The California Court of Appeal, Second Appellate District, reversed the trial court’s order dismissing all of Silver’s state law causes of action as preempted by ERISA. The California Court of Appeal first explained that the purpose of preemption is to prevent ERISA plans and plan sponsors from being subject to a myriad of diverse and potentially conflicting, substantive standards promulgated by the state courts. Congress’ goal in providing for preemption was to minimize the administrative and financial burden of compliance for ERISA plan and plan sponsors by preserving a uniform body of federal ERISA law to which they are subject.
The Supreme Court has made clear, however, that run-of-the-mill lawsuits against ERISA plans that do not substantively affect the benefits under ERISA plans are not preempted. In analyzing whether a particular claim is preempted, the Fifth Circuit has articulated a two-part test. Under the test, state law claims are generally preempted by ERISA if: (1) the 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 among the traditional ERISA entities—the employer, the plan and its fiduciaries, and the participants and beneficiaries.
The California Court of Appeal applied the Fifth Circuit’s two-part test in determining that Silver’s contract and quasi-contract claims were not preempted. It explained that the gravamen of Silver’s causes of action for breach of contract, quantum meruit, and promissory estoppel is that the Plan orally agreed to pay Silver for health care services, authorized the provision of those services, and then failed to pay as agreed. Silver is not seeking compensation for the Plan’s decisions to deny coverage under the terms of the plan. Rather, Silver’s claims are predicated on a garden-variety failure to make payment as promised for services rendered.
The court explained the public policy reason behind carving out commonplace claims against ERISA plans from the reach of preemption. If providers have no recourse in situations such as the one at bar, providers will understandably be reluctant to accept the risk of non-payment and may require payment up front by beneficiaries—or impose other inconveniences—before treatment is provided. This aim does not conflict with ERISA’s goal of uniformity. If a patient is not covered under an insurance policy, despite the insurance company’s assurances to the contrary, a provider’s subsequent recovery against the insurer in no way expands the right of the patient to receive benefits under the terms of the plan. In fact, a provider’s state law action under these circumstances does not arise due to the patient’s coverage under an ERISA plan, but precisely because there is no ERISA plan coverage.
On the other hand, the California Court of Appeal concluded that Silver’s claim for interference with contractual relations was preempted by ERISA. This claim is predicated on the Plan’s sending its policyholders explanation-of-benefits forms (EOBs) indicating that the billed procedures were not covered, and that neither the plan nor the patient had any obligation to pay Silver. Silver alleged that the Plan knew Silver had separate agreements with the policyholders to pay whatever portion of the charges the Plan did not cover, and in sending the EOBs, the plan interfered with such agreements.
Under ERISA, Plans are required to notify participants of an adverse determination, which the Plan here did vis-à-vis the EOBs. The court explained that whether the use of the EOBs rose to the level of interference with contractual relations—a question with wide-ranging implications for any plan using a similar form—is precisely the kind of question that preemption is intended to eliminate: one that could result in inconsistent directives among the states and increased administrative and financial burdens for plans and plan sponsors in complying with ERISA. Under the two-part test, the interference with contractual relations claim was not preempted because it: (1) addresses an area of exclusive federal concern (the manner in which adverse determinations are communicated to plan participants) and (2) directly affects the relationship between the plan and the participants.