Amicus Curiae Brief — General Motors Corp. v. Bennett

Be Bupreme Court, U.o.

5 [ete ED

' 2

No. 87.994 ~~ | aes

IN THE ae :

Supreme Court of the United States

OCTOBER TERM, 1987

GENERAL MOTORS CORPORATION and

AMERICAN NATIONAL RED CROSS,

- Petitioners,

WILLIAM M. BENNETT, CONWAY H. COLLIS,

ERNEST J. DRONENBURG, JR., RICHARD NEVINS,

GRAY DAVIS, and BRUCE BUNNER,

Respondents.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

BRIEF AMICI CURIAE FOR

AMERICAN COUNCIL OF LIFE INSURANCE AND

HEALTH INSURANCE ASSOCIATION OF AMERICA

IN SUPPORT OF THE PETITION

Of Counsel: ERWIN N. GRISWOLD

JACK H. BLAINE Counsel of Record

Vice President, State Relations, | PATRICIA A. DUNN

and General Counsel JONES, DAY, REAVIS & POGUE

PHILLIP E. STANO Metropolitan Square

Senior Counsel 1450 G Street, N.W.

AMERICAN COUNCIL OF LIFE Washington, D.C. 20005-5701

INSURANCE (202) 879-3939

1001 Pennsylvania Avenue, N.W. Counsel for the Amici

Washington, D.C. 20004-2599

(202) 624-2183

JOE W. PEEL

Vice President and

General Counsel

JANA LEE PRUITT

Assistant Counsel

HEALTH INSURANCE ASSOCIATION

OF AMERICA

1025 Connecticut Avenue, N.W.

Suite 1200

Washington, D.C. 20036-3998

(202) 223-7780

AEP EIA 0 EAE S I ET SE CRE RETEI GLE ISS PETIA MLY MEI ip SIE YE NORGANNON

WILSON - EPES PRINTING Co., INC. - 789-O096 - WASHINGTON, D.C. 20001 d

QUESTIONS PRESENTED

1. Whether a state tax that “relates to” an employee

benefit plan under §514(a) of the Employee Retire-

ment Income Security Act (“ERISA’’), 29 U.S.C. § 1144

(a), by explicitly including the plan’s benefit payments

in the amounts subject to tax is saved from preemption

as a law which “regulates insurance” under ERISA § 514

(b) (2) (A) because the legal incidence of the tax is on

insurance companies?

2. Whether such a state tax deems ERISA plans “to

be engaged in the business of insurance” in violation of

§ 514(b) (2) (B) of ERISA, 29 U.S.C. § 1144(b) (2) (B),

because it treats the benefits paid by such plans as a

taxable cost of “insurance”, regardless of the extent of

insurance actually purchased by the plans?

(i)

TABLE OF CONTENTS

Page

pg ae iv

INTERESTS OF THE AMICI... 1

I A BD ccsccsisncecnrnccnsnnnnnnasenasteorenncnsssnnscesce 3

EE EERIE. 0 RSW On 5

REASONS FOR GRANTING THE WRIT ..................... 7

1. The Court Below Decided An Important Issue

Of Federal Law In A Manner Inconsistent With

The Decisions Of This Court .....................-........... ere arses

2. The Decision Below Has A Far-Reaching And

Impermissible Impact On Plan Funding Deci-

Ne secusssnterntacenennoes 10

3. The Decision Below Presents An Opportunity

To Clarify The Respective Roles Of ERISA’s

Saving And Deemer Clauses ......................2.......-. 13

aaa tasinttcendensetenennanctecveccnstinnsennesinsiocres 18

(iii)

iv

TABLE OF AUTHORITIES

Cases Page

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

fs eM ee ears waemen ee one ne 8, 10

Fort Halifax Packing Co. v. Coyne, 107 S. Ct. 2211

$e Een NO CEM S Lor Rees WF 2 OI ae 11

Franchise Tax Board v. Construction Laborers Va-

cation Trust, 463 U.S. 1 (1983) .......................--..- 7

General Motors Corp. v. California State Board of

Equalization, 815 F.2d 1305 (9th Cir. 1987) ........ passim

General Motors Corp. v. California State Board of

Equalization, 600 F. Supp. 76 (C.D. Cal. 1984),

amended, 626 F. Supp. 439 (C.D. Cal. 1985) ........ 6

Group Life & Health Insurance Co. v. Royal Drug

ig Fe i STD iitcteerintictittermnrnnnhtibonmviti 16

Metropolitan Life Insurance Co. v. Massachusetts,

. §-s & 2: £_ eRe: sos passim

Metropolitan Insurance Co. v. California State

Board of Equalization, 32 Cal. 3d 649, 186 Cal.

Re Ne ID ceictencthesesdindinjet ah ctasesseciedasciatileReasidbcennnie 5, 12

Minnesota Chamber of Commerce and Industry v.

Hatch, No. Civil 4-87-707.(D. Minn. Oct. 29,

TED. cititadinintiiitinscsiitaisninisetaiiaenninlaniidtaiieladnta 11,17

Moore v. Provident Life and Accident Insurance

Co., 786 F.2d 922 (9th Cir. 1986) ........0.22200000.... 17

National Carriers’ Conference Comm. v. Heffernan,

454 F.. Supp. 914 (D. Conn. 1978) ......................... 8

Northern Group Services v. Auto Owners Insur-

¥ ance Co., No. 86-1614 (6th Cir. Nov. 13, 1987) .... 17

Park’n Fly, Inc. v. Dollar Park and Fly, Inc., 469

Oa UI I ithaca eile ahaa 14

Pilot Life Insurance Co. v. Dedeaux, 107 S. Ct.

RSE Reco we eee 7, 8,16

SEC v. National Securities, Inc., 393 U.S. 453

SIS aUNIITITIccchclich is ldeesisabineciostueneaenttitceadictnliediaiadiaaah ace iiniac. 15

Shaw v. Delta Air Lines, 463 U.S. 85 (1983)........ 8,11

Union Labor Life Insurance Co. v. Pireno, 458 U.S.

8 BE ES REP a or Ce ION SOS EO 16

United Food & Commercial Workers v. Pacyga, 801

fF: £ RRR e ann 17

v

TABLE OF AUTHORITIES—Continued

Statutes Page

The McCarran-Ferguson Act, 15 U.S.C. §§ 1011-

| RENTS, Seem re eb oy Seca eS ONT Se ae 4,6

= 5, RRS Raia eRe 4

i cai cndmndnebennanabinantans 4,14

Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. §§ 1001 e¢ seq. ....................... 2

ERISA § 3(1), 29 U.S.C. § 1002 (1) ................... 10

ERISA § 514(a), 29 U.S.C. § 1144(a) _............. 3, 7,8

ERISA § 514(b), 29 U.S.C. § 1144 (b) -............. 3, 6

ERISA §514(b)(2)(A), 29 U.S.C. § 1144

at Si hati seal cligsiileananiceceiatien 3, 14

ERISA §514(b)(2)(B), 29 U.S.C. § 1144

ESE RSE ne OE ea Se ee oe 3, 7, 16

ERISA §514(b)(5)(A), 29 U.S.C. § 1144

II Sirti te eens iets enpptaepsicectemanivaiensnnnianane 4

ERISA § 514(b) (5) (B) (i), 29 U.S.C. § 1144

SII diniionerciativdbnasnnienesitiniianssntimnoninnnssie 4,8

ERISA § 514(c), 29 U.S.C. § 1144 (c) ............... 4

Cal. Rev. & Tax Code § 12221 (West 1970 & 1987

i 1c ccsai ainlgadinpeynnnnsnaantingtiannnieibeenes 5

1987 Tex. Gen. Laws, 70th Leg., 2d C.S., Ch. 5,

a 12

Legislative Materials

Administration Recommendations to the House

and Senate Conferees on H.R. 2 to Provide for

Pension Reform (April 1974), reprinted in 3

Legislative History of the Employee Retirement

“Income Security Act of 1974 (“Legislative His-

ge RRR ora acer cree ee 8

H.R. Rep. No. 143, 79th Cong., 1st Sess. 2 (1945) .... 14

H.R. Rep. No. 655, 98th Cong., 2d Sess., pt. 1

3 eS see Rela chee Teer om mecrar ca Oe 9

S. Rep. No. 127, 93d Cong., 1st Sess. 35 (1973),

reprinted in 1 Legislative History, at 621........ 12

OE Came, Teme, Ge CO nnn... ense......... 14

Be I I COD aracccscse cs cccsstccnreisccenns 12

vi

TABLE OF AUTHORITIES—Continued

120 Cong. Rec. 29,983 (1974) ................................ settle

120 Cong. Rec. 29,942 (1974)... Ea

128 Cong. Rec. $13151 (daily ed. Oct. 1, 1982)........

128 Cong. Rec. H9609 (daily ed. Dec. 13, 1982)...

Other Authority

“Employee Welfare Benefit Plans and Plan Spon-

sors in the Private Nonfarm Sector in the

United States, 1978-79,” Health and Population

Study Center, Battelle Human Affairs Research

SE IRE 0 IO orttccercndecntscccascdeneesdscsncneces

Health Insurance Association of America, Source

Book of Health Insurance Data, 1982-1983...

United States Department of Labor, Bureau of

Labor Statistics, “Employee Benefits in Medium

and Large Firms,” 1986 (June 1987) _................

12

In THE

Supreme Court of the United States

OCTOBER TERM, 1987

Ne. 87-994

GENERAL Motors CORPORATION and

AMERICAN NATIONAL RED Cross,

¥, Petitioners,

WILLIAM M. BENNETT, Conway H. COLLIs,

ERNEST J. DRONENBURG, JR., RICHARD NEVINS,

GRAY DAVIS, and BRUCE BUNNER,

Respondents.

On Petition for a Writ of Certiorari to the United States

Court ef Appeals for the Ninth Circuit

BRIEF AMICI CURIAE FOR

AMERICAN COUNCIL OF LIFE INSURANCE AND

HEALTH INSURANCE ASSOCIATION OF AMERICA

IN SUPPORT OF THE PETITION

This brief is filed on behalf of the American Council

of Life Insurance (“Council”) and the Health Insurance

Association of America (“HIAA”), as amici curiae, in

support of the petition for certiorari.’

INTERESTS OF THE AMICI

The Council is the largest life insurance trade associa-

tion in the United States, representing the interests of

1 Consent from counsel for both parties has been filed with the

Clerk of this Court.

645 member life insurance companies. The Council’s

members, which include most of the country’s major life

insurers, currently hold ninety-five percent of the life

insurance in force in legal reserve life insurance com-

panies in the United States. The HIAA represents the

interests of 345 member companies, which provide ap-

proximately ninety percent of the health insurance writ-

ten by commercial insurance companies in the United

States. The combined memberships of the HIAA and the

Council represent over ninety percent of such health

insurance.

The insurance industry plays a critical role in provid-

ing welfare benefits to members of the nation’s work-

force through benefit plans governed by the Employee

Retirement Income Security Act of 1974 (“ERISA”), 29

U.S.C. §§ 1001 et seg. As of 1979, insurance companies

—including many members of the Council and the HIAA

—funded through group policies approximately 99 per-

cent of the benefit plans in the United States which cov-

ered fewer than 100 participants. See “Employee Wel-

fare Benefit Plans and Plan Sponsors in the Private Non-

farm Sector in the United States, 1978-79,” Health and

Population Study Center, Battelle Human Affairs Re-

search Centers, Vol. IV (1980), at 43-45. Approximately

92 percent of the plans in this country covering greater

than 100 participants were also funded in this way. /d.

In many instances, insurers assume administrative re-

sponsibilities for insured, partially-insured and _ self-

insured plans. Jd. Thus, members of the Council and

the HIAA make welfare benefit plans possible for count-

less employers—large and small—thereby ensuring that

the great mass of workers in this country receive some

form of life and health insurance protection.

The legal and practical consequences of the Ninth Cir-

cuit’s opinion below are matters of grave concern to the

members of the Council and the HIAA. That decision—

that ERISA does not preempt a state premium tax as-

sessed indirectly against the self-funded benefits of an

3

employee benefit plan simply because the plan purchases

excess-risk insurance—greatly limits the funding choices

available to employers who voluntarily establish those

plans and penalizes ERISA plans partially funded by em-

ployers. If the decision below stands, employers who bear

all of the risk of paying the uninsured benefits of such

plans will be subjected to the cost resulting from the tax

on those benefits merely because they purchase excess-

risk insurance.

STATUTES INVOLVED

1. Section 514(a) of ERISA provides, in pertinent

part, that:

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

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. § 1144(a).

2. Section 514(b) of ERISA provides, in pertinent

part, that:

(2)(A) Except as provided in subparagraph (B),

nothing in this subchapter shall be construed to

exempt or relieve any person from any law of any

State which regulates insurance, banking, or securi-

ties.

[(2)](B) Neither an employee benefit plan de-

scribed in section 1003(a) of this title, which is not

exempt under section 1002(b) of this title... nor

any trust established under such a plan, shall be

deemed to be an insurance company or other insurer

. or to be engaged in the business of insurance

. .. for purposes of any law of any State purporting

to regulate insurance companies, [or] insurance con-

tracts....

4

(5) (A) Except as provided in subparagraph (B),

subsection (a) of this section shall not apply to the

Hawaii Prepaid Health Care Act (Haw. Rev. Stat.

§§ 393-1 through 3938-51).

[(5)](B) Nothing in subparagraph (A) shall be

construed to exempt from subsection (a) of this

section—

(i) any State tax law relating to employee

benefit plans....

29 U.S.C. § 1144(b).

3. Section 514(c) of ERISA provides, in pertinent

part, that:

(1) The term “State law” includes all laws, deci-

sions, rules, regulations, or other State action having

the effect of law, of any State....

(2) The term “State” includes a State, any political

subdivisions thereof, or any agency or instrumental-

ity 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. § 1144(c).

4, The McCarran-Ferguson Act provides, in relevant

part, that:

[1011.] Congress declares that the continued regula-

tion and taxation by the several States of the busi-

ness of insurance is in the public interest, and that

silence on the part of the Congress shall not be con-

strued to impose any barrier to the regulation or

taxation of such business by the several States.

[1012.] (a) The business of insurance, and every

person engaged therein, shall be subject to the laws

of the several States which relate to the regulation or

taxation of such business.

(b) No Act of Congress shall be construed to in-

validate, impair, or supersede any law enacted by

any State for the purpose of regulating the business

5

of insurance, or which imposes a fee or tax upon

such business, unless such Act specifically relates to

the business of insurance....

15 U.S.C. §§ 1011-1012.

STATEMENT

General Motors Corporation (“GMC”) and the Amer-

ican National Red Cross (‘Red Cross”) sponsor ERISA-

covered plans which provide disability and health care

benefits to employees. They fund the plans with company

assets and “excess-risk” policies purchased from Metro-

politan Life Insurance Company (“Metropolitan”). Un-

der this funding arrangement, GMC and Red Cross bear

the risk of paying, out of their own funds, all claims

up to a specified level, i.e., the so-called “trigger point”.

Metropolitan pays all claims above the trigger point.

The State of California taxes “gross premiums...

received” by insurance companies that do business in the

State. Cal. Rev. & Tax Code § 12221 (West 1970 & 1987

Supp.). “Gross premiums” include, as a matter of judicial

construction, “the entire cost of an employee benefit

plan.” Metropolitan Life Insurance Co. v. State Board

of Equalization, 32 Cal. 3d 649, 186 Cal. Rptr. 578, 585

(1982). Thus, in calculating the tax imposed on excess-

risk insurers, California includes not only the actual pre-

miums received by insurers for their excess-risk policies,

but also the amount of benefits paid by employers, from

company assets, to plan beneficiaries. 7d. at 584-85.°

Consistent with state law, therefore, the California Board

of Equalization and its members (the “Board’’) assessed

a premium tax on Metropolitan, based on the premiums

paid to it by GMC and Red Cross plus the actual bene-

2 This construction is premised on the California Supreme Court’s

conclusions that employers who sponsor employee benefit plans are

“mere agents” of insurers, and that the benefits that these agents

pay to employees under such plans are in essence “premiums” paid

to the insurer to satisfy employee claims.

6

fits paid to beneficiaries under the plans. Pursuant to the

terms of their excess-risk policies, GMC and Red Cross,

in turn, reimbursed Metropolitan for the total premium

tax assessed.

THE PROCEEDINGS BELOW

GMC and Red Cross filed suit in the United States

District Court for the Central District of California,

claiming, inter alia, that California’s taxation practice

is preempted by ER!ISA. The district court agreed. Re-

jecting the Board’s argument that the premium tax

merely taxed the business of insurance, the court con-

cluded that calculating “gross premiums” by reference to

benefits paid under the plans represents an indirect tax

on the benefits themselves. Thus, it concluded that “this

taxation practice is preempted because it ‘relates to’...

the plans by using the plans’ payments as a means for

measuring taxable premiums.” Appendix at 23a, General

Motors Corp. v. California Board of Equalization, 600 F.

Supp. 76, 80 (C.D. Cal. 1984), amended, 626 F. Supp.

439 (C.D. Cal. 1985).

The Ninth Circuit reversed. At the outset, the court

agreed that the tax “‘relate[s] to’ benefit plans... [be-

cause it] is computed on the basis of benefits paid by the

plans.” Appendix at lla, General Motors Corp. v. Cali-

fornia Board of Equalization, 815 F.2d 1305, 1309 (9th

Cir. 1987). But, relying on this Court’s decision in

Metropolitan Life Insurance Co. v. Massachusetts, 471

U.S. 724 (1985) (“Metropolitan Life’), and the McCar-

ran-Ferguson Act, 15 U.S.C. §§ 1011-1012, it concluded

that ERISA’s insurance saving clause—which exempts

from preemption state laws that “regulat[e] insurance”,

ERISA § 514(b), 29 U.S.C. §1144(b)—preserves the

states’ ability to tax insurance as well. Appendix at 13a,

815 F.2d at 1810. Finding that California’s premium

tax “is intimately associated with the business of insur-

ance” and that the “incidence of the tax remains on the

insurer, not the plans,” the court held it to be saved

7

from ERISA’s preemptive reach. Jd. Turning to the

“final step” in the preemption analysis, it then concluded

that the tax “does not run afoul of the deemer clause

[29 U.S.C. § 1144(b) (2) (B)] . . . [because] [i]t is im-

posed on insurance companies, not benefit plans.” Ap-

pendix at 14a, 815 F.2d at 1311. Thus, the court con-

cluded that ERISA did not preempt California’s pre-

mium tax.

REASONS FOR GRANTING THE WRIT

1. The Court Below Decided An Important Issue Of Fed-

eral Law In A Manner Inconsistent With The Deci-

sions Of This Court

ERISA’s “deliberately expansive”, Pilot Life Insurance

Co. v. Dedeaux, 107 S.Ct. 1549, 1552 (1987), but elu-

sively crafted, preemption clause once again raises an

important issue for review by the Court: whether a state

premium tax, which is nominally assessed against insur-

ers but is calculated in part based on the level of benefits

paid under the self-funded portion of an ERISA plan,

escapes preemption as a law which “regulates insurance”

within the meaning of ERISA’s saving clause. The court

below held that it does. In doing so, it “[e]levat[ed] the

incidence of the tax [on the insurer] over [its] effects

[on ERISA plans]”—reading Metropolitan Life to re-

quire such a result. Appendix at 14a, General Motors

Corp. v. California Board of Equalization, 815 F.2d at

1310. This is a misapplication of ERISA, which should

be reviewed by this Court.

ERISA’s “virtually unique pre-emption provision,”

Franchise Tax Board v. Construction Laborers Vacation

Trust, 463 U.S. 1, 24 n.26 (1983), “supersede[s] any

and all State laws insofar as they may now or hereafter

relate to any employee benefit plan. . . .” 29 U.S.C.

§ 1144(a). Giving “[t]he phrase ‘relate to’ . . . its broad

common-sense meaning,” this Court has stated “that a

state law ‘relate[s] to’ a benefit plan ‘in the normal sense

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

&

such a plan.’” Metropolitan Life, 471 U.S. at 739, quot-

ing Shaw v. Delta Air Lines, 463 U.S. 85, 97 (1983).

Thus, “[ERISA’s] pre-emption clause is not limited to

‘state laws specifically designed to affect employee bene-

fit plans,’” Pilot Life Insurance Co. v. Dedeaux, 107 S.

Ct. at 1553, quoting Shaw v. Delta Air Lines, 463 U.S.

at 98, because “even indirect state action . . . may en-

croach upon the area of exclusive federal concern.”

Alesssi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 525

(1981) ; see also Metropolitan Life, 471 U.S. at 739.

California—with the endorsement of the court below—

has indirectly, but seriously, encroached upon ERISA’s

exclusive domain. Plainly, if California had taxed directly

a wholly self-insured employee benefit plan, in amounts

that increased concurrently with the level of benefits it

paid to beneficiaries, there would be no doubt that

ERISA would preempt the State’s action. See, e.g., Na-

tional Carriers’ Conference Committee v. Heffernan, 454

F. Supp. 914 (D. Conn. 1978) (state statute requiring

plans to pay an annual tax based on the amounts of bene-

fits paid held preempted by ERISA). Such a tax—no

differently than the premium tax at issue here—would

surely “relate to” an employee benefit plan.* The mere

3 The clear words of ERISA and its legislative history permit

no other result. Indeed, though specifically presented with a rec-

ommendation to exclude from preemption the states’ authority to

tax pension plans in 1974, Congress did not do so. See Administra-

tion Recommendations to the House and Senate Conferees on H.R.

2 to Provide for Pension Reform (April 1974), reprinted in 3

Legislative History of the Employee Retirement Income Security

Act of 1974 (“Legislative History’), at 5050, 5145-47. Moreover,

eight years later, when it created a narrow exception to ERISA’s

preemption clause for Hawaii’s health care statute, Congress re-

affirmed that ERISA preempts state tax laws. See 29 U.S.C.

§ 1144(b) (5) (B) (i) (Hawaii exemption “shall [not] be construed

to exempt from [§514(a)] any State tax law relating to employee

benefit plans”); see also 128 Cong. Rec. S13151 (daily ed. Oct. 1,

1982) (Senator Dole) (“Hawaii law ... would not be preempted

by ERISA to the extent that [it] does not relate to matters

9

fact that the “incidence” of California’s premium tax

rests on the plan’s excess-risk insurer, rather than the

plan itae'f, should not protect it from preemption as a

law whir® “regulates insurance”, particularly where the

insurer bears no risk of paying, and receives no pre-

miums for, the benefits subject to taxation. That such

taxation is, in substance, a tax on an ERISA plan—and

not, as its form might suggest, a tax on insurance—is

starkly evident where, as here, the plan sponsors fund

the taxed benefits with company assets, purchase insur-

ance only to cover excess plan liabilities, and bear the

entire risk of paying the uninsured benefits subject to

the tax.

The contrary conclusion of the court below rests on its

misinterpretation of - Metropolitan Life. Nothing in

Metropolitan Life, however, compels the court’s elevation

of form over substance. The Court in Metropolitan Life

narrowly held that a state statute regulating the content

of insurance policies was saved from preemption by

ERISA as a law that “regulates insurance”. But the

Court did not hold, as the court below found, that “effects

are not determinative’ in ERISA preemption analysis.

Appendix at 14a, 815 F.2d at 1311. Nor did it implicitly

hold that ERISA’s saving clause protects indirect state

taxation of ERISA plans that self-insure all but excess

plan liabilities. Review is thus necessary to correct the

thoroughly regulated under ERISA or impose tax liability on in-

surance premiums or benefits”); 128 Cong. Rec. H9609 (daily ed.

Dec. 13, 1982) (Representative Erlenborn) (“amendments .. .

serve to reaffirm the broad Federal preemption of State laws as

they relate to employee benefit plans as was the original intent of

ERISA”). Congress did so again when, in 1984, it carved out an

exception to § 514 for qualified state domestic relations orders. See,

e.g., H.R. Rep. No. 655, 98th Cong., 2d Sess., pt. 1, at 42 (1984)

(“the original broad intent behind ERISA’s rule of preemption

. . . has always been to preempt state or local government laws

or actions of any type which directly or indirectly relate to any

employee benefit plan subject to ERISA. ... [T]he Committee

reasserts that a state tax levy on employee welfare benefit plans

is preempted by ERISA”).

10

Ninth Circuit’s misapplication of Metropolitan Life and

to “preclude [California] from avoiding through form

the substance of [ERISA’s] preemption provision.”

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. at 525.

2. The Decision Below Has A Far-Reaching And Im-

permissible Impact On Plan Funding Decisions

California’s indirect taxation practice encroaches on

ERISA’s exclusive domain in yet another way: it under-

cuts employer discretion to fund employee welfare bene-

fit plans “through the purchase of insurance or other-

wise.” 29 U.S.C. §1002(1). Because the decision below

effectively eliminates one method of plan funding—a

combination of company assets and excess-risk insurance

—and disrupts the uniform administration of benefit

plans that ERISA was designed to foster, this Court

should review it.

The decision below—that ERISA does not preempt a

state premium tax assessed indirectly against the self-

funded benefits of an ERISA plan simply because the

plan purchases excess-risk insurance—greatly limits the

funding choices available to employers who voluntarily

establish ERISA plans. The practical effect of the deci-

sion below is to inflate, perhaps prohibitively, the cost of

excess-risk insurance to plan sponsors and thus to dis-

courage their reliance on innovative funding methods.

By discouraging excess-risk insurance, the decision would

leave plans vulnerable to catastrophic losses that may

deplete plan assets substantially, if not entirely. Cali-

fornia’s practice thus penalizes creative compromises that

might lower costs for both employers and insurers and

might encourage the growth of benefit plans.

Such results are entirely at odds with the words and

intent of ERISA. Because the decision below effectively

eliminates a method of funding that ERISA permits, it

intrudes on ERISA’s exclusive domain. Cf. Alessi v.

Raybestos-Manhattan, Ine., 451 U.S. at 524 (New

Jersey statute which prohibits offsetting pension ben-

11

efits with workers’ compensation benefits held pre-

empted by ERISA “because it eliminates one method for

calculating pension benefits—integration—that is per-

mitted by federal law” and that ERISA left subject to

the discretion of pension plan sponsors). Indeed, if states,

like California, are permitted to interfere with employer

discretion by encouraging or discouraging certain fund-

ing methods, employers who operate—and insurers who

provide insurance for—multi-state plans will be forced to

conform to a patchwork of state-preferred funding meth-

ods or eliminate their plans altogether. But, as this

Court stated in Shaw v. Delta Air Lines, Inc., 463 U.S.

at 105 and n.25, and recently reiterated in Fort Halifax

Packing Co. v. Coyne, 107 S. Ct. 2211 (1987), subjecting

employers with nationwide plans to the varied, and per-

haps inconsistent, requirements of different states’ laws:

would produce considerable inefficiencies, which the

employer might choose to offset by lowering benefit

levels. . . . ‘ERISA’s comprehensive preemption of

state law was meant to minimize this sort of inter-

ference with the administration of employee benefit

plans,’ . . . so that employers would not have to

‘administer their plans differently in each State in

which they have employees.’

Id. at 2217 (citation omitted). Cf. Minnesota Chamber

of Commerce and Industry v. Hatch, No. Civil 4-87-707

(D. Minn. Oct. 29, 1987) (“If such ownership of [stop-

loss] insurance were enough to prevent ERISA preemp-

tion, plan providers would be subject to a myriad of state

regulation which would operate to frustrate ERISA’s

uniform treatment of benefit plans.’’) .*

* Any other conclusion would disregard Congress’ explicit intent

to provide for uniformity in the administration of ERISA plans:

Except ... in certain ... enumerated circumstances, state law

is preempted. Because of the interstate character of employee

benefit plans, the Committee believes it essential to provide for

a uniform source of law in the areas of vesting, funding, in-

surance and portability standards, for evaluating fiduciary con-

12

The impact of the decision below on employee benefit

plan administration is thus potentially far-reaching. The

disincentives spawned by California’s taxing scheme seri-

ously threaten the stability of multi-state employee bene-

fit plans which rely in part on insurance funding or the

administrative services of insurers. It threatens re-

versal of a trend away from fully-insured plans to self-

funded plans which rely on insurers only for excess lia-

bility coverage or administrative services. Indeed, while

less than five percent of total insurance company group

coverage in 1975 consisted of such innovative funding

arrangements, like that at issue here, those arrangements

represented an estimated 30 percent of the total insur-

ance group coverage in 1981. See HIAA, Source Book of

Health Insurance Data, 1982-1983, at 8. Moreover, that

duct, and for creating a single reporting and disclosure system

in lieu of burdensome multiple reports.

S. Rep. No. 127, 93d Cong., Ist Sess. 35 (1973), reprinted in 1 Leg-

islative History, at 621 (emphasis added); see also 120 Cong. Rec.

29,197 (1974) (Representative Dent) (broad federal preemption

was designed to eliminate “the threat of conflicting and inconsistent

State and local regulations”) ; 120 Cong. Rec. 29,933 (Senator Wil-

liams) (“the substantive and enforcement provisions .. . are in-

tended to preempt the field for Federal regulations, thus eliminating

the threat of conflicting or inconsistent State and local regulation of

employee benefit plans”); 120 Cong. Rec. 29,942 (1974) (Senator

Javits) (“the emergence of a comprehensive and pervasive Federal

interest and the interests of uniformity with respect to interstate

plans required—but for certain exceptions—the displacement of

State action in the field of private employee benefit programs”).

5 Because California taxes “the entire cost of an employee bene-

fit plan,” Metropolitan Life Insurance Co. v. State Board of Equali-

zation, 32 Cal. 3d 649, 186 Cal. Rptr. 578, 585 (1982), even plans

that purchase only the administrative services of an insurance com-

pany may be subject to the tax. Moreover, the effect of the decision

below is only amplified by the fact that California’s taxing practice

is not unique. Indeed, Texas has recently enacted, and Michigan

considered adopting, a similar practice. See 1987 Tex. Gen. Laws,

70th Leg., 2d C.S., Ch. 5, Art. 8, p. 57. That more states may follow

suit. in the wake of the decision below, is hardly unexpected.

Ae ee RC LO PEE BSD AA OED Es C40 7 + ~~ CDE

NR wa ote

13

trend has continued. A recent study reveals that over 80

percent of employees receiving employer-provided health

care benefits in 1980 were covered by commercial insur-

ance carrier and Blue Cross-Blue Shield policies. See

United States Department of Labor, Bureau of Labor

Statistics, “Employee Benefits in Medium and Large

Firms,” 1986 (June 1987), at 32 and Table 47. Such

policies accounted for only one-half or less of health care

coverage in 1986. /d.

Review of the decision below is thus vitally important.

To deny review, and thereby leave intact state taxing

practices like California’s, would only create disuniformi-

ties in plan administration and discourage innovative

funding methods—and thus the provision of welfare bene-

fits to the nation’s workers—in clear derogation of

ERISA.

3. The Decision Below Presents An Opportunity To Clar-

ify The Respective Roles Of ERISA’s Saving And

Deemer Clauses

Review is‘ necessary for still another reason: the court

below gave ERISA’s saving clause an unduly broad read-

ing, and construed the deemer clause too narrowly, when

it held that a state premium tax calculated with refer-

ence to the level of benefits paid under the self-funded

portion of an ERISA plan is not preempted by ERISA.

The decision below neither comports with a “common-

sense” interpretation of ERISA’s insurance saving clause,

read in light of Metropolitan Life and the McCarran-

Ferguson Act, nor gives due consideration to ERISA’s

proscription against “deeming” plans to be engaged in

the “business of insurance.”

14

ERISA saves from preemption “any law of any State

which regulates insurance.” 29 U.S.C. § 1144(b) (2) (A)

(emphasis added). “[T]he language employed by Con-

gress and the assumption that the ordinary meaning of

that language accurately expresses the legislative pur-

pose,” Metropolitan Life, 471 U.S. at 740, quoting Park’n

Fly, Ine. v. Dollar Park and Fly, Inc., 469 U.S. 189, 194

(1985), strongly suggest that ERISA saves from pre-

emption only state regulation of insurance, and not, as

the court below found, state taxation of the self-insured

benefits of an ERISA plan.* That such state tax laws

do not constitute insurance regulation draws support

from Metropolitan Life. In that case, the Court—as it

has in interpreting other words in ERISA—gave the

phrase “regulates insurance” its practical and “common-

sense” meaning. Metropolitan Life, 471 U.S. at 740. It

6 The McCarran-Ferguson Act, which provides in part that “[t]he

business of insurance... shall be subject to the laws of the several

States which relate to the regulation or taxation of such business,”

15 U.S.C. § 1012(a) (emphasis added), was obviously in mind when

Congress saved from ERISA preemption state laws that “regu-

lat[e] insurance.” See Metropolitan Life, 471 U.S. at 744 n.21. The

omission from the saving clause of any reference to state laws

which “tax” insurance is conspicuous when the language of the two

clauses is carefully considered. Congress surely meant something

different by the terms “regulation” and “taxation”, as the words of

the McCarran-Ferguson Act and its legislative history amply re-

flect. See H.R. Rep. No. 143, 79th Cong., Ist Sess. 2 (1945) (bill

designed to address questions as to the “validity of State tax laws

as well as State regulatory provisions”) ; 91 Cong. Rec. 480-81, 48%

(Jan. 25, 1945) (Senators Ferguson and Radcliffe); id. at 485-86

(Senator Revercomb); id. at 487 (Senator Ellender). Whether

Congress intended, when it omitted “taxation” from the saving

‘clause, to leave ERISA’s expansive preemption clause effective as

to state taxation of the self-insured portion of a partially-insured

ERISA plan warrants consideration by this Court.

15

thus concluded that Massachusetts’ mandated-benefits law

was saved from preemption as a law which “regulates

insurance,” noting that regulation of the content of in-

surance contracts—no differently than “regulation of

the carrier [and] regulation of the sale and advertising

of the insurance”, id. at 728—is precisely the type of

state insurance regulation that the McCarran-Ferguson

Act preserves."

Regulation of the substantive terms of insurance con-

tracts, however, is distinctly different from the tax prac-

tice at issue here. Unlike the mandated-benefits law at

issue in Metropolitan Life, the California tax involved

here does not “regulate” the content. of insurance con-

tracts in California. Nor, given its ‘substantive impact

on ERISA plans, can the tax reasonably be found to

“regulate” insurers and their transacting of insurance

business within the State. To hold otherwise, and apply

California’s taxing practice to the self-funded portion

of an employee benefit plan, would attribute to the phrase

“regulates insurance” an overly broad meaning which

makes little common sense.

7 Indeed, the Court in Metropolitan Life articulated its inter-

pretation of “regulation” with clarity. To illustrate the types of

state insurance regulation preserved by the McCarran-Ferguson

Act, it explained (id. at 728 n.2) (citation omitted and emphasis

added) :

Laws regulating the insurer include, for example, those govern-

ing solvency or the qualification of management. Laws regulat-

ing aspects of transacting the business of group insurance in-

clude, for example, those regulating claims practices or rates.

Finally, laws regulating the content of group policies include,

in addition to the mandated-benefit statutes under considera-

tion here, those requiring the policies to provide grace periods

and conversion privileges. ... All three varieties of regulation

are common.

See also SEC v. National Securities, Inc., 393 U.S. 453, 460 (1969)

(“Congress was concerned [in the McCarran-Ferguson Act] with

the type of state regulation that centers around the contract of

insurance. ..”’).

16

That California’s tax practice does not “regulat(e] in-

surance” also draws support from this Court’s decisions

under the McCarran-Ferguson Act. Specifically, this

Court has articulated three criteria for determining

whether a particular activity constitutes the “business of

insurance” within the meaning of the McCarran-

Ferguson Act: “first, whether the practice has the effect

of transferring or spreading a policyholder’s risk; second,

whether the practice is an integral part of the policy

relationship between the insurer and the insured; and

third, whether the practice is limited to entities within

the insurance industry.” Union Labor Life Insurance

Co. v. Pireno, 458 U.S. 119, 129 (1982). Applying these

criteria to determine whether a state ‘aw “regulates in-

surance” within the meaning of ERISA’s saving clause,

as this Court did in Metropolitan Life, 471 U.S. at 742-

44, and Pilot Life Insurance Co. v. Dedeaux, 107 8S. Ct.

at 1553-55, suggests that the tax practice at issue here is

not saved from preemption. At a minimum, a state tax-

ing practice which, though nominally an insurance law,

taxes the self-insured benefits of an ERISA plan does not

regulate the spreading or transferring of the pulicyhold-

er’s risk, which is the “one ‘indispensable characteristic

of insurance’.” Union Labor Life Ins. Co. v. Pireno, 458

U.S. at 127, quoting Group Life & Health Insurance Co.

v. Royal Drug Co., 440 U.S. 205, 211-12 (1979).

Further, the court below read ERISA’s “deemer”

clause too restrictively when it concluded that Califor-

nia’s indirect taxation of plan benefits did not “run afoul

of the deemer clause.” Appendix at 14a, 815 F.2d at

1311. That clause prevides that “{no] employee benefit

plan . .. shall be deemed to be an insurance company

. or to be engaged in the business of insurance...

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

late insurance companies. . . .” 29 U.S.C. § 1144(b) (2)

(B) (emphasis added). Through its tax practice, Cali-

fornia certainly “purport[s] to regulate insurance com-

17

panies.” Jd. But, in effect, it taxes the self-insured bene-

fits of ERISA plans. Because it effectuates this taxation

by treating plan sponsors as the excess-risk insurer’s

“agents”—though the plan itself bears all the risk of

paying pre-trigger benefits—and by treating benefit pay-

ments to plan participants as insurance “premiums”,

California necessarily deems the plan to be engaged in

the “business of insurance” in violation of ERISA’s

deemer clause.*

Only this Court can correct the misapplication of

ERISA’s saving and deemer clauses by the court below.

Resolving the question whether these clauses, properly

construed, protect from preemption indirect state taxa-

tion of the self-insured benefits of an ERISA plan is

critically important to states, insurers and plan ad-

ministrators alike. Review by this Court is required to

avoid continued struggle—with numerous cases in the

lower courts—over the proper interpretation of ERISA’s

preemption clauses and to preserve ERISA’s primacy in

the field of employee benefits.

® The conclusion that the deemer clause precludes California’s

taxing practice draws support from the cases—including some

within the Ninth Circuit—that have concluded that the deemer

clause protects self-insured plans even if the plans purchase excess

insurance. See, e.g., United Food & Commercial Workers, et al. v.

Pacyga, 801 F.2d 1157, 1161-62 (9th Cir. 1986) ; Moore v. Provident

Life and Accident Insurance Co., 786 F.2d 922, 927 (9th Cir. 1986) ;

Minnesota Chamber of Commerce and Industry v. Hatch, No. Civil

4-87-707 (D. Minn. Oct. 28, 1987). But ef. Northern Group Serv-

ices, Inc. v. Auto Owners Insurance Co., No. 86-1614 (6th Cir.

Nov. 12, 1987) (holding self-insured plans to be subject to state

“coordination of benefits” regulation, court concluded that the

deemer clause overrides the saving clause only when there is “some

ERISA interest in uniformity to outweigh the McCarran-Ferguson

interest in state regulation of insurance”).

18

CONCLUSION

For the reasons set forth above and for the additional

reasons advanced in the Petition, the writ of certiorari

should be granted.

Respectfully submitted,

Of Counsel; ERWIN N. GRISWOLD

JACK H. BLAINE Counsel of Record

Vice President, State Relations, | PATRICIA A. DUNN

and General Counsel JONES, DAY, REAVIS & POGUE

PHILLIP E. STANO Metropolitan Square

Senior Counsel 1450 G Street, N.W.

AMERICAN COUNCIL OF LIFE Washington, D.C. 20005-5701

INSURANCE (202) 879-3939

1001 Pennsylvania Avenue, N.W. Counsel for the Amici

Washington, D.C. 20004-2599

(202) 624-2183

JOE W. PEEL a

Vice President and

General Counsel

JANA LEE PRUITT

Assistant Counsel

HEALTH INSURANCE ASSOCIATION

OF AMERICA

1025 Connecticut Avenue, N.W.

Suite 1200

Washington, D.C. 20036-3998

(202) 223-7780

December, 1987

sins ite

i P Me

ane .

a4