Opposition Brief — Pegram v. Herdrich

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, «JUL 28 1995

CLERK

No. 98-1949

IN THE

Supreme Court of the United States

LORI PEGRAM, M.D., CARLE CLINIC ASSOCIATION

and HEALTH ALLIANCE MEDICAL PLANS, INC.,

Petitioners,

CYNTHIA HERDRICH,

Respondent.

On PETITION FOR A Writ OF CERTIORARI TO THE

Unitrep STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

RESPONDENT?’S BRIEF IN OPPOSITION

James P. GINZKEY

Counsel of Record

Hayes, HAMMER, MILEs,

Cox & GINZKEY

Attorneys for Respondent

202 North Center Street

Bloomington, Illinois 61701

(309) 828-7331

154154 @) Counsel Press LLC

FORMERLY LUTZ APPELLATE SERVICES

(800) 274-3321 + (800) 359-6859

PARTIES TO THE PROCEEDING

Carle Clinic Association, P.C. is an Illinois professional

corporation comprised of licensed physicians, dentists and

podiatrists. Health Alliance Medical Plans, Inc. is a for-profit

Illinois domestic stock insurance company and is a wholly-

owned subsidiary of Carle Clinic Association, P.C.

(App. 42a). Carle Health Insurance Management Company

is a for-profit Illinois corporation and is a wholly-owned

subsidiary of Carle Clinic Association, P.C. (App. 42a).

These three entities file consolidated income tax returns.

(App. 44a). Pursuant to Article III, Section 2 of Health

Alliance’s corporate by-laws, an appointment to the Board

of Governors of Carle Clinic Association, P.C. results in an

automatic appointment to the Board of Directors of Health

Alliance. (App. 45a).

TABLE OF CONTENTS

Parties to the Proceeding

Table of Contents

Table of Appendices

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Statement of the Case

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A. The Petition Mischaracterizes the Ruling of

the Court of Appeals ...................

B. The Petition Mischaracterizes the Allegations

of the Amended Complaint ..............

Reasons for Denying the Writ .................

I. The Petition Overstates The Importance Of

The Narrow Holding Below, Which Does Not

Squarely Present The Question On Which

sepvenwr Bb GOMER. «oo ick ccceenciueee

A. Petitioners Failed To Preserve Their

Arguments In The Courts Below .....

B. Due to the Procedural Posture and

Incomplete Record, This Case is Not An

Appropriate Vehicle to Resolve This

Highly Fact-Specific Issue ..........

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iii

Contents

C. Court of Appeals’ Decision Does Not

Equate Medical Malpractice With

Breach of Fiduciary Duty ...........

j isi Not

Il. Court Of Appeals’ Decision Does

Conflict With The Decisions Of This Court,

Nor With The Decisions Of Other Courts. ..

A. Court of Appeals’ Decision Complements,

Rather Than Abrogates, Legislation

Enabling Health Maintenance

Organizations ...........+++++:

B. Petitioners are Clearly Fiduciaries Under

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Page

TABLE OF CITED AUTHORITIES

Page

Cases:

Biomet v. Black, _F. Supp.2d __,(N.D. Ind. 1999)

$ouscvedesepevnuecescuseutadssenasasenun 20

District of Columbia v. Greater Washington Bd. of

Trade, 506 U.S. 125, 113 S. Ct. 580, 121 L. Ed.

SPD édeveuucenéeuhsaeeeee 11,12

Health Cost Controls v. Bichanich, 968 F. Supp. 396

bs SEE enn nddedadeowseeaesees: 29

Hughes Aircraft Co. v. Jacobson, US. ,119S.

Cd TENT cusecexsatenadsvbaddaadeccss 19, 20

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111

S. Ct. 478, 112 L. Ed. 2d 474 (1990) .......... 12

Lockheed Corp. v. Spink, 517 U.S. 882, 116 S. Ct.

SUPE 644000. 64udeendsdsneeacasiie 19, 20

Moralis v. Health Plus, Inc., 954 F. Supp. 464

es GN va.¢nneeducntaanuceedsenenues 21

O'Reilly v. Ceuleers, 912 F.2d 1383 (11th Cir. 1990)

:edesedenesseseveedvestesesersdeedesdou 21

Weiss v. CIGNA Healthcare, Inc., 972 F. Supp. 748

Se CED 0808000sk0 206 0cnelsaeneene 6,7

Cited Authorities

Page

Statutes:

28 U.S.C. § 1367 .... ccc cece ec eccceecccnees 2

29 U.S.C. § 1002(1) «1... eee eee ee eee eerie 12

29 U.S.C. § 1002(21 MA)... . 6. eee eee eee eee 12

29 U.S.C. § TIO] 2... cece eee eee ee eens 2

29 U.S.C. § 1104(a) .. 2... cece eee eee eee en eees 12

42 U.S.C. § 300(e) .. 1... cee cece e eee eees 13, 14, 18

815 ILCS 505/1 ef seq. ... 62-2 e cece ec eeeeeees 2

Other Authorities:

42 C.F.R. § 417.479 ..... 62 ee eee eee: 13, 14, 18, 19

61 Fed. Reg. 13432 (March 1996) .........--+-- 16

American Medical Association, Principles of

Medical Ethics (1994) .... 2... 6-2 eee eee eenee 6

Chairman of the House Committee on Education and

Labor, 120 Cong. Rec. 3977 (February 25, 1974),

reprinted .. 1... 6... cece eee e eee e eens aneee 12

2 Legislative History of the Employee Retirement

Income Security Act of 1974, 3293 ........... 12

Cited Authorities

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http://www. humana.com/investor/] 998annual/

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http://www. kaiserpermanente. org/healthplans/

doctorshands. html

http://www. kaiserpermanente. org/newsroom/

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United States Department of Health & Human

Services, /ncentive Arrangements Offered by

Health Maintenance Organizations and

Competitive Medical Plans to Physicians ......

United States General Accounting Office, GAO/

HRD-94-93, Managed Healthcare Effect on

Employers’ Costs Difficult to Measure (1993) ..

Page

vil

TABLE OF APPENDICES

Appendix A — Order Of The United States District

Court For The Central District Of Illinois, Peoria

Division Dated And Filed May 13, 1996 ......

Appendix B — Order Of The United States District

Court For The Central District Of Illinois, Peoria

Division Dated And Filed July 25, 1995 .......

Appendix C — Memorandum In Opposition To

Plaintiff's Motion To Remand ...............

Appendix D — Annual Statement Of Health Alliance

Dietiees Fiemme, BRR. 2c ccccccccsccccesccessss

Appendix E — Part 1 — Organizational Chart ....

Appendix F — Notes To Financial Statements

Of Health Alliance Medical Plans, Inc. ........

Appendix G — Minutes Of April 6, 1992 Of

The Annual Meeting Of Health Alliance

DGeGions Pham, BRB. oc cccccccccccccccccccce

Page

23a

38a

42a

43a

45a

STATEMENT OF THE CASE

In March of 1991, petitioner Lori Pegram, respondent

Cynthia Herdrich’s doctor, discovered a 6 x 8 centimeter

“mass” (later determined to be her appendix) in respondent’s

abdomen. 154 F.3d 362, 374. Although the mass was

inflamed on March 7, Pegram delayed instituting immediate

treatment of Herdrich, and forced her to wait more than one

week (eight days) to obtain the accepted diagnostic procedure

(ultrasound) used to determine the nature, size and exact

location of the mass. Ideally, Herdrich should have had the

ultrasound administered with all speed after the inflamed

mass was discovered in her abdomen in order that her

condition could be diagnosed and treated before deteriorating

as it did, but respondents’ policy requires plan participants

to receive medical care from Carle-staff facilities. /d.

Respondent was forced to wait the eight days before

undergoing the ultrasound at a Carle facility in Urbana,

Illinois. During this unnecessary waiting period, Herdrich’s

health problems were exacerbated and her appendix ruptured,

resulting in the onset of peritonitis. In an effort to defray the

increased costs associated with the surgery required to drain

and cleanse Herdrich’s ruptured appendix, Carle insisted that

she have the procedure performed at its own Urbana facility,

necessitating that Herdrich travel more than fifty miles from

her neighborhood hospital in Bloomington, Illinois. /d.

Respondent Herdrich filed a two count complaint in State

court on October 21, 1992. (App. 5a). Count I alleged medical

negligence against petitioner Lori Pegram for failing to

adequately examine, treat, and follow-up on respondent’s

complaint of right, lower quadrant pain. She claimed that

Pegram’s failure to employ the skill and care ordinarily used

by a reasonably well-qualified physician resulted in a

ruptured appendix, which caused peritonitis. Count II sought

to hold Carle Clinic Association liable under the theory of

respondeat superior. Pegram and Carle Clinic filed an

Answer to the State court complaint on December 8, 1992.

(App. 6a).

Because it appeared that all the decisions as to

respondent’s treatment could be explained on the basis of

petitioners’ profit motive, respondent filed an addendum to

her State court complaint in February 1994, adding Counts

Ill and IV. Count III alleged that Carle Clinic failed to

disclose certain material facts regarding the ownership of

Health Alliance Medical Plans in violation of the Illinois

Consumer Fraud Act, 815 ILCS 505/1 et seg. Count IV

charged Health Alliance breached its duty of good faith and

fair dealing. (App. 6a).

The petitioners filed a Notice of Removal on March 14,

1994, asserting that Counts III and IV were preempted by

the Employees Retirement Income Security Act (“ERISA”),

29 U.S.C. § 1101, and that the pendant state claims set forth

in Counts I and II were removable pursuant to 28 U.S.C.

§ 1367. Respondent filed a Motion to Remand on April 8,

1994. (App. 6a).

In opposition to the Motion to Remand, petitioners

argued that Counts III and IV related to the administration

of a Plan and were thus preempted under ERISA.

Specifically, petitioners set forth a Synopsis of Relevant

Facts which stated that Herdrich was a participant and

beneficiary in an employee benefit plan (“the Plan”) provided

to her through her husband’s employer, State Farm Insurance

Companies. Petitioner’s factual synopsis also asserted that

Health Alliance was the administrator and fiduciary of the

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Plan. In their memorandum in opposition to respondent’s

motion to remand, petitioners stated:

The plaintiff, Cynthia Herdrich, was a participant

and beneficiary in an employee benefit plan (“the

Plan”) provided to her by her husband’s employer,

State Farm Insurance Companies. Defendant,

Health Alliance Medical Plans, Inc. (“Health

Alliance”) was the administrator and fiduciary

of the Plan within the meaning of ERISA (29

U.S.C. Section 1001 et seq.)

(App. 24a).

In the case now before this Court, it is clear that

the plaintiff’s claims relate to the Plan

administered by Health Alliance. The relationship

between the plaintiff and Health Alliance arose

solely from the Plan. But for the existence of the

Plan, Cynthia Herdrich’s participation in that

Plan and Health Alliance’s serving as

administrator/fiduciary of that Plan, there would

be no relationship whatsoever between Cynthia

Herdrich and Health Alliance and thus no

lawsuit.

(Emphasis added) (App. 36a).

This case was initially filed in state court. It was

petitioners that sought and obtained removal to federal court.

It was petitioners that sought and obtained a ruling that they

were fiduciaries under ERISA. It was petitioners that sought

and obtained a ruling that ERISA governs this action. After

seeking and obtaining these rulings, petitioners now argue

that they are not fiduciaries, and that this action should not

be governed by ERISA.

A. The Petition Mischaracterizes the Ruling of the Court

of Appeals

Petitioners argue that the Court of Appeals “determined

that the bare allegations that petitioners implemented cost-

containment mechanisms that included potential rewards for

physicians based on the Plan’s financial performance sufficed

to state an ERISA claim for breach of fiduciary duty.” (Pet.

7, 9) Petitioners further assert that the “issue in this case is

whether employer-sponsored health plans governed by

ERISA may use the commonplace mechanisms for financing

and delivering health care for their participants and

beneficiaries,” (Pet. 14) and that, if the Court of Appeals’

decision is accepted, then “the principal organizational forms

through which medical care is delivered today are unlawful.”

(Pet. 15).

These arguments completely mischaracterize the ruling

the Court of Appeals. The Court of Appeals explicitly stated

that its decision does mot stand for the proposition that the

existence of incentives automatically gives rise to a breach

of fiduciary duty:

The dissent disagrees with this aspect of today’s

holding, which it characterizes as concluding that

“the mere existence of this asserted conflict [i.e.,

the conflict between the incentive scheme for

Carle doctors to limit medical care and treatment,

on the one hand, and the fiduciary duty of Carle

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to the beneficiaries, on the other], without more,

gives rise to a cause of action for breach of

fiduciary duty under ERISA.” That is not the

conclusion we reach. Our decision does not

stand for the proposition that the existence of

incentives automatically gives rise to a breach

of fiduciary duty. Rather, we hold that incentives

can rise to the level of a breach where, as pleaded

here, the fiduciary trust between plan participants

and plan fiduciaries no longer exists (i.e., where

physicians delay providing necessary treatment

to, or withhold administering proper care to, plan

beneficiaries for the sole purpose of increasing

their bonuses.)

154 F.3d 362 at 373 (emphasis added). The Court of Appeals

went on to say:

The dissent also stresses that ERISA allows

fiduciaries to adopt dual loyalties, and that

maintaining dual loyalties does not in itself

constitute a breach of fiduciary duty. We do not

disagree with this contention, for it is well

established that dual loyalties are tolerated under

ERISA. See, e.g., Donovan v. Bierwirth, 538 F.

Supp. 463, 468 (E.D.N.Y. 1981). Our point is not

that a fiduciary may not have dual loyalties; it is

that the tolerance of dual loyalties does not extend

to the situation like the case before us where a

fiduciary jettisons his responsibility to the

physical well-being of beneficiaries in favor of

“loyalty” to his own financial interests. Tolerance,

in other words, has its limits.

Id.

Petitioners also argue that the Court of Appeals stretched

“the definition of a ‘fiduciary’ under ERISA,” in order to

hold that “health plans which include incentives to health

care providers to contain costs are unlawful.” (Pet. 9). Not

only do these arguments mischaracterize the ruling of the

Court of Appeals, they also completely ignore the fact that

petitioners removed this case to federal court; that petitioners

claimed to be fiduciaries under ERISA; and that petitioners

argued that this case was governed by ERISA. Petitioners,

at this point, are essentially arguing with themselves.

Petitioners invoked federal jurisdiction and argued ERISA

preemption in order to vitiate respondent’s common law and

statutory claims. After having been accommodated in their

requests, petitioners are now arguing that they are not FRISA

fiduciaries and that this action is not governed by ERISA!

Petitioners further argue that it is ironic that this ruling

involves a physician-owned HMO because physicians cannot

allow financial incentives to hinder patient care in light of

the American Medical Association’s Principles of Medical

Ethics (1994). (Pet. 10). This argument firstly assumes that

petitioners adhere to the AMA’s principles of medical ethics,

a fact upon which there has been no proof. But more

importantly, the courts examining this issue have not found

that the AMA’s proscriptions afford patients adequate

protection. In Weiss v. CIGNA Healthcare, Inc., 972 F. Supp.

748 (D.C.N.Y. 1997) the court held that an HMO’s “gag

order” violated ERISA’s fiduciary duties and stated:

It is true that a physician has an independent duty

to provide full information to his or her patients,

a duty which “is not altered by limitations in the

coverage provided by the patient’s managed care

plan.” (See Council on Ethical and Judicial

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Affairs, American Medical Association Ethical

Issues in Managed Care, Council Report, 273

JAMA 330 (Jan. 25, 1995)). A patient therefore

cannot be deprived of such information absent an

ethical breach on the part of the physician.

Nonetheless, CIGNA’s alleged rule mandating

such an ethical breach upon pain of termination

would provide many physicians with no

meaningful choice and would effectively limit the

amount of information available to Plan

participants.

Weiss at 752.

B. The Petition Mischaracterizes the Allegations of the

Amended Complaint

Petitioners argue that, in Count III of her complaint,

Herdrich alleged that petitioners breached their fiduciary duty

under ERISA by establishing a cost-containment mechanism

which provided physicians with a “year-end distribution”

based on the savings achieved by cost-containment,

(Pet. 15) and that therefore, the Court of Appeals’ essential

hold: zg is that ERISA health care plans “have a fiduciary

duty not to adopt HMO(s) or other managed care options

because cost-containment incentives create a conflict of

interest for the health care provider.” (Pet. 9). But the Court

of Appeals did not hold, and respondent did not allege, that

cost-containment incentives, standing alone, constitute a

breach of ERISA fiduciary duties. Rather, respondent

alleged, in great detail, that here the particular corporate

structure between the medical clinic (Carle Clinic), the

insurance company (Health Alliance), and the individual

physician-owners, created a conflict of interest. Due to this

peculiar corporate structure, the primary care physicians and

the insurance company offering the HMO are the alter egos of

Carle Clinic. Carle Clinic and Health Alliance file consolidated

income tax returns. (App. 44a) Appointment to the Carle Clinic

Board of Governors results in an automatic appointment to the

Health Alliance Board of Directors. (App. 45a) Health Alliance

is a for-profit Illinois stock insurance company, 100% of which

is owned by Carle Clinic. The physicians, as owners of 100%

of the stock of Health Alliance, not only employ themselves,

but also completely control the claims processing and utilization

review functions of Health Alliance. Respondent did not allege

the mere existence of cost containment incentives. Respondent

alleged:

6. Prior to March of 1991 and annually thereafter,

for valuable consideration, through State Farm,

defendants sold plaintiff a subscription in

CARLE CARE HMO, a pre-paid health

insurance plan (hereinafter “the Plan”)

arranging medical and hospital services for

subscribers (see attached Exhibit A).

7. State Farm retained no right to direct or control

the administration of the Plan.

8. Defendants have the exclusive night to decide

all disputed and non-routine claims under the

Plan.

9. Under the Plan, defendants exercise

discretionary authority and discretionary control

of claims management, property and asset

management, and administration of the Plan.

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10.

11.

12.

(a)

Defendant [sic] is a participant and

beneficiary under the Plan and brings this

action on behalf of the Plan pursuant to

29 USC 1132(a).

Defendants are fiduciaries with respect to the

Plan and under 29 USC 1109(a) are obligated

to discharge their duties with respect to the

Plan solely in the interest of the participants

and beneficiaries and

(a) for the exclusive purpose of:

(i) providing benefits to participants

and their beneficiaries; and

(ii) defraying reasonable expenses of

administering the Plan;

(b) with the care, skill, prudence, and

diligence under the circumstances then

prevailing that a prudent man acting in

a like capacity and familiar with such

matters would use in the conduct of an

enterprise of a like character and like

aims.

In breach of that duty:

CARLE owner/physicians are the officers and

directors of HAMP and CHIMCO and receive

a year-end distribution, based in large part

upon, supplemental medical expense

payments made to CARLE by HAMP and

CHIMCO;

(b) Both HAMP and CHIMCO are directed and

controlled by CARLE owner/physicians and

seek to fund their supplemental medical

expense payments to CARLE:

(i) by contracting with CARLE

owner/physicians to provide the

medical services contemplated in

the Plan and then having those

contracted owner/physicians;

(1)

(2)

(3)

minimize the use of

diagnostic tests;

minimize the use of facilities

not owned by CARLE; and

minimize the use of

emergency and _ non-

emergency consultation and/

or referrals to non-contracted

physicians.

(ii) by administering disputed and

non-routine health insurance

claims and determining:

(1)

(2)

which claims are covered

under the Plan and to what

extent;

what the applicable standard

of care is;

(3) whether a course of treatment

is experimental;

(4) whether a course of treatment

is reasonable and customary;

and

(5) whether a medical condition

is an emergency.

13. As a direct and proximate result of

defendants’ breach of their fiduciary duties,

the Plan has been deprived of those sums

comprising the supplemental medical

expenses made by HAMP and CHIMCO to

CARLE, as well as those amounts which

would have been realized by prudently

investing those supplemental medical

expenses.

Petitioners implore this Court to ignore the fact that

respondent’s allegations were very fact-specific, and to

ignore the fact that the ruling of the Court of Appeals was

very fact specific.

REASONS FOR DENYING THE WRIT

ERISA is a statutory scheme which regulates all “private

employee benefits plans, including both pension plans and

welfare plans.” District of Columbia v. Greater Washington

Bd. of Trade, 506 U.S. 125, 127, 113 S. Ct. 580, 582, 121

L. Ed. 2d 513 (1992). The definition of a “welfare plan”

includes “any plan, fund, or program” maintained for the

purpose of providing medical or other health benefits for

employees or their beneficiaries “though the purchase of

insurance or otherwise.” /d. (quoting 29 U.S.C. § 1002(1)).

ERISA establishes uniform standards, including rules

relating to “reporting, disclosure, and fiduciary

responsibility.” Ingersoll-Rand Co. v. McClendon, 498 U.S.

133, 137, 111 S. Ct. 478, 482, 112 L. Ed. 2d 474 (1990).

In order to properly state a claim for breach of fiduciary

duty under ERISA, a complaint must allege facts which set

forth: (1) that the defendants are Plan fiduciaries; (2) that

the defendants breached their fiduciary duties; and (3) that a

cognizable loss resulted. See 29 U.S.C. § 1104(a).

ERISA defines the term “fiduciary” in 29 U.S.C.

§ 1002(21)(A), which reads, in relevant part:

Except as otherwise provided in subparagraph (B),

a person is a fiduciary with respect to a plan to

the extent (i) he exercises any discretionary

authority or discretionary control respecting

management of such plan or exercises any

authority of control respecting management or

disposition of its assets ... or (iii) he has any

discretionary authority or discretionary

responsibility in the administration of such plan.

Congress, when it enacted ERISA, intended that this statutory

definition of “fiduciary” be broadly interpreted. As stated

by the Chairman of the House Committee on Education and

Labor, 120 Cong. Rec. 3977, 3983 (February 25, 1974),

reprinted, 2 Legislative History of the Employee Retirement

Income Security Act of 1974 at 3293:

The Committee has adopted the view that the

definition of fiduciary is of necessity broad... A

fiduciary need not be a person with direct access

to the assets of the plan. . . Conduct alone may in

an appropriate circumstance impose fiduciary

obligations. It is the clear intention of the

Committee that any person with a specific duty

imposed upon him by this statute be deemed to

be a fiduciary .. .

THE PETITION OVERSTATES THE IMPORTANCE

OF THE NARROW HOLDING BELOW, WHICH

DOES NOT SQUARELY PRESENT THE QUESTION

ON WHICH REVIEW IS SOUGHT.

A. Petitioners Failed To Preserve Their Arguments In

The Courts Below

In opposing Herdrich’s appeal to the Seventh Circuit,

Petitioners did not argue, as they now do in their petition for

writ of certiorari, that there was no breach of fiduciary duty.

Rather, petitioner’s argued firstly that there was no appellate

jurisdiction and secondly, that Herdrich had not established

that petitioners were fiduciaries. Indeed, in opposing

Herdrich’s appeal to the Seventh Circuit, petitioners argued

that there was no need to even discuss the issue of cost

containment incentives, arguing that that question was

“inappropriate at this stage of the litigation.” At no point

during the initial appeal did petitioners argue 42 U.S.C.

§ 300(e) (enabling legislation) or 42 C.F.R. § 417.479

(Medicare and Medicaid regulation). Quite to the contrary,

petitioners argued that this was a case of first impression.

Petitioners did not make any arguments concerning 42 U.S.C '

§ 300(e) and 42 C.F.R. § 417.479 until they filed their motion

for rehearing. Even in that motion for rehearing, petitioners

emphasized that this was a case of first impression, that no

federal appellate court had ever addressed the allegations

made in Herdrich’s complaint, and that the majority opinion

“created what some might perceive as new precedent.”

The arguments that petitioners now make were not

properly presented below. In initially opposing Herdrich’s

appeal, petitioners made absolutely no arguments about any

alleged conflicts with federal statutes or agency rulings

concerning HMOs.

B. Due to the Procedural Posture and Incomplete

Record, This Case is Not An Appropriate Vehicle to

Resolve This Highly Fact-Specific Issue

Petitioners’ motion for rehearing en banc was denied

by the Court of Appeals with Justice Easterbrook filing a

written dissent. Here the petition cites the dissent of Justice

Easterbrook at great length. But Justice Easterbrook assumed

quite a number of facts that were not in evidence. Petitioners

quote Justice Easterbrook as stating that, if the Court of

Appeals’ decision stands, then “the principal organizational

forms through which medical care is delivered today are

unlawful,” (Pet. 9) and that “[p}hysicians own much of the

stock of HMOs organized as corporations.” (Pet. 26).

Justice Easterbrook is wrong. Because respondent’s

fiduciary duty count was dismissed at the pleading stage,

specific facts were not presented. For instance, Justice

Easterbrook has no way of knowing whether the plan in

question was self-insured (meaning that the risk of loss was

retained by the plan sponsor), or whether the plan was an

insured plan (meaning that the risk of loss falls on the plan

itself). Neither does Justice Easterbrook know whether the

HMO in question here is a staff model, group model, IPA

model, or direct contract model, and whether the distinction

between those models was affected by the corporate structure

chosen by petitioners. Likewise, no evidence was adduced

concerning the issue of whether the HMO in question is

federally qualified or not. Like Justice Easterbrook, here

petitioners jumped to the conclusion that all HMOs are alike.

Frankly, nothing could be further from the truth.

As reported by the United States General Accounting

Office, GAO/HRD-94-93, Managed Healthcare Effect on

Employers’ Costs Difficult to Measure (1993):

The term “managed care” lacks a commonly

accepted definition. It has been used to

characterize a wide range of health care plans that

select a network of physicians and hospitals,

negotiate reimbursement levels, and apply

controls on the use of services. The spectrum of

such plans ranges from simple preferred provider

networks to more tightly structured health

maintenance organizations (HMOs).

In 1990, the United States Department of Health

& Human Services presented a report to Congress entitled,

Incentive Arrangements Offered by Health Maintenance

Organizations and Competitive Medical Plans to Physicians,

which concluded that the results of the department’s review

and analysis of physician incentive plans in a sample of

HMOs showed a “wide variety of incentive plans.” There

were differences in the types of incentive payments, the

distribution of incentives, the basis for determining the

incentive payments, and the parties or entities the incentive

affected. 61 Fed. Reg. 13432 (March 1996).

An HMO may be an insurance plan only, or it may

consist of an insurance plan, a group of health care providers

and a hospital, or some combination of these. CIGNA, for

example, is an insurance plan which hires its own physicians

but contracts with independent hospitals. A large

combination-type HMO is Kaiser-Permanente, a company

which provides insurance, hires the physicians and other care

providers, and owns the clinics and hospitals where the care

takes place.' Kaiser-Permanente doctors can order any tests,

medications, medical procedures or referrals they need

without approval from someone in the health plan.

Physicians have full authority to make health care decisions

with their patients.? (emphasis added). Permanente

physicians are devoted full time to serving only Kaiser-

Permanente members ... Individual physicians are

compensated on a salaried basis and do not have an

incentive to ration care.’ (emphasis added).

Here 100% of the stock of Health Alliance is owned by

the Carle physicians. The stock of Humana, Inc., one of the

nation’s largest managed care companies, is publicly traded.

In his 1998 annual report to shareholders, Humana chairman,

David A. Jones, reported that Humana, Inc.’s net income for

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2. Attp://www.kaiserpermanente.org/healthplans/doctorshands.

html.

3. http://www.kaiserpermanente.org/newsroom/structure. html.

te ne ee le Pe he

1998 was $213 million or $1.27 per share for Humana’s more

than 167 million outstanding shares of stock.‘

The corporate structure of Kaiser-Permanente is

completely different from the corporate structure of Health

Alliance. The corporate structure of Humana is completely

different from the corporate structure of Health Alliance. The

only uniform statement that can be made about the great

variety of HMOs, is that there is no uniformity. Here there

is absolutely no basis for petitioners or Justice Easterbrook

to conclude that the Court of Appeals’ decision, which was

limited to the specific facts of this case, applies to any other

HMO, much less all other HMOs.

C. Court of Appeals’ Decision Does Not Equate Medical

Malpractice With Breach of Fiduciary Duty

As in their motion for rehearing en banc, petitioners

argue here that mere medical malpractice is tantamount to a

breach of fiduciary duty under the Court of Appeals’ ruling.

Petitioners are incorrect. Medical malpractice does not

constitute a breach of ERISA fiduciary duties merely because

the defendant doctor is part of an HMO. In fact, here the

medical malpractice portion of respondent’s suit is not even

before this Court. As determined by the magistrate in his

ruling on petitioners’ motion to dismiss amended Count III,

“defendants’ move to dismiss arguing that Count 3 fails to

state a claim under ERISA, and that the new claim is totally

unrelated to the original claim for medical negligence.”

(Pet. App. 62a). After successfully arguing at the trial court

level that amended Count III should be dismissed due, in

part, to the fact that it is totally unrelated to the remaining

malpractice counts, petitioners cannot be permitted to argue

4. http://www. humana.com/investor/1998annual/letter.htm!.

that the Court of Appeals’ opinion somehow “blurs” the

distinction between traditional medical malpractice and

breach of fiduciary duties under ERISA.

COURT OF APPEALS’ DECISION DOES NOT

CONFLICT WITH THE DECISIONS OF THIS COURT,

NOR WITH THE DECISIONS OF OTHER COURTS.

A. Court of Appeals’ Decision Complements, Rather

Than Abrogates, Legislation Enabling Health

Maintenance Organizations

Citing 42 U.S.C. § 300(e) and 42 C.F.R. § 417.479,

petitioners state that the Court of Appeals decision effectively

bypasses express congressional authorization of HMOs.

(Pet. 10, 17). This is incorrect. 42 U.S.C. § 300(e) is merely

enabling legislation. Respondent here does not dispute that

HMOs are legally authorized. But the issue is not whether

HMOs are legally authorized, nor whether cost-containment

incentives in general are permissible. The issue presented

here is whether this particular corporate structure and cost-

containment incentive scheme violate ERISA.

Petitioners are correct in stating that 42 C.F.R. § 417.479

addresses the issue of cost-containment incentives for HMOs

receiving Medicare or Medicaid payments. But as stated

above, because Count III was dismissed at the pleading stage,

no evidence was presented as to whether Health Alliance

was federally qualified and participating in Medicare and

Medicaid. As a consequence, there is no evidence as to

whether 42 C.F.R. § 417.479 even applies to Health Alliance.

But more importantly, there is no conflict between the

decision of the Court of Appeals and 42 C.F.R. § 417.479, which

was promulgated by the United States Department of Health &

Human Services’ Health Care Financing Administration. Both

the Court of Appeals and H.C.F.A. recognized and were

sensitive to the problems inherent in a cost-containment

incentive scheme. In order to qualify for Medicare or Medicaid

payments, an HMO’s contract with H.C.F.A. must specify that

the HMO may operate a physician incentive plan only if no

specific payment is made directly or indirectly under the Plan

toa physician or physician group as an inducement to reduce

or limit medically necessary services furnished to an individual

enrollee, and only if further disclosure requirements of H.C.F.A

are met. In point of fact, the rules and regulations adopted by

H.C.F.A. attempt to address the very issues addressed by the

—_ of Appeals in its decision. The H.C.F.A. rules and

- / co are perfectly consistent with the ruling of the Court

B. Petitioners are Clearly Fiduciaries Under ERISA

, Petitioners suggest that the Court of Appeals decision i

inconsistent with this Court’s decisions in Hughes prev ing

v. Jacobson, _U.S. __, 119 S. Ct. 755 (1999) and Lockheed

Corp. v. Spink, 517 U.S. 882, 116 S. Ct. 1783 (1996). But neither

the Hughes Aircraft case nor the Lockheed case is applicable to

the case at bar. Hughes Aircraft involved the amendment of a

pension plan and did not involve fiduciary duties concerning

administration of the Plan’s assets. In Hughes Aircraft, this

Court was quick to point out that ERISA provides an employer

with broad authority to amend a benefit plan, and that given

the employer’s obligation to make up any shortfall, no member

of a defined benefit plan under ERISA has a claim to any

— asset that composes a part of the Plan’s general asset

Like Hughes Aircraft, the Lockheed case involved a

lawsuit against the employer-sponsor of a pension plan. The

case at bar does not involve a pension plan, and the plan

sponsor, State Farm Insurance, is not even a party to this

lawsuit. But more importantly, this Court’s ruling in

Lockheed (plan sponsors who alter the terms of a plan do

not fall into the category of fiduciaries) is completely

irrelevant where, as here, petitioners have declared

themselves to be ERISA fiduciaries and have obtained

beneficial rulings based up on that status.

Moreover, the ruling of the Court of Appeals is

consistent with a number of other federal court decisions

that specifically address HMOs and healthcare plans as

opposed to pensions. In Biomet v. Black, _ F. Supp. 2d __,

(N.D. Ind. 1999), the Biomet Health Benefit Plan filed a

complaint against one of its participants to enforce a

subrogation lien for medical payments of $91,006.02 made

for injuries sustained in a motor vehicle accident. The

employee-participant sought dismissal of the complaint on

the basis that the Health Benefit Plan was not a “participant,

beneficiary or fiduciary” under § 501(a)(3). The District

Court disagreed, holding that the Health Benefit Plan was a

fiduciary, relying in part on Health Cost Controls v.

Bichanich, 968 F. Supp. 396 (N.D. Ill. 1997). In Bichanich,

the Plan itself was not seeking to enforce its subrogation

rights. Rather, a collection agency, Health Cost Controls,

was seeking to recover on behalf of the Plan. The Court for

the Northern District of Illinois specifically ruled that, by

definition, an asset is anything of value to the Plan. The

ability to recover benefits previously paid out is

unquestionably valuable to the Plan; that Health Cost

Controls exercised substantial discretion over these plan

assets and was, therefore, a fiduciary under ERISA. See also

O'Reilly v. Ceuleers, 912 F.2d 1383 (11th Cir. 1990); Moralis

v. Health Plus, Inc., 954 F. Supp. 464 (D.P.R. 1997)

(an HMO can be an ERISA fiduciary when it exercises

discretionary authority or discretionary responsibility in the

administration of the healthcare plan). Petitioners do not cite

a single decision of any lower court that is in conflict with

the 7th Circuit’s decision here. There is no reason to use

this case as vehicle to resolve the issue of whether HMOs

breach any fiduciary duties under ERISA by implementing

cost containment incentives.

Petitioners and Justice Easterbrook accuse the Court of

Appeals of “stretching” the definition of fiduciary. Even

ignoring petitioner’s own assertion that they are fiduciaries,

it is relatively clear that neither petitioners nor Justice

Easterbrook are conversant with the current state of the law

on this topic.

CONCLUSION

The petition for certiorari should be denied.

Respectfully submitted,

JAMES P. GINZKEY

Counsel of Record

Hayes, HAMMER, MILEs,

Cox & GINZKEY

Attorneys for Respondent

202 North Center Street

Bloomington, Illinois 61701

(309) 828-7331

APPENDIX

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IN THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF ILLINOIS

PEORIA DIVISION

No. 94-1143

CYNTHIA HERDRICH,

Plaintiff,

vs.

LORI PEGRAM and CARLE CLINIC ASSOCIATION,

HEALTH ALLIANCE MEDICAL PLANS, INC.

Defendants.

ORDER

Before this Court is Plaintiff's Motion to Remand [#43],

which the Defendants oppose. For the reasons stated herein,

this Court DENIES the Motion to Remand.

care ordinarily used by a reasonably well-qualified physician

resulted in a ruptured appendix, which caused peritonitis.

Count II seeks to hold Carle Clinic Association (“Carle

Appendix A

Herdrich filed an addendum to her State court complaint

in February 1994, adding Counts III and IV. Count III alleges

that Carle Clinic failed to disclose certain material facts

regarding the ownership of Health Alliance Medical Plans

(“Health Alliance”) in violation of the Illinois Consumer

Fraud Act 815 ILCS 505/1 et seg. Count IV charged that

Health Alliance breached its duty of good faith and fair

dealing.

The Defendants filed a Notice of Removal with this

Court on March 14, 1994, asserting that Counts III and IV

were preempted by the Employees Retirement Income

Security Act (“ERISA”), 29 U.S.C. § 1101, and that the

pendant state claims set forth in Counts | and II were

removable pursuant to 28 U.S.C. §1367. Herdrich filed a

Motion to Remand on April 8, 1994. On July 22, 1994,

Magistrate Judge Robert J. Kauffman recommended the

Motion to Remand be denied. This Court adopted the

Magistrate’s Report and Recommendation and denied the

Motion to Remand on August 5, 1994.

Thereafter, Defendants moved for summary judgment

as to Counts III and IV. In an Order dated July 25, 1995, this

Court granted the motion for summary judgment as to Count

IV. The Order also found that ERISA preempted Count III,

and that Herdrich would have to amend her complaint as

Count III did not state a claim under ERISA.

Herdrich filed an Amended Count III on September 1,

1995. On November 14, 1995, Defendants filed a Motion to

Dismiss Amended Count III. On March 26, 1996, Magistrate

Judge Kauffman granted the Motion to Dismiss in a Report

and Recommendation and granted Herdrich leave to file an

Appendix A

amended Count III. Herdrich appealed the Magistrate Judge’s

ruling under Federal Rule of Civil Procedure 72. This Court

adopted the recommendation and granted Herdrich jeave to

file a second amended Count III.

Herdrich then filed her Motion to Remand. In her

Motion, she states, “Plaintiff will not further amend her

ERISA count (Count III), but rather chooses to stand on those

pleadings.” She then argues that this Court should remand

the matter because this Court lacks jurisdiction to consider

the underlying medical malpractice actions.

Defendants oppose the Motion to Remand and argue that

this Court should retain jurisdiction under 28 U.S.C. § 1367.

Counsel for the Defendants has represented that Herdrich

will appeal this Court’s April 15, 1996 ruling granting the

Motion to Dismiss if the Motion for Remand is granted.

Section 1367 provides, in relevant part:

(a) [T]he district courts shall have supplemental

jurisdiction over all other claims that are so related

to claims in the action within such original

jurisdiction that they form part of the same

case or controversy under Article III of the United

States Constitution.

supplemental jurisdiction over a claim under

subsection (a) if —

(1) the claim raises a novel or complex

issue of State law,

Appendix A

(2) the claim substantially predominates

over the claim or claims over which the

district court has original jurisdiction,

[or]

(3) the district court has dismissed all

claims over which it has original

jurisdiction.

28 U.S.C. § 1367.

In the case at bar, the medical malpractice claims do not

present novel or complex issues of state law. Subsection (2)

does not apply to this matter as the federal claims have fallen

out of the suit. Finally, this Court has dismissed all claims

over which it had original jurisdiction. This litigation is over

two years old and judicial economy would not be served by

remanding the matter to State court. Moreover, if Herdrich

decides to appeal this Court’s April 15, 1996 Order, the

Defendants would be fighting this battle on two fronts: in

the Court of Appeals and in State court. This Court finds

that both judicial economy and fairness will be served by

retaining Counts | and II.

For the reasons set forth herein, this Court DENIES the

Motion to Remand [#43]. This matter is referred to

Magistrate Judge Kauffman.

ENTERED this 13th day of May, 1996.

s/ Michael M. Mihm

Michael M. Mihm

Chief United States District Judge

APPENDIX B — ORDER OF THE UNITED STATES

DISTRICT COURT FOR THE CENTRAL DISTRICT

OF ILLINOIS, PEORIA DIVISION DATED AND

FILED JULY 25, 1995

IN THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF ILLINOIS

PEORIA DIVISION

No. 94-1143

CYNTHIA HERDRICH,

Plaintiff,

VS.

LORI PEGRAM and CARLE CLINIC ASSOCIATION,

HEALTH ALLIANCE MEDICAL PLANS, INC.

Defendants.

ORDER

Before the Court are Defendants’ Motion for Summary

Judgment [#16] and Plaintiff's Motion for Leave to File

Amended Complaint [#22]. For the reasons set forth herein,

the Motion for Summary Judgment is GRANTED in part

and DENIED in part. The Motion for Leave to File Amended

Complaint is GRANTED in part and DENIED in part.

Factual Background

Plaintiff filed a two count complaint in State court on

October 21, 1992. Count I alleged medical negligence against

Appendix B

Defendant Lori Pegram (“Pegram”’) for failing to adequately

examine, treat, and follow-up on Plaintiff's complaint of

right, lower quadrant pain. She claims that Pegram’s failure

to employ the skill and care ordinarily used by a reasonably

well-qualified physician resulted in a ruptured appendix,

which caused peritonitis. Count II seeks to hold Carle Clinic

Association (“Carle Clinic”) liable under the theory of

respondeat superior. Defendants Pegram and Carle Clinic

filed an Answer to the State court complaint on December

8, 1992.

Herdrich filed an addendum to her State court complaint

in February 1994, adding Counts III and IV. Count III alleges

that Carle Clinic failed to disclose certain material facts

regarding the ownership of Health Alliance Medical Plans

(“Health Alliance”) in violation of the Illinois Consumer

Fraud Act 815 ILCS 505/1 et seq. Count IV charges Health

Alliance breached its duty of good faith and fair dealing.

All of the Defendants filed a Notice of Removal with this

Court on March 14, 1994, asserting that Counts III and IV

were preempted by the Employees Retirement Income

Security Act (“ERISA”), 29 U.S.C. §1101, and that the

pendant state claims set forth in Counts I and II were

removable pursuant to 28 U.S.C. §1367. Herdrich filed a

Motion to Remand on April 8, 1994.

Her Motion to Remand argued that ERISA did not

preempt Counts III and IV of her State court complaint

because the State laws at issue did not relate to an employee

benefit plan. Plaintiff asserted that Counts III and IV were

merely related to employee benefits generally. ERISA’s

preemption provision provides, in relevant part,

Appendix B

Except as provided in subsection (b) of this

section, the provisions of this subchapter and

subchapter III of this chapter shall supersede any

and all State law insofar as they may now or

hereafter relate to any employee benefit plan

described in section 1003(a) of this title . . .

29 U.S.C. § 1144(a). She maintained that State law actions

which are merely incidentally connected to an employee

welfare benefit plan are not preempted by ERISA, citing

Mackey v. Lanier Collections Agency & Service, 486 U.S.

825, 108 S.Ct. 2182 (1988). She concluded that Counts III

and IV of her Complaint only indirectly affected the

administration of a plan, in that her claims arose out

Defendants’ business decisions and therefore were not

preempted.

In opposition to the Motion to Remand, Defendants

argued that Counts III and IV related to the administration

of a plan and were thus preempted under ERISA.

Specifically, Defendants set forth a Synopsis of Relevant

Facts which stated that Herdrich was a participant and

beneficiary in an employee benefit plan (“the Plan”) provided

to her through her husband’s employer, State Farm Insurance

Companies. The factual synopsis also asserted that Defendant

Health Alliance was the administrator and fiduciary of the

Plan. Finally, Defendants contended that as part of the Plan,

Health Alliance contracted with Carle Clinic to provide

medical care to Plan participants in accordance with an

agreed upon fee schedule. In response to Herdrich’s legal

argument that Count IV was not preempted because it lacked

the necessary relationship to an employee benefit plan,

Appendix B

Defendants maintained that plaintiff's reference to the Plan

and Health Alliance’s duty in her Addendum to the

Complaint evidenced a relation between Count IV and the

employee welfare benefit plan.

On July 22, 1994, Magistrate Judge Robert J. Kauffman

recommended the Motion to Remand be denied. (Report and

Recommendation, at 1). The Magistrate Judge found that

Count IV related to an employee welfare benefit plan, and

as such, was preempted by ERISA. /d. at 2-3. The Magistrate

did not find specifically that Count III was preempted.

Neither party filed objections to the Magistrate's Report and

Recommendation, and this Court adopted the Magistrate's

Report and Recommendation, denying the Motion to Remand

on August 5, 1994.

Discussion

A motion for summary judgment will be granted where

there are no genuine issues of material fact and the moving

party is entitled to judgment as a matter of law. Fed.R.Civ.P.

56(c). The moving party has the responsibility of informing

the court of portions of the record or affidavits that

demonstrate the absence of a triable issue. Celotex Corp. v.

Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552 (1986).

The moving party may meet its burden of showing an absence

of material facts by demonstrating “that there is an absence

of evidence to support the non-moving party’s case.” /d., at

325, 106 S.Ct. at 2553. Any doubt as to the existence of a

genuine issue for trial is resolved against the moving party.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct.

2505, 2513 (1986); Cain v. Lane, 857 F.2d 1139, 1142 (7th

Cir. 1988).

Appendix B

If the moving party meets its burden, the non-moving

party then has the burden of presenting specific facts to show

that there is a genuine issue of material fact. Matsushita Elec.

Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-

87, 106 S.Ct. 1348, 1355-56 (1986). Federal Rule of Civil

Procedure 56(e) requires the non-moving party to go beyond

the pleadings and produce evidence of a genuine issue for

trial. Celotex Corp., 477 U.S. at 324, 106 S.Ct. at 2553. This

Court must then determine whether there is a need for trial

— whether, in other words, there are any genuine factual

issues that properly can be resolved only by a finder of fact

because they may be reasonably resolved in favor of either

party. Anderson, 477 U.S. at 250, 106 S.Ct. at 2511.

Defendants submit that the Plan, through a subscription

issued by Carle Clinic Health Maintenance Organization

(Carle HMO), provided health and medical benefits to its

participants and qualifies as an ERISA plan pursuant to 29

U.S.C. §1001 et seg. Defendants assert that Plaintiff's

contract with Health Alliance resulted solely from her

enrollment in the Plan. Defendants contend, and Plaintiff

does not deny, that all benefits provided for under the Plan

were paid. Defendants state, without reference to supporting

material, that Carle HMO acts as the fiduciary of the Plan.

However, the Defendants also frame the issues contained in

the Motion for Summary Judgment as “whether an ERISA

plan participant/beneficiary may sue an ERISA plan fiduciary

under Illinois common law and under the Illinois Consumer

Fraud Act, 815 ILCS 505/1, et seg., to recover extra-

contractual damages,” indicating that Carle Clinic and Health

Alliance function as fiduciaries. This statement, taken in

conjunction with the prior representations made by

10a

Appendix B

Defendants, indicates that there are three fiduciaries of the

Plan: Carle Clinic, Health Alliance, and Carle HMO.

Defendants’ primary argument in support of its Motion for

Summary Judgment, as to Count IV, 1s that regardless of

who functions as the fiduciary, Plaintiff is not entitled to

extracontractual damages under ERISA.

Herdrich claims that the Motion for Summary J udgment

is “vague and ambiguous.” She contends that Carle HMO is

a product, not an entity and as such cannot qualify as a

fiduciary. under 29 U.S.C. §1002(21)(A). She also submits

that Carle Clinic is not a fiduciary as a matter of law and

Defendants have failed to present evidence which supports

their assertion that Carle Clinic is a fiduciary. Further, she

argues that Health Alliance does not appear to be a fiduciary

of the Plan as a matter of fact. In support of this contention,

Herdrich cites to Health Alliance’s 1992 Annual Statement,

filed with the Illinois Department of Insurance, which states

that Health Alliance is not a “provider of administrative

services or ‘stop loss’ group accident and health insurance

to a multiple employer trust or multiple employer welfare

arrangement.” Herdrich submits that Carle Health Insurance

Management Company (“CHIMCO”) is, in fact, the fiduciary

of the Plan. This Court will first address the issues raised by

the parties in terms of Count IV, as neither the Magistrate

Judge nor this Court have determined that Count Ill is

preempted by ERISA. Then this Court will determine, for

purposes of jurisdiction, whether Count III is preempted by

ERISA.

Appendix B

A. Count IV

As there are serious questions about which

organization(s) function as the fiduciary, this Court must

determine whether this Plaintiff can recover the type of

damages she seeks in Count IV, regardless of who exists as

the fiduciary. Herdrich submits that ERISA provides for

extracontractual damages in §502(a)(3). Plaintiff cites Blue

Cross and Blue Shield of Alabama y. Lewis, 753 F.Supp.

345, 347 (N.D.Ala. 1990), for the proposition that §502(a)

of ERISA allows for extracontractual, even punitive

damages. Herdrich concedes, however, that the Seventh

Circuit does not follow the holding in Lewis, Stating that

“[i]t is doubtful that the Seventh Circuit’s refusal to follow

the ruling of the Alabama District Court is justified since

the Seventh Circuit apparently ignored the intent of

Congress.” (Mem. in Opposition to Summary Judgment, at

4).

Defendants cite the Supreme Court’s holding in

Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S.

134, 105 S.Ct. 3085 (1985), for the proposition that ERISA

prohibits the award of extracontractual damages. ERISA’s

civil enforcement provision, § 502(a) provides, in relevant

part,

A civil action may be brought —

(1) by a participant or beneficiary —

(A) for the relief provided for in

subsection (c) of this section, or (B) to

recover benefits due to him under the —

12a

Appendix B

terms of his plan, to enforce his rights

under the terms of the plan, or to clarify

his rights to future benefits under the

terms of his plan;

(2) by the Secretary, or by a participant,

beneficiary or fiduciary for appropriate

relief under section 1109 of this title;

(3) by a participant, beneficiary, or

fiduciary (A) to enjoin any act or

practice which violates any provision of

this subchapter or the terms of the plan,

or (B) to obtain other appropriate

equitable relief (i) to redress such

violations or (ii) to enforce any

provisions of this subchapter or the

terms of the plan.

29 U.S.C. § 1132(a). Section 409, entitled Liability for breach

of fiduciary duty states, in part,

(a) Any person who is a fiduciary with respect

to a plan who breaches any of the responsibilities,

obligations, or duties imposed upon fiduciaries

by this subchapter shall be personally liable to

make good to such plan any losses to the plan

resulting from each such breach, and to restore to

such plan any profits of such fiduciary which have

been made through use of assets of the plan by

the fiduciary, and shall be subject to such other

13a

Appendix B

equitable or remedial relief as the court may deem

appropriate, including removal of such fiduciary.

29 U.S.C. § 1109%a).

In Russell, the plaintiff received benefits under an

employee welfare benefit plan for a back injury from May

1979 until October 17, 1979 when an orthopedic surgeon

reported that the plaintiff was no longer disabled. Russell,

473 U.S. at 136. The plaintiff requested a review of the

termination of her benefits and proffered a report from her

psychiatrist “... indicating that she suffered from a

psychosomatic disability with physical manifestations rather

than an orthopedic illness.” Jd. When this report was

confirmed by a second psychiatrist, the plan administrator

reinstated plaintiff's benefits — including a retroactive

payment. /d. The plaintiff's suit, brought under §502(a)(2),

alleged that she sustained an injury “by the improper refusal

to pay benefits from October 17, 1979, when her benefits

were terminated, to March 11, 1980, when her eligibility

was restored.” /d.

The Court granted certiorari “to review both the

compensatory and punitive components of the Court

of Appeals holding that § 409 authorizes recovery of

extracontractual damages.” /d. at 138. The Court held that

§ 502(a)(2) authorizes a plan beneficiary to bring suit against

a fiduciary under § 409. Any recovery for a breach of

fiduciary duty, however, “inures to the benefit of the plan as

a whole.” /d. at 140. Further, the Court's decision states that

within the context of §§ 502(a)(2) and 409, “we do not find

in §409 express authority for an award of extracontractual

l4a

Appendix B

damages to a beneficiary.” /d. at 144. The Court did not

address whether a plan could recover extracontractual

damages from a fiduciary under § 409. /d. at n.12.

The Court noted that because the plaintiff relied “. . .

entirely on §409(a), and expressly disclaimed reliance on

§502(a)(3), we have no occasion to consider whether any

other provision of ERISA authorizes recovery of extra-

contractual damages.” /d. at 139, n.5. Therefore, regardless

of the identity of the fiduciary, to the extent that Plaintiff

seeks recovery of extracontractual damages under

§§ 502(a)(2) and 409(a), summary judgment is granted in

favor of the Defendants.

The plaintiff in Russell also argued that a private right

of action for extracontractual damages should be implied

absent an express authorization by ERISA. Russell, 473 U.S.

at 145. The Court looked to the four-factor test employed by

Cort v. Ash, 422 U.S. 66, 78 (1975), to determine whether

an implied right of action for extracontractual damages exists

under ERISA. /d. at 145. The Court declined to extend the

Ash decision to “authorize the recovery of extracontractual

damages. Because ‘neither the statute nor the legislative

history reveals a congressional intent to create a private right

of action.’ ” /d. at 148 (quoting Northwest Airlines, Inc. v.

Transport Workers, 451 U.S. 77, 94, n.31 (1981)). To the

extent. Herdrich argues for an implied right of action for

extracontractual damages, the Russell case controls. No such

right exists.

As the Russell decision left open the issue of whether

§502(a)(3) would permit recovery of extra-contractual

15a

Appendix B

damages, this Court must now turn to Plaintiff's argument

that after the Supreme Court’s decision in /ngersoll-Rand

Co. v. McClendon, 111 S.Ct. 478 (1990). 502(a)(3) should

be found to allow for the recovery of extracontractual

damages by a plan beneficiary. In Harsch v. Eisenberg, 956

F.2d 651 (7th Cir.), cert. denied, 113 S.Ct. 61 (1992) the

plaintiffs filed a suit against their employer, a law firm, and

the employee welfare benefit plan to which they belonged.

Harsch, 956 F.2d at 652-53. The plaintiffs alleged that their

employer “had refused to comply with the plaintiffs’ written

request for information and claims for benefits, in violation

of the terms of the plan, the policy and practices of the firm,

and ERISA” and sought compensatory and punitive damages.

Id. at 653. In holding that neither §502(a)(1)(B) nor

§502(a)(3)(B) provided for compensatory damages, the

Harsch court discussed the impact of McClendon on the

Russell holding. /d. at 655, 659-660. The Seventh Circuit

focused on the last paragraph of the McClendon opinion

which states:

[T}here is no basis in § 502(a)’s language for

limiting ERISA actions to only those which seek

“pension benefits.” It is clear that the relief

requested here is well within the power of the

federal courts to provide. Consequently, it is no

answer to a preemption argument that a particular

plaintiff is not seeking the recovery of pension

benefits.

Id. at 659 (quoting McClendon, 111 S.Ct. at 486). After

summarizing the post-McClendon case law, including Blue

Cross and Blue Shield v. Lewis, supra, the case our Plaintiff

l6a

Appendix B

relies upon, and /nternational Union, United Automobile,

Aerospace and Agricultural Implement Workers v. Midland

Steel Products Co., 771 F.Supp. 860, 863 (N.D.Ohio 1991),

the Seventh Circuit concluded that the dicta from McClendon

did not authorize the recovery of compensatory damages

under §502(a)(3). Jd. at 660 (“we are not rash enough to

believe that the Court intended to overrule settled law in

most of the circuits, as well as narrowly limit — if not

overrule — its own decision in Russell in such an off-hand

manner’).

As to the availability of punitive damages under either

§502(a)(1)(B) or §502(a)(3), the Harsch court found neither

section of ERISA allowed for punitive damages. /d. at 661

Specifically as to §502(a)(3), the court cited its prior holding

in Kleinhans v. Lisle Savings Profit Sharing Trust, 810 F.2d

618, 627 (7th Cir. 1987) (punitive damages are not available

under § 502(a)(3)). Other courts have relied upon Harsch in

finding that § 502(a)(3) does not provide for extracontractual

damages. See e.g. Lafov v. HMO Colorado, 988 F.2d 97, 99

(10th Cir. 1993); Medina v. Anthem Life Ins. Co., 983 F.2d

29, 32 (Sth Cir. 1993); Zimmerman v. Sloss Equipment, Inc.,

835 F.Supp. 1283, 1291 (D.Kan. 1993); Pension Plan of

Public Service Assoc. of New Hampshire et al. v. KPMG

Peat Marwick, 815 F.Supp. 52, 56-57, n.2 (D.N.H. 1993).

Although Herdrich suggests that the Seventh Circuit's

decision in Harsch is an incorrect reading of Russell and

McClendon, this Court chooses to follow the Seventh

Circuit’s well reasoned holding.

Additionally, the Supreme Court has recently elaborated

on the reference in § 502(a)(3)(B) to “other appropriate

17a

Appendix B

equitable relief.” Mertens v. Hewitt Assoc., 113 S.Ct. 2063

(1993). The Court granted certiorari to answer the question

“... whether ERISA authorizes suits for money damages

against non-fiduciaries who knowingly participate in a

fiduciary’s breach of fiduciary duty.” /d. at 2066. In

determining that a beneficiary may not recovery monetary

damages from a non-fiduciary, the Court held that

§502(a)(3)(B) included typical remedies available in equity

and not “legal remedies” like compensatory damages or

monetary relief. /d. at 2069. The Mertens decision was

limited to the type of damages which may be recovered under

§ 502(a)(3). Anweiler v. American Elec. Power Service

Corp., 3 F.3d 986, 993 (7th Cir. 1993). Thus, Mertens gives

further support to this Court’s conclusion that to the extent

Herdrich relies on §502(a)(3)(B) as a basis for monetary

relief, as opposed to equitable relief, she may not proceed as

a matter of law. This Court finds that plaintiff's claim for

extracontractual damages against Defendant Health Alliance

may not, as a matter of law, survive summary judgment. As

this Court’s finding is not specific to Health Alliance, but

may be applied to any fiduciary, Plaintiff's Motion for Leave

to Amend is denied as to Count IV.

B. Count Ill

As the Magistrate Judge left open the question of whether

Count III of Plaintiff's Complaint is preempted, this Court

must determine, as a jurisdictional matter, whether Count

III is preempted by ERISA. If not, the matter should be

remanded to State court. As set forth above, Count III alleges

that Carle Clinic failed to disclose certain material facts

regarding the ownership of Health Alliance in violation of

18a

Appendix B

the Illinois Consumer Fraud Act 815 ILCS 505/1 et seq.

Specifically, Plaintiff claims that Carle Clinic sold her a

subscription in Carle HMO through its wholly owned

subsidiary Health Alliance. Plaintiff maintains that

Defendant Carle Clinic violated the Consumer Fraud act by

failing to advise her that the Carle HMO physicians hired

by Health Alliance, in fact owned Health Alliance. Plaintiff

also avers that Defendant Carle Clinic failed to inform her

that the compensation of Carle HMO physicians was

“increased to the extent that those physicians did not order

diagnostic tests; did not utilize facilities not owned by those

physicians; and did not make emergency or consultation

referrals.” (Addendum to Complaint, at 2). Count III seeks

an amount in excess of $15,000.00 plus costs and attorney

fees.

In ERISA’s §1, Congress articulated its declaration of

policy, stating: “... to provide for the general welfare and

free flow of commerce, that disclosure be made and

safeguards be provided with respect to the establishment,

operation, and administration of such plans.” 29 U.S.C.

§ 1001(a). In ERISA, Congress set out to

protect .. . participants in employee benefit plans

... by requiring the disclosure and reporting to

participants and beneficiaries of financial and

other information with respect thereto, by

establishing standards of conduct responsibility,

and obligation for fiduciaries of employee benefit

plans, and by providing for appropriate remedies,

sanctions and ready access to the Federal courts.

19a

Appendix B

29 U.S.C. § 1001(b). Herdrich’s claim in Count III is

essentially that Defendants failed to disclose relevant,

material information regarding the operation of the Plan. In

order to find Count III preempted by ERISA, the State law

which forms the basis of the claim must “relate to” an

employee welfare benefit plan. 29 U.S.C. § 1144(a). The

Supreme Court has given a broad interpretation to the

“relate[s] to” requirement. In Shaw v. Delta Air Lines, 463

U.S. 85, 97, 103 S.Ct. 2890, 2900 (1983), the Court held

that “a law ‘relates to’ an employee benefit plan in the normal

sense of the phrase, if it has a connection with or reference

to such plan.” Shaw, 463 U.S. at 97.

ERISA contains detailed disclosure requirements. In

§ 101, the statute requires the administrator of each employee

benefit plan to provide all participants with a summary plan

description and fiscal statements and schedules. 29 U.S.C.

§ 1021(a) The summary plan description must include the

following:

The name and type of administration of the plan,

the name and address of the person designated as

agent for the service of legal process, if such

person is not the administrator; the name and

address of the administrator, names, titles, and

addresses of any trustee or trustees (if they are

persons different from the administrator); a

description of the relevant provisions of an

applicable collective bargaining agreement; the

plan’s requirements respecting eligibility for

participation and benefits; a description of the

provisions providing for nonforfeitable pension

20a

Appendix B

benefits; circumstances which may result in

disqualification, ineligibility, or denial or loss of

benefits; the source of financing of the plan and

the identity of any organization through which

benefits are provided; the date of he end of the

plan year and whether the records of the plan are

kept on a calendar, policy, or fiscal year basis;

the procedures to be followed in presenting claims

for benefits under the plan and the remedies

available under the plan for the redress of claims

which are denied in whole or in part.

29 U.S.C. § 1022(b). Additionally, ERISA requires each

employee benefit plan publish an annual report, which is to

be filed with the Secretary and made available to the plan

participants and beneficiaries. 29 U.S.C. §§ 1023(a)(1)(A)

and 1024(a) & (b) The annual report must contain a financial

statement and opinion. 29 U.S.C. § 1023(a)(1)(B){i). The

financial opinion must issue from an independent qualified

public accountant. 29 U.S.C. § 1023(a)(3)(A). The financial

statement must include “a statement of assets and liabilities;

a statement of changes in fund balance; and a statement of

changes in financial position.” 29 U.S.C. § 1023(b)(1). The

notes accompanying the financial statement must contain the

following disclosures:

[A] description of the plan including any

significant changes in the plan made during the

period and the impact of such changes on benefits;

a description of material lease commitments, other

commitments, and contingent liabilities; a

description of agreements and transactions with

2la

Appendix B

person known to be parties in interest; a general

description of priorities upon termination of the

plan; information concerning whether or not a tax

ruling or determination letter has been obtained;

and any other matters necessary to fully and fairly

present the financial statements of the plan.

29 U.S.C. § 1023(b)(1). ERISA also dictates the schedules

which must be attached to the financial statements. 29 U.S.C.

§1023(b)(3). The annual report must also contain an actuarial

statement and opinion prepared by an enrolled actuary. 29

U.S.C. § 1023(a)(4)(A)

It is apparent from this brief review of ERISA’s

disclosure requirements that the statute comprehensively

regulates the necessary disclosures. Count III seeks to impose

additional disclosure requirements on the plan administrator

other than those which are expressly enumerated in ERISA.

This Court finds that under the broad reach of ERISA’s

§ 514, Plaintiff's Count III relates to an employee benefit

plan, and as such is preempted.

Having found Count III preempted, Herdrich must now

allege which of ERISA’s civil enforcement provisions, if

any, would be provide a cause of action for Plaintiff. The

availability of a federal remedy does not govern the

preemption decision, and thus it may be that Plaintiff has no

cause of action under ERISA. Lister v. Stark, 890 F.2d 941,

946 (7th Cir. 1989). Plaintiff is given leave to submit an

amended Count III which clearly sets forth her basis for

proceeding under ERISA, including the applicable civil

enforcement provision. If Plaintiff declines this opportunity,

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Appendix B

Count III will be dismissed with prejudice, and the remaining

matters will be remanded to State Court.

Conclusion

For the reasons stated herein, the Motion for Summary

Judgment as to Count IV is GRANTED in favor of Defendant

Health Alliance Medical Plans, Inc. with costs. The Motion

for Summary Judgment as to Count III is DENIED. The

Plaintiff has fourteen (14) days to file her amended

Complaint as to Count III, specifying under which of

ERISA’s civil enforcement provisions she intends to proceed.

IT IS SO ORDERED.

ENTERED this 25th day of July, 1995.

s/ Michael M. Mihm

Michael M. Mihm

Chief United States District Judge

23a

APPENDIX C — MEMORANDUM IN OPPOSITION

TO PLAINTIFF’S MOTION TO REMAND

IN THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF ILLINOIS

PEORIA DIVISION

No. 94-1143

CYNTHIA HERDRICH,

Plaintiff,

VS.

LORI PEGRAM and CARLE CLINIC ASSOCIATION,

HEALTH ALLIANCE MEDICAL PLANS, INC.

Defendants.

MEMORANDUM IN OPPOSITION TO

PLAINTIFF’S MOTION TO REMAND

Introduction

Defendants, Lori Pegram, M.D., Carle Clinic

Association, and Health Alliance Medical Plans, Inc.,

removed this case on March 14, 1994. The state trial court

in the Eleventh Circuit of Illinois, McLean County, had

allowed the plaintiff to amend her pleadings on February

18, 1994. The new allegations, Counts III and IV, for the

first time, raise claims which relate to an employment benefit

plan, as defined and preempted by Section 514(a) of ERISA

(29 U.S.C. Section 1144(a)(1988)). The original complaint,

24a

Appendix C

Counts | and II failed to adequately set forth a claim or right

arising under the Constitution, treatises or laws of the United

States, in that they stated a claim for professional negligence

against Lori Pegram, M.D. (Count 1) and respondeat superior

against Carle Clinic Association (Count II).

After receipt of plaintiff's Addendum to the Complaint

as stated above, the defendants were, for the first time, put

on notice that the plaintiff was asserting an action which

was removable to this Court since the Addendum, for the

first time, brought a claim over which this Court has original

jurisdiction of the provisions of Title 28, U.S.C., Section

1441(b) and Title 29, U.S.C., Section 1144(a). Removal of

this matter was, therefore, timely. Plaintiff has not raised

timeliness as an objection to the removal.

Rather, plaintiff asserts in the motion to remand and

supporting memorandum, that the claims set forth in Counts

Il] and IV of the Addendum to the complaint do not “relate

to” any employee benefit plan ... as set forth in Section

514(a) of ERISA.

Synopsis of Relevant Facts

The plaintiff, Cynthia Herdrich, was a participant and

beneficiary in an employee benefit plan (“the Plan”) provided

to her by her husband’s employer, State Farm Insurance

Companies. Defendant, Health Alliance Medical Plans, Inc.

(“Health Alliance”) was the administrator and fiduciary of

the Plan within the meaning of ERISA (29 U.S.C. Section

1001 et seq.)

ee ee Oe ee

25a

Appendix C

As part of the Plan, Health Alliance entered into a

contract with Carle Clinic Association (“Carle”) in which

Carle agreed to provide medical care to participants in the

Plan in accordance with an agreed upon fee schedule.

Defendant, Dr. Lori Pegram, is an employee of the Carle

Clinic Association. In March of 1991, Cynthia Herdrich has

alleged she was suffering from right, lower quadrant pain

resulting from appendicitis. She was seen by Dr. Pegram on

March 1, 1991. On March 7, 1991, plaintiff's appendix

perforated. On March 15, 1991, plaintiff underwent a

successful exploratory laparotomy.

This action was commenced in state court on October

21, 1992. The original action was for the alleged malpractice

of Dr. Pegram and under a theory of respondeat superior,

Carle Clinic Association. Initially they were the only

defendants.

In February of 1994, the plaintiff was allowed leave to

file an Addendum to the Complaint, which for the first time,

added Health Alliance Medical Plans, Inc. as an additional

defendant. For the first time, plaintiff alleged that Carle

Clinic, P.C., violated the Illinois Consumer Fraud Act (815

ILCS 505/1 et seq.) by allegedly failing to advise the plaintiff

that the Carle Care HMO physicians hired by Health Alliance

in fact owned Health Alliance and failed to advise plaintiff

that the compensation of the Carle Care HMO physicians

hired by Health Alliance was increased to the extent that

those physicians did not order diagnostic tests; did not utilize

facilities not owned by those physicians; and did not make

emergency or consultation referrals. It was further alleged,

for the first time, that Health Alliance breached a duty of

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Appendix C

good faith and fair dealing in arranging medical and hospital

services by having its contracted physicians minimize the

use of diagnostic tests, the facilities not owned by those

physicians, and the emergency consultation referrals.

Federal Preemption

The United States Constitution provides that “The Laws

of the United States ... shall be the supreme Law of the

Land ... anything in the Constitution or Laws of any State

to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2.

Thus, since McCulloch v. Maryland, 17 U.S. 316, 427 (1819)

(Wheat.), state law that conflicts with federal law has no

effect. Maryland v. Louisiana, 451 U.S. 725, 746 (1981).

However, Supremacy Clause analysis “start(s] with the

assumption that the historic police powers of the states [are]

not to be superseded by Federal Act unless that [is] the clear

and manifest purpose of Congress”. Rice v. Santa Fe Elevator

Corporation, 331 U.S. 218, 230 (1947) (emphasis added).

Accordingly, the purpose of Congress is the “ultimate

touchstone” of preemption analysis. Malone v. White Motor

Corporation, 435 U.S. 497, 504 (1978) (quoting Retail

Clerks v. Schermerhorn, 375 U.S. 96, 103 (1963)).

Congress’ purpose may be stated explicitly in a statute’s

language or contained implicitly in the statute’s structure

and purpose. Jones v. Rath Packing Co., 430 U.S. 519, 525

(1977). For example, state law is preempted if it actually

conflicts with federal law, even in the absence of an express

Congressional command. Pacific Gas & Electric Co. v.

Energy Resources Conversation and Dev. Comm 'n., 461 U.S.

190, 204 (1983). State law also is preempted if federal law

27a

Appendix C

“so thoroughly occupies a legislative field as to make

reasonable the inference that Congress left no room for the

states to supplement it.” Fidelity Federal Savings & Loan

Association v. De la Cuesta, 458 U.S. 141, 153 (1982). Both

of these principles of preemption apply in the case of ERISA.

ERISA Preemption

Section 514(a) of ERISA provides, in part:

[T]he provisions of this subchapter and subchapter

III of this chapter shall supersede any and all State

laws insofar as they may now or hereafter relate

to any employee benefit plan described in Section

1003(a) of this Title and not exempt under

Section 1003(b) of this Title. 29 U.S.C. Section

1144(a)(1988)

The United States Supreme Court, commenting upon the

breadth of this provision, described it as a “virtually unique

preemption provision.” Franchise Tax Board v. Construction

Laborers Vacation Trust, 463 U.S. 1, 24 n.26 (1983)

Congress’ purpose in enacting ERISA is the “ultimate

touchstone” in determining ERISA preemption. Pilot Life

Insurance Co. v. Dedeaux, 481 U.S. 41, 45 (1987). Congress

enacted ERISA to protect employees’ anticipated benefits.

29 U.S.C. Section 1001(1988). ERISA’s preemption clause

protects employee benefit plans from conflicting and

inconsistent state laws because such laws may hinder a plan’s

ability to administer benefits uniformly. Fort Halifax

Packing Co. v. Coyne, 428 U.S. 1, 8-9 (1987).

28a

Appendix C

There are a number of Supreme Court decisions

interpreting ERISA’s preemption clause. One of the earliest

to find preemption is Alessi v. Raybestos-Manhattan, Inc.,

451 U.S. 504(1981). In Alessi, the court included that ERISA

preempts a New Jersey statute prohibiting an offset against

employee retirement benefits for the amount a retiree

received in workers’ compensation. In so finding, the court

concluded that the New Jersey statute “relates to” pension

plans governed by ERISA because it purports to eliminate

one method of calculating pension benefits-integration that

ERISA permits. The court rejected the suggestion, similarly

put forth by the plaintiff here, that New Jersey law intrudes

on ERISA only indirectly, through a workers’ compensation

law, rather than directly, through a “pension regulation.” The

Court observed:

ERISA makes clear that even indirect state action

bearing on private pensions may encroach upon

the area of exclusive federal concern. For the

purposes of the pre-emption provision, ERISA

defines the term ‘State’ to include: ‘a State, any

political subdivision thereof, or any agency or

instrumentality of either, which purports to

regulate, directly or indirectly, the terms and

conditions of employee benefit plans covered by

this subchapter.’ 29 U.S.C. Section 1144(c)(2)

(emphasis added).

ERISA’s authors clearly meant to preclude the States from

avoiding through form the substance of the preemption

provision. /d. at 525.

et a

29a

Appendix C

| One of the more oft-cited Supreme Court cases on the

issue of ERISA preemption is Pilot Life Insurance Co. v.

Dedeaux, 481 U.S. 41 (1987). The Pilot Life decision is

particularly interesting because it concludes that ERISA

preempts certain state common-law tort and contract actions

that assert improper processing of a claim under an employee

benefit plan. Pilot Life demonstrates the expansiveness of

the meaning of “State law” in Section 514(a) of ERISA,

which Congress defined to include “all laws, decisions, rules,

regulations, or other State action having the effect of law, of

any state.” 29 U.S.C. Section 1144(c)(1)(1988).

The Court found in Pilot Life there was no dispute that

the common-law causes of action in question — tortious

breach of contract, breach of fiduciary duties, and fraud in

the inducement — “related to” an employee benefit plan.

Having reached this conclusion, the Court’s only task was

to determine whether any of the exemptions to preemption

applied. The plaintiff asserted that Mississippi's law of bad

faith is a law “which regulates insurance” and thus is saved

from preemption by ERISA, Section 514(b)(2)(A), 481 U.S.

at 47. The Court rejected this argument, however, noting

that Mississippi's bad faith law, while identified with the

insurance industry, has its roots in the general principles of

Mississippi tort and contract law.

Of particular import to the plaintiff's Addendum to the

Complaint here, in which bad faith and fraud are alleged,

and the ERISA preemption of same is the discussion of

preemption of such claims in Pilot Life:

The policy choices reflected in the inclusion of

certain remedies and the exclusion of others under

30a

Appendix C

the federal scheme would be completely

undermined if ERISA-plan participants and

beneficiaries were free to obtain remedies under

state law that Congress rejected in ERISA. The

six carefully integrated civil enforcement

provisions found in Section 502(a) of the statute

as finally enacted . . . provide strong evidence that

Congress did not intend to authorize other

remedies that it simply forgot to incorporate

expressly.

The deliberate care with which ERISA’s civil

enforcement remedies were drafted and the

balancing of the policies embodied in its choice

of remedies argues strongly for the conclusion that

ERISA’s civil enforcement remedies were

intended to be exclusive. 481 U.S. at 54.

Here, plaintiff's claim of fraud and breach of duty to act in

good faith are clearly related to the employment benefit plan.

To be sure, plaintiff attaches the subscription agreement to

the complaint referencing same in her complaint. The

plaintiff states in her Motion for Remand, “ERISA

preemption is not triggered by actions which indirectly affect

the administration of a benefit plan, but only those that impact

directly on primary administrative functions of the plan.” It

is contended that the allegation of good faith and fair dealing

does not “impact on” the employee benefit plan. For this

proposition, the plaintiff cites the District Court for the

Eastern District of Pennsylvania (/ndependence HMO, Inc.

v. Smith, 733 F.Supp. 983 (E.D. Pa. 1990)). In essence,

plaintiff argues that her claims are not clearly preempted

3la

Appendix C

under Section 514 (29 U.S.C. Section 1144(a)(1988))

because they do not “relate to” an ERISA plan, a pre-

condition to preemption under Section 514. The plaintiff's

contention must fail, given the breadth placed upon the term

“relates to” by the United States Supreme Court. The United

States Supreme Court has stated they have no hesitation to

enforce ERISA’s preemption provisions where a state law

creates the prospect that employer’s administrative scheme

would be subject to conflicting requirements. Fort Halifax

Packing Co., Inc. v. Coyne, 42 U.S. 1.

In First National Life Ins. v. Sunshine-Junior Food

Stores, 960 F. 2d 1546 (11th Cir. 1992) the court held:

Moreover, state contract and tort laws that impose

varying standards upon the administrator of a

welfare benefit plan create a significant potential

for conflict with ERISA and thus are logically

preempted. As we noted earlier, Congress

deliberately wrote Section 1144(a) in a broad

manner in order to make pension plan regulation

exclusively a federal concern. 960 F. 2d at 1550.

In this case, as is evidenced by the fact that plaintiff, in

her Addendum to the Complaint, has specifically referred to

the Plan, and must in order to create any relationship or

“duty” between Health Alliance and Cynthia Herdrich, the

existence of the Plan is a prerequisite to the plaintiff's state

law claims. In other words, absent the existence of the Plan,

plaintiff would have absolutely no standing to assert any

claim against Health Alliance.

32a

Appendix C

The United States Supreme Court of Appeals for the

Eleventh Circuit has similarly held in Sanson v. General

Motors Corp., 966 F. 2d 618 (11th Cir. 1992) that when a

plaintiff would not have a state law cause of action absent

the existence of an ERISA plan, the state law claim is

preempted. Clearly, plaintiff's Addendum to the Complaint

is based solely and completely upon her contractual

relationship to the ERISA plan of Health Alliance. Thus,

under the compelling rationale of Sanson and First National

Life Insurance and countless other cases, plaintiff's claims

here are preempted.

The plaintiff's reliance on a decision from the Eastern

District of Pennsylvania is misplaced. The Pennsylvania

Court has, in other decisions, found no preemption. Yet, the

underpinning and rationale of those decisions has been

specifically rejected by the Seventh Circuit in Lister v. Stark,

890 F. 2d 941 (7th Cir. 1989) cert. den'd. 111 S. Ct. 579

(1990) and their reasoning rejected again in Bartholet v.

Reishauer A.G. (Zurich), 953 F. 2d 1073, 1076-77 (7th Cir.

1992). See, also, Christopher v. Mobil Oil Corp., 950 F. 2d

1209 (Sth Cir. 1992); Bernatowicz v. Colgate Palmolive Co.,

1992 U.S. Dist. Lexis 2889 (D. N.J. 1992). Not a single

federal court has followed or adopted the line of cases from

the Eastern District of Pennsylvania. Indeed, every federal

court to address these cases has rejected them.

The Pennsylvania cases are simply based upon a

misunderstanding of the breadth of the term “relate to”, a

misunderstanding specifically noted and rejected by the

Seventh Circuit in Lister.

oe ee ae

33a

Appendix C

The Bartholet court noted when rejecting Bartholet’s

argument that his claims were not removable because they

were not related to an ERISA plan:

Thomas Reed Powell defined the legal mind as

one that can think of something inextricably

connected to something else, without thinking

of what it is connected to. Not even the most

segmented mind could contemplate the benefit

without the plan.

Indirect Effect on Plan

Plaintiff contends in her Motion for Remand that the

state law claims affect the Plan only indirectly. However,

this contention, even if true, does not avoid the expansive

language of Section 514.

In Stuart Circle Hospital Corp. v. Aetna Health

Management, 15 EBC 1934 (E.D. Va. 1992), Aetna operated

a health maintenance agreement (HMO) and was the insurer/

administrator of an ERISA plan which provided medical

benefits through the HMO. Aetna had chosen not to allow

Stuart Circle Hospital to participate in the HMO. The hospital

sued, attempting to enforce a Virginia statute that provided

PPOs could not discriminate against whom they allowed to

join.

The District Court held that the state statute was

preempted. After reviewing the broad scope of ERISA’s

preemption provision, the court held:

34a

Appendix C

So long as a state law has a ‘connection with or

reference to’ an employee benefit plan, then the

law relates to the plan, and it is of no consequence

whether the effect on the plan is direct or indirect.

15 EBC at 1937.

The court held the Virginia law was preempted.

An Illinois law that allows an ERISA plan administrator/

fiduciary to be subject to the liability for directing a patient’s

healthcare in order to maximize profits for the Plan and affect

optimum delivery of care, has both a connection with and

affects that Plan directly. A Plan administrator who relies

upon the unanimous case law which provides it can be held

liable only for those benefits specifically provided in the

ERISA plan it administers, could now find itself, as a result

of its administering the ERISA plan, facing unlimited

liability under state law statutes and theories. In such a

scenario, it is ludicrous to argue that such state law claims

have no connection to the ERISA plan or that they only affect

the ERISA plan indirectly as plaintiff asserts here.

The proposition put forth by the plaintiff in the Motion

to Remand was similarly discussed by Justice O’Connor in

Ingersoll-Rand v. McClendon, 498 U.S. 133, 138 (1991).

Justice O’Connor explained:

The preemption clause is conspicuous for its

breadth. Its deliberately expansive language was

designed to establish pension plan regulation as

exclusively a federal concern. [citations omitted]

The key to Section 514 is found in the words

at oar ey a nad eee

Sidr aA woe

35a

Appendix C

“relate to.” Congress used those words in their

broad sense, rejecting more limited pre-emption

language that would have made the clause

“applicable only to state laws relating to the

specific subjects, covered by ERISA.” [citation

omitted] Moreover, to underscore its intent that

Section 514(a) be expansively applied, Congress

used equally broad language in defining the “state

law” that would be preempted . . . A law “relates

to” an employee benefit, in the normal sense of

the phrase, if it has a connection with or reference

to such plan.

In Holland v. Burlington Industries, Inc., 772 F.2d 1140

(4th Cir. 1985), aff'd. sub nom., Brooks v. Burlington

Industries, Inc., 477 U.S. 903 (1986), the court acknowledged

that ERISA was the most sweeping federal preemption statute

ever enacted by Congress and, relying upon Alessi v.

Rabestos-Manhattan, Inc., 451 U.S. 504 (1981), stated that

the only state laws not preempted were those specifically

exempted from preemption by Section 514. 772 F. 2d at

1146-47. In the recent case of Talamine v. Unum Life

Insurance Co. of America, 1992 U.S. Dist. Lexis 14372 (N.D.

Ill. September 24, 1992), the court again acknowledged the

“sweeping breadth” of Section 514 and noted that the

Supreme Court had consistently “expansively interpreted”

the preemptive scope of ERISA.

A somewhat more detailed approach was taken by the

Eighth Circuit in Arkansas Blue Cross & Blue Shield v. St.

Mary's Hospital, 947 F. 2d 1341 (8th Cir. 1991 ), cert. den'd.,

112 S. Ct. 2305 (1992). The court there identified various

36a

Appendix C

factors that should be examined in determining whether or

not a plaintiff's claims “relate to” an ERISA plan. Applying

each of the factors identified by the Eighth Circuit to the

facts of this case, it is clear that Cynthia Herdrich’s claims

relate to the Plan because her claims would: (1) significantly

impact the relationship between Plan participant and Plan

administrator as the Plan administrator would become the

guarantor of the quality of care paid for by the Plan; (2) would

considerably increase the administrative burdens of the Plan

who would have to develop and enforce an entirely new and

burdensome system whereby it would oversee and guarantee

the medical judgments of the physician; (3) substantially

increase the cost of administering the Plan by requiring the

oversight system described above and by requiring the Plan

administrator’s budget for risk of breach of claims for breach

of bad faith and fair dealing, as well as fraud; (4) dramatically

affect the statutory scheme which was intended to assure

Plan sponsors and fiduciaries that they would have the

freedom to develop their ERISA plans as they choose,

thereby limiting their liability.

In the case now before this Court, it is clear that the

plaintiff's claims relate to the Plan administered by Health

Alliance. The relationship between the plaintiff and Health

Alliance arose solely from the Plan. But for the existence of

the Plan, Cynthia Herdrich’s participation in that Plan and

Health Alliance’s serving as administrator/fiduciary of that

Plan, there would be no relationship whatsoever between

Cynthia Herdrich and Health Alliance and thus no lawsuit.

Moreover, the claims against Carle Clinic, P.C. relating

to fraud arise solely out of the relationship between Carle

+ eee

37a

Appendix C

Clinic, P.C. and the plaintiff and their collective relationship

to Health Alliance. In light of the foregoing, the plaintiff

cannot seriously contend that her claims are not related to

the Plan.

In short, because the plaintiff is a participant/beneficiary

of the Plan, and because she is asserting claims related to

the Plan against the Plan’s fiduciary and administrator, their

claims are clearly within the preemption provision of Section

514. Ingersoll-Rand v. McClendon, supra.

Respectfully Submitted,

LORI PEGRAM, M.D., CARLE

CLINIC ASSOCIATION, and

HEALTH ALLIANCE MEDICAL

PLANS, INC., Defendants,

BY: LIVINGSTON, BARGER,

BRANDT & SCHROEDER

BY:

one of their attorneys

38a

APPENDIX D — ANNUAL STATEMENT OF

HEALTH ALLIANCE MEDICAL PLANS, INC.

LIFE AND ACCIDENT AND HEALTH COMPANIES —

ASSOCIATION EDITION

0000779509201400

affix bar code above

ANNUAL STATEMENT

For the Year Ended December 31, 1992

OF THE CONDITION AND AFFAIRS OF THE

Health Alliance Medical Plans, Inc.

NAIC Group Code 000 NAIC Company Code 77950

Employer’s ID Number 37-1260731

Organized under the Laws of the State of Illinois, made to

the INSURANCE DEPARTMENT OF THE STATE OF

PURSUANT TO THE LAWS THEREOF

Incorporated November 17, 1989 Commenced Business

December 1, 1989

Statutory Home Office 602 W. University Avenue (Street

and Number), Urbana, Illinois 61801 (City or Town, State

and Zip Code)

Main Administrative Office 102 E. Main Street, Suite 200,

P.O. Box 6003 (Street and Number), Urbana, IL 61801 (City

or Town, State and Zip Code) 217 337-8010 (Area Code)

(Telephone Number)

39a

Appendix D

Mail Address 102 E. Main Street, Ste. 200, P.O. Box 6003

(Street and Number or P.O. Box), Urbana, Illinois 61801

(City or Town, State and Zip Code)

Primary Location of Books and Records 102 E. Main Street,

Suite 200 (Street and Number), Urbana, IL 61801 (City or

Town, State and Zip Code) 217 337-8000 (Area Code)

(Telephone Number)

Annual Statement Contact Person and Phone Number

Lynn A. Rice 217 337-8241

OFFICERS

President Executive Dir.

John W. Pollard, MD C. Carleton King

Secretary Medical Dir.

Alan K. Hatfield, MD Benjamin H. Robbins, Jr., MD

Vice Presidents

Martha A. Baddour

Judith A. Griffith

Jeffrey C. Ingrum

DIRECTORS OR TRUSTEES

Robert M. Scully, MD Robert J. Turngren, MD

Barbara A. Kammer, MD John W. Pollard, MD

Alan K. Hatfield, MD

Terry R. Noonan, MD

Thomas C. Schrepfer, MD

40a

Appendix D

STATE OF Illinois )

) ss.

COUNTY OF Champaign )

John R. Pollard MD, President, Alan K. Hatfield, MD,

Secretary, ... of the Health Alliance Medical Plans, Inc.,

being first duly sworn, deposes and says that they are the

above described officers of the said insurer, and that on the

thirty-first day of December last, all of the herein described

assets were the absolute property of the said insurer, free

and clear from any liens or claims thereon, except as herein

stated, and that this annual statement, together with related

exhibits, schedules and explanations therein contained,

annexed or referred to are a full and true statement of all the

assets and liabilities and of the condition and affairs of the

said insurer as of the thirty-first day of December last, and

of its income and deductions therefrom for the year ended

on that date, and have been completed in accordance with

the NAIC annual statement instructions and accounting

practices and procedures manuals except to the extent that:

(1) state law may differ; or (2) that state rules or regulations

require differences in reporting not related to accounting

practices and procedures, according to the best of their

information, knowledge and belief, respectively.

s/ John W. Pollard, MD s/ Alan K. Hatfield, MD

President Secretary

* * *

(a) is this an original filing? yes [ x ]

* * ~

4la

Appendix D

Subscribed and sworn to before

me this 8th day of March, 1993.

s/ Marsha Diane Eversole

notary public

42a

APPENDIX E — PART 1 —

ORGANIZATIONAL CHART

PART 1 — ORGANIZATIONAL CHART

Carle Clinic Association, P.C.

(parent corporation)

Carle Health Ins. Mgmt. Co.* Health Alliance Medical Plans, Inc.*

weeeeee mgt. contract - - - - - - - (domestic stock insurance co.)

| |

| cscs coat — ms

PPA/TPA | Direct CarleCare HMO | Health Alliance HMO Health Alliance |

Ancillary

Licenses Products Contracting (federally qualified) (not federally qualified) PPO

¢ for-profit wholly-owned subsidiary of Carle Chusic Association, P.C.

BEST AVAILABLE COPY

43a

APPENDIX F — NOTES TO FINANCIAL STATEMENTS

OF HEALTH ALLIANCE MEDICAL PLANS, INC.

ANNUAL STATEMENT

HEALTH ALLIANCE MEDICAL PLANS

NOTES TO FINANCIAL STATEMENTS

Basis of Presentation:

The accompanying financial statements have been

prepared in conformity with accounting practices

prescribed or permitted by the National Association of

Insurance Commissioners and the State of Illinois.

Basis of Valuation of Invested Assets:

Asset values are generally stated as follows: Invested

cash includes short-term investments which are stated

at cost. Short-term investments totaled $109,963.

Long-term investments are stated at the lower of cost

or market value. Long-term investments totaled

$5,841,839. The effective interest method was used

for the Amortization of bonds.

. Purchased computer software is recorded at cost and

is amortized using the straight-line method over

3 years. Furniture and equipment is recorded at cost

and is depreciated using the MACRS method over

periods of 5 and 7 years.

Not applicable.

44a

Appendix F

Investment Income:

No category of investment income has been deducted or

excluded (non-admitted) on any investment.

Federal Income Tax Allocation:

A. The Company files a consolidated Income Tax return

with the following companies:

Carle Clinic Association

Carle Health Insurance Management Company

B. The Company and the Clinic have agreed that the

consolidated tax liability for any given year will be

allocated to those companies that have taxable income

during such year in proportion to their relative taxable

incomes. Similarly, consolidated tax benefits are

allocated to those companies that have taxable losses

which give rise to the benefit in proportion to their

relative taxable losses.

Intercompany tax balances are settled annually in the

fourth quarter.

45a

APPENDIX G — MINUTES OF APRIL 6, 1992 OF

THE ANNUAL MEETING OF HEALTH ALLIANCE

MEDICAL PLANS, INC.

MINUTES

‘HEALTH ALLIANCE MEDICAL PLANS, INC.

ANNUAL MEETING

The Board of Directors of Health Alliance Medical Plans,

Inc. (“Health Alliance”) met on Monday, April 6, 1992 at

3:30 p.m. in the North Tower | Board Room. The following

Directors were present: Drs. Scully, Noonan, Parker,

Schrepfer, Hatfield, Kammer, and Pollard; Staff present: Dr.

Parker; and Messrs. Bash, Green, and King.

Dr. Scully, Chairman, called the meeting to order and noted

that a quorum was present. It was moved, seconded and

passed to approve the minutes of the March 18, 1991 Annual

Meeting as submitted.

Pursuant to Article III, Section 2 of Health Alliance’s

corporate bylaws as amended in 1991, an appointment to

the Board of Governors of Carle Clinic Association, P.C.

results in an automatic appointment to the Board of Directors

of Health Alliance. Therefore, no elections at Health

Alliance’s Annual Meeting are required. Dr. Noonan was

recognized as a new Director for the record.

It was moved, seconded, and passed to appoint the following

individual as Officers of Health Alliance’s Board of

Directors:

Robert M. Scully, MD, Chairman

Thomas C. Schrepfer, MD, Vice-Chairman

Terry R. Noonan, MD, Secretary-Treasurer

John W. Pollard, MD, President

46a

Appendix G

It was moved, seconded, and passed to appoint the Corporate

Officers of Health Alliance assigned by Carle Health

Insurance Management Company pursuant to the

Management Services Agreement between the two

organizations. These individuals are authorized to sign

checks, enter into contracts and conduct business on behalf

of Health Alliance:

John W. Pollard, MD, President

Benjamin H. Robbins, MD, Medical Director

Joseph C. Barkmeier, MD, Associate Medical Director

Kenneth G. Bash, Assistant Treasurer

Richard D. Green, Assistant Secretary

C. Carleton King, Executive Director

Jeffrey C. Ingrum, Vice-President of Finance

Martha A. Baddour, RN, Vice-President of Health

Services

Judy A. Griffith, Vice-President of Operations

The need to indemnify (hold harmless) members of the HMO

Advisory Board (a.k.a. Patient Satisfaction Committee)

serving at the request of the corporation against threatened,

pending or completed actions, suits or proceedings was

discussed. It was moved, seconded and passed to amend

Article VII of the by-laws to indemnify HMO Advisory

Board members meeting the applicable standards of conduct

in the same manner in which directors, officers, employees

and agents are indemnified.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.