HealthAmerica v. Menton

• Decision Date: 21 July 1989
• Citation: 551 So.2d 235
• Parties: 11 Employee Benefits Cas. 1751 HEALTHAMERICA and Pamela Merle v. Edward MENTON. 87-1100.
• Court: Alabama Supreme Court

Page 235

551 So.2d 235

11 Employee Benefits Cas. 1751

HEALTHAMERICA and Pamela Merle v. Edward MENTON.

87-1100.

Supreme Court of Alabama.

July 21, 1989.

Rehearing Denied Sept. 15, 1989.

Michael S. McGlothren, Vincent A. Noletto, Jr., and Thomas H. Nolan, Jr., of Brown, Hudgens, Richardson, Mobile, and Steven A. Brower of Wood, Lucksinger & Epstein, Los Angeles, Cal., for appellants.

Robert T. Cunningham, Jr., G. Johnson Rice, Jr., and Andrew T. Citrin of Cunningham, Bounds, Yance, Crowder, and Brown, Mobile, for appellee.

Theresa L. Sorota, Counsel of Record, and Joe W. Peel, Vice President and Gen. Counsel, Health Ins. Ass'n. of America, Phillip E. Stano, Counsel of Record, and Jack H. Blaine, Vice President, State Relations, and Gen. Counsel, American Council of Life Ins., Washington, D.C., for amici curiae.

SHORES, Justice.

The plaintiff/appellee, Edward Menton, was employed as city editor for the Mobile Press Register newspaper ("Press Register"). As part of his employment, Menton was provided with medical insurance coverage, for which the Press Register paid 50 to 60 percent of the premiums and the balance was deducted from Menton's salary. In June 1985, the Press Register offered an alternative medical benefit selection, which allowed qualified Press Register employees either to keep the medical insurance that they had, or to cancel it and enroll in one of the two health maintenance organizations then in the Mobile area, Prime Health and defendant/appellant, HealthAmerica, without suffering an interruption of benefits.

Menton had a son, Jacob, whose premature birth necessitated a series of surgical operations to lengthen and straighten the tendons in his legs and feet. After each such operation, and after his casts were removed, Jacob would undergo physical therapy treatments three times a week until he was ready for his next surgical operation.

Menton's health insurance under the Press Register's employment benefit plan paid 80% of the cost of Jacob's physical therapy treatments and orthopedic appliances. Jacob's second operation was imminent when the Press Register employees were offered alternative coverage by either of the health maintenance organizations. HealthAmerica's list of physicians included both of the physicians who had been treating Jacob's legs; Prime Health's did not. Menton read the promotional literature regarding HealthAmerica's coverage but could not determine from that whether HealthAmerica would provide coverage for Jacob's physical therapy and orthopedic appliances.

At the suggestion of the assistant general manager of the Press Register, who had initially reviewed the coverage provided by HealthAmerica and had helped HealthAmerica distribute information about its plan to the Press Register employees, Menton attended an informational meeting of Press Register employees three days before Jacob's second surgery. This meeting was presided over by defendant/appellant Pamela Merle, who had worked for HealthAmerica for approximately one and one-half months prior to this meeting. During the meeting, the Press Register employees were repeatedly told that the coverage provided by the health maintenance organizations such as HealthAmerica and Prime Health was generally the same as, or was better than, the medical coverage that Menton and other employees had. After the meeting, Menton asked Merle specific questions about HealthAmerica's coverage of Jacob's medical expenses. He explained Jacob's medical history, his impending operation, and his need for extensive physical therapy and orthopedic appliances after his second surgery. In response to a direct question from Menton, Merle informed Menton that Jacob's medical expenses would be "covered one hundred percent by HealthAmerica."

In reliance upon Merle's representations, Menton dropped his health insurance and enrolled in the HealthAmerica plan. After Menton enrolled in the HealthAmerica plan, he received a schedule of benefits in the mail. On reviewing the schedule, Menton noticed that outpatient services for physical therapy were apparently covered for only 60 days. Menton attempted to get HealthAmerica to provide the coverage that he had been promised when he dropped his previous insurance, which provided coverage for 80% of Jacob's physical therapy expenses for an unlimited period of time. HealthAmerica extended coverage for 60 additional days after the initial 60-day period, but would not provide coverage beyond that. Jacob's physical therapy expenses amounted to approximately $150 a week.

Menton filed this suit against HealthAmerica and its agent, Merle, in which he alleged a state common law action for fraud, asserting misrepresentations of a material fact made willfully to deceive, or recklessly without knowledge, that caused him to drop the hospital coverage he had under an insured employment benefit plan and to elect the HealthAmerica coverage also provided under the plan. The defendants pleaded the general issue and preemption by the Employee Retirement Income Security Act of 1974 ("ERISA"), 88 Stat. 829 as amended, 29 U.S.C. § 1001 et seq. Menton did not file a claim under ERISA. Predicated on the ERISA preemption, the defendants moved for a directed verdict at the close of Menton's case and at the close of all the evidence. The trial court observed that the Alabama Health Maintenance Organizations Statutes ("HMO Statutes"), Code 1975, §§ 27-21A-1 to 27-21A-32, and the Alabama "twisting" statute, Code 1975, § 27-12-6, might be saved by § 514(b) of ERISA if Menton's claim were subject to ERISA preemption; overruled the defendants' motions for a directed verdict; and submitted the case to the jury with instructions on Alabama civil actions for misrepresentation, without reference to the HMO statutes or the twisting statute. The jury returned a verdict in favor of Menton. After final judgment was entered, Menton filed a motion to amend his complaint to conform to the evidence, alleging a violation of § 27-12-6, the "twisting" statute. The defendants' objection to this was overruled, as was their motion for a judgment notwithstanding the verdict or in the alternative for a new trial.

The first issue presented by this case is whether ERISA preempts a state common law action for fraud where the plaintiff alleges that he relied on misrepresentations made by the defendants in dropping his old hospital insurance and electing coverage under the defendants' plan. We hold that a claim for fraud in the inducement does not "relate to" an employee benefit plan and is therefore not preempted by ERISA.

The courts in Alabama have recognized a common law right of action for fraud, at least since the case of Einstein, Hirsch & Co. v. Marshall & Conley, 58 Ala. 153 (1877), when Justice Stone criticized the old case of Chandelor v. Lopus, 1 Smith Lead.Cas. 319 (9th ed. 1889) (adjudged in the Court during the Reign of James the First), which involved alleged fraud in the sale of a stone, which the seller represented as a bezoar stone and sold as such. All the Barons, except Anderson, in the Court of Exchequer held that " 'the bare affirmation that it was a Bezoar stone, without warranting it to be so, is no cause of action; and although he knew it to be no Bezoar stone, it is not material.' " 58 Ala. at 160 (quoting Chandelor v. Lopus ). To this Justice Stone wrote, "We submit, if this language does not sanction looser morals than the present state of the law will justify." 58 Ala. at 160. To make certain that it did not sanction those looser morals of Chandelor v. Lopus, the legislature of Alabama in 1907 codified laws that it had enacted that provided civil actions for fraud (now Code 1975, § 6-5-100), for misrepresentations of material fact (now § 6-5-101), for suppression of material facts (now § 6-5-102), and for deceit (now § 6-5-103).

With ERISA, Congress imposed comprehensive federal oversight of employee benefit plans of employers engaged in interstate commerce. Under ERISA Section 502(a), as set forth in 29 U.S.C. § 1132(a)(1)(B), a civil action may be brought by a participant or beneficiary "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan." This limits the options of the employee, who is preempted from bringing actions under state laws when they "relate to" any employee benefit plan.

ERISA's preemption provision states:

"Except as provided in subsection (b) of this section [the saving clause], the provisions of this subchapter and subchapter III of this chapter supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan...."

29 U.S.C.A. § 1144(a).

The defendants argue that Menton is preempted under this ERISA preemption provision from filing a state common law action for fraud. Under the facts of this case, the Press Register is engaged in interstate commerce; the undisputed evidence shows that the Press Register solicits advertisements from outside Alabama, advertises for businesses located outside Alabama, and sells its papers outside Alabama. Menton was a full-time employee of the Press Register, and the Press Register had an employee benefit plan prior to and after Menton enrolled in the HealthAmerica plan.

Therefore, we must determine whether his claim is preempted by ERISA. The defendants rely upon Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987), wherein the Supreme Court ruled that a state lawsuit asserting improper processing of a claim for benefits under an ERISA-regulated plan was preempted by federal law. In Pilot Life the Supreme Court held that the phrase "relate to" is to be given its " 'broad common-sense meaning, such that a state law "relate[s] to" a benefit plan "in the normal sense of the phrase, if it has a connection with or reference to such a plan." ' " 481 U.S. at 47, 107 S.Ct....