20 Employee Benefits Cas. 1580, Pens. Plan Guide P 23922n Betty Jass v. Prudential Health Care Plan, Incorporated, a Corporation, Karen Margulis and Peter J. Anderson, M.D.

Citation: 88 F.3d 1482Docket: 95-2471

Court: Court of Appeals for the Seventh Circuit; July 8, 1996; Federal Appellate Court

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Betty Jass underwent knee replacement surgery and subsequently sued Prudential Health Care Plan (PruCare) and nurse Karen Margulis for vicarious liability and negligence, asserting dissatisfaction with her surgical outcome. PruCare removed the case to federal court, claiming diversity and federal question jurisdiction. Before the court ruled on Jass's motion to remand, she amended her complaint to include a negligence claim against Dr. Peter Anderson, her treating physician, who resided in Illinois, thereby eliminating diversity jurisdiction.

The district court determined it had federal question jurisdiction due to ERISA preemption over claims against PruCare and Margulis, leading to the dismissal of those claims. It remanded the remaining claim against Dr. Anderson to state court. Jass appealed, arguing that the district court lacked jurisdiction since her claims were solely based on state law.

The appellate court concluded that Jass's state law negligence claim against Margulis and vicarious liability claim against PruCare were completely preempted by ERISA, thus providing the district court with jurisdiction. The court affirmed the dismissal of these claims, as Jass failed to state a valid ERISA claim. However, it recharacterized the vicarious liability claim against PruCare as a denial of benefits claim, allowing Jass the opportunity to amend her complaint to seek appropriate ERISA relief.

Additionally, the court found that the vicarious liability claim against PruCare related to Dr. Anderson's negligence was not covered under ERISA's § 502(a) but was preempted by § 514, which provides a defense to state law claims concerning employee benefit plans. The court affirmed the dismissal of this claim as well, resulting in a partial affirmation and partial remand of the case. Jass participated in a benefit plan administered by PruCare, which was governed by ERISA regulations, and included a list of participating physicians that affected reimbursement rates for medical expenses.

On January 8, 1992, Jass underwent knee replacement surgery at St. Elizabeth's Hospital, under Dr. Anderson's care. Following surgery, Jass required physical therapy, but Karen Margulis, an agent of PruCare, denied this necessity, leading to her premature discharge and alleged permanent knee injury. Jass filed a negligence claim against Margulis and a vicarious liability claim against PruCare, which was removed to federal court, asserting both diversity and federal question jurisdiction based on ERISA preemption. Jass contested this removal and, while her remand motion was pending, amended her complaint to include a medical malpractice claim against Dr. Anderson, which destroyed diversity jurisdiction since both Jass and Dr. Anderson were Illinois citizens.

The district court ruled that, despite the loss of diversity, federal question jurisdiction persisted due to ERISA preemption, leading to the dismissal of Jass' claims against PruCare and Margulis. Consequently, the court remanded the remaining case against Dr. Anderson to state court. Jass appealed, arguing that the district court improperly found jurisdiction over her claims against Margulis and PruCare, asserting they were solely based on state law and did not raise a federal question. The appellate analysis will focus on the well-pleaded complaint rule, complete preemption under ERISA, and the distinction between complete and conflict preemption, evaluating the validity of Jass' claims against PruCare and Margulis, which include negligence, vicarious liability for Margulis' and Dr. Anderson's alleged negligence, and ostensible agency claims. The review will also address the appropriateness of the district court's dismissals.

Federal question jurisdiction requires that a case arises under U.S. law, as stipulated in 28 U.S.C. § 1331. Courts assess this by examining the plaintiff's well-pleaded complaint, where federal jurisdiction exists only if the complaint itself raises federal issues, not based on the defendant's assertions. A defense of preemption does not establish original federal jurisdiction, with the exception of cases where Congress has completely preempted state law in a particular area, allowing for removal to federal court. The complete preemption doctrine, established in Avco Corp. v. Aero Lodge, indicates that if Congress has displaced a state law claim, the complaint may be recharacterized as arising under federal law, even without explicit reference to federal jurisdiction.

Regarding ERISA, the Supreme Court's decision in Taylor extended complete preemption to certain ERISA claims, recognizing Congress's intent to convert such claims into federal question suits. This led to confusion between complete preemption and conflict preemption, the latter being a federal defense. The distinction clarified in Rice emphasizes that claims under ERISA § 502(a) are subject to complete preemption, while those under § 514(a) fall under conflict preemption.

The excerpt addresses the jurisdictional issues surrounding vicarious liability claims under ERISA. In the case of Rice, it was determined that a state law vicarious liability claim against a plan administrator based on a physician's negligence fell under ERISA section 514(a) conflict preemption, rather than section 502(a) complete preemption, leading to a remand for dismissal due to lack of subject matter jurisdiction. In the current case involving Jass, who claims vicarious liability against PruCare for Dr. Anderson's alleged negligence, the claims mirror those in Rice. It is established that such claims against a plan administrator are subject to conflict preemption under section 514(a) but do not invoke complete preemption under section 502(a). Therefore, the district court incorrectly assumed federal question jurisdiction based on ERISA preemption.

Additionally, Jass's negligence claim against Margulis, a registered nurse, is characterized as a state law claim without any federal law basis, reinforcing her argument that it cannot be completely preempted by ERISA. Before deciding on the dismissal of Jass's vicarious liability claim against PruCare, the court must first assess if there is another basis for federal subject matter jurisdiction regarding that claim.

Jass's claim against Margulis, although framed as a state law negligence claim, may be subject to complete preemption under ERISA § 502(a). The legal principle established in Rice indicates that if a state law claim falls within the scope of ERISA, it cannot evade federal jurisdiction simply through artful pleading. A plaintiff cannot avoid federal court access by omitting facts indicating federal jurisdiction. Courts have the authority to look beyond the complaint to ascertain the true nature of the claim and determine if it should be classified as arising under federal law.

In evaluating whether Jass's claim is fundamentally based on ERISA, the factors outlined in Rice must be applied. These factors suggest that Jass's claim is effectively a denial of benefits claim under ERISA § 502(a). As a participant in the plan, Jass is entitled to seek relief under this provision. The record reveals a prior complaint by Jass regarding the same issues, specifically challenging the denial of benefits related to rehabilitation treatment.

Furthermore, Jass's allegations implicate a decision about benefits; Margulis's determination that Jass's treatment was not medically necessary and subsequent actions to discharge her from the hospital qualify as a benefits determination under ERISA. Therefore, Jass's claim aligns with a § 502(a)(1)(B) action, which focuses on whether benefits owed under the plan were provided.

Jass attempts to characterize her claim against Margulis as a state law negligence action by alleging that Margulis voluntarily assumed a duty to manage her medical care; however, Margulis was actually acting as a utilization review administrator for PruCare, responsible solely for determining benefits under the ERISA-regulated plan. Margulis' only interactions with Jass were in this administrative capacity, as affirmed by her affidavit stating that she acted within her employment duties and had no other contact with Jass outside of benefit determination. Jass' claims are thus subjected to ERISA's complete preemption, as any state law claims that require interpreting the benefits contract are effectively converted to federal claims. Despite Jass arguing that her claim is solely under state law, ERISA's preemptive force converts it into a federal issue, and the district court has jurisdiction over the matter. Although the district court dismissed Jass' claim against Margulis as preempted by ERISA, it did so incorrectly by using the "relates to" standard, which applies to conflict preemption, rather than recognizing the claim as a federal denial of benefits claim under ERISA § 502(a).

The dismissal of Jass's claim against Margulis was warranted because ERISA allows recovery suits only against the Plan as an entity, not against individuals. Specifically, Jass's claim for vicarious liability against PruCare based on Margulis's actions was recharacterized as a denial of benefits claim, falling under ERISA Section 502(a), which limits recovery to benefits due under the plan rather than compensatory damages for injuries. Although Jass did not initially seek the appropriate relief under ERISA, she should be permitted to amend her complaint to align with the provisions of Section 502(a). Additionally, attempts to avoid federal jurisdiction through artful pleading may lead to dismissal without the chance to amend. Regarding Jass's claims against Dr. Anderson, the district court mistakenly found subject matter jurisdiction based on ERISA preemption; however, this claim was not completely preempted and did not arise under federal law.

The district court had federal question jurisdiction over two of Jass' claims, allowing for potential supplemental jurisdiction over her vicarious liability claims against PruCare related to Dr. Anderson's alleged negligence. However, the court did not consider this jurisdictional basis. Initially, when PruCare removed the case, there was complete diversity between Jass and the two defendants, Margulis and PruCare. Subject matter jurisdiction became an issue only after Jass amended her complaint to include Dr. Anderson, a non-diverse defendant. The court mistakenly assumed it had federal question jurisdiction over the vicarious liability claims, leading to a lack of subject matter jurisdiction regarding those claims against PruCare. The inclusion of Dr. Anderson destroyed diversity jurisdiction unless the court exercised supplemental jurisdiction, which it did not. Consequently, the joinder of Dr. Anderson was deemed inappropriate without remanding the case to state court, as per Title 28 U.S.C. 1447(e). However, when the court remanded the claim against Dr. Anderson, it effectively resolved the jurisdictional issue by dismissing the non-diverse party, allowing federal jurisdiction to remain over the remaining diverse parties and claims.

The merits of Jass' vicarious liability claims against PruCare were considered, with Jass alleging that Dr. Anderson was PruCare's agent, which rendered PruCare vicariously liable. The district court dismissed these claims, ruling they were preempted by ERISA, but did not clarify the distinction between 'conflict' and 'complete preemption.' The relevant issue was the defense of 'conflict preemption' under ERISA section 514(a), which preempts state laws that relate to employee benefit plans covered by ERISA. The core inquiry focuses on whether Jass' claims against PruCare relate to any such employee benefit plan.

The Supreme Court in FMC Corp. v. Holliday established that the 'relate to' clause of ERISA is broad, encompassing all state laws connected to employee benefit plans. ERISA preemption affects any state cause of action that references or connects to an ERISA plan. In Jass' case, both vicarious liability claims against PruCare for Dr. Anderson's alleged negligence are directly related to the benefit plan, as Dr. Anderson was identified as a physician within the plan, which incentivized participants to seek his treatment. Jass' claims hinge on an agency relationship between PruCare and Dr. Anderson, which arises solely from the health care plan. Evaluating this relationship necessitates analyzing the benefit plan itself, which clarifies that participating physicians are not considered PruCare employees or agents.

Furthermore, the specific allegations of negligence involve Dr. Anderson's failure to treat, which ties back to Margulis' denial of benefits as PruCare's utilization review administrator, indicating that the claims are intrinsically linked to the benefit plan. Allowing Jass to pursue a vicarious liability claim based on a physician's alleged negligent failure to treat would contradict Congress' intent with ERISA, as it would allow state law remedies that Congress specifically excluded when enacting the statute. Thus, the federal framework would be undermined if participants could seek state law remedies for issues that ERISA intended to regulate.

Recovery against an ERISA Plan based on state law would undermine Congress' intention to ensure that employee benefit plans are regulated exclusively at the federal level, which prevents conflicts arising from varying state laws. The precedent set in *Safeco Life Ins. Co. v. Musser* emphasizes that the regulation of employee benefit plans should not lead to differing administrative requirements for employers operating in multiple states. State laws that regulate the structure or administration of ERISA plans or offer alternative avenues for employee claims are preempted to maintain uniformity, as highlighted in *Shaw v. Delta Air Lines, Inc.* and *Corcoran*.

Allowing vicarious liability claims against ERISA Plans for a physician's negligence would necessitate that multi-state plans adapt their administration to comply with varying state laws, conflicting with the uniformity Congress aimed to achieve. The case of *Pacificare of Oklahoma, Inc. v. Burrage* is distinguished from the current situation, as the alleged negligence in *Pacificare* was deemed too remote from the benefit plan, while here, the physician's alleged negligence directly impacts the benefits determination due to a denial of payment for treatment.

In summary, while some state actions may have only a tenuous connection to employee benefit plans, this case does not fall into that category, as the alleged negligence is directly intertwined with the benefits at stake. The document also references previous cases that illustrate what constitutes a "too tenuous, remote, or peripheral" connection to ERISA plans.

A lawsuit against an ERISA plan for unpaid rent or attorneys' fees has been cited, along with a hypothetical scenario involving a slip and fall in a plan administrator's office, emphasizing that these are typical tort claims which do not involve a direct suit by a plan participant against a plan under ERISA. The claims in question arise solely from the health benefit plan provided by PruCare to Jass, establishing that Jass’ negligence claims against Margulis and PruCare are completely preempted by ERISA and fall within the court’s jurisdiction. The dismissal of these claims was justified as Jass did not present a claim eligible for ERISA relief. Additionally, claims of vicarious liability against PruCare were also preempted as they relate to the benefit plan. However, since Jass’ claim against PruCare has been recharacterized as a denial of benefits claim, she is allowed to amend her complaint to seek appropriate ERISA relief. The court affirms part of the ruling and remands part of it, noting that the claim against Dr. Anderson was not appealed and remains pending in state court. Jass initially did not name Dr. Anderson as a defendant, merely listing him as a respondent-in-discovery, which renders his citizenship irrelevant for diversity jurisdiction. Margulis claimed not to be a citizen of Illinois, a fact unchallenged by Jass. Section 502(a) of ERISA allows civil actions by participants or beneficiaries.

Relief under subsection (c) pertains to recovering benefits owed or enforcing rights under an employee benefit plan. Section 514(a) establishes that the provisions of the relevant subchapters supersede all state laws relating to employee benefit plans that are not exempt. Case law supports the notion of ERISA preemption, as seen in Corcoran, where the Fifth Circuit determined that the plaintiff's claims against a utilization review organization were preempted by ERISA, indicating a complete preemption. Similarly, the Third Circuit in Dukes recognized that a negligence claim against a utilization review organization is also completely preempted, as such organizations are positioned to deny benefits under ERISA plans. Jass's claims against PruCare for alleged negligence are not completely preempted, although they may still be subject to conflict preemption, which is a broader concept than complete preemption. The Tenth Circuit has addressed ERISA preemption concerning vicarious liability claims, while district courts remain divided on the issue.