As a class action geek and an ERISA geek, one case that fascinated me recently is Wurtz v. The Rawlings Co., LLC, No. 13-1695-cv (2d Cir. July 31, 2014). This is the case of CAFA meets ERISA, and the case is important both for its procedural analysis and substantive holdings. In Wurtz, the Second Circuit held that while there would have been no jurisdiction for the federal court to hear the ERISA dispute in question, such jurisdiction did exist under CAFA. And in deciding that there was no ERISA preemption in the antisubrogation context, the Second Circuit’s substantive holding is at odds with holdings in other circuits.
Plaintiffs filed a class action in state court seeking to enjoin defendant insurers from obtaining reimbursement of medical benefits from plaintiffs’ tort settlements under New York General Obligations Law section 5-335, which provided (prior to 2013) “that a personal injury settlement presumptively ‘does not include any compensation for the cost of health care services’ or other losses that ‘are obligated to be paid or reimbursed by a benefit provider’ (such as an insurer), and that benefit providers have no ‘right of subrogation or reimbursement against any such settling party.'” (Note that the law changed in 2013 from referring to a “benefit provider” to referring to an “insurer.”)
Defendants removed the action to federal court and moved to dismiss, contending that plaintiffs’ claims were preempted under ERISA. The district court granted the motion to dismiss, holding that the claims were both expressly and completely preempted under ERISA.
The Second Circuit began by examining its own subject matter jurisdiction. It noted that complete preemption can be a basis for federal subject matter jurisdiction, but that because it did not agree with the district court that N.Y. Gen. Oblig. Law 5-335 was completely preempted by ERISA, there had to be another basis for federal jurisdiction for the court to reach the merits of the case.
Enter CAFA. Although the court held that there was no complete preemption here, it nevertheless held that it had subject matter jurisdiction under CAFA. Under CAFA, federal jurisdiction exists when there are at least 100 putative class members, minimal diversity exists and the amount in controversy exceeds $5,000,000. The court found the test easily satisfied here from the face of the complaint and that none of CAFA’s exceptions applied.
The court then reached the specifics of the preemption arguments. As is well established, ERISA expressly preempts any state law that “relate[s] to any employee benefit plan,” but only if such law does not “regulate insurance.” A law regulates insurance and is thus “saved” from express preemption when “it (1) is ‘specifically directed toward entities engaged in insurance,’ and (2) ‘substantially affect[s] the risk pooling arrangement between the insurer and the insured.'”
Relying on the U.S. Supreme Court’s holding in FMC Corp. v. Holliday, 498 U.S. 52 (1990), the Second Circuit overruled the district court, and held that N.Y. Gen. Oblig. Law section 5-335 does regulate insurance and is thus saved from express preemption under ERISA, “as it is specifically directed toward insurers and substantially affects risk pooling between insurers and insureds.” In so holding, the Second Circuit found that the fact that the law applied beyond the insurance field did not mean that it was not also “specifically directed” at insurers. Similarly, relying on the U.S. Supreme Court’s decision in Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985), the Second Circuit rejected the argument that because the law does not affect the entire insurance market it does not substantially affect the risk pooling arrangement between insurer and insured.
With regard to complete preemption, the Second Circuit applied the U.S. Supreme Court’s test in Davila, pursuant to which claims are subject to complete ERISA preemption “if they are brought (i) by ‘an individual [who] at some point in time, could have brought his claim under ERISA section 502(a)(1)(B),’ and (ii) under circumstances in which ‘there is no other independent legal duty that is implicated by a defendant’s actions.'” Here, the court held that neither part of the test was satisfied. As to a section 502(1)(1)(B) claim, that section allows a plaintiff “to recover benefits due to him under the terms of the plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” As the court held: “The claims in plaintiffs’ complaint seek to do none of these things. Plaintiffs do not contend that they have a right to keep their tort settlements ‘under the terms of [their] plans’ — rather, they contend that they have a right to keep their tort settlements under N.Y. Gen. Oblig Law section 5-335.” Similarly, as to the second part of the test, the court held that another independent legal duty was implicated because the plans are not relevant to the question of whether plaintiffs can keep their tort settlements under New York law: “[p]laintiffs’ claims do not derive from their plans or require investigation into the terms of their plans; rather, they derive from N.Y. Gen. Oblig. Law section 5-335.”
The court recognized that its preemption holding was “in tension” with holdings in other circuits (notably, the Third, Fourth and Fifth Circuits), but reasoned that “because ERISA is silent on subrogation, our decision does nothing to disturb ERISA’s goal of national uniformity in employee benefit plan regulation.”
While this area of the law may seem esoteric, the decision is important as it adds to the debate on the tension between ERISA and state law and demonstrates a court’s use of CAFA as a means to delve into that debate.