UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
PHARMACEUTICAL CARE : MANAGEMENT ASSOCIATION, : : Plaintiff, : Civil Action No.: 04-1082 (RMU) : v. : Document Nos.: 76, 77 : DISTRICT OF COLUMBIA et al., : : Defendants. :
MEMORANDUM OPINION
GRANTING IN PART THE PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING IN PART THE DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT
I. INTRODUCTION
This case comes before the court on the parties’ motions for summary judgment. The
plaintiff, Pharmaceutical Care Management Association (“PCMA”), is a national trade
association representing pharmaceutical benefit management companies (“PBMs”). The plaintiff
argues that the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1001 et
seq., preempts Title II of the District of Columbia’s Access Rx Act of 2004 (“Access Rx Act” or
“the Act”), D.C. Code §§ 48-831 et seq. The defendants, on the other hand, contend that ERISA
does not preempt the Access Rx Act because the Act does not regulate ERISA plans and has no
connection with ERISA. As discussed in more detail below, by regulating the relationship
between PBMs and ERISA plans, the Act impermissibly intrudes upon a field exclusively
reserved for federal regulation. II. BACKGROUND
A. Factual History
At issue in this case is the District of Columbia’s attempt to regulate the relationship
between PBMs and “covered entities” such as ERISA health plans, government agencies and
insurance companies. Compl. ¶ 14. PBMs process claims for pharmaceutical drug benefits for
over 200 million Americans. Id. As time passed, PBMs began to expand their services to
include, inter alia, (1) establishing networks of pharmacies that provide discounted drugs to plan
members; (2) negotiating rebate arrangements with drug manufacturers; (3) reviewing drug
utilization to decrease prices and enhance safety; (4) creating therapeutic drug interchange
programs; and (5) establishing generic drug substitution programs. Id. ¶ 15.
In response to rising prescription drug prices, the D.C. Council unanimously passed the
Access Rx Act, which, in the Council’s estimation, would lower the cost of prescription drugs.
Mem. Op. (Dec. 21, 2004) at 2. On May 18, 2004, the Access Rx Act took effect. Compl. ¶ 1.
Title II of the Act, the only portion that the plaintiff challenges, regulates PBMs by imposing
fiduciary duties on them, as well as by requiring disclosure of certain financial information. Id. ¶
3; Mem. Op. (Dec. 21, 2004) at 2. Specifically, Title II dictates that PBMs owe a fiduciary duty
to “covered entities,” which they must discharge in accordance with all applicable laws. D.C.
CODE § 48-832.01(a). Title II also imposes several disclosure requirements on PBMs. For
instance, PBMs must disclose to their customers “information showing the quantity of drugs
purchased by the covered entity and the net cost to the covered entity for the drugs. This
information shall include all rebates, discounts and other similar payments.” Id. § 48-
832.01(c)(1)(A). Furthermore, upon request PBMs must disclose to covered entities “all
financial terms and arrangements for remuneration of any kind that apply between the [PBM]
2 and prescription drug manufacturer or labeler, including, without limitation, formulary
management and drug substitution programs, educational support, claims processing and data
sales fees.” Id. § 48-832.01(c)(1)(B).
The Act also provides that when dispensing prescription drugs, a PBM may substitute a
lower-priced therapeutically equivalent drug for a higher-priced drug. Id. § 48-832.01(d). But,
“[i]f the substitute drug costs more than the prescribed drug, the [PBM] shall disclose to the
covered entity the cost of both drugs and any benefit or payment directly or indirectly accruing to
the [PBM] as a result of the substitution.” Id. § 48-832.01(d)(2). The PBM must then “transfer
in full to the covered entity any benefit or payment received . . . as a result of a prescription drug
substitution.” Id. § 48-832.01(d)(3). Finally, the statute only applies to contracts between PBMs
and covered entities “entered into in the District of Columbia or by a covered entity in the
District of Columbia.” Id. § 48-832.02.
B. Procedural History
Because Title II imposes fiduciary duties and disclosure requirements on PBMs, as
described supra, the plaintiff moved this court to enjoin the defendants from enforcing the
Access Rx Act. Pl.’s Mot. for Prelim. Inj. The court granted preliminary injunctive relief to the
plaintiff on December 21, 2004. See generally Mem. Op. (Dec. 21, 2004). The defendants
appealed the court’s decision to the D.C. Circuit, which remanded the case for this court to
determine in the first instance whether the First Circuit’s ruling in PCMA v. Rowe, 429 F.3d 294
(1st Cir. 2005) precluded the plaintiff from further challenging the validity of the Act under
principles of collateral estoppel. PCMA v. District of Columbia, 522 F.3d 443 (D.C. Cir. 2008).
Accordingly, the court examines the Rowe decision and its effect on this case.
3 1. The First Circuit’s Decision in Rowe
The First Circuit in Rowe addressed the propriety of a statute in Maine that required
PBMs to act as fiduciaries for certain covered entities 1 by “disclos[ing] conflicts of interest,
disgorg[ing] profits from self-dealing, and disclos[ing] to the covered entities certain of their
financial arrangements with third parties.” Rowe, 429 F.3d at 299. To determine whether
ERISA preempted the state statute, the court first analyzed the “high stakes” issue of whether
PBMs are fiduciaries under ERISA. Id. at 300. The court explained that the state statute’s
“provisions requiring disclosure of conflicts of interest and payments from drug manufacturers
are administrative provisions involving no discretion on the part of the PBMs, . . . are purely
ministerial and simply not sufficient . . . to find that the PBMs are acting as fiduciaries under
ERISA.” Id. at 301. With that hurdle behind it, the court applied a two-part test in examining
whether ERISA preempts the state statute. The test first probes whether the statute has a
“connection with” an employment benefit plan and then asks whether the statute “references”
such a plan. Id. at 302 (quoting Cal. Div. of Labor Standards Enforcement v. Dillingham
Constr., N.A., Inc., 519 U.S. 316, 324 (1997)).
Turning to the first prong, the court acknowledged that a principal concern under the
“connection with” prong is “to avoid a multiplicity of regulation in order to permit the nationally
uniform administration of employee benefit plans.” Id. (quoting N.Y. State Conf. of Blue Cross
& Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 657 (1995)). With that in mind, the
court observed that the state statute left plan administrators with a “free hand” to “administer or
1 The Maine statute’s definition of “covered entity” is slightly broader than that provided in D.C.’s Access Rx Act. The Maine statute applies to “health plans, labor union plans, association plans, insurance companies, HMOs, medical service organizations, and the state Medicaid program.” PCMA v. Rowe, 429 F.3d 294, 304 (1st Cir. 2005). The Access Rx Act covers the same groups provided they utilize PBMs. Compare ME. REV. STAT. ANN. tit. 22, § 2699(1)(A) with D.C. CODE § 48-831.02(4)(A).
4 structure their plans in Maine precisely as they would elsewhere.” Id. at 303. The court also
noted that “[a]lthough the ERISA plans can re-evaluate their working relationships with the
PBMs if they wish in light of the [requirements of the state statute], nothing in the [statute]
compels them to do so.” Id. Therefore, the court concluded that the statute did not have an
“impermissible ‘connection with’ ERISA plans.” Id.
Moving to the second part of the test, the court explained that an impermissible
“reference to” an ERISA plan occurs “[w]here a State’s law acts immediately and exclusively
upon ERISA plans . . . or where the existence of ERISA plans is essential to the law’s
operation.” Id. (quoting Dillingham, 519 U.S. at 325). The court easily determined that the
Maine statute did not reference an ERISA plan under this standard because the statute “applies
with respect to a broad spectrum of health care institutions and health benefit providers,
including but not limited to ERISA plans.” Id. at 304. In addition, due to the statute’s broad
application, the court reasoned that “[i]f the reference to employee health plans was deleted from
the text of the [statute], [it] would still be operable.” Id.
Finally, the court addressed a separate ground for ERISA preemption: whether the state
statute provides an alternative enforcement mechanism for ERISA claims. Id. at 305 (citing
Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990)). Because PBMs are not fiduciaries
under ERISA, the court reasoned that the state statute has “no real bearing on the intricate web of
relationships among the principal players in the ERISA scenario.” Id. Accordingly, the court
held that the statute did “not provide an alternative enforcement mechanism to ERISA’s civil
enforcement scheme and [was] not preempted.” Id.
5 2. Rowe’s Effect on the Plaintiff’s Claims and Subsequent Proceedings
In light of the First Circuit’s ruling addressing identical issues pertaining to an almost
identical statute, 2 this court determined that Rowe precluded the plaintiff from litigating the
validity of the Act, noting that the two cases “are closely aligned in time and subject manner.”
Mem. Op. (Mar. 6, 2007) at 11 (quoting Montana v. United States, 440 U.S. 147, 163 (1979)).
On appeal, the Circuit disagreed, explaining that applying collateral estoppel would “freeze the
development of the law in an area of substantial public interest.” PCMA, 522 F.3d at 447. The
Circuit also noted that practical considerations counsel against the application of collateral
estoppel because eight months after this court issued its decision on collateral estoppel, the
Department of Labor (“DOL”) proposed a rule implementing ERISA that would require PBMs
to “disclose certain financial information to the plans they serve.” Id. (citing Reasonable
Contract or Arrangement Under § 408(b)(2)—Fee Disclosure, 72 Fed. Reg. 70,988 (Dec. 13,
2007)). Observing that this proposed rule would require PBMs to disclose information similar to
that required under the Act, the Circuit opined that it “may change the legal analysis regarding
ERISA preemption,” “particularly if the proposed rule is promulgated.” Id. The Circuit then
remanded the case for further consideration on the merits. Id.
Shortly thereafter, the court imposed a briefing schedule for the parties to submit cross-
motions for summary judgment. Briefing was completed on October 14, 2008, 3 and the court
now turns to the pending motions.
2 Between the court’s first decision granting a preliminary injunction and the D.C. Circuit’s remand to determine whether Rowe precluded the plaintiff’s claims, the District of Columbia amended the Act to “conform the District’s law to the Maine law to withstand constitutional and other legal challenges.” Access Rx Act Clarification Temporary Amendment Act of 2006 (“Act Am.”), 53 D.C. Reg. 40 (2006). 3 The court appreciates the thoughtful and thorough briefing provided by the parties.
6 III. ANALYSIS
A. Legal Standard for a Motion for Summary Judgment
Summary judgment is appropriate when “the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law.” FED. R. CIV. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986); Diamond v. Atwood, 43 F.3d 1538, 1540 (D.C. Cir. 1995). To determine which facts are
“material,” a court must look to the substantive law on which each claim rests. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A “genuine issue” is one whose resolution could
establish an element of a claim or defense and, therefore, affect the outcome of the action.
Celotex, 477 U.S. at 322; Anderson, 477 U.S. at 248.
In ruling on a motion for summary judgment, the court must draw all justifiable
inferences in the nonmoving party’s favor and accept the nonmoving party’s evidence as true.
Anderson, 477 U.S. at 255. A nonmoving party, however, must establish more than “the mere
existence of a scintilla of evidence” in support of its position. Id. at 252. To prevail on a motion
for summary judgment, the moving party must show that the nonmoving party “fail[ed] to make
a showing sufficient to establish the existence of an element essential to that party’s case, and on
which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322. By pointing to
the absence of evidence proffered by the nonmoving party, a moving party may succeed on
summary judgment. Id.
The nonmoving party may defeat summary judgment through factual representations
made in a sworn affidavit if he “support[s] his allegations . . . with facts in the record,” Greene v.
Dalton, 164 F.3d 671, 675 (D.C. Cir. 1999) (quoting Harding v. Gray, 9 F.3d 150, 154 (D.C. Cir.
7 1993)), or provides “direct testimonial evidence,” Arrington v. United States, 473 F.3d 329, 338
(D.C. Cir. 2006). Indeed, for the court to accept anything less “would defeat the central purpose
of the summary judgment device, which is to weed out those cases insufficiently meritorious to
warrant the expense of a jury trial.” Greene, 164 F.3d at 675.
B. Legal Standard for Federal Preemption Under ERISA
The preemption doctrine is rooted in the Supremacy Clause of Article VI of the
Constitution and stands for the general proposition that courts implement Congress’s intent for a
federal law to trump, and therefore supersede the enforceability of, a state law. Fidelity Fed.
Sav. & Loan Assoc. v. De La Cuesta, 458 U.S. 141, 152-53 (1982); see U.S. CONST. art. VI, cl. 2.
In all pre-emption cases, and particularly in those in which Congress has “legislated . . . in a field which the States have traditionally occupied,” . . . we “start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.”
Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996) (quoting Rice v. Santa Fe Elevator Corp., 331
U.S. 218, 230 (1947)).
The Court has recognized preemption “by express provision, by implication, or by a
conflict between federal and state law.” Travelers, 514 U.S. at 654. To determine whether a
federal statute or regulation preempts state law, the court must evaluate: (1) the congressional
intent to occupy the entire field and whether the pervasiveness of the regulatory scheme leaves
no room for state supplementation; (2) the level of dominance of the federal interest in
preventing state intervention; and (3) the danger of conflict between state laws and the
administration of a federal program. Pennsylvania v. Nelson, 350 U.S. 497, 502-05 (1956).
“Accordingly, ‘the purpose of Congress is the ultimate touchstone’ of pre-emption analysis.”
8 Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516 (1992) (quoting Malone v. White Motor
Corp., 331 U.S. 497, 504 (1978)).
To discern Congress’s intent the court “examine[s] the explicit statutory language and the
structure and purpose of the statute.” Ingersoll-Rand Co., 498 U.S. at 138. This inquiry is
“considerably simplified,” id., under ERISA because the text is “clearly expansive,” Travelers,
514 U.S. at 655, in that it expressly preempts “any and all State laws insofar as they . . . relate to
any employee benefit plan,” 29 U.S.C. § 1144(a). The Court has remarked that this provision
“indicates Congress’s intent to establish the regulation of employee welfare benefit plans ‘as
exclusively a federal concern.’” Travelers, 514 U.S. at 656 (quoting Alessi v. Raybestos-
Manhattan, 451 U.S. 504, 523 (1981)). In an effort to give meaning to the statutory language of
ERISA in light of the presumption against preemption, the Court has explained that “[a] law
‘relates to’ an employment benefit plan, in the normal sense of the phrase, if it has a connection
with or reference to such a plan.” Shaw v. Delta Air Lines, 463 U.S. 85, 96-97 (1983) (emphasis
added). An additional basis for preemption exists if a state law cause of action “duplicates,
supplements, or supplants the ERISA civil enforcement remedy” because the state law cause of
action “conflicts with the clear congressional intent to make the ERISA remedy exclusive.”
Aetna Health Inc. v. Davila, 542 U.S. 200, 209 (2004).
C. The Access Rx Act “Relates to” ERISA
1. Legal Standard for Determining Whether a State Law Has a “Connection With” an ERISA Plan
As with the phrase “relate to” the Supreme Court has expressed frustration with the
phrase “connection with” because an “uncritical literalism” would lead to “infinite connections”
being “the measure of pre-emption.” Travelers, 514 U.S. at 656. The Court, instead, has
instructed courts to assess both “‘the objectives of the ERISA statute as a guide to the scope of
9 the state law that Congress understood would survive,’ as well as [] the nature of the effect of the
state law on ERISA plans.” Dillingham, 519 U.S. at 325 (quoting Travelers, 514 U.S. at 656,
658-59).
As to Congress’s objectives in enacting ERISA, the Court has stated that the “basic
thrust” of ERISA’s preemption provision is “to avoid a multiplicity of regulation in order to
permit the nationally uniform administration of employee benefit plans.” Travelers, 514 U.S. at
657; Ingersoll-Rand, 498 U.S. at 142 (noting that ERISA preemption “was intended to ensure
that plans and plan sponsors would be subject to a uniform body of benefits law; the goal was to
minimize the administrative and financial burden of complying with conflicting directives
among States or between States and the Federal Government”). Indeed, this provision
“displace[s] all state laws that fall within its sphere, even including state laws that are consistent
with ERISA’s substantive requirements.” Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724,
739 (1985). However, “pre-emption does not occur . . . if the state law has only a tenuous,
remote or peripheral connection with covered plans, as is the case with many laws of general
applicability.” District of Columbia v. Greater Wash. Bd. of Trade, 506 U.S. 125, 130 n.1
(1992).
To determine the strength of the connection between a state law and an ERISA plan,
courts should also consider the effect of the state law on the ERISA plan. The Eighth Circuit has
provided the following factors to guide a court’s analysis:
[1] whether the state law negates an ERISA plan provision, [2] whether the state law affects relations between primary ERISA entities, [3] whether the state law impacts the structure of ERISA plans, [4] whether the state law impacts the administration of ERISA plans, [5] whether the state law has an economic impact on ERISA plans, [6] whether preemption of the state law is consistent with other ERISA provisions, and [7] whether the state law is an exercise of traditional state power.
10 Shea v. Esensten, 208 F.3d 712, 718 (8th Cir. 2000) (quoting Wilson v. Zoellner, 114 F.3d 713,
717 (8th Cir. 1997)).
2. ERISA’s Broad Preemptive Sweep Covers the Access Rx Act
The defendants assert that the Act “does not have an impermissible connection with
ERISA-covered employee benefit plans, because it does not bind plan administrators to [a]
particular choice and thus function as a regulation of an ERISA plan itself, nor does it preclude
uniform administrative practice or the provision of uniform interstate benefit package . . . .”
Defs.’ Mot. at 12 (internal quotation marks omitted). Specifically, the defendants argue that the
Act “imposes no restrictions on plans, plan fiduciaries, or plan sponsors.” Id. According to the
defendants, the Act “does not threaten uniformity because it allows plans, fiduciaries, and
sponsors to administer or structure their plans in [states] precisely as they would elsewhere,” and
it “neither forbids a method for calculating benefits that ERISA permits nor requires certain
benefits to be included in or excluded from a plan.” Id. (internal quotation marks omitted).
The plaintiff counters that because “PBMs administer prescription drug benefit plans for
their customers, [the Act], which imposes mandates on PBM administration of drug benefit
plans, falls squarely within the zone of preemption.” Pl.’s Mot. at 14. The plaintiff maintains
that the Act attempts to “dictate the fiduciary and disclosure duties of persons that perform
administrative functions for ERISA plans,” and thereby “intrudes into areas of express ERISA
concern.” Id. at 15. For example, the plaintiff cites to the Act’s provisions that “mandate PBM
standards of conduct; disclosures to customers; and financial arrangements,” which it states
“create the potential for differing state-by-state requirements that would frustrate Congress’s
goal of minimizing the costs and burdens associated with ERISA plans.” Id. at 16-17 (internal
citations omitted). Furthermore, the plaintiff notes that the Act’s requirement that PBMs
11 “divulge confidential information” also requires plans to “protect the confidentiality of the
information.” Id. at 17. In sum, the plaintiff believes that by imposing duties and regulating the
relationship with an entity that plays “a central role in the administration of ERISA-regulated
prescription drug benefit plans,” the Act “cross[es] the line into the territory preempted by
ERISA.” Pl.’s Opp’n at 6.
As to the proposed DOL regulation that may require PBMs to disclose conflicts of
interest and certain financial information, the defendants observe that the regulation is not yet in
effect, and is, therefore, a nullity. Defs.’ Mot. at 21. Furthermore, even if the rule was finalized,
the defendants aver that the regulations do not preempt the Act because the rule has “no indicia
of express preemption of state law,” “so the presumption is that [the] DOL does not intend to
abolish the application of valid state laws to administrative service providers simply because
they provide services to ERISA plans.” Id. And, the defendants note that the plaintiff has
argued to the DOL that PBMs should be excluded from the proposed regulation. Id. at 20-21.
The plaintiff protests that the proposed regulation governs key aspects of the relationship
between PBMs and ERISA plans, in fact the same aspects that the Access Rx Act addresses.
Pl.’s Mot. at 12-13. The plaintiff also clarifies that “it is not the regulation[], nor even the DOL,
that preempts [the Act] – it is ERISA.” Pl.’s Opp’n at 5.
In weighing the parties’ arguments, the court first addresses the scope of ERISA
preemption and then turns to the effect, if any, of the DOL proposed regulation. “ERISA makes
clear that even indirect state action . . . may encroach upon the area of exclusive federal
concern.” Alessi, 451 U.S. at 525 (quoting ERISA, 29 U.S.C. § 1144(c)(2), defining “State” to
include “any political subdivision [], or any agency or instrumentality of either, which purports
to regulate, directly or indirectly, the terms and conditions of employee benefit plans covered by
12 this subchapter”). After reviewing ERISA’s legislative history, the Supreme Court has observed
that the focus of federal concern under ERISA “is on the administrative integrity of benefit
plans.” Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 15 (1987). Although the Supreme Court
has not directly addressed whether state regulation of PBMs falls within the preemptive scope of
ERISA, the Court has provided some guidance for courts examining whether a state law intrudes
upon the uniform administration of ERISA plans.
In Travelers, the Court held that a New York law requiring hospitals to collect surcharges
from patients covered by a commercial insurer but not from patients insured by a Blue
Cross/Blue Shield plan did not have a sufficient indirect connection with the uniform
administrative practice that ERISA was designed to preserve because the law “simply b[ore] on
the costs of benefits and the relative costs of competing insurance to provide them.” 514 U.S. at
660. And in Fort Halifax, the Court included within “ERISA administration” tasks such as
“determining the eligibility of claimants, calculating benefit levels, making disbursements,
monitoring the availability of funds for benefit payments and keeping appropriate records in
order to comply with applicable reporting requirements.” 482 U.S. at 9. The Court added that
uniformity would be
difficult to achieve [] if a benefit plan is subject to differing regulatory requirements in differing States. A plan would be required to keep certain records in some States but not in others; to make certain benefits available in some States but not in others; to process claims in a certain way in some States but not in others; and to comply with certain fiduciary standards in some States but not others.
Id. (emphasis added).
13 With this guidance, the Third Circuit recently concluded that ERISA preempted a state
professional malpractice claim against a non-fiduciary4 administrator, because the claim went to
“the essence of the function of an ERISA plan – the calculation and payment of the benefits due
to a plan participant.” Kollman v. Hewitt Assocs., LLC, 487 F.3d 139 (3d Cir. 2007). The Third
Circuit explained that the concern of having different standards applicable to the same employer
conduct applies to agents of employers “who undertake and perform administrative duties for
and on behalf of ERISA plans.” Id. at 148; see also Custer v. Sweeney, 89 F.3d 1156, 1165 (4th
Cir. 1996) (concluding that a malpractice claim by a trustee was not preempted because “claims
against third-party service providers to an ERISA plan do not implicate the essential functions of
an employee benefit plan, such as funding, benefits, reporting and administration”).
The defendants acknowledge that PBMs “facilitate the provision of prescription drug
benefits to the benefits providers’ insured, participants or subscribers.” Defs.’ Supp. Statement
of Facts ¶ 5. Stated differently, PBMs, among other things, process prescription drug claims on
behalf of “insurance companies, health maintenance organizations and private and public health
plans and programs,” including ERISA plans. Id. The Act places fiduciary duties on PBMs,
D.C. CODE § 48-832.01(b), and requires PBMs to “transfer in full to the covered entity any
benefit or payment received in any form by the [PBMs] as a result of a prescription drug
4 The parties dispute whether PBMs are fiduciaries under ERISA. Defs.’ Mot. 12-15; Pl.’s Response to Defs.’ Statement of Undisputed Facts ¶ 2. Circuits are split on whether ERISA preempts state regulation of non-fiduciaries. Compare Rowe, 429 F.3d at 305 and Penny/Ohlmann/Nieman, Inc. v. Miami Valley Pension Corp., 399 F.3d 692 (6th Cir. 2004) and Gerosa v. Savasta & Co., 329 F.3d 317, 328-30 (2d Cir. 2003) with Kollman v. Hewitt Assocs. LLC, 487 F.3d 139 (3d Cir. 2007) and Custer v. Pan Am. Life Ins. Co., 12 F.3d 410, 419 (4th Cir. 1993) and Consolidated Beef Indus., Inc. v. N.Y. Life Ins. Co., 949 F.2d 960, 964 (8th Cir. 1991) and Gibson v. Prudential Ins. Co., 915 F.2d 414, 417-18 (9th Cir. 1990) and Howard v. Parisian, Inc., 807 F.2d 1560, 1564 (11th Cir. 1987). In this case, even assuming PBMs are non- fiduciaries, the court concludes that ERISA preempts the regulations because, as discussed infra, the regulations impede uniform administration of ERISA plans. N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 657 (1995).
14 substitution,” 5 id. § 48-832.01(d)(3). In return, if a PBM discloses confidential information
pursuant to one of the Act’s many disclosure provisions, an ERISA plan 6 may not disclose that
information without the consent of the PBM or order of the court. 7 Id. § 48-832(c)(2). By
managing the relationship between an ERISA plan and a third-party service provider
instrumental to the administration of the plan,8 the defendants, through the Act, improperly inject
5 The plaintiff argues that the Act converts PBMs into ERISA fiduciaries, Pl.’s Mot. at 19 n.22, an argument rejected by the First Circuit in Rowe, 429 F.3d at 300-01. The First Circuit reasoned that PBMs were not ERISA fiduciaries because they “do not exercise discretionary authority or control in the management and administration of the plan.” Id. at 301 (internal quotation marks omitted). But this Circuit’s decision in Chao v. Day held that a fiduciary under ERISA, as defined in the disposition clause, “contains no ‘discretion’ requirement,” thus, providing the plaintiff a strong argument that the Act would convert PBMs into ERISA fiduciaries by giving them “authority or control” over plan assets. 436 F.3d 234, 236-38 (D.C. Cir. 2006); 29 U.S.C. § 1002(21)(A)(i) (defining a fiduciary as one who “exercises any authority or control respecting management or disposition of its assets”). Because determining whether PBMs are ERISA fiduciaries does not control the outcome in this case, the court leaves the issue for another day. 6 PBMs contract with entities other than ERISA plans, and therefore, the Act does not affect ERISA plans exclusively. But “even if a state law does not expressly concern an employee benefit plan, it will still be preempted insofar as the law applies to a benefit plan in particular cases.” Bd. of Trustees of Hotel & Restaurant Employees Local 25 v. Madison Hotel, Inc., 97 F.3d 1479, 1487 (D.C. Cir. 1996) (quoting Boren v. N.L. Indus., Inc., 889 F.2d 1463, 1466 (5th Cir. 1989)). 7 The parties disagree about the economic impact the Act will have on ERISA plans. Defs.’ Mot. at 2 (stating that the Act was “designed to slow down rising pharmaceutical costs”); Pl.’s Opp’n at 2; Pl.’s Statement of Facts ¶¶ 8-9 (noting that the “Directors of the Bureau of Competition, Bureau of Economics and Office of Policy Planning of the FTC have concluded that disclosure requirements in state legislative proposals similar to [the Act] are likely to increase rather than decrease the costs of PBM services”). 8 The court notes that although “the field of health care [is] a subject of traditional state regulation,” Pegram v. Herdrich, 530 U.S. 211, 237 (2000), the preemption clause displaces “all state laws that fall within its sphere, even including state laws that are consistent with ERISA’s substantive requirements,” Mackey, 486 U.S. at 829.
15 state regulation into an area exclusively controlled by ERISA. 9 Fort Halifax, 482 U.S. at 9
(stating that ERISA administration includes the “process[ing] [of] claims”); Travelers, 514 U.S.
at 661 (explaining that ERISA preemption “was meant to sweep more broadly than ‘state laws
dealing with the subject matters covered by ERISA[,] reporting, disclosure, fiduciary
responsibility, and the like’” (quoting Shaw, 463 U.S. at 98)); E.I. DuPont de Nemours & Co. v.
Sawyer, 517 F.3d 785, 800 (5th Cir. 2008) (observing that “[f]or purposes of ERISA preemption
the critical distinction is not whether the parties to a claim are traditional ERISA entities in some
capacity, but instead whether the state law affects an aspect of the relationship that is
comprehensively regulated by ERISA”); Kollman, 487 F.3d at 150 (recognizing that the
“calculation and payment of the benefit due to a plan participant” is an essential administrative
function of ERISA plans); but see Sommers Drug Stores Co. Employee Profit Sharing Trust v.
Corrigan Enters., Inc., 793 F.2d 1456, 1467-68 (5th Cir. 1986) (stating that “courts are more
likely to find that a state law relates to a benefit plan if it affects relations among the principal
ERISA entities – the employer, the plan, the plan fiduciaries, and the beneficiaries – than if it
affects relations between one of these entities and an outside party, or between two outside
parties with only an incidental effect on the plan”).
This determination is bolstered by ERISA’s statutory framework and by the DOL’s
proposed regulation. First as to the statute, ERISA allows fiduciaries to contract with a “party in
9 The First Circuit, in Rowe, ended its “connection” analysis after determining that the Maine statute “[i]n no way [] circumscribe[s] the ability of plan administrators to structure or administer their ERISA plans.” 429 F.3d at 303. Although determining whether a state law binds plan administrators may be an important factor, Cal. Division of Labor Stds. Enforcement v. Dillingham Constr. N.A., 519 U.S. 316, 332 (1997) (concluding that ERISA did not preempt a California state law in part because the law “does not bind ERISA plans to anything”), analyzing whether a state law “affect[s] the uniform administrative practice” of ERISA is also important, Travelers, 514 U.S. at 660 (emphasis added). And the First Circuit simply did not address whether the nature of PBM services qualified as ERISA administration.
16 interest” 10 for “services necessary for the establishment or operation of the plan, if no more than
reasonable compensation is paid therefore.” 29 U.S.C. § 1108(b)(2). 11 Because PBMs are
“parties in interest,” to contract with an ERISA fiduciary, PBMs must provide a service
“necessary for the establishment or operation of the plan.” Id. This provision conforms with the
court’s understanding, discussed supra, that PBMs provide ERISA plans with essential
administrative services, which states may not regulate.12 Ingersoll-Rand, 498 U.S. at 142
(opining that ERISA’s preemption clause is designed to foreclose states from subjecting ERISA
administration “to the peculiarities of the laws of each jurisdiction”).
Second, the proposed DOL regulation supports this reading of ERISA by clarifying the
meaning of “reasonable” in § 1108(b)(2). 72 Fed. Reg. 70988 (stating that the regulation “will
ensure the disclosure of information to assist plan fiduciaries in assessing the reasonableness of
the compensation or fees paid for services that are rendered to the plan and the potential for
conflicts of interest that may affect a service provider’s performance”). The proposed regulation
would require a PBM to disclose to the plan “the compensation it will receive, directly or
indirectly, and any conflicts of interest that may arise in connection with its services to the plan.”
Id. at 70,989. The DOL’s initial interpretation of ERISA’s scope, as demonstrated in the
10 ERISA defines “‘party in interest,’ as to an employee benefit plan [as] . . . a person providing services to such a plan.” 29 U.S.C. § 1002(14)(B). 11 ERISA prevents a plan fiduciary from engaging in a transaction, “if he knows or should know that such transaction constitutes a direct or indirect . . . transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan” except as provided in 29 U.S.C. § 1108. 29 U.S.C. § 1106(a)(1). 12 The defendants argue that this would lead to the preemption of regulations pertaining to “every entity with whom an ERISA plan contracts.” Defs.’ Opp’n at 8. The court disagrees because the “ERISA administration,” as described in Fort Halifax, does not reach as far as the defendants’ fear. See Painters of Phila. Dist. Council No. 21 Welfare Fund v. Price Waterhouse, 879 F.2d 1146, 1153 n.7 (3d Cir. 1989) (holding that ERISA “does not generally preempt state professional malpractice actions”).
17 proposed regulation, includes PBM’s contractual relationship with ERISA plans and confirms
the court’s reading of ERISA. Id. (explaining that “a pharmacy benefit manager that contracts
with an employee benefit plan to manage the plan’s prescription drug program would be covered
as a service provider to the plan providing third party administration or recordkeeping, and
possibly consulting, services”); Wyeth v. Levine, 2009 WL 529172, at *11 (Mar. 4, 2009)
(recognizing that “[w]hile agencies have no special authority to pronounce on pre-emption
absent delegation by Congress, they do have a unique understanding of the statutes they
administer”). Because the Access Rx Act “creates the potential for the type of conflicting
regulation of benefit plans that ERISA pre-emption was intended to prevent,” the Act must yield
to ERISA’s preemptive force. Fort Halifax, 482 U.S. at 14. Having concluded that the Act has
an impermissible connection with ERISA and is therefore preempted, the court need not traverse
the parties’ remaining preemption arguments.
IV. CONCLUSION
For the foregoing reasons, the court grants in part the plaintiff’s motion for partial
summary judgment and denying the defendants’ motion for partial summary judgment. An
Order consistent with this Memorandum Opinion is separately and contemporaneously issued
this 19th day of March, 2009.
RICARDO M. URBINA United States District Judge