updated 1/17/2007 5:05:33 PM ET 2007-01-17T22:05:33

A federal appeals court upheld a ruling invalidating a Maryland law that would have forced Wal-Mart Stores Inc. to spend more on employee health care, agreeing Wednesday that the state law interferes with federal law.

Maryland's law would have required non-governmental employers with 10,000 or more workers to spend at least 8 percent of payroll on health care or pay the difference in taxes. The lower court ruled that the state law was pre-empted by the 1974 Employee Retirement Income Security Act, or ERISA.

The measure was aimed at Bentonville, Ark.-based Wal-Mart, which has been under attack by critics who say that its inadequate health care benefits is forcing some employees to use state-funded plans.

"Were we to approve Maryland's enactment solely for its noble purpose, we would be leading a charge against the foundational policy of ERISA, and surely other states and local governments would follow," the ruling by the 4th U.S. Circuit Court of Appeals reads. "As sensitive as we are to the right of Maryland and other states to enact laws of their own choosing, we are also bound to enforce ERISA as the 'supreme law of the land."'

Judge M. Blane Michael said in his dissenting opinion that Maryland, along with many other states, is dealing with explosive growth in Medicaid spending and the federal government has "consistently called upon the states to function as laboratories for developing workable solutions."

The Maryland law offers employers the option to pay into a fund that will support the state's Medicaid program and does not impact ERISA plans, Michael wrote.

U.S. District Judge J. Frederick Motz had ruled in July that that ERISA pre-empts "any and all state laws insofar as they may now or hereafter relate to any employee benefit plan."

Wal-Mart Chief Executive Lee Scott said following the July ruling that overturning Maryland's law meant businesses would not have to contend with different health-coverage standards in different states.

The Maryland law came amid efforts by legislative leaders to cut the state's $4.6 billion annual Medicaid tab and was seen as a means to encourage employers to keep their employees off public health care rolls. The state's Democratic legislature overrode a veto by Republican Gov. Robert Ehrlich to pass the law, which would have taken effect this month.

Wal-Mart has 53 stores and two distribution centers in Maryland and employs nearly 16,000 people in the state.

Michael noted in his dissent that the increase in Medicaid spending is caused in part by the decline in employer sponsored health insurance.

"In Maryland's words, Medicaid 'has been transformed into a corporate subsidy,"' Michael said, noting that a study by one North Carolina hospital found 31 percent of Wal-Mart employees were enrolled in Medicaid and 16 percent were uninsured and a Wal-Mart internal company memo acknowledges that 27 percent of its employees' children are on Medicaid and another 19 percent are uninsured.

"The Act's revenue raising component is directly connected to the regulatory purpose of assessing employers that rely disproportionately on state-subsidized programs to provide health care for their employees," Michael wrote.

The Retail Industry Leaders Association, of which Wal-Mart is a member, filed suit in February against the law, with the Arlington, Va.-based group contending it unfairly targeted the world's largest retailer.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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