Opposition Brief — Aetna Life Insurance v. Borges

HP er

FILED

») juN 14 88

JOSEPH F. SPANIOL, JR

=ELERK

No. 88-1883 ae “——

In Che

Supreme Court of the United States

OCTOBER TERM, 1988

AETNA LIFE INSURANCE CO.,

Petitioner,

V.

FRANCISCO L. BORGES, TREASURER

OF THE STATE OF CONNECTICUT, and

STATE OF CONNECTICUT,

Respondents.

On Petition For Writ of Certiorari

to the United States Court of Appeals

for the Second Circuit

RESPONDENTS’ BRIEF IN

OPPOSITION TO PETITION

CLARINE NARDI RIDDLE

Deputy Attorney General

(Acting) Attorney General

WILLIAM J. PRENSKY*

Assistant Attorney General

110 Sherman Street

Hartford, CT 06105

Telephone (203) 566-4899

“Counsel of Record for Respondents

a ate ol, Nghia oy

QUESTION PRESENTED

Whether the Employee Ketirement Income Security

Act of 1974 (“ERISA”) preempts Connecticut’s unclaimed

property statute, Conn. Gen. Stat. § 3-64a, as it applies to

issued but uncollected checks and drafts for employee

benefits provided through ERISA plans which are

charged for such benefits in accordance with Aetna’s

presented basis accounting procedure?

il

TABLE OF CONTENTS

Page

QUESTION PRESENTED .... 2.6 000s0s006eeueneeees i

TABLE OF AUTHORITIES ......052000ss0sc0ue moun iii

STATEMENT OF THE CASE.......000s00s0sutvauns 1

REASONS FOR DENIAL OF THE PETITION....... 3

COPNCLUBION, oo nc sewccenccind serie esenen heer 10

iii

TABLE OF AUTHORITIES

Page

CasEs:

Aetna Life Insurance Co. v. Borges, 869 F.2d 142 (2d

EE GW Ge wees eer ss veccssercceses 3, 6

Aetna Life Insurance Co. v. Parker, 692 F. Supp. 94

EE eee 1

American Telephone and Telegraph Co. v. Merry, 592

ES ) 6, 7,9

Attorney General v. Blue Cross & Blue Shield, 168

Mich. App. 372, 424 N.W.2d 54 (1988) ............. 5

Blue Cross & Blue Shield of Florida, Inc. v. Depart-

ment of Banking & Finance, 791 F.2d 1501 (1ith

ee ge nec cserssccccsccces 5, 6

Connecticut Mutual Life Insurance Co. v. Moore, 333

rks ass sso noses sscccseces 7

Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1

eG Gis sec e sete cece et ceesceeesees 8

Mackey v. Lanier Collections Agency & Service, Inc.,

EE er eee 4,9

Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41

TE eee 8

Ray v. Atlantic Richfield Co., 435 U.S. 151 (1978) ...... 6

Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), cert.

OS) 6, 7,9

Shaw v. Delta Airlines, Inc., 463 U.S. 85 (1983) ...5, 6, 9

iv

TABLE OF AUTHORITIES - Continued

Page

FEDERAL STATUTES:

5 U.S.C. § 8902(m)(1) (1982)..... 6. eee eee ee ee eee eee 5

Employee Retirement Income Security Act,

RON i cay nee eec dass cAC eRe erseen eae heteeense 8, 9

Employee Retirement Income Security Act,

RGD chu than seo asee toch nea es pAesesaeee mbes i. @

StraTE STATUTES:

Conn. Gen. Stat. § 3-64a (1989) ..... 0. .ccceecees 7, 8,9

Conn. Subst. Senate Bill No. 1064, 1989 Gen.

Re ee ee ean d Lae CRECE ERE 8

STATEMENT OF THE CASE

In addition to the facts stated by the petitioner, the

following facts, stipulated by the parties, are relevant to

the disposition of the case. These facts pertain to Aetna’s

intricate accounting procedures used to calculate pre-

miums charged to ERISA plans. The parties agreed that

Aetna relies on its method of premium computation as a

matter of its own choosing, rather than as a result of any

legal obligation. Petitioner’s Appendix (Pet. App.) at A44,

q@ 9; A46, TY 15, 16.3

Aetna’s contention that under section 514(a) ERISA

preempts Connecticut’s unclaimed property law with

regard to the checks and drafts it issues in payment of

ERISA benefits requires an explanation of this accounting

method. The District Court, relying on the parties’ joint

stipulation, found the following facts.2 Using a method of

group insurance pricing called “experience rating,” Aetna

1 On this point the District Court specifically noted the

following: By the terms of its contracts with policyholders,

Aetna has discretion to set the amount of credits applied

toward premiums; on occasion, Aetna has negotiated the

amount of premiums and credits with ERISA plans; and it has

made adjustments to premiums in order to prevent poli-

cyholders from terminating or cancelling their policies. Pet.

App. at Al9.

2 The District Court decision is reported as Aetna Life

Insurance Co. v. Parker, 692 F.Supp. 94 (D. Conn. 1988); however,

for the convenience of the Court, reference to that decision is

made through references to Petitioner’s Appendix, pages A16

to A33, inclusive, wherein that decision is reprinted.

bases premiums for the ensuing year on several factors,?

the most important of which is the amount actually paid

in claims to members of that group during the pending

year. Pet. App. at A18; A44, 7 8. Aetna does not include a

claim from the previous year in its experience rating until

the claim payment draft has cleared banking channels — a

practice known as “presented basis accounting.” Pet.

App. at A18; A45, J 12; A46, J 17. Aetna uses the oppo-

site method, “issued basis accounting,” in which it

charges drafts to the appropriate plan at the time it issues

the drafts, only for pharmacy and repetitive payment

claims. Pet. App. at A46, J 18; A52, ¥ 41. Most insurers, in

contrast to Aetna, use “issued basis accounting” for the

ERISA and non-ERISA plans they insure. Pet. App. at

A18-A19; A46, J 19.

To cover the contingency in which Aetna’s payment

does not clear banking channels during the policy year,

Aetna sets aside a reserve fund for payment of these

claims based upon the group’s claims history. Pet. App. at

A19; A45, 9 10. The size of this reserve fund is also a

factor in a plan’s experience rating and will thus affect

insurance premiums. Pet. App. at A45, 7] 11, 12.

When an ERISA plan cancels or terminates an Aetna

insurance policy, Aetna continues to pay claims submit-

ted under the plan in the usual manner for two additional

3 Some of these factors, other than claims clearing banking

channels, see text infra, are: a contingency for unrecoverable

losses (Pet. App. at A45, 4 11); administrative charges; an

amount for current reserves for incurred but unrecorded

claims less an amount for prior required reserves; and profit

charges. Pet. App. A45-46, ¥Q 11, 12, 13.

years. Pet. App. at A19; A48, J 29. Two years after the

plan ends, Aetna returns the reserve funds to the plan,

deducting a 2 percent residual for unclaimed drafts that

the claimant may subsequently present. Pet. App. at A19;

A46, J 14. Once a final accounting has taken place, Aetna

cannot charge a cancelled or terminated plan for drafts

that a claimant subsequently presents for payment. Pet.

App. at A48, 7 30.

>

7.

REASONS FOR DENIAL OF THE PETITION

1. The question presented by the petitioner asks to

what minimal extent does Connecticut’s unclaimed prop-

erty law have an impact on Aetna’s accounting system.

This is an esoteric issue of limited precedential value. The

facts of this case turn on the unique and discretionary

accounting method Aetna employs to charge premiums to

the ERISA plans it insures. Petition (Pet.) at 3;4 See the

detailed accounting method outlined in the joint stipula-

tion of facts, Pet. App. at A44-A46, 79 12-17; A48, 7 29.

The parties stipulated that most insurers do not use the

“presented basis” accounting method relied on by Aetna.

Pet. App. at A46, 77 19, 20. The Court of Appeals relied

on the following stipulaied facts regarding the operation

of Aetna’s accounting methods:

4 The decision below is reported as Aetna Life Insurance Co.

v. Borges, 869 F.2d 142 (2d Cir. 1989); however, for the conve-

nience of the Court, references to that decision will be made to

Petitioner’s Appendix, pages A1 to A15, inclusive, wherein the

decision is reprinted.

The premium that Aetna charges to employers is

based on each employer’s “experience rating” —

that is, it is related to the cost of providing

benefits to the employees of that company in

previous years. The more benefits paid out

under a plan, the higher the premium will be for

the employer.

Not infrequently, after Aetna approves an

employee’s claim for benefits and issues a draft

on an Aetna account to pay the claim, the

employee fails to present the draft for payment.

The draft then remains on Aetna’s records as

outstanding... .

Aetna generally calculates the experience rating

of employers on the basis of checks presented

for payment (“presented basis” accounting)

rather than on all checks that have been issued

(“issued basis” accounting). .. .

Most other insurers in Connecticut use issued

basis accounting. To the extent that issued basis

accounting may lead to higher premiums, Aetna

enjoys a competitive marketing advantage over

its competitors.

Pet. App. at A2 to A3.

Thus, any cost that ultimately may be passed on to

ERISA plans through the operation of Connecticut’s

unclaimed property law is directly caused by Aetna’s

discretionary accounting procedures. Furthermore, the

Court below was correct when it characterized the eco-

nomic impact of Connecticut’s law on the plans as “not

substantial enough, however, to persuade us that this is

the type of law Congress intended to preempt.” Pet. App.

at Al2. “[I]ndirect economic impact alone is not suffi-

cient.” Pet. App. at A14.

2. The decision below does not conflict with any

other federal or state court decision on the issue of ERISA

preemption of state unclaimed property or escheat laws.

On the contrary, there is consistency and unanimity on

this issue. As Circuit Judge Newman noted, speaking for

the Court, the Michigan Court of Appeals has ruled that

the State of Michigan’s escheat law was not preempted by

ERISA. Attorney General v. Blue Cross & Blue Shield, 168

Mich. App. 372, 424 N.W.2d 54 (1988). Pet. App. at A4.

There are no other reported decisions involving state

unclaimed property or escheat laws and ERISA

preemption.

Petitioner manufactures a conflict between the cir-

cuits when it claims Blue Cross & Blue Shield of Florida, Inc.

v. Department of Banking & Finance, 791 F.2d 1501 (11th

Cir. 1986) is inconsistent with the Second Circuit’s deci-

sion in this litigation. In the Eleventh Circuit case, Flor-

ida’s escheat law was held preempted, not by ERISA, but

by a totally distinct federal statute, 5 U.S.C. § 8902(m)(1)

(1982), dealing with a contractual provision in federal

health benefits contracts.

Also, the Florida and Connecticut cases arise in dif-

ferent contexts. The Eleventh Circuit’s scope of review

was confined to the examination of an administrative

record. The Eleventh Circuit was concerned whether a

federal agency’s determination of preemption was rea-

sonable and not whether that position was actually cor-

rect in the first instance, as was the case in the Second

Circuit’s decision. In its ruling, however, the Eleventh

Circuit specifically recognized, as did the Second Circuit

here, the limiting parameters of ERISA preemption set

forth by this Court in Shaw v. Delta Airlines, Inc., 463 U.S.

85 (1983), to wit, that some state laws may affect

employee benefit plans in too tenuous, remote or periph-

eral a manner to warrant a finding that the law “relates

to” the ERISA plan. Blue Cross & Blue Shield of Florida, Inc.

v. Dept. of Banking and Finance, 791 F.2d at 1505. See also

Aetna Life Insurance Co. v. Borges, Pet. App. at A12 (“[Wle

think that the impact of Connecticut’s escheat law on

ERISA benefit plans is too tenuous, remote, and periph-

eral to require preemption under Section 514(a).”) The

Eleventh Circuit opined that as to its preemption finding,

“the opposite conclusion might also be reasonable.” Blue

Cross & Blue Shield of Florida, Inc. v. Dept. of Banking and

Finance, 791 F.2d at 1506.

3. The Court of Appeals reached a correct and fair

decision. It aptly observed that ERISA does not address

the situation involved in this case; that is, ERISA neither

prescribes any particular’ procedure for handling ERISA

benefits that are awarded but uncollected, nor does it

specify a time limit for honoring such claims. Pet. App. at

A4-A5. Noting this, the Court applied two decisions of

this Court. It considered the general test for preemption

of state laws which embody the traditional exercise of

state power. Such laws are “not superceded by a federal

act unless that was the clear and manifest purpose of

Congress.” Ray v. Atlantic Richfield Co., 435 U.S. 151, 157

(1978). Pet. App. at A5. The Court also relied on the rule

that some state laws can have a minimal or remote effect

on ERISA plans yet not be superceded hv ERISA. Shaw v.

Delta Airlines, Inc., 463 U.S. 85, 100 n. 21 (1983), citing

American Telephone and Telegraph Co. v. Merry, 592 F.2d

1181, 1121 (2d Cir. 1979). Pet. App. at A7. See also Rebaldo

v. Cuomo, 749 F.2d 133, 138 (2d Cir. 1984), cert. denied, 472

U.S. 1008 (1985).

Within that framework, the Court of Appeals consid-

ered the three relevant areas in ERISA preemption anal-

ysis. First, it found that Connecticut’s unclaimed property

statute, Conn. Gen. Stat. § 3-64a, falls squarely within the

class of laws recognized as historic police powers of the

states. Escheat of abandoned property is such an area of

traditional state authority. Connecticut Mutual Life Insur-

ance Co. v. Moore, 333 U.S. 541, 547 (1948).° Pet. App. at

Al2.

Realizing that the traditional police power aspect of

the state law is not sufficient by itself to survive preemp-

tion, the Court’s second area of inquiry was the economic

impact, if any, of the Connecticut statute on ERISA plans.

Pet. App. at A10-A13. Although there is a limited eco-

nomic impact here, it is caused solely by Aetna’s volun-

tarily selected method of accounting which Aetna uses

for pricing its insurance products. Thus, the economic

impact of section 3-64a is solely indirect and, as the Court

noted, not substantial enough to indicate that it is that

type of law Congress intended ERISA to preempt.

Lastly, the Court considered the impact of the state

law on the administrative functions of ERISA plans. Pet.

5 Federal courts have held that state laws involving other

areas of traditional state control survive ERISA preemption;

e.g., Mackey v. Lanier Collections Agency & Service, Inc., 108 S.Ct.

2182 (1988) (state garnishment laws); American Telephone and

Telegraph Co. v. Merry, 592 F.2d 1181 (2d Cir. 1979) (state domes-

tic relations statute); Rebaldo v. Cuomo, 749° F.2d 133 (2d Cir.

1984), cert. denied, 472 U.S. 1008 (1985) (state hospital cost

containment statute).

App. at A10-A11. Reviewing the facts of the case, the

Court correctly found that the application of the Connect-

icut statute does not affect the calculation of ERISA bene-

fits, the processing of payment or disbursing benefits, all

areas that are precluded by state law. Fort Halifax Packing

Co., Inc. v. Coyne, 482 U.S. 1, 9 (1987). Section 3-64a only

comes into play after the ERISA plan has performed all of

these vital administrative functions; the state statute

clearly has no effect upon, and does not interfere with,

the initial calculation and disbursement of ERISA bene-

fits. Pet. App. at All n. 3.

Petitioner claims section 3-64a provides an alterna-

tive cause of action to recover ERISA benefits due under

the terms of an ERISA plan in violation of section 502(a)

of ERISA. Pet. App. at A15-A18. Acknowledging section

502(a) is the exclusive vehicle for ERISA plan benefici-

aries and participants to recover benefits due under the

terms of ERISA plans, Pilot Life Insurance Co. v. Dedeaux,

481 U.S. 41, 54 (1987), the court below correctly observed

that section 3-64a “does not provide a civil action govern-

ing the issuance of drafts in the first instance,” which is

the intended gravamen of an action under section 502(a).

Pet. App. at A15. Section 3-64a solely insures delivery of

the ERISA draft many years after its issuance.®

6 The Connecticut General Assembly recently passed

Subst. Senate Bill No. 1064. This bill, if approved by the Gover-

nor, would relieve the Treasurer of his obligation to escheat

abandoned property which he has held in a custodial capacity

for many years. See section 4. The actual escheatment of any

funds held by the Treasurer would be purely discretionary,

potentially providing access to such property in perpetuity.

Petitioner’s argument under section 502(a) is therefore

inapposite and erroneous.

The Court of Appeals was well aware that this

Court’s analysis of Georgia’s generally applicable gar-

nishment law under ERISA’s preemption provision in

Mackey v. Lanier Collections Agency & Service, Inc., 108

S.Ct. 2182 (1988), was not upheld on the ground that the

law’s effect on ERISA plans was tangential. The Second

Circuit merely cited Mackey, however, as “an example of a

state statute with an indirect effect on ERISA plans that

the Court did not find inconsistent with ERISA.” See Pet.

App. at A9 n. 2. This analysis is in total accord with this

Court’s prior decisions. See Shaw v. Delta Airlines, Inc., 463

U.S. 85, 100 n. 21 (1983). See also Rebaldo v. Cuomo, 749

F.2d 133 (2d Cir. 1984), cert. denied, 472 U.S. 1008 (1985);

American Telephone and Telegraph Co. v. Merry, 592 F.2d 118

(2d Cir. 1979).

Furthermore, the court correctly applied the criteria

used by this court in Mackey. The Connecticut statute

“does not single out or specially mention ERISA plans of

any kind.” Mackey, supra, at 2186. The Connecticut statute

does not “expressly refer[] to — indeed, solely appl[y] to -

ERISA employee benefit plans.” Mackey, supra, at 2185

Section 3-64a does not focus specifically on ERISA plans

or benefits; it applies to lost or abandoned property

generally.

e

10

CONCLUSION

For the foregoing reasons, this Court should deny the

petition for a writ of certiorari.

Respectfully submitted,

Francisco L. Borcgs, Treasurer

of the State of Connecticut,

and State of Connecticut

Respondents

CLaARINE Narpi RIDDLE

Deputy Attorney General

(Acting) Attorney General

WiiuiaM J. PReNsky

Assistant Attorney General

110 Sherman Street

Hartford, CT 06105

(203) 566-4899

Counsel of Record

for Respondents

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