Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-05865/USCOURTS-cand-4_06-cv-05865-4/pdf.json

Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 29:1132 E.R.I.S.A.: Employee Benefits

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

DAVID CAPLAN,

Plaintiff,

v.

CNA SHORT TERM DISABILITY PLAN; CNA

LONG TERM DISABILITY PLAN; HARTFORD

LIFE GROUP INSURANCE COMPANY,

Defendants.

 /

No. C 06-5865 CW

ORDER GRANTING IN

PART PLAINTIFF'S

MOTION TO MODIFY

SCHEDULING ORDER

AND TO AMEND

COMPLAINT 

Plaintiff David Caplan seeks to modify the current scheduling

order and to amend the complaint to enable him to add two new

parties and three new claims. Defendants Hartford Life Group

Insurance Company (Hartford), CNA Long Term Disability Plan (LTD

Plan) and CNA Short Term Disability Plan (STD Plan) oppose the

motion. The matter is submitted on the papers and the hearing

scheduled for June 7, 2007 is vacated. Having considered all of

the papers filed by the parties, the Court grants Plaintiff's

motion in part. The Court will modify the scheduling order to

permit Plaintiff to add additional parties and claims; however, he

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can add only his state law claims against CNA Financial

Corporation. 

BACKGROUND

On February 23, 2005, Plaintiff filed a claim for short-term

disability benefits. After Hartford denied his claim, Plaintiff

submitted a request for review of the decision and submitted a

claim for long-term disability benefits. Hartford referred

Plaintiff's request for review to University Disability Consortium

(UDC) for a comprehensive medical review of his claim. According

to Plaintiff, however, UDC has a financial conflict of interest

because its income is largely dependent on Hartford. Plaintiff

requested that Hartford obtain a medical review from an evaluator

more neutral. Hartford did not, nor did it respond directly to

Plaintiff's letter requesting a different evaluator. Rather, it

sent Plaintiff a letter, dated April 21, 2006, informing him that

it upheld its decision to deny his claim for short-term benefits

and, therefore, denied his claim for long-term benefits.

On September 22, 2006, Plaintiff filed his complaint in this

action. In November, the parties filed a joint stipulation to

allow Plaintiff to file a first amended complaint, in part because

some Defendants had indicated that they would provide information

to Plaintiff that "may suggest that Plaintiff should, depending on

the content of that information, amend the complaint to bring

concurrent state law claims against an additional defendant." 

Springer-Sullivan Dec., Ex. 1. 

In December, STD Plan wrote to Plaintiff that ERISA was

applicable and provided copies of pages from the summary plan

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description. After receiving that letter, Plaintiff filed his

first amended complaint, asserting two causes of action; but,

relying on STD Plan's representation that it was an ERISA plan, he

did not add any state law claims. His first claim is for benefits

pursuant to ERISA § 502(a)(1)(B) under the terms of the STD Plan

and LTD Plan. His second cause of action is for injunctive and

other equitable relief pursuant to ERISA § 502(a)(3) and is brought

only against Hartford. According to Plaintiff, Hartford relied on

UDC's biased medical reviews, failed to provide a reasonable claim

procedure and, therefore, breached its fiduciary duties. Plaintiff

seeks to enjoin Hartford from utilizing UDC as a medical reviewer

and to remove Hartford as a plan fiduciary.

In January, STD filed its answer, which alleged that it was an

ERISA plan. 

Even after filing his first amended complaint, Plaintiff

continued to seek information from STD Plan that would show how the

plan was funded so that Plaintiff could determine whether his

claims were properly brought under ERISA. Plaintiff requested

further information to verify the accuracy of the documents he had

received prior to filing his amended complaint. STD Plan's counsel

assured Plaintiff's counsel more than once that she was working on

getting a declaration from STD Plan proving that it was an ERISA

plan whose benefits were funded through a trust. Other than

assurances, however, Plaintiff received nothing until March 16,

2007.

On March 2, 2007, the Court held an initial case management

conference. At the conference, the parties indicated that they did

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not anticipate adding any additional parties or claims. Plaintiff

did not mention that he was still in the process of seeking

additional information that could result in amending the complaint

to add new parties or claims. The Court set March 2, 2007, as the

deadline to add additional parties or claims. Plaintiff did not

request an extension of that deadline.

Two weeks later, Plaintiff received the Declaration of Julia

M. Cochrane Regrading ERISA Status of CNA Short Term Disability

Plan. According to Plaintiff, this declaration shows that the STD

Plan is not an ERISA plan because payments under the plan are made

from the employer's general assets, not from the trust, which

reimburses the employer on a monthly basis. See Springer-Sullivan

Dec., Ex. 5 at ¶ 4 ("STD benefits are paid to eligible participants

through the Continental Casualty Company payroll system.").

Plaintiff requested that, in light of the Cochrane

declaration, Defendants stipulate to the filing of an amended

complaint. He sent a copy of the proposed second amended complaint

to Defendants. The amended complaint seeks to drop STD Plan as a

defendant, to add UDC and CNA Financial Corporation (CNA) as

defendants and to add three new causes of action: two state law

claims against CNA and a unfair competition claim, under California

Business and Professions Code § 17200, against Hartford and UDC. 

Defendants refused to stipulate and, approximately a week later,

Plaintiff filed this motion.

LEGAL STANDARD

Federal Rule of Civil Procedure 15(a) provides that leave of

the court allowing a party to amend its pleading "shall be freely

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given when justice so requires." See, e.g., United States v. Webb,

655 F.2d 977, 979 (9th Cir. 1981) (Rule 15's policy of favoring

amendments to pleadings should be applied with "extreme

liberality"). The ability of a party seeking to amend a pleading

after the date specified in a scheduling order, however, is

governed by Rule 16(b), not Rule 15(a). Johnson v. Mammoth

Recreations, Inc., 975 F.2d 604, 608 (9th Cir. 1992). 

Thus, the party must first show "good cause" for the amendment

under Rule 16(b) and, second, if good cause is shown, the party

must demonstrate that the amendment is proper under Rule 15. Id. 

In order to determine good cause, courts primarily consider

the diligence of the party seeking the modification. Id. at 609;

see also Coleman v. Quaker Oats Co., 232 F.3d 1271, 1294 (9th Cir.

2000). "Not only must parties participate from the outset in

creating a workable Rule 16 scheduling order but they must also

diligently attempt to adhere to that schedule throughout the

subsequent course of the litigation." Jackson v. Laureate, Inc.,

186 F.R.D. 605, 607 (E.D. Cal. 1999). A party seeking to amend a

scheduling order must show that it had assisted the Court to create

a workable schedule at the outset of litigation, that the

scheduling order creates deadlines that have become impracticable

notwithstanding its diligent efforts to comply with the schedule,

and that it was diligent in seeking the amendment once it became

apparent that extensions were necessary. See id. at 608. 

DISCUSSION

The Court's deadline for amending the complaint to add parties

or claims was March 2, 2007. Therefore, Plaintiff's motion is

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governed by Federal Rule of Civil Procedure 16(b). Only if good

cause can be shown does the Court consider whether amendment is

proper under Rule 15. Defendants argue that Plaintiff's motion

should be denied because good cause does not exist to modify the

scheduling order and because, even if good cause does exist,

Plaintiff's proposed amendments are futile.

I. Good Cause Under Rule 16(b)

According to Defendants, Plaintiff was not diligent. They

point out that the unfair competition claim against Hartford and

UDC is based on the same conduct alleged in the original and first

amended complaints. Defendants further note that, by November,

2006, Plaintiff was aware that he may not have named everyone he

wanted to sue; he was aware that he had potential state law claims

against Defendants, yet he did not plead any of them in his first

amended complaint. Rather, in that complaint, he alleged that the

STD Plan was an employee welfare benefit plan within the meaning of

ERISA. The parties' joint case management statement, filed before

the initial case management conference, states that one of the

legal issues the parties dispute is whether the STD Plan is subject

to ERISA or instead is governed by state law. Nonetheless,

Plaintiff neither plead state law claims in the alternative nor

mentioned to the Court that state law claims may need to be plead

after he received the requested information from STD Plan. See

Jackson, 186 F.R.D. at 608 (noting that parties anticipating

possible amendments to their pleadings have an obligation to alert

the Rule 16 scheduling judge of the nature and timing of such

anticipated amendments and that, if the plaintiff was aware of

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circumstances that may require amendment and yet said nothing about

them to the judge setting the scheduling order, such an omission

would not be compatible with a finding of diligence). 

Plaintiff should have mentioned to the Court at the initial

case management conference that, depending on the information STD

Plan supplied, he might amend his complaint to add additional

parties and state law claims. In light of the circumstances in

this case, however, the Court does not find that his failure to do

so shows that he was not diligent. 

Unlike in Johnson, where the court found that the plaintiff

was not diligent and, thus, did not show good cause to amend the

scheduling order, Plaintiff did not receive information from

Defendants showing that amendment was necessary before the deadline

to add additional parties or claims expired. See 975 F.2d at 609. 

As Plaintiff points out, he received repeated assurances from

counsel that the STD Plan was governed by ERISA and that further

documentation would support that assertion, not prove it false. 

STD Plan filed its answer, asserting that it was an ERISA Plan. 

Based on this record, and consistent with Rule 11 obligations,

Plaintiff contends that he could not have alleged state law claims

against STD Plan and that any unfair competition claim would have

been preempted by ERISA.

Plaintiff continued diligently to seek information to verify

that the STD Plan was an ERISA plan, as his counsel was repeatedly

told. He did not, as Defendants suggest, wait passively until

March 16, 2007, when he received the Cochrane declaration. After

receiving the information, he did not, like the plaintiff in

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Johnson, then wait an additional four months after the deadline had

passed before seeking to amend the scheduling order and his

complaint. See id. at 610. Plaintiff diligently pursued a

stipulation to permit the filing of an amended complaint and, after

that failed, he promptly filed this motion. 

 The Court concludes that Plaintiff has shown good cause to

amend the scheduling order. Plaintiff, however, still must show

that amendment is proper under Rule 15.

II. Futility Under Rule 15

Leave to amend lies within the sound discretion of the trial

court, which discretion "must be guided by the underlying purpose

of Rule 15 to facilitate decision on the merits, rather than on the

pleadings or technicalities." Webb, 655 F.2d at 979; DCD Programs,

Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). The Supreme

Court has identified four factors relevant to whether a motion for

leave to amend should be denied: undue delay, bad faith or dilatory

motive, futility of amendment, and prejudice to the opposing party. 

Foman v. Davis, 371 U.S. 178, 182 (1962). The Ninth Circuit holds

that these factors are not of equal weight; specifically, delay

alone is insufficient ground for denying leave to amend. Webb, 655

F.2d at 980. Futility of amendment can, by itself, justify the

denial of a motion for leave to amend; however, "a proposed

amendment is futile only if no set of facts can be proved under the

amendment to the pleadings that would constitute a valid and

sufficient claim or defense." Miller v. Rykoff-Sexton, 845 F.2d

209, 214 (9th Cir. 1988) (citing Baker v. Pacific Far East Lines,

Inc., 451 F. Supp. 84, 89 (N.D. Cal. 1978)); Bonin v. Calderon, 59

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F.3d 815, 845 (9th Cir. 1995).

Defendants argue that, because the proposed amendments are

futile, even under Rule 15's liberal policy, Plaintiff's motion to

amend should be denied. STD Plan contends that it is an ERISA plan

and, thus, the current ERISA claims against it are the proper

vehicle for recovery of benefits, not Plaintiff's proposed state

law claims. Hartford contends that Plaintiff lacks standing to

assert a claim under California's Unfair Competition Act.

A. ERISA plan versus state-law governed payroll practice

ERISA regulates employee welfare benefit plans, such as shortterm and long-term disability plans. As the Ninth Circuit

explained in Alaska Airlines, Inc. v. Oregon Bureau of Labor, 122

F.3d 812, 812 (9th Cir. 1997), "A regulation of the Secretary of

Labor, however, excludes certain 'payroll practices' from the

application of ERISA." This regulation provides that an "employee

welfare benefit plan" shall not include:

Payment of an employee's normal compensation, out of the

employer's general assets, on account of periods of time

during which the employee is physically or mentally unable to

perform his or her duties, or is otherwise absent for medical

reasons . . . .

29 C.F.R. § 2510.3-1(b)(2). 

Plaintiff contends that he discovered, through the Cochrane

declaration, that the STD Plan is payroll plan, not an ERISA plan,

and therefore, is governed by state law, not ERISA law. In her

declaration, Ms. Cochrane states that, based on her knowledge and

understanding, the STD Plan was established and is maintained as an

ERISA plan. But she further explains that short-term disability

benefits are paid to eligible participants through the Continental

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Casualty Company payroll system, which is then reimbursed by CNA

Employees' Health Plan Trust. Plaintiff claims that when

disability benefits are paid, not by a trust or an insurance

company, but rather by the employer, the employee's expectation of

receiving benefits depends on the solvency of the employer, not the

solvency of a trust, and ERISA can offer no protection. See

Bassiri v. Xerox, 463 F.3d 927 (9th Cir. 2006) (noting the

importance of the source of funding as a distinguishing feature

between ERISA plans and non-ERISA plans throughout Department of

Labor regulation).

STD Plan responds that this Court rejected Plaintiff's payroll

practice theory in Air Transport Association v. City and County of

San Francisco, 992 F. Supp. 1149, 1180 (1998). That case, however,

did not analyze whether a particular plan fell within the payroll

practice exemption and STD Plan's reliance on it is misplaced. STD

Plan further argues that a plan does not become a non-ERISA payroll

practice merely because a benefit is provided by an employer who is

then reimbursed by the trust funding the plan. That is true; the

Department of Labor instructs that, in determining whether a plan

is an employee welfare benefit plan, many other factors must be

evaluated including whether the trust is a bona fide separate fund,

whether the trust has the direct legal obligation to pay benefits

under the plan, whether there is a contribution obligation

enforceable against the employer and whether contributions are

actuarially determined, established through collective bargaining

or otherwise bear a relationship to the plan's accruing liability. 

The Cochrane declaration does not address all of those factors. 

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1

Because the Court is not ruling whether the STD Plan is a

ERISA plan or a payroll plan, Plaintiff may want to plead in the

alternative and to keep STD Plan, and its ERISA claims against STD

Plan, in this case. Plaintiff then would not have to seek leave to

amend its complaint if the Court determines that the STD plan is an

ERISA plan. 

11

As explained above, a proposed amendment is futile only if no

set of facts can be proved under the amendment that would

constitute a valid and sufficient claim. Based on the record

before it, the Court cannot conclude that the proposed amendment is

futile. Therefore, Plaintiff will be allowed to amend his

complaint to include state law claims against CNA and to drop his

ERISA claims against STD Plan.1

B. Standing and Plaintiff's Proposed Unfair Competition Claim

Article III standing requires (1) injury, (2) causation and

(3) redressability. In the context of injunctive relief, which

Plaintiff seeks pursuant to his unfair competition claim, "'the

plaintiff must demonstrate a real or immediate threat of an

irreparable injury.'” Hangarter v. Provident Life and Acc. Ins.

Co., 373 F.3d 998, 1021-22 (9th Cir. 2004) (emphasis in original)

(quoting Clark v. City of Lakewood, 259 F.3d 996, 1007 (9th Cir.

2001)). 

Hartford argues that, like the plaintiff in Hangarter,

Plaintiff has no Article III standing to pursue injunctive relief

under California's Unfair Competition Act. In Hangarter, the court

concluded that the plaintiff did not have a real or immediate

threat of injury and ordered the district court to vacate the

injunction it granted under the Unfair Competition Act. There, the

plaintiff's entire disability policy had been cancelled and thus

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she had no current contractual relationship with the defendants and

could not be personally threatened by the defendants' conduct. 373

F.3d at 1022. Here, if Plaintiff is granted disability benefits,

he will continue to have a relationship with Hartford, but he will

have no contractual relationship with the STD Plan. It is

undisputed that Plaintiff's short-term disability benefits are

limited to the period of March 7, 2005 through August 28, 2005. 

Therefore, Hartford contends that there can be no possibility of

future harm to Plaintiff from any alleged unlawful business plans

relating to his short-term disability benefits because that time

has passed.

Plaintiff's response is not persuasive. It distinguishes the

circumstances here by noting that, unlike in Hangarter, Plaintiff

here would continue to have a relationship with Hartford. That

distinction, however, is not meaningful because Plaintiff has not

demonstrated a real or immediate threat of injury from Hartford or

UDC as it relates to his short-term benefits. Plaintiff will

remain at risk of Hartford obtaining another allegedly biased

medical opinion from UDC and using that as a basis for terminating

his long-term disability benefits. But, if this Court finds that

short-term benefits should have been awarded, nothing Hartford or

UDC do can take away those benefits, which are limited to a time

that has passed. Plaintiff has Article III standing to bring ERISA

claims against Hartford with respect to long-term benefits, but he

does not have Article III standing to bring his unfair competition

state law claim against Hartford with respect to short-term

benefits. 

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The Court concludes that an unfair competition claim against

Hartford and UDC would be futile and the Court will not grant

Plaintiff leave to add that claim.

CONCLUSION

For the foregoing reasons, Plaintiff's Motion to Modify

Scheduling Order and to Amend Complaint (Docket No. 43) is GRANTED

IN PART and DENIED IN PART. The Court will modify the scheduling

order: the deadline for Plaintiff to add additional parties or

claims is extended and Plaintiff must add any additional parties or

claims within five days from the date of this order. The Court

grants Plaintiff leave to file his amended complaint with respect

to his two state law claims against CNA, but denies leave with

respect to Plaintiff's proposed unfair competition claim under

California Business and Professions Code § 17200. If he wants to

redraft his proposed amended complaint to plead in the alternative

and not to drop STD Plan as a defendant, he may do so. 

The remaining dates set forth in the scheduling order are not

vacated. If necessary, CNA can seek to stipulate to modify the

scheduling order or it can move for such relief. 

IT IS SO ORDERED.

Dated: 6/1/07 

CLAUDIA WILKEN

United States District Judge

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