State Law Claim for Invasion of Privacy Escapes ERISA Preemption: Rose v. HealthComp, Inc.

by Williams Mullen

A federal court recently held that the plaintiff’s claims under state law survived ERISA preemption, and remanded the case to state court to determine the plaintiff’s claims for invasion of privacy and unfair business practices arising from the administrator’s disclosure of her medical records to her employer. While rooted tightly to its facts, Rose v. HealthComp, Inc., No. 1:15-cv-00619-SAB (E.D. California, August 10, 2015), illustrates some of the limits to the otherwise broad reach of ERISA preemption.

Background. The plaintiff (“Rose”) was employed in California by Harris Ranch Beef Company (“Harris Ranch”) for over eight years, to late 2012, and was enrolled in Harris Ranch’s self-insured employee health plan. The defendant, HealthComp, Inc. (“HealthComp”), was the plan’s third-party administrator and, in that fiduciary role, provided case management services. As part of these services, HealthComp notified Harris Ranch when HealthComp saw an employee’s health costs rising, and also assigned a nurse case manager to work with an employee in an effort to hold down health costs.

Rose suffered from medical issues for years, leading in December 2011 to hospitalization for treatment and diagnosis of liver failure. Her doctors determined that she needed a liver transplant and placed her on a transplant waiting list. Rose alleged, in this case, that in March 2012, without her permission, HealthComp notified Harris Ranch of her medical condition and need for a liver transplant. HealthComp assigned Rose a nurse case manager, and Rose signed a medical release form for that case manager; Rose alleged in this case, however, that she was not told that her medical information would be shared with her employer.

In December 2012, HealthComp sent Harris Ranch a report that Rose’s need for an expensive liver transplant had increased. Harris Ranch terminated Rose shortly after it received that report, and HealthComp closed its case management file on Rose. Rose later filed a lawsuit against Harris Ranch. HealthComp then reopened its file; Rose alleged, in this case, that HealthComp used its prior medical authorization release to then review her medical records and furnish information to Harris Ranch.

Rose then sued HealthComp under California law in California superior court, alleging invasion of privacy and unfair business practices arising from unauthorized disclosures of her medical information to Harris Ranch. HealthComp removed the case to federal court, asserting that the claims were preempted by ERISA. Rose then filed a motion to remand the case to state court.

The Court’s Ruling. The federal courts have long held that the scope of ERISA’s preemption of state law is very broad in order to achieve the Congressional goal of providing a uniform regulatory scheme for ERISA-governed employee benefit plans. All state law claims that come within the scope of ERISA preemption are displaced by the federal statute and converted into federal claims under ERISA’s civil enforcement provision, section 502. That is, the claimant then has the remedies ERISA’s section 502 would allow, if any, and not the remedies provided under state law. The question in Rose was whether the plaintiff’s state law claims were subject to that broad preemptive reach.

The Rose court held that under the U. S. Supreme Court’s decision in Aetna Health Inc. v. Davila, 542 U. S. 200 (2004), and the U. S. Court of Appeals for the Ninth Circuit’s subsequent decision in Fossen v. Blue Cross & Blue Shield of Montana, Inc., 660 F.3d 1102 (9th Cir. 2011), the district court had to apply a two-part test to determine whether Rose’s state law claims were preempted. Under that test, a state law claim would be preempted if, first, the individual, at some point in time, could have brought the claim under ERISA section 502(a)(1)(B)(for civil claims by plan participants and beneficiaries to recover plan benefits, obtain a declaration of rights under the plan, etc.), and, second, there is no other independent legal duty implicated by the defendant’s actions.

The Rose court decided that the case met the first part of the Fossen test. For comparison, the court noted the holding of the U. S. Court of Appeals for the Fourth Circuit in Darcangelo v. Verizon Communications, Inc., 292 F.3d 181 (4th Cir. 2002). The Darcangelo court held that “alleged misconduct by an administrator that was clearly undertaken in the course of carrying out duties under a plan” would be preempted by ERISA, but if the administrator obtained an employee-participant’s medical information and informed the employer solely to assist the employer in determining whether the participant was a threat to her co-workers, then state law claims arising from that disclosure would “not be related to the plan”.  In Rose, HealthComp obtained Rose’s medical information while performing case management duties under the plan, and then disclosed them to the employer (improperly, according to Rose), and Rose could thus have alleged a breach of HealthComp’s plan fiduciary duties and pursued a claim under ERISA section 502(a). This satisfied the first prong of the Fossen test.

Regarding the second part of the test, however, Rose asserted claims arising under California’s right of privacy that arose independently of either ERISA or the plan terms. The court found that the state law claims did not arise “but for” the administration of the ERISA plan, and those claims could have been brought even if Harris Ranch’s plan had not existed. The fact that HealthComp would not have obtained Rose’s medical information without the existence of the Harris Ranch plan, did not create a sufficient relationship with the plan under the Ninth Circuit’s cases to justify preemption.

Because Rose’s claims did not satisfy both prongs of the Fossen test, the court granted Rose’s motion to remand the case back to the state court for further proceedings.

The Significant Lesson: While each of the federal circuits will have its own case precedents interpreting the Supreme Court’s Davila holding, the ruling in Rose is representative of the preemption analysis. It also points up the seriousness of facts alleging the improper use of a participant’s personal medical information and the potential exposure of plans and their fiduciaries when handling such information in this era of heightened sensitivity to personal data disclosures. Rose thus indicates some limits to ERISA’s broad preemption doctrine in that scenario.

Written by:

Williams Mullen

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