Cause of Action Asserted Against Blue Cross for Violation of Montana's Unfair Trade Practices Act is Not Preempted by ERISA

Posted by Scott Calvert on November 09, 2011

In a recent decision, the Ninth Circuit Court of Appeals ruled that ERISA does not preempt causes of action based on unfair insurance practice claims brought under Montana’s Unfair Trade Practices Act.  However, the Court did find that Montana’s so-called “little HIPAA” was preempted by federal HIPAA, which is part of ERISA. 

In Fossen v. Blue Cross and Blue Shield, __ F.3d __ (9th Cir. October 18, 2011), the Court considered an appeal from a District Court ruling that entered summary judgment in favor of Blue Cross on two causes of action.  Plaintiffs – which consisted of three brothers, their corporations and a partnership of the three corporations – sued Blue Cross after the health insurer increased their premiums by over 40%.  The lawsuit, filed in state court, alleged two causes of action:  violation of Montana Code Annotated § 33-22-526(a) (also known as Montana’s “little HIPAA” statute) and violation of Montana Code Annotated § 33-18-101 (also known as Montana’s Unfair Trade Practices Act).  Plaintiffs alleged that premium increase violated little HIPAA’s prohibition against imposing a “premium or contribution that is greater than the premium or contribution for a similarly situated individual” on account of "any health status-related factor of the individual” and the Unfair Trade Practices Act’s prohibition against “unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged.”  The action, filed in state court, was removed to the District Court, which eventually granted Blue Cross’ motion for summary judgment as to all causes of action.

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Tumult in California UCL Class Action Cases: Will the Supreme Court Step in?

Posted by Robert McKennon on February 21, 2010

Late last year the Fourth Appellate District of the California Court of Appeal issued its decision in Zhang v. Superior Court, 178 Cal. App. 4th 1081 (2009).  In that case, the court identified the issue presented “as whether fraudulent conduct by an insurer, which is connected with conduct that would violate Insurance Code § 790.03 et seq., sometimes referred to as the ‘Unfair Insurance Practices Act’—can also give rise to a private civil cause of action under the Unfair Competition Law (UCL), Business and Professions Code § 17200 et seq.”  The court held that it did.  This case will thus address whether insurance companies enjoy any special exemption from UCL liability.  The statement of issues on review reads:

(1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code, § 17200) based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so? (2) Does Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287 bar such an action?

This was a departure from Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004), which was previously interpreted to bar UCL “unlawful” prong claims against insurers based on conduct prohibited by § 790.03.  The court held that “if a plaintiff relies on conduct that violates the Unfair Insurance Practices Act but is not otherwise prohibited, Moradi-Shalal requires that a civil action under the UCL be considered barred.”  The court explained that that where, however, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

On February 10, 2010, the California Supreme Court granted the Petition for Review of this case.  It is therefore no longer citable. 

On the same day the California Supreme Court denied a Petition for Review and Depublication in Cohen v. DIRECTV, Inc. (October 28, 2009).  Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009).

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Unfair Insurance Practices Act Can Give Rise To Private Cause Of Action Under UCL

Posted by Robert McKennon on January 19, 2010

The California Court of Appeal recently addressed the question of whether a violation of the Unfair Insurance Practices Act can give rise to a civil cause of action under the Unfair Competition Law (“UCL”).  The court answered the question in the affirmative.  In Zhang v. Superior Court, 178 Cal. App. 4th 1081 (2009), Plaintiff Zhang sued California Capital Insurance Company (“California Capital”) for breach of contract and bad faith arising out of the handling of her claim for damages to her commercial premises due to fire.  In addition, Zhang alleged a cause of action under the UCL and for “unfair, deceptive, untrue, and/or misleading advertising.”  California Capital demurred to Zhang’s third cause of action by arguing that the plaintiff could not state a private cause of action under the UCL due to the decision in Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988).  The trial court agreed by sustaining the demurrer and Zhang appealed.

On appeal, the court explained that Moradi-Shalal did not stand for the proposition that insurers who violate the Unfair Insurance Practices Act can never be liable in tort to the injured party.  Instead, the court noted that “the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.”  Moradi-Shalal, at 304-305.

This was departure from Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal.App.4th 1061 (2004), which was previously interpreted to bar UCL "unlawful" prong claims against insurers based on conduct prohibited by section 790.03.  Instead, the court held that “if a plaintiff relies on conduct that violates the Unfair Insurance Practices Act but is not otherwise prohibited, Moradi-Shalal requires that a civil action under the UCL be considered barred.”  Where, however, as in Zhang, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

In response to those who make the “end run” argument, the Zhang court observed in a footnote that, as established in State Farm v. Superior Court, 45 Cal. App. 4th 1093 (1994), a UCL plaintiff is not entitled to seek compensatory and punitive damages, only restitution and injunction.  Accordingly, “if a plaintiff expressly alleges conduct that was prohibited by the UCL, then there is no reason to apply Moradi-Shalal to prohibit the cause of action.”

As a result, the Court of Appeal found that the trial court erred in sustaining the demurrer and issues an order overruling the lower court’s decision.

California Supreme Court Holds that Only the Class Representative Needs to Meet the Standing Requirements of Proposition 64 to Pursue a Representative Action

Posted by Robert McKennon on January 14, 2010

Following the passage of Proposition 64 on November 2, 2004, in order to bring a representative claim under the unfair competition law (“UCL”), a plaintiff must meet the following standing requirements: (1) establish that he or she “has suffered injury in fact and has lost money or property as a result of such unfair competition” and (2) comply with the class action requirements as set forth in California Code of Civil Procedure Section 382. Bus. & Prof. Code §§ 17203, 17204 and 17535. After the passage of Prop 64, litigants continued to debate whether only the named plaintiff or all class members had to meet the more stringent standing requirements of injury in fact and loss of money or property as a result of the alleged conduct. 

In In Re Tobacco II Cases, 46 Cal. 4th 298 (2009), the California Supreme Court resolved that debate. Specifically, the Court addressed two questions: “First, who in a UCL class action must comply with Proposition 64’s standing requirements, the class representative or all unnamed class members, in order for the class action to proceed?” and “Second, what is the causation requirement for purposes of establishing standing under the UCL and in particular what is the meaning of the phrase ‘as a result of’ in section 17204?” In response to the first question, the Court concluded that the new standing requirements of Prop 64 applied only to the named plaintiff/class representative and not to absent class members. In reaching this conclusion, the Court reasoned that “the references in section 17203 to one who wishes to pursue UCL claims on behalf of others are in the singular; that is, the ‘person’ and the ‘claimant’ who pursues such claims must meet the standing requirements of section 17204 and comply with Code of Civil Procedure section 382.” The Court concluded that these singular references must be interpreted to relate only to the individual representative plaintiff.  The Court further reasoned that there was nothing in Prop 64 that indicated it was to have any affect on absent class members and the way in which class actions operate in the context of the UCL, or on the remedies available under the UCL, which did not always require actual injury to absent class members.

In response to the second question, the Court concluded that the named plaintiff/class representative must demonstrate actual reliance on the alleged deceptive or misleading representations, consistent with the element of reliance required in common law fraud actions. The Court, however, indicated that while the representative plaintiff must show that the alleged misrepresentation was “an immediate cause of the injury-producing conduct, the plaintiff need not demonstrate it was the only cause.” In other words, it is enough that the plaintiff’s reliance “played a substantial part” and was “a substantial factor, in influencing his decision.”

Finally, while the Court made clear that the new standing requirements of Prop 64 applied only to the named plaintiff/representative, the Court also noted that Prop 64 “explicitly mandates that a representative UCL action comply with Code of Civil Procedure section 382,” which requires that class representative’s claims be typical of the unnamed class members and that common questions of law and fact predominate. See Basurco v. 21st Century Ins. Co., 108 Cal. App. 4th 110, 117 (2003).

Justice Moreno authored the opinion for a divided Court, and Justice Baxter wrote a concurring and dissenting opinion.

California Supreme Court Restricts the Use of Business & Professions Code Section 17200

Posted by Robert McKennon on January 14, 2010

In a pair of cases, the California Supreme Court restricted the use of California Business & Professions Code Section 17200 et seq.   One case affirmed what many expected, that Proposition 64, a 2004 voter initiative, requires plaintiffs to follow strict class-action procedures when seeking to recover under California’s unfair competition law (Bus. & Prof. Code § 17200 et seq.) which prohibits “any unlawful, unfair or fraudulent business act or practice . . . .” 

Before 2004, any person could assert representative claims under the unfair competition law to obtain restitution or injunctive relief against unfair or unlawful business practices. Such claims were not required to be brought as a class action, and a plaintiff had standing to sue even without having personally suffered an injury. (See Former §§ 17203, 17204; Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553, 561 (1998)).

In 2004, however, the California electorate passed Proposition 64, amending the unfair competition law to provide that a private plaintiff may bring a representative action under this law only if the plaintiff has “suffered injury in fact and has lost money or property as a result of such unfair competition” and “complies with Section 382 of the Code of Civil Procedure . . . .” This statute provides that “when the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.” The Court has previously interpreted Code of Civil Procedure section 382 as authorizing class actions. See Richmond v. Dart Industries, Inc., 29 Cal. 3d 462, 470 (1981).

In Arias v. Superior Court of San Joaquin (Angelo Dairy), 46 Cal. 4th 969 (2009), the Court held that employees can pursue penalties for wage-and-hour violations under the Private Attorneys General Act, or (“PAGA”), without having to qualify their lawsuit as a class action.

Justice Joyce L. Kennard, writing for the majority, also analyzed the effect of Proposition 64. Plaintiff contended that because Proposition 64’s amendment of the unfair competition law required compliance only with “[s]ection 382 of the Code of Civil Procedure” and because that statute makes no mention of the words “class action,” his representative lawsuit brought under the unfair competition law need not comply with the requirements governing a class action. The Court rejected this assertion, explaining:

In light of this strong evidence of voter intent, we construe the statement in section 17203, as amended by Proposition 64, that a private party may pursue a representative action under the unfair competition law only if the party “complies with Section 382 of the Code of Civil Procedure” to mean that such an action must meet the requirements for a class action. (See Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1092, fn. 9.)

In a concurring opinion by Justice Werdegar, she disagreed with the majority’s “nonliteral interpretation of Proposition 64 (Gen. Elec. (Nov. 2, 2004)), which forecloses a variety of representative actions the measure clearly permits. Unlike the majority, I do not believe we would frustrate the voters’ intent by enforcing the measure according to its plain language.”

Similarly, in Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.), 46 Cal. 4th 993 (2009), the Court ruled that the requirement that a plaintiff be one “who has suffered injury in fact,” combined with the PAGA requirement that a labor action be initiated by an “aggrieved employee,” prevents a union from bringing a UCL action based on associational standing.

Second Circuit Holds Delayed Discovery Rule Applies to Unfair Competition Claims

Posted by Robert McKennon on January 14, 2010

Recently, in Broberg v. The Guardian Life Insurance Company of America, 171 Cal. App. 4th 912 (2009), the Court of Appeal held that the "delayed discovery" rule, which applies to delay accrual of the statute of limitations for fraud causes of action until such time as the plaintiff discovers facts putting him on notice of the fraud, applies to unfair competition claims that are based upon alleged fraud.  Guardian allegedly sold a life insurance policy by falsely representing that earnings from the policy would be sufficient to pay premium costs after the policy’s 11th year and by providing misleading marketing materials that represented out-of-pocket costs would be eliminated in the policy’s 12th year.   The plaintiffs claimed they were not aware of the falsity of these representations until they were billed for additional premiums after the 11th year.  The trial court, relying on the four-year statute of limitations, dismissed the action with prejudice by concluding that the claims had accrued when the policy was first sold.  The trial court also held that the plaintiffs could not establish justifiable reliance because of inconsistent language in the policy itself and in a footnote disclosure in the marketing material.

Applying the delayed discovery doctrine, the Court of Appeal reversed.  It held, as a matter of law, that the placement of the disclaimers – “buried in a sea of same-sized capitalized print” – coupled with the absence of “any cautionary language” on the first page of Guardian’s policy illustration precluded such a determination.  In so holding, the court added to the conflict in published decisions on the issue of whether the "delayed discovery" rule applies to unfair competition claims. See, e.g., Snapp & Associates Ins. Services, Inc. v. Robertson, 96 Cal. App. 4th 884, 891 (2002) (holding the "delayed discovery" rule does not apply to unfair competition claims).

Health Care Provider Claims Against Employer Not Preempted by ERISA

Posted by Robert McKennon on January 14, 2010

In Marin General Hospital v. Modesto & Empire Traction Co., 581 F.3d 941 (9th Cir. 2009), the Ninth Circuit Court of Appeals held that section 502(a)(1)(B) of ERISA did not completely preempt state-law causes of actions for breach of contract, negligent misrepresentation, quantum meruit and estoppel brought by a hospital against a patient’s employer and its claims administrator based on an alleged oral agreement between the hospital and claims administrator to pay for services provided by the hospital. Because the claims could not be pursued under section 502(a)(1)(B), the Ninth Circuit concluded that the state-law claims were not preempted, depriving the court of subject matter jurisdiction. Accordingly, removal from state court was improper and the case was remanded to the district court with instructions to remand the matter to state court.

Marin General Hospital (“Hospital”) contended that its representative spoke to a representative of Medical Benefits Administrators of M.D. Inc. (“Medical Benefits”) on April 8, 2004 to confirm that a prospective patient had health insurance through a plan provided by his employer, Modesto & Empire Traction Co., and administered by Medical Benefits.  The Hospital contended that the Medical Benefits representative verbally verified the patient’s coverage, authorized treatment, and agreed to cover ninety-percent of the patient’s medical expenses. The Hospital sued Medical Benefits and Modesto & Empire in state court and the defendants successfully removed the case to the U.S. District Court for the Northern District of California, claiming that ERISA completely preempted the claims. The district court subsequently dismissed the Hospital’s complaint, concluding that the only remedy available was under ERISA § 502(a)(1)(B).

The Ninth Circuit first found the parties “have not clearly understood 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).” Complete preemption under § 502(a) is a jurisdictional doctrine. 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.

The court then explained that removal was only proper if the Hospital’s state law claims were completely preempted under section 502(a)(1)(B) of ERISA. It then examined whether the claims asserted by the Hospital were completely preempted by ERISA, concluding that they were not. In reaching this conclusion, the Ninth Circuit clarified a distinction between complete preemption under section 502(a) and conflict preemption under section 514(a). Citing to Franciscan Skemp Healthcare, Inc. v. Central States Joint Board Health & Welfare Trust Fund, 538 F.3d 594, 596 (7th Cir. 2008), the Ninth Circuit explained that complete preemption under section 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 claims.” In contrast, the “rule is that a defense of federal preemption of state-law claims, even conflict preemption under section 514(a) of ERISA, is an insufficient basis for original federal question jurisdiction.”

Relying on Aetna Health Inc. v. Davila, 542 U.S. 200, 210 (2004), the Ninth Circuit explained that a state-law cause of action is completely preempted by section 502(a)(1)(B) if: (1) “an individual, at some point in time, could have brought [the] claim under ERISA section 502(a)(1)(B);” and (2) “where there is no other independent legal duty that is implicated by a defendant’s actions.” Based on this conjunctive two-prong test, the Ninth Circuit concluded that the Hospital’s state-law claims were not pre-empted.