Amicus Curiae Brief — De Buono v. NYSA-ILA Medical and Clinical Services Fund

In the Supreme Court of the United States

OCTOBER TERM, 1996

BARBARA A. DE BUONO, NEW YORK STATE

COMMISSIONER OF HEALTH, ET AL., PETITIONERS

.

NyYsA-ILA MEDICAL AND CLINICAL SERVICES FUND,

ETC., ET AL.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONERS

WALTER DELLINGER

Acting Solicitor General

J. DAVITT MCATEER EwIN S. KNEEDLER

Acting Solicitor of Labor Deputy Solicitor General

ALLEN H. FELDMAN

NATHANIEL I. SPILLER

JUDITH D. HEIMLICH

Attorney

Department of Labor

Wasington, D.C. 20210

JAMES A. FELDMAN

Assistant to the Solicitor

General

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

V

so

QUESTION PRESENTED

Whether a state tax on the “gross receipts received

from all patient care services and other operating income”

of hospitals licensed to operate in the State “relate[s] to”

employee welfare benefit plans within the meaning of

Section 514(a) of the Employee Retirement Income Secu-

rity Act of 1974 (ERISA), 29 U.S.C. 1144(a), and is thus

preempted, insofar as the tax applies to the income of

medical centers owned and operated by an ERISA plan.

(1)

TABLE OF CONTENTS

Introduction and summary of argument

Argument:

Application of New York’s Hospital Facility

Assessment to the Health Care Facilities

Operated by Respondents is not Preempted by

L ....ccccccccccscececccccssccccscscccssess

A. Section 514(a) of ERISA does not preempt a

generally applicable state law in an area of tradi-

tional state regulation, so long as the law does

not operate in a field in which ERISA itself pro-

vides governii.g standards, makes no reference

to ERISA pians, and does not require that plans

or employers provide any particular benefits ....

B. The HFA is not preempted under the foregoing

principles governing the application of Section

2 —

. ————— — ͤ —L—

TABLE OF AUTHORITIES

Cases:

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

(2d Cir.), cert. denied, 493 U.S. 811 (1989) ..............

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

— —̃ — —„——¾

Birdsong v. Olson, 708 F. Supp. 792 (W. D. Tex.

1989), appeal dismissed, 901 F.2d 1270 (5th Cir.

————— .

Boyle v. Anderson, 68 F.3d 1093 (8th Cir. 1995),

cert. denied, 116 S. Ct. 1266 (1996) . . .

Curtiss Wright Corp. v. Schoonejongen, 115 S. Ct.

8 — —

(III)

12

12

S &

IV

Cases—Continued: Page

District of Columbia v. Greater Washington Bd. of

Trade, 506 U.S. 126 (1908) .........0ccccccesscessseceeesees 14, 21

E-Systems, Inc. v. Pogue, 929 F.2d 1100 (5th Cir.),

cert. denied, 502 U.S. 981 (1991) . . . 14

FMC Corp. v. Holliday, 498 U.S. 52 (1990) .... 14, 15, 18

Firestone Tire & Rubber Co. v. Neusser, 810 F 2d

ü . 15

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

—— —ů̃ͤ̃ͤ — 18

General Motors Corp. v. California Bd. of Equali-

zation, 815 F.2d 1305 (9th Cir. 1987), cert. denied,

r 15

Harmon City Inc. v. Neilson & Senior, 907 P. 2d

. . ² . 20

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133

— . 13, 15, 16, 24, 27

Mackey v. Lanier Collection Agency & Serv., Inc.,

486 U.S. 826 ( u e 14, 22, 23, 24, 27

Massachusetts v. Morash, 490 U.S. 107 (1989) ...... 25

Metropolitan Life Ins. Co. v. Massachusetts,

2 . 17, 20, 21, 24

Morgan Guar. Trust Co. v. Tax Appeals Tribunal,

L Re See 28

National Carriers’ Conference Comm. v. Heffernan,

454 F. Supp. 914 (D. Conn. 1978) . . 15

New England Health Care Employees Union, District

1199 v. Mount Sinai Hospital, 65 F.3d 1024 (2d

GR SEED ccesencansvssnmncnmnteccteinnnicomnianiinitsensititiibiasenen 16

New York State Conference of Blue Cross & Blue

Shield Plans v. Travelers Insurance Co., 115

II 3 86 passim

NYS Health Maintenance Org. Conference v.

Curiale, 64 F.3d 794 (2d Cir. 1995) ... . . . 16

Northwest Airlines, Inc. v. Roemer, 603 F. Supp.

L . 1 19

Cases Continued: Page

Pilot Life Ins. Co. v. Dedeaur, 481 US. 41 (1987) ... 13

Retirement Fund Trust of Plumbing v. Franchise

Tax Bd., 909 F 2d 1266 (9th Cir. 1980) 15, 19

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

a 7, 14, 17, 18, 21

Thiokol Corp, Morton Int'l, Inc. v. Roberts, 76 F.3d

. een 15, 16

Travelers Ins. Co. v. Pataki, 63 F.3d 89 (2d Cir.

—— ——— —

United Wire, Metal & Machine Health & Welfare

Fund v. Morristown Memorial Hosp., 995 F. 2d

1179 (3d Cir.), cert. denied, 510 U.S. 944

—— ͤͤ kn 47— 16-17, 24

Constitution and statutes

U.S. Const. Amend. XI . . . . „ „ 5

Retirement Income Security Act of 1974,

e 1

r . 20

§ B(1), 29 U.S.C. 10001) . 3, 20, 29

§ 3(13), 29 U.S.C. 1002013) . U

3437), 29 U.S. C. 100037) „ 3

Seeta), 29 U.S.C. 11) . . 13

50 le), 29 U.S.C. 1182 ꝙ Z). 13

§ 506(b), 29 U.S. C. 11380 „ 1

11 13

. G 1

$ 514(a), 29 U.S.C. 114%) cccccccceceeeeese-. passim

§ 514(b), 29 U.S.C. 114% cccccecccccccceeseesesseeee, 10

SIA NA), 29 U.S.C. 1144(b)(2)(A) ............... 17

§ 514(b)(5), 29 U.S.C. 114485) „ 19

SIA NBC), 29 U.S.C. II44 h NCR) 19

§ 514(c)(2), 29 U.S.C. E 11. 26

Labor Management Relations Act of 1947, 6 302,

4. pe Se eae 3, 29

Tax Injunction Act, 28 U.S.C. 131. 5

J... ..... 3

VI

In the Supreme Court of the United States

Statutes—Continued: Page OCTOBER TERM, 1996

N.Y. Pub. Health Law (McKinney 1993):

EE ee 2

SS ee 2 No. 95-1594

— atresia aman manimeritntinteniies 3

5 ALERT IE TAAL ASAI 28 BARBARA A. DE Buono, New York STATE

Kc 28 COMMISSIONER OF HEALTH, ET AL., PETITIONERS

iil aa te tee he 3 as? 2

D TS SO ie aan Se 2 8

, ˙ . ESE: SE Sl 2

—— 7 moe es Be SE De : Nysa-ILA MEDICAL AND CLINICAL SERVICES FUND,

11 — 2 ETC., ET AL.

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— 6ͤ— m ————˖«» : — tilhiithaie tak i

PPP. LETS OTS : UTE deere DES Te ee

. —— . A : FOR THE SECOND CIRCUIT

9 BRIEF FOR THE UNITED STATES

ee ee 1 AS AMICUS CURIAE SUPPORTING PETITIONERS

1— 16

INTEREST OF THE UNITED STATES

This case presents questions concerning the scope of

the preemption provision of the Employee Retirement

Income Security Act of 1974 (ERISA), 29 U.S.C. 1001-1169;

see 29 U.S.C. 1144. The Secretary of Labor is primarily

responsible for enforcing and administering Title I of

ERISA. See 29 U.S.C. 1002(13), 1136(b). The United

States therefore has a substantial interest in the resolu-

tion of the question presented. In response to the Court’s

invitetion, the United States filed a brief at the petition

stage of this case urging that certiorari be granted.

(1)

STATEMENT

1. In 1990 New York State enacted a tax, known as the

Health Facility Assessment (HFA), in order to raise

revenue and avoid reductions in the State’s Medicaid

program. Pet. App. 7a; C.A. App. 46, 51, 56, 59. With cer-

tain exceptions not relevant here, the assessment is im-

posed on all Ih lospitals“ operating in the State. The stat-

ute defines the term “hospital” to include a broad range of

facilities that provide health care services under the

supervision of a physician or dentist, and expressly encom-

passes a “diagnostic center” and a “treatment center.”

N.Y. Pub. Health Law §§ 2801(1), 2807-d(1)a) (McKinney

1993). The assessment is calculated as a percentage of the

hospital’s “gross receipts received from all patient care

services and other operating income.” Id. § 2807-d(1)(a).'

The percentage differs for three types of hospitals, see id.

§ 2807-d(2)(a) to (e), but is assessed at 0.6% for diagnostic

and treatment centers.

The law requires hospitals to make monthly payments

of the assessment to the health commissioner or her des-

ignee, who remits the accumulated monies to the State’s

general fund. N.Y. Pub. Health Law § 2807-d(1)(a), (5),

(Id) and (9) (McKinney 1993); see C. A. App. 60. Hospitals

must also submit quarterly reports, and a certified annual

report, of their gross receipts that are subject to the tax.

1 Receipts from “patient care services” refers to “all monies re-

ceived for or on account of hospital or health-related services,”

including preadmission, out-patient, in-patient, and post discharge care,

and items such as nursing service, ambulance service, laboratory

service, medical social service, drugs, supplies, and room and board.

N.Y. Pub. Health Law §§ 2801(4)(a) and (b), 2807-d(3)(c) (McKinney

1993). “Operating income” includes “monies received for or on account

of such revenue sources as investment income, parking lots, cafeterias,

gift shops and rental income,” with certain exclusions. N.Y. Pub.

Health Law § 2807-d(3)(d) (McKinney 1993); see C. A. App. 65.

3

N.Y. Pub. Health Law § 2807-d(7)(a) and (b) (McKinney

1993); see C. A. App. 60.

2. Respondents are the trustees of the NYSA-ILA

Medical and Clinical Services Fund (Fund). The Fund is a

labor-management trust governed by Section 302 of the

Labor Management Relations Act of 1947, 29 U.S.C. 186.

The Fund was established pursuant to an Agreement and

Declaration of Trust and Plan and collective bargaining

agreements between the New York Shipping Association,

Inc., and the International Longshoremen’s Association

covering longshore employment in the Port of New York

and New Jersey. Pet. App. 7a; C.A. App. 19. The Fund ad-

ministers a self-insured, ERISA-covered multi-employer

welfare benefit plan, see 29 U.S.C. 1002(1) and (37); 26

U.S.C. 414(f), that provides medical, dental and other

health services on an outpatient basis through three

medical centers that it owns and operates. Pet. App. 7a.

The two centers at issue here are located in New York and

are licensed by the State to operate as diagnostic and

treatment centers. Pet. 4; see N.Y. Public Health Law

§ 2805 (McKinney 1993); C. A. App. 43, 57, 83.

The centers principally serve longshore workers and

retirees (and their dependents) whose labor contracts

entitle them to receive health care at the centers. C.A.

App. 78. The centers also provide services to members of

other ILA locals who are employed by non-longshore

employers (“outside employers”) and whose contracts also

entitle them to health care at the centers, ibid.; to

members of the Port Police and Guards Union (PPGU)

which, through its own ERISA-covered welfare plan (the

NYSA-PPGU Welfare Fund), contracts with the NYSA-

ILA Fund for the treatment of its members on a fee-for-

service basis at the centers, C.A. App. 79, 81; and to local

union officers and employees, ibid.

The centers receive income from a variety of sources.

First, they receive payments directly from Fund partici-

pants for annual registration fees and prescription co-

payments. C.A. App. 76, 82, 143-144. Second, they receive

payments from workers’ compensation insurance carriers

for services rendered to Fund participants injured on the

job. C.A. App. 76, 82. Third, each of the centers receives

contributions from nearby employers calculated on the

basis of hours worked by Fund participants, as provided by

labor contracts.” C.A. App. 76, 81. Fourth, the centers

receive payments from the NYSA-PPGU Welfare Fund

for services rendered to its participants on a fee-for-

service basis. Ibid. Under the New York law, all of those

categories of income constitute receipts from patient care

services, and the HFA has been assessed against them. A

fifth category of income—weekly remittances from the

Fund for operating expenses on an as-needed basis—has

not been subject to the assessment. C.A. App. 80.°

From January through November 1991, the centers filed

reports and paid the 0.6% assessment applicable to diag-

2 Although some employers send their contributions directly to the

closest medical center, others (especially those who operate at more

than one location) send their contributions to the Fund, which in turn

funnels the money on an as-needed basis to the medical centers. C.A.

App. 80-81; see note 3, infra.

3 The remittances derive from employer contributions to the Fund

for Fund participants and contributions for local union officers and

employees based on hours of work. C.A. App. 80-81. The Fund main-

tains that those remittances are akin to a grant that is nonassessable

income under the New York law, Pet. 4 (citing C.A. App. 84), and the

State has not attempted to apply the HFA to those monies. Pet. App.

Za; see id. at 13a. The assessability of remittances from the Fund to the

centers is therefore not at issue in this case. Id. at 8a. Application of

the assessment to operating income derived from such activities as

records reproduction fees, which respondents do not challenge, is also

not at issue. Id. at 9a.

5

nostic and treatment centers on revenues the centers re-

ceived for patient care services. Pet. App. 8a; see C.A. App.

143, 138.“ Thereafter the Fund placed its assessments into

escrow and ceased filing reports. Pet. App. 8a; C.A. App.

21-22. Beginning in 1992, payment of registration fees by

Fund participants and service fees by the NYSA-PPGU

Welfare Fund was redirected to the Fund instead of to the

centers. Pet. App. 8a; C.A. App. 86.

3. In 1992 respondents brought this action to invalidate

and enjoin enforcement of the HFA on the ground that it is

preempted by Section 514(a) of ERISA, 29 U.S.C. 1144(a),

“insofar as [the HFA] imposes a levy on contributions and

payments for health care benefits provided by the Fund.”

Pet. App. 9a.° ERISA’s preemption clause provides that

ERISA supersedes all state laws that “relate to” an

ERISA plan. 29 U.S.C. 1144(a).

On cross motions for summary judgment, the district

court held that ERISA does not preempt the HFA.“ Pet.

App. 19a. Relying on Aetna Life Insurance Co. v. Borges,

869 F.2d 142 (2d Cir.), cert. denied, 498 U.S. 811 (1989), the

district court reasoned that the HFA is a tax law of

general application because “it is not specifically directed

at ERISA plans but applies to all health care facilities.”

Pet. App. 2la. The court observed that the tax “does not

interfere with the calculation of benefits” or with “the

determination of an employee's eligibility for benefits,”

For that period the Fund paid $7,066 on assessable income of

$1,177,670 (patient receipts and operating income). Pet. App. Sa; C. A.

App. 84-85.

5 Petitioners also sought “compensatory damages equal to the

amounts paid to” the State, plus interest, costs and fees. C.A. App. 23.

§ The district court did not reach the State’s defenses under the Tax

Injunction Act, 28 U.S.C. 1341, and the Eleventh Amendment. Pet.

App. 19a.

6

and that the HFA’s “impacts on benefit plans are ineiden-

tally economic resulting only in the need for administra-

tive and accounting procedures to comply with the law.”

Ibid. The court also concluded that the economic impact of

the 0.6% assessment is not substantial. Id. at 22a.

4. The court of appeals reversed. Pet. App. 6a-l4a. It

rejected the district court’s conclusion that the HFA is a

law of general application, because the HFA “does not

apply broadly to every sector of society” in the State, but

rather “targets only the health care industry,” which, “by

definition, [is] the realm where ERISA welfare plans must

operate.” Id. at 12a. Because the HFA “operates as an

immediate tax on payments and contributions which were

intended to pay for participants’ medical benefits,” the

court stated, it “directly affects the Fund in its principal

role” as a provider of health care benefits to plan partici-

pants and beneficiaries. Ibid. The court thus concluded

that the HFA “relates to” the Fund because it “depletes

those assets earmarked for the provision of health care

benefits,” and would cause the plan either to reduce bene-

fits or increase charges. Ibid. In the court’s view, those

consequences would “detrimentally affect the central mis-

sion and purpose of the Fund,” and therefore are not

“remote or tenuous.” /bid.

Further, the court stated, it makes no difference that

the Fund could avoid the HFA by “restructuring its fi-

nances so that funds formerly remitted by plan partici-

pants and employers directly to the medical centers would

be remitted to the Fund which would subsequently trans-

fer them to the centers”; in the court’s view, state laws

“that force plans to change their traditional methods of

administration or to adopt different methods on a state-by-

state basis” are preempted by ERISA. Pet. App. 13a.

Finally, the court concluded, a state law does not escape

7

ERISA preemption merely because its economic impact on

ERISA plans is de minimis. Id. at 14a.

5. This Court granted the State’s petition for a writ of

certiorari, vacated the judgment of the court of appeals,

and remanded the case for further consideration in light of

its intervening decision in New York State Conference of

Blue Cross & Blue Shield Plans v. Travelers Insurance

Co., 115 S. Ct. 1671 (1995). Pet. App. 5a. This Court held in

Travelers that New York statutes imposing 9%, 11% and

13% surcharges on hospital care paid for by health mainte-

nance organizations and commercial insurers did not

“relate to” ERISA plans within the meaning of Section

514(a), and thus were not preempted. 115 S. Ct. at 1674.

Determining that the surcharge statutes did not “make

‘reference to“ ERISA plans, the Court analyzed whether

they nevertheless had a “connection with” the ERISA

plans. Id. at 1677; see Shaw v. Delta Air Lines, Inc., 463

U.S. 85, 96-97 (1983). The Court observed that ERISA pre-

empts state laws that “mandate[ ] employee benefit struc-

tures or their administration” or “provid{e] alternative

enforcement mechanisms” for ERISA claims. 115 S. Ct. at

1678. Unlike those effects, the Court reasoned, the sur-

charge statutes had only “an indirect economic effect on

choices made by insurance buyers, including ERISA

plans.” Jd. at 1679. The Court noted that the surcharge

statutes did not “bind plan administrators to any particu-

lar choice and thus function as a regulation of an ERISA

plan itself.” Ibid. Nor, the Court reasoned, did the in-

direct influence of the surcharges preclude uniform ad-

ministrative practice or the provision of a uniform benefit

package.” Ibid.

6. On remand from this Court, the Second Circuit

adhered to its original decision in this case. Pet. App. la-

4a. The court of appeals observed that the surcharges in

Travelers were imposed not “on ERISA plans themselves,

8

but on insurance carriers providing health insurance

coverage to the plans and their beneficiaries.” Id. at 3a.

Those surcharges, the court stated, “raised costs to the

patient, who remained liable for the balance of any bill” not

paid by insurance or an ERISA plan. Ibid. Accordingly,

the court stated, the surcharges operatſed] as an in-

direct source of merely economic influence’” on plan deci-

sions. Ibid., quoting Travelers, 115 S. Ct. at 1680. The

court distinguished the HFA on the ground that “there is

no third party between the plan and the tax imposed

pursuant to the HFA,” so that the HFA “depletes the

Fund’s assets directly.” Pet. App. 3a-4a. Thus, the court

concluded, In lothing in Travelers undermines our reli-

ance on the HFA’s direct economic impact upon the Fund

as a basis for finding ERISA pre-emption nor precludes a

determination that a state law’s direct economic impact on

ERISA plans is sufficient for a finding of preemption.” Id.

at 4a.

7 The court of appeals’ analysis on remand in the instant case was

foreshadowed by its decision on remand in Travelers. This Court had

remanded the case to the court of appeals to determine whether the 13%

surcharge applicable to hospital bills incurred by members of “self-

insured funds” was preempted. 115 S. Ct. at 1675 n.4. On remand, the

Second Circuit held that the 13% surcharge did not relate to “self-

insured funds.” Travelers Ins. Co. v. Pataki, 63 F.3d 89, 93-94 (1995).

The court distinguished the HFA from the 13% surcharge on the ground

that the HFA directly depletes plan assets, whereas self-insured plans

are “not directly liable for the surcharge.” Jd. at 94. The court ques-

tioned, however, whether it “should continue to distinguish between

laws that directly deplete ERISA plans’ assets and laws that only

indirectly do so.” Ibid. In the court’s decision on remand in the instant

case, it did not cite to its remand decision in Travelers.

INTRODUCTION AND SUMMARY OF ARGUMENT

Section 514(a) of ERISA provides that, with certain

exceptions not relevant here, ERISA “shall supersede any

and all State laws insofar as they * * * relate to any

employee benefit plan” covered by the Act. 29 U.S.C.

1144(a). Because the key term “relate to” is of indefinite

scope, the application of that provision has posed difficult

problems, and this Court has therefore adjudicated numer-

ous cases in recent years in which parties have claimed

that Section 514(a) preempts a variety of state laws insofar

as they are applied to or affect ERISA plans. As a result

of those cases, certain key principles concerning the scope

and limits of the term “relate to” can now be summarized

in a more concrete form than was hitherto possible, thus

providing additional guidance to the lower courts and

obviating some of the confusion that has been present in

this area.

Congress intended that the regulation of ERISA-

covered employee benefit plans be exclusively an area of

federal concern. Therefore, in areas where ERISA itself

provides law or remedies, Congress intended that Section

514(a) broadly preempt the field of state regulation. More-

over, even in areas where ERISA does not itself provide

law or remedies, Congress’s occupation of the field pre-

cludes the States from attempting to impose their own

ideas—._gardless of how salutary—regarding the struc-

ture and administration of benefit plans. For that reason,

state laws that specifically refer to ERISA plans are also

preempted. Beyond that area, this Court’s cases establish

that Congress intended a further area of preemption, since

it intended to leave to the private parties involved— pri-

marily the employer and employee—the basic substantive

decision regarding what benefits should be provided.

10

Thus, state laws that require employers to offer particu-

lar benefits are also preempted (unless preserved by the

savings clause, 29 U.S.C. 1144(b)).

There is no basis for extending preemption under Sec-

tion 514(a) to state laws of general applicability that do not

fall within any of the above categories. ERISA plans

frequently choose to provide benefits by entering an area

of commerce or activity traditionally governed by state

laws that are applicable to many others who also operate in

that area. By conducting activities in the regulated area,

the ERISA plan subjects itself to the same state laws that

governs all other actors within the State. Thus, ERISA

plans that offer medical services remain subject to gener-

ally applicable, plan-neutral state regulation of (and taxa-

tion of) medical care, just as ERISA plans that offer other

kinds of services remain subject to generally applicable,

plan-neutral state regulation of those services. A State

may, through such laws of general application, regulate or

tax an activity in a way that adds to its costs or limits the

way in which the activity may be conducted in the State by

anyone, including plans, but it cannot direct employers to

provide a particular plan benefit or prohibit them from

providing a benefit that is permitted outside ERISA plans.

Under the foregoing principles, the Second Circuit’s de-

cision holding the HFA preempted must be reversed. The

HFA tax does not prescribe any law in any field for which

ERISA itself furnishes governing law, since ERISA itself

contains no provision for the regulation of hospitals. Nor

does the HFA tax make any reference to ERISA plans or

otherwise treat them differently from all other owners of

hospitals in the State. Nor does the HFA tax require or

prohibit employers or plans to offer any specific employee

benefits. In those circumstances, because the HFA is a

11

tax of general applicability, and because it undoubtedly op

erates in an area of traditional state regulation, it does not

“relate to” ERISA plans. The HFA relates, rather, to the

provision of hospital services in New York. Accordingly, it

is not preempted by Section 514(a).

The Second Circuit erred in holding that the fact that

the ERISA plan (or, more precisely, the hospital that the

plan owned) must directly pay the tax is sufficient to

warrant preemption. ERISA preemption is not limited to

direct state regulation; it applies, for example, to all state

laws that “purport[] to regulate, directly or indirectly,”

ERISA plans. 29 U.S.C. 1144(c)(2). Nor do this Court's

decisions, which have held some “indirect” state regula-

tion preempted while permitting some “direct” state regu-

lation to stand, make the characterization of a state law as

“indirect” or “direct” dispositive of the preemption issue.

Finally, if the Second Circuit’s theory that “direct” regu-

lation is necessarily preempted were correct, virtually

every state regulation of health care—in addition to

regulation of legal services, day care for children, and

other areas of traditional state health and safety regula-

tion—would be inapplicable to ERISA plans that choose to

provide those services themselves rather than purchasing

them from others. This Court held in Travelers that

Congress “could not possibly have intended” to eliminate

“myriad state laws in areas traditionally subject to local

regulation.“ 115 S. Ct. at 1683. The Second Circuit's

theory therefore must be rejected.

12

ARGUMENT

APPLICATION OF NEW YORK’S HOSPITAL FA-

CILITY ASSESSMENT TO THE HEALTH CARE FA-

CILITIES OPERATED BY RESPONDENTS IS NOT

PREEMPTED BY SECTION 514(a) OF ERISA

A. Section 514(a) Of ERISA Does Not Preempt

A Generally Applicable State Law In An Area Of

Traditional State Regulation, So Long As The Law

Does Not Operate In A Field In Which ERISA Itself

Provides Governing Standaris, Makes No Reference

To ERISA Plans, And Does Not Require That Plans

Or Employers Provide Any Particular Benefits

Section 514(a) of ERISA provides that, with certain ex-

ceptions not relevant here, ERISA “shall supersede any

and all State laws insofar as they * * * relate to any em-

ployee benefit plan” covered by the Act. 29 U.S.C. 1144(a).

This Court has addressed that provision numerous times

in recent years in a variety of contexts. What has

emerged from this Court’s decisions are four basic propo-

sitions regarding the scope of ERISA preemption, each of

which governs a distinct category of state laws challenged

under Section 514(a). We do not contend that recognition

of these categories would automatically resolve all of the

difficult questions regarding ERISA preemption. But we

believe that it is useful to distinguish the different sorts of

cases that arise in order to identify the factors that de-

termine the preemption issue in each class of cases.

1. Where ERISA provides law governing an area,

preemption of state law in that field is very broad.

Where ERISA itself provides governing legal standards,

preemption under Section 514(a) is at its broadest. In

those areas, ERISA’s “deliberately expansive” language

was “designed to ‘establish pension plan regulation as

13

exclusively a federal concern.“ Pilot Life Ins. Co. v. De-

deauæ, 481 U.S. 41, 46 (1987). Specifically, ERISA im-

poses participation, funding, and vesting requirements on

pension plans”; it “sets various uniform standards, includ-

ing rules concerning reporting, disclosure, and fiduciary

responsibility, for both pension and welfare plans”; and it

includes “a carefully integrated civil enforcement scheme

that is one of the essential tools for accomplishing the

stated purposes of ERISA.” Ingersoll-Rand Co. v. Me-

Clendon, 498 U.S. 133, 137 (1990) (internal quotation

marks omitted). Because ERISA therefore broadly gov-

erns the rights, duties, and remedies of plan participants

and beneficiaries vis-a-vis plan fiduciaries and employers,

state laws that also regulate those areas are preempted.

In Ingersoll-Rand, for example, this Court held pre-

empted a state-law wrongful discharge action based on a

claim that an employer discharged an employee to avoid

contributing to the employee’s pension plan. The court

reached that conclusion in part because the state-law

cause of action “conflicts directly” with the ERISA-

created, exclusively federal cause of action under ERISA

Section 502(a) and (e), 29 U.S.C. 1132(a)(3), (e). Ingersoll-

Rand, 498 U.S. at 143; see ERISA 5 510, 29 U.S.C. 1140

(prohibiting interference with rights protected under

ERISA or a benefit plan). For similar reasons, the Court

held in Pilot Life Ins. Co. that “common law causes of

action * * * based on alleged improper processing of a

claim for benefits under an employee benefit plan undoubt-

edly meet the criteria for pre-emption under § 514(a)” be

cause they conflict with ERISA’s exclusive civil enforce-

ment remedies. 481 U.S. at 48; see 29 U.S.C. 1132(a).* In

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 (1981), is

governed by the same principles. In that case, the Court first conclyded

that “Congress expressly preserved the option of pension fund integra-

14

areas such as these, the existence of federal law precludes

the States from applying their own law or creating their

own causes of action, even if their own law or remedy is

claimed to be supplementary to or supportive of the

underlying goals of ERISA.

2. Where ERISA itself does not provide governing

legal standards, state laws specifically referring to

ERISA plans are nonetheiess preempted. ERISA does

not, however, “pre-empt only state laws dealing with the

subject matters covered by ERISA—reporting, disclosure,

fiduciary responsibility, and the like.” Shaw v. Delta Air

Lines, 463 U.S. at 98. Where ERISA itself does not pro-

vide law governing an area, state laws are still preempted

if they refer to employee benefit plans and single them out

for special treatment. For example, in Mackey v. Lanier

Collection Agency & Serv., Inc., 486 U.S. 825, 829-830

(1988), this Court held that a state law exempting ERISA

plans from generally applicable garnishment procedures

was preempted by Section 514(a). The law’s defect was

that it “expressly refers to—indeed, solely applies to—

ERISA employee benefit plans.” 486 U.S. at 829.

Similarly, i. District of Columbia v. Greater Washington

Bd. of Trade, 506 U.S. 125 (1992), the Court held preempted

a local law requiring employers to provide employees

receiving workers compensation with health insurance

tion defined as the practice of determining benefits “by combining

pension funds with other income streams available to the retired

employees”—when it enacted ERISA. 451 U.S. at 514. The Court also

noted that that practice had been sanctioned by a valid Department of

Treasury regulation. 451 U.S. at 517-521. The Court concluded that the

New Jersey statute at issue in that case was preempted “because it

eliminates one method for calculating pension benefits—integration—

that is permitted by federal law.” 451 U.S. at 524. See also FMC v.

Holliday, 498 U.S. 52 (1990) (ERISA preempts law barring plans from

enforcing subrogation claims on benefits).

15

equivalent to “the existing health insurance coverage”

provided by the employer to other employees. 506 U.S. at

130. Because the “existing health insurance coverage”

was necessarily “a welfare benefit plan under ERISA,” the

Court held that the local law “specifically refers to

welfare benefit plans regulated by ERISA and on that

basis alone is pre-empted.” Ibid.; see also Ingersoll-Rand,

498 U.S. at 136; FMC Corp. v. Holliday, 498 U.S. at 59.“

The lower courts have uniformly held that state tax laws that are

specifically directed at ERISA plans “relate to” plans. See E-Systems,

Inc. v. Pogue, 929 F 2d 1100, 1101, 1108 (Sth Cir.) (state law that im-

posed a 2.5% tax expressly on plan administrators’ fees and on claims

and benefits paid under a plan is preempted), cert. denied, 502 U.S. 981

(1991); General Motors Curp. v. California Bd. of Equalization, 815 F 2d

1305, 1309 (9th Cir. 1987) (“tax * * * computed on the basis of benefits

paid by the [self-insured ERISA-covered] plans” relates to plans be-

cause “reference to plan activities in computing the tax is unavoid-

able”), cert. denied, 485 U.S. 941 (1988); Birdsong v. Olson, 708 F. Supp.

792, 798 (W.D. Tex. 1989) (preempting same law as in E-Systems), ap-

peal dismissed, 901 F.2d 1270 (5th Cir. 1990); National Carriers’ Confer-

ence Comm. v. Heffernan, 454 F. Supp. 914, 915 (D. Conn. 1978) (state

law that required “group maintaining [the] plan“ to pay annual tax of

2.75% on “amounts paid as benefits” is a law “specifically directed at

such plans exclusively” and is preempted) (citation omitted).

By the same token, courts have recognized that state tax laws that

do not accord special treatment to plans are not preempted. See

Thiokol Corp., Morton Int'l, Inc. v. Roberts, 76 F.3d 751, 753, 754-755

(6th Cir. 1996) (2.35% state tax imposed on business tax base that

included employers’ payments to ERISA plans “has, at most, a tenuous,

remote, or peripheral effect” that does not warrant preemption),

petition for cert. pending, No. 95-1913 (filed May 23, 1996); Retirement

Fund Trust of Plumbing v. Franchise Tax Bd., 909 F 2d 1266, 1281 (9th

Cir. 1990) (State’s “tax levy procedure does not single out ERISA

trusts” and is a “neutral law of general application”); Firestone Tire &

Rubber Co. v. Neusser, 810 F.2d 550, 551, 554 (1987) (2% city tax

imposed on earned income of city residents that included employee

contributions for ERISA plan benefits is a “neutral tax of general

application” that is not preempted).

16

State laws referring to and singling out ERISA plans

are preempted because Congress intended in passing

ERISA to leave to federal law the field of regulation of

ERISA-covered employee benefits. As this Court has

noted, the congressional sponsors of ERISA referred to

“the reservation to federal authority [of] the sole power to

regulate the field of employee benefit plans“ as the

“crowning achievement” of the ERISA legislation. Shaw,

463 U.S. at 99 (quoting 120 Cong. Rec. 29,197 (1974) (state-

ment of Rep. Dent)); see also ibid. (quoting 120 Cong. Rec.

29,933 (1974) (“substantive and enforcement provisions of

[ERISA] are intended to preempt the field for Federal

regulations”) (statement of Sen. Williams)). Although

state laws of general applicability that “function[ | irre-

spective of the existence of an ERISA plan,” Ingersoll-

Rand, 498 U.S. at 139, may not be preempted even though

they may affect the operation of ERISA plans, see infra

pp. 19-23, the States may not attempt specifically to

regulate that field. Because a state law that refers to

employee benefit plans intrudes the State into the field

reserved to federal law by Congress, it is preempted.”

This Court has not had occasion to address the limits of the

“reference to” analysis. If a state law that is not one of general

applicability clearly is intended to target ERISA employee benefit

plans and single them out for special treatment, but is drafted so as to

avoid explicit reference to such plans, the law may still be preempted

under this principle. On the other hand, where a purely verbal refer-

ence to ERISA plans in a state law of general applicability is neces-

sary to ensure that ERISA plans are treated the same as a broad class

of other entities within an area subject to state control, the state law

may in some circumstances avoid preemption. See, e.g., Thioko! “orp.,

Morton Int l., 76 F.3d at 756-761; New England Health Care nr mplwyees

Union, District 1199 v. Mount Sinai Hospital, 65 F.3d 1024, 1032 (2d

Cir. 1995); NYS Health Maintenance Org. Conference v. Curiale, 64

F.3d 794, 799-801 (2d Cir. 1995); United Wire, Metal & Machine Health

17

8. Where ERISA itself does not provide law govern-

ing an area, state laws requiring or prohibiting provi-

sion by employers of certain employee benefits through

ERISA plans are preempted. ERISA preemption extends

to an additional category of cases. Where ERISA itself

does not provide federal law governing an area, state laws

are still preempted if they require employers to provide a

particular employee benefit through an ERISA plan. For

example, in Shaw v. Delta Air Lines, the Court held that

New York’s Human Rights Law and its Disability Bene-

fits Law “relate[d] to” ERISA plans because they required

employee welfare plans to provide benefits for pregnancy.

463 U.S. at 97; see Travelers, 115 S. Ct. at 1678. Similarly,

in Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

724 (1985), Massachusetts implicitly conceded (and the

Court readily assumed) that its law, which required any

employee welfare “fund” that provided hospital benefits

also to provide minimum mental health benefits, related to

self-insured ERISA plans. Id. at 730 n.11, 735 n.14; see

Travelers, 115 S. Ct. at 1680."

The rule that emerges from Metropolitan Life and

Shaw is that States cannot tell employers which, if any,

welfare benefits to offer employees. As a result, employ-

ers operating in a number of States can offer benefits to

their employees on a uniform basis across the country,

thereby avoiding the “considerable inefficiencies” result-

ing from Aa] patchwork scheme of regulation” that could

in turn “lead those empluyers with existing plans to

& Welfare Fund v. Morristown Memorial Hosp., 995 F.2d 1179, 1192 n.6

(3d Cir.), cert. denied, 510 U.S. 944 (1993).

u Although “related to” ERISA plans under Section 514(a), the

minimum mental health benefit was nonetheless saved from preemp-

tion by operation of the ERISA “savings” provision for state laws of

insurance. Metropolitan Life, 471 U.S. at 739-749; see 29 U.S.C.

1144(b)(2)(A).

18

reduce benefits, and those without such plans to refrain

from adopting them.” Fort Halifax Packing Co. v. Coyne,

482 U.S. 1, 11 (1987); see also FMC Corp. v. Holliday, 498

U.S. at 60 (“Application of differing state subrogation laws

to plans would therefore frustrate plan administrators’

continuing obligation to calculate uniform benefit levels

nationwide.”); Travelers, 115 S. Ct. at 1677-1678; Shaw, 468

U.S. at 105 n.25. By precluding States from requiring

plans to provide particular health or other benefits,

ERISA also permits employers to be certain that em-

ployees in a mandated-benefit State would not receive

those benefits at the expense of employees in another

State that did not mandate those benefits.

Finally, to permit States to dictate the level of benefits

would be inconsistent with Congress’s considered decision

that ERISA “not mandate that employers provide any

particular benefits.” Shaw, 463 U.S. at 91; see also Truv-

elers, 115 S. Ct. at 1674 (At he federal statute does not go

about protecting plan participants and their beneficiaries

by requiring employers to provide any given set of

minimum benefits, but instead controls the administration

of benefit plans”); Curtiss-Wright Corp. v. Schoonejongen,

115 S. Ct. 1223, 1228 (1995) (ERISA does not “create any

substantive entitlement to employer-provided health bene-

fits or any other kind of welfare benefits.”).” In reaching

that conclusion, Congress determined that the public

welfare would be maximized if the interested parties could

tailor benefits packages to the financial resources that the

2 Although ERISA does not “establish any minimum participation,

vesting, or funding requirements for welfare plans as it does for pension

plans,” Curtiss-Wright, 115 S. Ct. at 1228, that omission was deliberate.

Therefore, state regulation of those subject matters for welfare plans

would also be inconsistent with ERISA, as it would be for pension

plans.

19

employer wanted to make available and the needs that the

employees most wanted to satisfy. To permit the States to

intrude on that decision by mandating particular benefits

would conflict with Congress’s determination that such

decisions should be left to the private sector.”

4. Where an employer or ERISA plan chooses to pro-

vide benefits by engaging in an activity subject to state

regulation, it is subject to that regulation. Outside the ar-

eas outlined above, ERISA plans that choose to undertake

activities in areas over which the States have undoubted

regulatory (and taxing”) authority generally remain sub-

ject to that authority in the same way as other entities in

the State.“ This Court has long acted on the “assumption

8 A state law prohibiting plans from providing a particular benefit

— — — concerns. However, as discussed below, a plan-

on a regulated activity that applies to

and non-plans would not be preempted. l ere

4 Section 514 RRC) of ERISA provides that “any State tax law

relating to employee benefit plans” is not “exempt from subsection (a)”

of Section 514. 29 U.S.C. 1144(b\5)(B)i). The history of Section

SA H] is recounted in Retirement Fund Trust of Plumbing v.

Franchise Tax Bd., 909 F.2d 1266 (9th Cir. 1990), which concluded that

“Congress intended, when it enacted § 514(b)(5), that state tax laws

should receive precisely the same analysis as other state laws. Only

state tax laws that ‘relate to’ ERISA plans are preempted.” Id. at

1280; accord Birdsong v. Olson, 708 F. Supp. 792, 797 (W.D. Tex. 1989)

(“state tax laws related to employee welfare benefit plans are

preempted”), appeal dismissed, 901 F.2d 1270 (5th Cir. 1990); Northwest

Airlines, Inc. v. Roemer, 603 F. Supp. 7, 12 (D. Minn. 1984) (“Congress

intended to preempt state tax laws insofar as they relate to employee

benefit plans”). Neither the district court, nor the court of appeals in its

original and remand decisions, referred to Section £14(b)5).

© Thus, in this case the Fund, a self-insured welfare plan, chose to

provide hospital care through a facility that it owns and operates. If

the Fund had instead chosen to purchase hospital care from hospitals

directly or from insurers that provide such coverage, this case would be

analytically identical to Travelers. Indeed, because this case, unlike

20

that the historic police powers of the States were not to be

superseded by the Federal Act unless that was the clear

and manifest purpose of Congress.” Travelers, 115 S. Ct.

at 1676; see also Metropolitan Life, 471 U.S. at 740. Con-

gress itself provided no substantive standards in ERISA

governing medical care, day care centers, or prepaid legal

services—to name just afew of the areas in which ERISA

plans operate. See 29 U.S.C. 1002(1). Nothing in ERISA

suggests that Congress intended that those areas should

be entirely free of state regulation (and thus of all

governmental regulation) whenever they happen to be pro-

vided in kind by an ERISA plan. See Travelers, 115 S. Ct.

at 1683 (state regulation of medical care is “no different

from myriad state laws in areas traditionally subject to

local regulation, which Congress could not possibly have

intended to eliminate”).

In short, although Congress in enacting ERISA meant

to establish plan regulation “as exclusively a federal con-

cern,” Travelers, 115 S. Ct. at 1677 (quoting Alessi v. Ray-

bestos-Manhattan, Inc., 451 U.S. 504, 523 (1981)), Congress

did not intend similarly to federalize the regulation of

hospitals, lawyers, or day care centers. See, e.g., Harmon

City, Inc. v. Nielsen & Senior, 907 P.2d 1162 (Utah 1995)

(legal malpractice claims against plan attorneys not pre-

empted). Indeed, it would be extraordinary if a Congress

that was intent on protecting the rights of plan partici-

pants and beneficiaries, see 29 U.S.C. 1001, in fact deprived

those parties of the protection of traditional state regula-

tion merely because the services ordinarily subject to that

regulation were provided by ERISA plans. Such state

Travelers, involves a tax that is imposed at a uniform rate and that

therefore has no effect on a plan’s decisions about how to provide

medical care, the state assessment here has less of an impact on plan

decisions than did the state assessments in Travelers.

21

regulation “relates to” the various subject mat

which it applies—medical care, legal — day — —

children, etc.; it does not relate to ERISA plans as such, or

address the subject matter (the furnishing of employee

benefits) that sets ERISA plans apart from other entities.

In that critical sense, such regulation affects “employee

benefit plans in too tenuous, remote, or peripheral a man-

ner to warrant a finding that the law ‘relates to’ [ERISA]

plans.” Shaw, 463 U.S. at 100 n.21. See also Greater

Washington Bd. of Trade, 506 U.S. at 130 n.1 (laws of

“general applicability” frequently not preempted).”

The fact that state regulation in this category may have

effects—even substantial effects—on ERISA plans does

not alter the analysis. That principle was established by

this Court’s decision in Travelers. The Court in Travel-

ers held that ERISA did not preempt New York statutes

setting surcharges on hospital costs depending on

whether they were paid for by a Blue Cross/Blue Shield

plan, a commercial insurer, or an HMO.” The surcharges

© There was no need for Congress to “save” such traditional

from preemption as it did expressly for insurance, —

securities laws. Traditional state regulation and taxation of social

welfare activities or the professions does not “relate to” plans insofar as

ERISA does not itself provide law on those subjects; insurance,

banking and securities laws, in contrast, are “saved” even if they do

ber plans. Metropolitan Life, 471 U.S. at 741-742.

Court remanded for consideration of whether the 13%

surcharge on “self-insured funds” was preempted. Travelers, 115 S. Ct.

at 1675 n.4. The United States stated in its amicus curiae brief at the

petition stage in Travelers that “{a}pplication of the 13% surcharge to

‘self-insured funds’ may raise some distinct issues,” not that it “would

present entirely distinct issues,” as respondents assert (Br. in Opp. 6

n.4; emphasis added). See Brief for the United States as Amicus Curiae

at 14 n.5 in Nos. 93-1408, 93-1404, and 93-1415 (filed Sept. 14, 1994). The

distinct issue we had in mind—but which was not before the Court—

was whether the 13% surcharge payable by “self-insured funds” (but

22

have an impact on plans because they affect “the relative

costs of competing insurance to provide [benefits]” and

because they “bear{] on the costs of benefits“ like any

regulation of “[qjuality standards” or “employment condi-

tions“ by driving up the costs of the benefits. 115 S. Ct.

at 1679. Yet the Court held that neither the effect on plan

choice nor the modest overall draw on plan assets caused

by the surcharges sufficed for preemption, because the

New York scheme “leaves plan administrators right

where they would be in any case, with the responsibility to

choose the best overall coverage for the money.” 115 S. Ct.

at 1680. Such a scheme does not implicate It he basic

thrust of the pre-emption clause,” 115 S. Ct. at 1677-1678,

because it does not “preclude uniform administrative prac-

tice or the provision of a uniform rr *

if a wishes to provide one, 115 S. Ct. at :

— — not “relate to” ERISA plans within the

meaning of Section 514(a).” See also Mackey, 486 U.S. at

not other favored payors like Blue Cross/Blue Shield) necessarily

singled out self-insured plans for special treatment and thus relateld]

to plans“ for that reason. Here, no distinct analysis is necessary

because the tax applies generally to hospitals and is entirely neutral

with respect to ERISA plans.

18 This Court in Travelers left open the question whether ERISA

would preempt a state regulation that produced such an “acute”

economic effect “as to force” an ERISA plan “to adopt a certain scheme

of substantive coverage or effectively restrict its choice” of benefits or

the manner in which they will be provided. Travelers, 115 S. Ct. at

1683. That question likewise need not be answered here, because the

0.6% HFA is not such “an exorbitant tax” or “so prohibitive” in its

effect that it compels the Fund to cease providing hospitalization

coverage, reduce the level of that coverage, or provide the coverage

through other than Fund-owned facilities. Id. at 1681. Indeed, the

HFA has even less effect on ERISA plans than the 9%, 11%, and 13%

surcharges in Travelers because the HFA’s uniform, low rate is not

23

830-841 (generally applicable state garnishment law held

applicable to ERISA plans and not preempted under

Section 514(a)).

We acknowledge that drawing the line between for-

bidden state regulation of what benefits an employer must

provide and permitted state regulation of an area of

commerce or activity in which a plan chooses to operate

may not always be easy. But the broad outline of the

distinction between a State’s requirement that a plan

provide certain benefits, as in Metropolitan Life or Shaw,

and a State’s requirement that plans abide by state

regulations applicable to others similarly situated in the

State, as in Travelers or Mackey, is clear. Although

employer and employee must be left free to decide what

package of hospitalization, day care, or legal services will

best satisfy their needs, ERISA does not provide them

with a means of opting out of generally applicable state

laws regulating those areas simply by choosing to include

them in an ERISA plan.

B. The HFA Is Not Preempted Under The Foregoing

Principles Governing The Application Of Section

514(a) Of ERISA

1. Under the above analysis, the New York tax, as

applied in this case, does not “relate to” an ERISA plan

within the meaning of Section 514(a) of ERISA. First, the

HFA has no effect on any of the fields in which ERISA

itself provides governing law. When it enacted ERISA,

Congress included no provisions concerning the regula-

tion or taxation of hospitals, and New York’s HFA tax

does not affect any of the areas—such as reporting, dis-

closure, fiduciary responsibility, or civil enforeement—in

designed to and will not have any effect on plans regarding what kind

of health care to provide or how to provide it.

24

which ERISA set forth standards to govern employee

benefit plans.

Second, the HFA does not itself refer to ERISA plans.

To the contrary, the HFA statute is a law of general

application because it applies to all “hospitals” without

regard to their ownership, their patient composition, or

the ultimate source of patient revenues subject to the tax.

Cf. United Wire, Metal & Machine Health & Welfare

Fund v. Morristown Memorial Hosp., 995 F.2d 1179, 1192

n.6 (3d Cir.), cert. denied, 510 U.S. 944 (1993). The HFA

operates in an area of traditional state regulation and

“makes no reference to, [and] indeed functions irrespective

of, the existence of an ERISA plan.” Ingersoll-Rand, 498

U.S. at 139.”

Third, the HFA does not require (or forbid) employers

or plans to provide any particular level of medical benefits

to plan participants or beneficiaries. The HFA does not

require the Fund to “provide a certain kind of benefit to

cover a specified illness or procedure,” Metropolitan Life,

471 U.S. at 728, or mandate that the Fund cover specified

categories of persons defined by age or condition, id. at

729, such as infants, the elderly, or the disabled. Employ-

ers and ERISA plans in New York, as in other States,

remain free to provide as much or as little hospital care as

they desire.

10 If the HFA did expressly exempt plan-owned hospitals from the

tax, which is the result respondents seek to achieve in this litigation,

the exemption would be preempted as a law that refers to an ERISA

plan and thereby “singles out ERISA employee welfare benefit plans

for different treatment.” See Mackey v. Lanier Collection Agency &

Servs., Inc., 486 U.S. 825, 830, 838 n.12 (1988). It would be an odd rule of

preemption that required a court to carve out an exemption from a

state law of general applicability in such circumstances, yet prohibited

a State from including the very same exemption in its own law in the

first place out of respect for the very same principles of preemption.

25

The HFA tax therefore does not fall within any of the

three categories in which this Court has previously found

ERISA preemption. The tax does, however, fall squarely

within the fourth category described above: situations in

which an employer or ERISA plan chooses to provide

benefits by engaging in an activity subject to traditional

state regulation of general application. It is therefore

subject to that regulation. Respondents could have pro-

vided hospitalization benefits to plan participants either by

purchasing hospitalization insurance, by reimbursing

participants from plan funds for hospitalization expenses,

or by negotiating directly with HMOs or local hospitals to

provide hospitalization for plan participants. They chose

none of those options, but instead decided to operate a

hospital themselves. Nothing in ERISA suggests that by

making that choice, respondents were also able to immu-

nize themselves from all of the mechanisms—including

generally applicable taxes—of state hospital regulation.”

Significantly, moreover, the HFA operates in the same

realm as the surcharges upheld in Travelers, the regula-

tion of health care. The Court observed in Travelers that

“general health care regulation * * * historically has

been a matter of local concern,” and the Court concluded

that “nothing in the language of [ERISA] or the context of

® In California Division of Labor Standards Enforcement v.

Dillingham Construction, N.A., No. 95-789 (argued Nov. 5, 1996), we

argued that the same rule was applicable in that case. The state

regulation concerning apprenticeship training at issue there did not

refer to ERISA plans because not all apprenticeship training is con-

ducted through ERISA plans. See 95-789 U.S. Br. 12-13 (discussing

Massachusetts v. Morash, 490 U.S. 107 (1989)). Therefore the regula-

tion was a generally applicable law that an employer could not simply

disregard because the employer in that case happened to choose to

provide apprenticeship training through an ERISA plan. (We have

provided copies of our brief in Dillinghan- to the parties in this case.)

its passage indicates that Congress chose to displace”

such regulation. 115 S. Ct. at 1680.“ In both Travelers

and in this case, the state law has an effect on ERISA

plans only because, and to the extent that, plans have cho-

sen to engage in activity that is covered by the generally

applicable state law. That incidental effect is too “ten-

uous, remote, or peripheral” to warrant a finding that the

law ‘relates to’ ERISA plans. Travelers, 115S. Ct. at 1680;

Shaw, 463 US. at 190 n.21.

3. In its decision in this case on remand from this

Court, the Second Circuit relied on a single factor to

justify its adherence to its prior view that the HFA was

Holding that “a state law’s direct economic

impact on ERISA plans is sufficient for a finding of pre-

emption,” Pet. App. 4a, the court below decided the case on

the ground that the HFA constitutes a direct imposition

because “there is no third party between the plan and the

[HFA] tax,” Pet. App. 3a. The court erred in holding that

the single factor of direct economic impact on ERISA

plans is a sufficient basis to warrant preemption.

The text of ERISA’s preemption provision establishes

that state laws that relate to ERISA plans “directly or

indirectly,” are superseded, see 29 U.S.C. 1144(c)(2), and

this Court has not suggested that the “direct” or

“indirect” nature of a state law’s effect on ERISA plans is

dispositive of whether the law relates to plans.” See e. g.

2 In its original opinion in this case, the court of appeals reasoned

that “the HFA targets only the health care industry,” and “[bjecause

this industry is, by definition, the realm where ERISA welfare plans

must operate,” the HFA relates to plans and is preempted. Pet. App.

12a. Travelers established that that reasoning is mistaken.

2 Respondents mischaracterize (Br. in Opp. to Pet. 6 n.4) the United

States’ position in Travelers. In urging that the indirect economic

effects of the New York surcharges were insufficient for ERISA pre-

emption, we expressed the broader view that Ja] state regulation does

27

Travelers, 115 S. Ct. at 1678-1681. The Court in Travelers

did refer to New York’s surcharge statutes in terms of

their “indirect economic influence” on plan choices. 115 S.

Ct. at 1679. But that was because the only question before

the Court in Travelers was whether the surcharges—

which were not directly paid by plans—were preempted.

Indeed, this Court has recognized that laws whose “effect

is only indirect” may also relate to plans and be preempted.

Ingersoll-Rand, 498 U.S. at 139; accord Alessi, 451 U.S. at

525; see Travelers, 115 S. Ct. at 1683. By the same token,

this Court has held that ERISA does not preempt a gener-

ally applicable state garnishment law even as it applies to

“participants’ benefits in the hands of an ERISA welfare

benefit plan.” Travelers, 115 S. Ct. at 1680 (describing

Mackey v. Lanier Collection Agency & Serv., Inc., supra);

see Mackey, 486 U.S. at 841 (“ERISA does not forbid

garnishment of an ERISA welfare benefit plan, even where

the purpose is to collect judgments against plan partici-

pants”). The court of appeals was therefore wrong to

conclude that the HFA “relates to” plans, within the

meaning of Section 514(a) of ERISA, because it “imposes

‘an immediate tax on payments and contributions which

were intended to pay for participants’ medical benefits.’”

Pet. App. 4a (quoting its original decision).

If the Second Circuit were correct that “direct eco-

nomic impact” is sufficient to warrant preemption, virtu-

ally every state law that taxes or regulates hospital care

not relate to plans so long as its only effect is to subject all buyers in a

broad-based market in which ERISA plans and others substantially

participate to a single set of marketplace incentives.” Brief for the

United States as Amicus Curiae Supporting Petitioners at 9 in Nos. 93-

1408, 93-1414 and 93-1415 (filed Nov. 15, 1994). The United States never

contended, as respondents here have suggested, that the preemption

analysis turns solely on the indirect or direct nature of the regulatory

impact.

28

would be invalidated insofar as it applies to hospitals

owned by ERISA-covered plans. For example, payment of

generally applicable unemployment compensation taxes,

payroll taxes or real property taxes by a plan-owned

hospital depletes plan assets at least as “directly” as

payment of the provider tax here. See Boyle v. Anderson,

68 F.3d 1093, 1106-1107 (8th Cir. 1995), cert. denied, 116 S.

Ct. 1266 (1996); Morgan Guar. Trust Co. v. Tax Appeals

Tribunal, 587 N.Y.S.2d 252 (N.Y. 1992) (ERISA preempts

state tax on gain from property transfer when applied to

transfer of plan-owned property). Similarly, state laws

that impose quality control or workplace standards on

hospitals have an impact on plans that own hospitals that

is fully as “direct” as the impact of the provider tax. In

both situations, the law’s effect necessarily falls on the

plan because the plan provides hospital care rather than

purchasing it from third-party providers in the market-

place. Indeed, if “directness” of a law’s impact were the

test of ERISA preemption, New York State’s basic licens-

ing laws could not survive in this setting, because they

require “hospitals” to conform to state-approved systems

of cost analysis, reporting and audits, and to maintain

“premises, equipment, personnel, rules and by-laws, stan-

dards of medical care, and hospital service” that are “fit

and adequate” according to state law.” N.Y. Pub. Health

Law § 2805(1) and (2)(b) (McKinney 1993).

2 The breadth of the Second Circuit’s decision is demonstrated by

the court’s decision to hold the HFA preempted as to all receipts for

patient care by the Fund’s centers—even when the Fund is merely

acting like any other hospital in providing services to patients that are

not paid for out of Fund assets. Thus, under the Second Circuit's

decision, even when the Fund’s hospitals treat patients who are not

beneficiaries of the Fund (such as members of the PPGU) or whose care

is paid for by workers’ compensation, the income from those activities

is immune from the HFA.

More broadly still, the court of appeals’ reasoning leads

to the conclusion that ERISA plans are exempt from a

host of state laws that may tax or regulate the provision of

other benefits and services that ERISA welfare plans

provide in kind rather than purchase from third parties. In

addition to hospital and medical services, welfare benefits

may include death benefits, day care services and prepaid

legal services. 29 U.S.C. 1002(1); see 29 U.S.C. 186(c).

Application of the court of appeals’ “direct effect” test

would invalidate, as applied to plan-owned service provid-

ers, state laws that tax client funds escrowed with

attorneys, staffing requirements for day care centers, and

embalming procedures for funeral homes. It would also

invalidate ethical requirements and malpractice laws

insofar as such providers are concerned. In short, the

court of appeals’ reasoning would lead to preemption of

myriad state laws that constitute an otherwise valid

exercise of a state’s traditional police powers, a result that

“would effectively read the limiting language in § 514(a)

out of the statute.” Travelers, 115 S. Ct. at 1679. More-

over, federal preemption would leave a void in these areas

historically regulated by States, and possibly serve as an

invitation to unscrupulous operators to set up ERISA

plans to avoid state regulation in those fields.

* Tronically, although the result would be to tend to decrease plan

costs, it would not eliminate the impact of the preempted state laws.

To the contrary, those laws would still have a dramatic impact on plan

choice; if ERISA plans were the only entities in the State entitled to

provide hospital services, legal services, day care, and the like, without

paying state taxes or obeying state regulations, the resulting economic

impact would surely drive many ERISA plans to provide such services

themselves rather than contracting with others to provide them.

30

CONCLUSION

The judgment of the court of appeals should be

reversed.

Respectfully submitted.

WALTER DELLINGER

J. DAVITT MCATEER EwIn S. KNEEDLER

Acting Solicitor of Labor Deputy Solicitor General

ALLEN H. FELDMAN JAMES A. FELDMAN

Associate Solicitor Assistant to the Solicitor

NATHANIEL I. SPILLER General

JUDITH D. HEIMLICH

Attorney

Department of Labor

NOVEMBER 1996