Seventh Circuit Declines To Address The EEOC’s Challenge To The Legality Of Employer’s Wellness Plan

by Seyfarth Shaw LLP
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Seyfarth Synopsis: After an employee lost his employer-funded health insurance because he failed to complete a medical examination required by his employer, the EEOC sued the employer under the ADA’s ban on involuntary medical examinations. The U.S. Court of Appeals for the Seventh Circuit affirmed dismissal of the suit, not on the merits, but because the relief sought was “unavailable or moot.”

In EEOC v. Flambeau, Inc., No. 16-1402 (7th Cir. Jan. 25, 2017), the EEOC filed suit against Flambeau, Inc. (“Flambeau”) in the U.S. District Court for the Western District of Wisconsin on behalf of a former Flambeau employee.  Flambeau had terminated the employee’s health insurance because he failed to complete a “health risk assessment” and biometric testing, which Flambeau required of employees to participate in its employer-subsidized health plan.

The parties cross-moved for summary judgment.  The district court granted summary judgment for Flambeau and denied summary judgment for the EEOC. The district court found that Flambeau’s program was exempted from liability for involuntary medical examinations under the ADA’s safe harbor provision for the administration of a bona fide benefits plan.  On appeal, the Seventh Circuit declined to decide the case on the merits, but nonetheless affirmed on the grounds that the relief sought by the EEOC was unavailable or moot.

The Seventh Circuit’s opinion provides useful guidance on the issues of punitive damages and mootness in the employment context.  In particular, while courts are hesitant to award punitive damages against an employer where plaintiff pursues an unsettled theory of liability, which is the case even if the EEOC has issued guidance that the employer has not followed.  With respect to mootness, an employer’s pre-suit cessation of an allegedly illegal activity may moot a claim where the employer can show it did so for reasons other than impending litigation.

Case Background

In 2012 and 2013, Flambeau required its employees to participate in a wellness program, which included a “health risk assessment” and biometric testing, in order to obtain Flambeau’s employer-subsidized health insurance.  Id. at 3.  Dale Arnold (“Arnold”), a Flambeau employee, failed to complete the assessment and testing prior to the 2012 benefit year deadline, so Flambeau terminated his insurance coverage. Id. Arnold filed complaints with the U.S. Department Of Labor (“DOL”) and the EEOC alleging a violation of the Americans With Disabilities Act (“ADA”) and the Family & Medical Leave Act. Id. at 3-4. After discussions with the DOL, Flambeau agreed to reinstate Arnold’s insurance retroactively once he completed the testing and paid his share of premiums. Id. at 4.  Arnold did both, and Flambeau restored his insurance.  Id.

Before the 2014 benefit year began, Flambeau ended the mandatory assessment and testing, finding that it was not cost-effective. Id. In March 2014, Arnold resigned from Flambeau.  Id.  Nonetheless, six months later, the EEOC sued Flambeau.  The EEOC alleged that Flambeau’s mandatory testing violated the ADA’s prohibition of involuntary medical examinations Id. (citing 42 U.S.C. § 12112(d)(4)).  EEOC enforcement guidance at the time further provided: “A wellness program is ‘voluntary’ as long as an employer neither requires participation nor penalizes employees who do not participate.”  Id. at 10 (citations omitted).  The EEOC sought compensatory and punitive damages on behalf of Arnold as well as an injunction preventing Flambeau from operating such a program.

Flambeau and the EEOC filed cross-motions for summary judgment. Id. at 4.  Flambeau argued that its wellness plan was covered by the ADA’s insurance safe harbor, which exempts the administration of a bona fide benefits plan from liability for involuntary medical examinations. Id. at 4 (citing 42 U.S.C. § 12201(c)(2) & (c)(3)). The EEOC, meanwhile, argued that the safe harbor provision was inapplicable to Flambeau’s program.  Id. at 4. The district court sided with Flambeau, finding that the safe harbor provision “could cover at least some wellness programs,” and Flambeau’s was one such program. Id. at 5.

The Decision

On appeal, the U.S. Court of Appeals for the Seventh Circuit affirmed the judgment in favor of Flambeau.  Id. at 15. However, its decision was not based on the merits of the case, i.e., whether the district court properly ruled that Flambeau’s wellness program was exempted under the ADA.  Instead, the Seventh Circuit found that the EEOC’s claim was moot. Id. at 5-6.

Article III of the Constitution limits federal courts’ jurisdiction to “live controvers[ies].”  Id. at 5 (citations omitted).  Accordingly, a case is moot if a party “lacks a personal stake” in the outcome.  Id. (citations omitted).  The EEOC argued that: (a) Arnold had a personal stake in the outcome because he had both compensatory and punitive damages; and (b) the EEOC had a stake because voluntary cessation of illegal conduct – here, Flambeau’s wellness program – typically does not moot a case.  The Seventh Circuit rejected both arguments.

First, the Seventh Circuit ruled that Arnold failed to establish compensatory damages because he did not actually pay the $82.02 in medical expenses he incurred while without Flambeau’s insurance. Id. at 6. Arnold also failed to establish any damages for emotional distress. Id. at 6-7.

Furthermore, the Seventh Circuit held that Arnold was not entitled to punitive damages.  Punitive damages are recoverable under the ADA where an employer acts “with malice or reckless indifference to the federally protected rights of an aggrieved individual.”  Id. at 7 (citing 42 U.S.C. § 1981a(b)(1)).  The Seventh Circuit explained that Flambeau did not act with reckless indifference to Arnold’s federally protected rights because whether or not the ADA’s safe harbor covered Flambeau’s wellness plan was an unsettled question when Flambeau utilized it (and remains one today).  Id. at 7-8.  Punitive damages are not available under the ADA where plaintiff’s theory of liability is “novel or otherwise poorly recognized.” Id. at 7 (citations omitted).  Importantly, the Seventh Circuit noted that the fact that Flambeau’s program potentially contravened the EEOC’s guideline on wellness programs did not amount to reckless indifference.  Id. at 10-11 (“An employer’s or its attorney’s disagreement with EEOC guidance does not by itself support a punitive damages award, at least where the guidance addresses an area of law as unsettled as this one.”).

Second, the Seventh Circuit found that Flambeau’s voluntary cessation of its wellness program mooted the case because there was no reasonable expectation Flambeau would reinstate the program. Id. at 11. The record showed that Flambeau dropped the program because, based on two years of experience, its economic costs outweighed its benefits. Id. at 12. Moreover, Flambeau’s pre-suit cessation of the program evidenced that it was a genuine business decision and not a mere litigation tactic. Id.  This distinguished it from cases wherein an employer stopped its illegal activity abruptly in relation to litigation and without a sufficient alternative explanation.  Id. at 13.

In closing, the court noted that prudential concerns also weighed against deciding the case on the merits.  Id. at 14.  Given the prevalence of wellness programs among employers, such a decision would have wide-ranging implications.  Id.  Moreover, the EEOC had promulgated further regulations on the issue after this case’s events.  Id. (citing 29 C.F.R. § 1630.14).  As such, the court felt that the “issues should be decided . . . in a case where the answers will matter to the parties.” Id. at 15.

Implication For Employers

This decision illustrates the importance of employer vigilance with respect to company-wide programs, particularly where such a program touches on unsettled areas of the law.  Where an employer can show attempts to consult and comply with the law, it will be in a better position to defend government agency action, which can include requests for punitive damages and impactful injunctive relief.  That is so even where the employer’s action does not necessarily conform with government agency guidance on the topic.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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