It's Not a Federal Question: 7th Circuit Sends Case Involving Affordable Care Act Funds Back to State Court

What is or what is not a federal question under Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005), is an issue that continues to perplex lawyers, judges, and law students alike. In Hartland Lakeside Joint No. 3 School District v. WEA Insurance Corp., No. 13-3787 (7th Cir. June 27, 2014), the Seventh Circuit (in an opinion written by Judge Easterbrook) remanded to Wisconsin state court a dispute between certain Wisconsin school districts and WEA Insurance, the former administrator of their health-care programs, because it failed to present a federal question.

The dispute concerned the school districts’ portion of $5 billion distributed by the federal government to employers across the country under section 1102 of the Patient Protection and Affordable Care Act, 42 U.S.C. § 18002, a section designed to reimburse employers for certain costs associated with early retirees. WEA Insurance applied for the funds on the districts’ behalf, but, in an effort to gain a competitive advantage, decided to use the funds to reduce premiums in future years, instead of, as the school districts argued, paying them to the districts that had incurred the costs that the program was intended to defray. Small difference, if a school district intended to continue with WEA Insurance, but for those districts that were changing insurers, it mattered quite a lot, because they would never receive the funds allotted for them.

The more fundamental issue for the Seventh Circuit, however, was the basis for subject-matter jurisdiction. The school districts had thought their claims (essentially for conversion) arose merely under state law and thus filed the case in Wisconsin’s Circuit Court for Waukesha County. WEA Insurance removed the case, and that removal survived the districts’ motion to remand.

The Seventh Circuit held that it should not have. In the process, it took issue with WEA’s interpretation of the rule in Grable as one that creates federal jurisdiction based merely on the predominance of the federal issue. In deciding Gunn v. Minton, 133 S. Ct. 1059 (2013), the Court held that “federal jurisdiction over a state law claim will lie if a federal issue is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Id. at 1065.

This case failed both (1) and (4). As to (1), it did not “necessarily raise[]” a federal issue, unlike Grable, in which the “issue of federal law was inescapable, and the national government itself was vitally concerned with the outcome.” Slip Op. 6. Similarly, for (4), the Seventh Circuit was befuddled as to how this element could be satisfied, particularly in light of the McCarran-Ferguson Act and its grant to states of preeminence in insurance regulation: “[H]ow can one resolve a dispute between an insurer and its clients about the size of premiums without stepping on states’ toes?” Id. The court was further influenced by the fact that Congress did not create a private right of action in § 18002. “Many federal programs create entitlements while leaving ownership to state law.” Slip Op. 7. It vacated the district court’s decision, with instructions to return the case to state court.

Foley & Lardner LLP represents the plaintiffs, including Hartland Lakeside Joint No. 3 School District, Oconomowoc Area School District, and Arrowhead Union High School District, in these proceedings.