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News spread quickly among Pennsylvania plaintiffs lawyers in June 2002 when Senior U.S. District Judge Clarence C. Newcomer broke ranks with his colleagues and held that plaintiffs suing an HMO under ERISA were entitled to add a claim under Pennsylvania’s bad-faith statute. Newcomer’s decision in Rosenbaum v. UNUM was significant because it allowed plaintiffs to pursue punitive damages, which the Employee Retirement Income Security Act does not. The ruling sparked a flurry of litigation, and Newcomer soon found himself almost on his own as, one by one, more than a dozen of his colleagues on Pennsylvania’s three federal benches explicitly rejected his reasoning and held that a bad-faith claim is always pre-empted by ERISA. Only one other judge, Judge James M. Munley of the Middle District of Pennsylvania, opted to follow Rosenbaum in holding that bad-faith claims should not be pre-empted because they are protected by ERISA’s “saving clause.” But now the 3rd U.S. Circuit Court of Appeals has ruled that Newcomer and Munley were wrong and that any lingering doubts about the issue were clearly resolved by the U.S. Supreme Court’s June 2004 decision in Aetna Health Inc. v. Davila. In Davila, the justices held that a Texas plaintiff had no right to sue his HMO in state court under the Texas Health Care Liability Act but instead must pursue the case strictly as an ERISA claim in federal court. Now, in a ruling that comes as no surprise to lawyers who follow the issue, the 3rd Circuit has ruled that the justices used such explicit and sweeping language in Davila that a Pennsylvania bad-faith claim is also clearly pre-empted by ERISA. Chief Judge Anthony J. Scirica concluded that Davila “confirmed that state laws that supplement ERISA’s civil enforcement scheme conflict with Congress’ intent to make the ERISA remedy exclusive.” Although Scirica’s opinion for a unanimous three-judge panel focused on the rationale first articulated by Newcomer in Rosenbaum, the ruling came in another case. The Rosenbaum decision was never reviewed by the 3rd Circuit because the case had already settled by the time the appellate court announced that it had agreed to hear an interlocutory appeal. But a new case quickly emerged to fill the void when Newcomer handed down an order in Barber v. UNUM that once again greenlighted an ERISA plaintiff to pursue a bad-faith claim under Pennsylvania’s Section 8371. Instead of writing a new opinion, Newcomer simply cited his two prior Rosenbaum opinions and again certified the issue for an immediate appeal to the 3rd Circuit. When the Barber case was argued in May, all three judges — Scirica, Judge Marjorie O. Rendell and visiting 9th Circuit Senior Judge Arthur L. Alarcon — expressed skepticism over Newcomer’s reasoning. But less than a month later, the U.S. Supreme Court handed down its decision in Davila, and the 3rd Circuit asked the lawyers for supplemental briefs about its impact. UNUM’s lawyer, E. Thomas Henefer of Stevens & Lee in Reading, Pa., claimed victory, saying in a four-page letter brief that Davila “thoroughly undermines [Newcomer's] approach to conflict pre-emption.” Henefer argued that Davila “mandates reversal” because it flatly rejected one of the critical steps in Newcomer’s rationale — a section of the Rosenbaum opinion in which Newcomer said he recognized that the Supreme Court had previously called for broad application of the doctrine of conflict pre-emption but that he considered the justices’ remarks on that point to be “unpersuasive dicta” that could not withstand scrutiny. In Davila, Henefer said, the justices laid that reasoning to rest by explicitly relying on the remarks that Newcomer had labeled dicta. The language of the holding in Davila was also so sweeping, Henefer argued, that it clearly calls for pre-emption not only of the Texas law at issue, but also Pennsylvania’s bad-faith law by barring “any state-law cause of action that duplicates, supplements or supplants the ERISA civil enforcement remedy.” Lead plaintiff’s attorney Joseph Roda of Roda & Nast, in his three-page letter brief, seemed almost to concede defeat, but he nonetheless insisted that his case was not yet dead. Roda argued that the “strict holding” of Davila was only that ERISA pre-empts claims under the Texas law which provides for compensatory damages. By contrast, Roda said, Pennsylvania’s bad-faith claim does not provide for compensatory damages, but only for punitive damages and “equitable remedies,” such as attorney fees, interest and costs. “Thus, strictly speaking, Davila does not decide our case, and there is a legitimate reason to view the two statutes differently,” Roda wrote. “Compensatory damages that an HMO pays under a Davila statute could affect the employer’s premium, and thus the employer’s interest, but punitive damages that an insurer pays under Pennsylvania’s bad faith statute should not, since punitive damages are normally paid from an insurer’s surplus,” Roda wrote. But Roda said he also recognized that Davila “relies on” the dicta in the Supreme Court’s 1987 decision in Pilot Life Insurance Co. v. Dedeaux that said ERISA pre-empts any state cause of action for remedies beyond those of ERISA. In one section of the letter, Roda seemed to argue that Davila was wrongly decided. The justices’ decision to premise their ruling on the dicta in Pilot Life, Roda said, was “unfortunate because it is wrong.” Instead, Roda argued that Newcomer was correct in finding that a bad faith claim is protected by ERISA’s “saving clause.” The saving clause, Roda argued, “takes insurance companies and their regulation out of ERISA’s scope, leaving them where they were when ERISA was enacted.” But in Davila, Roda said, the Supreme Court “adopted a reverse interpretation” by holding that an earlier section in ERISA modifies and qualifies the saving clause, which appears later in the statute. “That is contrary to rules of statutory construction, as well as to the language of ERISA’s general pre-emption clause … which specifically excepts the saving clause — and the regulation of insurance — from ERISA’s pre-emption,” Roda wrote. Urging the 3rd Circuit not to extend Davila, Roda argued that a holding that ERISA pre-empts any state bad faith laws “dramatically changes the federal/state relationship on the regulation of insurance companies when there is no evidence in the language or legislative history of ERISA that Congress intended to do that.” The saving clause, Roda said, shows that Congress had “the opposite intent,” which the Supreme Court seemed to recognize in its 1985 decision in Metropolitan Life v. Massachusetts, in which the justices commented that the saving clause “appears to have been designed to preserve the McCarren Ferguson Act’s reservation of the business of insurance to the states.” Roda noted that Davila “does not mention Metropolitan Life, much less reconcile this statement.” Insisting that public policy was on his side, Roda argued that ERISA was enacted to help workers “secure their promised benefits, including health benefits.” Barring state law claims on the basis of conflict pre-emption, Roda said, “makes employees second-class insurance citizens, and thus less likely to get their benefits than someone to whom ERISA does not apply.” Such a rationale is flawed, Roda argued, because “as the saving clause makes clear, [ERISA] was not meant to confer protection on insurance companies.” Any ruling that extends Davila, Roda said, “will only perpetuate abuses in health and disability insurance that have now become rampant.” As proof, Roda cited a recent decision from the District of Massachusetts in Radford Trust v. UNUM Life Insurance Co. of America, which, he said, refers to UNUM’s “disturbing pattern of arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics.” In his closing sentence in the letter brief, Roda wrote, “One struggles to understand how ERISA can be interpreted to protect patterns like these [cited in Radford], to the detriment of the very people whom ERISA was enacted to protect.” Now the 3rd Circuit has rejected Roda’s arguments and ruled that Davila clearly calls for pre-emption of a Pennsylvania bad faith claim. Scirica found that under Davila, “conflict preemption applies to any ‘state cause of action that provides an alternative remedy to those provided by the ERISA civil enforcement mechanism’ because such a cause of action ‘conflicts with Congress’ clear intent to make the ERISA mechanism exclusive.’” Taken together, Scirica said, the Supreme Court’s long line of ERISA cases now clearly show that a state statute is pre-empted if it provides “a form of ultimate relief in a judicial forum that added to the judicial remedies provided by ERISA,” or if it “duplicates, supplements or supplants the ERISA civil enforcement remedy.” Pennsylvania’s bad-faith statute “is such a statute,” Scirica said, “because it is a state remedy that allows an ERISA plan participant to recover punitive damages for bad faith conduct by insurers, supplementing the scope of relief granted by ERISA.”

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