Lupton v. Blue Cross and Blue Shield

LUPTON v. BLUE CROSS AND BLUE SHIELD, 1999 NCBC 4

STATE OF NORTH CAROLINA ) GENERAL COURT OF JUSTICE
ORANGE COUNTY ) SUPERIOR COURT DIVISION
98-CVS-633
BRADSHAW B. LUPTON, )
individually and on behalf of all persons ) AMENDED ORDER AND OPINION
similarly situated, )
)
Plaintiff )
)
v. )
)
BLUE CROSS AND BLUE SHIELD
)
OF NORTH CAROLINA, a non-profit
)
Corporation,
)
Defendant )
)
and )
)
MICHAEL F. EASLEY, ATTORNEY )
GENERAL, on behalf of the rights and )
interests of the public, )
)
Defendant- )
Intervenor )
)

{1} This matter is before the Court on defendant’s motion to dismiss for lack of subject matter jurisdiction
pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure.[fn1] For reasons set forth below,
it appears to the Court that the complaint fails to state a claim upon which relief can be granted, and the
defendant’s motion should be GRANTED.

Marvin Schiller, Carol M. Schiller; Hare & Hare, by Nicholas S. Hare, for plaintiffs.

Maupin Taylor & Ellis, P.A., by M. Keith Kapp, Laura Kay W. Berry, and Kevin W. Benedict;
Robinson, Bradshaw & Hinson, P.A., by Robin L. Hinson, A. Ward McKeithen, and Frank E.
Emory, for defendant.

Attorney General Michael F. Easley, by Special Deputy Attorney General John R. Corne, for
defendant-intervenor.

FACTS

{2} Plaintiff Lupton filed his action on behalf of himself and all other persons who were, are, or will be
subscribers in an underwritten medical service plan of Defendant Blue Cross and Blue Shield of North
Carolina (hereinafter "Blue Cross"), seeking a declaratory judgment, preliminary and permanent injunctive
relief, and monetary damages.[fn2] The essence of plaintiff’s claims is that defendant misrepresented to
the Commissioner of Insurance that its reserves were within statutory limits in order to secure approval of
higher medical insurance premium rates. (Giduz compl. paras. 39, 45-46, 49-50, 53-54, 61; Lupton compl.
paras. 39, 45-46, 49-50, 53-54, 61.) Plaintiffs’ chief allegation in this regard is that Blue Cross included
gross receipts from its cost-plus business in its reserves calculation, which is prohibited by N.C.G.S. 58-
65-95. Plaintiffs allege that this purported conduct by the defendant was unfair and deceptive in violation
of North Carolina’s unfair trade practice laws. Plaintiff further alleges common law causes of action for
(1) breach of fiduciary duty, (2) breach of contract, (3) unjust enrichment, and (4) fraud. However
phrased, all of plaintiffs’ claims seek recovery of the same damages: a substantial refund based on the
allegedly excessive reserves accumulated by the defendant.

OPINION

{3} The standard for ruling on a motion to dismiss pursuant to Rule 12(b)(6) is "whether, as a matter of
law, the allegations of the complaint, treated as true, are sufficient to state a claim upon which relief can be
granted under some legal theory . . . ." Harris v. NCNB, 85 N.C. App. 669, 670, 355 S.E.2d 556, 558
(1988). However, a motion to dismiss is properly granted where a valid legal defense stands as an
insurmountable bar to plaintiffs’ recovery. Horton v. Carolina Medicorp, Inc., 344 N.C. 133, 135, 472
S.E.2d 778, 780 (1996). The defendant asserts that the filed rate doctrine, adopted by North Carolina in
N.C. Steel, Inc. v. National Council, 123 N.C. App. 163, 170, 472 S.E.2d 578, 581 (1996), aff’d, 347 N.C.
627, 496 S.E.2d 369 (1998), stands as a complete bar to the plaintiff’s recovery.

{4} Chapter 58 of the North Carolina General Statutes is a comprehensive regulatory scheme for the
insurance industry. Under Chapter 58, the Insurance Commissioner has broad powers to set rates and to
address violations by insurers. This scheme is designed to place regulatory authority over the insurance
business with the administrative agency, which has expert knowledge in the field. The central issue
presented by the motion to dismiss is whether the defendant’s alleged acts which provide the basis for
plaintiff’s complaint are acts that the legislature intended to be within the regulatory power of the
Insurance Commission. The Court concludes that the plaintiff’s claims constitute an assertion that the
Insurance Commissioner made an error in the computation of defendant’s allowable reserves, and that this
resulted in an error in setting the approved rate. Those claims are barred by the filed rate doctrine.

{5} The filed rate doctrine (otherwise known as the Keogh doctrine) holds that a plaintiff may not assert a
claim for damages "on the grounds that a rate approved by a regulator as reasonable was nonetheless
excessive or inadequate because it was the product of unlawful conduct." N.C. Steel, 347 N.C. 627, 496
S.E.2d 369 (1998); Keogh v. Chicago & N.W. Ry. Co., 260 U.S. 156, 43 S.Ct. 47, 67 L.Ed 183 (1922).
Under the filed rate doctrine, once a rate is deemed lawful by the appropriate regulator, that rate
determination cannot be challenged other than by a timely direct appeal of the regulator’s decision to
approve the rate. N.C. Steel, 347 N.C. 627, 632, 496 S.E.2d 369, 372 (1998) ("When the Commissioner
approved the rates, they became the proper rates . . . . We do not believe that, with this comprehensive
regulatory scheme, the General Assembly intended that the rate could be collaterally attacked."). North
Carolina applies the filed rate doctrine to the insurance industry. Id.

{6} Courts that have adopted the filed rate doctrine have given many reasons for doing so, including: (1)
that the agency’s authority to determine the reasonableness of the rates must be preserved. (N.C. Steel, 123
N.C. App. 163, 169-170, 472 S.E.2d 578, 584-585 (1996), quoting Wegoland Ltd. V. NYNEX Corp., 27
F.3d 17 (2d Cir. 1994) (holding that the filed rate doctrine is necessary because:

Congress and state legislatures establish regulatory agencies in part to ensure that rates
charged by generally . . . oligopolistic industries are reasonable . . . . If courts were licensed to
enter this process under the guise of ferreting out . . . [antitrust violations] in the rate-making
process, they would unduly subvert the regulating agencies’ authority and thereby undermine
the stability of the system).

Id. at 168; (2) that the agency which regulates the industry involved possesses expertise with regard to that
industry, whereas courts do not. Id; and (3) the filed rate doctrine promotes uniformity in rate making
decisions. N.C. Steel, 123 N.C. App. 163.

{7} A review of the Supreme Court’s decision in N.C. Steel demonstrates that the filed rate doctrine bars
the plaintiff’s claims in this action. In N.C. Steel, the plaintiffs were companies paying workers’
compensation insurance premiums. The plaintiffs alleged that the insurance companies withheld certain
evidence from the Commissioner of Insurance about servicing carrier fees for residual market workers’
compensation insurance in order to secure approval of excessive rates. The plaintiffs had two theories
under which they believed they were entitled to relief. First, plaintiffs argue that since defendants had
wrongfully obtained the excessive rate, they were entitled to a refund of the excess premiums paid. The
Court of Appeals held (and the Supreme Court affirmed) that because such a refund could only be
calculated by determining what the "proper rate" would have been, the filed rate doctrine barred recovery.

{8} Plaintiffs’ second theory was based on allegations that the defendants conspired to pay excessive
servicing carrier fees, which prevented the premiums from covering losses in the residual market. This
resulted in a shortfall, requiring the defendants to use part of the premiums from the voluntary market to
cover this loss. The plaintiffs alleged that the defendants’ unlawful actions forced the defendants to place
more marginal risks in the residual market with its higher premiums. The plaintiffs maintained that, under
this theory, it was not necessary to question the rates set by the Insurance Commissioner in order to prove
their damages. They argued that the damage to the plaintiffs came from shifting plaintiffs to the residual
market, and thus did not depend on a challenge to the rates. Id. The Court of Appeals agreed, stating:

"[T]he filed rate doctrine does not act to bar any claims which involve damages other than
inflated rates."

....

We do not believe that plaintiffs’ second claim for relief requires the approved rates to be
recalculated. Instead, we find that plaintiffs’ second claim for relief depends only on the
number of employers who were forced to purchase insurance in the residual market by the
alleged illegal conduct which would otherwise have been able to purchase insurance in the
voluntary market.

N.C. Steel, 123 N.C. App. At 172, 173, 472 S.E.2d at 587-588. (1996).

The Supreme Court reversed, holding:

We believe that the plaintiffs cannot prove their claim without the rates set by the
commissioner being questioned. The plaintiffs’ damages must come from being shifted from
the voluntary market to the residual market. If the plaintiffs offer evidence that a certain
number of policyholders who were in the residual market should have been in the voluntary
market, the defendants could show that the influx of these policyholders would have caused
the Commissioner to set different rates for the two markets. This is a questioning of rates set
by the Commissioner, which the filed rate doctrine is designed to prevent.

N.C. Steel, 347 N.C. 627, 496 S.E.2d 369. Thus, the Supreme Court made clear that in any case which
could result in a recalculation of the insurance rates approved by the Commissioner, the filed rate doctrine
applies.

{9} In the instant case, Lupton argues that his claim does not implicate the filed rate doctrine because it is
not necessary to re-compute the insurance rate approved by the Commissioner in order to compute
subscribers’ damages.[fn3] Instead, plaintiff argues, it is only necessary to calculate the amount Blue
Cross’ reserves exceed their statutory limit. The method of calculation of the statutory reserves in question
is set forth in N.C.G.S. §58-65-95 and §58-65-135. N.C.G.S. §58-65-95 provides in part as follows:

Every [medical service corporation] . . . shall accumulate and maintain . . . a special
contingent surplus or reserve at the following rates annually of its gross annual collection of
membership dues, exclusive of receipts from cost plus plans, until said reserve shall equal
three times its average monthly expenditures for hospital and/or dental claims and
administrative and selling expenses:
(1) First $200,000 . . . . . . . . . . . . . . . 4%

(2) Next $200,000 . . . . . . . . . . . . . . . 2%

(3) All above $400,000 . . . . . . . . . . . 1%

N.C.G.S. §58-65-95 (1991). Plaintiff argues that if the proper reserves calculation is done based on
defendant’s average monthly expenditures, the amount yielded can be subtracted from the reserves at
issue, and the class members can be refunded the difference without a recalculation of rates.

{10} This assessment of the situation is incomplete because it fails to acknowledge that the reserves
calculation is part of the Insurance Commissioner’s calculation of the approved rate.

In addition, the putative class members paid premiums to defendant at the approved rate(s). As provided,
the defendant accumulates reserves out of its gross collection of premiums. This is the only form of
payment from the putative class to the defendant. Therefore, implicit in their allegation that defendant
wrongfully acquired excessive reserves is the allegation that defendant charged excessive premiums to get
those reserves. Put another way, Blue Cross could show that a reduction in their reserves would have
caused the Commissioner to approve a different rate. This is the same analysis applied by the Supreme
Court to bar the plaintiff’s second cause of action in N.C. Steel. Based on the Supreme Court’s holding,
plaintiff’s claims are barred.

{11} Plaintiff also argues that the method of damage calculation distinguishes his case from N.C. Steel. As
stated above, the N.C. Steel plaintiffs alleged a conspiracy by the defendant insurance companies that led
to higher rates than would have been approved "in a competitive residual market." N.C. Steel at 636. Thus,
according to the N.C. Steel plaintiff, the factfinder would have been required to derive a reasonable rate in
the abstract in order to remedy the wrong caused by the conspiracy. (Plaintiff’s Brf. p. 5.) Lupton asserts
that his case is distinguishable, and outside the scope of the filed rate doctrine, because the factfinder
could recalculate his damages not in the abstract, but based on the statutory guidelines. While this
distinction may be relevant to the ease of calculating the amount of defendant’s allegedly unlawful gain, it
does not change the fact that what the plaintiff proposes involves a recalculation of the approved rate.

{12} The N.C. Steel Court did not base its decision on the difficulty of recalculating the rate, but rather on
the policy that it is not the province of the Court to redetermine an approved rate. The N.C. Steel decision
makes clear the judicial system’s deference to the Insurance Commission on all rate making matters. The
fact that plaintiff may have an easier method of computing damages than the N.C. Steel plaintiff is
irrelevant. Where the damages result in or require a recalculation of the approved rate, the filed rate
doctrine bars recovery. N.C. Steel and this case both challenge an underlying component of the
Commissioner of Insurance’s rate determination. If there is an error in determining the underlying
component and correction of that error could result in a rate change, those claims should be pursued
before the Insurance Commission.

{13} The Commissioner of Insurance has broad powers to determine whether defendant properly
calculated its reserve levels and to correct the situation through restitution and/or penalties if the
Commissioner determines that defendant did not properly calculate its reserves. Those powers provide an
adequate administrative remedy for plaintiff’s complaint. See N.C. Gen. Stat. §§ 58-2-40, 58-2-70, and 58-
65-95.

CONCLUSION

{14} The filed rate doctrine exists to prevent courts from intruding on the authority vested in
administrative agencies by the legislature. The North Carolina Insurance Commission has been given
broad authority by the state legislature to deal with all matters involving rates and rate setting. The
allegations in plaintiff’s complaint clearly implicate the approved rates. It is impossible to conclude that
defendant accumulated excess reserves without questioning the Commissioner’s approval of the premium
rates defendant was charging. The plaintiff’s proper recourse for questioning those rates is with the
Insurance Commission.

{15} It is therefore ORDERED that plaintiff’s complaint in both of the above captioned cases is dismissed
for failure to state a claim upon which relief may be granted.

This the 14th day of June, 1999.

_________________________________

Footnote 1 Defendant filed various other motions to dismiss contemporaneously with this motion. Since
this order is dispositive of the case, the Court does not reach defendant’s other motions. The Court notes
that the same statutory scheme which supports application of the filed rate doctrine also provides an
exclusive remedy which would support dismissal based upon a lack of subject matter jurisdiction pursuant
to Rules 12(b)(1) and (h)(3).

Footnote 2 The cases captioned above have been consolidated pursuant to an Order of this Court. The
complaints referred to herein are the Lupton Complaint (which mirrors the Giduz Complaint) and the
Lupton Amended Complaint. Giduz is no longer a party.

Footnote 3 It is significant to the Court that, while plaintiff argues that a recalculation of the approved rate
is unnecessary to compute his damages, plaintiff’s original complaint alleged that class members had been
damaged by having to pay excessive rates. (Lupton Compl. at paras. 39(c), 49, 50, 51, 53, 58, 60, 61.)
Plaintiff later filed an amended complaint that removed all reference to excessive rates, possibly in
response to defendant’s filed rate doctrine defense. Whatever plaintiff counsel’s reasons for amending the
complaint, it appears to the Court that plaintiff’s counsel initially and quite logically viewed damages in
terms of the excess premiums allegedly paid by subscribers as a result of defendant’s conduct, indicating
that a recalculation of those rates is necessary to reveal plaintiff’s damages.