No. 09-885

OFFIC~�: ~1.- ~ r’lE ~LERK

upreme eurt the nite tate

STANDARD INSURANCE COMPANY,

Petitioner,

v.

MONICA LINDEEN,State Auditor, ex officio Commissioner of Insurance,

Respondent.

On Petition For Writ Of CertiorariTo The United States Court Of Appeals

For The Ninth Circuit

BRIEF OF AMERICAN COUNCIL OF LIFEINSURERS AS AMICUS CURIAE IN SUPPORT

OF PETITION FOR WRIT OF CERTIORARI

CARL B. WILKERSONLISA TATE

AMERICAN COUNCIL OF

LIFE INSURERS

i01 Constitution Ave., NWWashington, DC 20001(202) 624-2153

MARK E. SCHMIDTKE*

*Counsel of RecordOGLETREE, DEAKINS, NASH,

SMOAK ~ STEWART, P.C.

225 Aberdeen, Suite FValparaiso, IN 46385mark.schmidtke@

ogletreedeakins.com(219) 242-8649

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964OR CALL COLLECT (402~ 342-2831

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QUESTIONS PRESENTED

Amicus will address the following questions:

1. Whether a state rule banning discretionaryclauses, with the sole purpose and sole effect ofdictating universal de novo review by the federalcourts of ERISA benefits decisions, is preempted byERISA.

2. Whether this Court’s opinion in RushPrudential HMO, Inc. v. Moran, 536 U.S. 355 (2002),authorizes the states to eliminate the option of adeferential federal court standard of review thatCongress made available to the creators of ERISAplans.

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TABLE OF CONTENTS

Page

INTEREST OF THE AMICUS CURIAE ...............1

SUMMARY OF ARGUMENT ................................ 5

ARGUMENT ...........................................................9

A. THIS COURT HAS APPLIED TRADI-TIONAL CONFLICT PREEMPTIONANALYSIS IN MULTIPLE CONTEXTSWHERE STATE LAWS CONFLICT WITHTHE PURPOSES OF ERISA ......................9

B. MONTANA’S BLANKET PROHIBITIONOF DISCRETIONARY CLAUSES FALLSINTO A CATEGORY OF STATE INSUR-ANCE LAWS THAT THIS COURT HASHELD PREEMPTED BECAUSE THEYCONFLICT WITH ERISA’S CIVIL EN-FORCEMENT PROVISIONS ......................16

C. THE BREADTH OF THE MONTANALAW AND ITS DIRECT IMPACT ONFIDUCIARY DECISIONS REMOVES ITFROM ANY PROTECTION FROM PRE-EMPTION PURPORTEDLY PROVIDEDBY RUSH PRUDENTIAL ...........................21

CONCLUSION .......................................................26

111

TABLE OF AUTHORITIES

CASES

Aetna Health, Inc. v. Davila, 542 U.S.

Page

200(2004) ...............................................................passim

American Council of Life Insurers v. Ross, 558F.3d 600 (6th Cir. 2009) ............................................4

Boggs v. Boggs, 520 U.S. 833 (1997) ..................6, 9, 13

Cook v. Liberty Life Assur. Co. of Boston, 320F.3d 11 (lst Cir. 2003) .............................................19

Egelhoffv. Egelhoff, 532 U.S. 141 (2001) ...............9, 13

Graham v. Hartford Life & Acc. Ins. Co., 589F.3d 1345 (10th Cir. 2009) ........................................3

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133(1990) .................................................................11, 12

John Hancock Mut. Life Ins. Co. v. Harris Trust& Savings Bank, 510 U.S. 86 (1993) ................10, 12

Kergosien v. Ocean Energy, Inc., 390 F.3d 346(5th Cir. 2004) .........................................................19

Luby v. Teamsters Health, Welfare, and PensionTrust Funds, 944 F.2d 1176 (3rd Cir. 1991) ...........20

Mackey v. Lanier Collection Agency & Serv.,Inc., 486 U.S. 825 (1988) ...........................................9

Marks v. Newcourt Credit Group, Inc., 342 F.3d444 (6th Cir. 2003) ..................................................19

McCulloch v. Maryland, 17 U.S. 316, 4 Wheat.316 (1819) ..................................................................9

iv

TABLE OF AUTHORITIES - Continued

Page

Metropolitan Life Ins. Co. v. Massachusetts,471 U.S. 724 (1985) ...........................................16, 18

Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58(1987) ............................................................. 6, 11, 17

Moon v. American Home Assur. Co., 888 F.2d 86(llth Cir. 1989) ........................................................20

Patton v. MFS/Sun Life Financial Distributors,Inc., 480 F.3d 478 (7th Cir. 2007) ...........................20

Pegram v. Herdrich, 530 U.S. 211 (2000) .....7, 14, 15, 21

Perlman v. Swiss Bank Comprehensive Dis.Protection Plan, 195 F.3d 975 (7th Cir. 1999) ........19

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41(1987) ................................................... 5, 6, 10, 11, 17

Rush Prudential HMO, Inc. v. Moran, 536 U.S.355 (2004) ........................................................ passim

Shaw v. Delta Airlines, Inc., 463 U.S. 85 (1983) .........9

Unum Life Ins. Co. of America v. Ward, 526U.S. 358 (1999) ........................................................17

Varity Corporation v. Howe, 516 U.S. 489(1995) .......................................................................23

CONSTITUTIONAL PROVISIONS

U.S. Const., Art. VI, cl. 2 ..............................................9

V

TABLE OF AUTHORITIES - Continued

Page

STATUTES

29 U.S.C. §1002(1) ..............................................passim

29 U.S.C. §1132 ...........................................................12

29 U.S.C. §1132(a) ................................................11, 18

29 U.S.C. §1132(a)(1)(B) ...............................................3

29 U.S.C. §1133(2) ......................................................23

29 U.S.C. §1144 .......................................................9, 10

29 U.S.C. §1144(b) ......................................................10

29 C.F.R. §2560.503-1(h)(3)(ii) ...................................18

OTHER AUTHORITIES

BNA Pension and Benefits Daily, "States BeefUp Bans on ’Discretionary Clauses’ as CourtsRule Out ERISA Hurdle" (February 12,2010) ..................................................................2, 3, 4

National Compensation Survey: EmployeeBenefits in the United States, March 2009,available at http://www.bls.gov/ncs/ebs/benefits/2009/ebb10044.pdf .....................................................2

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INTEREST OF THE AMICUS CURIAE1

The American Council of Life Insurers ("ACLI"),a non-profit trade association, is the largest tradeassociation in the United States representing the lifeinsurance industry. ACLI represents more than 300legal reserve life insurer and fraternal benefit societymember companies operating in the United Statesbefore federal and state policy-makers, insurancedepartments, and the courts. ACLI members repre-sent more than 90% of the assets and premiums ofthe life insurance and annuity industry. In addition tolife insurance and annuities, ACLI member com-panies offer pensions, 401(k) and other retirementplans, long term care and disability income insur-ance, and reinsurance. ACLI shares the concerns ofpetitioner Standard Insurance Company as set forthin detail below.

Life and disability benefits are among the typesof benefits governed by ERISA. See 29 U.S.C.§1002(1). According to the U.S. Bureau of LaborStatistics, as of March 2009, 73% of private industryfull-time workers had access to life insurance plans

1 Pursuant to Supreme Court Rules 37.2 and 37.3, theparties have received timely notice of the intent to file and haveconsented to the filing of this Brief amicus curiae. Their lettersof consent have been filed with the Clerk of this Court. Pursuantto Supreme Court Rule 37.6, Amicus states that this brief wasnot authored in whole or in part by counsel for a party, and noperson or entity, other than Amicus, made a monetarycontribution for the preparation or submission of this brief.

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through their employers and 96% of those workersparticipated in their employer-sponsored plans.National Compensation Survey: Employee Benefitsin the United States, March 2009, available athttp://www.bls.gov/ncs/ebs/benefits/2009/ebb10044.pdf(Table 16). Life insurance plan benefits are invariablyinsured because the sheer economies of scale allowlife insurers to provide larger benefits at lower coststhan could be funded by employers outside of theinsurance market. During the same period, 41% offull-time workers had access to long term disabilityplans and 96% of those workers participated in theiremployer-sponsored long term disability plans. Id.Except for the very largest employers, virtually alllong term disability programs are also insured. Again,most employers do not have the financial where-withal to fund monthly disability benefits over a longperiod of time without insurance. The high percent-age of employees who participate in their employer-sponsored life and disability plans is strong evidenceof the substantial value that such benefits offer toAmerican workers.

Because virtually all life plans and the vastmajority of long term disability plans are insured, theMontana ban on discretionary clauses potentiallyimpacts two entire classes of ERISA-governed plansin that state. Moreover, as discussed in the Petition,Montana is not the only state considering such aprohibition. See also BNA Pension and Benefits Daily,"States Beef Up Bans on ’Discretionary Clauses’ asCourts Rule Out ERISA Hurdle" (February 12, 2010).

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State regulators are also looking at even broaderintrusion into the ERISA judicial review process asshown by Colorado’s recent enactment of a law thatrequires ERISA-governed insurance policies toprovide for a jury trial which is contrary to universalcircuit law that jury trials are not available underERISA.~ The concern of the insurance industry is that

state regulators are interpreting language in RushPrudential HMO, Inc. v. Moran, 536 U.S. 355 (2004)to give them broad authority to control the ERISAremedial process and to interfere with the carefullycrafted federal remedial scheme and correspondingfederal common law that has developed over the past35 years.

An article in BNA’s Pension and Benefits Daily,published on February 12, 2010, illustrates the sharpdebate over the validity and effect of state efforts toban discretionary clauses.3 The article notes debateover the cost impact on insured plans, with the onlyquestion being how much costs will rise. Sources citedin the BNA article also point out that while dis-cretionary clauses provide consistency in the applica-tion of plan terms, a ban on such clauses "would have

~ Every federal circuit that has addressed the issue,including the Tenth Circuit, has held that jury trials are notavailable for ERISA suits for benefits under 29 U.S.C.§l132(a)(1)(B). See, e.g., Graham v. Hartford Life & Acc. Ins. Co.,589 F.3d 1345, 1355 (10th Cir. 2009).

3 See http://news.bna.com/pdln/display/batch_print_display.adp

(visited February 12, 2010).

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significant unintended consequences" and will "causedisruption for patients and employers" as ERISA planterms are subject to varied applications across thecountry. Still another source argued that the states’bans will have a disproportionate impact on smalleremployers who do not have the ability to self-fundtheir benefit programs and thereby avoid stateinsurance regulation.

Regardless of disagreement on the precise longterm effects of discretionary clause bans, the BNAarticle illustrates that there is unanimity in the viewthat the issue is critically important to state regu-lators, the insurance industry, employers, and em-ployees. State discretionary clause bans have ex-panded rapidly:

The state efforts to ban discretionary clauseswas slow at first, as only a handful of statestook steps to ban the clauses in the earlierpart of the decade. There was a surge ofactivity in 2008 and 2009, as several statesstepped forward to ban discretionary clauses.

BNA’s sources expect that, as a result of the decisionbelow and the Sixth Circuit’s decision in AmericanCouncil of Life Insurers v. Ross, 558 F.3d 600 (6th Cir.2009), "there is a likelihood that more states willcome on board in enacting laws that ban discre-tionary clauses."

Most importantly, the BNA article emphasizesthat the Petition in this case is being watched veryclosely, with one source saying that a denial will be

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viewed as an open door to further state regulation: "ifthe Supreme Court denies review, the issue of ERISApreemption of discretionary clause bans may besettled." Amicus supports Standard Insurance Com-pany’s request that this Court accept review of thismatter to clarify that state efforts to ban discre-tionary clauses are in conflict with ERISA and to

resolve the tension that exists between the states’misreading of Rush Prudential and this Court’s morerecent statements on the importance of deferentialreview in the formation of ERISA plans and in theadministration of ERISA’s exclusively federal civilenforcement scheme.

SUMMARY OF ARGUMENT

The primary purpose of Congress in enactingERISA was to regulate employee benefit plans undera uniform body of federal law. Congress accomplishedthis purpose in two principal ways. First, it includeda broad preemption clause which was "designed to’establish pension plan regulation as exclusively a

federal concern.’" Pilot Life Ins. Co. v. Dedeaux, 481U.S. 41, 46 (1987). Second, Congress created a"comprehensive civil enforcement scheme" that is"one of the essential tools for accomplishing thestated purposes of ERISA." Id. at 52. This Court hasheld on several occasions that ERISA’s civil enforce-ment scheme is the exclusive means to remedydisputes arising from the processing of ERISA benefit

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claims. Pilot Life, 481 U.S. at 54; Metropolitan LifeIns. Co. v. Taylor, 481 U.S. 58 (1987).

This Court has acknowledged the importance offederal preemption principles in the ERISA contextby accepting review of multiple ERISA preemptioncases since the statute was enacted in 1974. TheCourt explained the significance of these cases asfollows:

In large part the number of ERISA pre-emption cases reflects the comprehensivenature of the statute, the centrality ofpension and welfare plans in the nationaleconomy, and their importance to thefinancial security of the Nation’s work force.

Boggs v. Boggs, 520 U.S. 833, 839 (1997). Thepreemption issue in this case is no less significant:the state law directly impacts not only how all benefitdecisions by insured ERISA plans (i.e., life, health,and disability) will be litigated under ERISA’s civilenforcement provisions, but also, because life andlong term disability plans are almost always insured,the state law has a potentially inordinate impact onsuch plans.

Amicus agrees with and supports the argumentsin the Petition. In this brief, Amicus expands uponPetitioner’s argument that Montana’s prohibition ofdiscretionary clauses is in conflict with ERISA’s civilenforcement scheme. In terms of conflict preemptiongenerally, there are three categories of state insur-ance laws that have been considered by this Court inthe context of ERISA: (1) laws that regulate the

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substantive coverage provisions of insurance policies;(2) laws that regulate insurance claim processes; and(3) laws that regulate the judicial review process.Laws in the first two categories are not preemptedand laws that fall into the third category are pre-empted. The Montana prohibition of discretionaryclauses falls into the third category and is preemptedbecause its very purpose is to directly impact thejudicial review process.

Amicus will also address why the reliance ofstate regulators on Rush Prudential is misplaced andwhy clarification of Rush Prudential is essential tobring to a halt the wave of state insurance regulationprohibiting discretionary clauses as well as otherforms of state regulation that directly impact theERISA judicial review process. The major point ofdisagreement between the majority and the dissent inRush Prudential was whether the state third partyreview law in that case conflicted with the exclusivityof ERISA’s civil enforcement scheme where the statelaw had the effect of eliminating discretionary courtreview over certain HMO benefit decisions. The keypoint cited by the majority to uphold the state lawwas that the state law was limited to determinationsof "medical necessity" which under Pegram v.Herdrich, 530 U.S. 211 (2000), were deemed to benon-fiduciary in nature and outside of ERISA’sregulatory scope. The majority appeared to agree thata broad mandate for third party review that wentbeyond non-fiduciary HMO medical necessity

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determinations would be in conflict with ERISA’sremedial scheme.

This point of distinction cited by the Court inRush Prudential illustrates why the Montana law inthis case is preempted. Unlike the narrow state lawin Rush Prudential, the Montana law sweeps muchmore broadly, encompassing every type of benefitdecision made by a claim administrator under aninsured ERISA plan, decisions that this Court hasheld are fiduciary in nature under ERISA. AetnaHealth, Inc. v. Davila, 542 U.S. 200, 219 (2004) ("abenefit determination is part and parcel of theordinary fiduciary responsibilities connected to theadministration of a plan"). It also illustrates why, inaddition to the reasons stated in the Petition, stateinsurance regulators grossly misread Rush Pruden-tial and why that case does not authorize Montana’sblanket prohibition of discretion.

In the end, this case is less about insurancecompany discretion than it is about the inherentauthority that plan sponsors have under ERISA todetermine to whom and under what circumstancesfiduciary discretionary authority should be delegated.Plan sponsor authority and discretion are at the veryheart of the ERISA plan structure and it is the plansponsor’s authority and discretion that are poten-tially impacted by the Montana law for all insuredplans and especially for two entire classes of benefits- life and long term disability.

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ARGUMENT

A. THIS COURT HAS APPLIED TRADITIONALCONFLICT PREEMPTION ANALYSIS INMULTIPLE CONTEXTS WHERE STATELAWS CONFLICT WITH THE PURPOSESOF ERISA.

This Court has applied two types of preemptionunder ERISA: (1) statutory or "express" preemption;and (2) traditional "conflict" preemption. UnderERISA’s "express" preemption provision, ERISA pre-empts all state laws that "relate to" employee benefitplans except state laws that regulate insurance,banl~ing, or securities. 29 U.S.C. §1144. Under this"express preemption" provision, state laws arepreempted even if they do not conflict with ERISA.See, e.g., Mackey v. Lanier Collection Agency & Serv.,Inc., 486 U.S. 825, 829-30 (1988); Sha~v v. DeltaAirlines, Inc., 463 U.S. 85 (1983).

The second form of preemption, "conflict" pre-emption, occurs when state laws conflict with theprovisions of ERISA or operate to frustrate ERISA’spurposes. Boggs v. Boggs, 520 U.S. 833, 841 (1997);Egelhoff v. Egelhoff, 532 U.S. 141 (2001). "Conflict"preemption is a creature of the Supremacy Clause,which states that the laws of the United States "shallbe the supreme Law of the Land... any Thing in theConstitution or Laws of any State to the Contrarynotwithstanding." U.S. Const., Art. VI, cl. 2. See alsoMcCulloch v. Maryland, 17 U.S. 316, 4 Wheat. 316,427 (1819) ("It is of the very essence of supremacy, toremove all obstacles to its action within its own

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sphere, and so to modify every power vested insubordinate governments"). Thus, "conflict" pre-emption applies even to state laws that do not fallwithin the parameters of ERISA’s express preemptionprovision, §1144. See John Hancock Mut. Life Ins. Co.v. Harris Trust & Savings Bank, 510 U.S. 86, 99(1993) ("State law governing insurance generally isnot displaced, but ’where [that] law stands as anobstacle to the accomplishment of the full purposesand objectives of Congress,’ federal preemptionoccurs").

In Pilot Life, this Court applied both "express"preemption and "conflict" preemption to hold thatstate law claims, bad faith claims, were preempted byERISA. A beneficiary of an employee disability plansued the plan insurer for benefits, basing his claim onseveral state law theories, including bad faith. Theplaintiff argued that ERISA did not preemptMississippi’s law of bad faith because that law was astate law that regulated insurance and was thussaved from preemption under ERISA’s "express" pre-emption clause, §1144(b). The Court rejected theplaintiff’s argument and held that the law was notsaved from preemption under ERISA’s "express"preemption provision.

The Court also held that, even if the bad faithclaim was a state insurance law that was saved fromexpress preemption, it was still preempted undertraditional "conflict" preemption principles. AllowingERISA beneficiaries to bring varying state causes ofaction for claims that were within the scope of

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ERISA’s civil enforcement provision "would pose anobstacle to the purposes and objectives of Congress."Id. at 52. ERISA’s civil enforcement provisionincludes a panoply of remedies for ERISA planparticipants, beneficiaries, and their fiduciaries. 29U.S.C. §1132(a). The civil enforcement scheme ofERISA "is one of the essential tools for accomplishingthe stated purposes of ERISA." Id. at 52. Examiningthe language and structure of ERISA’s civil enforce-ment provision, and reviewing the legislative historyof that provision, this Court concluded "that ERISA’scivil enforcement remedies were intended to beexclusive." Id. at 54. The Court held that Congressintended "the civil enforcement provisions of ERISA§[1132(a)] [to] be the exclusive vehicle for actions byERISA plan participants and beneficiaries assertingimproper processing of a claim for benefits." Id. at 52.

Several other decisions reinforce the concept that"conflict" preemption under ERISA goes beyond"express" preemption. In Metropolitan Life Ins. Co. v.Taylor, 481 U.S. 58 (1987), this Court held thatpreemption by virtue of ERISA’s exclusive remedyprovisions was so strong as to override the removaljurisdiction concept of the "well pleaded complaintrule." In other words, a state law complaint arisingout of a dispute over the processing of ERISA planbenefits is so completely preempted that the state lawclaims are converted into federal claims underERISA. Id. at 64-67. In Ingersoll-Rand Co. v.McClendon, 498 U.S. 133 (1990), the Court held thatthe exclusivity of ERISA’s civil enforcement provision,

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§1132, supplemented "express" preemption underERISA and provided an independent basis for pre-emption of a state law wrongful discharge claim:

Even if there were no express preemption inthis case, the Texas cause of action would bepreempted because it conflicts directly withan ERISA cause of action.

Id. at 142.

This Court has also applied conflict preemptionanalysis to state laws that conflicted with thepurposes and provisions of ERISA other than ERISA’scivil enforcement section. In John Hancock, supra,the question revolved around the extent to whichERISA’s fiduciary standards governed an insurer’sadministration of guaranteed investment contractspurchased by ERISA plans. Among other things, theinsurer argued that ERISA’s fiduciary standardsshould not apply because they would create "irrecon-cilable conflicts" with state regulatory regimes, notingthat Congress reserved to the states the primaryresponsibility for regulation of the insurance indus-try. This Court held that, if such a conflict existed,then ERISA’s fiduciary requirements would prevailand state insurance law would be preempted as beingin conflict with federal law fiduciary requirements.510 U.S. at 99 (When state insurance regulation"stands as an obstacle to the accomplishment of thefull purpose and objectives of Congress, federal pre-emption occurs.").

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Similarly, in Boggs v. Boggs, supra, this Courtapplied traditional conflict preemption analysis tohold that state community property laws were pre-erupted by ERISA where state law created an obstacleto the full purposes and objectives of ERISA’s jointand survivor annuity provisions. 520 U.S. at 844.Boggs involved a dispute between a surviving spouseof a pension plan participant and the sons of thedecedent’s former spouse, who were the heirs to theformer spouse’s estate. The sons relied on Louisianacommunity property law to argue that their motherwas entitled to a share of the pension benefits. ThisCourt held that the state law conflicted with ERISA’spension plan requirements that favored survivingspouses over former spouses and was thereforepreempted. Id.

Also, in Egelhoff v. Egelhoff, supra, althoughphrased in terms of ERISA’s express preemptionclause, this Court addressed whether a state law thatautomatically divested a divorced spouse of benefi-ciary status under an ERISA plan was preempted.The Court held that the state law impacted thepayment of ERISA benefits, which the Court referredto as "a central matter of plan administration" andthat the state law was preempted because itconflicted with ERISA’s requirement that a fiduciarymust administer a plan according to its terms. 532U.S. at 147-48.

Finally, in Aetna Health, Inc. v. Davila, 542 U.S.200 (2004), the Court returned to conflict preemptionin the context of ERISA’s civil enforcement scheme,

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holding that a state law that imposed a duty of careon HMO coverage decisions and that purported toprovide a state law cause of action for violation ofthat duty, was preempted under ordinary principlesof conflict preemption because it provided "a separate

vehicle to assert a claim for benefits outside of, or inaddition to, ERISA’s remedial scheme." 542 U.S. at217-18. The Court also rejected the plaintiffs’argument that because the state law principallyregulated "medical decisions" under ERISA-governedHMO plans, the state law should not be preemptedbecause such decisions do not implicate ERISA’sfiduciary standards. The plaintiffs relied on theCourt’s earlier decision in Pegram v. Herdrich, 530U.S. 211 (2000), where the Court held that medicalnecessity decisions made by HMO treating doctorswere not subject to ERISA’s fiduciary requirementsbecause they were "mixed eligibility and treatmentdecisions" and non-fiduciary in nature. The AetnaHealth Court distinguished Pegram noting that thestate law in Aetna Health applied not just to HMOtreating physician decisions but more broadly toclaim administrator benefit determinations. TheAetna Health Court held that "a benefit determi-nation is part and parcel of the ordinary fiduciaryresponsibilities connected to the administration of aplan" and that "[t]he fact that a benefits determi-nation is infused with medical judgments does notalter this result":

This strongly suggests that the ultimatedecisionmaker in a plan regarding an award

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of benefits must be a fiduciary and must beacting as a fiduciary when determining aparticipant’s or beneficiary’s claim... Classi-fying any entity with discretionary authorityover benefits determinations as anything buta plan fiduciary would thus conflict withERISA’s statutory and regulatory scheme.

542 U.S. at 219-20. Unlike the non-fiduciary medicaldecisions at issue in Pegram, which fell outside ofERISA regulation, the broader spectrum of claimadministrator benefits determinations that weresubject to the state law in Aetna Health was squarelywithin the regulatory sphere of ERISA, and spe-cifically its fiduciary requirements, and the state lawwas in conflict with ERISA.

In summary, this Court has readily appliedconflict preemption analysis where state laws con-flicted with ERISA’s civil enforcement provisions aswell as where state laws conflicted with other coreprinciples and provisions of ERISA. The Montanaprohibition of discretionary clauses conflicts withERISA’s civil enforcement regime and, as discussedbelow, with ERISA’s regulation of fiduciaries. Wherestate laws such as the Montana law interfere with orpose an obstacle to ERISA’s purposes and provisions,they are preempted under traditional conflict pre-emption principles, regardless of whether or not theyfall under ERISA’s express preemption clause.

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B. MONTANA’S BLANKET PROHIBITION OFDISCRETIONARY CLAUSES FALLS INTOA CATEGORY OF STATE INSURANCELAWS THAT THIS COURT HAS HELDPREEMPTED BECAUSE THEY CONFLICTWITH ERISA’S CIVIL ENFORCEMENTPROVISIONS.

The above cases demonstrate that the stateinsurance laws reviewed by this Court can becategorized as follows: (a) state laws that regulate thesubstantive coverage terms of insurance policies, (b)state laws that regulate the insurance claims process,and (c) state laws that attempt to regulate thejudicial review process. This Court has upheld stateinsurance laws that fall into the first two categoriesand has uniformly he]d that state laws that fall intothe third category are preempted because theyconflict with ERISA.

This Court has upheld state laws that regulatethe substance of insurance coverage. For example, inMetropolitan Life Ins. Co. v. Massachusetts, 471 U.S.724 (1985), the Court held that a state law settingforth mandatory minimum health care benefits was"saved" from express preemption because it was astate law that regulated insurance. Although theCourt did not address conflict preemption directly, itdid note that the "substantive terms of group-healthinsurance contracts ... have been extensivelyregulated by the States" and that ERISA "containsalmost no federal regulation of the terms of benefitplans." Id. at 729, 732.

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This Court has also upheld state insurance lawsthat were aimed at the insurance claims reviewprocess. For example, in Unum Life Ins. Co. ofAmerica v. Ward, 526 U.S. 358 (1999), the Courtupheld application of a state notice-prejudice rulethat required an insurer to show prejudice before itcould deny a late claim as untimely. Similarly, inRush Prudential, supra, the Court upheld a statethird party review law that required independentreview of claim decisions involving medical necessity.Neither Ward nor Rush Prudential involved statelaws that were directly aimed at regulating thejudicial review process under ERISA, although thelaws had an indirect impact on that process. Unum v.Ward, 526 U.S. at 376-77 (plaintiff was pursuing aclaim for benefits under §1132(a) and the state lawmerely provided a rule of decision as to whether theunderlying claim was timely); Rush Prudential v.Moran, supra (upholding state third party reviewlaw).

Unlike state insurance laws regulating substan-tive provisions of a policy or insurance claim proce-dures, when reviewing a state law that was aimeddirectly at the judicial review process, this Court hasuniformly held that such laws are preempted as beingin conflict with the exclusivity of ERISA’s civilenforcement provisions. See, e.g., Pilot Life, supra;Metropolitan Life v. Taylor, supra; Aetna v. Davila,supra.

The Montana ban on discretionary clauses fallsin the third category of state insurance laws because

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it is aimed directly at the judicial review process. Theban is not an attempt to regulate the substantivecoverage terms of ERISA-governed insurance policiesas was the case in Metropolitan Life v. Massachusetts,supra. The discretionary clause ban also does notregulate the claim review process. The Department ofLabor, the federal entity with specific authority toregulate the ERISA claim review process, requiresthat all claim determinations and internal appellatereviews of claim denials be conducted de novo. 29C.F.R. §2560.503-1(h)(3)(ii) (a "full and fair review" ofa denied claim must "[p]rovide for a review that doesnot afford deference to the initial adverse benefitdetermination."). The only place where the state lawban on discretionary clauses has any impact is on thejudicial review process under §1132(a) - the processthat is exclusively regulated by the ERISA statuteand by federal common law. Because the state lawban is aimed directly at the ERISA remedial process,it is in conflict with the exclusivity of that processwhich is governed solely by federal law.

Not only does the Montana practice impact theremedial process, but it also cannot help but increasethe costs of that process. There is a stark contrastbetween the cost of litigating deferential and de novoreview cases. In a typical deferential review case, theevidence is limited to the plan documents and the file

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materials developed during the administrative reviewprocess.4 Extensive discovery is prohibited:

It follows from the conclusion that review of[the insurer’s] decision is deferential that thedistrict court erred in permitting discoveryinto [the insurer’s] decision-making. Thereshould not have been any inquiry into thethought processes of [the insurer’s] staff, thetraining of those who considered Perlman’sclaim, and in general who said what to whomwithin [the insurer]... Deferential review ofan administrative decision means review onthe administrative record.

Perlman v. Swiss Bank Comprehensive Dis. ProtectionPlan, 195 F.3d 975, 981-82 (7th Cir. 1999). Ultimately,deferential review cases are typically decided ondispositive motions.

In a de novo proceeding, on the other hand,courts have discretion to admit evidence outside ofthe claim review materials, potentially leading to

’ See, e.g., Cook v. Liberty Life Assur. Co. of Boston, 320 F.3d11, 19 (lst Cir. 2003) ("[W]e look to the record as a whole; the’whole’ record consists of that evidence that was before theadministrator when he made the decision being reviewed.");Kergosien v. Ocean Energy, Inc., 390 F.3d 346 (5th Cir. 2004)("Federal courts are generally prevented from going outside theadministrative record in reviewing ERISA plan fiduciarydecisions."); Marks v. Newcourt Credit Group, Inc., 342 F.3d 444,457 (6th Cir. 2003) ("The scope of the district court’s and thiscourt’s review of the denial of benefits is limited to theadministrative record available to the plan administrators whenthe final decision was made.").

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significant discovery.~ Summary judgments are rareand many de novo cases are decided after a full trial.In smaller de novo cases, discovery costs alone can farexceed the amount of benefits in dispute. Given theattempts to ban discretionary clauses in insurancepolicies in Montana and other states, life and longterm disability plans, which are almost alwaysinsured, now face the bleak prospect of incurringsubstantial additional litigation costs, which costswill have to be passed on to sponsoring employers. Inan environment of voluntary benefit programs, the"tipping point" at which employers can no longerafford benefits in the first place, cannot be very high.It is ironic that these efforts to increase the cost ofbenefits arise at a time when there is an ongoingnational debate over the already rapidly increasingcost of employee benefits.

~ See, e.g., Luby v. Teamsters Health, Welfare, and PensionTrust Funds, 944 F.2d 1176, 1184-85 (3rd Cir. 1991) ("We holdthat a district court exercising de novo review over an ERISAdetermination between beneficiary claimants is not limited tothe evidence before the Fund’s Administrator."); Patton v.MFS/Sun Life Financial Distributors, Inc., 480 F.3d 478, 485(7th Cir. 2007) ("Absent clear language to the contrary, plans areread to provide for searching judicial review of benefitsdeterminations: plenary review of the administrator’s interpre-tation of the facts and plan [... ] fortified by the district court’sdiscretionary authority to hear evidence that was not presentedin the administrative process."); Moon v. American Home Assur.Co., 888 F.2d 86, 89 (11th Cir. 1989) ("[The] contention that acourt conducting a de novo review must examine only such factsas were available to the plan administrator at the time of thebenefits denial is contrary to the concept of a de novo review.").

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C. THE BREADTH OF THE MONTANA LAWAND ITS DIRECT IMPACT ON FIDUCIARYDECISIONS REMOVES IT FROM ANY PRO-TECTION FROM PREEMPTION PURPOR-TEDLY PROVIDED BY RUSH PRUDEN-T/AL.

Insurance regulators read Rush Prudential toprovide them with broad authority to extinguishdiscretionary authority in insurance policies and,ultimately, to eliminate deferential review in federalcourt under ERISA’s civil enforcement provisions.This is a misreading of that case because theMontana law, unlike the state law in Rush Pruden-tial, applies to fiduciary decisions that are regulatedby ERISA.

The state law in Rush Prudential was narrowlydrawn to require third party review only of a smallsubset of ERISA benefit determinations, i.e., thosedeterminations involving whether requested healthcare was "medically necessary." As discussed above,the Court had previously held in Pegram that, atleast in the HMO context, medical necessity deter-minations were not considered fiduciary decisionsunder ERISA and are not subject to ERISA’s fiduciaryregulations. See Pegram, 530 U.S. at 237 (HMOdoctor cannot be sued for breach of fiduciary dutyunder ERISA as a result of a decision about whethercare is "medically necessary" because such decisions"are not fiduciary decisions under ERISA"). TheCourt picked up this theme again in Rush Prudential,another case involving regulation of HMOs, and it

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became a key point in the holding that the state thirdparty review law did not conflict with ERISA’s civilenforcement scheme. The Court emphasized thenarrow focus of the state law: "The Act does not givethe independent reviewer free-ranging power toconstrue contract terms, but instead, confines reviewto a single term: the phrase ’medical necessity,’ usedto define the services covered under the contract." 536U.S. at 383. Quoting Pegram, the Court also notedthat medical necessity determinations are outside theboundaries of ERISA’s fiduciary regime and areinstead "a subject of traditional state regulation,[where] there is no ERISA preemption without clearmanifestation of congressional purpose." 536 U.S. at387. In other words, because the limited stateregulation in Rush Prudential was focused solely onnon-fiduciary determinations, it fell outside of ERISAand was not in conflict with ERISA even if it had thepractical effect of removing deferential review overthose determinations.

This fiduciary/non-fiduciary distinction is impor-tant in this case because it illustrates why Montana’sblanket ban on discretionary clauses in insurancepolicies does conflict with ERIS/L The Montanaprohibition applies across the board to every ERISAbenefit determination, whether it is based on medicalconsiderations, a mix of medical and other consid-erations, vocational considerations (in the context ofdisability policies), or pure contractual interpretationissues, saying that none of these determinations canever be discretionary. This is a far cry from the

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limited area of state regulation at issue in RushPrudential that applied only to one limited type ofbenefit determination that this Court has twice heldto be non-fiduciary in nature and therefore outside ofERISA.

Montana cannot deny that ERISA benefit deter-minations are fiduciary in nature (with the possibleexception of medical necessity determinations in theHMO context). ERISA mandates that final claimdeterminations be made by an "appropriate namedfiduciary." 29 U.S.C. §1133(2) ("every employeebenefit plan shall.., afford a reasonable opportunityto any participant whose claim for benefits has beendenied for a full and fair review by the appropriatenamed fiduciary of the decision denying the claim").This Court held in Aetna Health that "the ultimatedecisionmaker in a plan regarding an award ofbenefits must be a fiduciary and must be acting asa fiduciary when determining a participant’s orbeneficiary’s claim." Likewise, in Varity Corporationv. Howe, 516 U.S. 489, 511 (1995), this Court heldthat a claim administrator "engages in a fiduciary actwhen making a discretionary determination aboutwhether a claimant is entitled to benefits under theterms of the plan documents." While it may arguablybe appropriate for a state to indirectly removediscretion in insurance policies from one narrow typeof benefit determination because the determination isnot regulated by ERISA, it is quite another thing fora state to remove discretion from all types of benefitdeterminations in all insurance policies and in at

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least two entire classes of ERISA benefits. Nothing inRush Prudential or any other decision by this Courtjustifies such a broad swath of state regulation thatgoes to the heart not only of ERISA’s civil enforce-ment scheme, but also to the nature of what it meansto be a fiduciary under ERISA.

It is not an overstatement to say that insuranceregulators are using Rush Prudential as an excuse tofoist all types of so-called "insurance regulation" onERISA-governed policies, all in the guise of regu-lating "insurance policy language." Justice Thomas,in his dissent in Rush Prudential, criticized such anapproach:

The Court of Appeals’ approach assumes thata State may impose an alternative enforce-ment mechanism through mandated contractterms even though it could not otherwiseimpose such an enforcement mechanism on ahealth plan governed by ERISA. No partycites any authority for that novel proposition,and I am aware of none... To hold otherwisewould be to eviscerate ERISA’s comprehen-sive and exclusive remedial scheme becausea claim to benefits under an employee ben-efits plan could be determined under eachState’s particular remedial devices so longas they were made contract terms. Suchformalist tricks cannot be sufficient to by-pass ERISA’s exclusive remedies; we shouldnot interpret ERISA in such a way as todestroy it.

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536 U.S. at 397. Certainly a state cannot mandatethat an ERISA-governed insurance policy contain aliquidated damages provision that would supplant orsupplement ERISA’s remedial provisions nor can astate mandate a policy provision that the parties willengage in mandatory arbitration in lieu of federalcourt action.6 These examples demonstrate that such"formalistic tricks" of mandating "insurance policylanguage" do not provide an unlimited basis tocircumvent ERISA where, as here, the regulationapplies broadly to all types of fiduciary determina-tions. To that extent, Amicus respectfully requeststhat the Court clarify the narrow holding in RushPrudential and hold that it does not grant stateinsurance regulators unlimited authority to regulatethe ERISA fiduciary and judicial review processes inthe guise of mandating "insurance policy language."

~ Rush Prudential stated that "[w]e do not mean to implythat States are free to create other forms of binding arbitrationto provide de novo review of any terms of insurancecontracts .... "536 U.S. at 386, n. 17.

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CONCLUSION

For the reasons stated herein, the petition forwrit of certiorari should be granted.

Respectfully submitted,

CARL B. WILKERSONLISA TATE

AMERICAN COUNCIL OFLIFE INSURERS

i01 Constitution Ave., NWWashington, DC 20001(202) 624-2153

MARK E. SCHMIDTKE*

*Counsel of RecordOGLETREE, DEAKINS, NASH,

SMOAK & STEWART, P.C.225 Aberdeen, Suite FValparaiso, IN 46385(219) 242-8649

February19, 2010