Amicus Curiae Brief — UNUM Life Ins. Co. of America v. Ward

In the Supreme Court of the E

OCTOBER TERM, 1998

UNUM LIFE INSURANCE COMPANY OF AMERICA,

Petitioner,

v.

JOHN E. WARD,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals for the

Ninth Circuit

BRIEF OF THE BUSINESS ROUNDTABLE

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

CHARLES ROTHFELD*

LAWRENCE S. ROBBINS

Mayer, Brown & Platt

2000 Pennsylvania Ave., N. W.

Washington, D.C. 20006

(202) 463-2000

* Counsel of Record

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TABLE OF CONTENTS

QUESTION PRESENTED ........-+-+eeeee:

TABLE OF AUTHORITIES .........----+++-

A. The Purposes Of ERISA Require An Expansive

Application Of The Statute’s Preemption

Puewietee ..6a 5 bc os 5 46 2 eee

B. The Elfstrom Rule “Relates To” ERISA Plans

And Therefore Is Preempted ............

C. The Notice-Prejudice Rule Is Preempted Because

It Conflicts With Substantive Provisions of

ERISA And Is Not Validated By The Insurance

Sawing Camas . wc eect ere esnsee

CONCEUIGION . cc cece otter beeen e ee eens

TABLE OF AUTHORITIES

Page(s)

Alessi v. Raybestos-Manhattan, Inc. ,

i ES 6 a os on an bb 0.9 4, 6, 20

Barnett Bank vy. Nelson, 517 U.S. 25 (1996) ...... 11

Boggs v. Boggs, 117 S. Ct. 1754 (1997) ...... passim

California Div. of Labor Standards

Enforcement v. Dillingham Constr.,

N.A., Inc., 117 §. Ct. 832 (1997) ........ passim

Cisneros v. UNUM Life Insurance Company

of America, 134 F.3d 939 (9th Cir. 1998),

petition for cert. filed, 66 U.S.L.W. 3773

(U.S. May 20, 1998 ), No. 98-1867 ...... passim

Curtiss-Wright Corp. v. Schoonejongen,

ee nw os oe a 10, 18

District of Columbia v. Greater Washington

Bd. of Trade, 506 U.S. 125 (1992) ..... 12, 13, 15

Elfstrom v. New York Life Ins. Co.,

ET i. os 5 os eg 6 6 0 6 8 « passim

FMC Corp. v. Holliday, 498 U.S. 52 (1990) ... passim

Fort Halifax Packing Co. v. Coyne,

en la eo 6 6 9 6a v's 9, 10, 11, 17

Group Life & Health Ins. Co. v. Royal

Drug Co., 440 U.S. 205 (1979) ....... 21, 22, 23

Ingersoll-Rand Co. v. McClendon,

EE passim

Mackey v. Lanier Collection Agency &

Serv., Inc., 486 U.S. 825 (1988) ......... 15, 16

iv

TABLE OF AUTHORITIES—Continued

Page(s)

Metropolitan Life Ins. Co. v. Massachusetts,

Gee Wee ME rhs wy ce cet obs eas passim

Moore v. Metropolitan Life Ins. Co. ,

856 F.2d 488 (2d Cir. 1988) ........... 10, 11

New York State Conference of Blue Cross &

Blue Shield Plans v. Travelers Insurance

Ga, S06 Ue Ge Gee 2 cece tae 5 ae. passim

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

| ere ee ory ee eee passim

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

CE on 6 60'6 uO Cah eee AES oes hes passim

Union Labor Life Ins. Co. v. Pireno,

fe. ll RE rE PERLE 20

United States Dep't of the Treasury v. Fabe,

SD Wet SE 6 oo ae 6 dihrae 4s 0.6 650 21, 22

Statutes and Regulations

Re EE ee weer eS 4

ap Te, SD. 0 0 od as ose Ade Ae 15

MESS. CHO -ccccvscsessevesiieh van 16

USC. 8 SEGRIRE . 6. kd Vs CVC TC 19

a Ge 6 ee 5-0 o00 040% keeseanne 19

2 USS. SRS. 66 cess seems ons passim

3 USL. OR is odd tert paced aoe 16

29 U.S.C. § LI44(QOM 2A) .. 2 2 2 ee eee 2

Page(s)

get ke 8 Se ee a ee 19

Miscellaneous

120 Cong. Rec. 29197 (1974) ............... 8

120 Cong. Rec. 29933 (1974) ............... 8

120 Cong. Rec. 29942 (1974) ............... 8

Congressional Budget Office, Economic

Implications of Rising Health Care Costs

Se he OW BS I SS 0 ws we 11

H.R. 2, 93d Cong. 2d Sess., § 514(a) (1974) ...... 6

H.R. 2, 93d Cong., 2d Sess., § 699(a) (1974) ...... 7

H.R. Rep. No. 93-1280 (1974) ............... 19

INTEREST OF THE AMICUS CURIAE

The Business Roundtable is an association of chief

executive officers of leading U.S. corporations with a

combined workforce of more than 10 million employees in

the United States; these corporations sponsor plans that

provide health insurance for some 25 million people.' The

chief executives are committed to advocating public policies

that foster vigorous economic growth; a dynamic global

economy; and a well-trained and productive U.S. workforce

essential for future competitiveness. Established in 1972, the

Roundtable was founded in the belief that chief executives of

major corporations should take an increased role in the

‘quine det Pagers yee mel

Nata ain ition a Aine AAO

is a matter of profound importance both to the companies

represented in the Roundtable and to those companies’

employees. This Court has noted “the centrality of pension

and welfare plans in the national economy, and their

implications for the financial security of the Nation’s work

force.” Boggs v. Boggs, 117 S. Ct. at 1754, 1760 (1997).

Yet the rule adopted by the court of appeals in this case will

lead to the imposition of inconsistent obligations on ERISA

plans, interfere with sound plan administration, and ultimately

redound to the disadvantage of plan beneficiaries by forcing

Teductions in plan benefits — or by inducing employers to

refrain from offering plans altogether. Because these

consequences would injure companies and employees

' Pursuant to Rule 37.3 of the Rules of this Court, the parties

have consented to the filing of this brief amicus curiae. Their

letters of consent have been filed with the Clerk of the Court.

Pursuant to Rule 37.6 of the Rules of this Court, amicus states

that this brief was not authored in whole or in part by counsel for

a party, and no person or entity, other than amicus or its members,

made a monetary Contribution to the preparation or submission of

2

throughout the Nation, amicus submits this brief to assist the

Court in the resolution of this case.

STATEMENT

1. The Employee Retirement Income Security Act

of 1974 (“ERISA”), 29 U.S.C. § 1001 ef seg., is a

comprehensive statute that regulates both pension plans and

welfare plans that “provid[e] employees with fringe benefits.”

Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90 (1983). This

case concerns the provisions of ERISA that address the

statute’s preemptive effect on state law. Section 514(a), the

“preemption clause,” preempts “any or all State laws insofar

as they may now or hereafter relate to any employee benefit

plan” covered by ERISA. 29 U.S.C. § 1144(a). State laws

that relate to ERISA plans may be saved from preemption by

the statute’s “saving clause,” however, if they “regulate[]}

insurance, banking, or securities.” Section 514(b)(2)(A), as

set forth in 29 U.S.C. § 1144(b)(2)(A).

2. Im this case, petitioner UNUM Life Insurance

Company of America (“UNUM”) issued a group long-term

disability policy to fund an employee welfare benefit plan

sponsored by Management Analysis Company (“MAC”).

MAC served as the administrator of the plan, but UNUM was

responsible for claims handling and payment functions, as

well as for the fiduciary review required by § 503 of ERISA.

Respondent John Ward, who served as MAC’s President and

Chief Executive Officer, was a participant in the plan. Ward

asserts that he became disabled in May 1992, but he did not

submit a claim under the disability policy until April 1994,

nearly two years after the onset of the claimed disability.

Pet. App. 2a-3a. UNUM denied Ward benefits because his

submission was untimely under the policy, which requires a

beneficiary to submit a written notice of claim within 30 days

of the onset of disability, and to submit a written proof of

claim no later than one year and 180 days after the onset of

disability. Jd. at 4a-Sa, 42a-43.

3

Ward then brought this suit against the plan and UNUM,

seeking payment of plan benefits. The district court rejected

the claim (Pet. App. 27a-33a), but the court of appeals

reversed. Jd. at la-25a. The court agreed that “Ward’s

submission of notice and proof of his claim plainly was

untimely under the express terms of the UNUM policy.” Jd.

at 5a. But the court nevertheless held that two California

common law rules allowed Ward’s claim to survive: the

“notice-prejudice rule,” which the court characterized as

“prevent(ing] an insurance company from avoiding liability

on the basis of untimely notice or submission of proof unless

the company proves it has been substantially prejudiced by

the delay” (Cisneros v. UNUM Life Insurance Company of

America, 134 F.3d 939, 943 (9th Cir. 1998), petition for cert.

filed, 66 U.S.L.W. 3773 (").S. May 20, 1998), No. 98-

1867); and the so-called “Elfstrom rule,” which holds that an

employer that performs administrative tasks under an insured

welfare pian is the agent of the insurer. Pet. App. 8a-12a.

The court of appeals rejected UNUM’s argument that

these state common law rules were preempted by ERISA.

Relying on its decision in Cisneros, the court first held that

the notice-prejudice rule is saved from preemption by

ERISA’s saving clause. Pet. App. Sa-6a. The court went on

to hold that the Elfstrom rule is not preempted by the

preemption clause because “Elfstrom does not dictate the

benefits to be paid or the manner in which the plan will be

administered. * * * Nor does Elfstrom create an ‘alternate

enforcement mechanism’ for ERISA plan obligations beyond

those set forth in the statute.” Jd. at 2la-22a. The court

remanded the case for factual findings related to the

application of these two state law rules. Jd. at 25a.

INTRODUCTION AND

SUMMARY OF ARGUMENT

A. The proper interpretation of ERISA’s preemption

provisions is a matter of enormous importance to companies

4

and employees across the Nation. As Congress explained

when it enacted ERISA almost 25 years ago,

the growth in the size, scope, and numbers of employee

benefit plans in recent years has been rapid and

substantial; * * * the continued well-being and security of

millions of employees and their dependents are directly

affected by these plans; * * * they are affected with a

national public interest[;] [and] they have become an

important factor affecting the stability of employment and

the successful development of industrial relations * * *.

29 U.S.C. § 1001(a). Benefit plans have only grown in

importance in the intervening years, as the number of

beneficiaries has continued to increase.

Congress recognized the centrality of benefit plans to the

national economy by providing, with the enactment of

ERISA, that the regulation of such plans is “exclusively a

federal concern.” Alessi v. Raybestos-Manhattan, Inc., 451

U.S. 504, 523 (1981). Congress therefore itself established

the rules governing plan administration, using ERISA to

“set{] various uniform standards, including rules concerning

reporting, disclosure, and fiduciary responsibility, for both

pension and welfare plans.” Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 91 (1983). The result was “an intricate,

comprehensive statute.” Boggs v. Boggs, 117 S. Ct. 1754,

1760 (1997).

Congress also recognized that the preemption of state laws

that relate to ERISA plans is a crucial element of this regime

and is essential to protect the interests of plans, of

beneficiaries, and of employers. Members of Congress

explained during the debate on ERISA — and this Court

repeatedly has agreed — that subjecting plans to the vagaries

of state law would have a variety of destructive effects.

Requiring plans to comply with inconsistent state rules would

cause significant inefficiencies, forcing plan sponsors to vary

their administrative mechanisms from State to State. Vague

5

or changing gi state laws would lead to unanticipated liability

and invite continuing litigation. And conflicting state laws

would create considerable uncertainty about the respective

obligations of plans and their beneficiaries.

These consequences of state regulation would impose

obvious and immediate costs on plans. At the same time,

increased state involvement in the regulation of plans

inevitably would redound to the disadvantage of plan

beneficiaries. Faced with rising costs and liabilities, plan

sponsors would have no choice but to reduce benefits or

increase the beneficiaries’ required contributions. At the

extreme, imcreased burdens and expenses likely would

discourage some employers from offering benefit plans at all.

B. These imperatives led Congress to give ERISA a

notably expansive preemption provision, and they should

shape the resolution of the preemption claims in this case.

The Elfstrom rule applied by the court of appeals must be

preempted because it refers directly to ERISA plans and

therefore intrudes on an area of exclusive federal concern. In

addition, allowing States to affect plan administration in the

manner approved by the court-of appeals would invite the

very sort of conflicting state regulation that Congress

condemned as destructive to sound plan administration. The

state notice-prejudice rule approved by the Ninth Circuit also

should not stand: it directly conflicts with the substantive

provisions of ERISA that give plan documents controlling

eT Remap RATA ES SGee SENNA, seeing

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ARGUMENT

In its decisions interpreting ERISA’s preemption

provisions, this Court has been guided both by the statute’s

“clearly expansive” language and by the manifest

congressional purpose “to establish the regulation of

employee welfare benefit plans ‘as exclusively a federal

concern.’” New York State Conference of Blue Cross & Blue

6

Shield Plans v. Travelers Insurance Co., 514 U.S. 645, 655,

656-657 (1995) (quoting Alessi v. Raybestos-Manhattan, Inc. ,

451 U.S. 504, 523 (1981)). The decision below, however,

disregarded both of these considerations. The Ninth Circuit's

restrictive construction of the preemption clause is grounded

on a patent misreading of this Court’s decisions. And its

expansive application of the insurance saving clause finds no

basis either in the statutory purpose or in this Court’s

holdings. If not set aside, the ruling below accordingly will

frustrate congressional policy, disrupting sound plan

administration while injuring employees and other

beneficiaries of ERISA welfare plans.

A. The Purposes Of ERISA Require An Expansive

Application Of The Statute’s Preemption Provision

The Court has noted on several occasions (with more than

a little understatement) that the ERISA preemption provisions

“‘are not a model of legislative drafting’” (FMC Corp. v.

Holliday, 498 U.S. 52, 58 (1990) (quoting Metropolitan Life

Ins. Co. v. Massachusetts, 471 U.S. 724, 739 (1985)). When

interpreting Section 514’s language, it therefore is useful to

begin at the beginning, with an examination of the statutory

history, structure, and purpose. That background makes clear

that Congress acted advisedly in developing an expansive

preemption clause: any attempt to be faithful “to the

objectives of the ERISA statute” (Travelers, 514 U.S. at 656)

will leave a distinctly limited and subordinate role for state

laws that bear directly on the operation of welfare plans.

1. The ERISA bills that originally passed the House and

Senate contained relatively limited preemption clauses that

were “applicable only to state laws relating to the specific

subjects covered by ERISA.” Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 98 (1983). See H.R. 2, 93d Cong. 2d

Sess.,§ 514(a) (1974), reprinted in 3 Legislative History of

the Employee Retirement Income Security Act of 1974

(Comm. Print), pp. 4057-4058 (1976) (“Legislative History”)

7

(bill that passed House preempted laws “relat{ing] to the

reporting and disclosure responsibilities, and fiduciary

responsibilities, of persons acting on behalf of any employee

benefit plan to which part 1 applies”); H.R. 2, 93d Cong., 2d

Sess., § 699(a) (1974), reprinted in 3 Legislative History

3820 (bill that passed Senate preempted laws “relat[ing] to the

subject matters regulated by this Act or the Welfare and

Pension Plans Disclosure Act”). But the Conference

Committee rejected those constricted provisions — as well as

a narrow alternative proposed directly to the Committee by

the administration (see Shaw, 463 U.S. at 98-99 n.19) —

opting instead for a much more inclusive approach. As the

Court has noted repeatedly, this history establishes that

Congress acted with deliberation to make “the section’s pre-

emptive scope * * * as broad as its language.” Jd. at 98.

See Travelers, 514 U.S. at 661; FMC Corp., 498 U.S. at 58-

59; Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138

“er Pilot Life Ims. Co. v. Dedeaux, 481 U.S. 41, 45-46

(1 :

ERISA’s principal sponsors left no doubt that this

“deliberately expansive” (Pilot Life, 481 U.S. at 45) approach

to preemption was essential to protect plans from the

litigation and administrative expense that would follow from

the necessity of complying with varying state requirements.

Senator Javits, for example, explained that

[bJoth [the original] House and Senate bills provided for

preemption of state law, but — with one major exception

appearing in the House bill — defined the perimeters of

preemption in relation to the areas regulated by the bill.

Such a formulation raised the possibility of endless

litigation over the validity of State action that might

impinge on Federal regulation, as well as opening the

door to multiple and potentially conflicting State laws

hastily contrived to deal with some particular aspect of

private welfare or pension benefit plans not clearly

connected to the Federal regulatory scheme.

8

Although the desirability of further regulation — at

either the State or the Federal level — undoubtedly

warrants further attention, on balance, the emergence of

a comprehensive and pervasive Federal interest and the

interests of uniformity with respect to interstate plans

required — but for certain exceptions — the displacement

of State action in the field of private employee benefit

programs.

120 Cong. Rec. 29942 (1974).

Senator Williams agreed:

It should be stressed that with the narrow exceptions

specified in the bill, the substantive and enforcement

provisions of the conference substitute are intended to

preempt the field for federal regulations, thus eliminating

the threat of conflicting or inconsistent State and local

regulation of employee benefit plans. This principle is

intended to apply in its broadest sense to all actions of

State or local governments, or any instrumentality thereof,

which have the force or effect of law.

120 Cong. Rec. 29933 (1974).

Indeed, Representative Dent, in an oft-quoted phrase,

characterized as “the crowning achievement of this

legislation, the reservation to Federal authority [of] the sole

power to regulate the field of employee benefit plans.” 120

Cong. Rec. 29197 (1974). He explained that this step was

crucial in furthering the interests of plan beneficiaries:

{w]ith the preemption of the field, we round out the

protection afforded participants by eliminating the threat

of conflicting and inconsistent State and local regulation.

* * * The conferees, with the narrow exceptions

specifically enumerated, applied this principle in the

broadest sense to foreclose any non-Federal regulation of

employee benefit plans. Thus, the provisions of section

514 would reach any rule, regulation, practice, or decision

9

of any State, subdivision thereof or agency or

instrumentality thereof * * * which would affect any

employee benefit plan * * *.

Ibid.

2. The Court already has had occasion to examine the

manner in which preemption advances the interests of welfare

plans and plan beneficiaries. As the Court has recognized,

the “most efficient way” for a plan sponsor to meet its

responsibilities

is to establish a uniform administrative scheme, which

provides a set of standard procedures to guide processing

of claims and disbursement of benefits. Such a system is

difficult to achieve, however, if a benefit plan is subject

to differing regulatory requirements in differing States. A

plan would be required to keep certain records in some

States but not in others; to make certain benefits available

in some States but not in others; to process claims in a

certain way in some States but not in others; and to

comply with certain fiduciary standards in some States but

not in others.

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 9 (1987).

Looking to the consequences of subjecting plans to these

sorts of unpredictable and varying standards, the Court

recognized that “[sjuch a situation would produce

considerable inefficiencies, which the employer might choose

to offset by lowering benefit levels.” Fort Halifax, 482 U.S.

at 10. The Court therefore found it

clear that ERISA’s pre-emption provision was prompted

by isin Ghat ena Sain und musketelal

employee benefit plans are faced with the task of

coordinating complex administrative activities. A

patchwork scheme of regulation would introduce

considerable inefficiencies in benefit program operation,

which might lead those employers with existing plans to

10

reduce benefits, and those without such plans to refrain

from adopting them. Pre-emption ensures that the

administrative practices of a benefit plan will be governed

only by a single set of regulations.

Id. at 11. For this reason, the Court consistently has sought

to “minimize the administrative and financial burden of

complying with conflicting directives among States or

between States and the Federal Government.” IJngersoll-

Rand, 498 U.S. at 142.

The concern that increasing administrative and litigation

costs for plans “could work to the detriment of plan

beneficiaries” (Ingersoll-Rand, 498 U.S. at 142) by

“producing inefficiencies that employers might offset with

decreased benefits” (FMC Corp., 498 U.S. at 60) is not

fanciful. After all, “[e]mployers or other plan sponsors are

generally free under ERISA, for any reason at any time, to

adopt, modify, or terminate welfare plans. * * * Nor does

ERISA establish any minimum participation, vesting, or

funding requirements for welfare plans as it does for pension

plans.” Curtiss-Wright Corp. v. Schoonejongen, 514 U.S.

73, 78 (1995). See Metropolitan Life, 471 U.S. at 731

(“ERISA * * * contains almost no federal regulation of the

terms of benefit plans”). As a result, it is inevitable that

increased burdens imposed upon plans by state law will force

plan sponsors to impose corresponding increases in premiums

and other employee contributions, or to reduce plan benefits

to make up the difference. While the application of particular

state laws in particular cases might benefit particular

plaintiffs, it therefore is plain that any rule diminishing the

scope of preemption would, in the long run, “decrease

protection for future employees.” Moore v. Metropolitan Life

Ins. Co., 856 F.2d 488, 492 (2d Cir. 1988) (Winter, J.).

Indeed, subjecting plans to varying and changing state

laws would have a complex and cascading series of effects —

all of them unfortunate. Many employees would be deprived

11

of insurance protection altogether; in the health setting, for

example, even relatively small cost increases drive large

numbers of people off of the insurance rolls. See

Congressional Budget Office, Economic Implications of Rising

Health Care Costs (Oct. 1992), at 42-45. Moreover, as

healthier employees decided to forgo participation in

increasingly expensive health plans, the pool of employees

that shares the risk would both decrease and include ever

greater percentages of high-risk participants who make

demands on the plan, a spiral that would lead to further cost

increases and declining participation. Cf. Metropolitan Life,

471 U.S. at 731. At the same time, the unpredictability and

expense inherent in a regime that is controlled by inconsistent

and changing state laws would create “substantial

disincentives for even offering [welfare] plans.” Moore, 856

F.2d at 492. Given “the centrality of pension and welfare

plans in the national economy, and their implications for the

financial security of the Nation’s work force” (Boggs v.

Boggs, 117 S. Ct. 1754, 1760 (1997)), it comes as no

surprise that a Congress faced with these dangers opted for a

notably broad approach to preemption.

3. Against this background, the one constant in the

Court’s ERISA holdings is the recognition “that ERISA’s pre-

emption provision is ‘clearly expansive.’” California Div. of

Labor Standards Enforcement v. Dillingham Constr., N.A.,

Inc., 117 S. Ct. 832, 837 (1997) (quoting Travelers, 514

U.S. at 655). See, e.g., Barnett Bank v. Nelson, 517 U.S.

25, 38 (1996); FMC Corp., 498 U.S. at 58; Ingersoll-Rand,

498 U.S. at 138; Fort Halifax Packing, 482 U.S. at 9;

Metropolitan Life, 471 U.S. at 732; Shaw, 463 U.S. at 96,

98. It necessarily follows that “ERISA certainly contemplated

the pre-emption of substantial areas of traditional state

regulation.” Dillingham, 117 S. Ct. at 840. With that point

in mind, the Court developed what has become a familiar

two-part test for ERISA preemption:

12

We have repeatedly stated that a law “relate[s}] to” a

covered employee benefit plan for purposes of § 514(a)

“if it has a connection with or reference to such a plan.”

Shaw, [463 U.S.] at 97. * * * This reading is true to the

ordinary meaning of “relate to,” * * * and thus gives

effect to the “deliberately expansive” language chosen by

Congress. Pilot Life, [481 U.S.] at 46. * * * Under

§ 514(a), ERISA pre-empts any state law that refers to or

has a connection with covered benefit plans (and that does

not fall within a § 514(b) exception) “even if the law is

not specifically designed to affect such plans, or the effect

is only indirect,” Ingersoll-Rand, (498 U.S.] at 139, and

even if the law is “consistent with ERISA’s substantive

requirements,” Metropolitan Life, [471 U.S.] at 739.

District of Columbia v. Greater Washington Bd. of Trade,

506 U.S. 125, 129-130 (1992) (footnote omitted).

The court of appeals nevertheless declined to apply this

test, evidently because it believed that Travelers marked a

sharp departure from the Court’s prior ERISA jurisprudence.

See Pet. App. 20a-21a (“the Travelers Court concluded that

two types of state laws ‘relate to’ employee benefit plans

within § 514(a): laws that ‘mandatfe] employee benefit

structures or their administration,’ and laws that ‘provid{e]

alternative enforcement mechanisms’”); Cisneros, 134 F.3d

at 943 n.3 (citing Travelers for the proposition that “[t}he

Supreme Court recently has narrowed the scope of ERISA’s

‘related to’ language”). But that conclusion is insupportable.

Travelers simply confirmed a proposition that long had been

implicit in this Court’s decisions: the term “relate to” cannot

be taken “to the furthest reach of its indeterminacy” because

“‘frjeally, universally, relations stop nowhere.’” 514 U.S. at

655 (citation omitted). Pointing to that insight, the Court in

Travelers held that, except in extreme circumstances, a state

law will not be preempted if its only connection to an ERISA

plan is “an indirect economic effect on the relative costs of

13

various health insurance packages.” Jd. at 662. See id. at

659-660, 664, 668.

In reaching that conclusion, however, the Court in

Travelers reaffirmed the view that “[tJhe governing text of

ERISA is Clearly expansive” (514 U.S. at 655); it agreed that

the preemption clause “indicates Congress’s intent to establish

the regulation of employee welfare benefit plans ‘as

exclusively a federal concern’” (id. at 656-657 (citation

omitted)); it confirmed that “Congress’s extension of pre-

emption to all ‘state laws relating to benefit plans’ was meant

to sweep more broadly than ‘state laws dealing with the

subject matters covered by ERISA’” (id. at 661 (quoting

Shaw, 463 U.S. at 98 & n.19)); and it disavowed none of the

Court’s prior decisions in this area. Indeed, more recently,

in Dillingham, the Court expressly restated the controlling

“two-part inquiry: A ‘law “relate[s] to” a covered employee

benefit plan for purposes of § 514(a) “if it (1) has a

connection with or [2] reference to such a plan.”’” 117 S. Ct.

at 837 (quoting Greater Washington Bd. of Trade, 506 U.S.

at 129, and Shaw, 463 U.S. at 96-97) (bracketed material

added by the Court). The Ninth Circuit's failure to apply that

test here led it fundamentally astray.

B. The Elfstrom Rule “Relates To” ERISA Plans And

Therefore Is Preempted

In upholding the Elfstrom rule’s application to ERISA

plans, the court of appeals paid no heed at all to the policies

served by the preemption clause. As we have explained, a

restrictive approach to preemption harms interests that

Congress regarded as crucial to the sound operation of plans.

Yet the court of appeals endorsed an approach that would

subject plans to inconsistent state rules, that would impose

substantial added expenses on plan sponsors, and that —

while perhaps benefitting Mr. Ward — would injure plan

beneficiaries in the aggregate. A proper application of this

Court’s precedents, and a faithful adherence to ERISA’s

14

governing principles, require setting the Ninth Circuit's

decision aside.

1. At the outset, the Elfstrom rule must be preempted

because it has a “reference” to ERISA plans. “Where a

State’s law acts immediately and exclusively on ERISA plans,

* * * or where the existence of ERISA plans is essential to

the law’s operation, * * * that ‘reference’ will result in pre-

emption.” Dillingham, 117 S. Ct. at 838. That plainly is the

case here.

Elfstrom addressed an employer’s obligation when it acts

as the administrator of a group imsurance policy that it

obtained for the benefit of its employees. See Elfstrom v.

New York Life Ins. Co., 67 Cal.2d 503, 509-510 (1967). The

California Supreme Court explained that “[t}he administration

of a group policy may be handled either by the insurer itself

on the basis of information furnished to it by the employer or,

as in the present case, by the employer.” Jd. at 509. With

that understanding, the court addressed the question “whether

an employer acts as the agent of the insurer or of the

employees in administering a policy of group insurance.” /d.

at 511. The answer to that question — the Elfstrom “rule”

announced by the California court and applied by the Ninth

Circuit in this case — is that “the employer is the agent of the

insurer in performing the duties of administering group

insurance policies.” Jd. at 512.

The Elfstrom rule therefore is expressly and specifically

designed to govern in only one circumstance: when an

employer has obtained and is administering a group insurance

policy for the benefit of its employees. See also Metropolitan

Life, 471 U.S. at 727 (describing group imsurance). And that

means, of course, that the rule is directed expressly and

exclusively at ERISA welfare plans, which are defined to

include, among other things, any “‘plan, fund, or program’

maintained for the purpose of providing medical or other

health benefits for employees or their beneficiaries ‘through

15

the purchase of insurance or otherwise.’” Greater Washington

Bd. of Trade, 506 U.S. at 127 (quoting ERISA § 3(1), 29

U.S.C. § 1002(1)). See Travelers, 514 U.S. at 650-651.

The Elfstrom rule’s “reference” to ERISA plans thus would

appear inarguable.

Petitioner’s preemption challenge to the Elfstrom rule

therefore is governed by the repeated decisions of the Court

that “‘have virtually taken it for granted that state laws which

are “specifically designed to affect employee benefit plans”

are pre-empted under § 514(a).’” Ingersoll-Rand, 498 U.S.

at 140 (quoting Mackey v. Lanier Collection Agency & Serv.,

Inc., 486 U.S. 825, 829 (1988)). In Ingersoll-Rand, for

example, the Court held preempted a state common law

action that was brought by an employee who claimed that he

had been discharged to prevent the attainment of pension

benefits; the Court explained that the state “cause of action

makes specific reference to, and indeed is premised on, the

existence of a pension plan.” Jbid. Similarly, in Greater

Washington Board of Trade the Court struck down a local law

that required employers to provide health insurance to injured

employees who were eligible for workers’ compensation.

Explaining that the required coverage was measured by the

insurance benefits provided to active employees, the Court

held that “any state law imposing requirements by reference

to such covered programs must yield to ERISA.” 506 U.S.

at 130-131. And in Mackey, the Court invalidated a state law

that specifically exempted ERISA plans from an otherwise

generally applicable state garnishment provision. 486 U.S.

at 828 n.2, 829-830. See also FMC, 498 U.S. at 59 (state

statute makes a “reference” to ERISA plans and is preempted

because it described benefits payable by various health plans).

Rather remarkably, the court of appeals made no mention

of any of these decisions. Perhaps the court believed that all

had been swept away by Travelers. If so, it most assuredly

was misguided; each of these decisions recently was cited

with approval in Dillingham. See 117 S. Ct. at 837-838. In

16

any event, the Ninth Circuit's only effort to explain its

holding was the assertion that “Elfstrom does not dictate the

benefits to be provided or the manner in which the plan will

be administered.” Pet. App. 2la. Even if the court’s

characterization of Elfstrom were correct, however, its

observation would be beside the point, for precisely the same

thing could be said of the state laws that were invalidated in

Ingersoll-Rand and Mackey: they also did not dictate benefits

or mandate particular methods of plan administration.’ As in

those cases, there is no doubt that the Elfstrom rule “act[s]}

exclusively on, or rel[ies] on the existence of, ERISA plans”

(Boggs, 117 S. Ct. at 1769 (Breyer, J., dissenting)), and that

is enough to require preemption. Under any reading of

Section 514(a), Elfstrom thus intrudes into “the field of laws

regulating ‘employee benefit plan{s) described in [29 U.S.C.

§] 1003(a).’” Dillingham, 117 S. Ct. at 843 (Scalia, J.,

concurring) (quoting 29 U.S.C. § 1144(a)).

2. The Elfstrom rule — and all similar state agency rules

— also must be preempted because it has a “connection with”

ERISA plans. “[{T]o determine whether a state law has the

forbidden connection, [the Court] look[s] both to ‘the

Objectives of the ERISA statute as a guide to the scope of the

state law that Congress understood would survive,’ * * * as

well as to the nature of the effect of the state law on ERISA

plans.” Dillingham, 117 S. Ct. at 838 (quoting Travelers,

514 U.S. at 656-656). That inquiry requires preemption here

because it is settled that one of ERISA’s principal objectives

is the elimination of state rules “that risk subjecting plan

? In fact, the court of appeals’ description of Elfstrom plainly was

incorrect; application of the rule has a direct impact on plan

administration by dictating the manner in which notice of claims

may be provided. Moreover, as we also explain below in

Elfstrom rule requires a departure from the claims procedure that

is spelled out in the written plan documents.

17

administrators to conflicting state regulations.” FMC Corp.,

498 U.S. at 59.

That risk is apparent here. If agency rules such as the one

stated in Elfstrom survive, particular actions that are related

to plan administration will have radically differing

consequences in different jurisdictions. In States that make

use of an Elfstrom or related rule, the employer’s knowledge

would be imputed to the insurer, resulting in liability for

benefits; in other States, the terms of the plan would govern

and liability would not attach. As a result, prudent employers

that wish to avoid unanticipated liability would have to make

use of differing administrative mechanisms in different

jurisdictions, or would have to base a nationwide system of

administration on the rules of the State that provides for the

most expansive system of liability. In either case, the

employer would be “required to accommodate conflicting

regulatory schemes in devising and operating a system for

processing claims and paying benefits — precisely the burden

that ERISA pre-emption was intended to avoid.” Fort

Halifax, 482 U.S. at 10. See generally Pilot Life, 481 U.S.

at 47-48; Metropolitan Life, 471 U.S. at 739. This

accordingly is a case where “state law intrudes into an area

Congress (given ERISA’s basic objectives) would have

wanted to reserve exclusively for federal legislation.” Boggs,

117 S. Ct. at 1769 (Breyer, J., dissenting). See Jngersoll-

Rand, 498 U.S. at 142.

C. The Notice-Prejudice Rule Is Preempted Because It

Conflicts With Substantive Provisions of ERISA

And Is Not Validated By The Insurance Saving

Clause

The court of appeals also erred in its conclusion that the

State-law “notice-prejudice” rule survives preemption. In

Cisneros, the decision whose reasoning was adopted by the

court below, the Ninth Circuit appears to have assumed

(correctly) that the rule falls within the scope of ERISA’s

18

preemption clause. See 134 F.3d at 943.’ But the court’s

reasoning hopped the track when it went on to hold that

preemption is vitiated by ERISA’s insurance saving clause.

The court erred for two independent reasons. Entirely apart

from the meaning of the saving clause, the notice-prejudice

rule must fall because it directly conflicts with ERISA’s

substantive provisions. And the court’s analysis of the saving

clause was, in any event, inconsistent both with this Court’s

decisions and with fundamental ERISA policy. Again, then,

the court of appeals’ approach runs directly counter to the

interest of plans, of plan sponsors, and of plan beneficiaries.

1. The court of appeals correctly held that the terms of

the UNUM disability policy — which is the controlling

ERISA plan document in this case — “unambiguously

establish that * * * timely submission of proof is a condition

precedent to payment of benefits.” The court aiso recognized

that “Ward’s submission of notice and proof plainly was

untimely under the express terms of the UNUM policy.”

Pet. App. Sa. Having reached that conclusion, however, the

court skipped immediately to the question whether the notice-

prejudice rule is saved by the insurance saving clause; the

court did not pause to consider the possibility that a state-law

rule cannot be given force if it requires a court to disregard

the terms of a written ERISA plan. That was a fatal

oversight.

In fact, this Court has emphasized that ERISA is in

substantial part “built around reliance on the face of written

plan documents.” Curtiss-Wright, 514 U.S. at 83. As the

Court has explained, one of “ERISA’s core functional

requirements” is

> As the United States recognizes in its brief in this case, there

can be no doubt that the notice-prejudice rule relates to ERISA

plans; it requires use of a particular method of administration,

setting aside the choice made by the plan sponsor.

19

that “[e]very employee benefit plan shall be established

and maintained pursuant to a written instrument.” 29

U.S.C. § 1102(a)(1) (emphasis added). In the words of

a key congressional report, “[a] written plan is to be

required in order that every employee may, on examining

the plan documents, determine exactly what his rights and

obligations are under tre plan.” H.R. Rep. No. 93-1280,

p. 297 (1974) (emphasis added). ERISA gives effect to

this “written plan documents” scheme through a

comprehensive set of “reporting and disclosure”

requirements * * * .

Ibid. Indeed, “plan administrators appear to have a statutory

responsibility actually to run the plan in accordance with the

currently operative, governing plan documents.” Jd. at 84.

See 29 U.S.C. § 1104(a)(1)(D) (plan administrators have duty

to run the plan “in accordance with the documents and

instruments governing the plan insofar as such documents and

instruments are consistent with the provisions of [ERISA]”).

See also 29 C.F.R. § 2560.503-1(d) (“[a] claim [for plan

benefits] is filed when the requirements of a reasonable claim

filing procedure of a plan have been met”) (emphasis added).

The California rule at issue here is flatly inconsistent with

this central element of ERISA. The federal statute requires

administrators to implement the provisions of the plan

documents, and gives those documents the crucial role in

informing employees about both their rights and their

obligations. The notice-prejudice rule, on the other hand,

authorizes the employee to disregard obligations stated in

those documents — and would require administrators to act

in a manner that the documents do not authorize. In these

circumstances, “there is a conflict [between ERISA and the

state law], which suffices to resolve the case.” Boggs, 117

S. Ct. at 1760. Whatever the meaning of the preemption and

saving clauses, preemption is mandated by “the state law’s

frustration of congressional intent.” Shaw, 463 U.S. at 97

20

n.15. See Pilot Life, 481 U.S. at 57; Alessi, 451 U.S. at

524.

2. While the existence of a direct conflict with ERISA’s

substantive provisions means that the saving clause (whatever

its proper construction) cannot save California’s notice-

prejudice rule, it should be added that the court of appeals

erred imrits understanding of the clause. It is settled that, to

determine whether a state law is one regulating insurance for

purposes of the saving clause, the Court first takes a

“common-sense view” of the language.” Pilot Life, 481 U.S.

at 48. The Court then looks to the three criteria used to

determine whether a practice falls within the “business of

insurance” for purposes of the McCarran-Ferguson Act:

“First, whether the practice has the effect of transferring

or spreading a policyholder’s risk; second, whether the

practice is an integral part of the policy relationship

between the insurer and the insured; and third, whether

the practice is limited to entities within the insurance

industry.”

Id. at 48-49 (quoting Union Labor Life Ins. Co. v. Pireno,

458 U.S. 119, 129 (1982)). See Metropolitan Life, 471 U.S.

at 740-743.

While the Court has held that the presence of a single one

of these criteria is mot sufficient to warrant treatment of a

given practice as part of the business of insurance (see Pilot

Life, 481 U.S. at 51), it never has held a state law to involve

the regulation of insurance unless all of the criteria are

present. The Court should not depart from that approach

here. That is especially so because all of the relevant

considerations actually point away from the conclusion that

the notice-prejudice rule regulates the business of insurance

— meaning that the saving clause cannot apply. Indeed, while

the saving clause necessarily countenances a degree of

inconsistency in the rules governing insured plans (see, ¢.g.,

Metropolitan Life, 471 U.S. at 747), the expansive approach

ee ee

21

taken to the clause by the court of appeals would subject

plans to a virtually limitless and undefined body of state

common law, which would cause the very inefficiency,

uncertainty, and expense that Congress understood to harm

the sound operation of ERISA plans.

First, under a “common sense” approach the notice-

prejudice rule does not qualify as an insurance regulation. In

holding to the contrary, the court of appeals opined that the

rule “is directed specifically at the insurance industry and is

applicable only to insurance contracts.” Cisneros, 134 F.3d

at 945. But as petitioner demonstrates (at Br. 27-30), the

court was wrong about this as a matter of state law because

the rule is only one manifestation of a broader and generally

applicable rule of contract law; “it is plain that the [rule] is

not limited to entities within the insurance industry.” United

States Dep’t of the Treasury v. Fabe, 508 U.S. 491, 517

(1993) (Kennedy, J., dissenting). Even if the rule is

“identified * * * with the insurance industry,” “the roots of

the law are firmly planted in the general principles of

[California] * * * contract law.” Pilot Life, 481 U.S. at 50.

As a consequence, “a common-sense understanding of the

phrase ‘regulates insurance’ does not support the argument

that the [notice-prejudice rule] falls under the saving clause.”

Ibid.

Moreover, courts should be especially cautious when

asked to hold that common law tort or contract rules qualify

as regulations of insurance within the meaning of ERISA or

the McCarran-Ferguson Act. Such rules have nothing in

common with considered state statutory or regulatory

oversight regarding benefits, rates, insurance reserves, and

the like, which were the central congressional concern at the

time of the enactment of the McCarran-Ferguson Act. See,

e.g., Group Life & Health Ins. Co. v. Royal Drug Co., 440

U.S. 205, 217-219 (1979). As the claims in Pilot Life and

this case illustrate, according the same protection to particular

applications of common law rules would invite manipulation

22

and impossibly fine line-drawing, while giving the McCarran-

Ferguson Act and the ERISA insurance saving clause an

essentially limitless sweep.

Second, the court of appeals itself acknowledged that the

rule “does not spread the policyholder’s risk within the

meaning of the first McCarran-Ferguson factor.” Cisneros,

134 F.3d at 946. That conclusion should. have been

dispositive. “There is general agreement that the primary

concerns of an insurance contract are the spreading and the

underwriting of risk, * * * and [the Court] hafs] often

recognized this central principle.” Fabe, 508 U.S. at 511

(Kennedy, J., dissenting). See Royal Drug, 440 U.S. at 212,

221 (identifying the “underwriting or spreading of risk as an

indispensable characteristic of insurance” and noting that

“Congress understood the business of insurance to be the

underwriting and spreading of risk”). It is difficult to see

how the notice-prejudice rule could be a regulation of the

business of insurance when the practice that it regulates “does

not involve the transfer of risk from insured to insurer, the

type of risk spreading that is the essence of the contract of

insurance.” Fabe, 508 U.S. at 512-513 (Kennedy, J

dissenting).

Third, the court of appeals found that the notice-prejudice

rule affected an integral part of the policy relationship

between insured and insurer because the rule “effectively

creates a mandatory contract term.” Cisneros, 134 F.3d at

946. On examination, however, the rule’s “connection to the

insurer-insured relationship is attenuated at best.” Pilot Life,

481 U.S. at 50-51. Here, the contractual relationship runs

directly between the employer and the insurance company,

and it is MAC and UNUM that negotiated over contract terms

and administrative requirements; the notice-prejudice rule, in

contrast, affects a different relationship, that between MAC’s

covered employees and the insurer. Cf. Royal Drug, 440

U.S. at 213-213. Moreover, the rule does not affect “the

substantive terms of insurance contracts” (FMC, 498 U.S. at

Ee ene

23

61 (emphasis added)) or “the type of insurance that an insurer

may sell to the policyholder” ( Metropolitan Life, 471 U.S.

at 743 (emphasis added)), and it therefore is doubtful that it

can be characterized as “regulat[ing] an integral part of the

relationship between the insurer and the policyholder” (ibid.

(emphasis added)); “[iJt does not follow that because an

agreement is necessary to provide insurance, it is also the

‘business of insurance.’” Royal Drug, 440 U.S. at 214 n.9.

Fourth, for reasons already explained, the notice-prejudice

rule, “even if associated with the insurance industry, has

developed from general principles of * * * contract law

available in any [California] * * * contract case.” Pilot Life,

481 U.S. at 51. For these reasons, the notice-prejudice rule

should not be deemed saved by the saving clause.

** * *

In enacting ERISA, Congress recognized that healthy

benefit plans, regulated by predictable and uniform rules, are

essential to the economic well-being of tens of millions of

employees and other beneficiaries. It acknowledged that such

plans are a central component of a sound relationship between

companies and their employees. And by providing for the

comprehensive federal regulation of welfare and pension

benefit plans, it established such plans as important elements

in the proper functioning of the national economy.

The approach taken by the court below, however,

threatens considerable harm to those interests. It would make

inevitable the application to plans of conflicting state

standards, creating significant inefficiencies and expense. It

would invite continuing litigation about the meaning of

varying state standards. And it ultimately would injure

beneficiaries by inducing plan sponsors to reduce or eliminate

benefits, while creating disincentives for the creation of new

plans. This Court should reject that approach, reaffirming its

understanding that Congress made an expansive preemption

provision a central element of ERISA.

24

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.