Petition for Writ of Certiorari — American Medical Security, Inc. v. Skilstaf, Inc.

IN THE

Supreme Court of the United States

AMERICAN MEDICAL SECURITY, INC.,

Petitioner,

~Y,

SKILSTAF, INC.,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

PETITION FOR WRIT OF CERTIORARI

PAUL J. ONDRASIK, JR.

Counsel of Record

ERIC G. SERRON

STEPTOE & JOHNSON LLP

1330 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 429-3000

Attorneys for Petitioner

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D. C. 20001

QUESTIONS PRESENTED

1. Whether Section 514(a) of the Employee Retirement

Income Security Act (“ERISA”) preempts state law claims,

including a claim for punitive damages, brought by a self-

funded employee benefit plan’s sponsor against the plan’s

third-party administrator arising out of the administrator’s

processing of benefit claims.

2. Whether Section 514(a) of ERISA preempts state law

claims, including a claim for punitive damages, based upon

alleged self-dealing and conflicts of interest in the processing

of benefit claims by a third-party administrator responsible

for reviewing denied claims under an employee benefit plan’s

statutorily-mandated claims procedure.

(i)

ii

PARTIES TO THE PROCEEDING BELOW

Plaintiff

Skilstaf, Inc.

Defendants

American Medical Security, Inc.

United Wisconsin Life Insurance Company

iii

RULE 29.6 STATEMENT

Pursuant to Supreme Court Rule 29.1, Petitioner American

Medical Security, Inc. discloses that its parent is American

Security Holdings, Inc., which in turn is a wholly owned

subsidiary of American Medical Security Group, Inc. Blue

Cross and Blue Shield of Wisconsin owns 44.9 percent of

American Medical Security Group, Inc.’s stock. Blue Cross

and Blue Shield of Wisconsin is a wholly owned subsidiary

of Cobalt Corporation.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED. .....ccccccscccsccossscsceccsoecesessose i

PARTIES TO THE PROCEEDING BELOW................. il

RULE 296 Si A ERIIUE ccsinsnscssesrintesnssstnnssnsnssnanammnsten ili

TABLES Gi ARPT RIIIRRE ERED ssccassssrisnttscaniacdssnsnobensinabliie Vii

_ PETITION FOR A WRIT OF CERTIORARI............... l

OPINIONS AND ORDERS BELOW ..............cessssesees l

FURS Be cainsscctaricsenissitdililibbassniininiantasiiiiiciasassiaiisniienian l

STATUTES AND REGULATIONS INVOLVED........ l

STATEMENT OF THE CASE ccccccceccsssssssccssoacsassonssscsees I

Pas FI siissssinncenserintoatncnatiimiaitndsintdahabuaninipaaliadeniaes 2

BD. PROCOOGIAES TINO ciscariisanstnvrnssnsitatenioonanincigatinn 5

REASONS FOR GRANTING THE PETITION ........... 6

I. THE ELEVENTH CIRCUIT’S DECISION

ALLOWS STATE LAW STANDARDS TO

INTRUDE INTO THE CLAIMS PROCE-

DURE MANDATED BY ERISA.............:0cse0008 9

Il. ALLOWING SPONSORS TO _ ASSERT

| STATE LAW CLAIMS FOR IMPROPER

CLAIMS PROCESSING WOULD INHIBIT

RESPONSIBLE DECISION-MAKING, _IN-

CREASE EMPLOYEE BENEFIT PLAN

COSTS, AND DETER QUALIFIED PER-

SONS FROM PROVIDING ADMINIS-

TRATIVE SERVICES TO PLANG............0s00000 12

Il. THIS COURT’S GUIDANCE IS NEEDED TO

RESOLVE CONFUSION OVER’ THE

APPLICATION OF ERISA PREEMPTION

TO STATE LAW CLAIMS AGAINST

THIRD-PARTY ADMINISTRATORS. ............... 15

(v)

vi

TABLE OF CONTENTS—Continued

Page

IV. THE ELEVENTH CIRCUIT’S DECISION

UNDERMINES CONGRESS'S INTENT TO

PROVIDE UNIFORM STANDARDS OF

FIDUCIARY CONDUCT AND EXCLUSIVE

REMEDIES FOR FIDUCIARY BREACHES ... 18

V. THE QUESTIONS PRESENTED BY THIS

PETITION HOLD IMPORTANT IMPLICA-

TIONS FOR THE INTEGRITY OF THE

CLAIMS PROCESSING FUNCTION PER-

FORMED ON BEHALF OF EMPLOYEE

PRIEGEIE CE © CFOS UI ccxcevesenscncscvenssosenanesncnnenstennsnsese 22

COLIN EATIBIAIEN cccneccncscensnnvecsesunsnneseennnnnssnansesnssieneohionniien 24

vii

TABLE OF AUTHORITIES

CASE Page

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

Pe (PIG cncnstsicssccnsetnnbedunsnmionnserensentnamentesnscenbese 6

American Federation of Unions Local 102

Health & Welfare Fund v. Equitable Life

Assurance Soc’y, 841 F.2d 658 (Sth Cir.

Analytical Surveys, Inc. v. Intercare Health

Plans, Inc., 101 F. Supp. 2d 727 (S.D. Ind.

SEED dincsictitcintanemsnnitiensnnannietinndcinuatiiinbictnnitintaliatenioe 17

BMW of N. America, Inc. v. Gore, 517 U.S. 559

PIPED echinintcinnnsntiinsitendncsnapinsnsinsininviadistninataiisipninatenin 14

Boggs v. Boggs, 520 U.S. 833 (1997) x.........ccceeeeee 6

Browning-Ferris Industries v. Kelco Disposal,

CE Ee Es SPE CaP Oe as citncessisetinninennsininninin 14, 15

City of Newport v. Fact Concerts, Inc., 453 U.S.

SE Cae Pein rinttincnniictnreniacstenintineninsnaniecmnrecsinnneines 13

Cooper Industries v. Leatherman Tool Group,

Bb, TE IG, CFS Ge Peccsnicncsscasinnccinsnsinnense 14

Coyne & Delany Co. v. Selman, 98 F.3d 1457

CR, Bi cnisapncncscnsinnntsisnntinssininnnentnesnninenccsne 17

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

Te (PPD asic biininttensiniesinantinticiimesianntabstnbhniniandanes 10

Egelhoff v. Egelhoff ex rel. Breiner, 121 S. Ct.

SSEZ CAGE ) cccccccsscsvssenseccvncsnsssesscensssenecssosonssseecses passim

FMC Corp. v. Holliday, 498 U.S. 52 (1990) ......... 11, 16

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

CRIED Pinvsninisadettsntcipictanniinienecsintntnnnniisstiniunanintinaeii passim

Fox, Curtis & Associates v. Employee Benefit

Plans, Inc., No. 92-C-5828, 1993 WL 2605474

oe SS ern 18

Geweke Ford v. St. Joseph's Omni Preferred

Care Inc., 130 F.3d 1355 (9th Cir. 1997) .......... 17

Harold Ives Trucking Co. v. Spradley & C oker,

Inc., 178 F.3d 523 (8th Cir. 1999) ..........ccccceeeee 20 :

Vili

TABLE OF AUTHORITIES—Continued

Page

Harris Trust & Savings Bank v. Salomon Smith

Barney, Inc., 530 U.S. 238 (2000) .........ccccceeeees 21

Hartford Fire Insurance Co. v. E.A. Sween Co.,

920 F. Supp. 1021 (D. Minn. 1996)............00008 17

Hughes Supply, Inc. v. Robey-Barber Insurance

Services, No. 99-2904-Civ-T-17C, 2000 WL

782954 (M.D. Fla. June 5, 2000) ...........:seeceeees 17

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

Eat chsuscenaniatainniaieaienianeniteaniabpeedsenteninantnbigeinds 8, 12,21

International Brotherhood of Electrical Workers

v. Foust, 442 U.S. 42 (1979).......ccccssccssscessecossees 13,14

Kentucky Association of Health Plans, Inc. v.

Nichols, 227 F.3d 352 (6th Cir. 2000), petition

for cert. filed, 69 U.S.L.W. 3646 (Mar. 22,

a ST OD ticctciinitinicentinntiianiiniinnnnecin 8

Kyle Railways v. Pacific Admin. Servs., 990 F.2d

FAD CONE ee Pe Pitricacesiseninensetsantinseanipresnintacses 17

Libbey-Owens-Ford Co. v. Blue Cross & Blue

Shield Mutual, 982 F.2d 1031 (6th Cir.), cert.

Gamied, SIO US. BID (1DFS) mccccccrsecrocccssesoscceseces 20

Lockheed Corp. v. Spink, 517 U.S. 882 (1996)...... 20

Massachusetts Mutual Life Insurance Co. v.

Russell, 473 U.S. 134 (1985) .....cccccccsccccssssscosseee passim

Mertens v. Hewitt Associates, 508 U.S. 248

CR cscccezopsnntncssnensiuiabinensiicnssosesiitinibenindstighanenbeastios passim

NLRB vy. Amax Coal Co., 453 U.S. 322 (1981)...... 13

New York State Conf. of Blue Cross & Blue

Shield Plans v. Travelers Insurance Co., 514

Stes Ce Cr Piceecitintitncapinccianeisitsianqnintthneaatithonve 7

Pacific Mutual Life Insurance Co. v. a 499

ae Cer ictiniiccstiliitiasihinnssichinnsiesiliinhioaniagiigabniin 14

_ Pegram v. Herdrich, 530 U.S. 211 (2000)............. passim

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

ESTE F Pitsicinncisncbavcsddenddtcnliakbdasiadbiniieabinanhetibiitinendidube passim

ix

TABLE OF AUTHORITIES—Continued

Page

Reich v. Lancaster, 55 F.3d 1034 (Sth Cir.

PIE iniciiisatsdieaiiaandahintinkigacedasiaibukssnteniabegsnbatbuansaloks 19

Rush Prudential HMO, Inc. v. Moran, 230 F.3d

959 (7th Cir. 2000), cert. granted, 121 S. Ct.

ME CITED Litusditsdintiaiiciaarintatainbesensarpisddundvesnsediniie 8

Smith v. Wade, 461 U.S. 30 (1983) .........ccseseeseees 13, 14

TXO Production Corp. v. Alliance Resources

CR, ee Gras FF Ie Risetesbcndesicisnicohsnsssierase 14

The Sixty-Five Security Plan v. Blue Cross &

Blue Shield, 583 F. Supp. 380 (S.D.N.Y.

ROD sissseieataditiepiibbnainstiaiictdiitaidsh a diibeniabebiibitasbonde 20

Tie Communications, Inc. v. First Health

Strategies, Inc., No. Civ-A-97-2597-EEO,

1998 WL 171126 (D. Kan. Mar. 3, 1998).......... 17

Tri-State Machine, Inc. v. Nationwide Insurance

Co., 33 F.3d 309 (4th Cir. 1994), cert. denied,

FE Brie Fe CU das cthensncscsosastenintbaceabisiiansicies passim

Union Health Care, Inc. v. John Alden Life

Insurance Co., 908 F. Supp. 429 (S.D. Miss.

STATUTES

i cbs dailibdnetnilion 17

Varity Corp. v. Howe, 516 U.S. 489 (1996) .......... 18

ae ei siihsniasnindiianicibbaisiduieahianiisnnlaiontiabien 5

Be TMG EF wekannitantecsodaciabsdscnndibatiadandinienans I

ERISA § 3(21)(A)(iii), 29 U.S.C. § 1002(21)

PRREET TS TE eR Rc NE 7 RITE EO PON RO OE TE passim

ERISA § 101(a)(1), 29 U.S.C. § 1021(a)(1).......... 10

ERISA § 102(b), 29 U.S.C. § 1022(b)..............0006 10

ERISA §§ 401-14, 29 U.S.C. §§ 1101-14.............. 7, 18

ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)

RAAT RAS Se Ee NFO Na EA CE OOP passim

ERISA § 406(b), 29 U.S.C. § 1106(b)................... 1, 8, 20

X

TABLE OF AUTHORITIES—Continued

Page

ERISA § 409(a), 29 U.S.C. § 1109(a) «0.0.0.0... eee 20

ERISA § 502(a), 29 U.S.C. § 1132(a) .............se0ee 1,7

ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2).......... 12

ERISA § 502(a)(3) 29 U.S.C. § 1132(a)(3)....... 12, 13, 21

ERISA § 502(g), 29 U.S.C. § 1132(g)......... esses 21

ERISA § 502(1), 29 U.S.C. § 1132(I)...............ce0ee 21

BRERA, © SUB, FO UG, FN ccicsescstscenesicncones passim

ERISA § 503(2), 29 U.S.C. § 1133(2)............... 10, 19, 23

ERISA § 514(a), 29 U.S.C. § 1144(a) .... a Re

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

CIT weinitiesscncsiisditeslsiipainsasinetstinsdtashenpenntunsabiinennniiaiaiainisn 1]

REGULATIONS

BP CP RR SFr GG ceittsstiinnivnisisinnanins a2, 23

SOS A a RIED sivcsnncnniissnnvtitnsaiens 19, 22, 23

29 CER, § ZISOAIID- ZIG ) .ccrcecsessssscnseisccssccsason 20

BP eS El hteitnssencinetineiciianaiaiiiainns 1,11, 19

BP Ce hk ee TD) sitenicncintstiniannicaniiaanomiiinin 10

29 CER. § 25GO.SUS-1(OU 1B) ncsccrccccesecoccrscssseess 10

EO eS RI atnininnmsviscninnimnndapiiiinte 10

ee es a Be tcncenstcithimmniinninticiiins 11, 12

2 CF ie S Ga NS ececensttnvternnscnnzaninesiiins 10

Be les OB SUERTE ED cacehscnssncantionsstsicinicinnns 10

29 C.F.R. § 2560.503-1(t)(1)(1)..........:cccesercessseeees 10

Be GE le © Be IED vacccicsentchatooiencnintiantviio 12

BP CE Ris © FD iicitbidinteidiiniepiriesennaniens 11

42 Fed. Reg. 27,426 (May 27, 1977) ..........cseeceeerss 19

65 Fed. Reg. 70,246 (Nov. 21, 2000)...............c0006 11

CONGRESSIONAL MATERIALS

H.R. Rep. No. 93-533 (1973), reprinted in 1974

SF acdc le MET tasitciasnnaeeninienidabibienesedeineniisien passim

120 Cong, Rec. Z9,197 (1976) ..ccrcocsrccrressoncesnessssies 7,18

120 Cong, Rec. 29,933 C1DTS) ..cecsescsecesssocsaseocsceees 6, 18

xi

TABLE OF AUTHORITIES—Continued

MISCELLANEOUS

Employee Benefits Research Institute, Employ-

ment-Based Health Care Benefits and Self-

Funded Employment-Based Plans: An Over-

RGR Ea Ry

Employee Benefits Research Institute, /ssue Brief

ee FE Ne FN ict datbscsidsscasehdacuensinidaioans

PWBA Press Release 01-31 (July 6, 2001)............

U.S. Dep’t of Labor, Pension & Welfare Benefits

Administration, Annual Performance Plan—

PIE A MI in is cabin hepicsiassicaanincdaninnenice

Page

16

16

11

22

PETITION FOR A WRIT OF CERTIORARI

Petitioner American Medical Security, Inc. (“AMS”)

respectfully prays that a writ of certiorari issue to review the

judgment of the United States Court of Appeals for the

Eleventh Circuit entered on March 9, 2001.

OPINIONS AND ORDERS BELOW

The unpublished decision of the court of appeals is

reported at 251 F.3d 163 (table) and is reproduced in the

Appendix (“App.”) at 3a to 4a. The Eleventh Circuit’s

unpublished order denying AMS’s petition for rehearing is

available at 2001 U.S. App. LEXIS 15575 and is reproduced

at la to 2a. The unpublished orders and judgment of the

United States District Court for the Middle District of

Alabama are reproduced at 5a to 48a.

JURISDICTION

The judgment of the court of appeals was entered on

March 9, 2001. Its order denying Petitioner’s timely petition

for rehearing en banc was filed on May 4, 2001. The

jurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

STATUTES AND REGULATIONS INVOLVED

This case involves Sections 3(21)(A)(iii), 404(a)(1)(A),

406(b), 502(a), 503, and 514(a) of the Employee Retire-

ment Income Security Act of 1974 (“ERISA”), 29 U.S.C.

§§ 1002(21)(A)(iii), 1104(a)(1)(A), 1106(b), 1132(a), 1133,

and 1144(a), and 29 C.F.R. § 2560.503-1 promulgated under

Section 503 of ERISA. These provisions are reproduced at

49a to 64a. 4

STATEMENT OF THE CASE

The sponsor of an employee benefit plan brought state law

claims against AMS, a third-party administrator responsible

for administering the plan’s ERISA-mandated benefit claims

2

review procedure. The state law claims included claims for

breach of fiduciary duty and “wantonness” based on AMS’s

alleged systematic delay in processing benefit claims to

benefit itself financially. The case was tried before a jury in

August 1999, the district court having previously rejected

AMS’s argument that ERISA preempted plaintiff’s state law

claims. The jury awarded plaintiff $6,902,576, which

included $1,422,576 in compensatory damages on _ the

fiduciary breach claim and $5,000,000 in punitive damages

on the “wantonness” claim.

A. Facts

Respondent Skilstaf’s predecessor, Stafco, Inc. (hereafter

“Skilstaf”’), established a self-funded employee benefit plan

(“Plan”) to provide health care benefits to its employees. In

September 1992, Skilstaf entered into an Administrative

Services Agreement (“Agreement”) with petitioner AMS.

Under the Agreement, AMS agreed to prepare a summary

plan description for the Plan’s participants, secure excess loss

insurance for Skilstaf, and perform certain administrative

functions with respect to the Plan. AMS’s administrative

functions included: processing benefit claims; paying

benefits from an account funded by Skilstaf; maintaining

records and preparing reports of transactions between

Skilstaf, AMS and Plan participants; pursuing subrogation

claims; notifying participants of the reasons for claim denials

and of their right to have the denials reviewed; and reviewing

denied claims under a procedure designed to satisfy ERISA.

The summary plan description (“SPD”) informed

participants of their rights under the Plan and of AMS’s

procedures for processing and adjudicating claims. In an

SPD section entitled “Statement of Your ERISA Rights,”

participants were informed that, “[w]ith respect to paying

claims for benefits under this Plan, [AMS] shall have

discretion to interpret policy terms, make decisions regarding

eligibility and resolve factual questions.”

3

Another SPD section, entitled “Claim Procedures,”

provided that participants would be notified of the decision

on their claim for plan benefits within 30 days of AMS’s

receipt of the claim. The section also stated that participants

would be informed of the reasons for any claim denial and

given an explanation of the Claim Appeal Procedure. Later,

under the heading “Legal Actions,” participants were advised

that, if a dispute arose:

[AMS] will resolve such dispute by appropriate

consideration of all available evidence. All

determinations are conclusive, final, and binding; unless

they are successfully appealed under the Claim Appeal

Procedure. You cannot bring an action against the Plan

or [AMS] at law or in equity to recover a claim or

damages until more than 60 days after the Claim Appeal

Procedure is completed... .

In another SPD section, entitled “Claim Appeal

Procedure,” participants were informed that an appeal request

had to be sent to AMS within 60 days after receipt of a notice

of claim denial. Participants would receive written notice of

any decision within 60 days (in special circumstances, up to

120 days) of AMS’s receipt of an appeal request. Participants

then would have 60 days from the date they received this

notice to request a second appeal to a special panel. The

special panel was to notify participants in writing of its final

decision within 60 days (in special circumstances, up to 120

days) of receiving the second appeal.

The SPD section describing the Claim Appeal Procedure

concluded as follows:

[AMS] will interpret the Plan, and determine all

inquiries arising in the administration, application, and

interpretation of the Plan in good faith and consistent

with the Plan. In any case, you must exhaust all

available appeals before taking any legal action.

4

The SPD did not establish, much less require participants to

exhaust, a third-level appeal to Skilstaf.

The Agreement confirmed that no appeal to Skilstaf was

contemplated. It provided that AMS (not the participants)

would refer to Skilstaf:

any disputed claim (after the appeal process under the

Plan has been completed); any question of eligibility or

entitlement of the claimant for coverage under the Plan;

and any other question as AMS deems necessary. The

PLAN SPONSOR acknowledges that any claim which it

requests to be paid on an ‘out-of-Plan’ basis will not be

considered Plan benefits reimbursable under the Excess

Loss Insurance Policy.

(Emphasis added).

AMS arranged for Skilstaf to obtain excess loss insurance

from United Wisconsin Life Insurance Company

(““UWLIC”). AMS had a number of financial relationships

with UWLIC, including a partial reinsurance arrangement

through an AMS subsidiary.

Under the excess loss policy, UWLIC agreed to reimburse

Skilstaf for “eligible medical claims under the Plan in excess

of certain specific and aggregate amounts.” However,

UWLIC had no obligation to reimburse Skilstaf under the

policy unless an expense was incurred and paid during the

policy term. If the policy terminated during a policy term, no

claims, including those already paid by AMS, would be

eligible for excess loss coverage. By its express terms, the

policy would terminate upon cancellation of Skilstaf’s

Agreement with AMS. Effective May 31, 1996 and prior to

the end of the policy’s term, Skilstaf canceled the Agreement,

which resulted in termination of the excess loss policy.

B. Proceedings Below

On January 22, 1998, Skilstaf filed this action against AMS

in the United States District Court for the Middle District of

Alabama, invoking jurisdiction under 28 U.S.C. § 1332.

Skilstaf’s amended complaint included state law claims for

breach of contract, negligence, “wantonness” and breach of

fiduciary duty arising out of AMS’s conduct in performing its

administrative responsibilities with respect to the Plan. In the

district court, Skilstaf maintained, among other things, that

AMS intentionally delayed processing benefit claims to

protect its subsidiary against excess loss liability as UWLIC’s

reinsurer. Skilstaf’s claims for breach of fiduciary duty and

“wantonness” were premised on this alleged conflict of

interest and self-dealing. No ERISA claims were asserted

against AMS.

In a summary judgment motion, AMS argued that

Skilstaf’s state law claims were preempted by ERISA.

Skilstaf acknowledged that: “As an ERISA fiduciary of the

Plan, Skilstaf could avail itself of the provisions of ERISA

regarding breach of fiduciary duty by the Defendants and

certainly has viable remedies under ERISA that it could

pursue against the Defendants.” Skilstaf, Inc.’s Response to

Defendants’ Reply Brief (June 18, 1999) at 3 n.3. Yet

Skilstaf insisted that it could pursue “available state law

remedies against the Defendants, although it certainly would

not be precluded from asserting an ERISA cause of action

against the Defendants in addition to its state law claims.” /d.

In denying summary judgment, the district court rejected

AMS'’s preemption argument, reasoning that “AMS is not an

ERISA entity and the state law claims against it do not

sufficiently relate to the employee benefit plan to be

preempted by ERISA.” App. at 33a. Skilstaf’s state law

claims were tried to a jury. AMS moved at the conclusion of

the evidence for a directed verdict, again arguing that

plaintiff's claims were preempted. The motion was denied,

6

and the jury returned a verdict against AMS for $6,902,576,

including $6,422,576 in compensatory and punitive damages

on the breach of fiduciary duty and “wantonness” claims.

App. at 2la-22a. The district court thereafter denied AMS’s

motion for judgment as a matter of law, a new trial and/or

remittitur, rejecting again AMS’s argument that the state law

claims were preempted. App. at | la.

AMS appealed the district court’s rulings to the United

States Court of Appeals for the Eleventh Circuit. On March

9, 2001, a panel of the Eleventh Circuit affirmed the district

court’s rulings in an unpublished per curiam decision. App.

at 3a-4a. AMS then filed a petition for rehearing en banc,

which the Eleventh Circuit denied on May 4, 2001. App.

at la-2a.

REASONS FOR GRANTING THE PETITION

This Court has taken notice of “the centrality of pension

and welfare plans in the national economy, and _ their

importance to the financial security of the Nation’s work

force.”' In enacting ERISA to protect the interests of

participants and beneficiaries in these plans, Congress

expressly intended to make employee benefit plan regulation

a “matter of exclusive federal concern.”” One of Congress’s

principal goals in drafting ERISA was the elimination of the

conflicting system of state and local regulation then

governing the employee benefit field.’ In its place, Congress

substituted a single federal regulatory scheme governing the

operation and administration of employee benefit plans.

ERISA, as finally enacted, imposes uniform standards of

' Boggs v. Boggs, 520 U.S. 833, 839 (1997).

? Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 525 (1981).

> H.R. Rep. No. 93-533 at 12 (1973), reprinted in 1974 U.S.C.C.A.N.

4639, 4650 (“H.R. Rep. No. 93-533”); 120 Cong. Rec. 29,933 (1974)

(remarks of Sen. Williams).

7

conduct on fiduciaries,’ establishes a comprehensive civil

enforcement scheme,’ and requires every employee benefit

plan to adopt an internal procedure for the orderly resolution

of benefit claims.°

ERISA’s preemption provision—referred to in_ the

legislative history as the statute’s “crowning achievement”’—

was meant to ensure that this new federal framework

remained preeminent. With narrow exceptions, ERISA §

514(a) expressly preempts “any and all State laws insofar as

they may now or hereafter relate to any. employee benefit

plan. ...”* The “basic thrust” of this preemption provision is

“to avoid a multiplicity of regulation in order to permit the

nationally uniform administration of employee benefit

plans.”

Consistent with this objective, this Court has found state

laws preempted where they purport to regulate the

administration of plans or provide alternate enforcement

mechanisms for breach of ERISA obligations.'° Nonetheless,

the scope of ERISA’s preemption of state law has remained a

source of confusion. Indeed, since its first foray into this

area in 1981, this Court has been required to address

ERISA’s preemptive scope on eighteen separate occasions—

most recently, last term in Egelhoff v. Egelhoff ex rel.

Breiner, 121 S. Ct. 1322 (2001)—and already it has decided

to hear still another ERISA preemption case on the merits this

* ERISA §§ 401-14, 29 U.S.C. §§ 1101-14.

° ERISA § 502(a), 29 U.S.C. § 1132(a).

° ERISA § 503, 29 U.S.C. § 1133.

7120 Cong. Rec. 29,197 (1974) (remarks of Rep. Dent).

* 29 U.S.C. § 1144(a).

* New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers

Ins. Co., 514 U.S. 645, 657 (1995).

'0 Td. at 657-58.

8

term. Rush Prudential HMO, Inc. v. Moran, 230 F.3d 959

(7th Cir. 2000), cert. granted, 121 S. Ct. 2589 (2001).""

The Eleventh Circuit’s decision once again calls on this

Court to address this central feature of ERISA’s statutory

scheme, this time in the context of an important member of

the employee benefit plan community—the third-party

administrator. Respondent’s state law claims—alleging that

Petitioner failed to timely process benefit claims—intrude

directly into the plan’s “‘system for processing claims and

paying benefits’” and impose “‘precisely the burden [on plan

administration] that ERISA pre-emption was intended to

avoid.””'* In addition, Respondent’s breach of fiduciary duty

and “wantonness” claims accused Petitioner of intentionally

delaying the processing of claims to benefit itself financially.

Such conduct is tantamount to an ERISA fiduciary “self-

dealing” violation,'’ for which the remedies provided by

ERISA’s civil enforcement scheme were intended to be

exclusive.’

'' Moran involves state intrusion into ERISA’s regulatory framework

and civil enforcement scheme (including the plan's claim review

procedures) similar to that here presented—a provision of a state HMO

law which requires disputes over medical necessity to be submitted to

independent physician review. The Court also has called for the views of

the Solicitor General in yet another ERISA preemption case in which a

petition for certiorari is pending—Kentucky Ass'n of Health Plans, Inc. v.

Nichols, 227 F.3d 352 (6th Cir. 2000), petition for cert. filed, 69 U.S.L.W.

3646 (Mar. 22, 2001) (No. 00-1471) (whether ERISA preempts state “any

willing provider” law). See 121 S. Ct. 2546 (2001) (interim order inviting

the Solicitor General's views).

'? Egethoff, 121 S. Ct. at 1329 (quoting Fort Halifax Packing Co. v.

Coyne, 482 U.S. 1, 10 (1987)).

'' See ERISA §§ 404(a 1A) & 406(b), 29 U.S.C. §§ 1104(a)(1)(A),

1106(b).

'* See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142-45 (1990)

(participant’s state common law claim alleging wrongful discharge to

9

The Eleventh Circuit’s decision allowing these state law

claims to survive undermines ERISA’s comprehensive

regulatory framework and the important principles of

uniformity upon which it is based. Furthermore, it conflicts

with this Court’s ERISA preemption jurisprudence and the

Fourth Circuit’s decision in Tri-State Machine, Inc. v.

Nationwide Ins. Co., 33 F.3d 309 (4th Cir. 1994), cert.

denied, 513 U.S. 1183 (1995). Finally, the case is illustrative

of the numerous cases in the lower courts that have addressed

ERISA’s preemption of state law claims against third-party

administrators with differing results and rationales. The

intervention of this Court is essential to provide clarity on an

issue of law that is of critical importance to a segment of the

employee benefit plan community that is responsible for

processing literally millions of claims for plan benefits

annually.

I. THE ELEVENTH CIRCUIT’S DECISION

ALLOWS STATE LAW STANDARDS TO

INTRUDE INTO THE CLAIMS PROCEDURE

MANDATED BY ERISA

The Eleventh Circuit’s decision frustrates a central goal of

ERISA’s statutory framework—enabling the establishment of

“*a uniform administrative scheme, which provides a set of

standard procedures to guide [the] processing of claims and

disbursement of benefits."” Egelhoff, 121 S. Ct. at 1328

(quoting Fort Halifax, 482 U.S. at 9). Under Section 503 of

ERISA, all employee benefit plans must establish claims

procedures that comply with Department of Labor

regulations. 29 U.S.C. § 1133; Pilot Life Ins. Co. v. Dedeaux,

481 U.S. 41, 53 (1987); Massachusetts Mut. Life Ins. Co. v.

Russell, 473 U.S. 134, 143-44 (1985). The regulation

promulgated by the Department of Labor requires every

prevent his attainment of plan benefits was preempted because it

conflicted with ERISA’s civil enforcement scheme).

10

employee benefit plan to establish “reasonable” claims

procedures and specifies a host of conditions that must be

satisfied. 29 C.F.R. § 2560.503-1(b).

Among other things, the Department’s regulation requires

plans to furnish participants with written notice of any claim

denial within a reasonable time after the plan’s receipt of the

claim.' 29 C.F.R. § 2560.503-i(e)(1). A time period ex-

ceeding 90 days is deemed unreasonable absent special

circumstances. 29 C.F.R. § 2560.503-1(e)(3). If an extension

of time is needed, written notice must be provided to the

claimant within the initial 90-day period, and the extension

itself cannot exceed 90 days. /d.

Under ERISA § 503(2) and 29 C.F.R. § 2560.503-1(g)(1),

every employee benefit plan also is required to establish a

procedure by which a claimant can obtain a “full and fair”

review of an adverse benefit decision by “an appropriate

named fiduciary.” The Department’s regulation provides that

a decision on review must be made “promptly,” ordinarily

within 60 days after the plan’s receipt of the request. 29

C.F.R. § 2560.503-1(h)(1)(i). If special circumstances

require an extension of time, a decision on review must be

rendered as soon as possible, but not later than 120 days after

receipt of a request for review. /d.

The Plan’s SPD in this case included a detailed description

of its ERISA-mandated claims procedure.” The SPD

'S ERISA requires a summary plan description to be furnished

to the plan’s participants and beneficiaries. ERISA § 101(a)(1),

29 U.S.C. § 1021(a)(1); see Curtiss-Wright Corp. v. Schoonejongen, 514

U.S. 73, 83 (1995) (purpose of summary plan description is “to

communicate to beneficiaries the essential information about the plan”).

This summary plan description must include, among other things, a

description of the plan’s procedures for presenting claims and the

remedies available under the plan for redressing denied claims, including

the claims procedures mandated by ERISA § 503. ERISA § 102(b), 29

U.S.C. § 1022(b); see also 29 C.F.R. § 2560.503-1(b)(1)(ii) (to be deemed

11

informed participants that they would be notified of the

decision on their claim within 30 days of Petitioner’s receipt

of the claim. Under the Department’s regulation, a

participant’s claim would be deemed denied if Petitioner

failed to notify the participant of a denial within a

“reasonable” time. 29 C.F.R. § 2560.503-1(e)(2). The SPD

further informed participants that they could seek review of

any denied claim through the Plan’s Claim Appeal Procedure,

and included a detailed description of the procedure and the

applicable time frames.

The Eleventh Circuit’s decision would allow state law

standards to interfere with the claims procedure mandated by

ERISA. Respondent’s state law causes of action required

Petitioner to adhere to an ill-defined “timeliness” standard in

processing claims that was untethered to the time limits

specified in the SPD and 29 C.F.R. § 2560.503-1. ERISA’s

pervasive regulation of the employee benefit plan claims

procedure necessarily displaces state law causes of action like

Respondent’s alleging untimely processing of benefit

claims."° The goal of ensuring uniformity in plan

reasonable, claims procedures must be described in the summary plan

description).

'© In its new claims procedure rules under ERISA § 503, the

Department of Labor expressly acknowledged the preemptive effect of its

implementing regulation. The new rules, which become applicable at the

earliest on January 1, 2002, specifically exclude certain state laws

regulating insurance from the preemptive scope of the regulation. 29

C.F.R. § 2560.503-i(k) (effective Jan. 20, 2001); 65 Fed. Reg. 70,246,

70,254 (Nov. 21, 2000) (explaining subsection (k)); PWBA Press Release

01-31 (July 6, 2001) (extending date for group health plans to

comply with new claims procedure rules), available at http://

www.dol.gov/dol/pwba/public/media/press/pr070601.htm. Respondent's

state law claims plainly are not laws regulating insurance within the

meaning of the saving clause, ERISA § 514(b)(2)(A); see, e.g., Pilot Life,

481 U.S. at 48-S2—nor would the saving clause apply to a self-funded

plan such as the one at issue in this case. FMC Corp. v. Holliday, 498

U.S. 52, 61 (1990).

ee

12

administration would be thwarted if third-party administrators

like Petitioner could be required to comply with standards

imposed by state law in processing benefit claims. Fort

Halifax, 482 U.S. at 9. As this Court stated recently,

“[rJequiring ERISA administrators to master the relevant laws

of the 50 States and to contend with litigation would

undermine the congressional goal of ‘minimiz[ing] the

administrative and financial burden[s]’ on plan adminis-

trators—burdens ultimately borne by the beneficiaries.”

Egelhoff, 121 S. Ct. at 1329 (quoting /ngersoll-Rand Co., 498

U.S. at 142).

Il. ALLOWING SPONSORS TO ASSERT STATE

LAW CLAIMS FOR IMPROPER CLAIMS

PROCESSING WOULD INHIBIT RESPONSI-

BLE DECISION-MAKING, INCREASE EM-

PLOYEE BENEFIT PLAN COSTS, AND DETER

QUALIFIED PERSONS FROM PROVIDING

ADMINISTRATIVE SERVICES TO PLANS

This Court has ruled that extracontractual damages cannot

be awarded to participants under ERISA § 502(a)(2) based

upon an administrator’s improper processing of a claim for

benefits. Russell, 473 U.S. at 148; 29 U.S.C. § 1132(a)(2)."”

The Court also has ruled that ERISA § 502(a)(3) authorizes

only equitable relief, not money damages. Mertens v.

” Having reviewed the statutory text and regulations relating to claims

procedures, the Court in Russell found “nothing” to support a conclusion

that delayed processing of claims gives rise to a cause of action for

compensatory or punitive damages under ERISA. Russell, 473 U.S. at

144. Indeed, under the Department’s regulation, the consequence at the

initial processing stage of failing to notify a claimant of a denial within a

reasonable time is that the claim is deemed denied, permitting the

claimant to proceed to the “review stage.” 29 C.F.R. § 2560.503-1(e)(2).

Likewise, as the Court noted in Russell, the consequence of failing to

furnish a claimant with a review decision promptly is that the claim is

deemed denied on review. 29 C.F.R. § 2560.503-1(h)(4); Russell, 473

U.S. at 144.

13

Hewitt Assocs., 508 U.S. 248, 256-58 (1993); 29 U.S.C.

§ 1132(a)(3). In addition, emphasizing the “clear expression

of congressional intent that ERISA’s civil enforcement

scheme be exclusive,” the Court has ruled that ERISA

preempts a participant’s state common law causes of action

alleging improper processing of a claim for benefits. Pilot

Life, 481 U.S. at 57.

Viewed in this context, the Eleventh Circuit’s decision

affirming an award of damages to the sponsoring employer

under state law can only encourage administrators to place

the interests of the employer above those of the plan and its

participants when processing claims. The interests of the

employer, of course, are likely to diverge from those of the

plan and the participants whose claims are being processed,

particularly in situations where the employer is ultimately

responsible for funding the payment of benefits. Encouraging

administrators like Petitioner to act in the interest of the

employer would be contrary to one of ERISA’s central

purposes—to “insulate the trust from the employer’s

interest.” NLRB v. Amax Coal Co., 453 U.S. 322, 333 (1981).

Furthermore, since administrators would face potential

liability for any alleged harm suffered by the plan sponsor

due to delays in processing participants’ claims, such damage

awards would encourage administrators to place a premium

upon speed at the expense of the thorough, deliberate

consideration of benefit claims contemplated by ERISA.

The allowance of punitive damages under state law only

compounds the disruptive impact of the Eleventh Circuit’s

decision. Such awards, of course, serve no compensatory

purpose, but represent mere windfalls to prevailing plaintiffs.

See Smith v. Wade, 461 U.S. 30, 59 (1983) (Rehnquist, J.,

dissenting); City of Newport v. Fact Concerts, Inc., 453 U.S.

247, 266 (1981); Int’l Bhd. of Elec. Workers v. Foust, 442

U.S. 42, 50 (1979). At the same time, such awards have

rested on standards that are both ill-defined and unevenly

oa

applied. See TXO Prod. Corp. v. Alliance Resources Corp.,

509 U.S. 443, 472-75 (1993) (O’Connor, J., dissenting);

Browning-Ferris Indus. v. Kelco Disposal, Inc., 492 U.S. 257,

281 (1989) (Brennan, J., concurring); Smith, 461 U.S. at 60

(Rehnquist, J., dissenting).

Lacking a consistent framework of analysis, courts have

developed a variety of ad hoc tests to determine both the

entitlement to, and the measure of, punitive relief. See, e.g.,

BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 588-89 (1996)

(Breyer, J., concurring); Pac. Mut. Life Ins. Co. v. Haslip, 499

U.S. 1, 42-43 (1991) (O’Connor, J., dissenting); Smith, 461

U.S. at 60-64 (Rehnquist, J., dissenting). The arbitrary nature

of these standards often fails to provide defendants with fair

warning of the consequences of their actions, thus negating

the primary purpose of punitive damage awards—deterrence

of conduct which violates legal standards. See, e.g., Gore,

517 U.S. at 574-75; Smith, 461 U.S. at 59 (Rehnquist, J.,

dissenting).

The detrimental impact of this state of affairs on employee

benefit plans is self-evident. Without a uniform federal

standard, punitive damages are likely to fall unevenly upon

those responsible for claims processing, depending upon the

state in which they are sued. See Cooper Indus. v.

Leatherman Tool Group, Inc., 121 S. Ct. 1678, 1683 n.6

(2001); Gore, 517_U.S. at 613 n.6, 614-19 (Ginsburg, J.,

dissenting); Smith, 461 U.S. at 59-64 (Rehnquist, J.,

dissenting). Moreover, the broad discretion accorded to the

trier of fact to set the amount of punitive damages must

inevitably lead to inconsistent results, see TXO, 509 U.S. at

473-75 (O’Connor, J., dissenting), which cannot be squared

with Congress’s emphasis in ERISA on predictability and

uniformity.'® See Int'l Bhd. of Elec. Workers, 442 U.S.

at 50-52.

'S H.R. Rep. No. 93-533, supra note 3, at 12, reprinted in 1974

U.S.C.C.A.N. at 4650 (“The uniformity of decision which the Act is

15

Subjecting administrators like Petitioner to punitive

damages would unsettle the delicate balance of costs and

protections reflected in ERISA. The prospect of substantial,

unpredictable punitive damage awards would increase the

cost of providing administrative services to employee benefit

plans. These costs inevitably would be passed back to the

plans in the form of increased fees, to the ultimate detriment

of the plans’ participants and beneficiaries. See Mertens, 508

U.S. at 262 (exposing non-fiduciary service providers to

liability for consequential damages would “impose high

insurance costs upon persons who regularly deal with and

offer advice to ERISA plans, and hence upon ERISA plans

themselves.”). Because of the difficulty of obtaining

insurance coverage for punitive damages, many qualified

persons would be deterred from providing administrative

services to employee benefit plans. See Browning-Ferris,

492 U.S. at 282 (O’Conner, J., dissenting). These predictable

results would frustrate Congress’s goal of minimizing the

costs and burdens imposed on employee benefit plans in

order to promote their growth. See Mertens, 508 U.S. at 262-

63; H.R. Rep. No. 533, supra note 3, at 1, reprinted in 1974

U.S.C.C.A.N. at 4639-40 (projected cost of each provision of

ERISA analyzed in relation to anticipated benefit).

Iii. THIS COURT’S GUIDANCE IS NEEDED TO

RESOLVE CONFUSION OVER THE APPLI-

CATION OF ERISA PREEMPTION TO STATE

LAW CLAIMS AGAINST THIRD-PARTY

ADMINISTRATORS

The Eleventh Circuit’s decision in this case conflicts with

Pilot Life and with the Fourth Circuit’s decision in Tri-State

Machine. This Court ruled in Pilot Life that state common

designed to foster will help administrators, fiduciaries and participants to

predict the legality of proposed actions without the necessity of reference

to varying state laws.”).

16

law causes of action alleging improper processing of a claim

for benefits “undoubtedly” met the criteria for ERISA

preemption. Pilot Life, 481 U.S. at 57. Relying on Pilot Life,

the Fourth Circuit held in Tri-State Machine that ERISA

preempted a plan sponsor’s state law claims against a third-

party administrator under circumstances similar to those

presented here. As in this case, the sponsor alleged that a

third-party administrator of its self-funded plan delayed

processing benefit claims to avoid coverage under a stop-loss

insurance policy issued by the administrator. Tri-State

Machine, 33 F.3d at 314. In holding that ERISA preempted

the sponsor’s state law claims, the Fourth Circuit reasoned

that the state claims were “essentially complaints about the

processing of claims under an employee benefit plan and,

therefore, relate to the plan in the common sense meaning of

that phrase.” Jd.

Resolution of this conflict is of critical importance to third-

party administrators of self-funded employee benefit plans.

In a self-funded plan, the employer (or trust in the case of a

multiemployer plan) pays the benefit claims of plan

participants out of its own assets. See FMC Corp., 498 U.S.

at 61-62 (distinguishing between insured and self-funded

plans). A recent study estimated that 47.9 million individuals

(39% of those in private sector, employment-based health

plans) were enrolled in_ self-funded private sector,

employment-based health plans in 1997. Employee Benefits

Research Institute, Employment-Based Health Care Benefits

and Self-Funded Employment-Based Plans: An Overview at 6

(Apr. 2000).'? These self-funded plans typically are

administered by a third-party administrator, which may be an

insurance company or other independent organization that

specializes in the provision of administrative services to

plans. See Employee Benefits Research Institute, /ssue Brief

No. 193, at 18 (Jan. 1998).

'? Available at http://www.ebri.org/facts/0400fact.pdf.

17

Absent review by this Court, the Eleventh Circuit’s

decision can only exacerbate existing uncertainty about the

application of ERISA’s preemption provision to state law

claims against third-party administrators. Preemption cases

involving state law claims against third-party administrators

are recurrent, and the case law reflects considerable confusion

about the circumstances under which such claims may be

preempted by ERISA. See Geweke Ford v. St. Joseph’s Omni

Preferred Care Inc., 130 F.3d 1355, 1359-60 (9th Cir. 1997)

(ERISA did not preempt plan sponsor’s state law breach of

contract claim against third-party administrator); Coyne &

Delany Co. v. Selman, 98 F.3d 1457, 1471-72 (4th Cir. 1996)

(ERISA did not preempt sponsor’s state law professional

malpractice claim against third-party administrator); Tri-State

Machine, 33 F.3d at 313-14 (ERISA preempted plan

sponsor’s state law claims against third-party administrator);

Kyle Rys. v. Pac. Admin. Servs., 990 F.2d 513, 518-19 (9th

Cir. 1993) (ERISA preemption of sponsor’s state law claims

against third-party administrator does not violate due process

clause).”” A decision by this Court would provide much

© See also Hughes Supply, Inc. v. Robey-Barber Ins. Servs., No.

99-2904-Civ-T-17C, 2000 WL 782954, at **5-7 (M.D. Fla. June 5, 2000)

(ERISA preempted sponsor’s state law action for conversion and breach

of contract against third-party administrator); Analytical Surveys, Inc. v.

Intercare Health Plans, Inc., 101 F. Supp. 2d 727, 734-36 (S.D. Ind.

2000) (ERISA did not preempt sponsor’s state law breach of contract and

gross negligence claims against third-party administrator for delayed

processing of benefit claims); Tie Communications, Inc. v. First Health

Strategies, Inc., No. Civ-A-97-2597-EEO, 1998 WL 171126, at **2-5 (D.

Kan. Mar. 3, 1998) (ERISA did not preempt sponsor’s state law breach of

contract claim against third-party administrator for failure to provide stop-

loss insurer with information about a participant’s claim in a timely

manner); Hartford Fire Ins. Co. v. E.A. Sween Co., 920 F. Supp. 1021,

1028-29 (D. Minn. 1996) (ERISA preempted sponsor’s state law breach

of contract, negligence and bad faith claims against third-party

administrator); Union Health Care, Inc. v. John Alden Life Ins. Co., 908

F. Supp. 429, 435-36 (S.D. Miss. 1995) (ERISA did not preempt

sponsor’s state law claim against third-party administrator for failure to

18

needed clarity and guidance as to the duties and liabilities of

third-party administrators under state and federal law in

providing administrative services to self-funded plans.

IV. THE ELEVENTH CIRCUIT’S DECISION

UNDERMINES CONGRESS’S INTENT TO

PROVIDE UNIFORM STANDARDS - OF

FIDUCIARY CONDUCT AND EXCLUSIVE

REMEDIES FOR FIDUCIARY BREACHES

Review of the Eleventh Circuit’s decision is necessary to

restore the primacy of federal regulation in the critical area of

fiduciary standards. In enacting ERISA, Congress sought to

establish a uniform federal regulatory scheme for evaluating

fiduciary conduct. H.R. Rep. No. 93-533, supra note 3, at 12,

reprinted in 1974 U.S.C.C.A.N. at 4650 (“[A] fiduciary

standard embodied in Federal legislation is considered

desirable because it will bring a measure of uniformity in an

area where decisions under the same set of facts may differ

from state to state.”).*' Congress accomplished this goal by

formulating detailed federal standards to guide fiduciaries,”

and by specifying the remedies available for enforcement of

these fiduciary responsibility requirements. See Varity Corp.

v. Howe, 516 U.S. 489, 507-09 (1996).

As this Court observed in Varity, an administrator is a

fiduciary under ERISA to the extent it makes discretionary

decisions about whether participants are entitled to benefits

under a plan’s terms. Varity, 516 U.S. at 511; ERISA

notify stop-loss carrier in a timely manner); Fox, Curtis & Assocs. v.

Employee Benefit Plans, Inc., No. 92-C-5828, 1993 WL 265474, at **3-6

(N.D. Ill. July 13, 1993) (ERISA did not preempt sponsor's state law

breach of contract and Illinois Consumer Fraud and Deceptive Practices

Act claims against third-party administrator).

1 See also 120 Cong. Rec. 29,933 (1974) (remarks of Sen.

Williams); id. at 29,197 (remarks of Rep. Dent).

22 See ERISA §§ 401-14, 29 U.S.C. §§ 1101-14.

—_—

19

§ 3(21)(A)iii), 29 U.S.C. § 1002(21)(A)(iii).> Under the

SPD’s written terms, Petitioner was an ERISA fiduciary

because it was the entity responsible for reviewing denied

claims.”* Indeed, ERISA provides expressly that a participant

must be afforded a reasonable opportunity for such review

by an “appropriate named fiduciary.” ERISA § 503(2),

29 U.S.C. § 1133(2) (emphasis added). According to the

Department of Labor, a person is a fiduciary to the extent

such person has “final authority to authorize or disallow

benefit payments in cases where a dispute exists as to the

interpretation of plan provisions relating to eligibility for

benefits.” 29 C.F.R. § 2509.75-8, Q-D-3. And the

Department has made clear that a person who reviews denied

claims under ERISA § 503(2) “must [have] authority to make

a final decision on the claim.” 42 Fed. Reg. 27,426, 27,426

(May 27, 1977) (preamble to 29 C.F.R. § 2560.503-1).7°

Respondent’s state law breach of fiduciary duty and

“wantonness” claims accused Petitioner of intentionally

delaying the processing of claims for its own financial

benefit—conduct which amounts to ERISA disloyalty,

conflict of interest, and self-dealing violations. As an ERISA

fiduciary, Petitioner had a duty under ERISA § 404(a)(1)(A)

to act “solely in the interest” of the plan’s participants and

* Cf. Pegram v. Herdrich, 530 U.S. 211, 228-37 (2000) (HMO

physicians’ “mixed” eligibility and treatment decisions are not fiduciary

decisions under ERISA). ' :

* See, e.g., Reich v. Lancaster, 55 F.3d 1034, 1047 (5th Cir. 1995)

(third-party administrator may be an ERISA fiduciary if it has the

authority to “grant, deny, or review denied claims”) (emphasis added).

** That the SPD did not describe any procedure for appealing a denied

claim to Respondent demonstrates that a decision by Petitioner on review

was final for purposes of exhausting all remedies available under the plan.

See, e.g., Russell, 473 U.S. at 144 (consequence of deeming a claim

denied on review is that the claimant can “bring a civil action to have the

merits of his application determined, just as he may bring an action to

challenge an outright denial of benefits”).

20

beneficiaries and for the “exclusive purpose” of providing

benefits and defraying reasonable expenses’ of

administration.” See Pegram, 530 U.S. at 223-25. Petitioner

also was subject to the prohibited transaction provisions of

ERISA § 406(b), which proscribe fiduciary conflicts of

interest and self-dealing.”’ See Lockheed Corp. v. Spink, 517

U.S. 882, 888 (1996); Russell, 473 U.S. at 143 n.10.

ERISA’s civil enforcement scheme provides a host of

remedies for these alleged fiduciary violations.” For

example, the remedies available under ERISA § 409(a)

include restoration of all losses resulting to the plan,”

restitution of ill-gotten profits,” and “other equitable or

26 99 U.S.C. § 1104(a)(1)(A).

27 The prohibitions of ERISA § 406(b), 29 U.S.C. § 1106(b), are

designed to deter fiduciaries “from exercising the authority, control, or

responsibility which makes [them] fiduciaries when they have interests

which conflict with the interests of the plans for which they act.” 29

C.F.R. § 2550.408b-2(e)(1).

8 As noted earlier, in opposing Petitioner’s summary judgment motion,

Respondent acknowledged that it could pursue such remedies against

Petitioner. See supra at 5.

? See, e.g., Libbey-Owens-Ford Co. v. Blue Cross & Blue Shield Mut.,

982 F.2d 1031, 1034-39 (6th Cir.) (complaint against third-party

administrator stated ERISA claim for an accounting and restitution of

improperly paid nursing-home claims), cert. denied, 510 U.S. 819 (1993);

cf. Harold Ives Trucking Co. v. Spradley & Coker, Inc., 178 F.3d 523 (8th

Cir. 1999) (third-party administrator liable under ERISA § 409 for breach

of fiduciary duty in failing to notify plan administrator that stop-loss

insurer had denied coverage of claim).

* See, e.g., Am. Fed’n of Unions Local 102 Health & Welfare Fund v.

Equitable Life Assurance Soc’y, 841 F.2d 658, 662-64 (Sth Cir. 1988)

(third-party administrator liable under ERISA § 409 for benefits paid to

ineligible claimants and for commissions earned on improper benefit

payments); The Sixty-Five Sec. Plan v. Blue Cross & Blue Shield, 583 F.

Supp. 380, 388 (S.D.N.Y. 1984) (ERISA complaint stated fiduciary

conflict of interest claim against third-party administrator for allegedly

overpaying claims to increase its fees).

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21

remedial relief as the court may deem appropriate,” including

removal of the fiduciary.*' See Mertens, 508 U.S. at 252-53.

Appropriate equitable relief also is available under ERISA §

502(a)(3). 29 U.S.C. § 1132(a)(3); see Harris Trust & Sav.

Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 250-53

(2000). And in such actions, a court in its discretion may

allow an award of attorney’s fees and costs to either party

under ERISA § 502(g).** 29 U.S.C. § 1132(g); see Pilot Life,

481 U.S. at 53.

Unless reversed, the Eleventh Circuit’s decision will

undermine this comprehensive regulatory framework and the

important principles of uniformity on which it is based. See

Ingersoll-Rand Co., 408 U.S. at 145 (ERISA preempts state

law cause of action purporting to provide alternate

enforcement mechanism for breach of an ERISA obligation).

Respondent’s state law claims not only attempt to regulate the

conduct of an ERISA fiduciary, but also are in direct conflict

with ERISA’s fiduciary responsibility requirements. In

particular, Respondent’s claims of breach of fiduciary duty

and “wantonness” purport to require Petitioner to carry out its

administrative functions in compliance with state law duties

of care and loyalty owed to Respondent in its capacity as

employer. These state law duties plainly conflict with

ERISA’s duty of loyalty, which requires Petitioner to act with

“an eye single’ toward [the plan] beneficiaries’ interests.”

Pegram, 530 U.S. at 235 (quoting Donovan v. Bierwirth, 680

3! See Russell, 473 U.S. at 147 (“If the plan administrator’s refusal to

pay contractually authorized benefits had been willful and part of a larger

systematic breach of fiduciary obligations, [the plan participant] . . . could

have asked for removal of the fiduciary pursuant to §§ 502(a)(2)

and 409.”).

* Additionally, the Secretary of Labor may assess a civil penalty

against a breaching fiduciary under ERISA § 502(1).” 29 U.S.C.

§ 1132(1); see Harris Trust & Sav. Bank., 530 U.S. at 248; Mertens,

508 U.S. at 259-61.

22

F.2d 263, 271 (2d Cir. 1982)). By affirming a judgment

against Petitioner for allegedly breaching these purported

state law duties owed to Respondent, the Eleventh Circuit's

decision can only frustrate Congress’s intent to establish a

uniform federal law for evaluating fiduciary conduct. See

Fort Halifax, 482 U.S. at 11.

V. THE QUESTIONS PRESENTED BY THIS

PETITION HOLD IMPORTANT IMPLICA-

TIONS FOR THE INTEGRITY OF THE

CLAIMS PROCESSING FUNCTION PER-

FORMED ON BEHALF OF EMPLOYEE

BENEFIT PLANS

The Department of Labor has estimated that there are now

more than 6 million private employee benefit plans covering

approximately 150 million people and controlling more than

$5 trillion in assets. U.S. Dep’t of Labor, Pension & Welfare

Benefits Administration, Annual Performance Plan—Fiscal

Year 2002.*° More than 2.5 million of these plans are group

health plans providing coverage to more than 125 million

participants and making benefit-related expenditures in

excess of $250 billion annually. /d. Many of these plans,

moreover, are multi-state in operation.

Claims processors for employee benefit plans can be

expected to process literally millions of claims for disability,

pension and health benefits annually. Although the review of

denied claims under a plan’s ERISA-mandated claims

procedure is necessarily a fiduciary function within the

meaning of ERISA § 3(21 Ai), the Department of Labor

has expressed the view that the initial “[pJrocessing of

*% Available at http://www.dol.gov/dol/pwba (accessed via library

link). :

99 U.S.C. § 1002(21)(A)iii).

Sinden ee

Ps ef OE, Pea tae?

23

claims” may be a ministerial, non-fiduciary function.”

Frequently, those who perform this initial “claims pro-

cessing” function are either employees or agents of the person

who serves as the plan’s claims review fiduciary under

ERISA § 503(2).

Because these persons are fiduciaries only “to the extent”

that they perform one of the functions listed in ERISA

§ 3(21 (Ail), see Pegram, 530 U.S. at 225-26, the Eleventh

Circuit’s decision creates confusion as to whether such

persons may be liable to plans or plan sponsors under state

law for improper processing of claims. Cf. Mertens, 508 U.S.

at 261 (assuming without deciding that ERISA preempts state

law claims against non-fiduciaries for knowing participation

in a fiduciary breach); id. at 267 n.2 (White, J., dissenting). A

decision by the Court is necessary to provide guidance to

these persons as to their respective duties and liabilities under

state and federal law in the performance of this initial “claims

processing” function. This Court’s intervention is critical to

restore the carefully crafted balance between state and federal

law struck by Congress in ERISA and to reestablish the

preeminence of ERISA’s civil enforcement scheme in a core

area of plan administration.

> See 29 C.F.R. § 2509.75-8, Q-D-2 and Q-D-3.

24

CONCLUSION

For the reasons stated above, this Court should grant

AMS’s petition for a writ of certiorari and reverse the

decision of the United States Court of Appeals for the

Eleventh Circuit.

Respectfully submitted,

PAUL J. ONDRASIK, JR.

Counsel of Record

ERIC G. SERRON

re STEPTOE & JOHNSON LLP

1330 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 429-3000

Attorneys for Petitioner

August 2, 2001

Ewe Se! *