Mayer Brown's



2000 Term, Number 19 / June 29, 2001

Today the Supreme Court granted certiorari in two cases of potential interest to the business community. Amicus briefs in support of the petitioners are due on Monday, August 13, 2001, and amicus briefs in support of the respondents are due on Wednesday, September 12, 2001. Any questions about these cases should be directed to Eileen Penner (202-263-3240) or Miriam Nemetz (202-263-3253) in our Washington office.

1. ERISA — Preemption — State Law Requiring Independent Review of HMO Decisions. The Supreme Court granted certiorari in Rush Prudential HMO, Inc. v. Moran, No. 00-1021, to determine whether the Employee Retirement Income Security Act ("ERISA") preempts an Illinois statute that provides for binding independent review of decisions by health maintenance organizations (HMOs) regarding the necessity of proposed medical procedures.

ERISA supersedes "any and all State laws * * * [that] relate to any [covered] employee benefit plan." 29 U.S.C. § 1144(a). State laws regulating insurance are exempt from this general preemption provision (id. § 1144(b)(2)(A)), but may still be preempted if they conflict with a substantive ERISA provision (see Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)).

When Debra Moran's insurance company, Rush Prudential HMO, Inc. ("Rush"), denied coverage for a microneurological surgery she desired, Moran demanded that Rush comply with Section 4-10 of the Illinois HMO Act, which requires HMOs to provide a mechanism for binding review by an independent physician when the patient's primary care physician and the HMO disagree about the medical necessity of proposed treatment. See 215 Ill. Comp. Stat. 125/4-10. When Rush failed to act, Moran filed suit in state court to require Rush to comply with the statute. While the suit was pending, Moran underwent the surgery. After receiving a determination from the reviewing physician that the procedure was medically necessary, Moran sought an order from the state court requiring Rush to reimburse her for the surgery. Rush removed the action to the United States District Court for the Northern District of Illinois, which held that Moran's suit to compel reimbursement of the cost of her surgery was properly characterized as a claim for benefits under Section 502(a)(1)(B) of ERISA and, as such, was completely preempted by federal law. After concluding that Rush did not abuse its discretion in denying Moran's claim for benefits under the plan, the district court granted summary judgment to Rush.

The Seventh Circuit reversed. 230 F.3d 959 (2000). The court of appeals concluded that the State's independent review provision was not completely preempted by ERISA. First, it determined that the provision falls within ERISA's savings clause in that it "‘regulates insurance' under a common sense understanding" (id. at 969) and meets two of the three factors generally employed to determine whether a regulation affects the "business of insurance" — i.e., it is an integral part of the insurer-insured policy relationship and is limited to entities within the insurance industry. See id. at 970. Second, the court concluded that the independent review provision does not conflict substantively with Section 502(a) of ERISA because it does not create an alternative remedial scheme but merely establishes terms that are incorporated into each participant's insurance contract and are enforceable under ERISA. See id. at 971. On the merits, the court concluded that Moran was entitled to invoke independent review and that the reviewing physician's finding of medical necessity was binding on Rush, entitling Moran to summary judgment on her reimbursement claim. The court of appeals recognized that its holding conflicts with Corporate Health Insurance, Inc. v. Texas Department of Insurance, 215 F.3d 526 (5th Cir. 2000), in which the Fifth Circuit found that ERISA preempted a similar Texas independent review provision.

Judge Posner, joined by Judges Coffey, Easterbrook, and Wood, dissented from the court's later denial of rehearing en banc. Judge Posner believed that the Illinois provision "interferes with the federally specified system for enforcing" entitlements under ERISA plans, "adds heavy new procedural burdens to ERISA plans," and "undermines the statutory purpose of federal uniformity in the administration of ERISA plans." 230 F.3d at 973-974.

Because 36 other States and the District of Columbia have similar independent review statutes, this case is important to all health maintenance organizations. It may become less significant, however, if the United States Congress, which currently is considering adoption of a "Patients' Bill of Rights," enacts a guarantee of independent review similar to that created by the Illinois statute at issue here.

2. Takings Clause – Temporary Moratoria On Land Development. The Court granted certiorari in Tahoe Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, No. 00-1167, to consider whether a "temporary moratorium" on land development requires compensation under the Takings Clause.

The Tahoe Regional Planning Authority (TRPA) is authorized by a 1969 interstate compact to regulate development in the Lake Tahoe region. In 1981, TRPA prohibited residential development in certain parts of the region that were zoned for such use while it studied and amended its Regional Plan for the area. TRPA extended this moratorium several times over the next few years. When the regulations remained in effect in 1984, even after TRPA adopted its 1984 Regional Plan, the owners of roughly 450 single-family residential lots around Lake Tahoe brought suit in federal court claiming that the series of building moratoria effected a taking of their property.

After fourteen and a half years of litigation, the United States District Court for the District of Nevada held a bench trial. The court concluded that the moratoria had precluded all economically beneficial use of the lands at issue between 1981 and 1984, requiring compensation for a taking under Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). See 34 F. Supp. 2d 1226 (D. Nev. 1999). 

The Ninth Circuit reversed. 216 F.3d 764 (2000). The court of appeals reasoned that the regulations did not effect a compensable taking because the moratoria were intended to be temporary, did not render the plaintiffs' property valueless, and deprived plaintiffs of "only a small portion" of the future use of their property. Id. at 780-782. In the court's view, there was no basis to distinguish this temporary suspension of development from "a land-use restriction that permanently denies all use on a discrete portion of property, or that permanently restricts a type of use across all of the parcel," each of which may diminish the property's value but does not constitute a taking. Id. at 776. The court acknowledged that the government must compensate landowners for takings "even if the taking is ‘temporary.'" Id. at 778 (citing First English Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304, 318 (1987)). It concluded, however, that First English extends only to "permanent regulation" effecting a taking that is rendered "temporary" when the ordinance is struck down, not to "temporary moratoria, which from the outset are designed to last for only a limited period of time." Ibid.

Rehearing en banc was denied over the dissent of five judges. See 228 F.3d 998. In a written dissent, Judge Kozinski contended that the panel followed the reasoning of Justice Stevens' dissent in First English, placing its holding "in square conflict with the majority's opinion in [that case]." Id. at 1002.

Tahoe Sierra is of great significance to all property owners. Under the Ninth Circuit's ruling, land use officials may prevent the use of property indefinitely by enacting short-term moratoria on development and extending them over lengthy periods during which they study the region and revise their land use plans.

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The Court will be in recess until Monday, October 1, 2001.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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