Ninth Circuit Rules in Favor of CalSavers in ERISA Preemption Case

The Ninth Circuit Court of Appeals ruled in favor of California's state-run retirement program (“CalSavers”) Thursday in a lawsuit challenging the program’s right to exist, holding that the state law that created CalSavers isn't preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”).

The Ninth Circuit upheld California legislation that was enacted in 2017. The court ruled that the legislation isn't preempted by ERISA, and the program it created, CalSavers, can stand. The Ninth Circuit’s ruling upheld a lower district court victory for CalSavers, which has created individual retirement accounts for nearly 100,000 workers without access to 401(k) plans or pensions since 2019, while dealing a loss to the nonprofit that characterized it as a waste of taxpayer money.

That nonprofit, the Howard Jarvis Taxpayers Association (the “HJTA”), claimed that California created an employee retirement plan when it made CalSavers, and the state was attempting to govern that plan itself even though Congress deemed ERISA the only law with control over such plans. The HJTA, a lobbying group, set out on a campaign to eliminate CalSavers, calling it a waste of government money. The group used ERISA to mount its challenge in 2018, claiming the federal benefits law preempts statutes like the 2017 California legislation that created CalSavers. The Trump administration backed the lobbying group’s position, but once the Biden administration took over, the federal government dropped out of the suit. 

HJTA's first defeat arrived courtesy of a federal district court in California, which held last year that CalSavers "is neither an employee benefit plan nor does it relate to an ERISA plan." Thus, the law creating it wasn't preempted by ERISA. On Thursday, the Ninth Circuit dealt HJTA another defeat. The decision marked the first time a federal circuit court of appeals has weighed in on whether an auto-IRA program can survive ERISA preemption challenges, a fact noted in the Ninth Circuit's opinion. According to the Court, "[n]o court has yet addressed whether a state-administered IRA program like CalSavers falls within ERISA's ambit.” “The issue initially seems close, because ERISA's preemption provision is expansive, and CalSavers concerns benefits in a general sense,” the Court wrote. "But closer inspection of the governing precedents and CalSavers' design shows that HJTA's broad ERISA preemption challenge to CalSavers cannot be sustained."

The Ninth Circuit found that CalSavers isn't actually an ERISA-governed employee retirement plan, stating that "CalSavers is not an ERISA plan, because it is established and maintained by the state, not employers; it does not require employers to operate their own ERISA plans; and it does not have an impermissible reference to or connection with ERISA." The Court continued on by stating "[n]or does CalSavers interfere with ERISA's core purposes. Accordingly, ERISA does not preempt the California law."

ERISA's "expansive" preemption provision was recently narrowed by the Supreme Court's December 2020 decision in Rutledge v. Pharmaceutical Care Management Association, a case in which the justices ruled 8-0 that ERISA only preempts regulations that affect benefits plans' design and administration. A brief discussion of the Rutledge case is useful in understanding the Ninth Circuit’s CalSavers decision.

The facts of the Rutledge case are as follows. In 2015, the Arkansas legislature passed a law, the Arkansas Act 900, regulating the conduct of pharmacy benefits managers ("PBMs")—the entities that serve as intermediaries between health plans and pharmacies—in an attempt to address the trend in that state of significantly fewer independent and rural-serving pharmacies. PBMs perform numerous functions in this role, including creating a maximum allowable cost ("MAC") list which sets reimbursement rates to pharmacies dispensing generic drugs. As a result of contracts between PBMs and some pharmacies, some other pharmacies might actually lose money on a particular prescription transaction. The Arkansas law sought to address this and other situations where the conduct of PBMs could cause harm to pharmacies.

The Pharmaceutical Care Management Association (“PCMA”), a pharmacy trade association, filed a lawsuit on behalf of its members claiming, among other arguments, that Arkansas Act 900 was preempted by both ERISA and Medicare Part D. A federal district court found that ERISA did preempt some portions of the Act but that Medicare Part D did not preempt the Act. On appeal, the U.S. Court of Appeals for the Eighth Circuit affirmed in part and reversed in part, finding that Arkansas Act 900 was preempted by both ERISA and Medicare Part D. The appellate court noted that ERISA broadly preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plans." Because Act 900 “both relates to and has a connection with employee benefit plans,” ERISA preempts it.

The case went to the Supreme Court where the issue posed was whether ERISA preempts the Arkansas law regulating pharmacy benefit managers’ drug-reimbursement rates? The Supreme Court unanimously held that Arkansas’s Act 900 was not pre-empted by ERISA. Justice Sonia Sotomayor authored the unanimous (8-0) opinion of the Court. The Court noted that ERISA pre-empts state laws that “relate to” a covered employee benefit plan. The Court went on to note that a state law “relates to” a covered plan if it has “a connection with” or “reference to” such a plan. The Supreme Court found that Arkansas Act 900 had neither. The Court found that Arkansas Act 900 lacked a connection with an ERISA plan because it was merely a form of cost regulation and did not dictate plan choices. Additionally, the Court found that Arkansas Act 900 did not “act immediately and exclusively on ERISA plans”; although it did affect some ERISA plans, it regulated those plans only incidentally, as part of its regulation of PBMs generally.

The Rutledge ruling was a significant win for states' ability to govern in the health care and retirement arenas, as it narrowed how far ERISA's “relates to” preemption provision extends. The Calsavers case similarly more narrowly construed ERISA’s “relates to” preemption provision.