Mayer Brown's



2001 Term, Number 21 / June 28, 2002

Today the Supreme Court granted certiorari in five cases of potential interest to the business community, two of which have been consolidated. Amicus briefs in support of the petitioners are due on Monday, August 12, 2002, and amicus briefs in support of the respondents are due on Wednesday, September 11, 2002. Any questions about these cases should be directed to Miriam Nemetz (202-263-3253) or Robert Bronston (202-263-3244) in our Washington office.

1. ERISA — Statutory Preemption — Any Willing Provider Statutes. The Employee Retirement Income Security Act of 1974 ("ERISA") preempts state laws that "relate to" an ERISA-governed employee benefit plan. 29 U.S.C. § 1144(a). Any state law that "regulates insurance," however, is expressly exempt from preemption. Id. § 1144(b)(2)(A). The Supreme Court granted certiorari in Kentucky Assoc. of Health Plans, Inc. v. Miller, No. 00-1471, to determine whether ERISA preempts state "any willing provider" ("AWP") statutes, which require health insurers to allow any provider to join the insurer's list of participating providers under the same terms offered by the insurer to other participating providers.

In 1994, the Kentucky legislature enacted the Health Care Reform Act, which included a provision that "[a] health insurer shall not discriminate against any provider who is located within the geographical coverage area of the health benefit plan and who is willing to meet the terms and conditions for participation established by the health insurer." Ky. Rev. Stat. § 304.17A-270. The Act defined "insurers" broadly to include: 

any insurance company; health maintenance organization; self-insurer or multiple employer welfare arrangement not exempt from state regulation by ERISA; provider-sponsored integrated health delivery network; self-insured employer-organized association, or nonprofit hospital, medical-surgical, dental, or health service corporation authorized to transact health insurance business in Kentucky.

Id. § 304.17A-005(23). Kentucky subsequently passed another AWP provision addressed to contracts between HMOs and chiropractors. Id. § 304.17A-171(2). In 1997, five HMOs and a nonprofit association of HMOs sued the Insurance Commissioner of Kentucky in federal district court, seeking to enjoin the enforcement of the Kentucky AWP provisions. The district court held that although the provisions "relate to" ERISA plans, they are not preempted because they "regulate[] insurance."

A divided panel of the Sixth Circuit affirmed. 227 F.3d 352 (2000). The court applied the analytical framework set forth in UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358 (1999), for determining whether a particular provision "regulates insurance." The majority found that "from a common sense view of the matter" the laws regulate insurance because they are specifically directed at the insurance industry and have the effect of giving insured persons greater freedom to choose health care providers. Id. at 364-368. The majority also concluded that the AWP laws satisfied the three McCarran-Ferguson Act factors for determining whether a regulation affects the "business of insurance." See id. at 368-372. Accordingly, the court concluded that ERISA does not preempt the AWP provisions.

The Fourth Circuit has reached the same conclusion as the Sixth Circuit. See Stuart Circle Hosp. Corp. v. Aetna Health Mgmt., 995 F.2d 500 (4th Cir. 1993). The Eighth and Fifth Circuits, in contrast, have ruled that ERISA preempts the similar AWP provisions enacted by Arkansas, Louisiana and Texas. See Prudential Ins. Co. v. National Park Med. Ctr., 154 F.3d 812 (8th Cir. 1998), Texas Pharmacy Ass'n v. Prudential Ins. Co. of Am., 105 F.3d 1035 (5th Cir. 1997); Cigna Healthplan v. Louisiana, 82 F.3d 642 (5th Cir. 1996).

As twenty-five states have enacted AWP laws, this case is important to all health insurers and managed-care entities.

2. Foreign Sovereign Immunities Act — Application To Subsidiaries of Corporations Owned By Foreign States. The Foreign Sovereign Immunities Act of 1976 ("FSIA"), 28 U.S.C. § 1602 et seq., offers procedural protections, including the right of removal to federal court, to "foreign states" sued in the United States. The statute defines "foreign state" to include a corporate entity "a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof." Id. § 1603(a). The Supreme Court granted certiorari in and consolidated Dole Food Co. v. Patrickson, No. 01-593, and Dead Sea Bromine Co. v. Patrickson, No. 01-594, to resolve a split among the Circuits concerning whether a subsidiary of a corporation that is owned by a foreign state is covered by the statute. At the request of the Solicitor General, the Court also will decide whether the FSIA applies to a corporation that was owned by a foreign state during the conduct at issue in a lawsuit but was not state-owned when the suit was filed.

The respondents are farm workers who claimed injury from exposure to the pesticide dipromochlorpropane ("DBCP"). They sued their former employers and certain manufacturers of DBCP in Hawaii state court. Dead Sea Bromine Company is a manufacturer of DBCP whose shares were indirectly owned by the government of Israel at the time of the alleged tortious conduct, but which was privatized before the lawsuit was filed. Despite plaintiffs' assertions that they sustained no injury from Dead Sea's products, the defendants impleaded Dead Sea and, invoking the FSIA, removed the case to federal district court. Defendants then moved to dismiss on the basis of forum non conveniens, while the plaintiffs moved to remand. The district court agreed with the plaintiffs that the FSIA does not apply to companies that are only indirectly owned by foreign states, but asserted federal question jurisdiction based on the federal common law of foreign relations. The district court granted defendants' motion to dismiss.

The Ninth Circuit reversed. 251 F.3d 795 (2001). The court of appeals agreed with the district court that the FSIA was inapplicable to companies only indirectly owned by foreign governments, but concluded that no federal question was implicated in the case and that the lower court should have remanded rather than dismissed the action. The court acknowledged that several Circuits have decided the FSIA issue the other way. See Delgado v. Shell Oil, 231 F.3d 165 (5th Cir. 2000), cert. denied, 121 S. Ct. 1603 (2001); In re Air Crash Disaster Near Roselawn, Ind., 96 F.3d 932, 941 (7th Cir. 1996); Gould, Inc. v. Pechiney Ugine Kuhlmann, 853 F.2d 445, 450 (6th Cir. 1988).

The court also considered (but found it unnecessary to decide) whether Dead Sea's privatization also made the FSIA inapplicable. The court acknowledged that other circuits have applied the FSIA to all entities that were "foreign states" at the time of the wrongdoing, regardless of whether they were still government-owned when suit was filed. See Pere v. Nuovo Pignone, Inc., 150 F.3d 477, 480-481 (5th Cir. 1998); General Elec. Capital Corp. v. Grossman, 991 F.2d 1376, 1381-1382 (8th Cir. 1993); Gould, Inc. v. Pechiney Ugine Kuhlmann, 853 F.2d at 450. The Ninth Circuit questioned that conclusion, however, noting that the statute by its terms "applies only to an entity that ‘is' a foreign state at the time of the suit" (251 F.3d at 805), and that the FSIA's policies would not be served by extending its protections to companies no longer owned by foreign governments.

This case is of interest to many businesses. Corporations that are indirectly owned by foreign states stand to lose the FSIA's broad protections if the Court affirms the Ninth Circuit's holding. Those who do business with such corporations, on the other hand, may benefit if the FSIA's barriers to litigation are eliminated.

3. Dormant Commerce Clause — Medicaid Prior Authorization — Legality of Maine Prescription Drug Program. The Supreme Court granted certiorari in Pharmaceutical Research & Manufacturers of America v. Concannon, No. 01-188, to determine whether the dormant Commerce Clause or the federal Medicaid statute prohibits Maine's attempt to use its authority to administer the state Medicaid program to induce pharmaceutical manufacturers to sell prescription drugs at a discount to Maine residents who are not eligible for Medicaid.

In order to make prescription drugs more affordable to Maine citizens, Maine's legislature passed an Act to Establish Fairer Pricing for Prescription Drugs, which established the Maine Rx Program. The Program allows all Maine residents to purchase prescription drugs from participating Maine pharmacies at discounted prices. Maine reimburses the pharmacies from "rebate payments" collected from participating drug manufacturers. The Act directs the Commissioner of Maine's Department of Health Services to negotiate rebate agreements with manufacturers. To encourage manufacturers to enter into rebate agreements, the Act provides that drugs produced by manufacturers not entering into rebate agreements will be subject to the prior authorization requirement of the state Medicaid program, which prohibits a drug from being dispensed to a Medicaid beneficiary without the approval of the state Medicaid administrator. Because subjecting a drug to the prior authorization requirement is likely to result in significantly reduced sales of that drug, pharmaceutical manufacturers have a strong incentive to enter into rebate agreements.

Pharmaceutical Research & Manufacturers of America filed a complaint for declaratory and injunctive relief, alleging that the Act violated the Commerce Clause and the Supremacy Clause of the U.S. Constitution. The district court issued a preliminary injunction, finding that the Act has an impermissible extraterritorial reach because it regulates transactions between out-of-state pharmaceutical manufacturers and out-of-state distributors. The court also held that the federal Medicaid program preempts the Act.

The First Circuit reversed. 249 F.3d 66 (2001). Addressing the preemption argument first, the court found no conflict between the Maine Act's imposition of prior authorization requirements and the federal Medicaid Act's structure and purpose. Rather, the court noted that the Medicaid Act "expressly permitted" such requirements and found that "[t]he purposes of the Medicaid statute, read broadly, are consonant with the purposes of the Maine Rx Program." Id. at 75-76. Turning to the dormant Commerce Clause challenge, the First Circuit rejected the argument that the Act regulates pharmaceutical manufacturers' profits from out-of-state transactions. Id. at 81-82. The court interpreted the Act to regulate only in-state activities: (1) the purchase of prescription drugs triggering the rebate; (2) the negotiation of the rebate; and (3) Maine's decision to subject a manufacturer's drug to prior authorization. Id. at 82.

This case is of obvious interest to pharmaceutical companies. The case is also significant to all other interstate businesses, because the Court is likely to clarify the scope of the dormant Commerce Clause's bar on extraterritorial regulation.

4. False Claims Act — Qui Tam Actions — Immunity of Local Governmental Entities. The False Claims Act ("FCA") establishes civil penalties for "any person" who knowingly presents or causes to be presented "a false or fraudulent claim for payment or approval" to an officer or employee of the United States Government, or conspires to defraud the Government through a false or fraudulent claim. 31 U.S.C. §§ 3729(a)(1), (3). Any person violating the FCA is subject to fines between $5,000 and $10,000, plus three times the damages sustained by the Government. Id. § 3729(a). Congress has authorized private parties, known as "relators," to bring qui tam actions for these damages in the government's name. Id. § 3730(b)(1). The Court granted certiorari in Cook County v. United States ex rel. Chandler, No. 01-1572, to determine whether local governmental entities are subject to qui tam actions under the False Claims Act.

In 1989, the National Institute of Drug Abuse ("NIDA") awarded $5,000,000 in federal funds to Cook County Hospital ("CCH") to implement a study of at least 300 drug-dependent pregnant women. In January 1997, Dr. Janet Chandler, who had served as project director of the grant, filed a qui tam action against Cook County, alleging that CCH had submitted false progress reports and created "ghost" research subjects in order to keep its funding and obtain additional federal funds. In 1999, the district court denied Cook County's motion to dismiss, holding that the County was subject to suit under the FCA. See 35 F. Supp. 2d 1078 (N.D. Ill. 1999). The Seventh Circuit, in an unpublished order, dismissed the County's interlocutory appeal. Soon afterward, the Supreme Court held in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), that States and their agencies are not "persons" under the FCA, relying in part on the presumption against the imposition of punitive damages on governmental entities. Cook County requested reconsideration of its motion to dismiss in light of Stevens. Relying on Stevens, the district court held that the County could not be prosecuted under the FCA because it is immune from any award or claim for punitive damages. See 118 F. Supp. 2d 902, 903 (N.D. Ill. 2000).

The Seventh Circuit reversed. 277 F.3d 969 (2002). The court concluded that municipal corporations were considered "persons" when Congress passed the FCA in 1863, and that the 1986 amendments to the FCA demonstrated Congress's continued intent to apply the FCA to local governments. 277 F.3d at 974-976. Interpreting City of Newport v. Fact Concerts, 453 U.S. 247 (1981), to require an analysis of whether municipal immunity was consistent with the FCA's purposes, the court reversed the district court's finding that municipalities are immune from suit. The court determined that Congress had deemed treble damages to be necessary to the FCA's effective operation, was aware that the definition of "person" included municipal corporations, and had not created a special exception for local governments. 277 F.3d at 977-979.

In contrast to the Seventh Circuit, the Third Circuit and the Fifth Circuit have concluded that local governments are not subject to liability under the FCA. See United States ex rel. Dunleavy v. County of Delaware, 279 F.3d 219 (3d Cir. 2002); United States ex rel. Garibaldi v. Orleans Parish Sch. Bd., 244 F.3d 486 (5th Cir. 2001).

The case is of obvious interest to local governmental entities, from cities and townships to municipal corporations such as public hospitals. The number of qui tam actions brought against local governmental entities has greatly increased since 1986, and the Court will resolve in this case whether those entities are immune from such suits. The Court may also provide further guidance as to the scope and nature of the presumption against the imposition of punitive damages against local governmental entities.

* * *

The Court is in recess until Monday, October 7, 2002.

* * *

The Bureau of National Affairs in Washington has just published the Eighth Edition of Supreme Court Practice, the treatise on practice before the Court written by late Mayer, Brown & Platt partner Robert L. Stern, Professor Eugene Gressman, and Mayer, Brown, Rowe & Maw partners Stephen M. Shapiro and Kenneth S. Geller. The Eighth Edition contains new suggestions for preparing effective petitions for certiorari, briefs in opposition to certiorari, and amicus briefs. It also offers new insights and suggestions on preparation of merits briefs; techniques for presenting effective oral arguments; a discussion of stay applications; an expanded discussion of the role of law clerks in disposing of the Court's case load; and a summary of the Court's new web site, which provides instant access to the Court's latest opinions and orders and other Court information. The Eighth Edition continues to offer detailed advice, reviewed and approved by the Clerk's office, on all of the jurisdictional and procedural rules that apply to cases litigated in the Supreme Court. The treatise may be ordered by telephone at 1-800-960-1220, and is available at a discount at

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.

© Copyright 2015. Mayer Brown LLP, Mayer Brown International LLP, Mayer Brown JSM and/or Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. “Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.