On March 31, 2016, the Arizona Court of Appeals, Division One issued its decision in Kobold v. Aetna Life Ins. Co., 2016 Ariz. App. LEXIS 49 (Kobold II ). In a concise decision on remand, the three judge panel unanimously held that the regulations regarding subrogation and reimbursement issued by the Office of Personnel Management (OPM) are entitled to deference under Chevron and the Court of Appeals was bound to interpret the Federal Employees Health Benefits Act (FEHBA) as preempting Arizona's anti-subrogation law.

The same court had previously ruled, in Kobold v. Aetna Life Ins. Co., 233 Ariz. 100 (Ct. App. Ariz. Sept. 5, 2013) (Kobold I ), that FEHBA did not preempt Arizona law prohibiting subrogation in personal injury cases. The court reasoned that the FEHBA preemption provision at 5 U.S.C. § 8902(m)(1) did not encompass subrogation and reimbursement because there is no direct and immediate relationship between subrogation and “coverage or benefits (or payments with respect to benefits).” Aetna appealed Kobold I to the Arizona Supreme Court, which declined to review the case. On June 9, 2014, Aetna filed a petition for writ of certiorari with the U.S. Supreme Court.

While the petition was pending before the Supreme Court, OPM promulgated new regulations construing the statute to include subrogation and reimbursement terms in FEHBA Program contracts (the “OPM regulations”). 5 C.F.R. § 890.106 (80 Fed. Reg. 29,203 (May 21, 2015)). The OPM regulations made clear the agency's view that subrogation and reimbursement “relate to” coverage and benefits (or payment with respect to benefits) as required to be encompassed under the FEHBA preemption provision. In light of the new OPM regulations, the Supreme Court vacated the Arizona Court of Appeals decision in Kobold I, and remanded the case for reconsideration of the preemptive effect of FEHBA.Aetna Life Ins. Co. v. Kobold, 135 S. Ct. 2886 (2015)

As an initial matter on remand, the court determined that the OPM regulations are procedurally eligible for Chevron deference. The administrative law principle of Chevron deference requires federal and state courts to defer to interpretations of federal statutes made by their enforcing federal agencies, unless such interpretations are unreasonable. OPM is specifically tasked with prescribing regulations necessary to carry out FEHBA and the OPM regulations are a product formal notice-and-comment rule-making process. 5 U.S.C. § 8913(a). Thus, the Arizona Court of Appeals found that the OPM regulations qualify procedurally for Chevron deference because Congress delegated authority to the agency to make rules carrying the force of law, and OPM’s interpretation claiming deference was promulgated in the exercise of that authority. See US v. Mead Corp., 533 U.S. 218, 226-27 (2001).

The Arizona Court of Appeals next determined that the OPM regulations qualify substantively forChevron deference. The appellate court acknowledged that OPM's interpretation is reasonable in light of U.S. Supreme Court precedent holding that FEHBA’s preemption provision was susceptible to multiple “plausible constructions” on the issue of whether subrogation and reimbursement are encompassed by 5 U.S.C. § 8902(m)(l), and therefore is entitled to Chevron deference. Under the Chevron doctrine, the court must defer to an agency's reasonable interpretation of a statute, even when the agency's interpretations is unwise or is not the most reasonable interpretation, so long as it is based on a “permissible construction of the statute.” Chevron, 467 U.S. at 843; US v. Mead Corp., 533 U.S. at 229. The Court of Appeals therefore observed that they were compelled to apply OPM’s interpretation, although with the objections that the Kobold I interpretation of the FEHBA preemption provisions was more reasonable.

Accordingly, in view of 5 C.F.R. § 890.106, the Court of Appeals reversed the Arizona superior court’s grant of summary judgment to Kobold and remanded for entry of judgment in Aetna’s favor. The Court of Appeals also denied Kobold’s request for attorneys’ fees and costs.