ERISA Preemption Curtailed by Supreme Court Ruling

On December 10, the U.S. Supreme Court issued a unanimous 8-0 ruling in a closely watched Employee Retirement Income Security Act (ERISA) case known as Rutledge v. Pharmaceutical Care Management Association. (Justice Amy Coney Barrett did not participate in the case.)

In Rutledge, the state of Arkansas challenged a ruling by the 8th U.S. Circuit Court of Appeals, which held that ERISA preempts a state law regulating prescription drug reimbursement. In simple terms, the Supreme Court reversed the 8th Circuit’s judgment, finding that the Arkansas law amounts to cost regulation that does not bear an impermissible connection with ERISA.

Discussing this outcome with PLANSPONSOR, Benjamin Conley, an attorney and partner at employment law firm Seyfarth Shaw, says there are some serious implications for the health care plan space, which is his main focus. He says national employers will be disappointed with the outcome of the ruling, as they might come to face a patchwork of prescription drug price control laws and regulations across the 50 states. However, he says he understands why Arkansas would enact such a law and why an otherwise divided Supreme Court has ruled this way: The nation is in clear need of prescription drug price reform.

Conley says there aren’t necessarily any direct and obvious connections to the retirement plan marketplace in the ruling—given that it focuses on the business practices of pharmacy benefit managers, or “PBMs.” Still, it is worthwhile for anyone working in the benefits industry to understand what the Supreme Court has done here, he says.

“The Supreme Court’s unanimous ruling creates a potential road map for states to influence ERISA plans without running afoul of ERISA’s preemption provisions,” Conley says. “The Supreme Court found that, while the Arkansas law at issue could certainly influence plan costs and create plan operational inefficiencies, it did not mandate any particular structure, nor did it impact central plan administrative operations. As such, the Supreme Court opined that extending preemption would create a potentially limitless barrier to state regulations.” 

According to Michael Klenov, an attorney at Korein Tillery, the Arkansas law addressed in Rutledge is one of many similar pieces of legislation that have been introduced or adopted in nearly 30 states. This one stands out, he says, because it is relatively limited in scope compared with some of the more ambitious cost-control approaches being taken in other states. In that sense, he says, the Supreme Court may have done more with this ruling than it might appear at first glance. What has effectively happened is that the court has handed down a ruling based on a more modest law, which could then apply in other situations where the law or regulation in question has significantly greater implications for plan operations.

In Klenov’s view, one potential long-term side effect of the Supreme Court becoming more conservative will be a broad trend away from the longstanding views of ERISA federal preemption. The expectation is based on the notion that more conservative jurists tend to view federal preemption of state laws more skeptically than their liberal peers. In technical terms, and as articulated in a concurring opinion filed in Rutledge by Justice Clarence Thomas, this viewpoint assumes that ERISA preemption issues demand a more case-specific “conflict” preemption analysis, rather than an overarching “field” preemption analysis.

“Though cases can evolve in ways you don’t expect, I don’t see this SCOTUS decision being any kind of sea change as it applies to retirement plans and pension plans,” Klenov notes. “Many of the ERISA provisions governing the retirement space are concerned with what kind of claims you can bring—with whether you can bring certain claims under state law, and whether you can plead theories that are not expressly recognized in ERISA. This ruling doesn’t really touch on that or address that area.”

Conley mostly agrees with that assessment.

“The conclusion reached in the case is that, if this state’s law is just going to cost a plan more, or if it seeks to make your plan more cost efficient, that is not sufficient to trigger ERISA preemption,” Conley says. “Instead, to trigger preemption problems, a law or regulation seemingly has to contain a design-based mandate for which there is no work-around, and which is central or core to plan administration. A law that may cause some inconvenience or additional costs, alone, does not trigger ERISA preemption. Given this focus, this decision won’t necessarily have an immediate impact on retirement plans, but you do wonder what could happen with some of the state-based retirement mandates being considered and adopted.”

Klenov says there could be a potential impact as pension plans and insurers conduct annuity transactions, for example as part of a risk transfer operation.

“We know that the states heavily regulate insurers, and so you could imagine this type of issue coming up as insurers are providing annuities to pension plans,” he says. “Again, I don’t think there will be much of a direct impact, to be clear. You won’t see this case cited too often in pension plan benefit litigation. I’ll put it that way.”