2005-10

Employee's State Law Claims Against Health Care Provider That Denied Benefits Are Preempted By Federal Law.

In Cleghorn v. Blue Shield of California, the Ninth Circuit Court of Appeals affirmed the District Court's dismissal of the complaint, finding that appellant's state-law causes of action arising from Blue Shield's denial of benefits under an Employee Retirement Income Security Act ("ERISA") plan are preempted by the exclusive civil enforcement scheme established by Congress in section 502(a) of ERISA.

Douglas D. Cleghorn was a participant in his employer's ERISA health plan offered by Blue Shield of California ("Blue Shield"). On one occasion he sought and received emergency medical services to which Blue Shield denied reimbursement. Cleghorn sued Blue Shield in California state court on behalf of himself, all others similarly situated, and the general public, asserting that Blue Shield's actions violation California Business and Profession Code section 17200 et seq., California's Unfair Competition Law ("UCL"), and the Consumer Legal Remedies Act ("CLRA") as well as alleging that Blue Shield had violated an emergency care provision set forth in section 1371.4(c) of the California Health and Safety Code ("HSC"). In pertinent part, the HSC stated:

A] health care service plan may deny reimbursement to a provider for a medical screening examination in cases when the plan enrollee did not require emergency services and care and the enrollee reasonably should have known that an emergency did not exist. A health care service plan may require prior authorization as a prerequisite for payment for necessary medical care following stabilization of an emergency medical condition.

Cleghorn asserted that this statute required Blue Shield to cover emergency treatment whenever the insured "reasonably believes that an emergency exists" and that a requirement of pre-authorization in such cases is forbidden.

Blue Shield subsequently removed the action to federal court on the ground that Cleghorn's state-law causes of action were completely preempted by ERISA. Cleghorn then amended his complaint to delete his individual claims for damages under CLRA and filed a motion to remand. The district court denied Cleghorn's motion to remand, concluding that Cleghorn's claims were still preempted. The district court provided Cleghorn with an opportunity to amend his complaint to include claims under ERISA's civil enforcement scheme, however he declined to do so. The district court thereupon dismissed the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a cognizable cause of action.

The Ninth Circuit affirmed the district court's dismissal. In reaching this conclusion, the court noted that ERISA section 514(a) expressly preempts all state laws "insofar as they may now or hereafter relate to any employee benefit plan." The court further noted that ERISA section 502(a) contains a comprehensive scheme of civil remedies to enforce ERISA's provisions. The court reasoned that a state cause of action which would fall within the scope of this scheme of remedies is preempted as conflicting with the intended exclusivity of the ERISA remedial scheme, even if those causes of action would not necessarily be preempted by section 514(a). In support of this conclusion, the Ninth Circuit relied on the Supreme Court's earlier decision in Aetna Health Inc., v. Davilia, 542 U.S. 200 (2004) where the Court held that a plaintiff's claims for reimbursement were preempted by ERISA even though plaintiffs couched their claims in terms of tort (unlike ERISA claims) and the remedies sought were not duplicative of those offered by ERISA. Therefore, the court concluded that ERISA's preemptive force precluded Cleghorn's state-law causes of action

Significantly, the court did not find persuasive the fact that Cleghorn amended his complaint to delete his individual claim. In this regard, the court noted, "[a]rtful pleading does not alter the potential for this suit to frustrate the objectives of ERISA." Accordingly, the court concluded that modifying the class claim does not circumvent preemption given that the appellant is a participant in an ERISA plan and brings his action on behalf of other similarly situated ERISA plan participants.

The court also rejected the argument that a claim brought under the HSC may not be preempted by ERISA because the statute applies "across the board to all health providers, not just ERISA plans." In support of the argument, appellant cited Washington Physicians Service Ass'n v. Gregoire, 147 F3d 1039 (9th Cir. 1998) which evaluated a statute that required every health carrier to provide that services be covered by the plan could be provided by every category of health care providers within their area of competence. In that case, the Ninth Circuit held that the statute was not preempted under ERISA section 514(a) because it did not "operate directly" on ERISA plans, but merely regulated a product that an employee benefit plan might choose to buy. In the instant case, the court found this reasoning to be unpersuasive because the court's rationale was not founded on section 514(a) but on the remedial scheme of section 502 In this regard, the court concluded that the HSC may not be enforced against an ERISA plan by way of a lawsuit asserting state-law causes of action because Congress enacted an exclusive and comprehensive civil enforcement scheme which preempted any such state-law causes of action.

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Employees Who Worked as Finance and Insurance Professionals for Retail Auto Dealerships are Exempt Employees Under the Fair Labor Standards Act.

In Gieg v. DRR, Inc., 2005 Daily Journal D.A.R., 407 F.3d 1038 (9th Cir. May 18, 2005), the Ninth Circuit Court of Appeals reversed the district court's grant of summary judgment awarding plaintiff employees overtime, finding instead that the employees who handled the finance and insurance aspects of a retail car dealership are exempt under section 207(I) of the Fair Labor Standards Act ("FLSA").

Appellee Jerry Gieg (1) was employed by Courtesy Ford, a car dealership, as a "Finance Writer" between June 10, 1998 and September 23, 1998. As a finance writer, Gieg sold insurance policies to facilitate continuing payment for a vehicle in case of illness, disability, or death. Additionally, Gieg sold extended warranties, alarm systems, and paint and fabric protection packages to dealership customers. In this respect, he was primarily compensated through commissions on the products which he sold. During the three and a half months of his employment Gieg earned $24,025.16 in commissions. Computed on an hourly basis, Gieg's compensation each month exceeded one and one-half times the prescribed minimum wage.

On December 15, 1998, Gieg filed an FLSA action against Courtesy Ford and its manager, Woody Howarth, in district court in Oregon seeking overtime wages under section 207(a) of the FLSA. The district court granted partial summary judgment in favor of the dealership on the ground that Gieg's claim was barred by section 213(b)(10)(A), which excludes from overtime eligibility "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a non-manufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers." On appeal, the Ninth Circuit reversed the district court's determination on the ground that an employee whose primary duties were selling financing and warranties did not qualify as a vehicle "salesman" within the section 213(b)(10)(A) exemption and remanded the case for further proceedings. See Gieg v. Howarth, 244 F.3d 775 (9th Cir. 2001).

On remand, Courtesy Ford and Howarth again moved for summary judgment under section 207(I) (2), claiming that the dealership was exempt from the Act's overtime provisions because: (1) Gieg was an employee of a retail automobile dealer; (2) his regular rate of pay exceeded one and a half times the federal minimum wage in 1998; and (3) more than half of his compensation was derived from commissions on the sale of goods and services. Gieg filed a cross-motion for summary judgment, claiming section 207(I) does not apply to the dealership's finance employees.

On February 14, 2003, the district court granted Gieg's cross-motion for summary judgment with respect to his FLSA overtime claim. The court concluded that the section 207(I) exemption did not apply to sale of all goods and services in a retail establishment. In this respect, the district court observed that FLSA exemptions are to be narrowly construed and that the Supreme Court has previously held that finance companies, insurance brokerages and claim adjusters all lack the "retail concept" necessary to be included within the 207(I) exception. As such, the fact that the appellee was earning commission on non-retail goods (the insurance policies) was fatal to dealership's argument that the employee was exempt.

On March 17, 2003, the Department of Labor ("DOL") issued an opinion letter concluding that section 207(I) excludes finance and insurance salespersons employed by a retail automotive dealership from FLSA overtime eligibility. The opinion letter concluded that "employee duties are irrelevant" if other requirements of the exemption are met. On March 21, 2003, Courtesy Ford and Howarth filed a motion for reconsideration in light of the DOL opinion letter. The District Court denied the motion and entered an order finding Courtesy Ford and Howarth liable to Gieg for overtime wages.

The Ninth Circuit reversed finding that the section 207(I) exception applies more broadly to all employees employed in a retail establishment earning commission on goods and services sold. As a preliminary matter, the court determined that the auto dealerships in question qualified as retail or service establishments under section 207(I). On this point, the court reasoned that the definition of "retail or service establishment" derived from 29 U.S.C. ? 213(a)(2) which excluded from minimum wage and overtime pay any establishment which earns 75 percent of its wholesale annual dollar volume from the retail sale of goods and services. Here, the court conceded that automobile finance and insurance sales are considered non-retail for the purpose of this analysis. However, the court emphasized that the relevant inquiry is not whether the particular transaction Gieg or the other appellees engaged in is retail, but whether the employer's primary business, the sale of automobiles, should be deemed to be retail. According to the court, the inquiry must focus on the retail sales of an establishment as a whole. Therefore, the fact that the sale of automobiles are undeniably retail sales and the fact that 75 percent of the dealerships annual dollar volume came from these sales compelled the conclusion that the dealerships qualify as retail establishments.

Next, the court evaluated whether the finance writers employed at the retail dealerships qualified for the exception. In ultimately concluding that the employees were exempt, the court evaluated the plain language of the statute, the legislative intent of exception, and the regulations interpreting the statute. With respect to the plain language of the section 207(I), the court found persuasive the fact that the exemption applies to "any employee" of a retail or service establishment who meets the compensation requirements. Additionally, the court noted that the language of the exemption is not limited to those employees who sell retail goods and services.

With respect to the legislative purpose of the exemption, the court reasoned that section 207(I) was enacted to relieve employers from their obligation to pay overtime compensation to employees of a retail or service establishment that are paid for the most part on the basis of commission. In this respect, the court noted that the statute was enacted to exempt employees in "big ticket" departments such as furniture, bedding, and major appliances. To this end, the court found that the policy justification for the exception focused more on the level of an employee's compensation than the actual type of good or service sold.

Finally, the court determined that the federal regulations support the conclusion that the employees are exempt from the FLSA's overtime requirements. Here the court noted that 29 C.F.R. ? 779.308 requires that for an employee to be exempt under section 207(I), that employee "must be employed by his employer in the work of the exempt establishment itself in activities within the scope of the exempt business." Here, the court found especially persuasive the fact that the car dealerships in question did not maintain separate insurance and accessory operations and that the duties performed by the finance officers were an integral and integrated part of the auto dealership itself. According to the court, both of these realities support the conclusion that the appellees were employed "in the work of the exempt establishment."

Accordingly, the court reversed the judgements of the district courts and the three cases were remanded back to the district court for further proceedings consistent with this opinion.

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Release of Age Discrimination Claims Not Enforceable Where Not Written in A Clear Manner Calculated to be Understood by the Intended Participants.

In Thomforde v. International Bus. Machs. Corp., the Eighth Circuit Court of Appeals reversed the district court's summary judgement in favor of International Business Machines ("IBM"), finding that an employee's release of claims was ineffective as a matter of law because it was not written in a manner calculated to be understood by its signatories as required by the Older Workers Benefit Protection Act ("OWBPA").

Dale Thomforde worked for IBM as an engineer from 1973 to 2001. In 2001, as part of a reduction in force, IBM implemented the Server Group Resource Action ("SGRA"), an involuntary termination program. In July 2001, Thomforde was notified that he had been selected for termination, and IBM provided him with a document titled "General Release and Covenant Not to Sue" (the "Agreement"). In pertinent part, the Agreement stated:

In exchange for the sums and benefits received pursuant to the terms of the [SGRA], DALE J. THOMFORDE (hereinafter "you") agrees to release and hereby does release [IBM] . . . from all claims, demands, actions or liabilities you may have against IBM of whatever kind including, but not limited to, those that are related to your employment with IBM, the termination of that employment, or other severance payments or your eligibility for participation in the Retirement Bridge Leave of Absence, or claims for attorneys' fees.

. . . .

You also agree that this Release covers, but is not limited to, claims arising from the [ADEA], as amended, . . . and any other federal, state or local law dealing with discrimination in employment including, but not limited to, discrimination based on sex, sexual orientation, race, national origin, religion, disability, veteran status, or age.

. . . .

You agree that you will never institute a claim of any kind against IBM . . . including, but not limited to, claims related to your employment with IBM or the termination of that employment or other severance payments or your eligibility for participation in the Retirement Bridge Leave of Absence. If you violate this covenant not to sue by suing IBM . . ., you agree that you will pay all costs and expenses of defending against the suit incurred by IBM . . ., including reasonable attorneys' fees, and all further costs and fees, including attorneys' fees, incurred in connection with collection. This covenant not to sue does not apply to actions based solely under the [ADEA], as amended. That means that if you were to sue IBM . . . only under the [ADEA], as amended, you would not be liable under the terms of this Release for their attorneys' fees and other costs and expenses of defending against the suit. This Release does not preclude filing a charge with the U.S. Equal Employment Opportunity Commission.

Prior to signing the Agreement, Thomforde asked his supervisor if the exception for ADEA claims contained in the covenant not to sue meant that he could sue IBM if the case was limited to claims under the ADEA. The supervisor told Thomforde that he would contact IBM's legal department. The supervisor later sent Thomforde an e-mail stating that the wording was as intended by IBM. The site attorney further suggested that Thomforde consult with his own attorney prior to signing the Agreement. After meeting with his attorney to review the Agreement, Thomforde concluded that he could sign the Agreement and still pursue his claims of age discrimination so long as they were limited to ADEA claims.

IBM terminated Thomforde on August 24, 2001, and Thomforde signed the Agreement on September 6, 2001. In November, Thomforde filed charges with the EEOC, which IBM sought to have dismissed based on the waiver contained in the Agreement. Despite the existence of the waiver, the EEOC issued a Notice of Right to Sue in October 2002, and Thomforde filed the instant suit.

At the district court level, IBM moved for summary judgment. In its motion, IBM made several arguments including that Thomforde, by signing the Agreement and accepting benefits, had released all of his claims against IBM; that Thomforde knowingly and voluntarily signed the Agreement; that the waiver conformed to the specifications of the OWBPA; and that the Agreement was not ambiguous. IBM further claimed that the covenant not to sue was an entirely different provision from the release provisions, and each provision performed different functions. According to IBM, the covenant not to sue did not "undo" his release of the ADEA claims, but merely exempted Thomforde from liability for attorneys' fees associated with defending a suit.

In response, Thomforde argued that he did not knowingly and voluntarily waive his ADEA rights because; the Agreement expressly preserved Thomforde's right to file an action solely under the ADEA; the waiver did not conform to the OWBPA requirement that it be written in a manner calculated to be understood by an individual signing the agreement; under a "totality of the circumstances" approach determining whether the waiver was knowing and voluntary, the evidence showed that Thomforde did not understand that he was surrendering his rights under the ADEA by signing the agreement; and even under state contract principles, the agreement was ambiguous on its face. Based on these arguments, the district court granted IBM's motion for summary judgment finding that Thomforde clearly waived any potential claims against IBM by signing the Agreement. The court further concluded that the waiver signed by Thomforde fully conformed with the OWBPA requirements.

The Eighth Circuit disagreed and reversed the district court's finding of summary judgment. In reaching this decision, the court noted that OWBPA amended the ADEA by providing that "an individual may not waive any right or claim under [the ADEA] unless the waiver is knowing and voluntary . . . ." 29 U.S.C. ? 626(f)(1)(A). According to court, if the Agreement was not "written in a manner calculated to be understood by such individual, or by the average individual eligible to participate," then the appellant did not release his rights under the ADEA. Here, the court found problematic the fact that the Agreement seemingly used the terms "release" and "covenant not to sue" interchangeably. As such, a "plausible," yet "paradoxical," interpretation of the Agreement could be that an employee releases IBM from all ADEA claims and agrees not to institute a claim of any kind against IBM, except an employee may bring an action based solely under the ADEA.

IBM countered by asserting once more that the terms "release" and "covenant not to sue" are separate and distinct provisions in the Agreement which served totally different purposes. The court, however, rejected this argument noting that the Agreement itself did not explain how the provisions related to each other or the limited nature of the exception to the covenant not to sue in light of the release of claims. In this respect, the court stated "Once IBM chose to use legal terms of art in the Agreement, IBM had a duty of carefully explain the provisions."

According to the court, the Agreement failed to explain the relationship between the release and the covenant not to sue and used the terms in such a way as to suggest that they are interchangeable. For example, the court pointed to the opening line of the Agreement which refers to itself as a "General Release and Covenant Not to Sue." Further, the court took exception to the fact that the Agreement contained no headings indicating a change of topic between the paragraphs. In one example, the court noted that immediately following the sentence that states that "this covenant not to sue does not apply to actions based solely under the [ADEA]," the Agreement uses the term "Release" to explain the covenant not to sue. In this respect, the Agreement states: "that means that if you were to sue IBM . . . only under the [ADEA], you would not be liable under the terms of this Release for their attorneys' fees." The court also pointed out that in the Agreement, the paragraph addressing the covenant not to sue continues with a statement that "this Release" does not prohibit an employee from filing a charge with the EEOC, again intimating that the terms are interchangeable. Accordingly, the Eighth Circuit concluded that release did not satisfy the requirements set forth in the OWBPA.

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1. Here, the Ninth Circuit consolidated three district court decisions arising out of substantially similar facts and presenting a similar question of law. For purposes of analysis, the court focused almost exclusively on factual and procedural posture of appellee Gieg's claim. For summaries of the procedural disposition of the other consolidated cases, please see footnotes 8 and 9 of the opinion.

2. Section 207(I) of the FLSA provided in relevant part:

No employer shall be deemed to have violated subsection (a) of this section by employing any employee of a retail or service establishment for a workweek in excess of the applicable work-week specified therein, if (1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under section 206 of this title, and (2) more than half the employee's compensation for a representative period (not less than one month) represents commissions on goods or services.