Reply Brief — Allen v. Pacheco

| Supreme Court, U.S.

| FILED

No. 03-642

JAN 13 2004

OFFICE OF THE CLERK

IN THE

Supreme Court of the Gnited States

LAWRENCE S. ALLEN, M.D., MICHAEL K. MILLER, M_D.,

TIMOTHY R. COLLINS, M.D., AND COLORADO PERMANENTE

MEDICAL GROUP, P.C.,

Petitioners,

V.

KAREN PACHECO,

Respondent.

On Petition for a Writ of Certiorari

to the Supreme Court

of the State of Colorado

REPLY BRIEF

CARTER G. PHILLIPS

JOSEPH R. GUERRA

SIDLEY AUSTIN BROWN & WOOD LLP

1501 K Street, NW

Washington, DC 20005

(202) 736-8000

MARK E. HADDAD*

SARAH J. HEIDEL

SIDLEY AUSTIN BROWN & WOOD LLP

555 W. Fifth Street, 40th Floor

Los Angeles, CA 90013

(213) 896-6000

Counsel for Petitioners

January 13, 2004 * Counsel of Record

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

TABLE OF CONTENTS

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A. Respondent Fails To Distinguish The HCAA

From The Statutes At Issue In Crawford, Hart,

and Orion, None Of Which Is Specifically

ST PAE II ns oi iovci neste erne teense

B. Respondent Fails To Refute The Confusion

And Uncertainty Surrounding The Proper Test

For Applying The First Clause Of Section 2(b)

Of The McCarran-Ferguson Act...............00......

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TABLE OF AUTHORITIES

CASES Page

American Bankers Ins. Co. of Fla. v. Crawford,

757 Go. 20 CIRC, TI sericea 3, 6, 7

Continental Ins. Co. v. Equity Residential Props.

Trust, 565 S.E.2d 603 (Ga. Ct. App. 2002)........ 6

Cox v. Woodmen of the World Ins. Co., 556

S.E.24 397 (S.C. Ct. App. 2008)......................:, 6

Hamilton Life Ins. Co. of N.Y. v. Republic Nat’l

Life Ins. Co., 408 F.2d 606 (2d Cir. 1969) ......... 3

Hart v. Orion Ins. Co., 453 F.2d 1358 (10th Cir.

Lp) ne nen 3

Imbler v. PacifiCare of Cal., Inc., 103 Cal. App.

th SOF oss eee eee 6

Kentucky Ass’n of Health Plans, Inc. v. Miller,

538 U.S. 329, 123 S. Ct. 1471 (2003) ........-..... 2,5

Mutual Reinsurance Bureau v. Great Plains Mut.

Ins. Co., 969 F.2d 931 (10th Cir. 1992) ............. 6

Smith v. PacifiCare Behavioral Health of Cal.,

Inc., 93 Cal. App. 4th 139 (2001), cert. denied,

S37 U.S. CD Cac snn es ee ee 6

Standard Sec. Life Ins. Co. of N.Y. v. West, 267

F 36 G22 CO Cir. BD nici cen cece 6

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

| | ERENCE MC tes SR! Mea

United States Dep't of Treasury v. Fabe, 508 US.

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REPLY BRIEF

The Colorado Supreme Court has determined that the

McCarran-Ferguson Act saves state laws that restrict an

insurer’s use of arbitration from preemption under the Federal

Arbitration Act (“FAA”), even if the state law is not

specifically directed at insurers. As a result, the Colorado

Supreme Court has gone further than any other court to date

in permitting states to restrict the use of arbitration in

insurance contracts. The petition demonstrates that the

Colorado Supreme Court’s decision conflicts with decisions

of the Alabama Supreme Court and the Second and Tenth

Circuits, which hold that the McCarran-Ferguson Act does

not save state anti-arbitration statutes that are not specifically

directed at insurers.

The petition also demonstrates substantial disagreement

about whether, at a more fundamental level, state law that

restricts the use of arbitration can ever properly be deemed to

regulate the business of insurance. The Colorado Supreme

Court held that tt could, because restrictions upon arbitration,

in its view, “further the interests of . . . policyholders.” Pet.

App. 16a. But other courts have concluded that a different set

of factors, namely those set forth in Union Labor Life

Insurance Co. v. Pireno, 458 U.S. 119 (1982), should be

addressed in determining whether any given state statute

regulates the business of insurance. Had the Colorado

Supreme Court faithfully applied the Pireno factors, it would

have concluded, as the Alabama Supreme Court did, that a

state statute that restricts the use of arbitration in insurance

contracts does not regulate the “business of insurance” within

the meaning of the first clause of section 2(b) of the

McCarran-Ferguson Act. See Pet. 18-19.

By expressly refusing to apply the Pireno factors to a case

arising under the first clause of section 2(b) (Pet. App. 14a

n.8), the Colorado Supreme Court exacerbated a mature

2

conflict over the proper test for determining whether a state

law has been enacted “for the purpose of regulating the

business of insurance” under the first clause of section 2(b) of

the McCarran-Ferguson Act. Although the Colorado

Supreme Court cited this Court’s decision last Term in

Kentucky Association of Health Plans, Inc. v. Miller, 538

U.S. 329, 123 S. Ct. 1471 (2003), as grounds for abandoning

any consideration whatsoever of Pireno in first clause cases,

the Colorado Supreme Court concomitantly ignored the test

that this Court set forth to replace consideration of the Pireno

factors. Instead, it adopted a broad new test that no other

court has applied, and that, as the dissenting Justices rightly

noted, allows the McCarran-Ferguson Act’s limited savings

clause to “swallow federal preemption under the Supremacy

Clause.” Pet. App. 28a.

The decision below thus confirms the need for a clear

statement from this Court, comparable to that provided last

Term for ERISA in Kentucky Association, of how lower .-

courts are to determine whether a state statute is one “enacted

for the purpose of regulating the business of insurance”

within the meaning of the first clause of section 2(b) of the

McCarran-Ferguson Act. The significance of the issue

presented is plain. As the amicus briefs filed by the

Reinsurance Association of America, the American

Association of Health Plans, the Civil Justice Association of

California and the California Chamber of Commerce make

clear, the insurance industry relies heavily on arbitration to

resolve disputes efficiently and economically. In instances

where parties resort to arbitration, successful claimants

receive quicker payments, and the resources saved by

avoiding conventional litigation permits insurance companies

to offer more comprehensive coverage at lower cost.

Accordingly, it is of vital importance to the insurance industry

that insurers be able to predict the enforceability of such

restrictions. Yet under current law, in which state and federal

courts apply different legal standards, insurers do not know

3

whether their agreements to arbitrate, though lawful under the

FAA, will be deemed unenforceable in light of state law.

Each of the considerations by which this Court traditionally

evaluates a petition for writ of certiorari thus supports a grant

of the petition. Respondent’s efforts to distinguish the

decisional conflicts are unpersuasive.

A. Respondent Fails To Distinguish The HCAA

From The Statutes At Issue In Crawford, Hart,

and Orion, None Of Which Is Specifically

Directed At Insurers.

Respondent argues that the anti-arbitration statutes at issue

in American Bankers Insurance Co. of Florida v. Crawford,

757 So. 2d 1125 (Ala. 1999), Hamilton Life Insurance Co. of

New York v. Republic National Life Insurance Co., 408 F.2d

- 606, 611 (2d Cir. 1969), and Hart v. Orion Insurance Co.,

453 F.2d 1358, 1360 (10th Cir. 1971) are distinguishable

from the HCAA because those statutes apply generally to all

contracts, while the HCAA applies only to contracts with

health care providers for medical services. Opp. 7-8. The

distinction is one without a difference. Neither the HCAA

nor the statutes at issue in Crawford, Hamilton, and Hart is

specifically directed toward insurers. Pet. 13-14. The

Colorado Supreme Court found that the HCAA arbitration

restrictions were saved because they “directly regulate” (Pet.

App. 15a) insurance contracts. But the Alabama Supreme

Court and the Second and Tenth Circuit found that such

direct regulation of insurance contracts was not enough.

Indeed, the Alabama Supreme Court reached that conclusion

even though Alabama’s general anti-arbitration statute was

incorporated by reference into the Alabama insurance code.

Crawford, 757 So. 2d at 1136. As the dissenting Justices

noted below, the HCAA is in all material respects “a law of

general application,” and the Colorado Supreme Court

therefore should have followed the lead of these other courts.

Pet. App. 27a. Its failure to do so alone warrants review by

this Court.

4

Respondent then argues that the HCAA regulates the

“business of insurance” because when applied to disputed

claims it has a “substantial effect upon the insurer-insured

relationship.” Opp. 9. The plain language of Section 2(b),

however, covers only state statutes enacted with the

“purpose” — and not merely the “effect” — of regulating the

business of insurance. And in any event, if the McCarran-

Ferguson Act did save any state law that has a “substantial

effect” upon insurance contracts, there should be no

difference in its application here and in Crawford, Hamilton,

and Hart, since the statutes in these cases all have the same

effect (substantial or not) on _ insurance _ contracts.

Respondent’s “substantial effects” argument does nothing to

distinguish those cases.

Respondent also argues that in United States Department of

Treasury v. Fabe, 508 U.S. 491 (1993), this Court

acknowledged that a state statute may have multiple purposes,

and held that so long as one of the purposes is to regulate the

business of insurance, the first clause of section 2(b) is

satisfied. Opp. 9. Respondent misconstrues Fabe. In Fabe,

the Court merely observed that different provisions within the

same broad statute could have different purposes. The Court

did not hold that a single provision that made no express

reference to regulating insurers, and that was not specifically

directed at insurers, could nevertheless be deemed a provision

enacted for the purpose of regulating the business of

insurance. See Fabe, 508 U:S. at 509-10.

Respondent thus fails to distinguish the threshold conflict

presented here: To be a law enacted “for the purpose of

regulating the business of insurance,” must the law be

specifically directed at insurers? The~ distinctions that

respondent attempts to draw between the HCAA and the

statutes in Crawford, Hamilton, and Hart are only semantic.

None of these cases involves a state law specifically directed

at insurers. This Court should grant review to resolve the

5

conflict between these decisions, and clarify the legal

standards for interpreting the McCarran-Ferguson Act.

B. Respondent Fails To Refute The Confusion And

Uncertainty Surrounding The Proper Test For

Applying The First Clause Of Section 2(b) Of

The McCarran-Ferguson Act.

The foregoing conflict is sufficient to justify granting the

petition. But plenary review is also warranted to address

whether state arbitration restrictions, even if specifically

directed at insurers, may be deemed to be laws for the

purpose of regulating the business of insurance. Not only is

this question unsettled, but so is the test to be applied in

attempting to answer it. See Pet. 15-19 & nn.2-4. The

significant and acknowledged confusion in the lower courts

regarding the applicable test for applying the first clause of

section 2(b) of the McCarran-Ferguson Act is an additional

and important reason to grant the petition.

Respondent does not deny that the lower courts are divided

over the applicability of the Pireno factors in cases involving

the first clause of section 2(b) of the McCarran-Ferguson Act.

Nor does respondent deny that this Court’s decision last Term

in Kentucky Ass'n, 123 S. Ct. at 1479, compounded that

confusion by making a “clean break” from the Pireno factors

in evaluating whether state laws “regulate insurance” under

ERISA. Pet. 19-20. The Colorado Supreme Court evidently

concluded that this Court’s rationale for rejecting the Pireno

factors in the context of ERISA’s saving clause applies with

equal force to the first clause of section 2(b) of the McCarran-

Ferguson Act. Pet. App. 14a n.8. Yet the Colorado Supreme

Court replaced the Pireno factors with a new test that is

wholly untethered to the plain language of section 2(b).

Respondent neither defends the Colorado Supreme Court’s

new test nor denies that it compounds the confusion in the

lower courts over the proper test. Respondent instead

teeeeeseieaiieieniemaindeaeamtetntibmaneeneintentie ae einai enon a

6

advances two related arguments as to why this case is not the

best vehicle for addressing that confusion.

First, Respondent argues that this case is unique because

“{mJjany, if not most, of the cases” involving confusion over

the proper test for applying section 2(b) “do not directly

concern the actual performance or enforcement of a particular

provision of an insurance contract.” Opp. 5. This is not true.

Numerous state and federal cases involving the application of

the Pireno factors have arisen in the context of an underlying

dispute over the enforcement of an arbitration provision in an

insurance contract. See, e.g., Crawford, 757 So. 2d at 1133;

Standard Sec. Life Ins. Co. of N.Y. v. West, 267 F.3d 821,

823-24 (8th Cir. 2001) (per curiam); Mutual Reinsurance

Bureau v. Great Plains Mut. Ins. Co., 969 F.2d 931, 933

(10th Cir. 1992).' This case is thus an entirely suitable

vehicle to use in addressing the vitality of the Pireno factors

in cases arising under the first clause of section 2(b).

Second, respondent argues that the conflict in the lower

courts over the application of the Pireno factors is irrelevant

here, because any case involving the enforceability of a term

in an insurance agreement is necessarily one involving “the

business of insurance.” Opp. 3. That proposition is unprece-

dented, and was squarely rejected by the court in Crawford.

~ Far from supporting the denial of the petition, respondent’s

resort to such a new and expansive proposition to defend the

decision below underscores the need for this Court’s review.

Respondent maintains that under Fade, “consideration of

the Pireno factors in a case concerning the actual

performance of an insurance contract ‘would be mere

' See also Smith v. PacifiCare Behavioral Health of Cal., Inc., 93 Cal.

App. 4th 139, 152-62 (2001), cert. denied, 537 U.S. 818 (2002); Jmbler v.

PacifiCare of Cal., Inc., 103 Cal. App. 4th 567, 571-77 (2002);

Continental Ins. Co. v. Equity Residential Props. Trust, 565 S.E.2d 603,

603-05 (Ga. Ct. App. 2002); Cox v. Woodmen of the World Ins. Co., 556

S.E.2d 397, 399-402 (S.C. Ct. App. 2001).

|

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7

formalism,’ since all three prongs of Pireno are satisfied

when the issue concerns the performance or enforcement of

the insurance contract.” Opp. 5. But in Fabe, the Court was

acknowledging only that the business of insurance is

implicated when there is a failure altogether to perform an

insurance contract, because that would prevent the transfer of

risk between insurer and insured. Fabe, U.S. at 503-04.

By contrast, the enforceability of an arbitration provision

does not affect whether claimants will recover on their claims,

and hence does not affect the transfer of risk between insurer

and insured. See Pet. 18-19. The enforcement of an

arbitration provision also does not “regulate, constrain, set

benefits, exclusions or limitations that [a]ffect the relationship

between the insurer and the policyholders.” Pet. App. 26a.

The enforcement of an arbitration provision thus affects only

the process and procedures by which a claimant seeks relief,

not the actual performance of the agreement. It is akin to

enforcement of a choice-of-law provision, integration clause,

or other common term of a contract, the enforceability of

which has no nexus to the business of insurance. See Pet. 19:

Pet. App. 26a; Crawford, 757 So. 2d at 1130-36.

Respondent’s proposed new test is thus vastly overbroad.

If every state law that affects the enforcement of any

provision in an insurance contract also “regulat[es] the

business of insurance,” then there would no longer be any

difference between the “business of insurance” and the

business of insurance companies. Cf. Opp. 6 n.3. Neither

this Court in Fabe, nor any lower court, has yet reached that

conclusion. Like the decision below, respondent’s broad

reading of the McCarran-Ferguson Act would also permit it to

“swallow federal preemption,” and hence does nothing to

undercut the need for this Court’s review. Pet. App. 28a.

Respondent has failed to rebut petitioners’ showing that the

factual context of this case is an appropriate one in which to

resolve the question presented. Respondent also does not

dispute that there is manifest confusion in the lower courts

8

over the standard for applying the first clause of section 2(b)

and has advanced no meaningful distinction of the Alabama

Supreme Court’s decision in Crawford. Whether the

McCarran-Ferguson Act grants courts free reign to enforce

state anti-arbitration laws against insurers is an issue of

national importance that this Court should now resolve.

CONCLUSION

For the forgoing reasons and those set forth in the petition,

the petition for a writ of certiorari should be granted.

Respectfully submitted,

CARTER G. PHILLIPS

JOSEPH R. GUERRA

SIDLEY AUSTIN BROWN & WOOD LLP

1501 K Street, NW

Washington, DC 20005

(202) 736-8000

MARK E. HADDAD*

SARAH J. HEIDEL

SIDLEY AUSTIN BROWN & WOOD LLP

555 W. Fifth Street, 40th Floor

Los Angeles, CA 90013

(213) 896-6000

Counsel for Petitioners

January 13, 2004 * Counsel of Record