Amicus Curiae Brief — FMC Corp. v. Holliday

i Supreme Court, U.S,

FILED

No. 89-1048 1 | APR 20 3990

JOSEPH F. SPANIOL, JR,

IN THE CLERK

Supreme Court of the United States

OCTOBER TERM, 1989

FMC CORPORATION,

: Petitioner,

Vv.

CYNTHIA ANN HOLLIDAY,

Respondent.

~~

On Writ of Certiorari to the United States

Court of Appeals for the Third Circuit

BRIEF OF THE CENTRAL STATES, SOUTHEAST AND

SOUTHWEST AREAS HEALTH AND WELFARE FUND AS

AN AMICUS CURIAE IN SUPPORT OF PETITIONER

ANITA M. D’ARCY

Counsel of Record

JAMES L. COGHLAN

STEPHEN J. HARRIS

COGHLAN, JOYCE, KUKANKOS,

URBUT AND D’ARCY

250 South Wacker Drive, Suite 1500

Chicago, Illinois 60606

(312) 906-8299

WILLIAM J. NELLIS

Secretary to the Board of Trustees

Central States, Southeast and

Southwest Areas Health and

Welfare Fund

9377 West Higgins Road

Rosemont, Illinois 60018

(708) 518-9800

Attorneys for Amicus Curiae

Midwest Law Printing Co., Chicago 60611, (312) 321-0220

TABLE OF CONTENTS

—_—_—_—_-—__-

TABLE OF AUTHORITIES ................. il

THE INTEREST OF THE AMICUS CURIAE ..

SUMMARY OF THE ARGUMENT .......... 3

SE 08sec cen caneea steer

or

THE PREEMPTION TEST ADVANCED BY

THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT SEVERELY LIM-

ITS THE SCOPE OF ERISA PREEMPTION IN

VIOLATION OF THE PLAIN MEANING AND

LEGISLATIVE HISTORY OF SECTION 514 OF

ERISA AND THIS COURT’S DECISIONS ... 5

Il.

IF THE DECISION OF THE THIRD CIRCUIT

IS NOT REVERSED AND THE SCOPE OF

ERISA PREEMPTION MAINTAINED AT ITS

BROAD LEVEL, SIGNIFICANT AND AD-

VERSE PUBLIC POLICY PROBLEMS WILL

EE csscestourecneusceseesunseneeenas 13

PPS << cocdsuvnesactnessasasetecouun 21

REC MENE: 5 000.00ésebavenveenseeisusaaie la

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TABLE OF AUTHORITIES

Cases PAGE

Auto Club Ins. Ass’n v. Frederick & Herrud, Inc.,

433 Mich. 900 (1989), petition for cert. filed,

Thorn Apple Valley Inc. v. Auto Club Ins.

Ass’n, ____ U.S.L.W. ____ (U.S. Dec. 29, 1989)

SEE Da GudEEUsivneedevedesdsesecee. 20

Baxter v. Lynn, 886 F.2d 182, reh’g denied,

SS es f 80) Ne 18

Central States, Southeast and Southwest Areas

Pension Fund v. Central Transport, Inc., 472

8 ESS ae ree l

Central States, Southeast and Southwest Areas

Health and Welfare Fund v. Hawkeye-Security

Ins. Co., __. U.S. ___, 109 S.Ct. 783 (1989) .. 20

FMC Corp. v. Holliday, 885 F.2d 79 (3rd Cir.

1989), cert. granted, __-—~-U.S. ___, 110 S.Ct.

eee bb eereddeedeudsess passim

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

ge ERE Se 13

Hunt v. Sherman, 345 N.W.24°750 (Minn. 1984) .. 19

Liberty Mutual Ins. Co. v. Iron Workers Health

Fund of Eastern Michigan, 879 F.2d 1384,

reh’g denied, ____ F.2d ____ (6th Cir. 1989) .. 20

Metropolitan Life Ins. Co. v. Massachusetts, 471

ete we van waeeneeseecce 3, 6, 10, 12

Northern Group Services, Inc. v. Auto Owners Ins.

Co., 833 F.2d 85 (6th Cir. 1987), cert. denied,

i i CE ccc cevseccncesecccess passim

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1989) .. 6, 10

Shaw v. Delta Air Lines, Inc., 463 U.S. 85

eS CeUEeceeews passim

ill

United Food & Commercial Workers v. Pacyga,

801 F.2d 1157 (9th Cir. 1986) ............. 18

United States v. Ron Pair Enterprises, Inc., 489

U.S. ___, 109 S.Ct. 1026, 103 L.Ed.2d 290

EE EI ee 6

Winstead v. Indiana Ins. Co., 855 F.2d 430 (7th

Cir. 1988), cert. denied, U.S. _, 109

CO 20

Statutes

Employee Retirement Income Security Act of

1974, 29 U.S.C. §1001, et seg.: Sections 3(1),

404(aX1XB), 514(b\2XB), 2(a), 402(aX1), 403(a),

and 404(aX1\B),

BP MPM DEED cccccccccccccccccccccecccce l

29 U.S.C. §1104(aX1XB) .........00000.00 0005. 1,15

29 U.S.C. §1144(bX2KB) ...............00000. passim

ee 8

29 U.S.C. $1102(aN1) ..... 2... ce ee eee 12, 18

29 U.S.C. §1103(a) ....... cece cee eee 12, 18

29 U.S.C. §1104(aX1XD) .............. 0 eee eee, 18

The Michigan No-Fault Insurance Act, Mich. Comp.

Law Ann. §500.3101 et seg.: Section 500.310Ga,

Mich. Comp. Law Ann. §500.3109(a) .......... 17, 18

The Pennsylvania Motor Vehicle Financial Respon-

sibility Law of 1984, 75 Pa. Cons. Stat. Ann.

Section 1720,

75 Pa. Cons. Stat. Ann. §1720 ................ 18

iv

Other Authorities

A. Foster Higgins & Co., Health Care Benefits

Survey, 1988, Med. Benefits, Feb. 28, 1989 ..

Average Costs Rose 18.6 Percent Under Employer

Plans, Survey Finds, 16 Pens. Rep. (BNA) 250

PN ey GD ecnccsvevaucecausseesstusss

Costs Will Rise into the 1890s, Pushing Up Cor-

porations’ Benefits Costs, 16 Pens. Rep. (BNA)

ok ee ER Pere rere

DiBlase, Group Health Bills Equal A Third Of

Profits, Bus. Ins., May 29, 1989 ...........

Francis, U.S. Industrial Outlook 1989: Health Ser-

vices, Med. Benefits, Feb. 15, 1989 ........

Letsch, Levit & Waldo, National Health Expen-

ditures, 1987, 10 Health Care Fin. Rev. 109

PE SD ccics cers tee cue eS

Sharkey & Buckle, The Medicare Prospective Pay-

ment System: Impact On The Frail Elderly

And An Alternative Reimbursement Formula,

3 Notre Dame J. of L., Ethics & Pub. Pol’y 227

2 rr ee re rn ree

15

14

No. 89-1048

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

FMC CORPORATION,

Petitioner,

We

CYNTHIA ANN HOLLIDAY,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Third Circuit

BRIEF OF THE CENTRAL STATES, SOUTHEAST AND

SOUTHWEST AREAS HEALTH AND WELFARE FUND AS

AN AMICUS CURIAE IN SUPPORT OF PETITIONER

—

THE INTEREST OF THE AMICUS CURIAE

The Central States, Southeast and Southwest Areas

Health and Welfare Fund (‘‘Fund”’) is a Taft-Hartley trust

and an employee welfare benefit plan as described in Sec-

tion 3(1) of the Employee Retirement Income Security Act

of 1974 (“ERISA”), 29 U.S.C. §1002(1).1 See Central States,

Southeast and Southwest Areas Pension Fund v. Central

Transport, Inc., 472 U.S. 559, 561-562 (1985). The Fund

self-funds all medical, hospital and disability benefits that

it provides to its more than 500,000 participants and bene-

ficiaries. These participants and beneficiaries reside in

over thirty-four states of the United States.

Due to escalating medical care costs and limited income

in the form of fixed employer contributions, the Trustees

of the Fund have included cost-containment measures,

such as subrogation and coordination of benefits provi-

sions, in the plan pursuant to their fiduciary duties under

ERISA to manage plan assets prudently and in the best

interest of all participants and beneficiaries. See 29 U.S.C.

§1104(aX1XB). The Fund is significantly and adversely af-

fected by the ruling in this case by the United States

Court of Appeals for the Third Circuit because the Fund

does provide benefits to participants and beneficiaries who

reside in Pennsylvania. Due to the Third Circuit’s opinion

in this case, the Fund probably will not be able to en-

force its subrogation provision in Pennsylvania and thus

will be deprived of an important cost-containment meas-

! Both the petitioner, FMC Corporation, and the respondent, Cyn-

thia Ann Holliday, gave the Fund consent to file this amicus

curiae brief, and copies of their attorneys’ letters confirming this

consent have been sent with this brief to the Clerk of the United

States Supreme Court.

info.

ure. Moreover, the Fund will have to adopt different ad-

ministrative procedures to comply with this Pennsylvania

insurance law, thereby causing the Fund to incur another

financial cost and administrative burden.

The Fund is also adversely affected by the increasing

disregard of the scope of ERISA preemption as demon-

strated by the decision in this case and the decision of

the United States Court of Appeals for the Sixth Circuit

in the case of Northern Group Services, Inc. v. Auto

Owners Ins. Co., 833 F.2d 85 (6th Cir. 1987), cert. denied,

486 U.S. 1017 (1988). Both circuits have advanced equal-

ly vague tests for ERISA preemption which subordinate

Congress’ objective in including a broad preemption pro-

vision in ERISA, which is uniform, federal regulation of

employee benefit plans, to state regulation of insurance.

If this precedent is not corrected by this Court, the Fund,

like thousands of other multi-state employee welfare bene-

fit plans, will have to comply with conflicting and incon-

sistent state laws, many of which will require such plans

to duplicate benefits or assume the financial burden of

specific risk insurance coverage from specific risk insurers.

These plans will also be forced to engage in substantial

and widespread litigation due to the vagueness of these

preemption tests.

Such precedents will encourage other states to adopt

laws regulating employee benefit plans. The resulting

patchwork scheme of federal and state regulation of self-

funded employee welfare benefit plans will force these

plans to reduce substantially their benefit levels. Accord-

ingly, the Fund urges this Court to reverse the Third Cir-

cuit and to hold that ERISA preempts all state laws that

relate to self-funded employee welfare benefit plans, in-

cluding state insurance laws.

= =

SUMMARY OF THE ARGUMENT

The Fund urges this Court to reverse the holding of

the United States Court of Appeals for the Third Cir-

cuit in this case for several reasons. First, the Third Cir-

cuit’s interpretation of the deemer clause of Section 514

of ERISA directly conflicts with the plain meaning and

legislative history of Section 514 and with several of this

Court’s decisions. By advancing a new test for ERISA

pre-emption which states that the deemer clause allows

preemption of state insurance law only where the state

law conflicts with a “core ERISA concern,” the Third Cir-

cuit is undermining the clear and expressed purpose and

intent of Congress in including a broad preemption pro-

vision in ERISA which was to prevent patchwork regula-

tion of self-funded employee benefit plans by the states.

Moreover, the Third Circuit’s holding directly conflicts

with the decisions of this Court in Shaw v. Delta Air

Lines, Inc., 463 U.S. 85 (1983), and Metropolitan Life Ins.

Co. v. Massachusetts, 471 U.S. 724 (1985). Contrary to

the Third Circuit’s ruling, this Court in Shaw held that

ERISA preemption is not limited to state laws that deal

only with the subject matters covered by ERISA. 463

U.S. at 98. Moreover, the Third Circuit’s holding violates

the distinction mandated by Congress and recognized by

this Court in the Metropolitan Life case, wherein this

Court stated that insured employee benefit plans are sub-

ject to indirect state regulation while self-funded plans are

not. 471 U.S. at 747.

This decision should also be reversed because the deci-

sion of the Third Circuit further splits the United States

Courts of Appeal on the issue of the scope of ERISA

preemption for self-funded employee benefit plans. Both

a

the Third Circuit in this case and ‘xe Sixth Circuit in the

case of Northern Group Services, Inc. v. Auto Owners Ins.

Co., 833 F.2d 85 (6th Cir. 1987), cert. denied, 486 U.S.

1017 (1988), have advanced different but equally vague and

insupportable tests for ERISA preemption. The Third and

Sixth Circuits’ restrictive interpretations of Section 514

comict with the interpretations given by the Eighth,

Seventh. Ninth, Fourth and Fifth Circuits.

The Third Circuit’s decision also creates serious public

policy problems. it effectively prohibits self-funded em-

plovee benefit plans from enforcing plan cost-containment

measures that are critical to such plans. As a result of

escalating medical care costs and the limited financial

resources of such plans, many such plans have adopted

subrogation and coordination of benefits provisions as cost-

containment measures. If such plans are precluded from

utilizing these cost-containment measures, comparable

reductions in benefit levels will, at a minimum, have to

occur.

Moreover, the vague tests advanced by the Third and

Sixth Circuits for determining whether ERISA preempts

a particular state law have caused and will continue to

cause extensive and expensive litigation which employee

benefit plans can little afford. If the precedents set by

Third and Sixth Circuits are upheld by this Court, multi-

state employee benefit plans will incur the substantial and

potentially crippling administrative and financial costs of

having to adopt separate plans and administrative proce-

dures for each state in which their participants and bene-

ficiaries reside. Therefore, the Fund recommends that this

Court reverse the decision of the Third Circuit aad uphold

broad preemption under ERISA of state law relating to

self-funded employee benefit plans.

=

—)—

ARGUMENT

THE PREEMPTION TEST ADVANCED BY THE UNITED

STATES COURT OF APPEALS FOR THE THIRD CIR-

CUIT SEVERELY LIMITS THE SCOPE OF ERISA

PREEMPTION IN VIOLATION OF THE PLAIN MEAN-

ING AND LEGISLATIVE HISTORY OF SECTION 514 OF

ERISA AND THIS COURT’S DECISIONS.

The Third Circuit’s decision in the instant case directly

conflicts with the plain meaning and legislative history of

Section 514 of ERISA and with several of this Court’s deci-

sions which construe Section 514 of ERISA. In the instant

case, the Third Circuit presented a new test for ERISA

preemption, allowing preemption of a state insurance law

only where the state law conflicts with a “core ERISA

concern.”’ FMC Corp. v. Holliday, 885 F.2d 79, 86, 89-90,

reh’g denied, __ F.2d _____ (3rd Cir. 1989), cert. granted,

—____ US. ___, 110 S.Ct. 1109 (1990). To justify adoption

of this “core conflict test,” which subordinates Congress’

goal to establish uniform, comprehensive federal regulation

of employee benefit plans to the states’ power to regulate

insurance, the Third Circuit advances an insupportable in-

terpretation of the deemer clause in Section 514, selective-

ly cites legislative history out of context and criticizes a

prier ruling by this Court. As to the distinction drawn be-

tween preemption as applied to self-funded employee bene-

fit plans and insured employee benefit plans articulated by

this Court in the Metropolitan Life case, the Third Cir-

cuit states that it lacks statutory and legislative history

foundation. Jd. at 86-89. The Third Circuit’s decision also

constitutes a direct conflict with this Court’s holding that

ERISA preemption is not limited to state laws that deal

=

with the subject matters covered by ERISA. Shaw v. Delta

Air Lines, Inc., 463 U.S. at 98.

In construing the meaning of a statute, the starting

point of such an analysis is the language of the statute,

and unless an ambiguity in the language exists, this anal-

ysis should end without resorting to an analysis of the

legislative history underlying the statute. See United

States v. Ron Pair Enterprises, Inc., 489 U.S. , 109

S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). In the instant

case, the Third Circuit does not identify any ambiguity

in the deemer clause. Instead, it attempts to justify its

selective review and strained analysis of the legislative

history underlying the deemer clause by stating that the

deemer clause’s ‘“‘scope is unclear.”’ 885 F.2d at 84. The

Third Circuit then concludes that “. . . the deemer clause

guards against any insurance regulation that infringes on

such ERISA areas as reporting, disclosure and non-for-

feitability.” /d.

The Third Circuit’s analysis and conclusion are errone-

ous for several reasons. First, there is no ambiguity in the

deemer clause. This Court has held that the plain mean-

ing of the deemer clause is unambiguous: “The deemer

clause makes clear that a state law that ‘purport[s] to

regulate insurance’ cannot deem an employee benefit plan

to be an insurance company.” Pilot Life Ins. Co. v.

Dedeaux, 481 U.S. 41, 45 (1987). Thus, the deemer clause

is the specified exception to the savings clause, which pre-

serves state insurance and other laws from ERISA pre-

emption, and the deemer clause prohibits employee benefit

plans from being regulated by “. . . any law of any State

purporting to regulate insurance companies, insurance con-

tracts. .. .”” 29 U.S.C. §1144(bX2XB). See Metropolitan

Life Ins. Co. v. Massachusetts, 471 U.S. 724, 733 (1985).

Moreover, this Court has emphasized that, in construing

7

—_—(—

Section 514 of ERISA, the plain language must be en-

forced unless there is a good reason to believe Congress

intended a more restrictive meaning to apply. Shaw v.

Delta Air Lines, Inc., 463 U.S. at 97.

The Third Circuit’s analysis of the deemer clause also

fails due to its highly selective and biased review of the

legislative history underlying Section 514 of ERISA. In

examining the legislative history, the Third Circuit main-

tains that preemption under the deemer clause is basically

limited to state laws that constitute ‘“. . . back-door at-

tempts by states to regulate core ERISA concerns in the

guise of insurance regulation.” 885 F.2d at 86, cited in,

Northern Group Services, Inc. v. Auto Owners Ins. Co.,

833 F.2d 85, 91-94 (6th Cir. 1987), cert. denied, 486 U.S.

1017 (1988). To support this argument, the Third Circuit

selectively quotes comments of ERISA legislative spon-

sors which relate only to their concern with state laws

being “hastily contrived” to regulate ERISA plans. How-

ever, the very quotations utilized by the Third Circuit

serve to underscore Congress’ primary concern in includ-

ing a broad preemption provision in ERISA, which was

that employee benefit plans be subject to uniform federal

regulation. The Senator Javits quotation, that ERISA

preemption extended to “ {s]tate laws hastily contrived

to deal with some particular aspect of private welfare or

pension benefit plans not clearly connected to the Federal

regulatory scheme,’ ”’ clearly expresses his concern with

the states’ passing laws after ERISA’s enactment to reg-

ulate areas of plan administration and operation not spe-

cifically governed by ERISA. 885 F.2d at 87. Senator Wil-

liams’ statement also stressed Congress’ concern that

state professional regulations “‘. . . should not be able to

prevent unions and employers from maintaining the types

of employee benefit programs which Congress has autho-

rized.”’ Id.

=

Uniform federal regulation of employee welfare and pen-

sion benefit plans was one of the fundamental and over-

riding purposes of Congress in enacting ERISA. So as

to remove any doubt concerning the purposes that ERISA

was to serve, Congress set forth its findings and declara-

tion of policy in Section 2 of ERISA, which, in part, pro-

vides:

The Congress finds that the growth in size, scope,

and numbers of employee benefit plans in recent

years has been rapid and substantial; that the opera-

tional scope and economic impact of such plans is in-

creasingly interstate; that the continued well-being

and security of millions of employees and their de-

pendents are directly affected by these plans; that

they are affected with a national public interest; that

they have become an important factor affecting the

stability of employment and the successful develop-

ment of industrial relations;

*x* * * * X

29 U.S.C. §1001(a).

Moreover, ERISA’s legislative sponsors stressed the im-

portance of uniform federal regulation of employee benefit

plans. In quoting Senator Williams, the Third Circuit ig-

nores his explanation of the scope of ERISA preemption:

It should be stressed that with the narrow excep-

tions specified in the bill, the substantive and enforce-

ment provisions of the conference substitute are in-

tended to preempt the field for Federal regulations,

thus eliminating the threat of conflicting or inconsis-

tent State and local regulation of employee benefit

plans. This principle is intended to apply in its broad-

est sense to all actions of State or local governments,

or any instrumentality thereof, which have the force

or effect of law.

Shaw v. Delta Air Lines, Inc., 463 U.S. at 99, quoting

120 Cong. Rec. 29933.

-

The Third Circuit also selectively cites Senator Javits’

remarks, which continued after the statement quoted by

the Third Circuit: “‘Although the desirability of further

regulation—at either the State or Federal level—undoubt-

edly warrants further attention, on balance, the emer-

gence of a comprehensive and pervasive Federal interest

and the interests of uniformity with respect to interstate

plans required—but for certain exceptions—the displace-

ment of State action in the field of private employee

benefit programs.” Jd. at 99-100 n.20. As to the task force

report denigrated by the Third Circuit, it was Senator

Javits who explained that the members of the conference

responsible for the final draft of ERISA had assigned the

Congressional Pension Task Force with the responsibility

of studying and evaluating ERISA preemption to deter-

mine what modifications in preemption policy would be

necessary. Jd. Another ERISA sponsor, Representative

Dent, who was not quoted by the Third Circuit, also

stressed the breadth of ERISA preemption:

Finally, I wish to make note of what is to many

the crowning achievement of this legislation, the

reservation to Federal authority the sole power to

regulate the field of employee benefit plans. With the

preemption of the field, we round out the protection

afforded participants by eliminating the threat of con-

flicting and inconststent State and local regulation.

Id. at 99.

In examining the proposed house and senate bills and

the conference bill ultimately passed by Congress, the

Third Circuit does not grasp the significance of Congress’

rejection of the bills which would have preempted only

state laws affecting subjects specifically addressed in

ERISA. By attempting to construe the word ‘“‘purporting”’

in the deemer clause as the basis for limiting preemption

to subject areas specifically regulated by ERISA, the

—10—

Third Circuit ignores the touchstone of Congress’ ex-

pressed concern in incorporating a broad preemption pro-

vision in ERISA, i.e., the establishment of uniform federal

regulation of employee benefit plans. Moreover, its inter-

pretation of the deemer clause would effectively incor-

porate the very language rejected by the Congress.

Based upon a thorough examination of the legislative

history underlying Section 514 of ERISA, this Court has

repeatedly held that ERISA preemption cannot be limited

to only those state laws which regulate the matters cov-

ered by ERISA, including reporting, disclosure and fidu-

ciary responsibility. 463 U.S. at 98. On the contrary, this

Court has held that Section 514 was intended “. . . to

displace all state laws that fall within its sphere, even

including state laws that are consistent with ERISA’s

substantive requirements.”’ Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. at 739. As this Court has

repeatedly explained, Congress considered and rejected

bills which allowed preemption of only subject matters ex-

pressly governed by ERISA and which did not include

a deemer clause reserving regulation of ERISA plans to

the federal government. 463 U.S. at 98; Pilot Life Ins.

Co. v. Dedeaux, 481 U.S. at 46. These bills were rejected

not only because they would have required ERISA plans

to comply with multiple and potentially conflicting state

laws, but also because they raise the possibility of ‘‘end-

less litigation’ on issues of whether state regulation im-

pinged upon federal regulation. 463 U.S. at 99 n.20. More-

over, after a period of monitoring by the Congressional

Pension Task Force and hearings by a House Subcommit-

tee, a report evaluating ERISA’s preemption provisions

was issued, and it stated that “‘the Federal interest and

the need for national uniformity are so great that enforce-

ment of state regulation should be precluded.” /d. at 100

n.20, quoting H.R. Rep. No. 94-1785, p. 47 (1977).

=ii-

Despite this clear authority supporting the wide scope

of ERISA preemption, the Third Circuit further contends

that any interpretation of the deemer clause other than

that it prohibits insurance regulation of the ‘central as-

pects of ERISA” would render the savings clause mean-

ingless or read in distinctions that are not supported by

the statute. 885 F.2d at 88. Although the Third Circuit

does not explain how any other interpretation of the

deemer clause would ‘‘swallow” the savings clause, it

criticizes this Court’s interpretation of the savings and

deemer clauses in the Metropolitan Life case, wherein this

Court stated that insured plans are subject to indirect

state regulation while self-funded employee benefit plans

are not. /d. at 89. The Third Circuit implies that this

Court erroneously created this distinction between self-

funded and insured plans without reliance upon statutory

language or legislative history, but instead based this

distinction upon the “vague language in Congress’ post

hoe study.”’ Id. at 89.

Again, the Third Circuit ignores the statutory language

and legislative history of Section 514 of ERISA. The

deemer clause prevents an employee benefit plan from

being deemed an insurance company or other insurer

or as being engaged in the business of insurance “

for purposes of any law of any State purporting to regu-

late insurance companies, insurance contracts. .. .”’ 29

U.S.C. §1144(bX2XB). However, the deemer clause does not

preempt state laws regulating insurance contracts pur-

chased by an employee benefit plan. The regulation of the

content of insurance contracts is not subject to preemp-

tion due to the plain meaning of the savings clause. Thus,

if an employee benefit plan chooses to self-fund its bene-

fits, it cannot be deemed an insurance company which

companies must under the laws of most, if not all, states

submit their benefit plan provisions concerning eligibility,

= =

benefit levels and terms and conditions for receiving

benefits to the state department of insurance for review

and approval as to their compliance with the state insur-

ance code and other regulations. See Metropolitan Life

Insurance Co. v. Massachusetts, 471 U.S. at 727-728. On

the other hand, those plans which decide to purchase in-

surance coverage for their members from insurance com-

panies must comply with the state law limitations placed

on those insurance contracts. This indirect regulation of

insured plans is thus expressly sanctioned by Congress.

Moreover, the fact that plans may choose to self-fund

benefits, and thus be entitled to adopt benefit rules with-

out regard to state law, or to purchase insurance policies

subject to state law restrictions comports with both the

statutory provisions of ERISA’s entrusting plan fiduciaries

with exclusive authority to manage and control plan assets

and with the legislative history which establishes that plan

fiduciaries have broad discretion in determining how the

plan is to be administered. See 29 U.S.C. §§1102(a\(1),

1103(a).

The Third Circuit takes an alternative position that its

proposed test concerning the application of the deemer

clause would not éradicate the distinction drawn by this

Court between msured and self-funded employee benefit

plans. 885 F.2d at 89. The Third Circuit explains that

*. . under Metropolitan Life insured plans would per

se survive the deemer clause, while self-insured plans

would merely be considered on a case-by-case basis as to

whether the state regulation involved affects a central con-

cern of ERISA.” Jd.

The Third Circuit’s contention that its proposed test is

actually in compliance with the Court’s guidelines in Met-

-ropolitan Life lacks merit. The Third Circuit does not

identify any statutory, legislative history or Supreme

=i.

Court case law authority for interpreting the deemer

clause so as to limit preemption to those state laws which

affect a ‘‘central concern” of ERISA. Furthermore, the

Third Circuit does not define what constitutes a “central

concern” of ERISA. Acknowledging the vagueness of its

test, the Third Circuit admits that ERISA preemption of

state law as applied to self-funded employee benefit plans

will have to be decided on a case-by-case basis. This result

was exactly what Congress expressly sought to preclude

by adopting a broad preemption provision.

Because the Third Circuit rejects uniformity of regula-

tion of employee benefit plans as a ‘“‘central concern” of

ERISA, it is apparent that the Third Circuit is suggesting

a highly restrictive definition of ‘‘central concern’”’ of

ERISA. Thus under the Third Circuit’s test, multi-state

plans which, as this Court has recognized, already have

the task of coordinating complex administrative activities

will also have to endure the considerable inefficiencies,

administrative burdens and financial costs of complying

with a patchwork scheme of regulation. See Fort Halifax

Packing Co. v. Coyne, 482 U.S. at 11. Such a result can-

not be allowed to stand under the plain meaning and leg-

islative history of Section 514 and the decisions of this

Court.

Il.

IF THE DECISION OF THE THIRD CIRCUIT IS NOT

REVERSED AND THE SCOPE OF ERISA PREEMPTION

MAINTAINED AT ITS BROAD LEVEL, SIGNIFICANT

AND ADVERSE PUBLIC POLICY PROBLEMS WILL

RESULT.

The conflicts among the circuits concerning the issue of

the scope of ERISA preemption as to self-funded em-

ployee benefit plans is thoroughly discussed by FMC Cor-

poration in its brief. To avoid repetition, the Central

=

States, Southeast and Southwest Areas Health and Wel-

fare Fund (‘‘Fund’’) will concentrate on the adverse public

policy problems that will result unless this split among

the circuits is resolved by reversing the Third Circuit and

allowing broad preemption of state laws relating to em-

ployee benefit plans.

The problem of rising medical care costs for self-funded

employee benefit plans cannot be overstated. For every

year since 1965, inflation in medical care prices has been

higher than the general rate of inflation for the economy

on a whole.? In 1987, the price of health care in this coun-

try exceeded $500 billion, increasing 9.8 percent from

1986.3 In 1988, total health care expenditures rose 10.2

percent from 1987 to an estimated $558.7 billion or about

$2,200.00 per capita.4 Total health care expenditures for

1989 are expected to rise to approximately $618.4 billion.®

If health care trends continue, medical care costs could

triple to $1.5 trillion by the year 2000.6

In 1988, employers with insured programs experienced

an average increase in health plan costs of 13.7 percent;

whereas, self-funded plans experienced an average in-

2 Sharkey & Buckle, The Medicare Prospective Payment System:

Impact On The Frail Elderly and An Alternative Reimbursement

Formula, 3 Notre Dame J. of L., Ethics & Pub. Pol’y 227, 228

(1988).

3 Letsch, Levit & Waldo, National Health Expenditures, 1987,

10 Health Care Fin. Rev. 109 (Winter 1988).

4 Francis, U.S. Industrial Outlook 1989: Health Services, Med.

Benefits, Feb. 15, 1989, at 1.

5 Jd. at 2.

6 Costs Will Rise into the 1990s, Pushing Up Corporations’ Bene-

fits Costs, 16 Pens. Rep. (BNA) 1979 (November 20, 1989).

_ =

crease of 24.8 percent in health plan costs for 1988.7 In

one survey of 2,000 employers who either purchased insur-

ance coverage or self-funded health benefits, total health

care costs equaled 37.2 percent of those employers’ profits.®

As a result of these substantial and escalating costs of

providing medical care, employee benefit plans throughout

the country have had to reduce benefits, institute cost-

containment measures, establish cost-management pro-

grams or a combination of the above. In compliance with

their fiduciary duties under ERISA to manage plan assets

prudently and in the best interest of all participants and

beneficiaries, the Trustees of the Fund have included cost-

containment measures in the plan, including subrogation

and coordination of benefits provisions. See 29 U.S.C.

$1104(aX1XB). The Trustees determined that these cost-

containment measures are necessary to preserve plan as-

sets for the payment of current and future medical bene-

fits and to eliminate duplication of benefits with other in-

surance or plan coverages. The Fund’s Trustees included

these subrogation and coordination provisions as part of

the plan terms in compliance with their fiduciary duties to

manage the plan assets “. . . solely in the interest of the

participants and beneficiaries . . .”’ and, in managing these

assets, to exercise “. . . the care, skill, prudence, and dili-

gence under the circumstances then prevailing that a pru-

dent man acting in a like capacity and familiar with such

matters would use in the conduct of an enterprise of a like

character and with like aims.” 29 U.S.C. §1104(a)(1)(B).

7 A. Foster Higgins & Co., Health Care Benefits Survey, 1988,

Med. Benefits, Feb. 28, 1989, at 1. See also, Average Costs Rose

18.6 Percent Under Employer Plans, Survey Finds, 16 Pens. Rep.

(BNA) 250 (Feb. 13, 1989). This survey covered 1,600 employers

and 10 million employees and dependents.

8 DiBlase, Group Health Bills Equal A Third of Profits, Bus.

Ins., May 29, 1989, at 1.

—16—

Multiemployer benefit plans, such as the Fund, are par-

ticularly affected by substantial increases in medical care

costs because their income is primarily, if not solely, from

employer contributions. The amount of each employer's

contribution is fixed by collective bargaining agreements

negotiated by the union and employers every three to five

years. Depending upon how much of the collectively bar-

gained moneys are allocated to wages, pension benefits

and health benefits, there may not be sufficient funds to

maintain health benefit levels. If the employers’ contribu-

tions are not sufficient to fund plan benefits, the trustees

of such plans have limited choices, namely to reduce bene-

fit levels and/or to institute cost-containment measures.

Although most cost-containment measures and benefit

reductions involve a transfer of costs to the participants

and beneficiaries or a restriction in the type or length

of medical care, two cost-containment measures, subroga-

tion and coordination of benefits, do not. On the contrary,

subrogation and coordination of benefits provisions pre-

vent the duplication of benefits by the plan where other

coverage exists and covers the particular injury or illness.

Subrogation and coordination provisions also ensure that

primary responsibility for providing benefits for specific

risk injuries is not transferred from specific risk insurers,

such as motor vehicle insurers, to employee benefit plans.

The Fund’s Plan Document provides for subrogation

against any person or entity responsible for providing a

recovery to a Fund participant or beneficiary for injuries

sustained as a result of an accident or illness. The Fund’s

coordination provision provides that where no-fault or per-

sonal injury protection (‘‘PIP’’) motor vehicle insurance

coverage exists, the no-fault or PIP coverage shall be pri-

marily responsible for providing benefits to a mutually

covered beneficiary who has sustained injuries as a result

=

of a motor vehicle accident and the Fund shall provide

excess coverage. These subrogation and coordination pro-

visions provide substantial cost savings to the Fund, allow-

ing it to cover rising medical costs without having to enact

comparable benefit cuts or restrictions.

The application of state laws to prohibit the Fund from

enforcing its subrogation and coordination provisions

would deprive the Fund of very valuable and necessary

cost-containment measures. If this were to occur, the

Trustees would be limited primarily to changes in the

benefit plan design that transfer the rising costs of

medical care to the Fund’s participants and beneficiaries,

e.g., lower percentage of coverage and higher deductibles,

or that restrict their medical care options.

Currently, there are two circuit court decisions which

limit the scope of ERISA preemption as applied to em-

ployee welfare benefit plans. In addition to the Third Cir-

cuit’s decision, the United States Court of Appeals for

the Sixth Circuit in the case of Northern Group Services,

Inc. v. Auto Owners Ins., Co., 833 F.2d 85 (6th Cir. 1987),

cert. denied, 486 U.S. 1017 (1988), also propounded a new

test subordinating the Congressional goal of uniform fed-

eral regulation of employee benefit plans to the state’s

interest in regulating insurance. In Northern Group, the

Sixth Circuit held that Section 500.3109a of the Michigan

No-Fault Insurance Act, which authorizes motor vehicle

insurance companies and their insureds to subordinate

motor vehicie no-fault benefits to benefits provided by

“other health and accident coverage,” was not preempted

by ERISA because of the priority of the state’s power

to regulate insurance. 833 F.2d at 94-95. To justify this

holding, the Sixth Circuit advanced a new test for ERISA

preemption, requiring that if a self-funded employee bene-

fit plan is to avoid state regulation, it must first demon-

lies

strate a federal interest in national uniformity indepen-

dent of and beyond the requirements of Section 514 of

ERISA, and that this specific federal interest must then

“. . . outweigh the McCarran-Ferguson interest in state

regulation of insurance.’ Jd. at 95.

State laws such as Section 1720 of the Pennsylvania

Motor Vehicle Financial Responsibility Law and Section

500.3109a of the Michigan No-Fault Insurance Act effec-

tively usurp the Trustees’ exclusive authority and respon-

sibility under ERISA to control and manage plan assets

in the best interest of all participants and beneficiaries.

See 29 U.S.C. §1102(aX1) (the plan must be administered

pursuant to a written instrument and named plan fidu-

ciaries have authority “. . . to control and manage the

operation and administration of the plan.’’); 29 U.S.C.

$1103(a) (“. . . the trustee or trustees shall have exclusive

authority and discretion to manage and control the assets

of the plan...” except for certain circumstances not ap-

plicable to this case); 29 U.S.C. §1104(aX1D) (plan fidu-

ciaries are required to perform their duties solely in the

interest of all participants and beneficiaries in accordance

with the provisions of the plan document).

There are a substantial number of state laws either pro-

hibiting or restricting subrogation and coordination in the

contexts where the Fund utilizes these cost-containment

measures. See, e.g., Baxter v. Lynn, 886 F.2d 182, 185,

reh’g denied, ___ F.2d ____ (8th Cir. 1989) (Missouri com-

mon law limitation on subrogation); United Food & Com-

mercial Workers v. Pacyga, 801 F.2d 1157 (9th Cir. 1986)

(Arizona anti-subrogation law); Northern Group Services,

Inc. v. Auto Owners Ins. Co., 833 F.2d 85 (6th Cir. 1987),

cert. denied, 486 U.S. 1017 (1988) (Michigan statute mak-

ing all health coverages primarily responsible and making

no-fault motor vehicle coverages secondarily responsible

—_ =

for benefits concerning injuries sustained in motor vehi-

cle accidents); Hunt v. Sherman, 345 N.W.2d 750 (Minn.

1984) (Minnesota common law restriction on subrogation).

If the decision in this case is allowed to stand, there is

little doubt that states with such laws will increasingly

attempt to enforce them and other states will consider

adopting similar laws.

These state laws effectively mandate that employee wel-

fare benefit plans provide specific risk insurance cover-

age, such as coverage for injuries incurred in motor vehi-

cle accidents, even though such coverage is available from

the specific risk insurers. Coordination laws, such as the

Michigan statute at issue in Northern Group, authorize

motor vehicle no-fault insurers and their insureds to dic-

tate when employee benefit plans must pay benefits and

what amount of benefits they must pay in contravention

of the plans’ terms as set forth in their plan documents.

Through such laws, state legislators, who are subject to

extensive lobbying campaigns by the insurance industry,

can lower specific risk insurance premiums and transfer

the cost of insuring such specific risks from specific risk

insurers, such as no-fault motor vehicle insurers, to em-

ployee benefit plans. Thus, the Fund’s assets will be used

to subsidize the specific risk insurance coverage of par-

ticipants and beneficiaries who reside in states with such

laws. This results in a tremendous windfall for these spe-

cific risk insurers, which are generally profit-based com-

panies, and an equally tremendous drain on self-funded

employee benefit plans, which are non-profit entities.

Moreover, assuming for purposes of argument that a plan

could afford such a subsidy, which assumption is extreme-

ly unlikely, plan assets would not be uniformly used in

the best interest of all participants and beneficiaries

because the contributions made to the plan on behalf of

2)

participants and beneficiaries in states without such laws

would be used to subsidize the lower specific risk insur-

ance premiums of those residing in states with such laws.

Thus, the end result of these state laws is that employee

benefit plans are forced to either duplicate benefits or to

provide benefits in lieu of the specific risk insurer.

The proverbial floodgates of litigation, which have

already been opened by the vague and differing preemp-

tion tests adopted by the Third and Sixth Circuits, will

be pushed further open. Unless this Court refuses to

adopt the vague tests advanced by the Third and Sixth

Circuits, multi-state employee benefit plans, which are

struggling to meet increasing medical costs, will have to

expend considerable plan assets on expensive litigation in

states throughout the nation. Moreover, these plans can-

not avoid this litigation because, inter alia, they cannot

afford to eliminate these cost-containment measures and

they cannot afford to administer a different plan in each

® As a result of the Northern Group decision, considerable litiga-

tion has ensued, and the cases listed below represent a small frac-

tion of the cases filed concerning the application of the Michigan

No-Fault Insurance Act to self-funded employee benefit plans: Auto

Club Ins. Ass'n v. Frederick & Herrud, Inc., 433 Mich. 900 (1989),

petition for cert. filed, Thorn Apple Valley, Inc. v. Auto Club Ins.

Ass’n, ___ U.S.L.W. ____ (U.S. Dec. 29, 1989) (No. 89-1125); Centra/

States, Southeast and Southwest Areas Health and Welfare Fund

v. Hawkeye-Security Ins. Co., ——. U.S. ___, 109 S.Ct. 783 (1989);

Winstead v. Indiana Ins. Co., 855 F.2d 430 (7th Cir. 1988), cert.

demied, ___-—*US.. , 109 S.Ct. 839 (1989); Liberty Mutual Ins.

Co. v. Iron Workers Health Fund of Eastern Michigan, 879 F.2d

1384, reh’g denied, ___._ F.2d ______ (6th Cir. 1989).

In fact, the Sixth Circuit has recently issued another decision in

the Northern Group case which will undoubtedly cause another mas-

sive wave of litigation. In its most recent decision, the Sixth Circuit

has ruled that, while it determined that ERISA did not preempt Sec-

tion 500.3109a of the Michigan No-Fault Insurance Act, it did not de-

cide the issue of whether a self-funded employee benefit plan comes

within the scope of Section 500.3109a. (The slip opinion issued by

the Sixth Circuit is reprinted in the Appendix, p. la, infra.)

state in which they operate. Thus, the nightmare of patch-

work regulation of employee benefit plans by the states,

which Congress intended to avoid by enacting Section 514

of ERISA, is becoming a reality. Accordingly, the Fund

urges this Court to reverse the decision of the Third Cir-

cuit in this case and follow the precedent clearly estab-

lished by this Court in requiring broad preemption of

state law under Section 514 of ERISA.

CONCLUSION

For the reasons discussed herein, this Court shouid re-

verse the decision of the United States Court of Appeals

for the Third Circuit in this case and hold that Section

514 of ERISA preempts Section 1720 of the Pennsylvania

Motor Vehicle Financial Responsibility Law.

Respectfully submitted,

ANITA M. D’ARCY

Counsel of Record

JAMES L. COGHLAN

STEPHEN J. HARRIS

COGHLAN, JOYCE, KUKANKOsS,

URBUT AND D’ARCY

250 South Wacker Drive, suite 1500

Chicago, Illinois 60606

WILLIAM J. NELLIS

Secretary to the Board of Trustees

Central States, Southeast and

Southwest Areas Health and

Welfare Fund

9377 West Higgins Road

Rosemont, Illinois 60018

April 20, 1990 Attorneys for Amicus Curiae

APPENDIX

1 a—

RECOMMENDED FOR FULL TEXT PUBLICATION

See Sixth Circuit Rule 24

No. 89-1053

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

NORTHERN GROUP SERVICES, INC.; MASCO INDUS-

TRIES, INC., Benefit Plan for Hourly Employees of Forming

Technology; MASCO INDUSTRIES, INC., Employees’ Benefit

Plan for Salaried Employees; MASCO INDUSTRIES, INC.,

Self-Funded Employee Benefit Plans; HIGHLAND APPLI-

ANCE COMPANIES, Medical Benefit Plan,

Plaintiffs-Appellants,

V.

STATE FARM MUTUAL AUTOMOBILE INSURANCE

COMPANY; AUTO OWNERS INSURANCE COMPANY;

AUTO CLUB INSURANCE ASSOCIATION; FARMERS IN-

SURANCE EXCHANGE; CITIZENS INSURANCE COM-

PANY OF AMERICA; MICHIGAN INSURANCE COM-

PANY; ALLSTATE INSURANCE COMPANY, jointly and

severally,

Defendants- Appellees.

On Appeal from the United States District Court

for the Eastern District of Michigan

Decided and Filed March 21, 1990

Before: MERRITT, Chief Judge; MARTIN, Circuit Judge;

and Brown, Senior Circuit Judge.

—2a—

MERRITT, Chief Judge. In a previous appeal in this ac-

tion, our Court published on November 13, 1987, an opin-

ion, Northern Group Serss., Inc. v. Auto Owners Ins. Co.,

833 F.2d 85 (6th Cir., 1987), cert. denied, 108 S.Ct. 1754

(1988), holding that the three preemption provisions of

the Employee Retirement Income Security Act of 1974

(“ERISA’’), 29 U.S.C. §§ 1144(a), 1144(b)(2)(A) and

1144(bX2XB), when read together, do not preempt § 3109a

of the Michigan Insurance Code, M.C.L.A. § 500.3109a,

insofar as it establishes coordination of benefit rules be-

tween automobile insurance and “‘health and accident cov-

erage.’’ The appeal in the previous case was from a dis-

trict court ruling that the federal statute preempted the

state statute, occupying the field of state coordination of

benefit rules. We reversed that ruling and remanded the

case to the District Court for further proceedings. The

District Court then held on remand that this Court’s pre-

vious opinion had interpreted § 3109a to apply to self-

funded or self-insured ERISA benefit plans as well as in-

sured plans as a matter of state law: ‘The Court con-

cludes that the Sixth Circuit has ruled that § 3109a of

the Michigan Insurance Code applies to plaintiff-employee

benefit plans as a matter of state law... .” J.A. at 23

(emphasis added).

This ruling by the District-Court was in error. We ruled

only on the federal claim of preemption, the federal issue

then before us, and did not attempt to rule on any pen-

dent state claim requiring an explication of state law. We

did not consider or rule, for example, on the question

whether uninsured ERISA plans constitute ‘‘health and

accident coverage’ and thus whether § 3109a—as a mat-

ter of state law—applied to self-insured ERISA plans. For

purposes of deciding the federal preemption question, and

that question only, we merely assumed, without deciding,

alli

that the coordination rules of § 3109a applied to both in-

sured and uninsured ERISA plans. We referred to the

fact that Michigan had ‘“‘developed a substantial and com-

plex body of common law and statutory principles to re-

solve questions of priority that arise when multiple cov-

erage produces conflicts of the type presented in this

case.”’ Northern Group Servs., 833 F.2d at 94. We did not

aitempt to precisely define those state law rules as they

apply to various forms of coverage or ERISA plan bene-

fits.

It was unnecessary for us to interpret § 3109a in any

detail because in our previous case we only had to decide

whether the preemption provisions of ERISA, e.g., § 1144(a)

(ERISA “shall supersede . . . State laws insofar as they

... relate to any employee benefit plan”) (emphasis added)

and § 1144(bX2XB) (a provision saving from preemption

“any law... purporting to regulate insurance’’), should

be interpreted to occupy the field of state coordination

of insurance benefit rules, not whether a specific, isolated

state coordination rule conflicts with a specific provision

in an ERISA plan. For background concerning the various

federal preemption principles, including ‘‘occupation of the

field”” preemption, see generally Metropolitan Life Ins.

Co. v. Massachusetts, 471 U.S. 724, 747-48 (1985); Jones

v. Truck Drivers Local Union No. 299, 838 F 2d 856,

868-75 (6th Cir. 1988); Field, Sources of Law: The Scope

of Federal Common Law, 99 Harv.L.Rev. 88-1 (1986).

Our previous opinion states in the first sentence that

the question presented was whether ERISA preempts

Michigan law ‘“‘to the extent that the Michigan law allows

policy provisions [on coordination of insurance benefits]

which conflict with ERISA plans.” Northern Group Servs.,

833 F.2d at 86 (emphasis added). We then explored the

legislative history of the ERISA preemption provisions.

—

We did not explore the legislative history of the Michigan

law or make any attempt to analyze which types of in-

surance or employee benefits fall under § 3109a.

The District Court judgment holding that our previous

decision made a conclusive interpretation of § 3109a of

the Michigan Code as a matter of state law is, therefore,

in error. Its ruling that we concluded that § 3109a ap-

plied to self-insured ERISA plans is reversed. The case

is remanded to the District Court.

The District Court on remand should treat the state law

issues concerning the application of § 3109a of the Mich-

igan Insurance Code as pendent state claims. It should

exercise its discretion to retain and decide those pendent

state issues under the principles established in United

Mine Workers v. Gibbs, 383 U.S. 715, 726-27 (1966); Gaff

v. Federal Deposit Ins. Corp., 814 F.2d 311, 319 (6th Cir.

1987); Beuth v. Brit Airlines, Inc., 749 F.2d 1235, 1240-41

(7th Cir. 1984), and other similar cases creating and ap-

plying standards to guide district courts in exercising ju-

risdiction over pendent state claims after the federal issue

in the case has been decided.

Accordingly, the judgment of the District Court is

reversed and the case remanded for disposition in accor-

dance with this Court’s instructions.

Pe ae te oy ee ee ee

~~ <! ) te ole