The U.S. Court of Appeals for the Ninth Circuit, in The Depot, Inc. vs. Caring for Montana, has ruled that state law claims of fraud and misrepresentation are not preempted by ERISA.
Facts: Three employers provided their employees with health care insurance based on the insurer’s representations that the monthly premiums would reflect only the cost of providing benefits. The employers later said these representations were false and that the insurer padded the premiums with hidden surcharges, which it used to pay kickbacks and to buy unauthorized insurance products.
In response, the employers sued the insurer under ERISA and state law, claiming that it had violated its fiduciary duties and certain state laws against fraud and misrepresentation.
The employers asserted that the insurer was an ERISA fiduciary because it performed most of the claims management and administration duties while the employers’ role was limited to deducting monthly premiums from their employees’ wages and notifying the insurer if an employee lost eligibility for coverage.
The district court dismissed the lawsuit, ruling that the insurer did not satisfy ERISA’s definition of a “fiduciary” for purposes of the breach of fiduciary duty claim, and that the state-law claims were preempted by ERISA because they constituted “alternative enforcement mechanisms” to ERISA.
Decision: The Ninth Circuit first upheld the lower court’s ruling with regards to fiduciary violations, stating that insurance companies do not exercise fiduciary discretion over plan assets or plan management when they negotiate at arm’s length to set rates or collect premiums. Rather, the employers “paid the premiums to the insurer in exchange for a contractual right to receive a particular service-healthcare coverage.” The premiums were monthly fees that the insurer collected as revenue for providing that service and the insurer had no control over plan assets.
However, the Ninth Circuit upheld the employers’ right to sue under state law. The court noted that, in general, ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” The court further observed that there are two categories of state-law claims that “relate to” an employee benefit plan: (i) claims that have “reference to” an ERISA plan, and (ii) claims that have an “impermissible connection to” a plan.
A claim has “reference to” an ERISA plan if it “is premised on the existence of an ERISA plan” or if “the existence of the plan is essential to the claim’s survival.” In this case, however, the employers’ state-law claims are not premised or dependent on the existence of an ERISA plan and could have occurred without the existence of an ERISA-covered plan. Thus the court concluded that the employers’ state-law claims do not have an impermissible reference to an ERISA plan.
The court next explained that a state law claim has “an impermissible connection” to an ERISA plan if the state law governs a central matter of plan administration, interferes with nationally uniform plan administration, or if it “bears on an ERISA-regulated relationship.” Preventing “sellers of goods and services…from misrepresenting the contents of their wares… is certainly an area of traditional state regulation that is…quite remote from the areas with which ERISA is expressly concerned.”
The court ruled that the duties implicated in the employers’ state-law claims do not derive from ERISA; “indeed, ERISA does not purport to govern negotiations between insurance companies and employers. Each of the state-law claims arises from [the insurer’s] misrepresentations and the effect they had on the employers’ decision to obtain insurance through the insurer. The legal duties in these state-law claims are independent of the duties imposed by ERISA and would exist regardless of whether an ERISA plan existed.
The court, therefore, said the state law claims were not preempted by ERISA and allowed that portion of the lawsuit to continue.