New York v. U.S. Dept. Of Labor

• Citation: 363 F.Supp.3d 109
• Decision Date: 28 March 2019
• Docket Number: Civil Action No. 18-1747 (JDB)
• Parties: State of NEW YORK, et al. Plaintiffs, v. UNITED STATES DEPARTMENT OF LABOR, et al. Defendants.
• Court: United States District Courts. United States District Court (Columbia)

363 F.Supp.3d 109

State of NEW YORK, et al. Plaintiffs,

v.UNITED STATES DEPARTMENT OF LABOR, et al. Defendants.

Civil Action No. 18-1747 (JDB)

United States District Court, District of Columbia.

Signed March 28, 2019

Matthew Colangelo, Matthew William Grieco, Sara Haviva Mark, Elizabeth Richer Chesler, Lisa Landau, Susan Joan Cameron, Office of the New York State Attorney General, New York, NY, Eric Michael Gold, Stephen Brian Vogel, Office of the Massachusetts Attorney General, Boston, MA, Andrew J. Saindon, Robyn Renee Bender, Valerie Maria Nannery, Office of the Attorney General for the District Of Columbia, Washington, DC, Karli Eisenberg, Office of Attorney General/CA, Sacramento, CA, Nimrod Pitsker Elias, California Department of Justice Office of the Attorney General, San Francisco, CA, Jessica Marie Willey, Delaware Department of Justice, Wilmington, DE, Steven Travis Mayo, John Michael Brown, Sr., La Tasha Arnae Buckner, Taylor Allen Payne, Office of the Attorney General, Commonwealth of Kentucky Civil & Environmental Law, Kimberly S. Cammarata, Maryland Office of the Attorney General, Baltimore, MD, Jeffrey S. Posta, Office of the Attorney General/NJ, Trenton, NJ, Michael John Fischer, Pennsylvania Office of Attorney General, Philadelphia, PA, Matthew Robert McGuire, Michelle S. Kallen, Toby Jay Heytens, Office of the Attorney General/VA, Richmond, VA, Jeffrey Todd Sprung, Office of the Washington Attorney General, Seattle, WA, for Plaintiffs

Ashley Alexandra Cheung, Brad P. Rosenberg, Tamra Tyree Moore, U.S. Department of Justice, Jaclyn L. West Hamlin, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., Washington, DC, for Defendants.

MEMORANDUM OPINION

JOHN D. BATES, United States District Judge

Eleven states and the District of Columbia have sued the Department of Labor ("DOL"),¹ alleging that its final rule interpreting the definition of "employer" in the Employee Retirement Income Security Act of 1974 ("ERISA"), 88 Stat. 829, 29 U.S.C. § 1001 et seq., is unlawful under the Administrative Procedure Act ("APA"), 5 U.S.C. § 706. DOL's interpretation of the term "employer," found at Definition of "Employer" Under Section 3(5) of ERISA—Association Health Plans, 83 Fed. Reg. 28,912 (June 21, 2018) (hereinafter "Final Rule") (codified at 29 C.F.R. pt. 2510), A.R. at 1–53,² impacts the treatment of certain healthcare plans under both ERISA and the Patient Protection and Affordable Care Act ("ACA"), Pub. L. No. 111-148, 124 Stat. 119 (2010).³ The States charge that DOL's Final Rule stretches the definition of "employer" beyond what ERISA's text and purpose will bear. For the reasons that follow, the Court agrees.

ERISA governs employee benefit plans arising from employment relationships. It provides that some employer associations acting "in the interest of" employer members are sufficiently employer-like to fall within the statute's scope. Health plans offered by these associations may qualify as single ERISA plans, a designation that confers regulatory advantages under the ACA. For decades, DOL has interpreted these provisions narrowly so as to allow only so-called "bona fide associations" with close economic and representational ties to their employer members to qualify as "employers" under the statute.

In 2018, DOL abruptly reversed course, issuing the Final Rule challenged in this case. The Final Rule allows virtually any association of disparate employers connected by geographic proximity to qualify as single ERISA plans. These associations no longer have to be viable apart from offering an association health plan ("AHP") and may form solely for the purpose of creating an AHP. In addition, the Final Rule brings sole proprietors without any employees within ERISA's scope by counting them as both "employers" and "employees." Because the ACA defines terms key to its implementation—including "employer" and "employee"—according to the definition of these terms in ERISA, the Final Rule expands AHPs in a way that allows small businesses and some individuals to avoid the healthcare market requirements imposed by the ACA.

The Final Rule is clearly an end-run around the ACA. Indeed, as the President directed, and the Secretary of Labor confirmed, the Final Rule was designed to expand access to AHPs in order to avoid the most stringent requirements of the ACA. Exec. Order 13,813, 82 Fed. Reg. 48,385 (Oct. 12, 2017), A.R. 6970; Final Rule, 83 Fed. Reg. at 28,912 (citing Executive Order); see also Alexander Acosta, A Health Fix for Mom and Pop Shops, Wall St. J., June 18, 2018. But equally important for the analysis that follows, the Final Rule does violence to ERISA. The Final Rule scraps ERISA's careful statutory scheme and its focus on employee benefit plans arising from employment relationships. It purports to extend ERISA to cover what are essentially commercial insurance transactions between unrelated parties. In short, the Final Rule exceeds the statutory authority delegated by Congress in ERISA. For the reasons that follow, the Final Rule's provisions defining "employer" to include associations of disparate employers and expanding membership in these associations to include working owners without employees are unlawful and must be set aside.

BACKGROUND

Statutory schemes created by ERISA and the ACA shape the content and context of the Final Rule. First, therefore, it will help to describe relevant parts of ERISA and the ACA, explain the structure and function of the Final Rule, and set the stage for the provisions challenged in this case.

I. ERISA AND THE ACA

ERISA is the key statute at issue in this case. It regulates employee benefit plans, including welfare plans and pension plans, arising out of employment relationships. Congress enacted ERISA in 1974 "following almost a decade of study[ ]" of employment benefits and pension systems and after making "detailed findings which recited, in part, ‘that the continued well-being and security of millions of employees and their dependents are directly affected by [employee benefit] plans.’ " Nachman Corp. v. Pension Benefit Guaranty Corp., 446 U.S. 359, 361–62, 100 S.Ct. 1723, 64 L.Ed.2d 354 (1980) (quoting 29 U.S.C. § 1001(a) ). ERISA states that its purpose is to address the "growth in size, scope, and numbers of employee benefit plans" across the country and to protect "the interests of participants in employee benefit plans and their beneficiaries." 29 U.S.C. § 1001(a) – (b).

The ACA is a statutory scheme that regulates health insurance markets more broadly. The ACA, among other things, establishes standards that apply differently to individual, small-group, and large-group health insurance markets. Congress targeted the individual and small-group healthcare markets for special heightened protections. Individual and small-group healthcare plans are required by the ACA to provide ten essential health benefits to insured individuals. 42 U.S.C. §§ 300gg-6, 18022(a). Large-group market participants face a choice: They may decline to provide these essential health benefits and instead pay a tax—the so-called "employer shared responsibility payment." I.R.C. § 4980H, 26 U.S.C. § 4980H. Congress differentiated small employers from large employers—for the purpose of placing them in small- or large-group markets—by the number of employees these employers employed. See 42 U.S.C. § 300gg-91(e)(2).

The ACA absorbs key ERISA definitions into the ACA statutory scheme. Under ERISA, an employer is "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity." ERISA § 3(5), 29 U.S.C. § 1002(5). An employee under ERISA is simply "any individual employed by an employer." ERISA § 3(6), 29 U.S.C. § 1002(6). The statutory definitions of "employer" and "employee" in ERISA have remained unchanged since ERISA's enactment in 1974.

Congress codified many of the ACA's key provisions in the Public Health Service Act ("PHS Act"), 42 U.S.C. § 201 et seq. At the time that Congress passed the ACA, the PHS Act already defined the term "employer" as having "the meaning given such term under [ERISA § 3(5) ], except that such term shall include only employers of two or more employees," and defined "employee" as having the meaning given to the same term under ERISA § 3(6) without exception. 42 U.S.C. §§ 300gg-91(d)(5)–(6).⁴ Congress preserved these definitions of "employer" and "employee" when it passed the ACA, and thus ERISA's definitions of those terms were incorporated into the ACA's statutory scheme.

II. ASSOCIATION HEALTH PLANS AND THE FINAL RULE

AHPs are group health plans offered through an association of employers, such as an industry group. DOL has always permitted some AHPs meeting stringent criteria to qualify as a single ERISA employee benefit plan, as if the plan was sponsored by a single employer for its employees.

Under DOL's longstanding sub-regulatory guidance, only so-called "bona fide associations" could sponsor an AHP under ERISA. Bona fide associations had to display certain employer-like characteristics, because "the Department's regulation of employee benefit plans [was] focused on employment-based arrangements, as contemplated by ERISA, rather than merely commercial insurance-type arrangements that lack the requisite connection to the employment relationship." Final Rule, 83 Fed. Reg. at 28,914. The "overall structure" of ERISA "contemplates employment-based benefit arrangements," and since these AHPs qualify as ERISA plans, they had to fit within an employment context, notwithstanding the fact that they were sponsored by employer associations rather than directly by single employers. Id. at 28,913.

Of most relevance to the issues raised in this case, DOL's sub-regulatory guidance analyzed bona fide associations based on three criteria: "(1) Whether the group or association [was] a bona fide organization with...