V.
PREEMPTION
Section 514(a) of ERISA states that the statute “shall supersede any and all State laws insofar as they
may now or hereafter relate to any employee benefit plan” that is covered by ERISA. Section
514(b)(2)(A) (the “insurance savings clause”) exempts “any law of any State which regulates
insurance,” with the proviso in subparagraph (B) that an employee benefit plan may not be “deemed”
to be an insurance company for state regulatory purposes.
A.
Supreme Court Preemption Guidance
No other ERISA provision has so intensively occupied the Supreme Court. Initially, the Court
interpreted preemption broadly, announcing that a state law “relates to” an ERISA plan “in the normal
sense of the phrase if it has connection with or reference to such a plan,” Shaw v. Delta Air Lines,
Inc., 463 U.S. 85, 96-97 (1983); and giving the phrase “relates to” a “broad common-sense
meaning,” Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47 (1987). The Court reiterated in 1990 that
the “deliberately expansive” language of Section 514 was designed “to establish pension plan
regulation as exclusively a federal concern.” Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138
(1990) (internal quotations and citations omitted).
In retrospect, Ingersoll-Rand was the high water mark of ERISA preemption. The Supreme Court
had always recognized that “some state actions may affect employee benefit plans in too tenuous,
remote, or peripheral a manner to warrant a finding that the law ‘relates to’ the plan.” Shaw, 463
U.S. at 100 n.21. Later Supreme Court decisions retreat from the broad “relates to” analysis and
bring ERISA closer to the standard preemption doctrine that focuses on whether Congress intended
the federal statute to preempt particular areas of traditional state regulation. However, they maintain
the Shaw concepts of “connection with” and “reference to” plans for identifying preempted law, and
do not overrule any of the earlier decisions.
In New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645
(1995), the Court held that ERISA does not preempt state health care initiatives that place surcharges
on medical bills of patients. It noted that within areas of traditional state regulation, the Supreme
Court works “on the assumption that the historic police powers of the States were not to be
superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” Id. at
655 (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947)). The Court cautioned against
applying the “relate to” language of Section 514(a) of ERISA too broadly. Travelers, 514 U.S. at
655. Instead, the court must “go beyond the unhelpful text and the frustrating difficulty of defining its
key term and look instead to the objectives of the ERISA statute as a guide to the scope of state law
that Congress understood would survive.” Id. at 656. Travelers identified those objectives as
avoiding a multiplicity of regulation in order to permit national uniform administration of benefit plans.
Focusing on the “connection with” leg of the preemption test, the Court described past decisions as
preempting laws “mandating employee benefit structures or their administration,” or providing
“alternative enforcement remedies.” Id. at 659. The state surcharge law did not do those things, and
its indirect economic influence on plans was insufficient to justify preemption, particularly since
“nothing in ERISA indicates that Congress chose to displace general health care regulation, which
historically was a matter of local concern.” Id. at 661.
Two years later, in De Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806
(1997), the Court reiterated that health care was a traditional subject of state regulation, and held that
ERISA does not preempt a state tax on gross receipts for patient services at diagnostic and treatment
centers owned and operated by ERISA plans. The same year, in California Div. of Labor Stds.
Enforcement v. Dillingham Constr., N.A., Inc., 519 U.S. 316 (1997), the Court held that ERISA
does not preempt a state prevailing wage statute allowing a lower minimum wage for workers in
state-certified apprenticeship programs than for those in apprenticeship programs that are not
state-certified. Justice Scalia in his Dillingham concurrence plainly stated that the Court’s earlier
preemption interpretations were wrong and that the “relate to” clause was meant “not to set forth a
test for preemption, but rather to identify the field in which ordinary field preemption applies.”
Dillingham, 519 U.S. at 336 (Scalia, J., concurring).
In UNUM Life Ins. Co. v. Ward, 526 U.S. 358 (1999), the Court considered the scope of the
insurance savings clause, and held that California’s insurance “notice prejudice” rule (late notice is
excused unless the delay prejudices the insurer) was not preempted, but the California doctrine
holding the employer under a group policy plan to be an agent of the insurer for notice purposes was
preempted. The Court has now decided, in Rush Prudential HMO, Inc. v. Moran, 122 S. Ct. 2151
(June 20, 2002), that the insurance savings clause saves state mandates for independent review of
HMO “medical necessity” determinations. Moran is discussed in Section II.A., supra.
While Travelers, DeBuono, Dillingham, Ward and Moran all limited preemption, two Supreme Court
cases in this period nevertheless reaffirmed preemption of state laws affecting spousal rights in
pensions. In Boggs v. Boggs, 520 U.S. 833 (1997), a divided Court held that ERISA preempts state
community property law that allowed a deceased spouse to bequeath her marital interest in the
participant’s pension to the children of the first marriage. It based preemption on the direct conflict of
this aspect of state law with ERISA’s specific protection for the surviving spouse of the second
marriage, and with its more general framework of rights to plan benefits. In Egelhoff v. Egelhoff, 532
U.S. 141 (March 21, 2001), the Court held that ERISA preempts a state law automatically revoking
upon divorce a designation of a spouse as beneficiary. Egelhoff is discussed in Section II.E., supra.
The principal theme of lower court preemption cases over the past few years is their struggle to
reconcile Travelers, DeBuono, Dillingham, Ward and now Moran with earlier Supreme Court cases
and with their own circuit precedents, which themselves reflect different evolutionary stages of
Supreme Court preemption doctrine. However, the narrowing of ERISA’s preemptive scope
following Travelers now seems to be meeting increased resistance in the appellate courts. One
indication of the trend is that of the ten principal decisions discussed in this Section where an appellate
level court reversed a lower court ERISA preemption decision on the merits in whole or in part, six
reversed in the direction of finding no (or less) preemption. But the outcome is not so much a uniform
shift in standards, as a vast enlargement of the concepts, guideposts, and analytical paradigms that
courts can bring to bear depending on their view of the nature of the case. The ongoing ferment and
outright conflicts in the lower courts mean that the Supreme Court likely will have to continue deciding
ERISA preemption cases for a long time to come.
B.
Benefit Claims and Related Torts
In Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987), the Supreme Court held that ERISA
preempted a suit asserting state law breach of contract and tort claims for improper processing of a
claim for benefits under an ERISA plan. The court found that the plaintiff’s claims “related to” the
ERISA plan because they were based on alleged improper processing of a claim for benefits under
the plan. Id. at 47-48. The court also concluded, based in part on a determination that ERISA
provides the exclusive remedy for allegations of improper claims processing, that the plaintiff’s claims
were not saved by the insurance savings clause. Id. at 57.
The Supreme Court had already held that ERISA does not itself allow extra-contractual
compensatory and punitive damages respecting a claim for benefits. Massachusetts Mutual Life Ins.
Co. v. Russell, 473 U.S. 134 (1985). Therefore, a finding that ERISA preempts claims which
essentially assert wrongful denial, improper processing, or misrepresentation or fraud, respecting plan
benefits, usually leaves the plaintiff with no remedy, or an arguably inadequate remedy, for an injury
suffered by the plaintiff. See, e.g., Corcoran v. United Healthcare, Inc., 965 F.2d 1321 (5th Cir.)
(ERISA preempts claims against HMO for refusal to authorize full-time home nursing care during
high-risk pregnancy ending with death of fetus; lack of a remedy does not affect ERISA preemption
analysis), cert. denied, 506 U.S. 1033 (1992).
1.
Contractual Benefit Claims and Related Torts
The Travelers line of cases has not seriously eroded the core holding of Pilot Life, that ERISA
preempts state law claims by plan participants for plan benefits or their equivalent. But litigation
continues over the boundary between claims that “relate” to a plan and those that do not.
The Fifth Circuit held that benefit claims by a non-employee independent contractor “relate to” the
plan in Hollis v. Provident Life & Accident Ins. Co., 259 F.3d 410 (5th Cir. Aug. 8, 2001)
(ERISA preempts state breach-of-contract and bad faith action by independent contractor covered
by ERISA plan). The employer maintained a combined program for both its independent contractor
sales agents like Hollis and its employee sales agents whereby it paid the first $600 of premiums for
disability insurance that the participant would procure from an insurer of his choice. Hollis chose a
Provident disability policy, became disabled, and began receiving benefits under the policy. Provident
later terminated his benefits on the grounds that Hollis did not have “total disability.” Id. at 412-13.
Hollis then sued Provident for breach of contract and bad faith denial. Provident moved for summary
judgment on the grounds of ERISA preemption, but the trial court denied the motion, and Hollis won
a jury verdict on his claim against Provident. Id. at 413.
The court of appeals reversed. It found preemption to apply “when two elements are present: (1) the
state law claims address areas of exclusive federal concern, such as the right to receive benefits under
the terms of an ERISA plan; and (2) the claims directly affect the relationship between the traditional
ERISA entities -- the employer, the plan and its fiduciaries, and the participants and beneficiaries.”
Id. at 414 (citing Weaver v. Employers Underwriters, Inc., 13 F.3d 172 (5th Cir.), cert. denied, 54
U.S. 1129 (1994); Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236 (5th Cir.
1990)). The first element was satisfied because the program covered employee salesmen as well as
Hollis, who was therefore claiming benefits under an ERISA plan. Id.
The second element required more discussion, since in Weaver the Fifth Circuit said that state law
claims could be preempted only when the claimant was a “participant” or “beneficiary,” and held that
claims by an independent contractor were not preempted. Weaver reasoned that an independent
contractor was not an “employee” and thus could not be a “participant” under ERISA Section 3(7),
and was not made a “beneficiary” by the terms of the plan before the court. See Hollis, 259 F.3d at
415. The district court had apparently relied on Weaver in denying summary judgment. The Hollis
court acknowledged that Hollis could not be a “participant,” but concluded that he could still be a
“beneficiary”: “For this particular issue, what we did not say in Weaver is more important than what
we said. We did not say that his status as an independent contractor had anything to do with him not
being a beneficiary. In fact, implicit in our holding in Weaver is that an independent contractor can be
a beneficiary so long as he is a person ‘who is or may become entitled to a benefit under the plan.’”
Id. at 415 (quoting ERISA § 3(8)).
Therefore the issue became whether “beneficiary” meant only family members or other non-workers
designated by the worker whose service resulted in the accrual of benefits (as Hollis argued, citing
Darden v. Nationwide Mutual Ins. Co., 796 F.2d 701, 704 n.3 (4th Cir. 1986)), or whether it
included anyone (including independent contractor participants) able to receive benefits from a plan
(as held in all the other circuits canvassed by the Hollis court: Wolk v. Unum Life Ins., 186 F.3d 352
(3d Cir. 1999), cert. denied, 528 U.S. 1076 (2000); Engelhardt v. Paul Revere Life Ins. Co., 139
F.3d 1346 (11th Cir. 1998); Prudential Ins. Co. v. Doe, 76 F.3d 206 (8th Cir. 1996); Peterson v.
American Life & Health Ins. Co., 48 F.3d 404 (9th Cir.), cert. denied, 516 U.S. 942 (1995)). The
majority rule was supported by the literal language of the statute and the rationale that “'to hold
otherwise would create the anomaly of requiring some insureds to pursue benefit claims under state
law while requiring others covered by the identical policy to proceed under ERISA'.” Hollis, 259
F.3d at 416 (quoting Peterson, 48 F.3d at 409). The Fifth Circuit thus joined the majority, vacated
the trial court’s decision, and remanded with rather specific instructions that the district court should
determine whether Hollis had exhausted his administrative remedies, and then, depending on this
determination, either remand to the plan administrator for consideration or determine whether to allow
Hollis to amend his claim to seek judicial review under the appropriate standard for review of a plan
administrator’s decision. Id.
The Seventh Circuit rendered an unpublished opinion addressing whether a pre-employment promise
of benefits “relates to” an employer’s ERISA plan in Welles v. Brach & Brock Confections, Inc.,
2001 WL 823887 (7th Cir. July 18, 2001) (ERISA preempts severance pay claims based on
pre-hire employment offer letter; letter was not a separate ERISA plan; and equitable estoppel did
not apply). In Welles, the offer letter stated that, upon termination without cause, Welles would “be
eligible for 12 months’ severance,” which correctly described the company’s severance plan then in
effect, but added that “[t]hese benefits provided may be modified from time to time.” The company
later amended its severance plan and promptly thereafter laid Welles off in a reduction in force,
offering him only 32 weeks of severance pay conditional upon a release. Id. at *1-2. Welles sued.
Welles argued that the letter was an independent severance arrangement separate from the company’
s plan. The court, however, found that the letter “related to” the plan because “the Supreme Court
has defined ‘relates to’ expansively,” id. at *2 (citing Ingersoll-Rand), and the letter only purported to
summarize benefits, with the details to be forthcoming. Id. Thus Welles’ state law contract claim
based on the letter was preempted. Id. Alternatively, the court stated that Welles would lose on the
merits of a contract claim because the offer letter reserved the employer’s right to modify benefits.
Id. at *3. Further, the letter in isolation did not constitute a separate ERISA plan supporting an
ERISA claim, since it provided for a lump sum payment involving no ongoing administrative scheme.
Id. Finally, equitable estoppel did not apply because of the reserved right to modify benefits. Id.
Thus, the district court was affirmed. Id.
Language in the Welles opinion recites a questionably broad interpretation of “relates to,” based on
Ingersoll-Rand and ignoring Travelers. But the actual result in Welles clearly follows from the
underlying factual premise that the offer letter only summarized an existing amendable plan and did not
independently provide severance benefits.
District (and state) courts also faced a variety of contract-based benefit claims. In Brenner v.
Chase Manhattan Mortgage Corp., 2002 WL 655211 (D. N.J. Jan. 3, 2002) (ERISA preempts
claim for negligent failure to enroll employee in plan), the issue was whether the plaintiff was entitled to
a jury trial in her suit against her late husband’s employer for negligently failing to supply the decedent
with the proper group life plan insurance forms. The plaintiff based her jury demand on the premise
that this was a pendant state law claim. Id. at *1. But the court characterized the action as one to
recover benefits due under the plan. It reasoned that the allegations focused on the administration of
the plan, and the plaintiff did not allege that a promise or contract existed between the defendant and
the decedent outside the scope of the formal plan. Id. The court applied governing Third Circuit
cases on preemption distinguishing between plan administration-based claims of negligence
(preempted), and claims alleging negligence in the provision of services (not preempted). Id. at *2
(citing Pryzbowski v. U.S. Healthcare, Inc., 245 F.3d 266 (3d Cir. 2001); Lazorko v. Pennsylvania
Hosp., 237 F.3d 242 (3d Cir. 2000), cert. denied, 533 U.S. 930 (2001)). The court decided that
the relief sought by the plaintiff was squarely within the terms of Section 502(a)(1)(B) of ERISA.
Since the plaintiff had only an ERISA claim for equitable relief she could not demand a jury trial. Id.
at *3.
In Swearingen v. Honeywell, Inc., 189 F. Supp. 2d 1189 (D. Kan. 2002) (widow’s state law
estoppel claim preempted by ERISA, but ERISA estoppel claim allowed to proceed), the common
law widow of a purported plan participant sued Honeywell for denying her claim for survivor income
benefits following her common law husband’s death. Steve Swearingen had worked at various
Honeywell locations across the country. At his death at age 41 he worked at their facility in Olathe,
Kansas. Following his death, one of Honeywell’s attorneys informed Mrs. Swearingen that the terms
of the Bendix Salaried Employee Retirement Pension Plan entitled her to $905.40 per month as a
survivor income benefit. Id. at 1192.
Mrs. Swearingen claimed that, in reliance upon the defendant’s representation, she made a less
favorable settlement with Mr. Swearingen’s family than she otherwise would have done. Almost a
year later, Mrs. Swearingen received a letter informing her that Honeywell had determined that she
was, in fact, not entitled to the benefit. Under the terms of the plan, employees who died before
reaching the age of 50 were required to be currently employed at a Bendix location to qualify for
coverage. The Olathe location did not qualify as a Bendix location. Id.
Honeywell moved to dismiss the plaintiff’s suit, arguing four points: 1) Mrs. Swearingen lacked
standing to file suit against the plan because she could not show that she was a plan beneficiary; 2)
her complaint alleged common law estoppel, which is preempted by ERISA; 3) estoppel is not
recognized under ERISA by the Tenth Circuit; and 4) Mrs. Swearingen’s ERISA count failed to state
claim. In addition, Honeywell sought costs and attorney’s fees. Mrs. Swearingen countered with a
request to the court that the Honeywell’s motion be dismissed or that she be given an opportunity to
amend her complaint to correct any deficiencies. Id. at 1193-94.
The court held that the plaintiff had standing to bring the suit to pursue her ERISA claims. A factual
issue existed as to Mr. Swearingen’s status under the plan on the date of his death; consequently,
Mrs. Swearingen’s beneficiary status was also uncertain. Under the standard of review appropriate
for a Rule 12(b)(6) motion, the court rejected the defendant’s contention that the plaintiff lacked
standing. Id. at 1194.
The court agreed with defendant that the plaintiff’s common law estoppel claim was preempted by
ERISA. The court explained that, “[a]ccording to Tenth Circuit jurisprudence, state common law
claims based on the doctrine of promissory estoppel ‘relate to’ a benefit plan and are, therefore,
pre-empted by ERISA.” Id. at 1195 (citing Peckham v. Gem State Mut. of Omaha, 964 F.2d 1043,
1030-31 (10th Cir. 1992)). The court rejected the plaintiff’s argument that, if Mr. Swearingen were
not actually a plan participant, the claim would be a non-preempted common law claim against a
defendant that “coincidentally” had an ERISA plan. The court reasoned that the estoppel claim
“relate[d] directly to her effort to secure payment under the Bendix plan.” Id. As a result, the court