FMC CORPORATION, PETITIONER V. CYNTHIA ANN HOLLIDAY

   No. 89-1048

   In The Supreme Court Of The United States

   October Term, 1989

   On Writ Of Certiorari To The United States Court Of Appeals For The
Third Circuit

   Brief For The United States As Amicus Curiae Supporting Petitioner

            TABLE OF CONTENTS
   Question Presented
   Interest of the United States
   Statutory provisions involved
   Statement
   Summary of argument
   Argument:
      ERISA's "deemer clause" prohibits state regulation
      of uninsured employee benefit plans
      A. As this Court concluded in Metropolitan Life,
         Congress authorized the States to regulate indirectly
         those employee benefit plans that obtain
         insurance but did not authorize the States to
         regulate uninsured plans
      B. State insurance regulation of uninsured employee
         benefit plans is inconsistent with the
         purposes of ERISA's preemption provision
   Conclusion

                     STATUTORY PROVISIONS INVOLVED

   Section 514(a) of ERISA, 29 U.S.C. 1144(a) -- the basic preemption
clause -- provides:

         Except as provided in subsection (b) of this section, the
      provisions of this subchapter and subchapter III of this chapter
      shall supersede any and all State laws insofar as they may now
      or hereafter relate to any employee benefit plan described in
      section 1003(a) of this title and not exempt under section
      1003(b) of this title.  This section shall take effect on
      January 1, 1975.

   Section 514(b)(2)(A) of ERISA, 29 U.S.C. 1144 (b)(2)(A) -- the
"savings clause" -- provides:

         (2)(A) Except as provided in subparagraph (B), nothing in
      this subchapter shall be construed to exempt or relieve any
      person from any law of any State which regulates insurance,
      banking, or securities.

   Section 514(b)(2)(B) of ERISA, 29 U.S.C. 1144 (b)(2)(B) -- the
"deemer clause" -- provides:

         (B) Neither an employee benefit plan described in section
      1003(a) of this title, which is not exempt under section 1003(b)
      of this title (other than a plan established primarily for the
      purpose of providing death benefits), nor any trust established
      under such a plan, shall be deemed to be an insurance company or
      other insurer, bank, trust company, or investment company or to
      be engaged in the business of insurance or banking for purposes
      of any law of any State purporting to regulate insurance
      companies, insurance contracts, banks, trust companies, or
      investment companies.

                          QUESTION PRESENTED

   Whether Section 514 of the Employee Retirement Income Security Act
of 1974, 29 U.S.C. 1144, preempts the application of state insurance
laws to uninsured employee benefit plans.

                     INTEREST OF THE UNITED STATES

   This case involves an application of the preemption provision of
the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.
1144.  The court of appeals construed that provision to mean that a
state law regulating insurance may be applied to uninsured employee
benefit plans, so long as the law does not regulate what the court
termed "core ERISA concerns." Pet. App. A19.  The Secretary of Labor
enforces the reporting, disclosure, and fiduciary obligations that
ERISA imposes on private employee benefit plans.  She therefore has a
strong interest in the proper interpretation of ERISA's preemption
provision, which Congress enacted to promote the development of
private pension and welfare plans and to assure uniform regulation of
such plans.  Moreover, the decision of the court below is inconsistent
with Department of Labor opinion letters concluding that state
insurance laws are preempted insofar as they apply to uninsured plans.
 See pages 18-19 and note 13, infra.

                               STATEMENT

   1. Petitioner FMC Corporation operates the FMC Salaried Health Care
Plan, an employee welfare plan within the meaning of Section 3(1) of
ERISA, 29 U.S.C. 1002(1).  The Plan provides health benefits to FMC
employees and their dependents.  FMC does not purchase a group
insurance policy from an insurance company in order to provide
benefits under the Plan, but instead pays benefits from its general
assets.  Pet. App. A2-A3, C1, C10.

   Respondent Cynthia Ann Holliday is the daughter of Gerald Holliday,
an FMC employee and subscriber to the Plan.  She was seriously injured
as a passenger in an automobile accident and the Plan paid substantial
medical expenses on her behalf.  /1/ In accordance with the Plan's
subrogation clause, Mr. Holliday signed a "third-party reimbursement
form" agreeing that if he brought a liability claim against any third
party, he would include benefits payable by the Plan in his claim and
would reimburse the Plan for the benefits provided.  Pet. App. A3-A4,
C1-C2.  /2/

   Mr. Holliday brought a negligence action on behalf of his daughter
in Pennsylvania state court against the driver of the automobile in
which she was injured.  The parties entered into a settlement of that
action under which respondent is entitled to $49,875.50 plus accrued
interest.  /3/ While the action was pending, FMC notified the
Hollidays that it would seek reimbursement for the amounts it had paid
for respondent's medical expenses.  The Hollidays informed FMC that
they would not reimburse the Plan, asserting that Section 1720 of the
Pennsylvania Motor Vehicle Financial Responsibility Law, 75 Pa. Cons.
Stat. Ann. Section 1720 (Purdon 1989), precludes subrogation by FMC.
Pet. App. A3-A5, C2-C3.  /4/

   2. Petitioner then filed this declaratory judgment action in
federal district court.  On cross motions for summary judgment, the
district court held, first, that "if it is not preempted, Section 1720
of the Pennsylvania law would prohibit FMC's exercise of subrogation
rights in any amount Holliday recovered" on his claim against the
driver.  Pet. App. C7.

   The court then ruled that Section 514 of ERISA, 29 U.S.C. 1144,
does not preempt application of the state statute.  The court noted
that Section 514(a) provides that ERISA "shall supersede any and all
State laws insofar as they may now or hereafter relate to any employee
benefit plan," and that the "Pennsylvania law 'relates to' the Plan."
Pet. App. C7, C8.  However, the court added, the saving clause,
Section 514(b)(2)(A), provides that ERISA does not "exempt or relieve
any person from any law of any State which regulates insurance," and
"the parties have agreed that this law regulates insurance." Pet. App.
C7, C10.

   The district court then turned to the "deemer clause," Section
514(b)(2)(B), which provides that "(n)either an employee benefit plan
* * * nor any trust established under such a plan, shall be deemed to
be an insurance company * * * or to be engaged in the business of
insurance * * * for purposes of any law of any State purporting to
regulate insurance companies (or) insurance contracts." The court
recognized that "FMC provides the funds needed to pay any medical
benefits due under the Plan out of its own assets," and that, in light
of the deemer clause, "a number of courts have held that certain state
laws regulating insurance are nonetheless preempted as they apply to
self-insured plans." Pet. App. C10, C11.  Indeed, as the district
court acknowledged (id. at C11), this Court in Metropolitan Life
Insurance Co. v. Massachusetts, 471 U.S. 724, 747 (1985), in upholding
application of a state law requiring insurance companies to provide
certain benefits in any policy they issue, stated that it was "aware
that our decision results in a distinction between insured and
uninsured plans, leaving the former open to indirect regulation while
the latter are not." However, relying on Northern Group Services, Inc.
v. Auto Owners Insurance Co., 833 F.2d 85, 93 (6th Cir.), cert.
denied, 486 U.S. 1017 (1988), and "certain aspects of the legislative
history," the district court held that "the effect of the deemer
clause should be assessed by a balancing of the interests in federal
uniformity against those of state primacy in the regulation of
insurance." Pet. App. C13.  The court then concluded that the state
interest outweighed the federal interest because preemption "would
encroach upon state law in an area in which states enjoy 'general
authority and autonomy' -- insurance regulation." Id. at C14 (citing
Northern Group Services, 833 F.2d at 93-94).

   3. The court of appeals affirmed.  Pet. App. A1-A27.  On the
preemption issue, /5/ the court of appeals recognized that the case
"turns on whether FMC's Salaried Health Plan falls within the deemer
clause exception insulating employee plans from state regulation." Id.
at A18.  The court held that Section 1720 is not preempted because, it
concluded, "the deemer clause is meant mainly to reach back-door
attempts by states to regulate core ERISA concerns in the guise of
insurance regulation." Pet. App. A19.

   In support of that construction of the statute, the court of
appeals noted that the deemer clause refers to "any state law
'purporting' to regulate insurance." Pet. App. A19.  The court added
that two comments on the floor of Congress "displayed concern for
pretextual state infringements." Ibid.  Furthermore, the court found
significance in the fact that the deemer clause first appeared in a
version of the bill that would have preempted only those laws
"relat(ing) to the reporting and disclosure responsibilities, and
fiduciary responsibilities, of persons acting on behalf of any
(covered) employee benefit plan";  the court said that "the retention
of the deemer clause in the face of the expanded preemption clause
indicates that the deemer clause in effect was meant to do the more
narrow, specified work which the original version of the preemption
clause was meant to do." Id. at A20, A23.  Finally, the court
dismissed this Court's statement in Metropolitan Life that uninsured
plans are not subject to state regulation on the ground that "the
Court cited neither statutory text nor legislative history," but
instead "rel(ied) on vague language in Congress' post hoc study" of
the effect of the preemption provision.  Id. at A25.

   The court of appeals similarly dismissed, as erroneously relying on
"Supreme Court dicta," the numerous decisions of other courts of
appeals holding that "the deemer clause incorporates a bright line
distinction between employee benefit plans that purchase insurance and
those, like FMC's, which are self-insured." Pet. App. A24.  In any
event, the court said, citing Northern Group Services (833 F.2d at
94-95), "the distinction between insured and self-insured plans does
not disappear" under its construction of the preemption clause.  Pet.
App. A26.  Rather, "insured plans would per se survive the deemer
clause, while self-insured plans would merely be considered on a
case-by-case basis as to whether the state regulation involved affects
a central concern of ERISA." Id. at A26-A27.

                          SUMMARY OF ARGUMENT

   The courts below erred by failing to conclude that the deemer
clause prohibits state regulation of uninsured employee benefit plans.
 Indeed, that is the only reasonable interpretation of Section 514.
The basic preemption provision, Section 514(a), broadly preempts state
law, while the saving clause, Section 514(b)(2)(A), excepts laws
regulating insurance from preemption.  The deemer clause makes clear
that uninsured employee benefit plans are not to be considered
insurance companies, and hence are not within the saving clause's
exception to preemption.

   1. This Court adopted that straightforward reading of Section 514
in Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724
(1985).  The Court held that insured employee benefit plans may be
indirectly regulated by the States in that they may regulate the terms
of insurance offered to those plans by insurance companies.  The Court
explicitly recognized that its "decision results in a distinction
between insured and uninsured plans, leaving the former open to
indirect regulation while the latter are not." Id. at 747.  The
Secretary of Labor, whose interpretation is entitled to deference, has
also long construed Section 514 to protect uninsured employee benefit
plans from state regulation.

   2. The court of appeals' interpretation of Section 514, in
contrast, has no basis in the language of the statute itself.  The
court suggested (Pet. App. A19) that because the deemer clause refers
to laws "purporting to regulate" insurance, Congress was concerned
only with pretextual attempts to regulate employee benefit plans.
This is, at best, a strained and unnatural reading of the statute.  By
that language, Congress merely intended to emphasize that a law
applying to insurance companies would not extend to uninsured employee
benefit plans.  Moreover, the test devised by the court of appeals
does not distinguish pretextual regulations from other state laws, but
focuses on whether "core ERISA concerns" (Pet. App. A19) are at issue.

   Nor does the legislative history support the court of appeals'
construction.  Indeed, the court's use of that history (Pet. App. A23)
flies directly in the face of the clearly expressed purpose of
Congress.  The fact that the deemer clause originated in a bill
providing for more limited preemption does not remotely suggest that
the deemer clause continued to have limited preemptive effect when the
scope of preemption mandated by the bill was expanded.  To the
contrary, the authors of the expansive preemption provision stressed
its breadth, and the language of the deemer clause reflects that
breadth by providing that "any law of any State purporting to regulate
insurance companies (or) insurance contracts" is preempted insofar as
it applies to uninsured plans.  Moreover, the court of appeals'
construction of the statute gives Section 514(a) a very limited effect
-- under that construction, state insurance laws may regulate insured
employee benefit plans to an unlimited extent and may also regulate
uninsured plans except for regulation that infringes on ERISA's "core"
areas.

   3. The court of appeals' approach is also defective in that it
threatens to encourage litigation over whether a state insurance law
affects a "core" area.  One of the virtues of the approach Congress
adopted by enacting a broad preemption provision, along with the
bright-line distinction between insured and uninsured plans recognized
by this Court in Metropolitan Life, is that such litigation may be
avoided.  In addition, Congress enacted ERISA's broad preemption
provision in order to allow plan designers to tailor plans to the
needs of the beneficiaries and the sponsors, and to ensure that
multistate plans would not be subject to inconsistent regulation.  The
court of appeals' holding directly conflicts with those goals, since
FMC's reasonable decision to pay health benefits to victims of
automobile accidents, while insisting on reimbursement if a tort
recovery is obtained, is overruled in those States that prohibit
subrogation clauses.  The statute does permit inconsistent regulation
with respect to plans that choose to obtain insurance, but that result
logically follows from Congress's decision broadly to preempt state
law while preserving the States' traditional role as the primary
regulators of insurance companies.

                               ARGUMENT

   ERISA'S "DEEMER CLAUSE" PROHIBITS STATE REGULATION OF UNINSURED
EMPLOYEE BENEFIT PLANS

   The courts below correctly held (Pet. App. A13-A15, C8-C9) that
Section 1720 of the Pennsylvania Motor Vehicle Financial
Responsibility Law, as applied to bar FMC's assertion of subrogation
rights, "relate(s) to" an employee benefit plan and thus falls within
the "expansive sweep" (Pilot Life Insurance Co. v. Dedeaux, 481 U.S.
41, 47 (1987)) of ERISA's basic preemption provision.  As the court of
appeals noted (Pet. App. A13-A15), the Pennsylvania law clearly has "a
connection with or reference to" FMC's plan (Shaw v. Delta Air Lines,
Inc., 463 U.S. 85, 97 (1983)) since, by the terms of the plan
document, FMC has a right of recoupment from a subsequent tort
recovery.  /6/ The Pennsylvania law overrides that right, requiring
the Plan to assume ultimate responsibility for payment of benefits
even where the beneficiary recovers medical expenses from a third
party.  /7/

   The court of appeals also correctly concluded (Pet. App. 16-18,
C9-C10) that the Pennsylvania statute falls within Section 514's
saving clause, which exempts from preemption state laws "which
regulate() insurance." Section 514(b)(2)(A), 29 U.S.C. 1144 (b)(2)(A).
 The Pennsylvania statute regulates "the business of insurance" as
those terms have been construed under ERISA's saving clause and the
McCarran-Ferguson Act.  By regulating subrogation rights, the state
law transfers a policyholder's risk (in this instance, back to FMC),
affects an integral part of the policy relationship between an insurer
and insured, and is aimed principally at a practice of the insurance
industry.  See Metropolitan Life Insurance Co. v. Massachusetts, 471
U.S. 724, 743 (1985).  /8/ The main effect of the law, in other words,
is to prevent insurers from obtaining reimbursement, despite a
contract calling for subrogation, where the beneficiary prevails in a
tort action and obtains an additional recovery.

   The courts below erred, however, by concluding that Section 1720 of
the Pennsylvania Motor Vehicle Financial Responsibility Law is saved
from preemption in this case.  Although the saving clause excepts from
preemption laws regulating insurance, the deemer clause makes clear
that uninsured employee benefit plans are not subject to such laws.
In this case, application of the Pennsylvania statute would have a
major impact on FMC's uninsured Plan, since despite the clear language
of the Plan, it would not be able to recoup its payments where
recovery is obtained from a tortfeasor.

   A. As This Court Concluded In Metropolitan Life, Congress
Authorized The States To Regulate Indirectly Those Employee Benefit
Plans That Obtain Insurance But Did Not Authorize The States To
Regulate Uninsured Plans

   1. A common-sense reading of Section 514 compels the conclusion
that uninsured employee benefit plans are not subject to regulation by
the States.  By providing that ERISA "supersede(s) any and all State
laws insofar as they may now or hereafter relate to any employee
benefit plan," Section 514(a) broadly preempts state law.  Pilot Life,
481 U.S. at 47;  Shaw, 463 U.S. at 97.  Section 514(a) was intended
"to foreclose any non-Federal regulation of employee benefit plans."
120 Cong. Rec. 29,197 (1974) (remarks of Rep. Dent), reprinted in 3
Staff of Subcomm. on Labor of the Senate Comm. on Labor and Public
Welfare, 94th Cong., 2d Sess., Legislative History of the Employee
Retirement Income Security Act of 1974, at 4670 (Comm. Print 1976)
(hereinafter Leg. Hist.).  /9/

   The saving clause, Section 514(b)(2)(A), excepts insurance laws
from the expansive preemption provision.  Insurance companies have
traditionally been subject to state regulation, and Congress in 1945
recognized the traditional primacy of the States by enacting the
McCarran-Ferguson Act, which provides that "(t)he business of
insurance, and every person engaged therein, shall be subject to the
laws of the several States which relate to the regulation or taxation
of such business." 15 U.S.C. 1012(a).  The saving clause preserves the
States' role as the principal regulator of the insurance industry.

   However, in the deemer clause, Section 514 (b)(2)(B), Congress made
clear that, while state regulation of the insurance industry was not
to be preempted, no employee benefit plan "shall be deemed to be an
insurance company." "Consequently, a state may not regulate an
employee benefit plan simply because the plan serves as self-insurer
on all of its benefits.  Thus, the deemer provision prevents a state
from subjecting a plan, as a business of insurance, to the state's
general insurance laws." Wadsworth v. Whaland, 562 F.2d 70, 77 (1st
Cir. 1977), cert. denied, 435 U.S. 980 (1978).

   The Court endorsed this straightforward reading of Section 514 in
Metropolitan Life.  The issue in that case was whether a state
mandated-benefit law, as applied to policies purchased from insurance
companies by employee health care plans, was saved from preemption by
ERISA's saving clause.  471 U.S. at 727.  Holding that the law was not
preempted, the Court reasoned that a state law's regulation of the
contracts sold by insurance companies is saved as a law which
"regulates insurance," notwithstanding its indirect effect on employee
benefit plans that enter into those contracts.  The Court "decline(d)
to impose any limitation on the saving clause beyond those Congress
imposed in the clause itself and in the 'deemer clause' which modifies
it." Id. at 746.

   The Court's holding in Metropolitan Life pertained directly to the
effect of the saving clause on insured plans because, "(i)n light of
ERISA's 'deemer clause,' * * * Massachusetts ha(d) never tried to
enforce (the state mandated benefit law) as applied to benefit plans
directly, effectively conceding that such an application of (state
law) would be preempted." 471 U.S. at 735 n.14.  Indeed, the
Massachusetts Supreme Judicial Court, also recognizing that Section
514 bars regulation of uninsured employee benefit plans, had held that
the part of the state law applicable to insurers was severable from
the preempted portions pertaining directly to benefit plans.  Ibid.
In light of Massachusetts' concession, the Court's holding related to
the saving clause, but in interpreting that clause the Court construed
the deemer clause as an integral part of its analysis.  Noting that
the deemer clause specifically refers to "insurance contracts," this
Court read the reference as indicating that the saving clause
encompassed laws affecting insurance contracts:  "Unless Congress
intended to include laws regulating insurance contracts within the
scope of the insurance saving clause, it would have been unnecessary
for the deemer clause explicitly to exempt such laws from the saving
clause when they are applied directly to benefit plans." Id. at 741.
/10/

   The Court recognized that the deemer clause precludes state
regulation of uninsured employee benefit plans.  It explained:  "We
are aware that our decision results in a distinction between insured
and uninsured plans, leaving the former open to indirect regulation
while the latter are not.  By so doing we merely give life to a
distinction created by Congress in the 'deemer clause,' a distinction
Congress is aware of and one it has chosen not to alter." 471 U.S. at
747.  /11/ Although no uninsured plan was at issue in Metropolitan
Life, the Court's statement flows naturally both from the language of
Section 514 and the Court's holding.  Indeed, the Court's holding with
respect to the scope of the saving clause was grounded in its
understanding of the relationship of that clause to the basic
preemption provision and the deemer clause.  /12/

   Like this Court, the Secretary of Labor consistently has
interpreted the deemer clause to insulate uninsured employee benefit
plans from state insurance regulation.  Shortly after ERISA's
enactment, the Secretary concluded that since the deemer clause
"adopts a distinction between insurance and employee benefit plans," a
state law was preempted insofar as it "require(d) employers who have
established self-insured plans for their own employees to meet
requirements for insurance companies." United States Department of
Labor, ERISA Opinion Letter No. 75-128, at 1 (June 20, 1975).  /13/
The Secretary's reasonable construction of the statute she administers
is entitled to deference.  /14/

   2. This straightforward reading of Section 514 stands in sharp
contrast to the court of appeals' conclusion (Pet. App. A19) that the
deemer clause is meant to preclude only state insurance regulation
related to "core" ERISA concerns.  /15/ The only textual argument
below was the court of appeals' comment that the deemer clause refers
to state laws "purporting" to regulate insurance.  Ibid.  But its
suggestion that by that term Congress meant to limit the effect of the
clause to "pretextual" attempts to regulate ERISA plans represents a
strained and unnatural reading of the statute.  In our view, the term
simply serves to emphasize that the deemer clause is an exception to
the saving clause, and that laws applying to insurance companies do
not directly govern employee benefit plans.  Cf. Section 514(c)(2), 29
U.S.C. 1144(c)(2) ("(t)he term 'State' includes a State, any political
subdivisions thereof, or any agency or instrumentality of either,
which purports to regulate, directly or indirectly, the terms and
conditions of employee benefit plans covered by this subchapter")
(emphasis added).  /16/ In any event, the court's interpretation of
the provision's language as referring to pretextual attempts to
regulate ERISA plans is unrelated to the preemption standard it
ultimately adopted:  "whether the state insurance regulation
intentionally or unintentionally addresses a core type of ERISA matter
which Congress sought to protect by the preemption provision." Pet.
App. A27 (emphasis added).

   Nor does the legislative history of Section 514 support the lower
courts' decision.  As noted (see note 9, supra), the Conference
Committee broadened the preemptive scope of Section 514(a) while
retaining the saving clause and the deemer clause contained in the
bill that originally passed the House.  See Summary of Differences
Between the Senate Version and the House Version of H.R. 2 to Provide
for Pension Reform 32-34 (June 12, 1974), reprinted in 3 Leg. Hist.
5282-5284.  The conferees stressed that the revised preemption
provision, "with the narrow exceptions specifically enumerated, * * *
foreclose(s) any non-Federal regulation of employee benefit plans."
120 Cong. Rec. 29,197 (1974) (remarks by Mr. Dent), reprinted in 3
Leg. Hist. 4670.  /17/ Relying on the fact that the deemer clause was
retained while the preemption provision was expanded, the court of
appeals deduced that the deemer clause was intended to do "the more
narrow, specified work which the original version of the preemption
clause was meant to do" (Pet. App. A23);  i.e., the deemer clause
protects only "core" ERISA areas from state regulation.  But that
extraordinary conclusion is wholly at odds with the clearly expressed
purpose of the statute.  It is directly contrary to the consistent
recognition by this Court that the preemption provision was intended
"to displace all state laws that fall within its sphere," even
including state laws that are consistent with ERISA's provisions or
that govern subjects not regulated by ERISA.  See Metropolitan Life,
471 U.S. at 739;  Shaw, 463 U.S. at 105 & n.25.  It is also contrary
to the statements of the conferees, who emphasized the breadth of the
newly enacted preemption provision, without even a hint that the
deemer clause was intended to perform the restrictive function of the
abandoned House and Senate-passed versions of the basic preemption
clause.  It would have been a simple matter for the conferees to have
inserted limiting language into the deemer clause had that been their
intent.  /18/ Instead, they retained the broad language of the deemer
clause referring to "any law of any State purporting to regulate
insurance companies (or) insurance contracts" (emphasis added).  /19/

   Furthermore, the Conference Committee's expansion of the preemption
provision would have little meaning under the court of appeals'
approach.  Under the court of appeals' rule, the States may regulate
insured plans (as this Court held in Metropolitan Life), and they may
also regulate uninsured plans pursuant to state insurance law, except
for those areas at the "core" of ERISA.  But that is essentially what
the bills provided before the conference revision.  Thus, the court of
appeals' rule gives little meaning to the broad language of Section
514(a).  Yet the conferees stressed, and this Court has repeatedly
recognized, that Section 514(a) was intended to have a broad effect.
Pilot Life, 481 U.S. at 47;  Shaw, 463 U.S. at 96-97.  /20/

   B. State Insurance Regulation Of Uninsured Employee Benefit Plans
Is Inconsistent With The Purposes Of ERISA's Preemption Provision

   The lower courts' decision interferes with Congress's intent to
avoid "endless litigation over the validity of state action that might
impinge on Federal regulation." 120 Cong. Rec. 29,942 (1974) (remarks
of Sen. Javits), reprinted in 3 Leg. Hist. 4770.  As Senator Javits
explained (id. at 4770-4771), one of the reasons the conferees
broadened the scope of the preemption provision was to eliminate
questions about whether a particular state law affected a matter
specifically governed by ERISA.  Instead, it adopted a bright-line
test -- if a plan is insured, indirect regulation pursuant to state
insurance laws is permissible;  if the plan is uninsured, regulation
is not permitted.  Congress hardly intended the deemer clause to
preserve the questions it thought it was eliminating.  Yet, the court
of appeals' "core area" test plainly does exactly that.  /21/

   In addition, this Court repeatedly has stressed that Congress
intended Section 514 to relieve employers of potentially conflicting
state requirements, thus fostering the development of employee benefit
plans.  /22/ The lower courts' holding that the Pennsylvania statute
can be applied to bar petitioner's subrogation rights would frustrate
Congress's purpose of freeing plans from state regulation.  Through
ERISA, Congress intended to leave decisions concerning the content of
plans "to the discretion of * * * plan designers" (Alessi, 451 U.S. at
525), unimpeded by state regulation that could thwart plan growth.
/23/ Moreover, divergent state regulation would preclude plan
administrators from "establish(ing) a uniform administrative scheme *
* * (with) a set of standard procedures to guide processing of claims
and disbursement of benefits." Fort Halifax Packing Co., 482 U.S. at
9.  Such a "patchwork scheme of (state) regulation" would "introduce
considerable inefficiencies" in benefit plans, and might lead
employers to reduce benefits.  Id. at 10-11.

   These concerns are directly implicated here.  By virtue of the
court of appeals' holding, FMC administrators can no longer operate
their plan through a single administrative scheme.  Rather, the
viability of this multistate Plan's subrogation provision will depend
upon its validity under the law of each State in which the Plan does
business.  Even more importantly, the lower court's holding thwarts
the reasonable choice of FMC Plan designers to provide medical
benefits for auto accident injuries on the condition that the Plan can
recoup its outlays where there has been recovery from a negligent
third party.  State law preclusion of that choice clearly increases
the Plan's costs for accident-related benefits.  As a result, the
Plan's designers might make a downward adjustment in benefits or
otherwise revise its program of personal injury protection for
accidents.  As this Court has noted, "ERISA's comprehensive preemption
of state law was meant to minimize this sort of interference with the
administration of employee benefit plans." Shaw, 463 U.S. at 105 n.25.
 /24/

   To be sure, Congress intended to preserve traditional state
authority over the insurance industry by virtue of the saving clause.
See Metropolitan Life, 471 U.S. at 740-741.  The relationship between
the saving clause and the deemer clause, however, implements that
congressional intent while preserving the freedom from state control
that Congress envisioned for benefit plans.  Employers that purchase
insurance for the provision of employee benefits do so with the
understanding that those insurance contracts may be subject to state
regulation.  /25/ At the same time, employers may choose to set up
uninsured plans, which will allow them to operate on a field of
federal uniformity.  Although the district court suggested that the
distinction between insured and uninsured plans is illogical (Pet.
App. C11-C12), it in fact represents a salutary and workable
accommodation between state insurance regulation and federal
preemption.

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   KENNETH W. STARR

      Solicitor General

   DAVID L. SHAPIRO

      Deputy Solicitor General

   CHRISTOPHER J. WRIGHT

      Assistant to the Solicitor General

   ROBERT P. DAVIS

      Solicitor of Labor

   ALLEN H. FELDMAN

      Associate Solicitor

   STEVEN J. MANDEL

      Deputy Associate Solicitor

   MARK S. FLYNN

      Attorney Department of Labor

   APRIL 1990

   /1/ Ms. Holliday's medical expenses totalled more than $178,000 by
1989.  The first $10,000 of her medical expenses were paid by Mr.
Holliday's automobile insurer.  Pet. App. A2-A3.  It is not clear from
the record what portion of the remainder was paid by the Plan,
although the amount exceeds $67,000.  C.A. App. 67a.  It appears that
the Hollidays also obtained recovery from Pennsylvania's Catastrophic
Loss Trust Fund.  See Br. in Opp. 3;  75 Pa. Cons. Stat. Ann. Sections
1761 et seq. (Purdon 1989) (repealed December 12, 1988).  The
Hollidays have not alleged that they have paid any of the medical
expenses.

   /2/ Because the courts below held that the Plan's subrogation
provision is void under Pennsylvania law and that the state law is not
preempted by ERISA, they did not consider the precise meaning of the
subrogation provision or its application to the facts of this case.
In our view, federal common law properly applies in construing a
subrogation clause in an employee benefit plan covered by ERISA.  See
120 Cong. Rec. 29,942 (1974) (remarks of Sen. Javits), reprinted in 3
Staff of Subcomm. on Labor of the Senate Comm. on Labor and Public
Welfare, 94th Cong., 2d Sess., Legislative History of the Employee
Retirement Income Security Act of 1974, at 4670-4671 (Comm. Print
1976) ("(i)t is also intended that a body of Federal substantive law
will be developed by the courts to deal with issues involving rights
and obligations under private welfare and pension plans");  Pilot Life
Insurance Co. v. Dedeaux, 481 U.S. 41, 56 (1987) (recognizing
Congress's "expectation() that a federal common law of rights and
obligations under ERISA-regulated plans would develop").  While it is
not appropriate at this time to determine the rule that should apply
as a matter of federal law, it should be noted that, under general
principles of subrogation law, FMC would not be allowed to obtain full
reimbursement out of a tort recovery if the Hollidays had not been
made whole.  See R. Jerry, II, Understanding Insurance Law 467 (1987).
 Instead, if the family was required to pay some of Ms. Holliday's
medical expenses, then the subrogation clause would be construed
either to call for prorating the tort recovery between FMC and the
Hollidays, or to call for FMC to recover only the amount in excess of
the family's payments.  Ibid.

   /3/ The parties to the negligence action settled the case after the
defendant driver interpleaded his $100,000 automobile policy in favor
of Ms. Holliday and three other claimants injured in the accident.
Pet. App. A3.  Under the terms of the state court order approving the
settlement, Ms. Holliday's recovery is being held in escrow pending
the outcome of this case.  Pet. 5 n.3.

   /4/ Section 1720 states as a general rule that "(i)n actions
arising out of the maintenance or use of a motor vehicle, there shall
be no right of subrogation or reimbursement from a claimant's tort
recovery." There is no exception barring double recovery.  Thus, even
if the Plan had paid all of Ms. Holliday's medical expenses, it would
be barred by Section 1720 from asserting any subrogation rights.

   /5/ The court of appeals also affirmed the lower court's ruling
that Section 1720 of the Pennsylvania Motor Vehicle Financial
Responsibility Law, if not preempted, bars FMC from enforcing the
subrogation provision.  Pet. App. A5-A10.  Petitioner has not sought
review of that holding, which involves a question of state law.

   /6/ A subrogation provision such as FMC's is a reasonable and
permissible method of reducing an employee benefit plan's costs while
ensuring that beneficiaries' primary needs are covered.  See R. Jerry,
supra, at 464;  compare Alessi v. Raybestos-Manhattan, Inc., 451 U.S.
504 (1981) (upholding pension plan provision reducing retirement
benefits by the amount of any workers' compensation award).

   /7/ Other courts have concluded that similar state laws "relate()
to" employee benefit plans.  See United Food & Commercial Workers v.
Pacyga, 801 F.2d 1157, 1160 (9th Cir. 1986) (Arizona common law
prohibition against subrogation "relates to" an employee benefit
plan);  Northern Group Services, Inc. v. Auto Owners Insurance Co.,
833 F.2d 85, 89 (6th Cir. 1987), cert. denied, 486 U.S. 1017 (1988)
(coordination of benefits provision of Michigan no-fault automobile
liability statute falls within preemptive scope of Section 514(a));
see also Shaw, 463 U.S. at 95-100 (mandated benefits law "relate(s)
to" employee benefit plan);  Alessi, 451 U.S. at 524 (ERISA preempts
New Jersey statute forbidding benefit plans from offsetting workers'
compensation payments against employee pension benefits).

   /8/ Accord Pacyga, 801 F.2d at 1160-1161;  Northern Group Services,
833 F.2d at 89-90 (coordination of benefits provision of Michigan
no-fault automobile insurance law regulates insurance within the
meaning of ERISA's saving clause);  contra Baxter v. Lynn, 886 F.2d
182, 186 (8th Cir. 1989) (common law rules on subrogation are not the
type of state insurance regulation intended to fall within scope of
saving clause).

   /9/ Section 514(a) was added by the Conference Committee after both
houses had passed bills that preempted state laws only to the extent
that they conflicted with certain matters regulated by ERISA.
Representative Dent explained the Conference substitute by stating:
"I wish to make note of what is to many the crowning achievement of
this legislation, the reservation to Federal authority (of) the sole
power to regulate the field of employee benefit plans.  With the
preemption of the field, we round out the protection afforded
participants by eliminating the threat of conflicting and inconsistent
State and local regulation." 120 Cong. Rec. 29,197 (1974), reprinted
in 3 Leg. Hist. 4670.  Senator Williams similarly explained the
Conference action, stating:  "It should be stressed that with the
narrow exceptions specified in the bill, the substantive and
enforcement provisions of the conference substitute are intended to
preempt the field for Federal regulations, thus eliminating the threat
of conflicting or inconsistent State and local regulation of employee
benefit plans.  This principle is intended to apply in its broadest
sense to all actions of State or local governments, or any
instrumentality thereof, which have the force or effect of law." 120
Cong. Rec. 29,933 (1974), reprinted in 3 Leg. Hist. 4745-4746.

   /10/ See also 471 U.S. at 744 ("the plain language of the saving
clause, its relationship to the other ERISA pre-emption provisions,
and the traditional understanding of insurance regulation, all lead us
to the conclusion that mandated-benefit laws such as (the
Massachusetts statute) are saved from pre-emption by the operation of
the saving clause") (emphasis added).

   /11/ The Court knew that Congress was aware of the distinction
between insured and uninsured plans because the matter had been
addressed by the 1977 Activity Report of the House Committee on
Education and Labor, which contains the report of a Congressional
Pension Task Force established pursuant to ERISA to study ERISA
preemption.  The Report had stated that persons selling insurance
policies may be subject to state regulation, but that "state action is
barred" with respect to plans themselves.  See 471 U.S. at 747 n.25
(quoting H.R. Rep. No. 1785, 94th Cong., 2d Sess. 48 (1977));  see
also id. at 47 ("the 'deemed' language was utilized to create an
irrebuttable presumption that these (employee benefit) plans are not
insurance, trust companies, etc., for purposes of state regulation").

   In addition, in 1983 Congress created a limited exception providing
that specified parts of a Hawaii health care statute enacted before
ERISA are not preempted.  29 U.S.C. 1144 (b)(5), added by the Act of
Jan. 14, 1983, Pub. L. No. 97-473, Section 301(a), 96 Stat. 2611.  The
amendment was precipitated by an uninsured employee benefit plan's
successful challenge to the Hawaii statute on the ground that it was
preempted by ERISA.  Standard Oil Co. v. Agsalud, 633 F.2d 760 (9th
Cir. 1980), aff'd mem., 454 U.S. 801 (1981).  Representative
Erlenborn, the ranking minority member of the House Committee on
Education and Labor, explained that Congress viewed the Hawaii law as
"an unusual special case," and stated that "(i)n agreeing to the
Hawaii exception this body will be reaffirming the broad scope of
ERISA preemption and the validity of the interpretation of the Federal
courts in connection with the Hawaii statute." 128 Cong. Rec. 30,356
(1982).  Accordingly, Congress expressly declined to save any other
similar state law, providing instead that the amendment "shall not be
considered a precedent with respect to extending such amendment to any
other State law." Section 301(b), 96 Stat. 2612.

   /12/ Following the lead of Metropolitan Life, the clear majority of
the courts of appeals that have addressed the issue have held that
ERISA preempts direct state regulation of uninsured employee benefit
plans.  Baxter v. Lynn, 886 F.2d at 186;  Reilly v. Blue Cross & Blue
Shield United, 846 F.2d 416, 425 (7th Cir.), cert. denied, 488 U.S.
856 (1988);  Moore v. Provident Life & Accident Insurance Co., 786
F.2d 922, 927 (9th Cir. 1986) ("uninsured plans are regulated
exclusively by the provisions of ERISA");  Pacyga, 801 F.2d at 1162;
Powell v. Chesapeake & Potomac Telephone Co., 780 F.2d 419, 423 (4th
Cir. 1985), cert. denied, 476 U.S. 1170 (1986);  Children's Hospital
v. Whitcomb, 778 F.2d 239, 242 (5th Cir. 1985) ("ERISA preempts the
Louisiana (mandated-benefit) statute insofar as it relates to a
self-insured plan, although it would not preempt if the plan were an
insured plan.");  accord Insurance Board of Bethlehem Steel Corp. v.
Muir, 819 F.2d 408, 411 (3d Cir. 1987) (Metropolitan Life "concluded
that ERISA permitted states to regulate insurance policies purchased
by plans from insurance companies, though ERISA did not permit states
to regulate the plans themselves");  see also Wadsworth v. Whaland,
562 F.2d at 76 n.34.  But see, in addition to the decision below,
Northern Group Services, 833 F.2d at 95.

   /13/ See also ERISA Opinion Letter No. 78-3A, at 2 (Feb. 15, 1978)
("to the extent that the proposed act in the Utah State Legislature to
regulate non-insured employee welfare benefit plans may be applicable
by its terms to employee benefit plans covered by ERISA, the proposed
Act would be preempted by Section 514 of ERISA" because, "under
Section 514 (b)(2)(B) of ERISA, an employee benefit plan subject to
ERISA may not be deemed to be an insurance company * * * for the
purpose of state laws purporting to regulate insurance companies (or)
insurance contracts");  ERISA Opinion Letter No. 79-6A, at 3 (Jan. 16,
1979) ("(a)lthough state insurance laws are excepted from preemption
by section 514(b)(2)(A), section 514(b)(2)(B), in effect, prevents a
state from regulating an employee benefit plan simply because the plan
self-insures its benefits");  ERISA Opinion Letter No. 82-006A, at 3
(Jan. 29, 1982) (Section 514 does not preempt application of a New
Hampshire statute insofar as the statute "require(s) an insurance
company to issue extended eligibility coverage to its policyholders,
even though some such policyholders may be employee welfare plans,"
but does preempt the portion of the statute regulating self-insured
plans).

   /14/ Massachusetts v. Morash, 109 S. Ct. 1668, 1673-1674 & n.14
(1989);  Blessitt v. Retirement Plan for Employees of Dixie Engine
Co., 848 F.2d 1164, 1167 (11th Cir. 1988) ("we note that we owe great
deference to the interpretations and regulations of the Pension
Benefit Guaranty Corporation * * * , the Internal Revenue Service * *
* , and the Department of Labor, which are the administrative agencies
responsible for enforcing and interpreting ERISA");  see generally
Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467
U.S. 837, 844 (1984);  Sullivan v. Everhart, 110 S. Ct. 960, 964
(1990).

   /15/ In its only effort to define those concerns, the court of
appeals referred to "such ERISA areas as reporting, disclosure, and
nonforfeitability." Pet. App. A23.

   /16/ The court's emphasis upon the term "purporting" also is
undercut by the legislative history of Section 514.  The Conference
Report's description of the deemer clause does not refer to the
"purporting" language, strongly suggesting that the term does not have
the overriding significance attributed to it by the court of appeals.
See H.R.Conf. Rep. No. 1280, 93d Cong., 2d Sess. 383 (1974)
("(h)owever, the substitute generally provides that an employee
benefit plan is not to be considered as an insurance company (and is
not to be considered as engaged in the business of insurance or
banking) for purposes of any State law that regulates insurance
companies, insurance contracts, banks, trust companies, or investment
companies") (emphasis added), reprinted in 3 Leg. Hist. 4650.

   /17/ Ignoring the thrust of the managers' comments, the court of
appeals seized on two words (emphasized in the quotations below) in
the remarks of two ERISA managers as support for its "pretextual"
approach to the deemer clause.  It referred (Pet. App. A19) to Senator
Javits' statement that preemption applied to state laws "hastily
contrived to deal with some particular aspect of private welfare or
pension benefit plans not clearly connected to the Federal regulatory
scheme." 120 Cong. Rec. 29,942 (1974), reprinted in 3 Leg. Hist.
4770-4771.  Of course, there is nothing in Senator Javits' statement
indicating that preemption was limited to such "contrived" state laws,
and such an implied restriction would make no sense in light of
Congress's broad preemptive intent.  Furthermore, and in direct
contradiction of the court of appeals' ruling that state insurance law
may govern "non-core" ERISA areas, Senator Javits emphasized that even
state laws governing aspects of benefit plans "not clearly connected
to the Federal regulatory scheme" are preempted.  Ibid.  Nor is the
court of appeals' approach supported by Senator Williams' reference to
"State professional associations acting under the guise of
State-enforced professional regulation." 120 Cong. Rec. 29,933 (1974)
(emphasis added), reprinted in 3 Leg. Hist. 4746.  Like Senator Javits
and Representative Dent, he stressed that, "with the narrow exceptions
specified in the bill," the conference substitute "preempt(s) the
field for Federal regulations." 120 Cong. Rec. 29,933 (1974),
reprinted in 3 Leg. Hist. 4745.

   /18/ For example, the conferees could have revised the deemer
clause so that it referred to state insurance laws regulating such
matters as disclosure, vesting, and forfeitability.

   /19/ In Metropolitan Life, the Court "declin(ed) to impose any
limitation on the saving clause beyond those Congress imposed in the
clause itself and in the 'deemer clause' which modifies it" (471 U.S.
at 746).  The Court concluded that the Massachusetts Supreme Judicial
Court's "attempt to save only state regulations unrelated to the
substantive provisions of ERISA" was inconsistent with the saving
clause's terms.  Id. at 746-747.

   /20/ The court of appeals suggested (Pet. App. A24) that unless its
"core area" standard were adopted, the deemer clause would "swallow"
the saving clause.  But that is simply not so.  Under Metropolitan
Life, the saving clause protects state insurance regulation over
insurance contracts purchased by employee benefit plans that would
otherwise fall prey to the sweep of the Act's basic preemption
provision.

   /21/ The similar approach adopted by the Sixth Circuit in Northern
Group Services -- "the effect of the deemer clause should be assessed
by a balancing of the interests in federal uniformity against those of
state primacy in the regulation of insurance" (833 F.2d at 93) -- has
similar defects.  In that case, the court of appeals held that Section
3109a of Michigan's no-fault automobile insurance law, Mich. Comp.
Laws Section 500.3109a (1983), is not preempted insofar as it requires
the liability of no-fault insurers to be secondary to that of an
uninsured employee benefit plan.  In Liberty Mutual Insurance Group v.
Iron Workers Health Fund, 879 F.2d 1384 (1989), however, the Sixth
Circuit held that the same Michigan statute, Section 3109a, is
preempted insofar as it prohibits an uninsured employee benefit plan
from excluding automobile accident coverage altogether.  Although the
court in Liberty Mutual discussed Northern Group Services (see 879
F.2d at 1387 (noting that "(i)t would appear at first blush that
Northern Group Services requires us to hold in this case that Section
3109a is not preempted by ERISA")), it is not clear why the federal
interest outweighed the state interest in the one case but not the
other.  It is clear, however, that under a test like the Sixth
Circuit's or that of the court below, employee benefit plan funds will
be expended in litigation over where the balance lies or whether a
"core area" of ERISA is infringed.

   /22/ See Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987)
("(p)re-emption ensures that the administrative practices of a benefit
plan will be governed by only a single set of regulations");  Pilot
Life, 481 U.S. at 45-46 ("the express pre-emption provisions of ERISA
are deliberately expansive, and designed to 'establish pension plan
regulation as exclusively a federal concern'");  Metropolitan Life,
471 U.S. at 739 ("(t)he pre-emption provision was intended to displace
all state laws that fall within its sphere, even including state laws
that are consistent with ERISA's substantive requirements");  Shaw v.
Delta Airlines, Inc., 463 U.S. at 105 & n.25 ("Congress minimized the
need for interstate employers to administer their plans differently in
each State in which they have employees").

   /23/ While freeing plan designers from state law restrictions,
Congress did impose some significant restrictions of its own.  For
example, pension plans must be separately funded according to
requirements set out in 29 U.S.C. 1082, and benefits must vest
according to a schedule set out in 29 U.S.C. 1053.

   /24/ The court of appeals' proviso that state insurance law may
regulate only "non-core" ERISA areas (Pet. App. A19) does not go far
enough to satisfy the underlying purposes of the statute.  As this
Court's decisions make abundantly clear (Metropolitan Life, 471 U.S.
at 739;  Shaw, 463 U.S. at 98-99 & nn.18-20), ERISA preemption extends
to state laws that regulate plan contents even in areas left
unregulated by ERISA.  Thus, Congress's intent to occupy the field is
not dependent upon whether the State has attempted to regulate an area
specifically regulated by ERISA.  Rather, as the preemption provisions
establish, there is an overriding ERISA interest in freeing plans from
direct state regulation.

   /25/ In that situation, the insurance company that sold the policy
-- which should be accustomed to inconsistent regulation in light of
the long tradition of state primacy in the area of insurance
regulation -- would presumably assist the purchaser in adjusting to
the differing rules of the various States.  Indeed, the insurance
company would bear most of the burden of adjustment itself -- a burden
that would be reflected at the outset in the announced cost to the
purchaser.