ERISA-N.J. District Court Rules That State Law Claims For Fraud and Misrepresentation Are Not Preempted By ERISA

In Aetna Health Inc. v. Health Goals Chiropractic Center, Inc., No. 10-5216-NLH-JS (D. NJ 2011), Defendant Kathleen Baumgardner, D.C. (hereinafter “Dr. Baumgardner”) is a licensed chiropractor and officer of Defendant Health Goals Chiropractic Center, Inc. (collectively the “Defendants”). Plaintiffs Aetna Heath Inc. and Aetna Life Insurance Co. (collectively the “Plaintiffs”) are health care benefits and health insurance providers. At all relevant times, Dr. Baumgardner was an in-network healthcare provider with the Plaintiffs. As an in-network provider, she was obligated to accept discounted rates when she provided professional chiropractic services to individuals covered by the Plaintiffs’ insurance plans. Under the terms of the in-network contract, the Plaintiffs were required to pay Dr. Baumgardner for all services deemed medically necessary or otherwise covered by the plans.

The Plaintiffs alleged that the Defendants entered into a scheme to defraud the Plaintiffs, and submitted insurance claims and statements to Plaintiffs for services which, among other things: (i) contained knowingly false and misleading information, (ii) misrepresented the services performed and (iii) failed to disclose information which affected their right to payment. According to the Plaintiffs, the claims submitted included excessive, phantom and duplicate charges. As a result of this alleged fraud, the Plaintiffs allege that they paid Defendants $1,078,079.42 to which they were not entitled. The Plaintiffs filed suit in the Superior Court of New Jersey. The Plaintiffs’ complaint relies exclusively on state law and alleges that the Defendants committed common law fraud, statutory fraud and negligent misrepresentation of their services when they submitted their claims to the Plaintiffs. Later, the Defendants removed the case to the New Jersey District Court, alleging that the Plaintiffs’ state claims were preempted by ERISA. Are they right? If not, removal is not proper.

In analyzing the case, the Court said that section 502(a) of ERISA, which embodies ERISA’s civil enforcement provisions, is designed to create a comprehensive statute for the regulation of employee benefit plans. Consequently, a state law that either supplements, replicates or duplicates the ERISA enforcement remedy is preempted. The Third Circuit (in which the District Court lies) uses a two part test to determine whether section 502 of ERISA preempts a state law claim. Under this test, the Court continued, a defendant seeking removal must prove that: (1) the plaintiff could have originally brought the claim under section 502 and (2) no other legal duty supports the claim. The Plaintiffs did not meet prong (1), since they were not bringing a claim on behalf of any employee benefit plans or the participants therein. Further, the Plaintiffs did not meet prong (2), since an independent legal duty other than ERISA – namely, New Jersey’s insurance fraud statute and its common law counterparts- governed the relationship between the Plaintiffs and the Defendants. As such, the Plaintiffs’ state law claims are not preempted by ERISA, and the removal to District Court was not proper.

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