Hewlett-Packard Co. v. Barnes, C-76-1607-CBR.

• Decision Date: 24 January 1977
• Docket Number: No. C-76-1607-CBR.,C-76-1607-CBR.
• Court: U.S. District Court — Northern District of California
• Parties: HEWLETT-PACKARD COMPANY, a California Corporation, et al., Plaintiffs, v. Willie R. BARNES, Commissioner of Corporations of the State of California, Defendant, John Scalone et al., Plaintiffs in Intervention.

425 F. Supp. 1294

HEWLETT-PACKARD COMPANY, a California Corporation, et al., Plaintiffs, v. Willie R. BARNES, Commissioner of Corporations of the State of California, Defendant John Scalone et al., Plaintiffs in Intervention.

No. C-76-1607-CBR.

United States District Court, N. D. California.

January 24, 1977.

Pillsbury, Madison & Sutro, Parker A. Maddux, Michael H. Salinsky, Woodrow R. Cossey, San Francisco, Cal., for plaintiffs.

Evelle J. Younger, Atty. Gen., State of Cal., Mervin R. Samuel, Randall P. Borcherding, Tyler Pon, San Francisco, Cal., for defendant.

Schwartz, Steinsapir & Dohrmann, Richard D. Sommers, Howard M. Knee, Los Angeles, Cal., for plaintiff in intervention Southern California Drug Benefit Fund.

Brobeck, Phleger & Harrison, Jean C. Gaskill, Melinda S. Collins, San Francisco, Cal., for plaintiff in intervention Wells Fargo & Co.

Littler, Mendelson, Fastiff & Tichy, John T. Hayden, Brundage, Beeson, Tayer & Kovach, Duane B. Beeson, San Francisco, Cal., for plaintiff in intervention Joint Benefit Trust.

MEMORANDUM OF OPINION

RENFREW, District Judge.

Plaintiffs commenced this action to prevent defendant Willie R. Barnes, Commissioner of Corporations of the State of California, from requiring them to comply with the California Knox-Keene Health Care Service Plan Act of 1975, Cal.Health & Safety Code § 1340, et seq. ("Knox-Keene"). Plaintiffs Standard Oil Company of California ("Standard"), Hewlett-Packard Company ("Hewlett-Packard"), The Pacific Lumber Company ("Pacific"), and The Pacific Lumber Company Employee Benefits Organization ("Pacific Employee Organization") filed the original complaint in this action on July 30, 1976. Pursuant to stipulation among plaintiffs, defendant, and intervenors, John Scalone and Freddy Sanchez as Trustees of the Joint Benefit Trust established by California Processors, Inc., and the California State Council of Cannery and Food Processing Unions ("Joint Benefit Trust") and Wells Fargo and Company ("Wells Fargo") were permitted to intervene as plaintiffs on September 1, 1976. In addition, on September 26, 1976, the Court granted the motion of Southern California Drug Benefit Fund ("Benefit Fund") to intervene as plaintiff.

The original and intervening plaintiffs are employers engaged in commerce or employee benefit organizations representing employees engaged in commerce which maintain various employee health benefit plans. Standard, Hewlett-Packard, and Wells Fargo offer self-funded plans which reimburse 80% or more of certain health care expenses independently contracted for and incurred by their employees, annuitants, and covered dependents in California and other states.¹ Pacific Employee Organization, a nonprofit Delaware corporation, maintains similar benefit plans for the employees and annuitants of Pacific and their covered dependents.² Joint Benefit Trust and Benefit Fund, employer-union health and welfare trust funds, maintain comparable plans for employees and annuitants in the drug and canning industries, respectively, and their dependents.³ In addition, as alternatives to the self-funded indemnity plans, Benefit Fund offers its participants the option of participating in Kaiser Health Plan, Inc., for hospital, medical and surgical care, and in a prepaid dental plan which it has arranged with contracting doctors.⁴

Each of these plans is concededly an "employee welfare benefit plan" within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974 ("ERISA"),⁵ 29 U.S.C. § 1003(a), and is therefore subject to regulation under that act.⁶ Each is also admittedly a "health care service plan" within the meaning of Article One of Knox-Keene⁷ and, according to defendant, is subject to regulation under the state statute. Invoking the supremacy clause of the federal Constitution,⁸ plaintiffs seek a declaration that ERISA preempts Knox-Keene insofar as Knox-Keene applies to the benefit plans which they maintain, and a permanent injunction prohibiting the regulation of these plans under the state statute.

Defendant contends that ERISA does not preempt Knox-Keene with respect to plaintiffs' plans for two reasons. First, he contends that neither the language of ERISA's preemption clause, Section 514(a) of ERISA, 29 U.S.C. § 1144(a), nor the statute's legislative history unmistakably mandates preemption of state legislation regulating health services such as Knox-Keene. Second, he asserts that Knox-Keene is a state law regulating insurance and thus expressly excluded from preemption under Section 514(b)(2) of ERISA, 29 U.S.C. § 1144(b)(2)(A). In addition, he argues that, if ERISA had so broadly preempted state regulation of health care services, Section 514(a) of the Act is unconstitutional as violative of the Tenth Amendment to the federal Constitution.

On September 30, 1976, the Court ordered a consolidation of the hearing on plaintiffs' motions for a preliminary injunction and the trial on the merits, pursuant to Rule 65(a)(2) of the Federal Rules of Civil Procedure. Between October 20 and 26, 1976, each of the plaintiffs filed motions for summary judgment. Defendant likewise filed a motion for summary judgment on November 19, 1976. The Court held a consolidated hearing on November 30, 1976. Having heard extensive oral argument and fully considered the parties' written submissions, the Court issued from the bench a declaratory judgment that ERISA preempts the state's regulation of plaintiffs' employee benefit plans under Knox-Keene and a permanent injunction against the enforcement of Knox-Keene as to these plans.⁹ However, given the importance and relative novelty of the question, the Court felt that a written discussion of its rationale for the decision would be appropriate.

ERISA is a broad-based legislative scheme designed to protect interstate commerce, the federal taxing power, and the interests of participants in private employee benefit plans and their beneficiaries. Congress sought to accomplish these goals by requiring disclosure and reporting to plan participants; by establishing standards of conduct, responsibility and obligation for fiduciaries of such plans; by providing appropriate remedies, sanctions, and ready access to the federal courts; and by improving the equitable character and soundness of such plans. 29 U.S.C. § 1001(b)(c).

Effective since July 1, 1976, Knox-Keene governs the delivery of health care services to California residents who participate in health care service plans. In enacting Knox-Keene, the California legislature intended to promote the delivery of low cost, quality health care through financially sound plans to participants well informed of the benefits of various available plans. Cal. Health & Safety Code § 1342. Knox-Keene regulates such areas as funding, disclosure, sales practices, and quality of services, and requires that any such plan be licensed by the state Commissioner of Corporations. Although primarily concerned with entities, plans, or contracts which directly deliver health care services, the statute seeks to regulate as well those which provide insurance-type coverage, including self-funded plans such as those maintained by plaintiffs.

When Congress exercises a granted power in a field which states have traditionally occupied, and unmistakably evinces its intent to exclude states from exerting their police power in that field, the federal legislation may displace state law under the Supremacy Clause. See Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142, 146-147, 83 S.Ct. 1210, 10 L.Ed.2d 248 (1963); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 229-231, 67 S.Ct. 1146, 91 L.Ed. 1447 (1947).

Section 514(a) of ERISA, 29 U.S.C. § 1144(a), provides:

"Except as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title. This section shall take effect on January 1, 1975."

Although defendant finds the phrase "relate to" "vague and ambiguous,"¹⁰ the Court doubts that Congress could have chosen any more precise language to express its intent to preempt a state statute such as Knox-Keene insofar as it seeks to regulate ERISA-covered employee benefit plans such as those maintained by plaintiffs.¹¹

Where the language of a statute unequivocally expresses its meaning, courts do not face the questions of interpretation which warrant a search of legislative history. Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917). However, as an examination of the legislative history dispels any doubt as to the provision's meaning, a brief discussion may be instructive.

The history of ERISA indicates that Congress, while attempting to formulate legislation concerning employee benefit plans, devoted considerable attention to the question of preemption. Over a period of years, Congress heard testimony from a number of individuals who held widely divergent views on the proper scope of federal preemption in the area.¹² While both houses favored preemption of some variety, the House and Senate originally outlined its scope somewhat differently. The House version of H.R. 2, 93d Cong., 1st Sess. (1973), the bill from which ERISA derives, generally limited the scope of preemption to state regulation of areas expressly covered by the bill; i. e., reporting, disclosure, and fiduciary duties with respect to employee benefit plans. In addition, it specifically preempted state regulation involving funding, financing, and forfeitability of such plans.¹³ Somewhat more ambiguously, the Senate version of H.R. 2 preempted state law insofar as it "relates to subject matters regulated by this Act or the Welfare and Pension Disclosure Act * * *."¹⁴

The more sweeping and precise language of Section 514 of ERISA...