United States: Ninth Circuit To Consider Mandatory Health Insurance

In April, the United States Court of Appeals for the Ninth Circuit heard oral argument in Golden Gate Restaurant Association v. City & County of San Francisco, on whether ERISA preempts a San Francisco Ordinance that requires that private employers with more than twenty employees make certain hourly expenditures towards the health care costs of their employees, and sets mandatory levels of health coverage.

In 2006, the City of San Francisco enacted the San Francisco Health Care Security Ordinance ("HCSO"). The HCSO requires that private employers with more than twenty employees make certain hourly expenditures towards the health care costs of their employees. The required expenditures vary depending on the employer's size, and can be earmarked for various health-related costs, including contributions to the City "to be used on behalf of covered employees." These payments can be combined with individual contributions, and funds added by the City, to organize and administer a Health Access Program ("HAP"). The HAP would function as an HMO and would also provide health coverage to uninsured San Franciscans, regardless of their employment status. Employer violations of the Ordinance result in significant penalties.

The Golden Gate Restaurant Association, "an industry group established to promote, extend, and protect the general interests of the restaurant industry," filed a lawsuit against the City and County of San Francisco in the United States District Court for the Northern District of California on November 8, 2006, seeking a declaratory judgment and an injunction against the application of the ordinance, arguing that the HCSO's employer spending requirements are preempted by ERISA.

ERISA and its interpretive regulations constitute a comprehensive legislative scheme deigned to promote the interests of employees and their beneficiaries in employee benefit plans. Congress sought to avoid a multiplicity of regulation and establish nationally uniform employee benefit plan administration, and intended for federal law to occupy the field of employee benefits. As a result, ERISA's preemptive scope is exceptionally broad, and the statute specifically preempts "any and all state laws insofar as they now or hereafter relate to any employee benefits plan." Despite its broad preemptive scope, however, ERISA was not intended to interfere with traditional fields of state regulation, such as matters of health and safety or general health care regulation. Obviously, the two policy concernsuniform national employee benefits regulation and leaving the regulation of health insurance to the different states, are often in conflict.

These conflicts often result in litigation over whether a particular state or local law has overstepped its bounds and interferes with the federal regulatory scheme. Generally, courts examine the extent to which a state law is related or connected to an ERISA plan in determining whether it is preempted. State laws that regulate ERISA-covered benefits, require the establishment of employee benefit plans, impose reporting, disclosure, funding, or vesting requirements for ERISA plans, or regulate ERISA relationships will generally be found to be preempted by ERISA.

On December 26, 2007, the Northern District of California agreed with Golden Gate, and ruled that the HCSO was preempted by ERISA. The court ruled that: (1) the HCSO's employer spending requirements constituted regulation of employee health benefit plans, (2) the HCSO required structural changes to existing ERISA plans, (3) the HCSO places additional recordkeeping requirements on employers, and (4) the HCSO makes direct reference to and acts directly upon employee benefit plans.

The City of San Francisco petitioned the court to stay implementation of its order pending an appeal. The court denied that request, and an immediate appeal followed. On January 9, 2008, the Ninth Circuit granted the stay application pending a final ruling on the City's appeal. In late February, Supreme Court Justice Anthony M. Kennedy refused to overturn the stay, permitting San Francisco to begin enforcing the HCSO. Oral argument on the City's appeal of the district court's substantive decision was heard in April, and a decision is pending. Local officials have explained that although the HCSO is technically in effect, no expenditures from employers will come due until April 30, 2008, leaving a short window for the Ninth Circuit should it choose to rule before the HCSO's implementation is complete.

The Golden Gate case has come to the forefront of the national debate on compulsory health care laws, and the Ninth Circuit will not be the first court to consider the issue. In January 2007, the United States Court of Appeals for the Fourth Circuit considered whether the Maryland Fair Share Health Care Fund Act was preempted by ERISA, in Retail Industry Leaders Association v. Fielder. The Fair Share Act was designed to fund public health benefits in part from contributions from large employers. It would have required large employers to spend a certain percentage of the total wages paid to their employees on health insurance costs, or to pay the state the difference between what the required percentage and what the employer actually provided to its employees. The state would then spend the money on public health care. The Fourth Circuit held that the Maryland Fair Share Act was preempted by ERISA because the law interfered with uniform national administration of employee benefit plans, and would result in inconsistent health benefits regulations in different states.

Suffolk County, New York enacted a similar law, the Suffolk County Fair Share for Health Care Act. The United States District Court for the Eastern District of New York struck down the Suffolk County Act based on ERISA preemption on July 14, 2007. The Suffolk County Fair Share Act was structured similarly to the Maryland Fair Share Act, and the court relied heavily on the Fourth Circuit's holding in reaching a similar conclusion.

Multiple other states are considering similar legislation, and Massachusetts enacted comprehensive statewide health insurance legislation in 2006. The Massachusetts law has yet to be challenged in court. It is clear, however, that there is a growing trend in state and local attempts to regulate health insurance and health benefits. Many of those attempts may end up in litigation. Companies that sponsor employee benefit plans should be aware of the broad, preemptive effect of ERISA. Companies must now also be mindful of the rapidly-changing field of state and local benefits regulation. While many attempts at such legislation have been struck down by federal courts, others continue in effect, and still more are contemplated.

Congress Considers "No Discrimination In Health Insurance Act"

Congress is considering a new bill that would prohibit health insurance providers from denying coverage to employees with serious pre-existing health conditions when they change jobs. Currently, federal law prohibits insurers from basing eligibility rules or premium rates on certain health conditions, but there are significant exceptions. One such exception permits insurers to deny coverage to new employees with preexisting health conditions for the first year of employment. The new bill, titled the No Discrimination in Health Insurance Act ("NDHIA"), H.R. 5449, would eliminate this exception.

The NDHIA would also prohibit insurance companies from charging higher rates to people who purchase insurance coverage for themselves individually. As a result, insurers would be forced to provide coverage to individual consumers at group coverage rates. The law would also prohibit insurers from charging different rates to consumers in the same state based on geographic or metropolitan distinctions. Additionally, the NDHIA would require insurers to make their rate tables available to the public through governmental disclosures and internet postings.

The bill's chief sponsor, Rep. Steve Kagen (D-Wis.) has called the bill, "essential legislation [that] will guarantee access to affordable care for every citizen in America&." Representatives of both the American Federation of State, County and Municipal Employees (AFSCME) and the Service Employees International Union (SEIU) have already come out in favor of the proposed legislation, which is currently being examined by the House Ways and Means Committee. Stiff opposition to the bill is anticipated from the insurance industry, which is expected to caution that passage of the NDHIA will result in additional increases in the costs of health care, which have already been increasing about three times as rapidly as wages in recent years.

If enacted, the NDHIA would represent the first significant modifications to ERISA's anti-discrimination provisions since the passage of the Health Insurance Portability and Accountability Act ("HIPAA") in 1996.

Supreme Court Expands 401(k) Participant Remedies

In a unanimous decision, the United States Supreme Court recently expanded the scope of remedies available to 401(k) plan participants under Section 502(a)(2) of the Employee Retirement Income Security Act ("ERISA") for fiduciary duty breaches. The ruling in LaRue v. DeWolff Boberg & Associates, Inc., permits participants to sue 401(k) plans for losses to the participants' individual accounts. This marks a significant departure from earlier lower court cases that had held that ERISA's limitation of recovery for fiduciary breaches to "losses to the plan as a whole," prohibited such individualized recoveries. As a result, only class action lawsuits were considered viable options for remedying fiduciary breaches by trustees of 401(k).

Under the newly-announced more lenient standard, the Court has determined that damage to an individual 401(k) participant's account qualifies as damage to the plan as a whole. The Court explained that the shift in emphasis from protection of the "entire plan" to the protection of individual accounts reflected the change in the "landscape of employee benefit plans." In recent years, there has been a dramatic shift in the employee benefits field away from traditional "defined benefit plans," to "defined contribution plans," which now dominate the retirement plan scene.

Defined benefit plans invest assets as directed by the trustees in order to guarantee a rate of return for qualifying participants. As a result, mismanagement of plan assets has a negative effect on all plan participants. In a defined contribution plan, however, separate accounts are maintained for each employee's respective contributions. The most prevalent defined contribution plan is the 401(k) plan. In a 401(k) plan, accounts are invested individually by the participants themselves. The eventual benefits paid to vary depending on the value of the contributions and the rate of return on the investment. Before LaRue, federal courts had generally used this distinction to prohibit defined contribution plan participants from proceeding with lawsuits against trustees for fiduciary duty breaches.

It is expected that the impact of the decision will be an increase in litigation commenced against defined contribution plans, their trustees, and the plan sponsors. In addition to the viability of a new cause of action, ERISA's fee-shifting provisions permit the recovery of counsel fees and expenses by successful plaintiffs.

As a result of this ruling it is imperative that defined contribution plans and the companies that sponsor them take greater steps to ensure that all aspects of the operation and administration of their plans comply with the rigid standards required under ERISA. Under ERISA, it is a breach of fiduciary duty for any plan fiduciary to carry out one's fiduciary duties in any manner that is not in the "solely in the interest of the participants and beneficiaries." To be actionable, fiduciary duty breaches do not need to be malicious, criminal, or even intentional. In LaRue, the alleged breach of fiduciary duty in was the plan's failure to follow LaRue's directions regarding investment changes to his account. These failures allegedly caused LaRue's interest in his individual account to be depleted by $150,000.

The Supreme Court's decision in LaRue will undoubtedly have a serious and far-reaching impact on all employers that provide 401(k), or other defined contribution benefits to their employees. Companies that sponsor or administer 401(k) plans are fiduciaries of those plans. ERISA does not, however, limit the fiduciary "label" to named sponsors or administrators. Fiduciary status can also attach to anyone who acts in a fiduciary capacity. Company executives, officers, and directors are often charged with oversight of company benefit plans. By exercising discretion over the administration of a plan, these individuals exercise control over plan assets and become functional fiduciaries. Under ERISA, all fiduciaries can be held personally liable for losses to the plan caused by breaches of fiduciary obligations. Delegating oversight of company defined contribution plans to investment managing firms or third party administrators does not absolve a fiduciary from his/her responsibilities under ERISA to ensure that assets are managed prudently, and that the plan is administered solely in the interest of participants and beneficiaries.

This is not to say that 401(k) plans are ill-advised. A 401(k) plan is often a cost-effective benefit plan that can be used by employers to attract and retain top employees. Companies should not, however, ignore the operation of these plans once they are set up. In this new landscape of fiduciary liability, there is now a heightened need for companies to monitor their employee benefit plans, and make sure to have appropriate professional assistance and fiduciary liability coverage.

Erisa Spring 2008 Supreme Court Preview

Three cases of involving significant employee benefits issues are pending this spring before the United States Supreme Court. The high Court's determination in each matter could have far-reaching effects on companies and the employment benefits they provide to their workers.

MetLife v. Glenn, U.S. No. 06-923

The Supreme Court is considering the potential conflict between the "dual roles" often inherent in plan administration. In MetLife v. Glenn, the plaintiff participated in her employer's disability insurance plan through MetLife. In 2000, Ms. Glenn was diagnosed with a heart condition that her treating physician stated prevented her from returning to work. Under the terms of the MetLife plan, a participant was initially considered "totally disabled" if she was unable to perform her own occupation due to her condition ("own-oc"). MetLife initially approved Ms. Glenn's disability benefits. After two years, however, the plan provided benefits only to those participants who were unable to perform the tasks associated with any occupationnot just her own job ("any-oc"). At this point, MetLife informed Ms. Glenn that in order to continue receiving benefits, she would need to demonstrate that her condition rendered her unable to perform the functions of any occupation.

Although Ms. Glenn's cardiologist maintained that she was unable to perform any occupation due to her heart condition, MetLife determined that she was no longer eligible for benefits, and denied her claim. The United States District Court for the Southern District of Ohio upheld the denial of benefits as neither arbitrary nor capricious. The United States Court of Appeals for the Sixth Circuit, however, reversed the lower court, ruling that it did not adequately consider the "apparent conflict of interest" created by MetLife's positions as both the judge of eligibility for benefits, and payor of those benefits.

MetLife has appealed the ruling, and the Supreme Court granted certiorari to determine how a conflict of interest in the situation of an administrator that both determines and pays claims under an ERISA plan should be taken into account on judicial review of a discretionary benefit determination. The case was argued on April 23, 2008.

Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, U.S. No. 07-636

The Supreme Court is also set to determine this spring whether a Qualified Domestic Relations Order ("QDRO") is the only method by which a divorcing spouse can waive rights to ERISA pension benefits. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, the decedent (Mr. Kennedy) was a participant in DuPont's Savings and Investment Plan ("SIP"). In 1974, Mr. Kennedy designated his wife as the sole beneficiary of his SIP account. The Kennedys divorced in 1994, and pursuant to the divorce decree, Mrs. Kennedy agreed to waive all rights that she had in any of Mr. Kennedy's retirement accounts. In 1997 a QDRO covering certain non-SIP accounts was approved, but no QDRO was ever entered covering the SIP account. Additionally, Mr. Kennedy never changed the beneficiary designation on the SIP account.

Upon Mr. Kennedy's death, the executrix of his estate instructed DuPont to remit the balance of the SIP account to the estate. DuPont refused, and instead delivered the balance to Mrs. Kennedy pursuant to the 1974 designation form. The estate then filed a lawsuit against DuPont seeking recovery of the SIP plan proceedsapproximately $400,000. The district court, applying federal common law principles, ruled that the divorce decree constituted a sufficient waiver of Mrs. Kennedy's rights to the SIP plan and ruled in favor of the estate.

The United States Court of Appeals for the Fifth Circuit reversed that determination. In so doing, the court explained that ERISA's anti-alienation provision trumped federal common law analysis. Section 206(d) of ERISA requires that "Each pension plan shall provide that benefits under the plan may not be assigned or alienated." ERISA also specifies that a QDRO is the only exception to the anti-alienation provision. The court noted that there is obvious tension between the fact-sensitive waiver approach under federal common law and ERISA's strict anti-alienation provision. The court noted, however, that when a statute provides a specific mechanism for addressing an issue (the QDRO being the only way to defeat ERISA's anti-alienation provision); there is no need to formulate a federal common law rule on the matter.

Mr. Kennedy's estate petitioned the Supreme Court for review, and certiorari was granted as to the issue of whether a QDRO is the only way for a divorcing spouse to waive his or her rights to the other spouse's retirement benefits. The case will be fully-briefed by May 5, 2008, and argument is expected later this year.

Amschwand v. Spherion Corporation, U.S. No. 07-841

In Amschwand v. Spherion Corporation, the Supreme Court has been asked to review a determination by the United States Court of Appeals for the Fifth Circuit that ERISA's "make whole" remedies that allow plan beneficiaries to obtain "other equitable relief," do not include the payment of life insurance proceeds that would have accrued to the plan beneficiary but for a plan fiduciary's breach of fiduciary duty.

In that case, Mr. Amschwand (a Spherion employee) took a medical leave after he was diagnosed with cancer. Spherion provided life insurance to its employees through an ERISA-covered benefit plan, and the company served as a fiduciary and the plan administrator. During Mr. Amschwand's leave, Spherion switched life insurance carriers (changing from Prudential to Aetna). The Aetna policy provided that any employee who was absent from work when the policy began would not qualify for coverage until that employee returned to work for at least one day. Spherion and Aetna also, however, agreed to waive this restriction for any employee whose absence was caused by a preexisting medical leave. Mr. Amschwand was not included in this waiver, although other similarly situated employees were included. Spherion offered no explanation for the omission.

After the change to Aetna, Spherion notified its employees of their opportunity to participate in the plan during an open enrollment period. Mr. Amschwand enrolled, and was informed by Spherion that he could maintain his $390,000 coverage from the Prudential policy under the new Aetna policy. As his condition progressed, Mr. Amschwand repeatedly contacted Spherion to confirm his coverage, and during each conversation Spherion maintained that he was covered. Spherion also never provided Mr. Amschwand with requested plan documents. Mr. Amschwand timely paid all premiums until his death the following year.

After Mr. Amschwand's death, his wife attempted to collect the proceeds of the Aetna policy, but was informed that her husband was ineligible for coverage because he had not returned to work since the inception of Aetna coverage. Mrs. Amschwand filed a lawsuit against Spherion under ERISA Section 502(a)(3) seeking recovery of the $390,000 she would have received if her husband had qualified for benefits. Spherion refunded the premium payments to Mrs. Amschwand, but maintained that the money damages she sought did not constitute "appropriate equitable relief" recoverable under ERISA.

The Fifth Circuit agreed with Spherion, and held that ERISA does not provide for the recovery of monetary damages in this situation. The court explained that the remedies available to Mrs. Amschwand are only those typically awarded by courts of equity (injunction, mandamus, restitution, etc.). Mrs. Amschwand's requested relief was a demand for money damages, a purely legal remedyand one simply not permitted by the statute.

The Fifth Circuit's opinion demonstrates a conflicted court. As Judge Benavides explained in a special concurring opinion, the legal precedent supports Spherion's position, but the facts tell a compelling story. The case "scream[s] out for a remedy beyond the simple return of premiums." Regrettably, under existing law it is not available." The Supreme Court has not yet determined whether to grant certiorari.

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