d 1059 1, 9,
22, 24, 37, 39
Commonwealth v. Morash,
402 Mass. 287, 552 N.E.2nd 409,
cert. granted, Oct. 3, 1988,
aan S.0¢.. 53 iii
Credit Managers Ass'n v. Kennesaw
Life & Acc. Ins.,
809 F.2d 617 (9th Cir. 1987) 49
Donovan v. Dillingham,
688 F.2d 1367 (llth Cir. 1982) 48,
Si, Se
Eversole v. Metropolitan Life
Ins. Co.,
500 F.Supp. 1162 (C.D. Cal. 1980) be
Fort Halifax Packing Co. v. Coyne
(1987)
U.S. » £07 6.Ct. 2211 43
Graves v. Blue Cross of California,
688 F.Supp. 1405 (N.D. Cal. 1988) 35,
a05. 37
vil
Griswold v. Union Labor Life Ins. Co.,
442 Atl.2d 920 (Conn. 1982) 26
Hamberlin v. VIP Ins. Trust,
434 F.Supp. 1196 (D. Ariz. 1977) 48
In Re: Life Ins. Co. of North
America,
857 F.2d 1190 (8th Cir. 1988) 30
Insurance & Prepaid Benefits Trust v.
Marshall,
90 FRD 703 (C.D. Cal. (1981) 48
Jenkins v. J. C. Penney Cas. Ins. Co.,
280 S.E.2d 252 (W. Va. 1981) a7
Klaudt v. Flink,
§58 P.2d 1065 (Mont. 1983) 27
Mass. Mutual Life Ins. Co. v.
Russell (1985)
473.0.8, i386, i835 3.¢t. 2360 g
Matthew 25 Ministries, Inc. v.
Corcoran,
774i P24 21 (€2n@ Cir. 1965) 48
McLaughlin v. Conn. General Life
Ins. Co.,
565 F.Supp. 434 (N.D. Cal. 1983) aa
Mead v. Burns,
509 Atl.2d 11 (Conn. 1986) ri oe
Metropolitan Life Ins. Co. v.
Mass. (1985)
471 U.S. 724, 105 S.Ct. 23680 34,
go, 26
Waid
Moradi-Shalal v. Fireman's Fund
Ins. Co. (1988)
e6 Cai.36@ 267, 758 P.2da 58 26
Pilot Life Ins. Co. v. Dedeaux (1987)
eee Gime. Sh, 107 S.Ct. 1549 14; 46,
Rea) Os ees 3Ue Shy Sky
sas 22s o8e. oe
Presti v. Connecticut General Life
He. CO<«,
605 F.Supp. 163 (N.D. Cal. 1985) 13
Rizzi v. Blue Cross of Southern
California (1988)
206 Cal.App.3d 380, 253 Cal.Rptr.
541 es. 48, 31:52
Sayble v. Blue Cross of Southern
California,
Cal.App.3d ’ Cal.Rptr.
, filed Mar. 20, 1989
(reported in the Los Angeles
Daily Journal, Daily Appellate
Reports for Mar. 22, 1989 at
>. 3567) 46
Sparks v. Republic National Life
Ins. Co.,
647 P.2d 1127 (Ariz. 1982)
cert. denied 459 U.S. 1070,
103 S.ct. 490 (1980) 27
Taggart Corp. v. Life & Health
Benefits Admin.,
617 F.2d 1208 (5th Cir. 1980)
cert. den. sub. nom., Taggart
Corp. v. Efros (1981), 450 U.S.
guau, 201 8.Ct. 1739 ce, ve
1X
Union Labor Life Ins. Co. v.
Pireno (1982)
458 t).8.. 145,102 8.Ct. 30Ge2 S35 ae
Van Dyke v. St. Paul Fire & Marine
Ins. COs,
448 N.E.2d 357 (Mass. 1983) 26
Wayne Chemical v. Columbus Agency
Service Corp.,
S67 F.2€ 692 (7th Cir. i977) 50
Federal Rules, Regulations
and Statutes
Title 28 United States Code,
Section 1254(1) 3
Section 1332 5
Title 29 United States Code,
Sections 1001 et seq. i
Section 1002(5) iii, 4, 18, 19,
20, 44, 47
Section 1003 ii
Section 1003(a) iii, 4, 19, 41, 54
Sections 1021-1029 42
Section 1131 4, 42, 54
Section 1132 29
Section 1132(a) (1) (b) ai
Section 1144(a) 30
Section 1144(b) (2) (A) is @y. 2Ss
a0: 30
ERISA Section 514(a) 33
ERISA Section 514(b)(2)(a) 33
Supreme Court Rules,
Rule 17.1 22
Rule 17.1(a) 41
Rule 17.1(c) 40, 41
23 CFR,
Section 2510.3-1(j) 4, 17, 19, 44
Section 2560.503-l(e) (1) (3) 8
Section 2560.503-1(f) (g) 11
Section 2560.503-1l(h) 8
Section 2560.503-l(h) (4) 3
State Statutes
Arizona Rev. Stats,
Section 20-443 re
California Insurance Code,
Section 790.03(h) iS, 25, 426 37
Section 709.03(h) (2) a, Gs Bese
14, 16
Florida Stats,
Section 624.155 20
X1
Louisiana Rev. Stats,
Section 22:65/7
Missouri Rev. Stats,
Section 375.296
Section 375.420
Texas Insurance Code Ann.,
Article 3.62
Periodicals
Los Angeles Daily Journal,
October 5, 1988,
Page 1, column 4
Wall Street Journal,
October 5, 1988,
Page A-24, column 4
“M22
a3
ye
No.
IN THE SUPREME COURT OF THE UNITED STATES
October Term, 1988
THEODORE KANNE and BEATRIZ KANNE,
PETITIONERS
Ve
CONNECTICUT GENERAL LIFE INS. CO.,
RESPONDENT
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Theodore and Beatriz Kanne
respectfully petition this Court for a
Writ of Certiorari to review the judgment
of the United States Court of Appeals for
the Ninth Circuit.
A. OPINIONS BELOW
The opinion of the District Court,
filed January 23, 1985, is reported at
=
607 F.Supp. 899 (Appendix A, annexed
hereto).
The original opinion of the Court of
Appeals for the Ninth Circuit was filed
on June 4, 1987, and is’ reported at 819
F.2d 204 (Appendix B, annexed hereto).
On July 23, 1987, the Court of Appeals
vacated that opinion and requested
briefing on two issues: whether the
insurance policy in question is a plan
governed by ERISA and whether California
Insurance Code Section 7908.93(h)(2) is
preempted by ERISA. This order is
reported at 823 F.2d 284.
On October 4, 1988, the Court of
Appeals issued its opinion, vacating the
District Court's opinion (Appendix C,
annexed hereto). This opinion is
reported at 859 F.2d 96. On October 18,
1988, the Kannes filed a Petition for
Rehearing. On February 2, 1989, the
2
Court of Appeals issued an amended
opinion upon denial of rehearing
(Appendix D, annexed hereto). That
opinion is not yet in the official
reports as of this writing.
B. JURISDICTION
The opinion of the Court of Appeals
vacating the District Court's judgment
for petitioners was filed on October 4,
1988. The Court of Appeals modified its
Opinion on denial of the Kannes' petition
for rehearing, on February 2, 1989, which
is the date of the judgment sought to be
reviewed (Appendix D, infra). The
District Court entered its order vacating
the judgment on March 17, 1989. The
jurisdiction of this Court is invoked
under 28 U.S.C. Section 1254(1), by
reason of the Court of Appeals' holding
that the federal law of ERISA applies to
this action, and preempts petitioners'
3
State law remedies.
C. STATUTES AND REGULATIONS
INVOLVED IN THIS CASE
The verbatim text of the statutes
and regulations involved in this case is
annexed hereto as Appendix E. They are
as follows: 29 U.S.C. Section
1144(b)(2)(A): 29 U.S.C. Section 1083(a);
29 U.S.C. Section 1002(5): 29 U.S.C.
Section 1131; 29 CFR Section 25198.3-1(j4):;
California Insurance Code Section
796.83(h)(2).
D. STATEMENT OF THE CASE
This action was originally filed on
December 17, 1982 in the Superior Court
of the State of California (Appendix A,
Pe2). The complaint of petitioners
Theodore and Beatriz Kanne sought
compensatory and punitive damages under
California law against respondent
Connecticut General Life Insurance Co.
ia
a
(Connecticut General) and others
(Appendix A, p.3). Petitioners alleged
various causes of action arising out of
respondent's failure to pay claims for
medical benefits (ibid). On April 8,
1983, after various defendants in the
case were dismissed, the case was
remanded to federal court on the basis of
diversity jurisdiction (28 U.S.C. Section
1332) (Appendix A, p.4).
Petitioner Theodore Kanne was an
employee of Harlow Carpets (Appendix A,
p-5). Respondent Connecticut General had
issued a group medical insurance policy
to the ABC Trust, of which Harlow Carpets
was a member (ibid). On May 23, 1981,
the Kannes' son, Jonathan, was born in
the Netherlands two months premature
(Appendix A, p.6). Because Jonathan had
congestive heart failure and was
cyanotic, the doctors in the Netherlands
5
recommended that Jonathan be treated at
Moffitt Hospital in San Francisco,
California (id, pp. 6-7). Pursuant to
these recommendations, Jonathan was
transported from the Netherlands to San
Francisco by air ambulance (id, p.7).
Subsequently, petitioners incurred
substantial medical bills over a period
of time because of the gravity of
Jonathan's condition (Appendix A, pp. 8-
11). Jonathan was hospitalized after
surgery for the period from October 16,
1981 to November 13, 1981 (id, p. 10).
The bill for this hospitalization, in the
amount of $89,848.16, was received by
respondent Connecticut General On
December 29, 1981, at the latest
(Appendix A, at p.10). Connecticut
General falsely told Mr. Kanne that it
had not received the bill and used that
as a pretext for not paying it (id at pp.
6
OO
18-11). [4] Connecticut General paid
only $9,999 on the claim in February,
1982 and $9,999 in March, 1982 (Appendix
A at p.10). (5) It paid the remaining
sum, totaling $69,917.44, in September
and October, 1982, only after a
collection agency made demand and the
Kannes went to the expense of hiring an
4. In fact, the testimony
established that the bill was mailed to
Connecticut General in October, 1981 (RT
Vol. I, pp. 18-19, Vol. II, pp. 67-71),
and that Connecticut General not only had
the bill in its file, but was also
repeatedly notified by a co-insurer that
this bill was outstanding (RT Vol. I, pp.
63-64, Vol. II, pp. 111-115, 125, 128-9).
Sie At trial, Connecticut General
claimed it could not make payments of
more than $9,999 at a time because its
computer program could not write checks
for more than four digits (RT Vol. II,
p-148, lines 18-24). It also had an
internal rule that it could not write
more than two checks to any health care
provider in any one day (RT Vol. II,
p.-148, line 18-p.141, line 19). Even
with these artful self-imposed
restrictions aimed at delaying payments,
Connecticut General still could have paid
the claim far more quickly than it did.
7
attorney (ibid).
The District Court found that
"Connecticut General neither has
justified the delay in these payments nor
has provided any rationalization for its
failure to investigate in a timely
fashion the status of the $69,141.44 sum.
Connecticut General knew or should have
known that the sum had not’ been paid at
least as early as December 29, 1981, when
it received the balance forward
indication on the $89,840.16 bill."
(Appendix A, at Pp. 21) (emphasis
added). [6]
6. The Department of Labor
regulations provide that an insurance
company administering an _ ERISA plan is
permitted to delay any decision as to
whether to pay a claim for up to 300
days, by availing itself of extensions of
time permitted by the regulations. 29
CFR Section 2560.583-1(e)(1)(3): Section
2560.503-1(h). Even if the 300-day
provision is violated, the insurer is not
(Continued on next page)
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The Kannes suffered excruciating
emotional turmoil because of Connecticut
General's failure to pay these bills. The
Kannes feared they would not be able to
secure for Jonathan the medical attention
necessary for his survival (RT Vol. I,
pp. 22-24, 71-76, Vol. II, p« 76}.
Because Connecticut General didn't pay
subject to any penalties because the only
result of failure to comply is that the
claim is deemed denied. See 29 CFR
Section 2560.503-1(h)(4):; Massachusetts
Mutual Life Ins. Co. v. Russell, 473 U.S.
134, 144, 105 S.Ct. 2388, 3091 (1985).
The result is that the inordinate
delays in payment allowed by ERISA force
health care providers to, in effect,
provide interest-free loans to insurance
companies. Thus, the effect of broad
ERISA preemption on health care providers
could well be catastrophic.
Considerations such as these
impelled the California Medical
Association to file an Amicus Curiae
Brief in the California Supreme Court in
Goodrich v. General Telephone Co. of
California, $002951, and in Commercial
Life Ins. Co. v. Superior Court, supra,
FN 1, Supra, urging that ERISA should not
preempt state laws regulating insurance.
ai
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7 :
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= a 7 -
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_
Jonathan's physicians, said physicians
demanded that the Kannes pay cash for all
future visits (RT Vol. I, p.24, lines 10-
20, pps 72, 76). Mrs. Kanne was
therefore compelled to sneak out of the
doctors' offices after visits because the
Kannes couldn't pay the bills (RT Vol. I,
p.24, lines 21-24). [7]
Connecticut General's delays were
not caused by any dispute over whether
the claims were justly due. The only
claim that Connecticut General disputed
was the claim for payment of the air
ambulance. Connecticut General rejected
this claim, assigning different professed
reasons at different times (Appendix A at
Te Mr. Hanna, the manager of
Connecticut General's Los Angeles Claims
Center (RT Vol. IV, p.9), testified that
taking 11 months to pay a claim that was
clearly due would not violate Connecticut
General's standards (RT Vol. IV, p.16,
line 28 to p.17, line 2).
10
pp. 17-18). [8]
United States District Judge Edward
Rafeedie, sitting without a jury, found
that Connecticut General had breached the
common law duty of good faith and fair
dealing (Appendix A, pp. 22-27) and also
violated California Insurance Code
8. Although Connecticut General
claimed in this litigation that it was
acting as an ERISA "claims review
fiduciary" (see, e.g., Connecticut
General's reply brief to the Court of
Appeals, served January 38, 1986, at pp.
23, 36, 38), it never produced any
evidence that it (or anyone else) ever
complied -with ERISA's claims review
procedures, which required Connecticut
General to notify the Kannes of their
rights to review of its decision denying
this claim. See, e.g., 29 CFR Section
2560.5803-1(£)(g).
Thus, while Connecticut General has
insisted throughout this litigation that
this matter is governed by ERISA, it
ignored ERISA requirements when
compliance with these requirements was
inconvenient or potentially costly to it,
and none of the entities involved in this
case (i.e., Connecticut General, Harlow
Carpets or ABC Trust) has ever shown that
they complied with any of ERISA's
requirements.
Za
Section 799.03(h)(2), which prohibits the
failure to acknowledge and act reasonably
promptly upon communications with respect
to claims arising under insurance
policies (Appendix A, pp. 32-33). He
found that Connecticut General's behavior
caused the Kannes emotional distress
damages in the sum of $250,000 (Appendix
A, pp. 37-38), and that Connecticut
General's behavior was so outrageous that
an award of $580,808 exemplary damages
was appropriate as a penalty and
deterrent (Appenix A, pp. 37-38).
The District Court also held that
the insurance covered the air ambulance
expenses (Appendix A, pp- 16-20).
Another insurer, Metropolitan Life Ins.
Co., had paid its share of these expenses
(id, p.-7), leaving a balance of $2,234.88
that was payable by Connecticut General
(id at p.20).
12
The District Court also considered
Connecticut General's contention that
ERISA preempted the Kannes' cause of
action and stated that the insurance
arrangement was an ERISA plan (Appendix A
at p.12). The District Court did not
state its reasons for this conclusion,
which was immaterial to the decision,
since the District Court also concluded
that ERISA did not preempt the Kannes'
causes of action (id at pp. 12-14). [9]
Respondent appealed the District
Court's judgment to the Ninth Circuit
9. At about the time of the
District Court's decision, there were a
number of cases holding that ERISA
preemption did not apply to actions for
insurance bad faith, because of the
saving clause, 29 U.S.C. Section
1144(b)(2)(A). See, e.g.: Presti vv.
Connecticut General Life Ins. Co., 605
F.Supp. 163 (N.D. Cal. 1985): McLaughlin
v. Connecticut General Life Ins. Co., 565
F.Supp. 434 (N.D. Cal. 1983): Eversole v.
Metropolitan Life Ins. Co., 588 F.Supp.
1162 (C.D. Cal. 1980).
13
Court of Appeals. The appeal was first
argued and submitted on April 7, 1986
(Appendix D at p.75). On July 2, 1986,
the appeal was withdrawn from submission,
pending this Court's decision in Pilot
Life Ins. Co. ve. Dedeaux, 481 U.S. 41,
107 S.Ct. 1549 (1987) (Appendix D at pp.
76, O62}. On June 4, 1987, after Pilot
Life was decided, the Court of Appeals
resubmitted the case and reversed the
District Court's conclusion that the
Kannes' claims were not preempted
(Appendix B, pp. 44-52, Appendix D, pp.
83-84). On July 23, 1987, the Court of
Appeals granted the Kannes' petition for
rehearing and directed the parties to
brief two issues: whether the Kannes'
cause of action under California
Insurance Code Section 798.03(h)(2) is
preempted by ERISA and whether the
insurance policy in question is a plan
14
a 7 es n
iain Matto
;
B Pie ae Hy! 6
a“
a)
governed by ERISA. 823 F.2d 284,
Appendix D, pp. 77 and 84. On November
23, 1987, the Court of Appeals heard oral
argument on these issues (Appendix D at
p.76).
On October 4, 1988, the Court of
Appeals filed its opinion, reversing the
District Court's decision (Appendix C,
pp. 53-74). The Kannes' filed another
petition for rehearing on October 18,
1988. On February 2, 1989, the Court of
Appeals modified its opinion and denied
the petition for rehearing (Appendix D,
at pp. 75, et seq.).
As the opinion of the Court of
Appeals demonstrates, the disposition of
the issue of whether ERISA preempts
petitioners’ State law remedies under the
State statute, California Insurance Code
Section 798.83(h), depends on the
interpretation of this Court's decision
15
in Pilot Life Ins. Co. v. Dedeaux, supra
(see Appendix D at pp. 91-96). The
Kannes contended that Pilot Life was
inapplicable because that case held only
that ERISA preempted common law causes of
action which were not state laws
regulating insurance, and hence did not
come within the ERISA savings clause.
The Kannes contended that their cause of
action for breach of California Insurance
Code Section 798.03(h)(2) is exempt from
ERISA by the savings clause, since
Section 798.83(h) (2) is a law which
regulates insurance (Appendix D at p.93).
The Court of Appeals held that it
was unnecessary to determine that issue.
The Court said:
“We can assume, without
deciding, that section
798.03(h) is a law regulating
insurance under the savings
Clause." (Appendix D at p. 93)
(emphasis added)
16
The Court of Appeals held that ERISA
preempted petitioners' cause of action
even if that cause of action was based on
a State law regulating insurance within
the meaning of the savings clause
(Appendix D at pp. 93-96). The Court of
Appeals interpreted the second part of
this Court's decision in Pilot Life (481
U.S. at pp. 51-57, 107 S.Ct. at pp. 1555-
8) to mean that ERISA civil enforcement
provisions are exclusive even where
plaintiffs are proceeding under a State
law regulating insurance (Appendix D at
pp. 93-96).
The Court of Appeals also held that
the insurance arrangement was a plan
subject to ERISA (Appendix Dat pp. 84-
91). The Court recognized that under
Department of Labor regulation 29 CFR
Section 2519.3=1(37) (1987) a group
insurance program is excluded from ERISA
17
if it contains the four criteria
described therein (Appendix D, pp. 87-
88). The Court concluded that the
evidence failed to establish that Mr.
Kanne's actual employer, Harlow Carpets,
had conducted any activities which would
take the insurance arrangement outside
the four criteria of the regulation
(Appendix D at pp. 88-89). However, the
Court held that Associated Builders &
Contractors (ABC), which purchased the
group insurance from Connecticut General,
could be considered an “ERISA employer,"
under 29 U.S.C. Section 1802(5) (Appendix
Dat pp. 89-98), which provides that an
"employer" includes “- group or
association of employers acting for an
employer in such capacity." [198]
19. As the Court knows, in order
for a plan to be governed by ERISA, it
must be established or maintained by any
(Continued on next page)
18
The Court of Appeals held that ABC
was an employer group or association
within the meaning of 29 U.S.C. Section
1982(5), and that the arrangement was an
ERISA plan because "ABC does not merely
advertise the group insurance, but
rather, as the administrator of the plan,
‘endorses' it," thereby establishing the
non-existence of one of the four criteria
set forth in 29 CFR Section 25198.3-1(j)
for excluding a plan from ERISA (the
third criterion) (Appendix D at p.9®@).
The Court concluded that if any of the
four criteria are absent, an ERISA plan
is established. See Appendix D at pp.
88, 89.
However, the opinion acknowledges
"employer" (unless it is established or
maintained by an employee organization,
which is not claimed here). 29 U.S.C.
Section 1003(a), set forth in Appendix E,
infra.
19
that at the trial "the parties did not
contest the issue of whether the ABC
Trust was an ERISA plan" (Appendix D,
p.86), and this issue was never
litigated. Hence, the opinion's
assumption that ABC was a bona fide
employer group within the meaning of 29
U.S.C. Section 1002(5) is not supported
by any evidence. See Section EII,
infra. [11]
Finally, the Court held that even
the Kannes' claim for reimbursement of
the air ambulance costs was preempted
(Appendix D, pp. 96-97). The Court said
that California's common law of contracts
is not a law that regulates insurance (id
ll. These matters were pointed out
in petitioners’ petition for rehearing to
ree Court of Appeals filed October 18,
1988.
The Court of Appeals‘ modification
of the opinion on denial of the rehearing
(Appendix D) did not further discuss
these matters.
20
|
at p. 97). The Court did not discuss any
reason that this claim could not be
recovered under ERISA (see 29 U.S.C.
Section 1132[a]{1](B]). The Court of
Appeals apparently assumed that the
“arbitrary and capricious" standard
governed claims brought under ERISA, as
contended by Connecticut General (see,
e.g-, Connecticut General's reply brief
filed in the Court of Appeals, served
January 38, 1986, at p. 36).
re |
E. REASONS THE WRIT SHOULD BE GRANTED
I. THE ISSUE OF WHETHER ERISA
PREEMPTS STATE LAW REMEDIES
PROVIDED BY A STATE LAW
REGULATING INSURANCE IS AN
ISSUE OF WIDESPREAD IMPORTANCE;
IT IS URGENT THAT THIS COURT
RESOLVE THIS ISSUE. [12]
The first question presented clearly
comes within the criteria of Rule 17.1.
} 4, 3 is of tremendous importance and
impacts on the rights of literally
millions of citizens of this country who
have employee group health and medical
insurance policies and seek State law
12. As noted above (Footnote l,
supra), the identical issue is presented
in the Petition for Writ of Certiorari in
the Commercial Life case, supra. We have
read that petition and adopt the
arguments contained therein by reference.
We will hereinbelow address ourselves to
additional reasons that the instant issue
merits the granting of the Kannes'
petition.
22
remedies when the insurers' failure to
honor these policies causes serious
hardship to ill and disabled
policyholders.
Indeed, the importance of this issue
has been conceded by one of respondent's
counsel, David Le. Bacon, Esq., who has
said that "[LiJlt's hard to overstate the
importance" of the Court of Appeals'
decision in the instant case (Los Angeles
Daily Journal, October 5, 1988, p.l.,
column 4) and "“({t]here are hundreds of
pending suits in California which involve
this very issue and hundreds and [sic]
millions of dollars [are] involved."
(Wall Street Journal, October 5, 1988,
p.A-24, column 4).
In California alone, there are
scores, if not hundreds, of cases pending
whose resolution is determined by the
issue of whether a citizen of a State may
a3
seek State law remedies for redress of
violations of State laws regulating
insurance. In Commercial Life Ins. Co.
v.- Superior Court, supra, the California
Supreme Court, in holding that actions
for breach of State laws regulating
insurance are preempted by ERISA, relied
extensively on the decision of the Court
of Appeals in the present Kanne case.
See 47 Cal. 3d at pp. 482-484, 764 P.2d
at pp. 1964-1866. [13] There are
13. The California Supreme Court
took for review at least five other cases
presenting the same issue: Goodrich v.
Gen. Tel. Co., supra, No. S002951,
DeFiori v. Bankers Life, No. S003448,
Pilot Life Ve Superior Court, No.
S003351, Blue Cross of Cal. v. Superior
Court, No. S004471 and General Tire &
Rubber Co. v. Superior Court, No.
LA32272. It retransferred these cases to
the California Courts of Appeal on
February 23, 1989 for reconsideration in
the light of the Commercial Life
decision. Commercial Life and these five
other cases which had already reached the
California Supreme Court are just the tip
of the iceberg.
24
countless other cases pending in the
Ninth Circuit and U.S. District Courts
of California and in the California State
Courts which present the very same
issue. [14]
Although the California Supreme
Court has now judicially abolished the
private right of action under California
Insurance Code Section 798.83(h), the
Court made it clear that the Legislature
of the State of California has the power
to reinstate this right of action.
14. The instant Kanne case is the
leading federal case on the subject, and
its importance is underscored by the
numerous Amicus Curiae Briefs filed in
the Court of Appeals. Amicus Curiae
included the United States Government in
support of Connecticut General and the
Attorney General of the State of
California in support of the Kannes. The
American Council of Life Insurance, the
Health Insurance Association of America
and the Association of California Life
Insurance Companies also filed Amicus
Curiae Briefs in support of Connecticut
General. Other “numerous amici” supported
the Kannes (Appendix D at pp. 78, 93).
25
Moradi-Shalal v. Fireman's Fund Ins.
Cos., 46 Cal.3d 287, 305, 758 P.2d 58, 69
(1988). Moreover, the Moradi-Shalal
decision applies prospectively only, and
does not affect the large number of
pending cases asserting causes of action
under California Insurance Code Section
798.83(h). See 46 Cal.3d at p.305, 758
P.2d at p. 69.
Nor is the reach of the present
issue confined to California. Numerous
other states have laws which seek to
deter unfair insurance practices by
assessing various penalties. See, e.g.:
Van Dyke v. St. Paul Fire & Marine Ins.
Co., 448 N.E.2d 357 (Mass. 1983) (cause
of action allowed for breach of
Massachusetts’ Insurance Unfair Claims
Practices Act): Griswold v. Union Labor
Life Ins. Co., 442 Atl.2d 920 (Conn.
1982) and Mead v. Burns, 5@9 Atl.2d 11
26
(Conn. 1986) (cause of action allowed for
breach of Connecticut's Unfair Trade
Practices Act); Sparks v. Republic Nat.
Life Ins. Co., 647 8.24 1127 (Ariz.
1982), cert. den., 459 U.S. 18078, 183
S.ct. 498 (1982) (to the same effect
under Ariz. Rev. Stats Section 20-443);
Jenkins v. J.C. Penney Cas. Ins. Co., 2898
S.E. 2d 252 (W.Va. 1981) (to the same
effect under West Virginia statute);
Klaudt v. Flink, 658 P.2d 1065 (Mont.
1983) (to the same effect under Montana
statute); Mo. Rev. Stat. Section 375.296
(allowing extracontractual damages and
attorneys fees against insurance
companies for vexatious refusal to pay);
Tex. Ins. Code Ann. Art. 3.62 (same); La.
Rev. Stats 22:657 (providing for
penalties for failure to promptly pay
claims arising out of health and accident
contracts).
The foregoing statutes, and similar
statutes in other states, will be
rendered a nullity under the Kanne
Court's interpretation of this Court's
decision in Pilot Life, supra. The Kanne
Court's interpretation of Pilot Life in
effect attributes to this Court's opinion
in Pilot Life a statutory interpretation
which ignores the plain words of the
statute. The Kanne Court's
interpretation is that the savings clause
does not apply to_ ERISA's enforcement
provisions. This is plainly incorrect.
The savings clause provides that
“nothing in this subchapter shall be
construed to exempt or relieve any person
from any law of any State which regulates
insurance..." 29 U.S.C. Section
1144 (b) (2) (A) (emphasis added). The
“subchapter” referred to is Subchapter I
of ERISA, entitled "Protection of
28
Employee Benefit Rights." The savings
clause is in Part 5 of Subchapter I. The
ERISA enforcement provisions are also in
Part 5 of Subchapter I. See 29 U.S.C.
Section 1132. Hence, the statute clearly
provides that ERISA's enforcement
provisions do not apply to State laws
regulating insurance. To interpret Pilot
Life as holding otherwise would impute to
this Court an intention to ignore the
plain words of the statute--an intention
which cannot be imputed to this Court.
It is particularly inappropriate to
impute such an intention to this Court
from statements in the Pilot Life
decision because the issue was not before
this Court in Pilot Life. Pilot Life did
not involve a State law regulating
29
insurance. [15]
We believe that the more rational
interpretation of the second half of
Pilot Life--and the interpretation
consistent with the statutory language--
is that the discussion therein merely was
15. Two other Court of Appeals
decisions have interpreted Pilot Life in
a fashion similar to the Ninth Circuit's
interpretation. See, e.g.-: In _ Re: Life
Ins. Co. of North America, 857 F.2d 11906
(8th Cir. 1988) (the Court held that
ERISA preempts Mo. Rev. Stat. Section
375.428, which provides a penalty for
vexatious refusal to pay insurance
benefits. The Court relied on the second
portion of the Pilot Life opinion, which
it construed as holding that "no state
law purporting to supply additional
remedies will escape the preemptive
effect of Section 1144(a) as laws ‘which
regulate insurance' under Section
1144(b)(2)(A)" (857 Fed. 2d at p.1194]);
Anschultz v. Connecticut General Life
Ins. CoO., 850 F.2d 1467 (llth Cir. 1988)
(holding that under Pilot Life, ERISA
preempts the Florida Insurance Unfair
Practices Act, Florida Stat. Section
624.155. The Court, relying on the
second portion of Pilot Life, held:
“where otherwise applicable, ERISA
preempts all state law." [850 F.2d at
p.1469] [emphasis in original]).
38
intended to set out another element to
consider in determining whether a State
law regulates insurance so as to come
within the saving clause. In discussing
the criteria to be utilized in
determining whether the saving clause
applies, this Court in Pilot Life said
that several considerations guided it.
481 U.S. at p.48, 1087 S.Ct. at p. 1553.
First, this Court was guided by a
"common-sense view of the language of the
saving clause itself" (ibid). Then, it
applied the three criteria set forth in
Union Labor Life Ins. Co. v. Pireno, 458
U.S. 119, 129, 102 S.Ct. 3902, 3009
at pp. 1553-4). Finally, in the portion
of Pilot Life relied on by the Court of
Appeals in the instant case, this Court
considered the role of ERISA in promoting
uniformity of enforcement for actions by
31
ERISA-plan participants and beneficiaries
(481 U.S. at pp. 51-57, 107 S.Ct. at pp.
1555-1558).
We submit that this last criterion
constitutes a criterion this Court
considered in determining the scope of
the saving clause and it alone cannot
take a state law regulating insurance
Outside the ambit of the saving clause.
Otherwise, it would nullify the saving
clause completely, and would make
superfluous this Court's previous
discussion in the Pilot Life opinion as
to whether the State law in question
regulated insurance and satisfied the
Union Labor Life requirements.
Thus, the opinion in Pilot Life
concludes with the statement that the
“state law suit asserting improper
processing of a claim for benefits under
an ERISA-regulated plan is not saved by
32
Section 514(b)(2)(a) and therefore is
pre-empted by Section 514(a)." (481 U.S.
at p. 57, 107 S.Ct. at p.1558) (emphasis
added). We interpret this to mean that
the suit was pre-empted because the law
involved was not a State law regulating
insurance within the saving clause. It
does not mean that suits based on State
laws which do regulate insurance and are
hence within the saving clause are also
subject to pre-emption. If this Court
intended to hold that ERISA's enforcement
provisions preempt all State laws
regardless of whether or not they
regulate insurance, it would have been
wholly unnecessary for this Court to
extensively discuss all of the reasons
that the Mississippi common law rules
involved in Pilot Life did not constitute
a state law regulating insurance.
This conclusion is supported by this
a2
Court's decision in Metropolitan Life
Ins. Co. v. Massachusetts, 471 U.S. 724,
195 S.Ct. 2388 (1985), where this Court
held that there is a presumption against
pre-emption of areas of "traditional
state regulation" (471 U.S. at p.748, 105
S.Ct. at p.2389) and that “we are not
inclined to read limitations into federal
statutes in order to enlarge their pre-
emptive scope.” (471 U.S. at p.741, 195
S.Ct. at p.2390). This Court rejected
the contention that "Congress intended
fa] marrow reading of the saving clause."
(471 U.S. at pp. 745-746, 105 S.Ct. at p-
2392. See also 471 U.S. at pp. 746-747,
195 S.Ct. at p.2393). This Court stated
that the saving clause is "broad on its
face" (471 U.S. at op. 746, FN 24, 105
$.Cct. at p.2393, FN 24). These
statements establish that the saving
clause may not be nullified by refusing
34
to apply it to a situation that comes
squarely within its terms.
The interpretation of the Court of
Appeals in the instant case would mean
that this Court did a complete about face
only two years after Metropolitan Life
was decided. Pilot Life contains nothing
to indicate that this Court intended to
effect such a sweeping reversal of the
holding in Metropolitan Life.
We respectfully submit that the
District Court in Graves v. Blue Cross of
California, 688 F.Supp. 1405 (N.D. Cal.
1988) correctly interpreted Pilot Life.
Therein, the Court rejected the
interpretation that the second half of
Pilot Life limited actions under State
laws regulating insurance to ERISA
remedies. The Court said:
"..e-such a holding would
conflict with both the language
of ERISA itself and the Supreme
35
Court's pronouncements in
Metropolitan Life. . .Since
ERISA's civil enforcement
provisions are contained in the
same subchapter as the saving
clause, see 29 U.S.C. Section
1132, the plain language of the
statute precludes a ruling that
state laws falling within the
boundaries of the saving clause
are nevertheless preempted if
they interfere with the
policies underlying the
exclusive civil enforcement
scheme. In effect, such a
holding would rewrite the
Saving Clause..." (688 F.Supp.
at pp. 1412-1413) (emphasis
added).
The District Court then noted the
language of Metropolitan Ins. Co.
Ve
Massachusetts, supra, and said:
"In this Court's view, the
only way to square Pilot Life
with Metropolitan Life and the
plain language of ERISA is to
read the Pilot Life exclusivity
analysis as merely bolstering
the Court's apparent conclusion
that the Mississippi bad faith
law was not insurance
regulation within the meaning
of the saving clause. In other
words, the insurance regulation
and exclusive remedy discussion
in Pilot Life are not
independent, alternative
36
holdings, but interdependent
considerations supporting the
Court's conclusion that the
saving clause does not apply."
(688 F.Supp. at p.1413)
(emphasis added)
In Commercial Life, supra, the
dissenting opinion of Justice Mosk
(joined in by Justice Broussard) points
out that under the statute it is plain
"that Section 798.83(h) is saved from
preemption by the express terms of ERISA:
the provision clearly ‘regulates
insurance’ [citation]. As I read their
opinion, the majority do not seriously
dispute that section 798.83(h) comes
within ERISA's saving clause--nor could
they fettation?. * * * ERISA does not
preempt Section 798.03(h), but expressly
saves the provision as a law
‘regulatLing] insurance.’ Further, the
civil enforcement scheme of the federal
statute does not displace the civil
37
enforcement scheme of the state act: the
former concerns the rights of employees
under covered plans, the latter the
duties of insurers under state laws."
(47 Cal. 3d at pp. 488-489, 764 P.2d at
pp. 1868-19869).
Justice Mosk then said:
"There is a growing and
ominous trend toward federal
preemption of issues that
belong within the sphere of
control by the individual
states. And these inroads into
traditional federalism are
taking place despite their
inconsistency with pious
rhetoric emanating from
Washington about returning
government to the people at
state and local levels." (47
Cal. 3d at p. 490, 764 P.2d at
p.-1869) (emphasis added).
We respectfully submit that these
comments are particularly appropriate in
light of the fact that the insurance
industry--with all the vast and able
legal resources at its command--has been
unable to cite in support of its position
38
one single expression from Congress in
all of the writings on ERISA's
legislative history. Nothing in that
history shows that Congress intended to
place sick and disabled beneficiaries of
employee group insurance plans at the
mercy of their insurers. To the
contrary, the saving clause constitutes a
plain expression of Congress' intent to
leave to the States the traditional State
law regulation of the duties of insurers
to the States’ citizens, as Justice Mosk
pointed out. See also: Petition for
Writ of Certiorari in Commercial Life,
supra, which sets forth other authorities
regarding the intent of Congress.
We respectfully submit that these
serious questions concerning
interpretation of Pilot Life urgently
require this Court to grant the instant
petition and definitively resolve the
39
question of whether or not the States are
powerless to enact or enforce legislation
designed to deter insurance companies
from inflicting on a State's citizens
anguish and hardship such as that
suffered by the Kannes at bar. We
respectfully submit that this issue is a
vitally important question of federal law
which has not been, but should be,
settled by this Court (Rule 17.1l(c)),
regardless of whether we are right or
wrong with respect to the ultimate
result.
II. THE ISSUE OF THE ELEMENTS
NECESSARY TO ESTABLISH THAT AN
INSURANCE ARRANGEMENT IS _ AN
“EMPLOYEE BENEFIT PLAN" SUBJECT
TO ERISA IS AN’ ISSUE OF WIDE-
SPREAD IMPORTANCE WHICH HAS
NEVER BEEN RULED ON BY THIS
COURT.
The issue of the elements necessary
to establish that a group insurance
policy is an "employee benefit plan"
subject to ERISA, pursuant to 29 U.S.C.
Section 1003(a), is also appropriate for
review, under the criteria of both Rule
17.1(a) and (c). As will be seen below,
the instant decision is in conflict with
other Court of Appeals decisions on this
issue. It is a vital issue which affects
every insurance arrangement made in an
employment setting. It affects the
rights of citizens of States to pursue
State law remedies in cases where an
employer arranges for an insurance policy
covering its employees, but there is no
written employee benefit plan and no
evidence that the employer had any
intention whatever to establish an
employee benefit plan subject to ERISA or
made any attempt to comply with the
41
various ERISA regulations governing such
plans. Such regulations include numerous
onerous reporting and record keeping
requirements. See, e.ge- 29 U.S.C.
Sections 10821-1029. An employer who
willfully violates any of these
provisions is guilty of a criminal act,
subjecting that employer to fine and
imprisonment. 29 U.S.C. Section 1131.
See Taggart Corp. v. Life & Health
Benefits Admin., 617 F.2d 1208, 1211 (5th
Cir. 1988), cert. den. sub. nom., Taggart
Corp. v. Efros, 458 U.S. 1030, 1801 S.Ct.
1739 (1981).
We respectfully submit that
employers, who are subject to criminal
prosecution, and employees, who are
threatened with loss of valuable rights
under State law, should be clearly and
definitively advised by this Court of the
circumstances when an insurance
42
arrangement constitutes an "employee
benefit plan" subject to ERISA.
This Court has never spoken on this
issue. A leading case from this Court
makes it clear that the provisions of
ERISA do not apply unless there is a plan
Or program. Fort Halifax Packing Co. v.
Coyne, Ga ~ a8) Oe. 3213
(1987). It does not address the issue of
the elements necessary to establish such
a plan or program.
The present opinion of the Court of
Appeals graphically demonstrates the
confusion and conflict among the Courts
on this issue. The Court of Appeals'
finding that an unwritten "employee
benefit plan" subject to ERISA existed in
the present case was based on at least
two propositions that are the subject of
conflict among the authorities:
(1) The proposition that the
43
nonexistence or absence of any of the
four criteria set forth in Department of
Labor regulation 29 CFR Section 25198.3-
1(34) is sufficient to subject an
insurance arrangement to ERISA (see
Section D, supra, Appendix Dat pp. 88,
89, 98).
(2) The proposition that the acts
of an employer association, as defined in
29 U.S.C. Section 1002(5), is sufficient
to subject an insurance arrangement to
ERISA, even when there is no evidence
that the direct employer played any part
in the management of the employer
association and no evidence that the
employer association consisted of
homogeneous, related employers (Section
D, supra. Appendix D at pp. 86, 89-90).
In the present case, the Court of
Appeals relied on these two propositions
to strip the Kannes of their rights under
44
well-established State law--and of the
fruits of this protracted and expensive
litigation.
The questionable nature of the first
proposition is established by holdings
that the nonexistence of one of the four
criteria set forth in the Department of
Labor regulation does not establish that
an insurance arrangement is subect to
ERISA. Thus, for example, in Rizzi v.
Blue Cross of So. Cal, 206 Cal. App. 3d
388, 253 Cal. Rptr. 541 (1988) the Court
analyzed the authorities and pointed out
that some authorities have held that
there is no ERISA plan “where the
employer ‘endorsed’ the policy sold by an
insurance trust, but the employer had no
control of the trust operation,
contributed no funds on behalf of the
employees, and the insurance brokers sold
the policies directly to individual
45
employees who paid the entire premiums.
[citations]" 205 Cal. App. 3d at p.386,
253 Cal. Rptr. at p.545 (emphasis added).
At bar, on the other hand, the alleged
presence of endorsement, which
established the non-existence of the
third criterion in the Department of
Labor regulation, was held to be
sufficient by itself to establish an
unwritten ERISA plan. See Appendix D at
pp. 88, 89, 96. See also: Sayble v.
Blue Cross of So. Cal., Cal. App. 3d
P Cal. Rptr. » filed March 290,
1989 (reported in the Los Angeles Daily
Journal Daily Appellate Reports for March
22, 1989 at p. 3587) (the Court held that
payment of premiums, which established
the non-existence of the first criterion
in the Department of Labor regulation,
was not sufficient to establish an
employee benefit plan where, as at bar,
46
Ll lela
there was no evidence of any other
employer involvement).
Moreover, in the present case the
Court of Appeals did not even find that
Mr. Kanne's direct employer's involvement
established the absence of any of the
four Department of Labor criteria. The
Court of Appeals found only that the acts
of ABC, an alleged employer group,
constituted "“endorsement," establishing
the absence of the third criterion
(Appendix D, pp. 88-90).
However, in order to be an "ERISA
employer" under 29 U.S.C. Section
18982(5), an alleged employer group or
association must be "a group or
association of employers acting for an
employer in such capacity." It has been
held that an employer association is not
an “ERISA employer" under this provision,
unless the evidence establishes that the
47
individual employer played a part in
management of the employer association.
If the employer association fails to show
what role the individual employers played
in itS management, it is not covered by
ERISA. See, e.g., Matthew 25 Ministries,
Ince, Ve Corcoran, 771 F.24 21 (24 Cir.
1985): Donovan v. Dillingham, 688 F.2d
1367, 1373, FN 11 (llth Cir. 1982). See
also Hamberlin v. VIP Ins. Trust, 434
F.Supp. 1196, 1198 (D. Ariz. 1977) (for
an employer group to be ané_ée ERISA plan,
the employers must have a voice in its
management); Baucom v. Pilot Life Ins.
Co., 674 F.Supp. 1175, 1181 (M.D.N.C.
1987) (same) ; Insurance & Prepaid
Benefits Trusts _v. Marshall, 90 FRD 783
(C.D. Cal. 1981) (an employer group can
qualify as an ERISA plan only when such
group involves an association of
employers, the employers participate in
48
the benefit committee and that committee
makes final decisions). See also:
Rizzi, supra.
Moreover, where an employer group
consists of "heterogeneous, unrelated
employers," ERISA is inapplicable.
Credit Managers Ass'n v. Kennesaw Life &
Acc. Ins., 809 F.2d 617, 625 (9th Cir.
1987). In the Rizzi case, supra, the
California Court of Appeal specifically
questioned the instant Kanne decision
because of this rule (206 Cal. App. 3d at
p.386, FN 4, 253 Cal. Rptr. at p.544, FN
4).
Thus, the Court of Appeals’ holding
in the instant case is directly contrary
to all of the above authorities, since
there was no evidence that Harlow Carpets
(or, for that matter, any other employer)
played any part in the management of ABC,
the purported "ERISA employer," and no
49
evidence that ABC was a group of
homogeneous, related employers.
Another conflict among the
authorities is presented by the question
of whether employer intent is necessary
to establish an unwritten employee
benefit plan subject to ERISA.
In Wayne Chemical v. Columbus Agency
Service Corp., 567 F.2d 692 (7th Cir.
1977), the Court held that an employee
benefit plan governed by ERISA is not
established when the employer applies for
insurance and pays premiums "without any
knowledge that the plan exists.
Establishing, maintaining or
participating in a plan requires an
intent, or ie (567 F.2d at p.699)
(emphasis added) Similarly, the opinion
of the Court of Appeals in the present
case also indicates that an intent to
form an ERISA plan is necessary, since it
uy
'¢,.)
x
found such intent, although only on the
part of ABC (Appendix D at p.98). On the
other hand, Donovan v. Dillingham, supra,
indicates that intent is unnecessary,
Since it sets forth different criteria
for determining whether a plan is
governed by ERISA (688 F.2d at p.
1373). [16] Rizzi, supra, specifically
raises the question of "whether a test
based on an employer's subjective intent
is appropriate." (206 Cal. App. 3d at p.
387, FN 7, 253 Cal. Rptr. at p.545, FN
7).
The Courts of Appeal are also in
conflict on the subject of whether the
“bare purchases of health insurance" may
constitute a "plan" subject to ERISA.
16. The Donovan test is "whether
from the surrounding circumstances a
reasonable person could ascertain the
intended benefits, beneficiaries, source
of financing, and procedures for
receiving benefits" (688 F.2d at p. 1373).
51
Taggart Corp. ve. Life & Health
Benefits Admin., supra, 617 F.2d 1208,
1211, held that there is no ERISA plan
under these circumstances. Donovan v.
Dillingham, supra, holds that “bare
purchases of health insurance" is
evidence of an employee benefit plan
governed by ERISA and the issue is one of
fact to be decided on a case by case
basis (688 F.2d at p.1373). Donovan
specifically disapproves the holding of
Taggart Corp., supra, on this subject.
(688 F.2d at p. 1375).
In Rizzi v. Blue Cross of So. Cal.,
supra, the California Court of Appeal
noted the confusion and inconsistency
among the authorities (206 Cal. App. 3d
at pp. 384-388, 253 Cal. Rptr. at pp.
543-546), stating that the various
“analytical approaches" the Courts have
considered "do not always coincide" (286
$2
Cal.App.3d at p. 389, 253 Cal.Rptr. at p.
547).
Indeed, as noted above (FN 2,
supra), counsel for respondent have
themselves advised this Court that there
is “An Increasingly Significant Circuit
Split And Wide-Spread Division And Error
In The Lower Courts" on this subject
(Petition in Pacific Mutual Life Ins Co.
v. Turnbow, supra, p. 16): a "sharp
Circuit conflict" on this subject (id. at
p- 18): and “increasing division and
error in the lower courts on ERISA's most
basic issues of coverage and preemption,
all stemming from an irreconcilable
Circuit conflict." (id. at p. 19).
- 29 therefore clear that the
certainty so urgently needed on this
subject is utterly lacking, and it is
vital that this Court issue a definitive
pronouncement of the criteria that
a2
determine what constitutes an employee
benefit plan governed by ERISA, under 29
U.S.C. Section 19803(a). We respectfully
suggest that this Court should adopt
criteria which may be easily understood
and applied.
We respectfully submit that it would
be error to permit vague, ambiguous and
obscure criteria to determine this
question, and particularly because of the
criminal sanctions which may be imposed
upon employers for failure to comply with
ERISA requirements, under 29 U.S.C.
Section 1131. It is elementary that a
criminal statute must be plain and
unambiguous. Under current authorities,
there is no way of knowing with certainty
when ERISA is applicable and when the
duty of compliance with ERISA regulations
arises.
We therefore respectfully submit
54
that it is urgently necessary that the
state and federal courts throughout this
country receive concrete guidance from
this Court on this subject. Otherwise,
confusion and uncertainty will
proliferate and will create intolerable
chaos in the state and federal court
systems. [17]
Conclusion
This Court's decision in Pilot Life,
supra, urgently requires clarification in
order that the States may know whether or
17. Prior to this Court's decision
in Pilot Life, most courts had held that
ERISA did not preempt common law causes
of action for bad faith. See, e@.G-,
cases cited at FN 9, supra. Under Pilot
Jife there are a large number of common
Taw bad faith cases throughout the
country that would be preempted by ERISA,
if it applies, and the issue of whether
it applies, which was largely academic
before Pilot Life, has now become
pivotal. See, e.g-, Appendix D at pp.
os
ui
ui
not they have the power to enact laws
regulating insurance which will
effectively deter predatory insurance
practices such as those demonstrated by
the record at bar. It was never the
intention of Congress to handcuff the
States' ability to protect their citizens
from the hardships which may result from
such practices. Nor did Congress intend
to compel health care providers, such as
hospitals--whose costs and finances are
already a grave national problem--to, in
effect, make interest-free loans to
insurance companies (see FN 6, supra).
It is also urgently necessary that
the State and Federal Courts be afforded
guidance with respect to when the federal
law embodied in ERISA applies to medical
and disability insurance arrangements
that are not the subject of any written
employee benefit plan. The consequences
56
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present state of confusion and
nty are most grave All sides to
“Ontrovers acree that an
itative pronouncement from this
ecessary to prevent the further
this deeply troubling confusion
rtaint
Respectfully submitted,
LEONARD SACKS
15915 Ventura Boulevard
Suite 384
Encino, California 91436
(818) 986-7288
Attorney for Petitioners
Theodore and Beatriz Kanne
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