Employers Resource Management Co. v. Shannon

• Citation: 869 F. Supp. 398
• Decision Date: 22 November 1994
• Docket Number: 3:94cv157.,Civ. A. No. 3:94cv148
• Parties: EMPLOYERS RESOURCE MANAGEMENT CO., et al., Plaintiffs, v. Preston C. SHANNON, et al., Defendants. COMMONWEALTH OF VIRGINIA, Plaintiff, v. EMPLOYERS RESOURCE MANAGEMENT CO., et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

869 F. Supp. 398

EMPLOYERS RESOURCE MANAGEMENT CO., et al., Plaintiffs, v. Preston C. SHANNON, et al., Defendants.

COMMONWEALTH OF VIRGINIA, Plaintiff, v. EMPLOYERS RESOURCE MANAGEMENT CO., et al., Defendants.

Civ. A. Nos. 3:94cv148, 3:94cv157.

United States District Court, E.D. Virginia, Richmond Division.

November 22, 1994.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John D. Epps, Steven W. Morris, LeClair, Ryan, Joynes, Epps & Framme, Richmond, VA, and Allan J. Graff and Robert W. Ridley, Farmer & Ridley, Los Angeles, CA, for Employers Resource Management Co. and American Employers Benefit Trust.

Anthony J. Gambardella, Jr., Peter B. Smith, and Michael D. Thomas, State Corp. Comm'n., Office of Gen. Counsel, Richmond, VA, for Preston C. Shannon, et al. and Com. of Va.

MEMORANDUM OPINION

PAYNE, District Judge.

On March 3 and 4, 1994, Employers Resource Management Co. ("ERM") initiated two actions in this court. The first action ("Case I"), in which ERM and American Employers Benefit Trust ("the Trust") are plaintiffs, prays for a declaration that ERISA preempts the application of Virginia state law regulating multiple employer welfare arrangements ("MEWAs") and for an injunction precluding state officials from proceeding with an action to enforce state law in the Virginia State Corporation Commission ("SCC"). Defendants, state officials, move the court to dismiss, stay, or abstain from adjudicating the case, and they move for judgment on the pleadings.

The second action ("Case II") came to this court upon removal by ERM and the Trust of pending state proceedings in the SCC that were begun by the Commonwealth of Virginia on February 18, 1994. The Commonwealth moves to remand this action. The ultimate question in both actions — the question that either a state court or this court must eventually decide — is whether ERM and the Trust are part of a MEWA such that ERISA does not preempt state regulation. See 29 U.S.C. § 1144(b)(6).

This court does not reach that ultimate question, however. Case II, as initiated by the Commonwealth, does not "arise under" federal law for purposes of 28 U.S.C. § 1331, which outlines the parameters of federal question jurisdiction. This conclusion, then, determines the result in Case I, as well, given both the Anti-Injunction Act, 28 U.S.C. § 2283, and the abstention principles set forth in Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), and subsequent cases. Because the state proceedings were begun before ERM initiated Case I, the injunction and the declaratory judgment sought in Case I, which would operate to enjoin the state proceedings associated with Case II, are not within the power of this court to grant. Virginia's state judicial system is capable of dealing with the preemption defense that ERM has raised. For the reasons set forth below, both the Commonwealth's motion to remand Case II and the state officials' motion to dismiss Case I are granted.

BACKGROUND

A. Procedural Facts

The parties have stipulated to most of the important facts. For purposes of remanding the entire controversy, including the question of ERISA preemption, only the procedural facts are substantially relevant.

ERM's trouble with state agencies began on November 18, 1991 when the Bureau of Insurance ("the Bureau") advised ERM that it might be operating in Virginia in violation of the SCC's rules governing MEWAs. ERM responded to the Bureau on January 2, 1992, arguing that ERISA preempted state regulation and representing that it stood prepared to file an action "in the appropriate forum" to enjoin the Commissioner of Insurance from enforcing state law. Stip., ¶ 15. A few days later, the Bureau countered by suggesting that the United States Department of Labor ("the DOL") could help resolve the dispute.

While maintaining that the Bureau had no jurisdiction and refusing to provide the Bureau with any documents, ERM did supply the DOL with requested documents. On May 28, 1992, ERM responded to an April 30 request by the DOL for information describing ERM's business, the current trust agreement of its employee welfare benefit plan, and an example of a contract between ERM and one of its client employers. After a formal request on June 23, 1992 by the Bureau for an opinion from the DOL, the DOL issued Advisory Opinion 93-29A(c), dated November 2, 1993, which found ERM was a MEWA subject to state regulation.

Next, on February 18, 1994, the Commission issued an Order to Take Notice informing ERM and the Trust that it would enter a cease and desist order after March 7, 1994 if ERM did not file a responsive pleading to object before that date. On March 3, ERM did respond. The next day, it removed that pending state proceeding to this court. Also on March 3, ERM filed a complaint in this court seeking an injunction and a declaratory judgment. Nothing of moment has occurred at the state level since March 3, when ERM filed its response to the Order to Take Notice.

B. State Law

Virginia specifies most of the judicial function of the SCC at Va.Code §§ 12.1-12, -13. These duties include "the duty of administering the laws made for the regulation and control of corporations doing business" in Virginia. Chapter 5 of Title 12 details the procedure the SCC follows and the right of litigants to appeal its decisions. Specifically, § 12.1-39 provides that "any party aggrieved by any final ... judgment of the Commission shall have, of right, an appeal to the Supreme Court irrespective of the amount involved." Moreover, no other state court may interfere with the Commission's proceedings. Id.

The substantive state law licensing requirements supporting the Commission's Order to Take Notice are found in certain rules governing MEWAs adopted by the Commission pursuant to Va.Code § 38.2-223. These rules define MEWAs and subject them to licensing requirements "as an insurance company, health maintenance organization, health services plan, or dental or optometric services plan pursuant to Title 38.2 of the Code of Virginia." See Commission's Rules Governing MEWAs § 5.A, in Commonwealth's Memorandum in Support of Motion to Remand, Ex. 2. A MEWA is defined in § 4 of those rules. The Commission's definition of MEWA tracks rather closely the definition of MEWA provided by ERISA at 29 U.S.C. § 1002(40)(A), which encompasses most arrangements that offer certain employee welfare benefits "to the employees of two or more employers." ERISA specifically provides that state regulation of such arrangements is not completely preempted. See 29 U.S.C. § 1144(b)(6)(A).

C. The Business of ERM

ERM's clients are employers. Each client and ERM are, in the language used by ERM, "co-employers" of the client's employees. When a new client enters an arrangement with ERM, its employees continue to work for the benefit of the client, which remains practically the sole overseer of the employees' work. ERM's primary role is to perform certain administrative functions: paying employees' their wages, paying employer taxes, being responsible for state and local employee payments or withholdings from wages, and, not least of all, maintaining a plan to provide employees with certain medical and death benefits. It also administers an occupational and worker safety program that all of its clients must follow. There exist substantial disputes respecting whether ERM is an employer and what legal principles should govern the resolution of that dispute. It is, however, not necessary to decide those issues.

DISCUSSION

A. Remand of Case II

As a general proposition, Virginia, like every other state, by virtue of its police power, has the right to regulate businesses operating within its borders. This right is limited, however, by the United States Constitution, including the Supremacy Clause. When a party argues that a state, which has instituted a suit to enforce state regulation against the party, cannot enforce its regulation consistently with the Supremacy Clause, it raises a federal preemption defense to a state claim. The case arises, then, not under federal law, but under state law. And even where "both parties admit that the only question for decision is raised by a federal pre-emption defense," the well-pleaded complaint rule precludes the exercise of jurisdiction by federal courts. See Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 12, 14, 103 S.Ct. 2841, 2848, 2849, 77 L.Ed.2d 420 (1983); Caterpillar Inc. v. Williams, 482 U.S. 386, 393, 107 S.Ct. 2425, 2430, 96 L.Ed.2d 318 (1987) ("It is now settled law that a case may not be removed to federal court on the basis of a federal defense, including the defense of preemption, even if the defense is anticipated in the plaintiff's complaint....") (emphasis in original).

Franchise Tax Board is indeed very much on point. There, a state agency sued a welfare benefit trust in state court, demanding money from the trust to cover unpaid personal income tax. The state agency also sought a declaration that ERISA did not preempt state regulation. 463 U.S. at 5-7, 103 S.Ct. at 2844-45. The Court found the case could not be removed on the basis of ERISA preemption, which related to both the tax levy and the declaratory judgment. Id. at 7, 103 S.Ct. at 2845. Using a "straightforward application" of the well-pleaded complaint rule, the Court disposed of the first cause of action, concerning the tax levy, rather simply. It explained,

California law establishes a set of conditions, without reference to federal law, under which a tax levy may be enforced; federal law becomes relevant only by way of a defense to an obligation created entirely by state law, and then only if plaintiff has made out a valid claim for relief under state law.

Id. at 13, 103 S.Ct. at 2848. Likewise, ERM's argument concerning the federal definition of MEWA is a defense to attempted enforcement of state regulation. Thus, the court must remand the case as the United States...