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Reply to: ALEXANDER MCC. PETERS SPECIAL LITIGATION SECTION 919.716.6900 FAX: 919.716.6763 E-MAIL: apeters@mail.jus.state.nc.us

June 20, 2003

The North Carolina State Bar Authorized Practice Committee Pension Plan Subcommittee c/o David Johnson, Committee Counsel

P.O. Box 25908 Raleigh, North Carolina 27611

Re: Advisory Opinion: N.C. GEN. STAT. § 84.1 et seq. Federal Preemption of North Carolina’s Unauthorized Practice of Law Statute

Dear Sirs and Mesdames:

We are writing in response to Douglas J. Brocker’s 12 February 2003 letter to Senior Deputy Attorney General Ann Reed. In that letter, Mr. Brocker requested, on behalf of your subcommittee, an opinion from this Office as to whether the federal Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) preempts North Carolina’s unauthorized practice of law statutes, N.C. GEN. STAT. § 84.1 et seq. Specifically, Mr. Brocker noted that your committee has received numerous complaints asserting that it is common practice for non-lawyers, principally third-party administrators, to advise employers about the types of pension plans or profit sharing plans they should utilize, as well as to prepare or aid in the preparation of documents necessary to establish such plans. In the event that your committee decides that any of these activities constitute the unauthorized practice of law, your committee wishes to know whether North Carolina is nevertheless preempted by federal law – ERISA in particular – from enforcing its unauthorized practice of law statutes in instances such as those described. Two separate questions are raised: whether ERISA itself preempts North Carolina’s statutes and whether North Carolina’s statutes are preempted by regulations of the Internal Revenue Service. We have carefully reviewed relevant statutory, regulatory and case law – as well as the numerous briefs filed with your committee by interested parties – and for the reasons that follow, it is our opinion that North Carolina’s statutes probably are not preempted by ERISA, at least to the degree that they impose criminal penalties, but are preempted by IRS regulations.

ERISA, codified at 29 U.S.C. § 1001 et seq., was enacted by Congress to

protect . . . participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and ready access to the Federal courts.

29 U.S.C. § 1001(b). Additionally, ERISA was intended to

protect . . . the interests of participants in private pension plans and their beneficiaries by improving the equitable character and the soundness of such plans by requiring them to vest the accrued benefits of employees with significant periods of service, to meet minimum standards of funding, and by requiring plan termination insurance.

29 U.S.C. § 1001(c). With certain exceptions, the requirements of ERISA

apply to any employee benefit plan if it is established or maintained - (1) by any employer engaged in commerce or in any industry or activity affecting commerce; or (2) by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce; or (3) by both.

29 U.S.C. § 1003(a). “Employee benefit plans” includes “employee welfare benefit plans” (such as provide medical or hospital benefits) and “employee pension benefit plans.” 29 U.S.C. § 1002. Some specific types of employee benefit plans are excluded from ERISA’s regulatory scheme. These include: plans maintained by governments; church plans (unless the church elects to be covered); workers’ compensation, unemployment compensation, and disability plans, as long as the plans offer only legally required benefits; plans that cover only the owner or partners of a business and their spouses; and unfunded “excess benefit” plans. 29 U.S.C. § 1003(b). Additionally, some other types of plans – such as unfunded deferred compensation plans for highly compensated employees and funded excess benefit plans – are generally covered by ERISA but are exempted from many of its substantive provisions. 29 U.S.C. §§ 1003(a) and (b), 1051 (2) and (7), 1081 (3) and (9), and 1101(a)(1). Unless a plan described by 29 U.S.C. § 1003(a) meets one of the exemptions set forth in ERISA, it is subject to ERISA; an employer cannot “opt out” of ERISA.

Just as ERISA’s application to employee benefit plans is broad and sweeping, so too is its preemption of state law. Pursuant to 29 U.S.C. § 1144(a),

[e]xcept as provided in subsection (b) of this section, the provisions of this

subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.

29 U.S.C. § 1144(a) (emphasis added). For the purpose of this preemption provision, “[t]he term “State law” includes all laws, decisions, rules, regulations, or other State action having the effect of law, of any State.” 29 U.S.C. § 1144(c)(1). Pursuant to 29 U.S.C. § 1144(b), certain specific state laws – including banking, insurance and, significantly, “generally applicable” criminal laws – are “saved” from ERISA’s broad preemption.

We have been unable to find any case that squarely addresses the question of whether ERISA preempts a state’s prohibition on the unauthorized practice of law. We cannot therefore predict with certainty how a court would view this question. Nevertheless, an examination of the case law regarding the scope of ERISA’s preemption, as well as consideration of the exemption for “generally applicable” criminal laws from ERISA preemption, suggest that even if it is assumed that North Carolina’s unauthorized practice of law statutes “relate to any employee benefit plan,”they are not preempted by ERISA.

The United States Supreme Court has held that “a law ‘relates to’ an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97, 77 L. Ed. 2d 490, 501, 103 S. Ct. 2890, 2900 (1983). In Shaw, the Court noted that

[i]n deciding whether a federal law pre-empts a state statute, our task is to ascertain Congress’ intent in enacting the federal statute at issue. “Pre-emption may be either express or implied, and ‘is compelled whether Congress’ command is explicitly stated in the statute’s language or implicitly contained in its structure and purpose.” Id. at 95, 77 L. Ed. 2d at 500, 103 S. Ct. at 2899 (quoting Fidelity Federal Savings & Loan Assn. v. De la Cuesta, 458 U.S. 141, 152-153 (1982), and Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977)).

Id. Following Shaw and similar Supreme Court decisions, the United States Court of Appeals for the Fourth Circuit has held:

In fact, “ERISA pre-empts any state law that refers to or has a connection with covered benefit plans . . . ‘even if the law is not specifically designed to affect such plans, or the effect is only indirect.’” District of Columbia v. Greater Washington Bd. of Trade, 506 U.S. 125, 129-30, 121 L. Ed. 2d 513, 113 S. Ct. 580 (1992) (quoting Ingersoll-Rand Co. v. McClendon, 498 U.S.

133, 139, 112 L. Ed. 2d 474, 111 S. Ct. 478 (1990)). Of course, “some state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law ‘relates to’ the plan.” Shaw, 463 U.S. at 100 n.21. But, as long as the nexus between the state law and the employee benefit plan is not too tangential, “a state law of general application, with only an indirect effect on a pension plan, may nevertheless be considered to ‘relate to’ that plan for preemption purposes.” Smith v. Dunham-Bush, Inc., 959 F.2d 6, 9 (2nd Cir. 1992).

Griggs v. E.I. DuPont De Nemours & Co., 237 F.3d 371, 377-78 (2001) (action for negligent misrepresentation, on appeal from the United States District Court for the Eastern District of North Carolina). The Second Circuit made the following analysis in Aetna Life Insurance Co. v. Borges, 869 F.2d 142 (2d Cir. 1989):

[W]e find that laws that have been ruled preempted are those that provide an alternative cause of action to employees to collect benefits protected by ERISA, refer specifically to ERISA plans and apply solely to them, or interfere with the calculation of benefits owed to an employee. Those that have not been preempted are laws of general application – often traditional exercises of state power or regulatory authority – whose effect on ERISA is incidental.

Id. at 146. Factors to consider in determining whether state statutes of general application “relate to” ERISA plans include but are not limited to factors such as whether the state law negates an ERISA plan provision, whether the state law affects relations between primary ERISA entities, whether the state law impacts the structure of ERISA plans, whether the state law impacts the administration of ERISA plans, whether the state law has an economic impact on ERISA plans, whether preemption of the state law is consistent with other ERISA provisions, and whether the state law is an exercise of traditional state power. Arkansas Blue Cross & Blue Shield v. St. Mary’s Hosp., Inc., 947 F.2d 1341 (8th Cir. 1991), cert denied, 504 U.S. 957, 119 L. Ed. 2d 227, 112 S. Ct. 2305 (1992) (citations omitted). (The court noted, however, that “[a]lthough the Supreme Court has not discussed the relevance of [whether the state law is an exercise of traditional state power], its failure to consider this criterion when deciding ERISA preemption cases is telling.” Id. at 1350.)

As noted, 29 U.S.C. § 1144(b)(4) provides that §1144(a)’s preemption provision “shall not apply to any generally applicable criminal law of a State.” N.C. GEN. STAT. § 84-8, of course, makes it a Class 1 misdemeanor to engage in the unauthorized practice of law. Again, we have found very few cases that consider or apply 29 U.S.C. § 1144(b)(4). One court, however, has noted:

The § 1144(b)(4) exception from preemption for “generally applicable” State criminal laws appears designed to prevent otherwise criminal activity from

being immunized from prosecution simply because the activity “relates to” an employee benefit plan. The exception seems directed toward criminal laws that are intended to apply to conduct generally – criminal laws against larceny and embezzlement, for example. By virtue of § 1144(b)(4), a State is not precluded from prosecuting, under a theft statute applicable to the entire population, an employer who steals money from an employee benefit plan, simply because the theft involved such a plan. But by limiting the § 1144(b)(4) exception to criminal laws of general applicability, Congress apparently intended to preempt State criminal statutes aimed specifically at employee benefit plans.

Commonwealth v. Federico, 383 Mass. 485, 490, 419 N.E.2d 1374, 1377-78 (1981) (finding that prosecution of employers for failure to make contributions to employee pension plan is preempted).

N.C. GEN. STAT. § 84-8 is a criminal law of general applicability, not one “aimed specifically at employee benefit plans.” As noted, the question of whether a certain state action is preempted by federal law is one of congressional intent. 29 U.S.C. § 1144(b)(4) certainly appears to manifest a congressional intent that generally applicable state criminal laws are not preempted. Such a reading is consistent with the idea that unauthorized practice of law statutes are “an exercise of traditional state power” designed not to impinge in any way on the structure, design, or administration of employee benefit plans, but rather to protect the public by assuring a minimal level of competence by practitioners. See State v. Pledger, 257 N.C. 634, 127 S.E.2d 337 (1962). Accordingly, it is our opinion that, pursuant to 29 U.S.C. § 1144(b)(4), North Carolina’s unauthorized practice of law statutes probably are not preempted by ERISA, due to the fact that violation of those statutes is a criminal offense.

An additional question must be considered, however. That is whether North Carolina’s statutes are nevertheless preempted by duly-adopted regulations of the Internal Revenue Service, one of the two federal agencies charged with administering and enforcing ERISA’s provisions, and the agency whose area of responsibility is most affected by advice and assistance in the drafting of ERISA documents. (The United States Department of Labor also has responsibility for administering and enforcing ERISA’s provisions.) 31 C.F.R. §10.3 provides that attorneys, certified public accountants, agents enrolled with the IRS, enrolled actuaries, United States and state government officers and employees, and virtually anyone else who meets certain qualifications is authorized to practice before the IRS. (31 C.F.R. §10.3 was adopted pursuant to explicit Congressional authority set forth in 31 U.S.C. § 330.) Practice before the IRS is broadly defined:

Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the Internal Revenue Service, and representing a client at conferences, hearings, and meetings.

31 C.F.R. §10.2. This definition would appear to include preparation of ERISA-plan documents if prepared for submission to the IRS in order to qualify the employee benefit plan.

31 C.F.R. §§10.2 and 10.3 provide a basis for finding that North Carolina’s unauthorized practice of law statutes are preempted at least with regard to assistance in the preparation of ERISAplan documents: a state cannot place restrictions on who may practice before a federal agency that are more restrictive than the agency’s own rules. In Sperry v. Florida ex rel. Florida Bar, 373 U.S. 379, 10 L. Ed. 2d 428, 83 S. Ct. 1322 (1963), Mr. Sperry had for many years represented patent applicants, prepared and prosecuted their applications, and advised them in connection with their applications. The Florida Bar had sued to enjoin Mr. Sperry, a non-lawyer, from such practices, contending that they constituted the practice of law. The United States Supreme Court stated:

We do not question the determination that under Florida law the preparation and prosecution of patent applications for others constitutes the practice of law. Such conduct inevitably requires the practitioner to consider and advise his clients as to the patentability of their inventions under the statutory criteria, as well as to consider the advisability of relying upon alternative forms of protection which may be available under state law. It also involves his participation in the drafting of the specification and claims of the patent application, which this Court long ago noted “constitute[s] one of the most difficult legal instruments to draw with accuracy[.]” And upon rejection of the application, the practitioner may also assist in the preparation of amendments, which frequently requires written argument to establish the patentability of the claimed invention under the applicable rules of law and in light of the prior art. Nor do we doubt that Florida has a substantial interest in regulating the practice of law within the State and that, in the absence of federal legislation, it could validly prohibit nonlawyers from engaging in this circumscribed form of patent practice.

Sperry, 373 U.S. at 383, 10 L. Ed. 2d at 431-32, 83 S. Ct. at 1325. Nevertheless, the Court held that the Florida Bar could not regulate Mr. Sperry’s practice before the Commissioner of Patents. Noting that the Commissioner of Patents, with the approval of the Secretary of Commerce and with Congressional authorization, had adopted regulations allowing non-lawyers to practice before the Patent Office, as well as that such practice had been allowed before the Patent Office and other federal agencies for many years, the Court held:

A State may not enforce licensing requirements which, though valid in the absence of federal regulation, give “the State’s licensing board a virtual

power of review over the federal determination” that a person or agency is qualified and entitled to perform certain functions, or which impose upon the performance of activity sanctioned by federal license additional conditions not contemplated by Congress.

Id., at 383, 10 L. Ed. 2d at 432-33, 83 S. Ct. at 1326.

The Supreme Court of Florida relied on Sperry when it rejected a proposed opinion from the Florida Bar’s standing committee on the unlicensed practice of law that would have found that “certain nonlawyer involvement in the area of designing and preparing pension plans and advising clients concerning such plans to be the unlicensed practice of law.” The Florida Bar Re: Advisory Opinion-Nonlawyer Preparation of Pension Plans, 571 So. 2d 430, 431 (1990) (this opinion did not decide the question of ERISA preemption). Based on the record before it, the Florida Supreme Court held:

It is apparent that pension plan preparation and administration is a field of practice that requires the knowledge and expertise of lawyers, CPAs, actuaries, and life insurance professionals. Further, the federal government, through acts of Congress, particularly ERISA and provisions of the Internal Revenue Code, as well as through regulations implementing congressional acts, clearly intends to protect pension plan beneficiaries. These federal statutes and regulations expressly allow nonlawyers to practice before federal agencies. . . .

With regard to the matter before us, we find that our authority is restricted because much of the practice in this field of law is before administrative agencies, and we are not convinced by this record that there exists a public need for the protection sought in this proposed opinion. Consequently, at this time, we find that we should disapprove the proposed opinion. In doing so, we are mindful of our [contrary] decision in The Florida Bar re Turner, 355 So. 2d 766 (Fla. 1978), but we note that it was based solely on a stipulated record and upon facts which occurred prior to the federal government’s entry into the field of pension planning. As the standing committee recognized, neither Turner nor the proposed opinion was intended to overrule any federal regulation authorizing nonlawyer professionals to practice before federal agencies. Clearly, we cannot prohibit authorized professionals from preparing and presenting the necessary documents to federal agencies before which they are admitted to practice.

The Florida Bar Re: Advisory Opinion, 571 So. 2d at 433. It is likely, in our opinion, that a comparable challenge to North Carolina’s unauthorized practice of law statutes would be similarly decided.

In summary, it is our opinion that North Carolina’s unauthorized practice of law statutes probably fall under the savings provision set forth in 29 U.S.C. § 1144(b)(4) for “generally applicable” criminal law and are therefore probably not preempted by ERISA, due to the fact that violation of those statutes is a criminal offense. On the other hand, the unauthorized practice of law statutes are preempted by 31 C.F.R. §§10.2 and 10.3 to the extent that those statutes would restrict to licensed attorneys the preparation or the aiding in the preparation of documents necessary to establish ERISA plans qualified by the Internal Revenue Service.

Very truly yours,

Grayson G. Kelley Senior Deputy Attorney General

Alexander McC. Peters Special Deputy Attorney General

AMP/hs