ERISA preemption presents a vexed question. And such preemption approaches the metaphysical where invoked as a basis for removal. Marin General Hospital v. Modesto & Empire Traction Co., 2009 WL 2882832 (9th Cir. Sep. 10, 2009), limns the issue.

The case arises out of prosaic circumstances. On April 8, 2004, Marin General Hospital telephoned the Medical Benefits Administrators of M.D., Inc. (“MBAMD”) to confirm that a prospective patient had health insurance through an ERISA plan provided by his employer, Modesto & Empire Traction Co. MBAMD was the administrator of Modesto’s plan. MBAMD orally verified the patient’s coverage, authorized treatment, and agreed to cover 90% of the patient’s medical expenses at the hospital.

Between April 19 and April 24, 2004, the hospital performed a lumbar fusion procedure on the patient. The hospital then submitted a bill to MBAMD for $178,926.54. MBAMD paid the hospital $46,655.54 and stated in the letter that the hospital was not entitled to further payment. The hospital responded in a letter that “[p]er your contract, this claim should be paid at 90% of total charges.” MBAMD denied that it had such a contract with the hospital and refused to make additional payment.

On December 8, 2006, the hospital filed suit in California state court against Modesto, MBAMD, and MBAMD’s CEO for breach of an implied contract, breach of an oral contract, negligent misrepresentation, quantum meruit, and estoppel. MBAMD and Modesto removed the suit to federal district court that on the ground ERISA completely preempted the hospital’s claims. The hospital moved to remand to state court, arguing that it alleged only state-law claims in its complaint, and that these claims were not completely preempted under ERISA. The district court denied the motion to remand and granted the defendant’s motion to dismiss. The Ninth Circuit reversed.

The court framed the issue as “whether the Hospital’s state-law claims are completely preempted under § 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B), and thus whether the case was properly removed from state to federal court.” 2009 WL 2882832, at *2. “Removal was proper only if the Hospital’s claims are completely preempted.” Id.

First, under the now familiar well-pleaded complaint rule, removal on the basis of federal question jurisdiction is proper only where the plaintiff’s well-pleaded complaint raises issues of federal law. It is fundamental that a federal defense does not provide a basis for federal question removal. The court observed that “there is an exception to the well-pleaded complaint rule for state-law causes of action that are completely preempted by § 502(a).” Id. The court, however, rejected the “defendants’ contention that the Hospital’s causes of action are completely preempted.” Id.

“The general rule is that a defense of federal preemption of a state-law claim, even conflict preemption under § 514(a) of ERISA, is an insufficient basis for original federal question jurisdiction under § 1331(a) and removal jurisdiction under § 1441(a).” 2009 WL 2882832, at *3.

The court noted that the case reflected (quite understandable) confusion among the parties as to “the difference between complete preemption under ERISA § 502(a), 29 U.S.C. § 1132(a), and conflict preemption under ERISA § 514(a), 29 U.S.C. § 1144(a).” Id.

“Complete preemption under § 502(a) is really a jurisdictional rather than a preemption doctrine, as it confers exclusive federal jurisdiction in certain instances where Congress intended the scope of a federal law to be so broad as to entirely replace any state-law claim.” Id.

“A provision of state law may ‘relate to’ an ERISA benefit plan, and may therefore be preempted under § 514(a).” Id. “But a defense of conflict preemption under § 514(a) does not confer federal question jurisdiction on a federal district court.” Id.

Rather, “a party seeking removal based on federal question jurisdiction must show either that the state-law causes of action are completely preempted by § 502(a) of ERISA, or that some other basis exists for federal question jurisdiction.” Id.

The court concluded that the case was controlled by Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004). 2009 WL 2882832, at *4. There, the Supreme Court formulated a two-part test to determine whether a state-law cause of action is completely preempted:

(1) an individual, at some point in time, could have brought the claim under ERISA § 502(a)(1)(B), and (2) where there is no other independent legal duty that is implicated by a defendant’s actions. 

542 U.S. at 205. 

The court observed that “the two-prong test of Davila is in the conjunctive.” 2009 WL 2882832, at *5. Therefore, “a state-law cause of action is preempted by § 502(a)(1)(B) only if both prongs of the test are satisfied.” Id. The court concluded that the case satisfied neither element of the test:

“First, the Hospital could not have brought its state-law claim under § 502(a)(1)(B) of ERISA. Second, the Hospital seeks to remedy violations of legal duties that are independent of ERISA.”

2009 WL 2882832, at *5.

Applying the first element of the Davila test, the court found material the fact that all of the hospital’s claims arise out of the telephone conversation “in which MBAMD allegedly agreed to pay 90% of the patient’s hospital charges.” Id. That is, “the Hospital does not contend that it is owed this additional amount because it is owed under the patient’s ERISA plan,” but rather “the Hospital is contending that this additional amount is owed based on its alleged oral contract with MBAMD.” Id.

That the patient had assigned to the hospital any claim he had under his ERISA plan was not material to the court’s analysis. “Pursuant to that assignment, the Hospital was paid the money owed to the patient under the ERISA plan.” 2009 WL 2882832, at *6. But, “the Hospital now seeks more money based upon a different obligation.” Id. And this “obligation to pay this additional money does not stem from the ERISA plan,” so that “the Hospital is therefore not suing as the assignee of an ERISA plan participant or beneficiary under § 502(a)(1)(B).” Id. “Rather, the asserted obligation to make the additional payments stems from the alleged oral contract between the Hospital and MBAMD.” Id. 

The court rejected MBAMD’s argument that the claims brought by the hospital necessarily related to the patient’s ERISA plan. “This argument is based on a misunderstanding of complete preemption under § 502(a)(1)(B).” 2009 WL 2882832, at *7. This is so because “the question whether a law or claim ‘relates to’ an ERISA plan is not the test for complete preemption under § 502(a)(1)(B),” but rather “is the test for conflict preemption under § 514(a).” Id. “A defense of conflict preemption under § 514(a) does not provide a basis for federal question jurisdiction under either § 1331(a) or § 1441(a).” Id.

The court also rejected MBAMD’s argument that the hospital’s standing to bring its action derived from its assignment from the patient, so that the hospital could only bring its suit under § 502(a)(1)(B). The court concluded that “the Hospital’s state-law claims based on its alleged oral contract with MBAMD were not brought, and could not have been brought under § 502(a)(1)(B).” 2009 WL 2882832, at *7.

MBAMD also failed to satisfy the second element of the Davila test. The court concluded that “the Hospital’s claims in this suit are based on independent legal duties.” 2009 WL 2882832, at *8. That is, “these claims do not rely on, and are independent of, any duty under an ERISA plan.” Id. In the court’s rather facile view, the hospital’s state-law claims are each premised on the allegation that the April 8 telephone call resulted in an oral contract, so that the claims had nothing to do with the ERISA plan. Id.

The court observed that under the second element of the Davila test, “we ask only whether ‘there is no other independent legal duty that is implicated’ by a defendant’s actions.” 2009 WL 2882832, at *8. “We do not ask whether that legal duty provides for a similar remedy, such as the payment of money.” Id.

“Since the state-law claims asserted in this case are in no way based on an obligation under an ERISA plan, and since they would exist whether or not an ERISA plan existed, they are based on ‘other independent legal duties’ within the meaning of Davila.” Id.