ERISA Preemption

The house passed its version of ERISA in the fall of 1973. The Senate approved its version in February of 1974. There were many differences to be reconciled by the Conference, which got underway in April of that year. One of them, however, was not the preemption of state law rule, which was the same in both bills. It provided for "subject matter" preemption. States were precluded from legislating with respect to matters addressed in ERISA. For example, no state could have imposed a vesting standard for retirement income plans because ERISA had a vesting rule for retirement income plans. Likewise, the other minimum standards (participation, accrual) and the funding standards. And no state could have imposed fiduciary standards on any kind of employee benefit plan because ERISA's rules applied to all plans. But that preemption rule could not have been used to prevent states from regulating, e.g., health care plans, in areas in which ERISA does not regulate. It was believed by the ERISA drafters that subject matter preemption was sufficient to prevent states from regulating that which Congress was regulating, and thus gave plan sponsors protection against having to cope with a multitude of differing state schemes that sought to do so.

And you all remember your high school civics textbook explanation of the role of conference committees in Congress: they reconcile differences between the respective bills passed by each of the houses, but they don’t mess with provisions that are the same in both bills.

So how, then, did we wind up with the utterly different, and much broader, preemption rule that was in ERISA as enacted? And why does the enacted provision say, "(1) the term 'State Law' includes all laws, decisions, rules, regulations, or other State action having the effect of law, of any State," and "(2) the term 'State' includes a State, any political subdivision thereof, or any agency or instrumentality of either, which purports to regulate, directly or indirectly, the terms and conditions of employee benefit plans covered by this title"?

Late in the Conference, a delegation of big business and big labor clambered up the Hill and confronted the conferees. The subject matter preemption rule, they said, had to be dramatically broadened, and if the conferees wouldn't change it, they threatened to combine their forces and defeat the conference substitute when it was brought to the floor of each house. What had gotten them so exercised?

For big business, it was the Monsanto case, in which the Supreme Court of Missouri had just upheld the assertion by the Missouri Insurance Commissioner that he had authority to regulate a self-insured health care plan sponsored by Monsanto. The big companies saw the specter of 50 state insurance commissioners miring them in a swamp of inconsistent regulations. For the unions, it was the efforts of some of the state supreme courts, acting in their capacity as arbiters of the ethics of the bar licensed to practice in their states, to outlaw "closed panel" legal services plans. The unions liked closed panel plans because they were cheaper to operate and easier to manage, and they were incensed that the bars of various jurisdictions that wanted more expensive plans and didn't like the idea of being managed were thwarting their effort to bring affordable legal services to their members. Take note that among the strongest advocates of "open panel" plans—plans in which participants were free to use any lawyer licensed in the jurisdiction— was the Litigation Section of the American Bar Association.

Facing the double-whammy of big business and big labor, the conference principals caved and directed the staff to work something out. The staff, already shattered by marathon sessions with a cast of thousands trying to reconcile serious differences in the two houses' bills and facing the very real deadline of an impending impeachment of our 37^th President (all believed that there was going to be an impeachment by the late summer of '74, and all knew that, if the ERISA conference substitute was not adopted by both houses before that point, it would be put off until the next Congress, and the two houses then would have to start all over again, literally from the beginning). So staff did what we all do when our choices are narrowed and become painfully clear—they hastily drafted what the business and labor lobbyists told them to draft. The logic was overpowering—get it done quickly because there is much else to do and very little time in which to do it.

But here's the human interest story. On the day the conference substitute came before the Senate, staff of four of the key senators scripted a colloquy for them to explain the operation of the new preemption rule. The senators, however, botched it. Badly. So badly, that it came out sounding as though they had decided to revert back to the original subject matter preemption and call the bluff of the Bigs. Sitting in the gallery that afternoon were two ABA Litigation Section lawyers who had come out from Chicago to observe. They heard what they heard, were ecstatic, zipped out to National Airport, and hopped on a plane back to Chicago to report their victory.

In the meantime, the Senate staff kicked into action. They hustled into the clerk's office, where the stenographers' transcripts were being edited, and began a little editing of their own. In short order, they had unbotched the colloquy. The next morning, the ABA envoys eagerly tore the plain brown wrapper off their newly arrived Congressional Record. Quel surprise!  In their anguish, they called a Labor Department lawyer who they knew had also listened to the colloquy. "You heard it," they said. "This is the exact opposite of what the senators said." He replied, "Do you see the words in the Record? That's what you heard." Not without some sympathy, he added, "Don't you know that the victors always write the history books?"

And, to come full circle, it obviously is not true that conferees cannot mess with a provision that is alike in both bills. They cannot mess with it only if a member objects to their having done so when the bill comes up for final passage.

So, that's how a relatively modest preemption rule was replaced by a hastily drafted, much broader rule that may be the most litigated provision in the statute.

If you could draft a new ERISA preemption rule, what would it say?

Steve Sacher

Jones Day

April 2, 2008

Comments

[Steve Sacher]

My thoughts on others' comments:

To Frank Cummings: I agree. That was a better protocol. And it worked because there were strong bonds of trust between the senators and their staffers.

To Ron Dean: I can't say that we saw a train wreck coming. What made us uneasy was that, unlike the rest of the statute which had been gesticulating since 1967 and had been vetted to within an inch of its life, here was a clearly important provision with wide-ranging implications that was never the subject of a committee hearing, never scrutinized by public media, never carefully analyzed by staff, and that on its very face had a certain Rube Goldberg disjointedness.

To Jim Wooten: You're right. I had forgotten about California's COLA initiative.

To Don Levit: To me, the answer to your question is simply that regulators tend to want to regulate everything that moves. Inside the government, turf is the coin of the realm. I'm not talking about individuals, most of whom are well motivated; I'm addressing the way tax-supported and non-profit institutions tend to behave, no matter who is at the helm.

[Frank Cummings]

Well, now after almost 35 intervening years we're making new legislative history? Aw, gee. Anyway, I don't remember it quite that way. But I do remember this: In those days under the Senate Rules a staff member could walk into the reporter's office and delete everything that was actually said on the floor, replacing it with the carefully scripted-in-advance colloquoy. There was nothing unusual about that. It happened every day. The rules have changed completely since then.

But I'm not sure that's a good thing. The colloquoy -- which was approved by the members in advance -- was what the members meant to say. If the actual words were a garble, which version is a better statement of what they meant to say?

[Ron Dean]

It proves that shortsightedness of big business and big labor (one a Missouri health plan that won the case anyway, and the other focused on some nuance of legal service plans that never got anywhere anyway) will control huge issues that greatly affect everyone who ever went to a doctor -- or prevents them from even seeing a doctor. And the amazing thing is that business and labor still have their heads stuck in the same sand of their same shortsighted self interests and refuse to acknowledge that perhaps Rome is burning and it's time to put down their fiddles.

Subject matter preemption is exactly right. Preempt on the matters you're regulating, but don't prevent someone else from putting out fires you're not interested in handling.

[Steve Sacher]

I am the source. I was the Labor Department lawyer.

[Jim Wooten]

I agree with much of what Steve Sacher says in his interesting account of the expansion of ERISA's preemption provision. But there was at least one important difference between the Senate and House bills. The House bill included the deemer clause, which was added shortly before the House passed its bill. The reasons for this addition were the trial court decision in the Monsanto case and the spat between organized labor and the American Bar Association over legal services plans. (These events are recounted on pages 235-36 of my book [The Employee Retirement Income Security Act of 1974: A Political History].)

The deemer clause in the House bill was intended to prevent states from regulating self-insured plans. An advisory committee of the National Association of Insurance Commissioners noted in March 1974 that the deemer clause appeared to exempt benefit plans from state regulation "when the fund or plan itself is the risk bearer." So the House had already moved beyond subject-matter preemption.

The Monsanto case and the fight over legal-services plans also were factors in the conference committee's decision to further expand the scope of the preemption language. Another factor, however, was a law under consideration in California that would have required DB plans to offer cost-of-living adjustments. (See my book, pages 264-65). The Building and Construction Trades wanted broader preemption language to torpedo the California law (and other similar laws).

[Don Levit]

Steve:
In the Monsanto case, the company was able to escape any regulation because the plan was self-funded. The plan could not be viewed as in the business of insurance.
If the plan involved another employer, however, it would be a MEWA and thus subject to state regulation.
While states do have the ability to use any and all laws to regulate self-funded MEWAs, we do know that these entities are not in the business of insurance.
Thus, why would many states subject self-funded MEWAs to surplus and reserve requirements, as if they were in the business of insurance?
Don Levit

[Roy Harmon]

I have heard similar reports in the past. What are your sources for this account?