Maryland Insurance Commissioner v. Kaplan

McDonald, j. CareFirst has a unique public and charitable mission under State law to ensure affordable and adequate health care for ²⁸⁴ Maryland residents. In light of that mission it enjoys a variety of tax and other benefits under the law. State law confers broad authority on the Maryland Insurance Commissioner (“Commissioner”) to oversee its operation and its adherence to its mission.

As this Court noted in 1994, because CareFirst has no shareholders, the Commissioner has -an enhanced role in preventing abuses and misuse of corporate funds. One concern is the payment of excessive executive compensation from corporate assets that would otherwise be devoted to its public and charitable purposes. In 2003, while reforming the governance and oversight of Carefirst, the Legislature entrusted the Commissioner with ensuring that executive compensation at CareFirst is “fair and reasonable” and “for work actually performed for the benefit of the corporation.” This case arises from the termination of Leon Kaplan, a former executive of CareFirst. At that time, CareFirst declined to pay part of the post-termination compensation set forth in Mr. Kaplan’s employment contract on the basis that it was not “for work actually performed,” as that standard had been interpreted by the Commissioner.

In a subsequent administrative proceeding, the Commissioner affirmed the decision not to pay those benefits on the ground that the payments would violate the statute. We are asked to decide whether the Commissioner’s determination is preempted in part by the federal Employee Retirement Income Security Act of 1974 (“ERISA”) and, if not, whether the Commissioner has mis-applied the Maryland statute. For the reasons outlined below, we hold that the Commissioner’s determination is not preempted by ERISA, that the Commissioner’s construction of the insurance code is legally correct, and that there was substantial evidence to support the Commissioner’s determination in this case. Background CareFirst Carefirst, Inc. (“CareFirst”), a nonstock, nonprofit Maryland corporation, is a holding company with two subsidiaries ²⁸⁵ that provide health insurance for millions of Maryland residents.

Each entity is licensed as a nonprofit health service plan under Maryland Code, Insurance Article (“IN”), § 14-101 et seq. Such entities are designated as “public benefit corporations” exempt from taxation. IN § 14-102(b). The statutory mission of a nonprofit health service plan is to “provide affordable and accessible health insurance,” to “assist and support public and private health care initiatives” for uninsured individuals, and to “promote the integration of a health care system that meets the health care needs of all the residents” of the areas in which it operates.

IN § 14-102(c). Because it has no shareholders and because it has an important public mission, CareFirst has long been subject to special regulation by the State. In particular, the law provides for close oversight by the Commissioner to ensure that its officers and directors carry out their fiduciary duties and that its assets are devoted to the statutory mission. In O’Donnell v. Sardegna, 336 Md. 18 , 646 A.2d 398 (1994), this Court held that CareFirst subscribers could not bring a “derivative action” against former officers of CareFirst for dissipating the company’s assets for the executives’ own benefit.

Rather, the Court held, Maryland law relies on oversight by State authorities, including the Commissioner, to prevent the waste of corporate assets of CareFirst through the payment of “excessive perquisites, salaries, and bonuses” to those who have charge of the company. 336 Md. at 37-44 , 646 A.2d 398 . Regulation of Executive Compensation at CareFirst Conversion statute — anti-inurement and anti-bonus provisions Following the Sardegna decision, the General Assembly enacted a statute governing the acquisition and conversion of nonprofit health care entities such as CareFirst into for-profit entities. Chapters 123, 124, Laws of Maryland 1998, codified at Maryland Code, State Government Article (“SG”), § 6.5-101 et seq. Under that law, conversion of a nonprofit health ²⁸⁶ service plan like CareFirst into a for-profit company, or its sale or merger, requires the approval of the Commissioner.

A key concern of that legislation is to ensure that the “public or charitable assets” of such an entity are not redirected to the private benefit of its managers or others. Any such transaction is to be scrutinized to, among other things, “ensure that no part of the public or charitable assets ... inure directly or indirectly to an officer, director, or trustee” of the organization. SG § 6.5 — 301(b)(4). In addition, steps must be taken to ensure that “no officer, director, or trustee of the [organization] receives any immediate or future remuneration as the result of an acquisition ... except in the form of compensation paid for continued employment....” SG § 6.5-301(b)(5).

These restrictions are sometimes referred to as the “anti-inurement” and “anti-bonus” provisions of the law governing acquisitions of nonprofit health care entities. 1 Anti-inurement and anti-bonus provisions applied to proposed Carefirst transaction In 2002, the management of CareFirst sought approval from the Commissioner 2 for a proposed conversion of CareFirst to for-profit status and the sale of the company to a private health insurer, Wellpoint Health Networks, Inc., for approximately $1.37 billion. As part of the deal, CareFirst executives were slated to receive $119.6 million in merger incentives and severance pay, including $39.4 million in retention bonuses, severance, and tax benefits for CareFirst’s then-CEO William L. Jews. When word of the proposed deal broke, there was considerable outcry among both the public and State legislators. 3 ²⁸⁷ The Commissioner reviewed the application and, after conducting 15 days of hearings, issued a report and an order in March 2003 concluding that the proposed conversion and acquisition was not “in the public interest” and that it was being driven by the anticipated payments of multi-million dollar bonuses to CareFirst executives. Accordingly, the Commissioner concluded that the proposed transaction violated Maryland law in a number of respects, including the antiinurement and anti-bonus provisions.

Stating that “the critical inquiry is whether any sums that an officer or director receives constitute reasonable or fair compensation for work actually performed,” the Commissioner concluded that the proposed payments to CareFirst executives would violate both provisions. Commissioner’s construction of conversion statute incorporated in IN § 14-139 In response to the Commissioner’s report, the General Assembly enacted extensive legislation during its 2003 and 2004 sessions to reform CareFirst and refocus its management on its nonprofit mission. Chapters 356, 357, Laws of Maryland 2003; Chapters 257, 330, Laws of Maryland 2004. 4 Among the reforms were additional measures to govern executive compensation at nonprofit health service plans. That legislation incorporated into IN § 14 — 139(c) the general standard that the Commissioner had developed in applying the antiinurement and anti-bonus provisions of the conversion statute in the Wellpoint transaction: A director, trustee, officer, executive, or employee of a [nonprofit health service plan] may only approve or receive from the assets of the corporation fair and reasonable compensation in the form of salary, bonuses, or perquisites ²⁸⁸ for work actually performed for the benefit of the corporation.

IN § 14-139(c) (emphasis added). The anti-inurement and anti-bonus standards were thus effectively extended to executive compensation outside of the context of an acquisition or for-profit conversion of a nonprofit health service plan. 5 To ensure that only “fair and reasonable” compensation is paid “for work actually performed,” the statute requires that the board of directors approve and adhere to compensation guidelines for board members and officers. IN § 14-139(d). Those guidelines are to be developed by comparison with similar nonprofit health service plans — as opposed to private corporations.

Id. On an annual basis, the Commissioner is to review the compensation actually paid and, if it exceeds the guidelines, prohibit the payment. Id. The William Jews case In November 2006, the board of directors of CareFirst terminated William L. Jews, who had served as its CEO since 1993.

In accordance with the severance terms of Mr. Jews’ employment contract, the board approved the payment to Mr. Jews of approximately $18 million in post-termination benefits comprised of various components of his compensation package. 6 Part of the amount approved consisted of a payment based on the terms of CareFirst’s Supplemental Executive Retirement Plan (“SERP”) — an unfunded executive pension ²⁸⁹ plan that is also a subject of this case. Pursuant to IN § 2-205, 7 the Commissioner conducted an examination of Care-First to review the compensation and benefits to be paid to Mr. Jews following his termination. The Commissioner examined the post-termination payments due Mr. Jews under his employment contract with CareFirst and determined that the amount violated the requirements that compensation be “fair and reasonable” and “for work actually performed for the benefit of the corporation.” In reaching that conclusion, the Commissioner reasoned that these two requirements of IN § 14-139(c) imposed substantive obligations on the officers and directors of CareFirst that were independent of the procedural guidelines for setting compensation that are set forth in IN § 14 — 139(d). The Commissioner also concluded that whether proposed compensation satisfies the criteria of IN § 14-139(c) — ie., whether it is “fair and reasonable” and for “work actually performed” — is a question of fact to be determined on the circumstances of each case.

On July 14, 2008, the Commissioner ordered that Mr. Jews’ total post-termination compensation be reduced by half — from approximately $18 million to approximately $9 million — although the order did not specify how the reduction was to be allocated across the various components of the compensation package. 8 ²⁹⁰ Revision of CareFirst executive compensation guidelines After the Commissioner’s order was issued in the Jews case, the compensation committee of the CareFirst board revised CareFirst’s executive compensation guidelines and, on September 28, 2008, approved a revision to be submitted to the board. The revised guidelines were adopted by the board in December 2008. These revised guidelines acknowledge that IN § 14-139 requires CareFirst to propose compensation guidelines consistent with that law. The guidelines included recognition of the obligation on the CareFirst Board to make “a separate independent judgment whether the compensation — even if otherwise comparable to similar health service plans — constitutes fair and reasonable compensation ... for work actually performed for the benefit of CareFirst.” The Employment and Compensation of Mr. Kaplan Mr. Kaplan’s employment agreement Leon Kaplan had been retained by CareFirst to serve as an executive vice president in December 2000.

In that capacity, Mr. Kaplan was primarily responsible for the insurance claims function and information technology. 9 At the time he was hired, he executed an employment agreement, which provided that it was to be interpreted in accordance with Maryland law. The terms of the agreement called for Mr. Kaplan’s employment to run until December 3, 2003, at which time the ²⁹¹ agreement would automatically renew each year until either Mr. Kaplan or CareFirst opted out. The original employment agreement was entered into prior to the rejection of the proposed Wellpoint transaction, the amendment of IN § 14-139, or the development of revised CareFirst executive compensation guidelines. 10 Mr. Kaplan’s employment agreement provided several forms of post-employment compensation in the event that his employment with CareFirst was terminated without cause: (1) He was to continue to receive his base salary for two years after the date of termination. (2) He was to receive payment of the full-year target amount under the annual incentive plan (“AIP”), also called the Management Incentive Plan, for the year in which he was terminated if the termination occurred after the first three months of the calendar year.

(3) He was to receive a long-term incentive plan payment on a prorated basis. (4) He was to receive a payment from CareFirst’s SEKP, if he met certain age and years-of-service eligibility requirements. (5) He was to continue to receive a variety of additional benefits and perquisites for one year. Under a non-compete clause in the employment agreement, Mr. Kaplan was prohibited from working in the health insurance industry for two years following termination.

The elements of Mr. Kaplan’s post-employment compensation that are at issue in this case are the payments with respect to the AIP and the SERP. Mr. Kaplan’s employment agreement provided for him to receive enhanced benefits with ²⁹² respect to each of those plans that exceeded the amounts that might otherwise be due under both plans. The AIP was designed to provide additional compensation to CareFirst executives and other management employees each year if CareFirst achieved certain minimal levels of financial and other performance for the particular year. The payout was to be determined at the end of the calendar year with payments made the following March.

The “target award” for a person in Mr. Kaplan’s position was to be 45% of base salary. 11 Under Mr. Kaplan’s employment agreement, he was to receive a full-year payout of the target amount upon termination, even if he did not work the entire year and even if the minimal objectives were not achieved, so long as he was terminated after the first three months of that year. A supplemental executive retirement plan, or SERP, provides a company’s senior executives with retirement benefits in addition to those provided under a company’s general pension plan. 12 The SERP for CareFirst executives had what is known as “cliff vesting” — ie., an employee must work a certain number of years in order to be eligible for benefits under the plan. Mr. Kaplan’s employment agreement enhanced his potential benefits under the SERP by crediting him with time that he had not actually worked for CareFirst. Under the CareFirst SERP, an executive was ordinarily eligible for benefits if, upon retirement, the executive either (a) was at least 55 years old and had served 10 years of executive service or (b) was at least 62 years old and had served five ²⁹³ years of executive service.

As part of his employment agreement, Mr. Kaplan was credited with executive service from January 1, 1991, almost 10 years prior to his actual employment by CareFirst. 13 The Termination of Mr. Kaplan On April 30, 2008, Mr. Kaplan was terminated without cause by CareFirst. Under the terms of his contract, Mr. Kaplan was to receive approximately $6.7 million in post-termination monetary compensation. 14 The termination occurred during the pendency of the Commissioner’s examination and hearing in the Jews case. As indicated above, as a result of the Commissioner’s order in the Jews case, the CareFirst board reviewed its compensation guidelines and revised them to ensure compliance with IN § 14-139(c) as construed by the Commissioner. It reviewed Mr. Kaplan’s situation with its counsel and a compensation consultant, in light of those guidelines.

At the time of his termination, Mr. Kaplan would not have been eligible for SERP benefits, absent the credit provided in his employment contract. 15 Similarly, he would not otherwise have been eligible for a full-year payout of the target amount under the ²⁹⁴ terms of the AIP, even if he had remained employed with CareFirst for the full year. 16 CareFirst Decision Not to Pay SERP and Full-Year AIP After consulting with legal counsel concerning the application of IN § 14 — 139(c), the CareFirst CEO recommended to the company’s compensation committee that Carefirst not pay Mr. Kaplan the benefits under the SERP or a full-year target amount under the AIP, reasoning that those amounts were not for work actually performed. The compensation committee accepted that recommendation. On January 29, 2009, CareFirst advised the Commissioner that it had determined that it should not pay Mr. Kaplan a benefit under the SERP and should pay only a pro rata amount under the AIP. As a result, it would pay Mr. Kaplan $2,695,912 17 (plus $4,719 in unpaid salary due at the time of termination) instead of the $6.7 million claimed by Mr. Kaplan.

It decided not to pay Mr. Kaplan $3,853,033 that he had sought with respect to the SERP and $181,089 representing the balance of the full year target amount with respect to the 2008 AIP. Administrative Review by the Commissioner On February 5, 2009, the Commissioner issued an initial order concluding that CareFirst’s decision was consistent with IN § 14-139. The Commissioner further concluded that, if CareFirst were to pay Mr. Kaplan the amount he sought, it would violate IN § 14-139(c). Mr. Kaplan requested a hearing as to that initial determination, and the matter was delegated to the Deputy Commissioner for a final administrative decision. 18 ²⁹⁵ On September 14, 2009, following an evidentiary hearing in which CareFirst also participated, the Deputy Commissioner affirmed the prior order and concluded that CareFirst was precluded by IN § 14-139(c) from paying Mr. Kaplan the additional $4,034,122 in SERP and full year AIP payments.

That is the ruling that we have been asked to review. 19 In a memorandum explaining the final administrative order, the Deputy Commissioner rejected Mr. Kaplan’s legal arguments that the application of IN § 14-139 to the SERP was preempted by ERISA and that its application to him violated the contract clauses of the federal and Maryland constitutions. 20 The Deputy Commissioner upheld the determination of the CareFirst board for two reasons. First, the Deputy Commissioner agreed that the SERP and full-year AIP payments would violate IN § 14-139(c) because they were not “for work actually performed” for the benefit of CareFirst. She noted that the Legislature had established this standard in light of the distinction between nonprofit health service plans and private corporations. She concluded that post-termination payments must represent moneys owed to the departing employee (such as salary, commission, or deferred compensation) for work providing a benefit to Care-First and not simply benefit the departing employee.

An incentive or inducement provided at the time of hiring that did not relate to any work by the employee does not meet that standard. In the Deputy Commissioner’s view, the CareFirst board had correctly determined that the grant, at the outset of ²⁹⁶ employment, of the service credit toward the SERP and the grant of a full-year AIP payout for a partial year’s work were inducements for Mr. Kaplan that did not directly benefit CareFirst or compensate Mr. Kaplan for work already done. She reasoned that “Mr. Kaplan did not have to do anything to earn the service credit.” Accordingly, she concluded that a grant of the service credit and a payment of a full-year AIP amount would violate IN § 14 — 139(c) because they were not for work actually performed. Second, the Deputy Commissioner concluded that, even if the SERP payment and full-year AIP payout were “for work actually performed,” the payments would violate IN § 14-139(c) because the amounts were not fair and reasonable.

She noted that the provisions of Mr. Kaplan’s employment contract that supported those payments contradicted the standards that otherwise governed the SERP and AIP. Without the special service credit provided in his employment contract, Mr. Kaplan did not satisfy either of the criteria for vesting in the SERP based on age and length of employment. Under the actual terms of the 2008 Management Incentive Plan, Mr. Kaplan would be entitled at best to a prorated AIP payment. The Deputy Commissioner reasoned that an employment contract that singled out the employee for such “preferential treatment” and “favoritism” was unjustified, particularly in the setting of a nonprofit health service plan.

She observed that nothing in the record indicated that Mr. Kaplan had been awarded these benefits because his skills were rare or difficult to find. She further noted that his own expert stated that the market for such skills is broad and that Mr. Kaplan had earned approximately 47% more in 2007 in total direct compensation than the industry average for his position. Judicial Review in Circuit Court Mr. Kaplan appealed the final administrative order to the Circuit Court for Baltimore County. That court held that there was substantial evidence to support the Commissioner’s determination that the payment to Mr. Kaplan of the enhanced SERP and full-year AIP benefits would not be for ²⁹⁷ work actually performed and therefore would violate IN § 14-139(c).

However, the court also held that ERISA preempted the Commissioner’s action with respect to the SERP. Accordingly, the Circuit Court upheld the Commissioner’s decision as to the full-year AIP payment and reversed it as to the SERP. The Commissioner appealed the Circuit Court’s decision to the Court of Special Appeals. Mr. Kaplan filed a cross-appeal.

Prior to a decision by the intermediate appellate court, we issued a writ of certiorari. Discussion The final administrative order is subject to judicial review pursuant to IN § 2-215. In this context we directly evaluate the Commissioner’s administrative determination, not the decision of the Circuit Court. Mehrling v. Nationwide Ins.

Co., 371 Md. 40, 57 , 806 A.2d 662 (2002). There is no dispute that the CareFirst SERP is regulated by ERISA. 21 Thus, the first question that we must resolve is whether the ERISA preemption provision precludes the application of State law to the proposed SERP payment. If not, we consider whether the final administrative order correctly interpreted and applied IN § 14-139(c) in approving Care-First’s decision not to pay the SERP benefit. In conjunction with that question, we also consider the final administrative order’s approval of CareFirst’s decision to pay only a prorated AIP benefit.

Standard of Review The interpretation of ERISA, and more particularly of the breadth of its preemption provision, is a legal question that is not within the special expertise of the Commissioner. Accordingly, we accord no special deference to the Commissioner’s view of that issue. Our review of the Commissioner’s application of IN § 14-139(c) is otherwise. That statute is one of several ²⁹⁸ provisions in the insurance code in which the General Assembly, as described by this Court in Sardegna and reinforced in subsequent legislation, has charged the Commissioner with special oversight of nonprofit health service plans.

As outlined above, in IN § 14-139(c) itself, the General Assembly approved, incorporated, and extended the Commissioner’s interpretation of anti-inurement and anti-bonus provisions of the conversion statute. Accordingly, the Commissioner’s construction of IN § 14-139(c) is entitled to substantial deference. See, e.g., Board of Physician Quality Assurance v. Banks, 354 Md. 59, 69 , 729 A.2d 376 (1999). Finally, assuming that we agree with the administrative construction of the statute, the application of the correct legal standard to the facts of a particular case must be supported by substantial evidence — that is, we assess “whether a reasoning mind reasonably could have reached the factual conclusion the agency reached.” Lumbermen’s Mut.

Cas. Co. v. Insurance Commissioner, 302 Md. 248, 266 , 487 A.2d 271 (1985) (quotation and citations omitted). Whether the Commissioner’s Application of IN § 14-139(c) is Preempted by ERISA ERISA Preemption Under the Supremacy Clause of Article VI of the United States Constitution, a federal law preempts a state law when Congress chooses to supersede state law, expressly or by implication, or when there is a conflict between federal and state law. Pacific Gas & Elec.

Co. v. State Energy Resources Conservation and Development Comm’n, 461 U.S. 190, 203-04 , 103 S.Ct. 1713 , 75 L.Ed.2d 752 (1983); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 , 67 S.Ct. 1146 , 91 L.Ed. 1447 (1947). One example of express preemption appears in ERISA, which provides that it “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” covered by the statute. 29 U.S.C. § 1144 (a). There are a number of exceptions to this broadly ²⁹⁹ stated preemption, including laws relating to insurance and state criminal laws. 29 U.S.C. § 1144 (b)(2), (4). The Supreme Court has noted the difficulty in defining the scope of the seemingly simple language of the ERISA preemption provision. “If ‘relate to’ were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes pre-emption would never run its course, for really, universally, relations stop nowhere....

We simply must go beyond the unhelpful text and the frustrating difficulty of defining its key term, and look instead to the objectives of the ERISA statute as a guide to the scope of the state law that Congress understood would survive.” New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655-56 , 115 S.Ct. 1671 , 131 L.Ed.2d 695 (1995) (internal quotations and citations omitted). The Court has devised a two-part inquiry: “A law ‘relate[s] to’ a covered employee benefit plan for purposes of [§ 1144(a) ] if it [1] has a connection with or [2] reference to such a plan.” Cal. Div. of Labor Stds.

Enforcement v. Dillingham Constr., N.A., 519 U.S. 316, 324 , 117 S.Ct. 832 , 136 L.Ed.2d 791 (1997). This test is of limited utility, as “connection with” is little more definite than “relates to.” See Travelers, 514 U.S. at 656 , 115 S.Ct. 1671 . As a practical way to determine whether a state law has the forbidden connection, courts look both to “the objectives of the ERISA statute as a guide to the scope of the state law that Congress understood would survive, as well as to the nature of the effect of the state law on ERISA plans.” Travelers, 514 U.S. at 658-59 , 115 S.Ct. 1671 . Consistent with that approach, the Supreme Court has referred to statements of ERISA’s congressional sponsors who explained that the preemption provision was designed to preclude “conflicting and inconsistent State and local regulation.” Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 9-11 , 107 S.Ct. 2211 , 96 L.Ed.2d 1 (1987) (citing 120 Cong.

Rec. 29197 & 29933 (1974)). The Court has summarized those statements as follows: It is thus clear that ERISA’s pre-emption provision was prompted by recognition that employers establishing and ³⁰⁰ maintaining employee benefit plans are faced with the task of coordinating complex administrative activities. A patchwork scheme of regulation would introduce considerable inefficiencies in benefit program operation, which might lead those employers with existing plans to reduce benefits, and those without such plans to refrain from adopting them. Pre-emption ensures that the administrative practices of a benefit plan will be governed by only a single set of regulations.

Id. at 11 , 107 S.Ct. 2211 . Therefore, “pre-emption does not occur ... if the state law has only a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general applicability.” District of Columbia v. Greater Washington Bd. of Trade, 506 U.S. 125 , 130 n. 1, 113 S.Ct. 580 , 121 L.Ed.2d 513 (1992) (internal quotation marks and citations omitted). “What triggers ERISA preemption is not just any indirect effect on administrative procedures but rather an effect on the primary administrative