# Opposition Brief — Pegram v. Herdrich

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0281%3A03

## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2000
- **Citation:** 530 U.S. 211

## Text

, «JUL 28 1995
CLERK

No. 98-1949

a

IN THE

Supreme Court of the United States

LORI PEGRAM, M.D., CARLE CLINIC ASSOCIATION
and HEALTH ALLIANCE MEDICAL PLANS, INC.,

Petitioners,
v.
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

=

i
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).

il

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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14

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
ESE EEE OPTI TT TIT TILT

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Page

17

18

18

19

21

iv

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

v
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

vi

Cited Authorities

hitp://www.canceronline. org/009-the-ideal.himl . .

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

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

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

"ee ee eeees
,eeeeeeeeeeae eee eee eb es

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
16

17

16

16

15

15

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

la

Sa

23a

38a

42a

43a

45a

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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

2

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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3

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

4

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.

6

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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7

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

8

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.

Ee a. ——

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10.

11.

12.

(a)

9

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;

10

(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;

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(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

12

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:

13

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.

14

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

15

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

16

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

1. Attp://www.canceronline.org/009-the-ideal. html.

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

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

te ne ee le Pe he

17

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!.

18

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

19

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

20

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

21

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

2a
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

3a

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.

(c) The district courts may decline to exercise
supplemental jurisdiction over a claim under
subsection (a) if —

(1) the claim raises a novel or complex
issue of State law,

4a
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

Sa

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

6a
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,

7a
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,

8a

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).

9a
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,

22a
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

he

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

26a
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

Ale eee oe. ae ©

+ 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.

J

ANNUAL STATEMENT
OF
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:

A.

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.

3.

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0281%3A03. Public record. Not legal advice.