Jackson B. SMITH and Vivian E. Smith, Plaintiffs-Appellants,
v.
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN and Delco
Electronics Corporation, Defendants-Appellees.
Jackson B. SMITH and Vivian E. Smith, Plaintiffs-Appellants,
and
Marjan R. Kmiec, one of the Attorneys for Plaintiffs, Appellant,
v.
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN and Delco
Electronics Corporation, Defendants-Appellees.
Nos. 89-3523, 90-1378.
United States Court of Appeals,
Seventh Circuit.
Argued Feb. 14, 1991.
Decided March 27, 1992.
Marjan R. Kmiec (argued), Christopher A. McConville (argued), Milwaukee, Wis., for plaintiffs-appellants.
Kim M. Cafaro (argued), Laurel Barnes, Blue Cross & Blue Shield of Wisconsin, Susan R. Maisa (argued), George D. Cunningham, Foley & Lardner, Milwaukee, Wis., for defendants-appellees.
Christopher A. McConville, Marjan R. Kmiec, Milwaukee, Wis., for appellant.
Before WOOD, Jr.1 and POSNER, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
FAIRCHILD, Senior Circuit Judge.
In March 1989, the Smiths filed a complaint against Delco Electronics and Blue Cross and Blue Shield in a Wisconsin court. The complaint alleged that Mr. Smith was employed by Delco Electronics and that he and his wife were beneficiaries of Delco's group insurance plan, which was insured by Blue Cross. It alleged in an introductory portion that the plan provided remedies both under the Employment Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. and state law. Because of Mr. Smith's arthritis and Mrs. Smith's diabetes, they undertook a weight loss program under medical supervision and submitted the bills to Blue Cross for payment. On August 20, 1987, Blue Cross denied the Smiths' claims. Although the complaint asserted plaintiffs' entitlement to ERISA remedies, it set forth as separate claims for relief state law claims that the denial was a breach of contract, was done in bad faith, that the denial was a breach of fiduciary duty, caused emotional distress, and deprived them of constitutional rights to life, liberty and property.
Delco and Blue Cross removed the case to federal court on the ground that the action arose under the constitution and laws of the United States, including ERISA. See Metropolitan Life Ins. Co. v. Taylor,
ERISA PREEMPTION
ERISA preempts all state laws which "relate to any employee benefit plan," 29 U.S.C. § 1144(a) (preemption clause), unless the state law "regulates insurance, banking, or securities," 29 U.S.C. § 1144(b)(2)(A) (saving clause). However, self-funded plans are exempt from state laws that regulate insurance. 29 U.S.C. § 1144(b)(2)(B) (deemer clause); FMC Corp. v. Holliday, --- U.S. ----,
Although the Smiths' state common law tort and contract claims are the same as those brought by the plaintiffs in Pilot Life, the Smiths argue that Pilot Life does not apply to Wisconsin's bad faith common law. They argue that in Pilot Life, the Court considered Mississippi's law of bad faith, and that Mississippi's law applies generally while Wisconsin's law of bad faith is applied only to insurance contracts. That distinction cannot be maintained. In Pilot Life, the Court said,
Even though the Mississippi Supreme Court has identified its law of bad faith with the insurance industry, the roots of this law are firmly planted in the general principles of Mississippi tort and contract law. Any breach of contract, and not merely breach of an insurance contract, may lead to liability for punitive damages under Mississippi law.
Id. at 50,
By virtue of the relationship between the parties created by the contract, a special duty arises, the breach of which duty is a tort and is unrelated to contract damages. This tort of bad faith or malicious and intentional harassment by one party to a contract directed toward the other party, who seeks to assert his contract claim, has been referred to as a "tortious breach of contract."
Id.
The Smiths argue that even if their claims are preempted by ERISA, ERISA applies only to plan fiduciaries, and there is no evidence that Delco and Blue Cross are both fiduciaries. The Smiths, however, have waived this claim because they presented it for the first time on appeal. Maciosek,
EXHAUSTION
The Smiths next argue that even if state law claims are preempted, their complaint also asserts claims under ERISA. The complaint sets forth as separate claims for relief only state law causes of action, and the claim alleging deprivation of constitutional rights. The complaint, in describing the employee benefit plan, says the plan provides remedies under both state law and under ERISA. The complaint would not ordinarily be treated as sufficient pleading of a claim under ERISA. This court has recently considered whether a complaint filed by the same lawyer representing the Smiths could be construed to include ERISA claims. The court held,
Their decision here to file only state claims in state court, thereby ignoring ERISA, can only be seen as a strategic attempt to avoid removal to federal court. The [plaintiffs] never sought to amend their complaint to add ERISA counts, even after their strategy failed and the case was removed to federal court. They are bound by those decisions.
Maciosek,
Even construing the complaint as stating an ERISA claim, we affirm. The district court wrote that summary judgment would then be appropriate because plaintiffs had not exhausted their internal plan remedies. Smith,
The Smiths argue that requiring exhaustion would be an abuse of discretion because although they did not exhaust their internal plan remedies,2 two exceptions to the exhaustion requirement apply to them. First, the Smiths claim the futility exception applies to their claims, although they do not explain why an appeal would be futile. In order to come under the futility exception, the Smiths must show that it is certain that their claim will be denied on appeal, not merely that they doubt an appeal will result in a different decision. Dale v. Chicago Tribune Co.,
The second exception to the exhaustion requirement is that claimants are not required to appeal when there is a lack of meaningful access to the review procedures. Carter,
SANCTIONS
The Smiths' lawyer, Mr. Kmiec, has appealed both the decision to award attorneys' fees under Rule 11 and the amount of the fee award. The district judge explained the basis for his award of sanctions:3
This action encompasses a classic violation of Rule 11. No reasonable attorney having read Pilot Life and Taylor could manufacture a good faith argument as to why this suit should be brought. Further, any attorney making a "reasonable inquiry" would have come across Pilot Life and Taylor. This case is contrary to settled precedent, and falls directly into the Eastway Construction [Corp. v. City of New York,
Smith,
We must defer to the district judge's decision to award sanctions and reverse only if he abused his discretion. Cooter & Gell v. Hartmarx Corp.,
Constitutional claims clearly cannot be brought against insurance companies merely because they are subject to extensive state regulation. A year before Mr. Kmiec filed the Smiths' complaint, the Eastern District of Wisconsin forcefully rejected a similar claim brought by Mr. Kmiec, Koller v. Aetna Life Ins. Co.,
The above discussion of preemption adequately supports the finding that the Smiths' preemption argument was frivolous. Furthermore, Mr. Kmiec did not mention Pilot Life in his brief in opposition to the defendants' motion to dismiss, let alone make a good faith argument for a modification or reversal of Pilot Life. Mr. Kmiec cannot argue that he was not aware of the weaknesses in his arguments or that a reasonable person would not have been aware of the weaknesses. Before the defendants filed their motion to dismiss, Delco's counsel wrote to Mr. Kmiec and advised him that his claims were frivolous and referred him to the applicable law. Delco's counsel warned that if Mr. Kmiec did not voluntarily dismiss the complaint, or at least amend the complaint to include only ERISA claims, she would request Rule 11 sanctions. Significantly, another panel of this court has recently upheld Rule 11 sanctions against Mr. Kmiec for bringing frivolous state common law claims that were preempted by ERISA. Maciosek,
AMOUNTS AWARDED
Foley & Lardner, attorneys for Delco, submitted an affidavit of costs and attorney's fees totalling $8,979.32. Blue Cross and Blue Shield's in-house counsel submitted an affidavit of costs and attorney's fees totalling $8,265.00.
Mr. Kmiec filed lengthy objections, a substantial part of which reargued the question whether the award of any sanctions was appropriate. He did address many of the items claimed by defendants, in some instances stating an objection, and in some merely reciting what the charge had been.
Judge Warren wrote a decision in which he fairly summarized the objections under 12 headings, and then dealt with them. As to arguments (1)-(3) (inappropriateness of charging for strategy sessions and general conferences between defendants), Judge Warren found them "partially persuasive" and said he applied the conclusions to disputed billings. As to argument (4), (a particular Blue Cross brief with routine citations does not merit the time billed), Judge Warren agreed and reduced the billing by half to $375.00. As to argument (5), (19.9 hours of phone conferences excessive), Judge Warren agreed and reduced by half to $995.00. As to argument (6), (excessiveness of 8 hours for an affidavit), he agreed and reduced by three-quarters, to $100.00. As to argument (7), (8 hours of reviewing claims file with inhouse counsel excessive), he agreed and reduced by three-quarters, to $100.00. As to argument (8), (challenge to charge for 4.8 hours spent by senior counsel at $205.00 per hour), Judge Warren disagreed, saying that as long as the billings are reasonable, plaintiffs cannot complain that Delco chose expensive counsel. As to argument (9), (excessiveness of combined billing rate for strategy conferences), Judge Warren agreed and reduced the item by $700.00. As to argument (10), (similar to (9)), he agreed and reduced the amount by $800.00. As to argument (11), (similar to (9)), Judge Warren agreed and reduced the amount by $400.00. As to argument (12), (similar to (9)), he agreed and reduced the total by $500.00. The court awarded $6,579.32 to Delco and $6,295.00 to Blue Cross.
Mr. Kmiec did include in his statement to the district court the assertion that plaintiffs would have voluntarily dismissed the action against Delco if Delco counsel had notified him that the plan was insured. Delco counsel asserted that she could not so represent because Delco (for some reason), wished to preserve its position that its plan was self-insured. In this court, Mr. Kmiec argues that Delco counsel failed to mitigate attorney's fees by informing him that the plan was insured, although he did not refer to a duty to mitigate in his objections in the district court.
We are not aware of Mr. Kmiec's reason for believing that he needed both defendants in the case, and why it made any difference in the outcome whether the arrangement between Blue Cross and Delco produced an insured plan or a self-insured plan. And Mr. Kmiec should have dismissed as to both defendants after the controlling authority was pointed out to him. We owe deference to the district court's computation of fees, Cooter & Gell,
SANCTIONS ON APPEAL
Delco and Blue Cross request that we also impose sanctions under Rule 38 of the Federal Rules of Appellate Procedure on the ground that Mr. Kmiec pursued a frivolous appeal. Sanctions are appropriate if "the appeal was prosecuted with no reasonable expectation of altering the district court's judgment and for purposes of delay or harassment or sheer obstinacy." Reid v. United States,
In this case, not only were the preemption arguments frivolous, but also the arguments concerning exhaustion of internal plan remedies had no basis in fact. In Maciosek, Mr. Kmiec argued that breach of contract and tortious interference with contract claims were not preempted by ERISA, and this court recognized that it had not addressed whether ERISA preempted those specific issues. In this case, however, Mr. Kmiec argued that a bad faith claim was not preempted, although that was the exact issue before the Supreme Court in Pilot Life. Although the Supreme Court considered Mississippi and not Wisconsin bad faith common law, Mr. Kmiec's attempt to distinguish the laws of the two states was frivolous. His only support for the distinction was a Wisconsin case which held that a duty of good faith does not apply to the termination of a terminable at will employee. Brockmeyer v. Dun & Bradstreet,
Mr. Kmiec's argument that the Smiths should be excused from exhausting their internal remedies was frivolous because no evidence supports this argument. At oral argument, Mr. McConville, Mr. Kmiec's associate, argued that the Smiths could not exhaust their remedies because they had not received a plan booklet which informed them what their remedies were. There is, however, no evidence that the Smiths did not have information about how to appeal the denial of their claims, and this argument was not made until the oral argument to this court. Furthermore, at oral argument, Mr. McConville seemed to claim that he still did not have a description of the review procedures, although a description of the procedure was part of the record, and the appellees included the description in a short appendix to their brief. Mr. McConville also argued that the Smiths had attempted to appeal but had received no response. All of the communications shown in the record, however, clearly occurred before the claim was denied.
The combination of frivolous legal arguments with regard to preemption and frivolous factual arguments with regard to exhaustion appear to warrant the imposition of sanctions on Mr. Kmiec pursuant to Fed.R.App.P. 38. No reasonable attorney could have thought that this court would overturn the decision of the district court, and Mr. Kmiec's arguments are "sheer obstinacy." In conformance with Circuit Rule 38, this opinion will serve as notice to Mr. Kmiec that the court is contemplating sanctions, and we will allow him 14 days to submit a statement as to why sanctions should not be imposed in accordance with this opinion.
Accordingly, the decision of the district court is AFFIRMED.
Notes
Judge Wood, Jr., assumed senior status January 16, 1992, after oral argument of this case
In their complaint, the Smiths allege that they exhausted their internal remedies, but in their brief they seem to concede that they did not, and an affidavit by Delco's supervisor of benefit plan administration states they did not. Although the Smiths could appeal the claims by merely notifying their local union benefit representative that their claims had been wrongly denied, they did not do so. In his affidavit, Mr. Smith said he contacted his union benefit representative four times, but he said these contacts occurred in 1986, and his claims were not denied until August 20, 1987. The appellate procedure clearly requires that the claimant contact the union benefit representative after the denial of the claim
Counsel's signing the complaint was not a violation of Rule 11, subject to sanctions, because the complaint was filed in state court. Schoenberger v. Oselka,