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When Does Federal Law Preempt State Law in a Breach of Contract Case?

When Does Federal Law Preempt State Law in a Breach of Contract Case?

Although most breach of contract and civil litigation cases fall under state law, there are times when federal law overrides or “preempts” such claims. This means that even if you can prove your case under New York state law, it will not matter, as a federal statute with different provisions ultimately controls the outcome of the litigation. Conversely, if you are the defendant in such a case, you may find federal law more amenable to your position than state law.

California Judge Rejects Application of New York Law in Anthem Data Breach

Federal preemption often comes into play with consumer class actions—that is, lawsuits brought on behalf of hundreds (even thousands) of plaintiffs against a defendant company. For example, in an ongoing class action against one of the nation's largest health insurance providers, federal preemption led a California judge to dismiss a number of claims brought by the plaintiffs under New York law. Going forward, this means the class will need to prove its case under federal law.

In February 2014, Anthem Inc. disclosed that it was the victim of a “very sophisticated cyber attack” that compromised the personal information of up to 80 million customers. According toUSA Today, “The hackers gained access to Anthem's computer system and got information including names, birthdays, medical IDs, Social Security numbers, street addresses, e-mail addresses and employment information, including income data.” It was believed to be the largest data breach involving a health care database.

This past April, a group of New York customers filed suit in Brooklyn Supreme Court, accusing Anthem of negligence, breach of implied contract, invasion of privacy, and other violations of New York law. The plaintiffs also sought certification of a nationwide class action against Anthem. Anthem, which is based in Indiana, removed the case from the state supreme court to the federal court in Brooklyn. A federal panel which supervises multi-district class actions then reassigned the case to a federal judge in northern California.

On November 24, that judgedenied the plaintiffs' motion to return the case to New York state court. The judge further declared the plaintiffs' New York state law claims were preempted by the Employment Retirement Income Security Act (ERISA), a federal law that governs employer-provided health care plans like the ones sold by Anthem. ERISA specifically preempts any state law action regarding a customer's “rights under the terms of the plan,” which covers any breach of contract or similar claim.

The plaintiffs here argued ERISA did not apply because they alleged a breach of an “implied” contract rather than the “express” terms of their insurance policies. The judge said that argument was “unpersuasive,” noting they receive benefits under an ERISA-covered policy, so therefore the federal law should apply to any claim against the insurer. The judge also held Anthem did not have an “independent legal duty” to protect their customers' privacy outside of the ERISA.

Need Help With a Civil Lawsuit?

As the above case illustrates, litigation is a complex undertaking where different sets of rules may clash, adversely affecting the rights of both parties. That is why if you are involved in any lawsuit (or potential lawsuit) you should work with an experienced New York civil litigation attorney. Contact the offices of Waldhauser & Nisar, LLP, today if you need to speak with someone right away.
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