Blue Cross Blue IL v. Cruz, Julia ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-4170
BLUE CROSS BLUE SHIELD OF ILLINOIS, et al.,
Plaintiffs-Appellants,
v.
JULIA CRUZ,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 9821—Amy J. St. Eve, Judge.
____________
ARGUED MAY 31, 2007—DECIDED JULY 27, 2007
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Before POSNER, KANNE, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. This appeal is before us once
again, the Supreme Court having remanded it to us for
further consideration in light of the Court’s decision in
Empire HealthChoice Assurance, Inc. v. McVeigh, 126 S. Ct.
2121 (2006). The parties have fully briefed the question,
which they answer differently, whether Empire requires us
to change our decision, 396 F.3d 793 (7th Cir. 2005), which
had reversed the district court’s dismissal of the suit for
want of federal-question jurisdiction. 28 U.S.C. § 1331.
2 No. 03-4170
To provide health insurance for federal employees, the
federal Office of Personnel Management contracts with
insurance carriers such as Blue Cross. The contract with
Blue Cross provides that an insured who having received
benefits from Blue Cross recovers compensation for the
same illness or injury from a third party (for example, as
the result of filing a tort claim against that party) must
return to Blue Cross so much of the benefits as the compen-
sation offsets. Blue Cross reserves the right not to permit
the insured to deduct any part of the attorney’s fee that he
incurred in obtaining the compensation from the third
party. The reason this provision appears in the contract
between the government and Blue Cross is that any
reimbursement received by Blue Cross must be remitted,
minus a service charge, to the federal government.
Blue Cross filed this suit in federal district court against
one of its insureds, Cruz (actually Cruz’s representative,
but we suppress that irrelevant detail). Blue Cross had paid
$4,682.20 in benefits to cover injuries that Cruz had sus-
tained in an automobile accident. He had hired his own
lawyer to bring a tort suit against the injurer, had recov-
ered $30,000 in a settlement, and had paid his lawyer one-
third of that amount as the lawyer’s fee. Blue Cross wanted
the entire $4,682.20 reimbursed to it, but Cruz argued that
under Illinois’s common fund doctrine he was entitled to
deduct a third as Blue Cross’s share of the attorney’s fee.
In that way, each of the beneficiaries of the lawyer’s
efforts—Cruz and Blue Cross—would be paying the lawyer
the same fraction (one-third) of their respective benefits
from his efforts.
The common fund doctrine allows a person who incurs
attorney’s fees in obtaining a judgment or settlement that
confers a benefit on another to deduct a portion of the fee.
No. 03-4170 3
E.g., Bloomer v. Liberty Mutual Ins. Co., 445 U.S. 74, 77
(1980); Scholtens v. Schneider, 671 N.E.2d 657, 662 (Ill. 1996);
Regnery v. Meyers, 803 N.E.2d 504, 513 (Ill. App. 2003); Wal-
Mart Stores, Inc. Associates’ Health & Welfare Plan v. Wells,
213 F.3d 398, 402 (7th Cir. 2000). The theory is that a
beneficiary of another’s legal efforts should contribute to
the cost of those efforts; otherwise they might not be
undertaken. In economic terms, the successful plaintiff in
such a case confers (if he is not compensated) “external” (to
his pocketbook) benefits, which he has no incentive to do
unless he is compensated and they therefore are internal-
ized to him. Cruz’s suit produced a benefit not only to
himself but also to Blue Cross, so Cruz believed that the
common fund doctrine entitled him to deduct part of his
attorney’s fee from the repayment demanded by Blue
Cross.
Blue Cross disagreed. It does not want to create the
incentive that the common fund doctrine provides. It (or
the Treasury) must like the tradeoff between fewer tort
recoveries by insureds and a larger share of each recovery.
At any rate, the contract is explicit that the insured is to
have no right to common fund treatment, and Blue Cross
contended that the Federal Employees Health Benefits
Act, 5 U.S.C. §§ 8901 et seq., which authorized the Office of
Personnel Management to make the contract in this case,
preempts any state law that might prevent enforcement of
a term of the contract relating to benefits or coverage. For
section 8902(m)(1) provides that “the terms of any contract
under this chapter which relate to the nature, provision, or
extent of coverage or benefits (including payments with
respect to benefits) shall supersede and preempt any
State or local law, or any regulation issued thereunder,
which relates to health insurance or plans.”
4 No. 03-4170
Ordinarily, however, preemption is a defense, and the
anticipation of a federal defense does not entitle the
plaintiff to bring a suit not otherwise within federal
jurisdiction in federal court, Caterpillar Inc. v. Williams, 482
U.S. 386, 392-93 (1987), as Blue Cross did. But Blue Cross
argues that the Act’s preemption provision, quoted in the
preceding paragraph, is so broad that it extinguishes any
state contract law relating to the insurance contract, so that
Blue Cross’s claim had to arise under federal law, presum-
ably a federal common law of contracts that are governed
by the Federal Employees Health Benefits Act. In the
alternative, it argues that the contract between the govern-
ment and it involves a unique federal interest that has to
be protected against conflicting state laws, such as
Illinois’s common fund doctrine, Boyle v. United Technolo-
gies Corp., 487 U.S. 500, 507 (1988), and that achieving
this purpose requires that all disputes arising from the
contract be resolved under federal common law.
Under either the “complete preemption” or “unique
federal interest” approach, Blue Cross’s suit would arise
under federal law and thus be within the jurisdiction of the
district court. Beneficial National Bank v. Anderson, 539 U.S.
1, 6-8 (2003); Caterpillar Inc. v. Williams, supra, 482 U.S. at
392-93; Illinois v. City of Milwaukee, 406 U.S. 91, 100 (1972).
The district judge rejected both approaches, however, and
so dismissed the suit for want of federal jurisdiction. We
reversed, and it is our order reversing the district court that
the Supreme Court has directed us to reconsider.
Empire arose from a suit by a health insurer against an
insured who had recovered tort damages but refused to
reimburse the insurer, on the ground that his damages
did not cover the injury for which he had received bene-
fits from the insurer. The Supreme Court, resolving an
No. 03-4170 5
intercircuit conflict that the Court identified our decision as
being on the wrong side of, held that the suit did not arise
under federal law. 126 S. Ct. at 2130. With respect to
“unique federal interest”—the only basis on which Blue
Cross persists in arguing for federal jurisdiction—the Court
ruled that the dispute between insurer and insured in the
Empire case should not be placed “under the complete
governance of federal law, to be declared in a federal
forum . . . . The state court in which the personal-injury suit
was lodged is competent to apply federal law, to the extent
it is relevant, and would seem best positioned to determine
the lawyer’s part in obtaining, and his or her fair share in,
the tort recovery.” Id. at 2137. In attempting to distinguish
Empire, Blue Cross fastens on the end of this passage, and
argues that while there may be no transcendent federal
interest in “the lawyer’s part in obtaining, and his or her
fair share in, the tort recovery”—which were the issues
over which the insurer and the insured were quarreling in
Empire—there is a transcendent interest in whether a
state’s common fund doctrine should be allowed to
override a term in the insurance contract, which was not
an issue in Empire.
That is to read the majority opinion too narrowly, and in
any event ignores the principle that jurisdictional provi-
sions should be simple and clear so that a party is not
placed in the position of filing a suit in one court only to
discover after years of litigating there that it has to start
over in another court because the first court lacked jurisdic-
tion. Budinich v. Becton Dickinson & Co., 486 U.S. 196, 202-03
(1988); Kusay v. United States, 62 F.3d 192, 194 (7th Cir.
1995); Unique Concepts, Inc. v. Manuel, 930 F.2d 573, 575 (7th
Cir. 1991); Coté v. Wadel, 796 F.2d 981, 983 (7th Cir. 1986);
Kuntz v. Lamar Corp., 385 F.3d 1177, 1183 (9th Cir. 2004). On
6 No. 03-4170
Blue Cross’s submission, if a fight over an insured’s
common fund defense involves messy, picky issues, such
as the reasonableness of the attorney’s fee paid by the
plaintiff, there is no federal jurisdiction, while if the insurer
is arguing for preemption of all common fund defenses it
can sue in federal court.
One reason the Court gave in Empire for rejecting a
federal common law of federal employees’ health benefits
is that a common fund defense will often involve a dis-
agreement merely over the value to the insurer of the
insured’s efforts in his third-party suit, and that is hardly
an issue on which a federal rule is necessary. Our case
involves the broader issue of the applicability of the
common fund doctrine in light of the contract, which
purports to entitle Blue Cross to reject the doctrine. An-
other reason the Court gave for its result in Empire was
that the contracts between the Office of Personnel Manage-
ment and the insurers allow an insurer to enforce the
insured’s third-party claim against the third party directly,
and if the insurer followed that route his right to reim-
bursement would depend entirely on the third party’s tort
liability; no reimbursement or common fund issue would
be presented, because the insurer would be paying the
attorney’s fee. 126 S. Ct. at 2133 n. 4, 2136. That does not
mean that only in such a case would the insurer be con-
fined to state court. A reason is not a holding. So we must
press on.
The jurisdictional holding in our previous opinion was
based on a belief that Congress in the Federal Employees
Health Benefit Act had wanted federal employees to have
the same benefits under their health plan no matter what
state they were in, so that if they moved from one state to
another they would not have to worry that their entitle-
ment had changed. That was an argument for regulating
No. 03-4170 7
the contracts between the insurers and the government by
a uniform body of contract principles, and thus by a fed-
eral common law of contracts. The Supreme Court distin-
guished, however, between benefits and reimbursement.
126 S. Ct. at 2132. The amount of benefits is determined by
the plan and is indeed uniform across states and is unaf-
fected by the common fund doctrine. That doctrine just
affects how much of a tort judgment or other judgment
against (or settlement with) a third party the plaintiff
gets to keep and how much he must give the insurer. The
disuniformity that results is not a disuniformity in benefits.
The beneficiary-litigant can, it is true, be made worse off
by suing, if he has a disappointing result. Suppose an
insured who incurred medical expenses of $40,000 paid for
by Blue Cross sued his injurer and settled with him for
$50,000 and his lawyer’s fee was $20,000. In both a common
fund state and a state that has no common fund doctrine,
the plaintiff would have insurance benefits of $40,000.
Suppose the common fund state would (as Cruz assumed
in deducting one-third of his attorney’s fee from the
reimbursement to Blue Cross) allow him to deduct as much
of his attorney’s fee as was proportionate to the insurer’s
benefit. In our hypothetical case, this would translate into
a deduction of $16,000 (80 percent of the fee because the
insurer received 80 percent of the settlement proceeds—
$40,000 out of the total of $50,000). So the plaintiff would
pay the insurance company $24,000 ($40,000 - $16,000),
retaining $6,000 for himself ($50,000 - $20,000 - $24,000),
while the identical plaintiff in the non-common-fund state
would end up $10,000 in the hole, because he would have
to pay his lawyer $20,000 and repay Blue Cross $40,000. But
that would be due not to a difference in benefits between
federal employees living in the two states but to the
insured’s having gambled on obtaining a sufficiently large
8 No. 03-4170
tort judgment or settlement to offset his reimbursement
obligation. Suppose the tort settlement had been not
$50,000 but $500,000 and the attorney’s fee had been
$200,000. After reimbursing the insurer $40,000 and paying
the attorney, the insured in the non-common-fund state
would end up with $260,000 ($500,000 - $40,000 - $200,000),
compared to only $40,000 had he not sued.
Thus the benefits are uniform, though the net financial
position of an insured who has a potential tort claim is not
but instead depends on the state liability rules applicable
to his tort claim, including rules ancillary to liability such
as the common fund doctrine. When “benefits” are under-
stood to include every financial incident of an illness or
injury, national uniformity is unattainable without a
federal takeover of the entire tort system.
We conclude that the district court’s judgment, dismiss-
ing Blue Cross’s suit for want of federal jurisdiction, must
be affirmed, and Blue Cross will have to start over in state
court—where it can if it wishes plead preemption, based
on the contract, as a defense to Cruz’s defensive invocation
of the common fund doctrine. We shall not speculate on the
outcome, but we shall try to offer some guidance to the
parties. Blue Cross will be able to argue before the state
court that the Federal Employees Health Benefits Act
should be interpreted to bar a state from forbidding waiver
of the common fund doctrine by the contracts that the
Office of Personnel Management makes with health
insurers, such as Blue Cross. Cf. Administrative Committee
of Wal-Mart Stores, Inc. Associates’ Health & Welfare Plan v.
Varco, 338 F.3d 680, 690 (7th Cir. 2003). In so arguing,
however, Blue Cross will have to contend with Hillenbrand
v. Meyer Medical Group, S.C., 720 N.E.2d 287, 294 (Ill. App.
1999), where the Illinois Appellate Court held the opposite,
No. 03-4170 9
and also with the possibility left open in Administrative
Committee of Wal-Mart Stores, Inc. Associates’ Health &
Welfare Plan v. Varco, supra, 338 F.3d at 691, that the federal
common fund doctrine is applicable instead of the state
doctrine and may override the contracts.
Blue Cross will also be able to argue that the rule of
Illinois law that makes waivers of the state common fund
doctrine unenforceable, see Scholtens v. Schneider, supra, 671
N.E.2d 662-63, 664-65, being premised on the notion that
the right to an attorney’s fee payable out of the common
fund (that is, a tort recovery with more than one benefi-
ciary, including at least one not represented by the lawyer
who created the fund) belongs to the attorney rather than
to his client, e.g., Bishop v. Burgard, 764 N.E.2d 24, 31-32, 33-
34 (Ill. 2002); cf. Obin v. District No. 9, 651 F.2d 574, 582 (8th
Cir. 1981); White v. New Hampshire Department of Employ-
ment Services, 629 F.2d 697, 703 (1st Cir. 1980), reversed on
other grounds, 455 U.S. 445 (1982), is inapplicable in the
present case because the attorney is not a party. But then
Blue Cross will have to reckon with cases like Scholtens and
Hillenbrand which hold that this makes no difference. It is
true that in Administrative Committee of Wal-Mart Stores, Inc.
Associates’ Health & Welfare Plan v. Varco, supra, 338 F.3d at
690-91, we suggested that with the lawyer out of the case
there might be no basis for invocation of the common fund
doctrine. But there, unlike the situation in the two Illinois
cases, the lawyer had been paid in full. In the present case,
so far as appears, the lawyer had not been paid when Blue
Cross sued and Cruz interposed the common fund defense.
In any event, Wal-Mart appears to be in considerable
tension with Scholtens and Hillenbrand, neither of which
suggests that the presence or absence of the lawyer bears
on the issue of waiver.
10 No. 03-4170
These are difficult questions, so the state court, we’re
afraid, will have its work cut out for it. We lack jurisdiction
to try to answer them.
AFFIRMED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-27-07