Hartland Lakeside Joint No. 3 School District v. Wea Insurance ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No.  13-­‐‑3787
HARTLAND   LAKESIDE   JOINT   NO.   3   SCHOOL   DISTRICT,
OCONOMOWOC   AREA   SCHOOL   DISTRICT,   and   ARROWHEAD
UNION  HIGH  SCHOOL  DISTRICT,
Plaintiffs-­‐‑Appellants,
v.
WEA  INSURANCE  CORPORATION,  et  al.,
Defendants-­‐‑Appellees.
____________________
Appeal  from  the  United  States  District  Court
for  the  Eastern  District  of  Wisconsin.
No.  12-­‐‑C-­‐‑154  —  William  E.  Callahan,  Jr.,  Magistrate  Judge.
____________________
ARGUED  MAY  23,  2014  —  DECIDED  JUNE  27,  2014
____________________
Before   BAUER   and   EASTERBROOK,   Circuit   Judges,   and   ST.
EVE,  District  Judge.*
EASTERBROOK,   Circuit   Judge.   Section   1102   of   the   Patient
Protection   and   Affordable   Care   Act,   42   U.S.C.   §18002,   pro-­‐‑
*  Of  the  Northern  District  of  Illinois,  sitting  by  designation.
2   No.  13-­‐‑3787
vides  $5  billion  to  reimburse  employers  and  their  proxies  for
some   outlays   on   early   retirees’   medical   care.   WEA   Insur-­‐‑
ance,   which   administers   health-­‐‑care   programs   on   behalf   of
many  school  districts  in  Wisconsin,  told  them  that  it  would
collect  on  their  behalf.  It  decided  to  use  the  federal  money  to
reduce   premiums   in   future   years.   The   school   districts   con-­‐‑
tended   that   WEA   should   have   rebated   premiums   for   the
years  in  which  the  retirees  received  the  medical  care  that  led
to  the  federal  payments.  The  difference  matters  to  school  dis-­‐‑
tricts  that  want  to  switch  carriers.  WEA’s  plan  to  cut  future
rates,   rather   than   provide   rebates,   gave   it   a   competitive   ad-­‐‑
vantage:   a   district   that   switched   to   another   insurer   would
never  see  a  penny  of  the  federal  money.
Three  districts  that  did  switch  filed  this  suit,  in  Wisconsin
court,   contending   that   state   law   requires   WEA   to   apply   the
receipts  so  that  the  school  districts  whose  expenses  justified
the   federal   payments   receive   the   economic   benefit.   The
school  districts  characterize  WEA’s  choice  to  allocate  none  of
the  money  to  districts  that  switch  carriers  as  a  form  of  con-­‐‑
version.   All   of   the   complaint’s   claims   arise   under   state   law,
and  all  litigants  are  citizens  of  Wisconsin.  WEA  nonetheless
removed  to  federal  court,  contending  that  §18002  and  its  im-­‐‑
plementing  regulations,  45  C.F.R.  §§  149.1  to  149.700,  are  the
crux  of  the  litigation.  A  magistrate  judge,  presiding  by  con-­‐‑
sent  under  28  U.S.C.  §636(c),  denied  the  districts’  motion  to
remand.  2012  U.S.  Dist.  LEXIS  57085  (E.D.  Wis.  Apr.  24,  2012).
The  judge  certified  the  issue  under  28  U.S.C.  §1292(b),  but  a
motions   panel   declined   to   accept   the   interlocutory   appeal.
After  the  magistrate  judge  ruled  in  WEA’s  favor  on  the  mer-­‐‑
its,  the  school  districts  appealed  from  the  final  decision.  Sub-­‐‑
ject-­‐‑matter  jurisdiction  is  our  first  order  of  business.
No.  13-­‐‑3787   3
Removal   was   proper   if,   and   only   if,   the   school   districts’
claim   arises   under   federal   law.   28   U.S.C.   §§  1331,   1441.   Yet
the  complaint  relies  entirely  on  state  law,  and  although  WEA
contends  that  federal  law  is  material  to  the  suit,  the  existence
of   a   federal   issue   rarely   allows   removal.   See,   e.g.,   Gunn   v.
Minton,   133   S.   Ct.   1059   (2013);   Bennett   v.   Southwest   Airlines
Co.,   484   F.3d   907,   rehearing   denied,   493   F.3d   762   (7th   Cir.
2007).
“Rarely”  differs  from  “never,”  and  WEA  relies  on  Grable
&   Sons   Metal   Products,   Inc.   v.   Darue   Engineering   &   Manufac-­‐‑
turing,  545  U.S.  308  (2005),  for  the  proposition  that,  when  the
principal   issue   is   federal,   removal   is   permitted.   The   magis-­‐‑
trate   judge   agreed,   writing   that   WEA   has   a   good   defense   if
federal  law  (including  the  regulations)  allows  insurers  to  col-­‐‑
lect  the  payments  as  the  effective  sponsors  of  the  health-­‐‑care
plans.   The   magistrate   judge   did   not   conclude   that   federal
law  occupies  the  field  (the  misleadingly  named  doctrine  that
“complete   preemption”   supplies   federal   jurisdiction);   noth-­‐‑
ing   in   §18002   suggests   that   all   claims   related   to   its   benefits
necessarily  are  federal.  Instead  the  judge  thought  that  a  fed-­‐‑
eral  issue  is  itself  enough  for  federal  jurisdiction.
Grable   announced   a   multi-­‐‑factor   approach   that   has   been
hard   to   use   consistently.   Its   application   here   is   doubtful,
since   WEA   does   not   contend   that   the   only   material   issue   is
federal.   To   make   such   an   argument,   it   would   have   to   con-­‐‑
cede  that  the  school  districts  have  a  good  claim  under  state
law.   Yet   far   from   conceding   this,   WEA   denies   that   the   dis-­‐‑
tricts   have   valid   state-­‐‑law   claims.   Thus   even   from   WEA’s
perspective,  the  case  contains  non-­‐‑trivial  issues  of  both  state
and  federal  law.
4   No.  13-­‐‑3787
Moreover,  it  is  difficult  to  see  a  federal  defense.  There  is
no   doubt   a   federal   issue.   The   school   districts   have   argued
that  WEA,  as  an  insurer  rather  than  either  a  sponsor  or  fidu-­‐‑
ciary  of  a  welfare-­‐‑benefit  plan  governed  by  ERISA,  see  Wis-­‐‑
consin  Education  Association  Insurance  Trust  v.  Iowa  State  Board
of  Public  Instruction,  804  F.2d  1059  (8th  Cir.  1986),  is  ineligible
to   collect   funds   under   §18002   except   as   the   school   districts’
agent.   See   42   C.F.R.   §423.882.   If   that’s   so,   then   it   is   easy   to
classify   WEA’s   retention   of   the   money   as   a   form   of   conver-­‐‑
sion  or  breach  of  duty  to  the  school  districts,  for  which  state
law  supplies  a  remedy.
The   magistrate   judge   thought   otherwise,   ruling   that   the
statute   and   regulations   allow   WEA   to   treat   itself   as   a   plan
sponsor  rather  than  (solely)  as  the  school  districts’  agent  for
collection.   The   judge   added   that   reducing   premiums   in   fu-­‐‑
ture   years   complies   with   the   federal   statute   or   regulations.
Suppose   that’s   right:   Where’s   the   federal   defense?   To   say
that   a   particular   plan   of   distribution   complies   with   federal
law  (as  a  rebate  also  would)  is  not  the  end  of  the  line.  Many
things  comply  with  federal  law  but  violate  state  law.  To  dis-­‐‑
place  state  law,  federal  law  must  require  a  particular  course
of   action   at   odds   with   state   rules,   and   the   magistrate   judge
did  not  conclude  that  §18002  or  the  regulations  does  that.
But   we   are   getting   ahead   of   ourselves.   The   magistrate
judge   thought   that   a   federal   rule   blocks   the   districts’   recov-­‐‑
ery.   If   Grable   allows   federal-­‐‑issue   removal,   and   the   magis-­‐‑
trate   judge   is   wrong,   that   would   be   a   reason   to   reverse   on
the  merits,  not  to  send  the  case  back  to  state  court.  See,  e.g.,
Bell  v.  Hood,  327  U.S.  678  (1946).  We  must  approach  subject-­‐‑
matter   jurisdiction   on   the   assumption   that   WEA’s   federal
arguments  are  not  frivolous.
No.  13-­‐‑3787   5
WEA’s   understanding   of   Grable   is   the   sticking   point.
WEA  treats  it  as  allowing  the  removal  of  cases  in  which  the
predominant   issue   concerns   federal   law.   Some   language   in
Grable  might  be  understood  that  way.  But  the  Court  held  in
Gunn  that  this  understanding  is  unsound.  The  Justices  wrote
that   “federal   jurisdiction   over   a   state   law   claim   will   lie   if   a
federal   issue   is:   (1)   necessarily   raised,   (2)   actually   disputed,
(3)  substantial,  and  (4)  capable  of  resolution  in  federal  court
without   disrupting   the   federal-­‐‑state   balance   approved   by
Congress.”   133   S.   Ct.   at   1065.   Gunn   gives   teeth   to   parts   (1)
and  (4)  by  holding  that  a  legal  malpractice  case  could  not  be
removed   even   though   analysis   of   the   claim   depended   on
understanding   and   application   of   federal   patent   law.
Whether   the   lawyers   had   provided   competent   work   de-­‐‑
pended   on   how   well   they   had   dealt   with   issues   of   patent
law,   and   that   couldn’t   be   decided   without   considering   the
substance  of  the  ex-­‐‑client’s  contention  that  their  former  law-­‐‑
yers  should  have  made  particular  patent-­‐‑specific  arguments.
Yet  the  Court  held  that  the  litigation  belonged  in  state  court,
for  state  law  defined  the  lawyers’  duties  to  their  clients.
Gunn   also   observed   that   the   litigation   in   Grable   had   de-­‐‑
pended  on  federal  law  from  the  outset,  which  limits  Grable’s
scope.   And   other   post-­‐‑Grable   decisions,   including   Empire
HealthChoice   Assurance,   Inc.   v.   McVeigh,   547   U.S.   677   (2006),
and  Pollitt  v.  Health  Care  Service  Corp.,  558  F.3d  615  (7th  Cir.
2009),  hold  that  a  federal  role  in  insurance  is  not  enough  to
establish  that  a  state-­‐‑law  suit  really  arises  under  federal  law.
In  Empire  the  Court  held  that  a  suit  to  recoup  health  benefits
paid   under   a   plan   for   federal   employees   arose   under   state
law,  even  though  the  plan  was  a  federal  creation.
6   No.  13-­‐‑3787
The  removal  of  this  litigation  does  not  satisfy  either  part
(1)   or   part   (4)   of   Gunn.   The   school   districts’   suit   does   not
“necessarily”  raise  any  issue  of  federal  law.  Grable  involved
a   quiet-­‐‑title   action   under   state   law   in   which   A   contended
that   B’s   title   to   real   estate   was   invalid   because   it   had   been
conveyed   to   B   by   the   United   States   following   a   seizure   to
satisfy   A’s   tax   liabilities.   A   insisted   that   the   seizure   and
transfer   were   vitiated   by   inadequate   notice.   State   law   pro-­‐‑
vided   the   remedy,   a   declaration   of   ownership,   but   it   was
impossible  to  decide  who  owned  the  land  without  deciding
whether  the  federal  government  followed  legal  requirements
when  seizing  the  parcel  from  A  and  conveying  it  to  B.  Decid-­‐‑
ing  an  issue  of  federal  law  was  inescapable,  and  the  national
government  itself  was  vitally  concerned  about  the  outcome;
an  adverse  decision  could  undercut  its  ability  to  collect  tax-­‐‑
es.   Nothing   remotely   similar   is   true   about   the   dispute   be-­‐‑
tween  WEA  and  the  school  districts.
As   for   (4)   on   Gunn’s   list:   how   can   one   resolve   a   dispute
between   an   insurer   and   its   clients   about   the   size   of   premi-­‐‑
ums   without   stepping   on   states’   toes?   The   McCarran-­‐‑
Ferguson  Act,  15  U.S.C.  §§  1011–15,  gives  states  preeminence
in   the   domain   of   insurance   regulation.   Most   insurance   dis-­‐‑
putes   arise   under   state   law   and   are   resolved   in   state   court.
They  can  reach  federal  court,  if  at  all,  only  under  the  diversi-­‐‑
ty   jurisdiction.   This   is   so   well   entrenched   that   even   ERISA,
which   may   contain   the   broadest   preemption   clause   of   any
federal  statute  and  completely  occupies  the  field  of  employ-­‐‑
ees’   health   and   welfare   benefits,   see   Franchise   Tax   Board   of
California   v.   Construction   Laborers   Vacation   Trust,   463   U.S.   1(1983),   has   an   exception   for   insurance,   which   it   leaves   to
state  law.  29  U.S.C.  §1191(a)(1).  Treating  every  dispute  about
what  insurers  do  with  money  received  under  §18002  as  aris-­‐‑
No.  13-­‐‑3787   7
ing   under   federal   law,   and   ignoring   state-­‐‑law   doctrines
about   insurers’   duties   to   their   clients,   would   disrupt   the
state–federal  allocation  approved  by  Congress  in  the  McCar-­‐‑
ran-­‐‑Ferguson  Act  and  ERISA.
Approaching  this  subject  from  a  different  angle  confirms
our  perspective.  The  parties  do  not  contend  that  §18002  cre-­‐‑
ates  a  private  right  of  action.  Thus  Congress  not  only  did  not
affirmatively  authorize  federal  litigation  between  competing
beneficiaries   of   the   program   (though   claims   against   the
agency   under   the   Administrative   Procedure   Act   could   be
possible)   but   also   implied   that   these   disputes   should   be   re-­‐‑
solved   in   state   court.   See,   e.g.,   Merrell   Dow   Pharmaceuticals
Inc.  v.  Thompson,  478  U.S.  804  (1986).  A  dispute  between  rival
beneficiaries   of   the   program   about   who   ultimately   gets   the
money  is  outside  the  scope  of  the  federal  rule.
Many  federal  programs  create  entitlements  while  leaving
ownership  to  state  law.  Think  of  patent  law,  which  confers  a
property   right   on   the   inventor   but   allows   free   transfer   to
others  by  contract.  Copyright  law  works  the  same  way.  T.B.
Harms  Co.  v.  Eliscu,  339  F.2d  823  (2d  Cir.  1964)  (Friendly,  J.),
holds  that  disputes  about  ownership  of  intellectual  property
arise  under  state  law  unless  the  (asserted)  copyright  proprie-­‐‑
tor   seeks   one   of   the   remedies   provided   by   federal   law   (for
example,  by  maintaining  that  someone  is  liable  for  infringe-­‐‑
ment).  Our  circuit  has  reached  the  same  conclusion.  See,  e.g.,
Affymax,   Inc.   v.   Ortho–McNeil–Janssen   Pharmaceuticals,   Inc.,
660   F.3d   281   (7th   Cir.   2011)   (collecting   cases).   See   also   Ze-­‐‑
rand-­‐‑Bernal   Group,   Inc.   v.   Cox,   23   F.3d   159   (7th   Cir.   1994)
(rights   under   a   contract   that   is   part   of   a   sale   in   bankruptcy
arise  under  state  law).
8   No.  13-­‐‑3787
The   current   litigation   is   about   ownership   following   dis-­‐‑
tribution  by  the  national  government.  Consider  a  lender  that
asserts  a  security  interest  in  (and  ultimately  ownership  of)  a
refund   of   federal   income   taxes.   The   lender’s   claim   would
arise  under  state  law,  notwithstanding  the  federal  source  of
the   money.   Likewise   the   school   districts’   claim   to   the   eco-­‐‑
nomic  benefit  of  the  federal  subsidies  that  were  justified  by
the   medical   expenses   of   the   districts’   retirees   is   a   dispute
about  ownership  and  belongs  in  state  court.
We   appreciate   that   the   school   districts,   which   initially
wanted   a   remand,   now   prefer   a   final   decision   in   federal
court,   where   they   believe   (despite   their   loss   in   the   district
court)  that  they  can  prevail  outright.  If  this  case  is  returned
to  state  court,  it  must  start  anew—the  magistrate  judge’s  de-­‐‑
cision  will  have  no  effect  beyond  the  force  of  its  reasoning—
and   more   than   two   years   will   have   been   lost.   But   practical
considerations  never  justify  a  federal  court’s  adjudication  of
a   suit   over   which   it   lacks   subject-­‐‑matter   jurisdiction.   When
we   asked   for   supplemental   jurisdictional   briefs,   the   school
districts   admirably   told   us   what   they   wanted   (immediate
decision  in  their  favor)  yet  carefully  explained  why  they  had
concluded  that  they  are  not  entitled  to  that  relief,  because  the
federal  courts  lack  jurisdiction.  Right  they  are.
The   judgment   of   the   district   court   is   vacated,   and   the
case  is  remanded  with  instructions  to  return  the  litigation  to
state  court.