What happens when state statutes impose duties on third parties administering ERISA plan benefits?

That issue was addressed this last week in the July 9, 2010 case of Pharmacy Care Management Association v. District of Columbia, 2010 WL 2696524 (July 9, 2010)(Imposing requirements upon third party service providers that administer pharmaceutical benefits for an employee benefit plan will “function as a regulation of an ERISA plan itself” and therefore are preempted. Op. at 8.).

The opinion provides some useful analysis on a variety of issues.

Facts: The Pharmacy Care Management Association (PCMA) is a trade association. It challenged a District of Columbia law that required benefit managers to act as fiduciaries, pass on discounts, and disclose information containing conflicts of interest. PCMA contended the law was preempted by ERISA.

HELD: District of Columbia Circuit Court of Appeals. District of Columbia law was preempted.

RATIONALE.

  1. A state law “relates to” [employee benefit plan (EPB)] if it [1] has a connection with or [2] reference to such a plan.”
  2. The District of Columbia government contended such regulations are not preempted, relying upon garden variety breach of contract or medical malpractice cases in which courts from other jurisdictions held ERISA did not preempt such claims. But none of the cases cited actually involved a state law regulating a third party administering employee benefits on behalf of the plan. Op. at 6.
  3. Some cases suggest a state law regulating a third party’s performance of administrative functions on behalf of a plan could be preempted. Op. at 6.
  4. This state statute provisions “touched upon ‘a central matter of plan administration’… and are preempted if they also have an impermissible effect upon an [employee benefit plan.]”
  5. The Supreme Court has not prescribed a standard for determining whether a state law sufficiently constrains an employee benefit plan’s decision-making to be deemed preempted. Op. at 8.
  6. Imposing requirements upon third party service providers that administer pharmaceutical benefits for an employee benefit plan will “function as a regulation of an ERISA plan itself” and therefore are preempted. Op. at 8.
  7. What is a plan administrator? Plan administration includes “determining the eligibility of claimants, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payments, and keeping appropriate records in order to comply with applicable reporting requirements.” Op. at 5.

ERISA allows an award of attorney fees “to either party” at the Court’s “discretion”— so long as the party seeking fees has achieved “some degree of success on the merits.” Hardt v. Reliance Standard Life Insurance Company, U.S. (May 24, 2010).

FACTS:

Hardt had surgeries for back, neck and carpal tunnel issues and made a long term disability claim under the applicable ERISA plan.

Reliance paid benefits for a while and then terminated benefits. Hardt sued.

District Court: The Court concluded Reliance’s denial of benefits was unreasonable, and remanded to Reliance for further review. Plaintiff then sought attorney fees for obtaining the remand. The Court awarded attorney fees to Hardt, concluding a remand satisfied the common law “prevailing party” requirement used in the Fourth Circuit. Reliance appealed.

COURT OF APPEALS: Vacated trial court. Rationale: Remand does not satisfy “prevailing party” requirement. To be a prevailing party one must obtain an “enforceable judgment on the merits.”

Hardt appealed to the U.S. Supreme Court.

UNITED STATES SUPREME COURT:

  1. One seeking attorney fees need not be a prevailing party to win attorney fees. The term “prevailing party” does not appear anywhere in the ERISA provision allowing for an award of attorney fees. Opinion at 8.
  2. Fees may be awarded in the Court’s discretion, but a court does not have unlimited discretion. Op. at 11
  3. One seeking fees must show “some degree of success on the merits.”
  4. Merely winning a “purely procedural victor[y] or a “trivial success on the merits” will not satisfy this requirement. Op. at 12.
  5. The District Court concluded there was “compelling evidence” of disability and that it was “inclined to rule in Ms. Hardt’s favor.” The trial court then remanded the matter for further review by Reliance. This ruling and remand is not “trivial success on the merits” or a “purely procedural victory.” This constitutes some “success on the merits” and fees may be awarded.