The State of Illinois v. Federal Preemption

By: Andrew Schulz, Esq.

Illinois has presented a unique interaction between federally based health plans and the state common fund doctrine. This includes plans established under the Employee Retirement Income Security Act of 1974 (ERISA) and the Federal Employee Health Benefit Act (FEHBA). Generally, the US Supreme Court has concluded that unambiguous ERISA plan language will be enforced as written and not subject to state equitable doctrines. See U.S. Airways, Inc. v. McCutchen, 569 U.S. 88, 133 S. Ct. 1537 (2013). Additionally, the Court has held that FEHBA plans also preempt state laws that seek to limit or eliminate recovery rights. See Coventry Health Care of Mo. Inc. v. Nevils, 137 S.Ct. 1190 (2017). Illinois courts have created a unique exception that attorneys in other states have sought to replicate.

In Schrempf, Kelly, Napp & Darr, Ltd. v. Carpenters’ Health & Welfare Trust Fund, 35 N.E.3d 988 (Ill. App. Ct. 2015), an ERISA plan beneficiary recovered damages from a third-party tortfeasor, and the self-funded health plan had paid claims related to the incident. The member’s attorney demanded the plan accept a reduction for his fees and costs; however, the plan refused based on the strong plan language entitling it to full reimbursement. The attorney issued payment in full and subsequently filed a state court action asserting the Illinois common fund doctrine.

The ERISA plan attempted to stop the state court action and sought an injunction in federal court, which was initially granted. In Trustees of the Carpenters’ Health & Welfare Trust Fund of St. Louis v. Darr, 694 F.3d 803 (7th Cir. 2012), the 7th Circuit vacated the district court’s injunction and held that the federal injunction was barred by the Anti-Injunction Act. The decision reinforced the principle that federal courts must respect the independence of state court proceedings, even when the underlying dispute involves an ERISA plan.

Ultimately, the state court action was allowed to proceed, and the attorney filed a motion for summary judgment. The trial court granted the motion and entered judgment for the full amount of the attorney’s claimed fees, including prejudgment interest. The ruling was appealed and the Illinois Court of Appeals affirmed the ruling holding that the attorney’s claim was not preempted by ERISA. Central to the court’s analysis was the conclusion that the attorney’s right to fees arose independently of the ERISA plan and did not seek to enforce, modify, or challenge the terms of the plan itself. Instead, the common fund claim was based on a state law equitable doctrine that compensates an attorney who creates a fund from which another party benefits.

These decisions recognized that while ERISA provides extensive federal regulation of employee benefit plans, it does not eliminate every state law claim that tangentially impacts a plan’s reimbursement rights.

More recently, the 7th Circuit addressed similar issues in the context of FEHBA in Ray v. Tabriz, 110 F.4th 949 (7th Cir. 2024). Under FEHBA, the Office of Personnel Management (OPM) may contract with private carriers to provide health benefits to federal employees. In this particular case, the member was enrolled in a federal health plan through Blue Cross Blue Shield Association (BCBS), and she filed suit in Illinois state court for medical malpractice. After settlement of the underlying malpractice claim, a dispute arose regarding the plan’s recovery rights, and the member sought judicial determination, arguing that BCBS’s interest was subject to the state common fund doctrine. BCBS removed the case to federal court, asserting that the court had proper jurisdiction over the federal plan’s recovery rights.

The court held that a reimbursement dispute involving a FEHBA plan did not, by itself, create federal question jurisdiction. The Court determined that a carrier acting under a federal agency (i.e. OPM) could meet the requirement for federal officer removal under 28 U.S.C. § 1442; however, it confirmed that FEHBA reimbursement rights are generally subject to Illinois state law and the common fund doctrine.

Illinois courts have demonstrated that federal preemption does not necessarily guarantee these plans will overcome state equitable doctrines such as the common fund. These decisions have recognized a limited exception to the typically strong recovery rights granted to federally based health plans. As a practical matter, we have seen attorneys from other states and federal circuits attempt to extend the reasoning in Schrempf to argue that ERISA preemption does not apply to the common fund doctrine in their state. While those efforts have been largely unsuccessful to date, it seems these challenges are becoming more common around the country. It stands to reason these common fund challenges will also become more prevalent with FEHBA plans in light of the Ray decision.

Attorneys often argue for these common fund reductions in the context of putting more money into the injured individual’s pocket from the settlement. In the context of subrogation, the health plan’s ability to recover has an impact on all members, not just an individual. While these may appear to be conflicting approaches, the health plan’s recovery benefits every plan member, not just the individual, as that money is reinvested back into the plan. This allows plans to provide exceptional benefits to their members while keeping costs down.