The Supreme Court’s decision in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) may well mean that the courts will not enforce reimbursement provisions in employment-based medical and disability insurance policies.

Introduction
Employee benefit plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA, federal courts have exclusive jurisdiction over actions brought by plans against participants. But Section 502(a)(3) of ERISA, 29 USC Section 1132(a)(3), permits fiduciaries (which includes plan administrators and their insurers) to bring only actions for injunctions or “other appropriate equitable relief.” The Knudson Court concluded that because reimbursement actions seek legal remedies, they can not be brought under ERISA.

Because ERISA generally preempts all state laws that relate to employee benefit plans, plan administrators may well be left with no legal mechanism to enforce reimbursement provisions.

In fact, appellate courts in Oregon and California have recently held that ERISA does preempt reimbursement actions. Apparently, no Washington appellate decision has addressed the issue. But Washington practitioners should carefully analyze the impact of Knudson before instructing clients to comply with reimbursement demands by ERISA plans.

The Knudson Decision
The facts of Knudson are unremarkable. Knudson was severely injured in an auto accident. Through her employment, she was covered by a medical plan, which paid over $400,000 for her treatment. The plan’s reimbursement provision gave it the right to recover its benefit payments if the beneficiary recovered from a third party. Knudson settled her state court tort action, with the bulk of the settlement amount paid directly from the defendant to the attorney for fees, and to a special needs trust for her future medical treatment. Some $14,000 was allocated to pay for past medical care. The plan sued in federal court to enforce its right to reimbursement of the full $400,000.

The Supreme Court decision explores the meaning of “equitable relief” at common law, and concludes that “restitution” is not equitable relief. The Court notes that constructive trust is an equitable remedy, but is not available in a situation where the funds are in the hands of a third party, as in the special needs trust, or where the funds are no longer separate from other property of the defendant.

The Preemption Whipsaw
If it were not for ERISA preemption, the Knudson decision would simply shift reimbursement actions to state court. But ERISA Section 514, 29 USC Section 1144, states that ERISA supersedes all state laws that “relate to any employee benefit plan.” The Knudson decision gives a nod to this problem, stating: “We express no opinion as to . . . whether a direct action by petitioners against respondents asserting state-law claims such as breach of contract would have been pre-empted by ERISA.” The Court also expressed no opinion on whether the insurer could have obtained equitable relief against Knudson’s attorney or the trustee of the special needs trust.

The Knudson quandary is especially severe in the Ninth Circuit, which has refused to permit reimbursement actions even if the funds are identifiable or in the possession of a third party. Westaff v. Arce, 298 F. 3d 1164 (9th Cir. 2002).

In Westaff, after the third party suit settled, the participant had agreed to put the settlement check in escrow. The insurer then sought a declaratory judgment that the funds belonged to it, to be implemented by a decree of specific performance. Those sound like equitable remedies. But the Ninth Circuit emphasized that the essence of the insurer’s suit was an action to impose personal liability, and held that characterizing the action as one for equitable relief did not change that fact.

In short, the Ninth Circuit approach appears to be that actions for reimbursement are legal actions, regardless of who has the funds, and there is no ERISA jurisdiction to hear them. Other circuits have been more willing to characterize reimbursement actions as equitable under certain circumstances. And at least one district court judge in Oregon has broken ranks and held, in an unreported decision, that a plan could enforce a constructive trust despite Westaff. But until the Supreme Court resolves the conflict among the circuits, Westaff is the law of this circuit.

That leaves plans and insurers with only an action in state court--unless that action is preempted by ERISA. As noted above, ERISA preempts all state laws that “relate to employee benefit plans.” The term “state laws” includes state common law. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) (ERISA preempts bad faith claims under state law). Obviously, “relates to” is not self-defining. As a result, the Supreme Court has struggled for years to define the scope of ERISA preemption. The Court’s most cogent formulation is that preemption should be determined by examining the objectives of ERISA, and the extent to which the state law would affect the administration of ERISA plans. California Div. of Labor Standards Enforcement v. Dillingham Construction, N.A., 519 U.S. 316 (1997).

The Ninth Circuit has a slightly more cogent approach. In Arizona State Carpenters Pension Fund v. Citibank, 125 F. 3rd 715 (9th Cir. 1997), the court explained that state laws that mandate employee benefit structures or their administration, or provide alternative enforcement mechanisms, are always preempted.

In addition, ERISA preempts state laws of general application if they regulate the relationship between ERISA entities, like the relationship between a plan and its participants. Id.

It would appear that under either the Supreme Court or the Ninth Circuit formulation, state court reimbursement actions would be preempted both because they provide an alternative enforcement mechanism, and because they regulate the relationship between plans and participants. This would be consistent with decisions holding that when a participant suffers a wrong for which ERISA provides no remedy, ERISA preempts state law actions to redress the situation. See, e.g. Tingey v. Pixley-Richards West, Inc., 953 F. 2d 1124 (9th Cir. 1992).

Nonetheless, in mid-March, a United State District Court in Arizona held that an action for interference with contractual relations against an attorney who declined to honor a reimbursement agreement was not preempted. Employers Reinsurance Corporation v. GMAC Insurance, 2004 U.S. Dist. LEXIS 4181, (D. Az. 3/16/04).

The State Court Response to Knudson
State courts have agreed that reimbursement actions by plans against participants are preempted. Liberty Northwest Ins. Corp. v. Kemp, 2004 Ore. App. LEXIS 171 (Feb. 18, 2004). In Kemp, the participant was severely injured in a bicycle accident. His attorney signed a reimbursement agreement with the insurer. He reached a structured settlement, and the insurer sought reimbursement of medical benefits. The court reasoned that the claim obviously “related to” an employee benefit plan, as it relied upon the terms of the plan as the basis for liability.

The court then considered whether permitting a reimbursement claim ran counter to congressional intent in passing ERISA. Although ERISA was intended to protect participants and beneficiaries, the court concluded that foreclosing reimbursement actions did not protect beneficiaries; it just prevented double recovery. However, a second congressional purpose was to create a uniform body of benefits law, so administrators would not be confronted with inconsistent rights and obligations in different states. The court concluded that a state law action for reimbursement was inconsistent with that purpose. In addition, it would constitute an alternative enforcement mechanism to ERISA. For both those reasons, it concluded that the reimbursement action was preempted by ERISA.

Plaintiffs’ counsel, who have been frustrated for years by the Pilot Life’s preemption of bad faith claims, will appreciate that in Kemp the court used Pilot Life as a sword for the participant. It reasoned that if ERISA prevented alternative state law enforcement mechanisms by participants against insurers, it should have the same effect when insurers sued participants. Like participants, insurers and plan administrators have only the remedies provided in ERISA.

The decision in Kemp was consistent with the unpublished California Court of Appeals decision in Bd. of Trustees of San Diego Electrical Health and Welfare Trust v. Doyle, 2003 Cal. App. Unpub. LEXIS 2377 (Cal. App. 2003).

While a prior published decision in Carpenters Health and Welfare Trust Fund for California v. McCracken, 83 Cal. App. 4th 1365 (Cal. App. 2000) appears, at first glance, to be inconsistent with Doyle, McCracken was actually an action to enforce a settlement agreement from a prior ERISA claim. Since the settlement agreement was not an ERISA plan, but a contract governed by state law, the McCracken decision is readily reconciled with Doyle.

Recently, a Florida Court of Appeals adopted this analysis of McCracken in a decision holding that a reimbursement action was preempted. MEBA Medical & Benefits Plan, 2004 WL 385031 (Fl. App. 4 Dist., March 3, 2004).

No Washington State appellate decisions addressing this issue are available in either the official reporters or through LEXIS. As Knudson and Westaff were both decided in 2002, reimbursement cases are doubtless pending in Washing-ton appellate courts by now. Plausible arguments can be made for departing from the analysis in Kemp and Doyle. But, since both decisions follow well-established analytic frameworks for ERISA preemption, Washington courts may well conclude that state law reimbursement actions are preempted.

Conclusion
In the long run, the current situation is untenable. Sponsors of medical plans, confronted with an inability to obtain reimbursement, are amending plans to provide no benefits, or severely limited benefits, when a third party may be liable for an injury. Disability insurance plans, which offset Social Security Disability benefits against benefits, may be amended to reduce benefits in anticipation of an SSD award, rather than advancing full benefits, and demanding reimbursement after the award.

But in the short run, there are very credible arguments that reimbursement cannot be enforced through the courts, and attorneys should counsel their clients accordingly.

Postscript:
In Providence Health Plan, v. McDowell, decided March 24, 2004 and designated for publication, a Ninth Circuit panel held that a state law breach of contract action for reimbursement was NOT preempted. The decision concludes that an action to enforce the reimbursement provision in a ERISA plan does not have a “connection with” or “reference to” an ERISA plan. That remarkable reasoning will generate a request for en banc review. n