The Ninth Circuit Revisits - and Limits - the "Presumption of Prudence" For ERISA Fiduciaries

Earlier this week, the Ninth Circuit Court of Appeals ruled in Harris v. Amgen that an ERISA pension plan fiduciary is not protected from liability under the “presumption of prudence” for company stock investments where the plan offers – but does not require – investment in company stock and places restrictions on company stock purchases. 

In 2007, Amgen’s stock lost significant value due to safety concerns over drugs it developed for the treatment of anemia. Before 2007, Amgen allegedly knew or should have known that its stock price was artificially inflated due to material misrepresentations and omissions in connection with the anemia drugs and illegal sales of the drugs. Following the stock’s decline, participants in Amgen’s ERISA-governed pension plans sued for violations of the plan administrator’s fiduciary duties. Defendants filed a motion to dismiss, which the district court granted.   

Under the “presumption of prudence,” an ERISA fiduciary is entitled to a presumption that it has been a prudent investor with respect to company stock when the plan terms require or encourage investment primarily in company stock. See Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir. 2010). 

The Ninth Circuit reversed the district court’s ruling that this presumption applied in Amgen. While the plan allowed fiduciaries to offer company stock as an investment choice, it did not require or encourage investment in company stock. To the contrary, the plan terms could be read to discourage investment in company stock by restricting the amount that could be purchased and by limiting the frequency and timing of sales. 

The court also reversed the district court’s ruling that Amgen could not be sued as a fiduciary. Although Amgen delegated investment authority to trustees and investment managers, the grant of authority was not exclusive, and Amgen still retained control over investment decisions. Therefore, without an exclusive grant of authority, Amgen could still be sued as a plan fiduciary. 

SCOTUS Declines Review in Case Allowing Health Care Provider to Pursue State Law Misrepresentation Claims Against ERISA Health Plan

The United States Supreme Court recently denied certiorari in a Fifth Circuit case, United Healthcare Insurance Co. v. Access Mediquip LLC, that allowed a health care provider to pursue state law misrepresentation claims against an ERISA-governed health insurance plan. 

The provider, a medical device company, alleged that it supplied devices to patients based on representations from the ERISA plan that it would reimburse reasonable charges for the devices and related services.

The District Court ruled that ERISA preempted the state law misrepresentation claims. The Fifth Circuit reversed, holding that the state law claims could go forward because the alleged misrepresentations were based on promises of reimbursement, rather than the terms of the ERISA plan. That ruling drew a distinction between plan beneficiaries and healthcare providers with respect to reimbursement representations – ERISA preempted the former but not the latter.

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Supreme Court Upholds San Francisco Health Care Plan Requiring Employer Contributions

On June 28, 2010, the United States Supreme Court announced that it would not hear a challenge to San Francisco’s universal health care program filed by the Golden Gate Restaurant Association.  The announcement effectively put an end to a four-year legal battle.

One provision of program, titled “Healthy San Francisco,” requires that businesses with at least 20 workers either provide health care coverage to their employees or pay a certain amount of money per employee hour worked to fund the health care program.  Business groups sued to halt the program, asserting that it is preempted by ERISA because it impermissibly creates an ERISA plan, or alternatively is related to employers’ existing ERISA plans.  In 2008, the Ninth Circuit ruled that the program was not preempted by ERISA.  In refusing to hear the business-led challenge to the health care program, the Supreme Court effectively sustained the Ninth Circuit’s ruling.

The Supreme Court’s decision was consistent with the Obama administration’s recommendation that the Court turn down the case, in part because the recently enacted national health reform law makes similar city- or state-level programs unlikely.

See a summary of the Ninth Circuit’s ruling here.

See previous Golden Gate news posts here and here.

United States' Amicus Brief Argues Medicare Act Preempts Statutory Consumer Protection and State Common Law Claims

Since January 1, 2006, Part D of the Medicare Act has provided Medicare beneficiaries with an elective prescription drug benefit option. Under Part D, benefits are administered to beneficiaries through private health insurance companies, known as “sponsors,” which contract with the Centers for Medicare & Medicaid Services (CMS).

In late 2005, Do Sung Uhm and Eun Sook Uhm (the “Uhms”), Medicare beneficiaries, applied for the prescription drug benefit plan offered by Humana (the “Plan”). In accordance with the Uhms’ election to receive benefits under Part D, the Social Security Administration withheld monthly premiums from their social security benefits.

Pursuant to the Plan, the Uhms’ benefits were to begin on January 1, 2006; however, as of February 6, 2006, the Uhms had not received any information from Humana regarding how to obtain their benefits. As a result, the Uhms had to pay out-of-pocket for their prescription medications.

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Claims by Health Care Provider Against Employer Not Preempted by ERISA When Claims Arise From an Oral Contract Separate From ERISA Plan

In Marin General Hospital v. Modesto & Empire Traction Co., 581 F.3d 941 (2009), the Ninth Circuit Court of Appeals considered whether section 502(a)(1)(B) of ERISA completely preempted state-law causes of actions for breach of contract, negligent misrepresentation, quantum meruit and estoppel brought by a hospital against a patient’s employer and its claims administrator based on an alleged oral agreement between the hospital and claims administrator to pay for services provided by the hospital. Because the claims could not be pursued under section 502(a)(1)(B), but rather relied on legal duties that were independent from duties required by the ERISA plan, the Ninth Circuit concluded that the state-law claims were not preempted, depriving the court of subject matter jurisdiction. Accordingly, removal from state court was improper and the case was remanded to the district court with instructions to remand the matter to state court.

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Golden Gate Restaurant Association Files Petition for Writ of Certiorari

The City of San Francisco’s attempt to require that all employers in the city make mandatory contributions towards employee health costs may end up being decided by the United States Supreme Court. As expected, the Golden Gate Restaurant Association filed a petition for writ of certiorari asking the Supreme Court to overturn the Ninth Circuit’s holding that the city ordinance was not preempted by ERISA. There is some dispute as to whether the Ninth Circuit’s ruling created a split with the Fourth Circuit, as the dissenting judges to the petition for en banc review stated that the original opinion conflicts with a the holding in Retail Industry Leaders Association v. Fielder, 475 F.3d 180 (4th Cir. 2007). In that case, a Maryland law requiring employers to play a penalty if it did not spend a certain percentage of their payroll on health coverage was struck down on the grounds that it was preempted by ERISA. The City and County of San Francisco’s response brief is due August 24th.

See also Golden Gate Restaurant Ass’n case summary.

See also Golden Gate news post.

No ERISA Preemption of California Statute Requiring Health Care Service Plans to Reimburse Providers for Cost of Emergency Care

Coast Plaza Doctors Hospital v. Blue Cross of Calif., 2009 WL 1272631 (Cal. App. 2nd Dist. May 11, 2009)

The California Court of Appeal has held that a claim against a health care insurer that is violated California Health and Safety Code Section 1371.4 (“Section 1371.4”) is not preempted by ERISA. In Coast Plaza Doctors Hospital v. Blue Cross of Calif., 2009 WL 1272631 (Cal. App. 2nd Dist. May 11, 2009), Coast Plaza Doctors Hospital (“Coast Plaza”) provided emergency care to a patient who was enrolled in a group health plan insured by Blue Cross of California (“Blue Cross”).  Coast Plaza was an “out-of-network” provider because it did not contract with Blue Cross to provide services to Blue Cross plan participants or beneficiaries. Coast Plaza billed Blue Cross over $580,000 in costs incurred to provide emergency care to the patient. Blue Cross refused to pay the bill, contending that Coast Plaza did not submit sufficient information to demonstrate that the services were rendered in connection with a medical emergency. 

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Ninth Circuit Denies En Banc Review of Golden Gate Restaurant Association

On March 9, 2009, the Ninth Circuit denied a petition for en banc review of Golden Gate Restaurant Ass’n v. City and County of San Francisco, 546 F.3d 639 (9th Cir. 2008) wherein the Court of Appeals found that a San Francisco city ordinance requiring that all employers in the city make mandatory contributions towards employee health costs was not preempted by ERISA. Eight (generally conservative) judges joined a dissent authored by Judge Milan Smith, Jr. criticizing the decision not to rehear the case en banc, and noted that there is now a split with the Fourth Circuit; specifically, Retail Industry Leaders Ass’n v. Fielder, 475 F.3d 180 (4th Cir. 2007). In light of this split, many believe that the United States Supreme Court will accept an expected petition for certiorari.

See also Golden Gate Restaurant Ass’n case summary.

The End of Discretionary Authority in Montana?

Standard Ins. Co. v. Morrison, 537 F. Supp. 2d 1142 (D. Mont. 2008).

A ruling by District Court Judge Donald Molloy may signal the end of discretionary authority for ERISA plans in Montana.  Standard Insurance Company brought suit against John Morrison, the Insurance Commissioner for the State of Montana.  Morrison had implemented a state-wide policy disapproving ERISA plans that contained any clauses that conferred discretionary authority to the plan/claims administrator, which would give rise to a more deferential judicial standard of review when the decision of the plan/claim administrator is challenged in the district court. 

Standard Insurance argued Morrison’s actions were pre-empted by ERISA and exceeded his authority.  However, the court found neither argument persuasive and stated that there was no law granting Standard the right to a particular standard of review.  The court reasoned that “ERISA’s Savings Clause recognized the traditional role of states in regulating insurance on behalf of state citizens and in accordance with state public policy objectives.”  This case "is the straight forward regulation of insurance, a matter ERISA expressly saves from preemption.”

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ERISA Preempts State Law Requiring That Insurer Reimburse Claimant for Copying Costs

Sgro v. Danone Waters of North America, Inc., 532 F.3d 940 (9th Cir. 2008).

A participant in an ERISA plan sued his employer (as plan administrator) and MetLife seeking unpaid disability benefits, reimbursement of copying costs and statutory penalties for failure to respond to a document request.

The claim for copying costs was based on California state law, which requires that an insurer reimburse claimants for costs associated with duplicating medical records. While ERISA preempts most state laws, some laws that “regulate insurance” are saved from preemption. Here, the Ninth Circuit ruled that, although the regulation requiring reimbursement by insurers is undoubtedly aimed at insurance companies, it does not “significantly affect the risk-pooling arrangement between the insurer and insured,” and therefore cannot be said to regulate insurance. Accordingly, the state law was preempted by ERISA.

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City Ordinance Requiring Minimum Health Care Expenditures for Employees is Not Preempted by ERISA

Golden Gate Restaurant Ass'n v. City and County of San Francisco, 546 F.3d 639 (9th Cir. 2008).

The city of San Francisco passed an ordinance requiring that most city-based employers make a certain level of health care expenditures on behalf of their covered employees.  (Basically, employers were required to either provide health care benefits to employees or pay the City a certain amount of money per employer hour worked to fund a city-run Health Access Plan.)  Employers argued that the ordinance was preempted by ERISA because it impermissibly created an ERISA plan, or related to employers’ existing ERISA plans.  Citing a presumption against preemption, the Court of Appeals for the Ninth Circuit found that the ordinance was not preempted by ERISA.

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