No. 13-­--3787 HARTLAND LAKESIDE JOINT NO. 3 SCHOOL DISTRICT, OCONOMOWOC AREA… v. Wea Insurance Corporation

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 13-­‐‑3787
HARTLAND LAKESIDE JOINT NO. 3 SCHOOL DISTRICT,
OCONOMOWOC AREA SCHOOL DISTRICT, and ARROWHEAD
UNION HIGH SCHOOL DISTRICT,
Plaintiffs-­‐‑Appellants,
v.
WEA INSURANCE CORPORATION, et al.,
Defendants-­‐‑Appellees.
____________________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 12-­‐‑C-­‐‑154 — William E. Callahan, Jr., Magistrate Judge.
____________________
ARGUED MAY 23, 2014 — DECIDED JUNE 27, 2014
____________________
Before BAUER and EASTERBROOK, Circuit Judges, and ST.
EVE, District Judge.*
EASTERBROOK, Circuit Judge. Section 1102 of the Patient
Protection and Affordable Care Act, 42 U.S.C. §18002, pro-­‐‑
* Of the Northern District of Illinois, sitting by designation.

-- 1 of 8 --

2 No. 13-­‐‑3787
vides $5 billion to reimburse employers and their proxies for
some outlays on early retirees’ medical care. WEA Insur-­‐‑
ance, which administers health-­‐‑care programs on behalf of
many school districts in Wisconsin, told them that it would
collect on their behalf. It decided to use the federal money to
reduce premiums in future years. The school districts con-­‐‑
tended that WEA should have rebated premiums for the
years in which the retirees received the medical care that led
to the federal payments. The difference matters to school dis-­‐‑
tricts that want to switch carriers. WEA’s plan to cut future
rates, rather than provide rebates, gave it a competitive ad-­‐‑
vantage: a district that switched to another insurer would
never see a penny of the federal money.
Three districts that did switch filed this suit, in Wisconsin
court, contending that state law requires WEA to apply the
receipts so that the school districts whose expenses justified
the federal payments receive the economic benefit. The
school districts characterize WEA’s choice to allocate none of
the money to districts that switch carriers as a form of con-­‐‑
version. All of the complaint’s claims arise under state law,
and all litigants are citizens of Wisconsin. WEA nonetheless
removed to federal court, contending that §18002 and its im-­‐‑
plementing regulations, 45 C.F.R. §§ 149.1 to 149.700, are the
crux of the litigation. A magistrate judge, presiding by con-­‐‑
sent under 28 U.S.C. §636(c), denied the districts’ motion to
remand. 2012 U.S. Dist. LEXIS 57085 (E.D. Wis. Apr. 24, 2012).
The judge certified the issue under 28 U.S.C. §1292(b), but a
motions panel declined to accept the interlocutory appeal.
After the magistrate judge ruled in WEA’s favor on the mer-­‐‑
its, the school districts appealed from the final decision. Sub-­‐‑
ject-­‐‑matter jurisdiction is our first order of business.

-- 2 of 8 --

No. 13-­‐‑3787 3
Removal was proper if, and only if, the school districts’
claim arises under federal law. 28 U.S.C. §§ 1331, 1441. Yet
the complaint relies entirely on state law, and although WEA
contends that federal law is material to the suit, the existence
of a federal issue rarely allows removal. See, e.g., Gunn v.
Minton, 133 S. Ct. 1059 (2013); Bennett v. Southwest Airlines
Co., 484 F.3d 907, rehearing denied, 493 F.3d 762 (7th Cir.
2007).
“Rarely” differs from “never,” and WEA relies on Grable
& Sons Metal Products, Inc. v. Darue Engineering & Manufac-­‐‑
turing, 545 U.S. 308 (2005), for the proposition that, when the
principal issue is federal, removal is permitted. The magis-­‐‑
trate judge agreed, writing that WEA has a good defense if
federal law (including the regulations) allows insurers to col-­‐‑
lect the payments as the effective sponsors of the health-­‐‑care
plans. The magistrate judge did not conclude that federal
law occupies the field (the misleadingly named doctrine that
“complete preemption” supplies federal jurisdiction); noth-­‐‑
ing in §18002 suggests that all claims related to its benefits
necessarily are federal. Instead the judge thought that a fed-­‐‑
eral issue is itself enough for federal jurisdiction.
Grable announced a multi-­‐‑factor approach that has been
hard to use consistently. Its application here is doubtful,
since WEA does not contend that the only material issue is
federal. To make such an argument, it would have to con-­‐‑
cede that the school districts have a good claim under state
law. Yet far from conceding this, WEA denies that the dis-­‐‑
tricts have valid state-­‐‑law claims. Thus even from WEA’s
perspective, the case contains non-­‐‑trivial issues of both state
and federal law.

-- 3 of 8 --

4 No. 13-­‐‑3787
Moreover, it is difficult to see a federal defense. There is
no doubt a federal issue. The school districts have argued
that WEA, as an insurer rather than either a sponsor or fidu-­‐‑
ciary of a welfare-­‐‑benefit plan governed by ERISA, see Wis-­‐‑
consin Education Association Insurance Trust v. Iowa State Board
of Public Instruction, 804 F.2d 1059 (8th Cir. 1986), is ineligible
to collect funds under §18002 except as the school districts’
agent. See 42 C.F.R. §423.882. If that’s so, then it is easy to
classify WEA’s retention of the money as a form of conver-­‐‑
sion or breach of duty to the school districts, for which state
law supplies a remedy.
The magistrate judge thought otherwise, ruling that the
statute and regulations allow WEA to treat itself as a plan
sponsor rather than (solely) as the school districts’ agent for
collection. The judge added that reducing premiums in fu-­‐‑
ture years complies with the federal statute or regulations.
Suppose that’s right: Where’s the federal defense? To say
that a particular plan of distribution complies with federal
law (as a rebate also would) is not the end of the line. Many
things comply with federal law but violate state law. To dis-­‐‑
place state law, federal law must require a particular course
of action at odds with state rules, and the magistrate judge
did not conclude that §18002 or the regulations does that.
But we are getting ahead of ourselves. The magistrate
judge thought that a federal rule blocks the districts’ recov-­‐‑
ery. If Grable allows federal-­‐‑issue removal, and the magis-­‐‑
trate judge is wrong, that would be a reason to reverse on
the merits, not to send the case back to state court. See, e.g.,
Bell v. Hood, 327 U.S. 678 (1946). We must approach subject-­‐‑
matter jurisdiction on the assumption that WEA’s federal
arguments are not frivolous.

-- 4 of 8 --

No. 13-­‐‑3787 5
WEA’s understanding of Grable is the sticking point.
WEA treats it as allowing the removal of cases in which the
predominant issue concerns federal law. Some language in
Grable might be understood that way. But the Court held in
Gunn that this understanding is unsound. The Justices wrote
that “federal jurisdiction over a state law claim will lie if a
federal issue is: (1) necessarily raised, (2) actually disputed,
(3) substantial, and (4) capable of resolution in federal court
without disrupting the federal-­‐‑state balance approved by
Congress.” 133 S. Ct. at 1065. Gunn gives teeth to parts (1)
and (4) by holding that a legal malpractice case could not be
removed even though analysis of the claim depended on
understanding and application of federal patent law.
Whether the lawyers had provided competent work de-­‐‑
pended on how well they had dealt with issues of patent
law, and that couldn’t be decided without considering the
substance of the ex-­‐‑client’s contention that their former law-­‐‑
yers should have made particular patent-­‐‑specific arguments.
Yet the Court held that the litigation belonged in state court,
for state law defined the lawyers’ duties to their clients.
Gunn also observed that the litigation in Grable had de-­‐‑
pended on federal law from the outset, which limits Grable’s
scope. And other post-­‐‑Grable decisions, including Empire
HealthChoice Assurance, Inc. v. McVeigh, 547 U.S. 677 (2006),
and Pollitt v. Health Care Service Corp., 558 F.3d 615 (7th Cir.
2009), hold that a federal role in insurance is not enough to
establish that a state-­‐‑law suit really arises under federal law.
In Empire the Court held that a suit to recoup health benefits
paid under a plan for federal employees arose under state
law, even though the plan was a federal creation.

-- 5 of 8 --

6 No. 13-­‐‑3787
The removal of this litigation does not satisfy either part
(1) or part (4) of Gunn. The school districts’ suit does not
“necessarily” raise any issue of federal law. Grable involved
a quiet-­‐‑title action under state law in which A contended
that B’s title to real estate was invalid because it had been
conveyed to B by the United States following a seizure to
satisfy A’s tax liabilities. A insisted that the seizure and
transfer were vitiated by inadequate notice. State law pro-­‐‑
vided the remedy, a declaration of ownership, but it was
impossible to decide who owned the land without deciding
whether the federal government followed legal requirements
when seizing the parcel from A and conveying it to B. Decid-­‐‑
ing an issue of federal law was inescapable, and the national
government itself was vitally concerned about the outcome;
an adverse decision could undercut its ability to collect tax-­‐‑
es. Nothing remotely similar is true about the dispute be-­‐‑
tween WEA and the school districts.
As for (4) on Gunn’s list: how can one resolve a dispute
between an insurer and its clients about the size of premi-­‐‑
ums without stepping on states’ toes? The McCarran-­‐‑
Ferguson Act, 15 U.S.C. §§ 1011–15, gives states preeminence
in the domain of insurance regulation. Most insurance dis-­‐‑
putes arise under state law and are resolved in state court.
They can reach federal court, if at all, only under the diversi-­‐‑
ty jurisdiction. This is so well entrenched that even ERISA,
which may contain the broadest preemption clause of any
federal statute and completely occupies the field of employ-­‐‑
ees’ health and welfare benefits, see Franchise Tax Board of
California v. Construction Laborers Vacation Trust, 463 U.S. 1
(1983), has an exception for insurance, which it leaves to
state law. 29 U.S.C. §1191(a)(1). Treating every dispute about
what insurers do with money received under §18002 as aris-­‐‑

-- 6 of 8 --

No. 13-­‐‑3787 7
ing under federal law, and ignoring state-­‐‑law doctrines
about insurers’ duties to their clients, would disrupt the
state–federal allocation approved by Congress in the McCar-­‐‑
ran-­‐‑Ferguson Act and ERISA.
Approaching this subject from a different angle confirms
our perspective. The parties do not contend that §18002 cre-­‐‑
ates a private right of action. Thus Congress not only did not
affirmatively authorize federal litigation between competing
beneficiaries of the program (though claims against the
agency under the Administrative Procedure Act could be
possible) but also implied that these disputes should be re-­‐‑
solved in state court. See, e.g., Merrell Dow Pharmaceuticals
Inc. v. Thompson, 478 U.S. 804 (1986). A dispute between rival
beneficiaries of the program about who ultimately gets the
money is outside the scope of the federal rule.
Many federal programs create entitlements while leaving
ownership to state law. Think of patent law, which confers a
property right on the inventor but allows free transfer to
others by contract. Copyright law works the same way. T.B.
Harms Co. v. Eliscu, 339 F.2d 823 (2d Cir. 1964) (Friendly, J.),
holds that disputes about ownership of intellectual property
arise under state law unless the (asserted) copyright proprie-­‐‑
tor seeks one of the remedies provided by federal law (for
example, by maintaining that someone is liable for infringe-­‐‑
ment). Our circuit has reached the same conclusion. See, e.g.,
Affymax, Inc. v. Ortho–McNeil–Janssen Pharmaceuticals, Inc.,
660 F.3d 281 (7th Cir. 2011) (collecting cases). See also Ze-­‐‑
rand-­‐‑Bernal Group, Inc. v. Cox, 23 F.3d 159 (7th Cir. 1994)
(rights under a contract that is part of a sale in bankruptcy
arise under state law).

-- 7 of 8 --

8 No. 13-­‐‑3787
The current litigation is about ownership following dis-­‐‑
tribution by the national government. Consider a lender that
asserts a security interest in (and ultimately ownership of) a
refund of federal income taxes. The lender’s claim would
arise under state law, notwithstanding the federal source of
the money. Likewise the school districts’ claim to the eco-­‐‑
nomic benefit of the federal subsidies that were justified by
the medical expenses of the districts’ retirees is a dispute
about ownership and belongs in state court.
We appreciate that the school districts, which initially
wanted a remand, now prefer a final decision in federal
court, where they believe (despite their loss in the district
court) that they can prevail outright. If this case is returned
to state court, it must start anew—the magistrate judge’s de-­‐‑
cision will have no effect beyond the force of its reasoning—
and more than two years will have been lost. But practical
considerations never justify a federal court’s adjudication of
a suit over which it lacks subject-­‐‑matter jurisdiction. When
we asked for supplemental jurisdictional briefs, the school
districts admirably told us what they wanted (immediate
decision in their favor) yet carefully explained why they had
concluded that they are not entitled to that relief, because the
federal courts lack jurisdiction. Right they are.
The judgment of the district court is vacated, and the
case is remanded with instructions to return the litigation to
state court.

-- 8 of 8 --