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State of New York v. United States Department of Labor

United States District Court, District of Columbia

March 28, 2019

STATE OF NEW YORK, et al. Plaintiffs,
v.
UNITED STATES DEPARTMENT OF LABOR, et al. 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 Guarantee Corp., 446 U.S. 359, 361-62 (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 business/organizational purposes and functions unrelated to the provision of benefits; (2) whether the employers share[d] some commonality and genuine organizational relationship unrelated to the provision of benefits; and (3) whether the employers that participate[d] in a benefit program, either directly or indirectly, exercise[d] control over the program, both in form and substance.” Id. at 28, 914. This opinion will refer to these three criteria as requirements for purpose, commonality of interest, and control, respectively.

         Passage of the ACA raised the regulatory stakes. The majority of AHPs-which were not sponsored by associations qualifying under DOL's bona fide association test-were “treated as the mechanism by which each individual employer obtains benefits and administrative services for its own separate plan.” Id. (citing CMS Ins. Standards Bulletin, “Application of Individual and Group Market Requirements under Title XXVII of the Public Health Service Act when Insurance Coverage Is Sold to, or through, Associations, ” Sept. 1, 2011, at 1-3, A.R. at 2211-13). In other words, the fact that the insurance came from an AHP did not matter for purposes of determining which ACA market standard applied. A small employer purchasing coverage through an AHP had to meet the ACA's requirements for small employers, individuals purchasing coverage through an AHP had to meet the ACA's individual market requirements, and so on. Id. Most AHPs providing coverage to individuals and small groups, then, had to satisfy the ACA's essential health benefits requirement. However, in the “rare instances” in which AHPs were sponsored by associations meeting DOL's bona fide association criteria, the “association coverage [would be] considered a single group health plan, ” and the number of total employees of all employer members would be counted to determine whether small or large group rules applied. CMS Ins. Standards Bulletin at 3, A.R. at 2213. If a bona fide association served as “employer” of “an average of at least 51 employees” over the past year, then the bona fide association would qualify as a “large employer, ” and its AHP would be subject to “large group market” rules. 42 U.S.C. § 300gg-91(e)(2)-(3).[5]Hence, AHPs sponsored by these bona fide associations avoid the more comprehensive requirements for healthcare coverage in the individual and small group markets.

         The Final Rule loosens the requirements for associations to qualify as ERISA-covered “bona fide associations, ” thereby allowing the AHPs they sponsor to qualify as single ERISA plans and avoid the ACA's individual and small-group market requirements. President Trump prompted DOL to undertake this change. In October 2017, President Trump issued an Executive Order titled “Promoting Healthcare Choice and Competition Across the United States, ” which directed DOL to “[e]xpand[] access to AHPs” by “allow[ing] more small businesses to avoid many of the [ACA's] costly requirements.” Exec. Order 13, 813, 82 Fed. Reg. at 48, 385; see also Final Rule, 83 Fed. Reg. at 28, 912 (citing Executive Order). More specifically, the Executive Order suggested that DOL “expand[] the conditions that satisfy the commonality-of-interest requirements” in DOL's then-existing guidance and “consider ways to promote AHP formation on the basis of common geography or industry.” Exec. Order 13, 813, 82 Fed. Reg. at 48, 386.

         DOL did as instructed. In June 2018, DOL promulgated the Final Rule, which significantly relaxed two of the three key criteria for qualifying as a bona fide association: the commonality of interest and purpose requirements. See Final Rule, 83 Fed. Reg. at 28, 912. Associations can satisfy the new “commonality of interest” test if their members are either in the same trade or business or in the same geographic area (the same state or same metropolitan area, even if that area includes multiple states). 29 C.F.R. § 2510.3-5(c). Before the Final Rule, “geography, alone, was not sufficient to establish commonality.” Final Rule, 83 Fed. Reg. at 28, 928 n.40. The Final Rule also allows an association to qualify as a “bona fide association” even if its primary purpose is “to offer and provide health coverage to its employer members and their employees” so long as it has “at least one substantial business purpose” unrelated to the provision of health care. 29 C.F.R. § 2510.3-5(b)(1). This represents a “departure from” DOL's prior guidance, which required that associations be viable organizations even without providing an AHP. Final Rule, 83 Fed. Reg. at 28, 917.

         The Final Rule also adds an entirely new provision allowing working owners (i.e., sole proprietors) without any common-law employees to “qualify as both an employer and employee” for two key ERISA purposes. 29 C.F.R. § 2510.3-5(d). First, working owners may join bona fide associations of employers, including for purposes of “the requirement . . . that each employer member of the group or association participating in the group health plan must be a person acting directly as an employer of one or more employees who are participants covered under the plan.” Id. Second, working owners qualify as both employer and employee for purposes of satisfying the requirement that AHPs-as ERISA health benefit plans-may only offer health coverage “to employer members through the association” for qualifying employees and beneficiaries. Id. The effect of this provision is that working owners with no employees may join these newly expanded bona fide associations and receive health benefits through the association's AHP, a single ERISA employee benefit plan. Under DOL's prior guidance, “working owners without common law employees were not permitted to participate” in an AHP. Final Rule, 83 Fed. Reg. at 28, 928 n.40.

         Although the Final Rule primarily interprets ERISA, the preamble to the Final Rule describes at least one other important implication of this new interpretation under the ACA. The preamble notes that the definition of the Final Rule “will apply solely for purposes of Title I of ERISA and for determining whether health insurance coverage of the AHP is regulated by the . . . PHS Act . . . provisions that apply to the individual, small group, or large group market, and not, for example, the purposes of taxation under the Internal Revenue Code.” Id. at 28, 915. In other words, DOL indicates that the Final Rule permits AHPs to qualify as large employers under the ACA yet avoid the choice that other large employers must make between providing essential health benefits or paying a shared responsibility payment. Under the Final Rule, AHPs avoid both ACA requirements for essential health benefits as described in the PHS Act and the employer shared responsibility payment under portions of the ACA codified in the Internal Revenue Code.[6]

         The Final Rule applied to fully-insured AHPs in September 2018 and to not-fully-insured existing AHPs in January 2019; it will apply to newly created AHPs beginning in April 2019. 29 C.F.R. § 2510.3-5(f).

         III. Procedural History

         Eleven States and the District of Columbia sued DOL over the Final Rule, raising claims under section 706 of the APA. Compl. [ECF No. 1]. The States allege that the Final Rule's bona fide association test and working owner provision are “not in accordance with law” under ERISA and the ACA, that the Final Rule does not “carry out” Congress's intent in enacting ERISA, and that the Final Rule is arbitrary and capricious. Id. ¶¶ 108-45. The States moved for summary judgment. Pls.' Mem. of Law in Supp. of Mot. for Summ. J. (“Pls.' Mot.”) [ECF No. 31-17]. DOL moved to dismiss the complaint on jurisdictional grounds for lack of standing and cross-moved in the alternative for summary judgment. Mem. of P. & A. in Supp. of Defs.' Mot. to Dismiss, or, in the Alt., for Summ. J. (“Defs.' Mot.”) [ECF No. 47-1]. The parties have fully briefed their positions on the motion to dismiss and on the motions for summary judgment, and the Court heard argument on the motions on January 24, 2019. The issues presented are now ripe for the Court's consideration.

         LEGAL STANDARD

         A court must “hold unlawful and set aside agency action . . . found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. § 706(2)(A), (C). “[W]hen a party seeks review of agency action under the APA, the district judge sits as an appellate tribunal.” Am. Bioscience, Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001). “The ‘entire case' on review is a question of law, ” id., and summary judgment is the proper mechanism for review, Ctr. For Food Safety v. Salazar, 898 F.Supp.2d 130, 138 (D.D.C. 2012).

         ANALYSIS

         The Court first considers the issue of standing raised in DOL's motion to dismiss. Finding that the States have standing to challenge the Final Rule, this opinion then considers the merits of the States' challenges to the Final Rule.

         I. Standing

         As a threshold matter, DOL urges dismissal of all claims on jurisdictional grounds. DOL argues that the States do not have standing to sue because they have not suffered a legally cognizable injury. DOL explains that “[t]he Final Rule applies to AHPs and not to states; it does not command any state to take, or refrain from taking, any action.” Defs.' Mot. at 14. The States respond that they have several different forms of injury, each of which confers standing. Pls.' Mem. of P. & A. in Opp'n to Defs.' Mot. (“Pl.'s Opp'n”) [ECF No. 54-1] at 2-15.

         “Standing is a structural, constitutional restraint on the subject matter jurisdiction of the federal judiciary.” Air Alliance Houston v. EPA, 906 F.3d 1049, 1057 (D.C. Cir. 2018). “To establish Article III standing, an injury must be ‘concrete, particularized, and actual or imminent; fairly traceable to the challenged action; and redressable by a favorable ruling.'” Clapper v. Amnesty Int'l U.S.A., 568 U.S. 398, 409 (2013) (quoting Monsanto Co. v. Geertson Seed Farms, 561 U.S. 139, 149 (2010)). A court “presume[s] that federal courts lack jurisdiction ‘unless ‘the contrary appears affirmatively from the record.'” Renne v. Geary, 501 U.S. 312, 316 (1991) (quoting Bender v. Williamsport Area School Dist., 475 U.S. 534, 546 (1986)). “[T]he presence of one party with standing is sufficient to satisfy Article III's case-or-controversy requirement.” Rumsfeld v. Forum for Acad. & Inst. Rights, Inc., 547 U.S. 47, 52 n.2 (2006).

         “Since they are not mere pleading requirements but rather an indispensable part of the plaintiff's case, each element must be supported in the same way as any other matter on which the plaintiff bears the burden of proof, i.e., with the manner and degree of evidence required at the successive stages of the litigation.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992). At the summary judgment stage, a plaintiff must set forth by affidavit or other evidence specific facts necessary to support standing. Swanson Grp. Mfg., LLC v. Jewell, 790 F.3d 235, 240 (D.C. Cir. 2015).

         First, although the parties agree that the Final Rule does not directly preempt state law, the States allege harm to their sovereign interests in making and enforcing a legal code. They express concern that the Final Rule sets the stage for possible future preemption-more specifically, that DOL might “enact future regulations to preempt State insurance laws as to AHPs . . . if States go ‘too far' in regulating them.” Compl. ¶ 101 (citing Final Rule, 83 Fed. Reg. at 28, 937). The Court agrees that States have sovereign interests in “the exercise of sovereign power over individuals and entities within the relevant jurisdiction, ” which can be articulated as “the power to create and enforce a legal code.” Alfred L. Snapp & Son, Inc. v. Puerto Rico (“Snapp”), 458 U.S. 592, 601 (1982). The D.C. Circuit accordingly has recognized federal preemption of state law as a concrete injury that can give rise to standing. See Alaska v. U.S. Dep't of Transp., 868 F.2d 441, 444 (D.C. Cir. 1989) (recognizing state standing to sue the Department of Transportation where its regulations on airline pricing preempted state consumer protection laws). But the problem here is that the Final Rule does not preempt or otherwise constrain state law.

         The preamble to the Final Rule expresses DOL's intention to leave AHPs to regulation by the states. For fully-insured AHPs, the Final Rule

provides that State laws that regulate the maintenance of specified contribution and reserve levels (and that enforce those standards) may apply, and State insurance laws are generally saved from preemption when applied to health insurance issuers that sell policies to AHPs and when applied to insurance policies that AHPs purchase to provide benefits . . . [, and] it is the view of [DOL] that ERISA section 514(b)(6) clearly enables States to subject AHPs to licensing, registration, certification, financial reporting, examination, audit and any other requirement of State insurance law necessary to ensure compliance with the State insurance reserves, contributions and funding obligations.

         Final Rule, 83 Fed. Reg. at 28, 936. For AHPs that are not fully insured, “section 514(b)(6)(A)(ii) of ERISA [provides that] any State law that regulates insurance may apply to the AHP to the extent that such State law is ‘not inconsistent' with ERISA.” Id. The States point to no law that will be preempted, instead alleging that DOL might “enact future regulations to preempt State insurance laws as to AHPs . . . if States go ‘too far' in regulating them, ” and that “no statement in the Final Rule disclaim[s DOL's] intent” to preempt other non-insurance state laws. Compl. ¶ 101 (citing Final Rule, 83 Fed. Reg. at 28, 937). The Court finds that the possibility of future preemption is too speculative-and the concern about a possibility of preemption of unidentified non-insurance laws is too nebulous-to constitute an injury-in-fact. See Clapper, 568 U.S. at 401; Whitmore v. Arkansas, 495 U.S. 149, 158 (1990). Hence, the States do not have standing based on the possible future preemption of state law.

         The States next allege harm to their quasi-sovereign interests based on their “responsibility to protect the health, safety and welfare of their citizens.” Compl. ¶ 2. They predict that the Final Rule will harm state insurance markets “in States where state law does not duplicate ACA requirements for individual and small group plans” because the Final Rule will allow healthier individuals to “leave the traditional market in states without sufficiently protective state laws.” Id. ¶ 104.[7] These healthier individuals allegedly will leave individual and small-group insurance markets for AHPs, which are predicted to be less expensive but also less comprehensive. This in turn will allegedly cause insurance premiums in the individual and small-group markets to rise, potentially pricing consumers out of coverage and/or pushing insurers out of these markets. Id. ¶¶ 104-05. The States express particular concern about employees earning less than four-hundred percent of the federal poverty level and working for small employers, because if these small employers were to offer insurance through an AHP-even if that insurance did not cover the employee's full insurance needs-the employee could lose eligibility for premium tax credits under the ACA and thereby be priced out of a plan in the individual market offering all essential health benefits. Id. ¶ 106; Pls.' Opp'n at 10 n.10.

         A state may have standing to sue under the doctrine of parens patriae when a state “express[es] a quasi-sovereign interest, ” including “in the health and well-being-both physical and economic-of its residents in general.” Snapp, 458 U.S. at 607. And here the States have raised such interests. But because a state cannot claim superior sovereignty to the federal government, a state “does not have standing as parens patriae to bring an action against the Federal Government.” Id. at 609 n.16 (citing Massachusetts v. Mellon, 262 U.S. 447, 485-86 (1923)); see also Pennsylvania v. Kleppe, 533 F.2d 668, 677 (D.C. Cir. 1976) (explaining that “the state can not have a quasi-sovereign interest because the matter falls within the sovereignty of the Federal Government”). Here, the States' general responsibility for their citizens' health and welfare- including the threat of increased premiums, loss of insurance coverage, or loss of tax credits- cannot directly support State standing because the underlying harms would be suffered by the States' citizens. Any theory of standing on this ground would derive from the State's status as parens patriae, which is not available to States in a suit against the federal government. See Snapp, 458 U.S. at 609 n.16; Mellon, 262 U.S. at 485-486. The States accordingly do not have standing on this ground.

         The States also allege that the Final Rule will cause them three forms of proprietary or economic harm. First, they predict a rise in “uncompensated care costs” because an “individual who formerly had access to coverage through the [ACA] marketplace will now be underinsured or uninsured due to the Final Rule, ” in which case the States “will . . . become responsible for providing care to individuals who cannot afford coverage or who are underinsured.” Compl. ¶ 106. Second, five States-New Jersey, Delaware, California, Washington, and Massachusetts-allege that under the Final Rule they will lose “tax revenue or administrative fees paid to state agencies for small group and individual plans obtained on a state insurance exchange.” Id. ¶ 102; Tr. of Jan. 24, 2019, Mot. Hr'g (“Tr.”) [ECF No. 77] at 31:20-23. Third, three States allege that the Final Rule will cause “a substantially increased regulatory burden on the States” as they “substantially ramp up enforcement against a new type of plan[] or face a wave of fraud and abuse similar to what occurred under [multiple employer welfare arrangements (“MEWAs”)] in past decades.” Compl. ¶ 103. The preamble to the Final Rule acknowledges that DOL “anticipates that the increased flexibility afforded AHPs under this rule will ...


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