On Discovery Problems and Solutions
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Here’s an interesting law review article, passed along in detail by the Workplace Prof, on problems, and potential solutions, in managing discovery. Discovery, to beat what must now be a dead horse, has become infinitely more complicated and expensive - with far more consequences for mistakes - in any type of complex litigation with the adoption of the federal rules governing electronic discovery (and in fact with the rise of computerized data itself). Regular readers know that I have argued before in this space that the courts need to develop a jurisprudence that analyzes the need for and cost of electronic discovery - which can often involve massive amounts of computer generated and/or stored data - in much greater depth than the more superficial analysis of discovery disputes that has historically been the norm: in essence, courts should engage in a more searching inquiry into disputes over electronic discovery, given their costs and how much of such data is likely to be irrelevant in any given case, before granting extensive discovery into electronically stored data. At a minimum, there should be a degree of inquiry that, even if it won’t allow conclusive enough findings to decide to outright not allow such discovery, will still allow an intelligent, reasoned limitation on exactly what the scope of that discovery should be. I would argue that, in cases that warrant it, it would even be appropriate to hold a mini-trial type proceeding, maybe of two or three witnesses, and then to rule on to what extent such discovery is warranted. This approach would be a far cry from how courts have traditionally addressed discovery disputes, but, as the article suggests, it is past time for the courts to begin applying a more systemic and in-depth approach to controlling discovery.
This is particularly important in the areas covered by this blog, ERISA litigation and insurance coverage litigation, where computerized data, communications and information processing, is almost literally the coin of the realm. Electronic discovery is therefore truly a major cost-driver and risk factor in these areas of the law. The development, at the boots on the ground level of magistrate judges (to whom discovery disputes are often assigned), special discovery masters and trial judges, of the law of electronic discovery provides an opening for courts to really address these issues, in the manner suggested by the article and with fresh eyes, and its an opportunity that should be taken advantage of, one that calls for curiosity, innovation and reasoned experimentation. I will give you one example, to make my point. One of my partners was recently handling a massive, multi-party litigation, in which there were numerous interrelated legal and factual issues, some of which may be outcome determinative. Rather than engage in the traditional approach of years of discovery with only minimal court oversight, followed by summary judgment motions, the court instead ordered some discovery, followed by summary judgment motions on the key potentially outcome determinative legal issues, followed by, if any party believed further discovery was needed to resolve those issues, the filing of Rule 56(f) affidavits to justify such discovery; the court would then decide what further discovery would be allowed before it would rule on the legal issues. The end result was order out of what otherwise could have been chaos, and a case that stayed on track towards resolution. It’s a good example of a court proactively using existing procedural tools to narrow the issues, and decide on what issues further and potentially expensive discovery is actually needed. This appears to be exactly the type of use of existing procedural tools and focus on the timing of discovery that the article's author is advocating as the means to improve discovery.
Some Quirks About QDROs
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Wow, QDROs (otherwise known as qualified domestic relations orders) are all the rage these days, aren’t they? QDROs concern the intersection of divorce/family law and ERISA governed benefit plans, in particular retirement plans. As a general rule, a QDRO is a court order in a state divorce proceeding that, if it meets certain requirements, has the effect of controlling dispersal of the ERISA governed plan benefits, benefits which, in the absence of such an order, would simply be paid according to the express terms of the ERISA governed plan itself.
The First Circuit just got into the act at the end of last week, with a detailed ruling on the collision of QDROs, retirement benefits, divorce proceedings, and jurisdictional issues. To me, the most interesting aspect of the case concerns the court’s discussion of the power of the state probate court to resolve this issue, and the court’s suggestion that a parallel, but separate, federal action over the enforcement and interpretation of a QDRO is, at a minimum, not an approach the court favors. Rather, the First Circuit emphasized that the state probate court has jurisdiction to determine whether a particular order qualifies as a QDRO and to thereafter enforce it, and that this particular issue does not have to be severed off from a particular probate court/divorce action and brought to federal court. The operative words of the court were:
Geiger [the party complaining about the QDRO] argues that state courts do not have jurisdiction to determine whether domestic relations orders are QDROs . . .Geiger cites no cases in support of his position. Instead he relies on what he calls the "unambiguous language" of ERISA, specifically, 29 U.S.C. § 1132(e)(1), which provides that federal courts "have exclusive jurisdiction over civil actions under this subchapter brought by a . . . participant," with the exception that state courts have concurrent jurisdiction over actions brought to recover benefits or enforce or clarify rights under a plan. 29 U.S.C. § 1132(a)(1)(B). In Geiger's view, this is the beginning and the end of the inquiry. His view, however, has been rejected by several courts. See e.g., Scales v. Gen. Motors Corp., 275 F. Supp. 2d 871, 876-77 (E.D. Mich. 2003) ("[S]tate courts have concurrent jurisdiction regarding the interpretation of QDROs . . . and are fully competent to adjudicate whether their own orders are QDROs."); In re Marriage of Oddino, 939 P.2d 1266, 1272 (Cal. 1997)(action to qualify domestic relations order is an action to "obtain or clarify benefits claimed under the terms of a plan," and thus within state courts' jurisdiction); Robson v. Elec. Contractors Ass'n Local 134, 727 N.E.2d 692, 697 (Ill. App. Ct. 1999) ("[S]tate and federal courts have concurrent subject matter jurisdiction to construe the ERISA provisions relating to a QDRO . . . ."); Eller v. Bolton, 895 A.2d 382, 393 n.6 (Md. App. 2006) ("State and federal courts have concurrent jurisdiction to review a plan's qualification of a state domestic relations order . . . .").
Geiger acknowledges the one-sidedness of the caselaw, but argues that the rationale set forth by those decisions both violates ERISA's plain language and is "logically senseless." We do not agree. In our view, it is significant that Congress has expressly exempted QDROs from ERISA's general preemption of state law. 29 U.S.C. 1144(b)(7). We are further persuaded that, "separate litigation of the QDRO issue in federal court presents the potential for an expensive and time-consuming course of parallel litigation . . . in the two court systems." Oddino, 929 P.2d at 1274-75. And finally, we share the view of the Oddino court that: Congress, having given state courts the power to issue orders determining and dividing marital rights in retirement plans, would require a separate federal court proceeding to decide whether the order is a QDRO. This would cause undue hardship, expense and delay to the affected party, and impose an unnecessary workload on already overburdened federal courts.
The case is Geiger v. Foley Hoag LLP Retirement Plan, and you can find it here. And you can find S. COTUS’ take on another central aspect of the case - various federal abstention and civil procedure issues - here, at Appellate Law & Practice.
Choosing a Defendant in ERISA Litigation
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In the First Circuit, the proper party defendant in an action concerning ERISA benefits is the party that controls administration of the plan; in other circuits, that’s not so plain. The question to which this is the answer is, who do you sue to recover benefits due under an ERISA governed plan. Here’s a timely and useful law review article, courtesy of the Workplace Prof blog, that provides a more lengthy and detailed answer to this particular question.
A Blog to Pass Along, and Some Thoughts About the Supreme Court's Interest in ERISA
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Lots going on, lots to talk about. Let’s start with this one, which, coincidentally, allows me to kill two birds with one stone. You may recall that some time back I mentioned that I had come across two interesting blogs that I wanted to pass along, one of which was The Float, covering primarily investment related issues and their intersection with ERISA. I mentioned I would pass along the other blog in a subsequent post, which, almost inevitably since I had promised to do so, I never did, as breaking news and a pending trial shunted it to the side. Well, that other blog is this one, Benefits Biz blog, by the benefits and executive compensation lawyers at Baker & Daniels, which I have found to be a consistently interesting read. Moreover, I return to it today to pass that link along because of a very interesting post they have concerning a case that the Supreme Court has now elected not to add to its docket, concerning the relationship of age discrimination laws and employer provided health insurance benefits. As many already know and as I have discussed in the past here on this blog, the Supreme Court has shown a continuing interest in all things ERISA, with three cases either already decided or added recently to its docket. The Supreme Court’s lack of interest in this particular case perhaps hints - I am reading tea leaves here now, in the august tradition of Kremlinologists and other students of secretive institutions - at the outer limits of the Court’s interest in the subject of ERISA. The cases accepted for review to date by the Court emphasize litigation issues and, in particular, the effect of the evolution of retirement benefits from pensions to 401(k) plans on the litigation environment. This is not a fair reading of the case passed on by the Court that the Baker & Daniels’ lawyers discuss in their post; we may be able to infer that if you want to attract the Court’s interest in an ERISA case right now, you better make it about litigation and defined contribution type plans.
Alienation of ERISA Governed Benefits
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I’ve had an interesting collection of educational materials and seminars piling up on my desk for awhile now, a number of which may be of interest to various readers of this blog. In the hope of both clearing up that backlog and passing along useful information, I am going to start a short series of - or maybe a series of short - blog posts on them, until they are exhausted. I expect I won’t run through them all seriatim, as I suspect breaking news or new court decisions will interpose themselves, but we will see.
The first one I wanted to pass along is something you can blame the Workplace Prof for, whom I have fingered in the past as the filter I use to screen law review articles and decide which ones might be worth reading. Some of you know from past posts that I don’t put a lot of stock in most law review publications, but some fit my criteria for being useful, which revolves heavily around whether they break any new ground in an area or manner that makes them useful to courts and practitioners. This one here, a 142 page analysis of when ERISA governed benefits can be transferred to anyone other than the participant or the participant’s selected beneficiary, fits this criteria to a tee. The Workplace Prof passed along the abstract of the article a little while back, which is:
This Article argues that a beneficiary designation made by a participant pursuant to the terms of an ERISA plan determines who is entitled to survivor benefits from that plan. Such designation may not be superseded by
(A) an agreement made in a marital dissolution or separation whereby a participant promises to make or retain a different designation (such agreements are not qualified domestic relations orders, "QDROs," because QDROs are limited to orders directed not at participants but at ERISA plans);
(B) an agreement made in a marital dissolution or separation whereby a participant's former or separated spouse "relinquishes" any interest in the participant's ERISA plan benefits; or
(c) a state law or federal common-law principle whereby killers of a participant are deprived of the entitlement to the participant's survivor benefits from an ERISA plan.
ERISA pension plans must incorporate the only two ERISA required beneficiary designations, QDROs and spousal survivor benefit designations. Neither statutory designation applies to an ERISA plan that is not a pension plan, such as a life insurance or disability plan. Thus, neither statutory designation may supersede a beneficiary designation made pursuant to the explicit terms of an ERISA life insurance or disability plan.
ERISA voids both (A) a direct benefit claim against an ERISA plan that is not based on a designation that was made pursuant to the terms of the plan, and (B) an indirect benefit claim against the recipient of plan benefits that is not based on a designation that was made pursuant to the terms of the plan.
What jumped out at me from the article itself is the author’s discussion of the application and impact of Qualified Domestic Relations Orders (known in common parlance as QDROs), which can supercede a participant’s designation of the party to whom plan benefits should be paid. The author gives QDROs a far narrower scope of application and power under ERISA than it appears to me courts have been giving to them, and in fact his position on their impact runs counter to what appears to me to be the trend at the trial level in the federal system in applying QDROs. He makes a fascinating and well-supported argument, although at this point, I reserve judgment on the ultimate issue he raises, of exactly how QDROs should be understood under ERISA. At a minimum, however, for anyone arguing the point in a case, there is a wealth of information in the article, as well as support for arguments that a party might make in court over that issue.
The Recent History of Subprime Litigation
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Kevin LaCroix, at his D&O Diary blog, has a tremendous history of the recent filing of subprime litigation, including class actions, many filed under ERISA. While I don’t necessarily agree with each of his interpretations of that history, it’s as good an overview of the subject as a whole that I have seen in any media. Perhaps my primary point of departure from his presentation would concern his view that these cases are very different from other types of class action litigation, such as the stock drop cases, that are often criticized as lawyer-driven suits warranting reform, because these are cases instead being brought by “very large institutions [who are] suing other very large institutions.” Perhaps, and certainly to some extent, but there is also an aspect to at least some of these cases that reflect that the class action bar has, for reasons of legal developments, public sentiment, and the winds of politics, moved towards using ERISA in circumstances where they would have previously used the securities laws, as well as towards the representation of large retirement plans, rather than individuals, as plaintiffs.
Two for the Price of One: An Excellent District Court Ruling Worth Reading, and More on the First Circuit's Decision in Gillis
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A couple of notes on cases today. Before the holidays, I posted about the First Circuit’s decision in Gillis, concerning an administrator’s discretion in calculating possible pension payments and how the discretionary authority granted to the administrator drove the conclusion that a challenge to the pension calculations would not be upheld in the courts. Suzanne Wynn, who writes on pension plan issues at her Pension Protection Act blog, has this very detailed analysis now of the issues concerning cash balance conversions that were at play in Gillis, for those of you looking for more information on that aspect of the case.
In addition, in the little window of time between the first holiday weekend of Christmas and the second holiday weekend of the New Year, Judge Woodlock of the United States District Court for the District of Massachusetts issued a very comprehensive and detailed opinion in the case of Island View Residential Treatment Center, Inc. v. Blue Cross Blue Shield of Massachusetts, which basically reads as a mini-treatise on a number of interesting issues arising in ERISA litigation. In the opinion, the judge covers, among other topics: standing to bring an ERISA claim; the application of federal common law to ERISA disputes; the statute of limitations applicable to ERISA disputes; exhaustion of administrative remedies; and the standard of review. Of particular note with regard to the standard of review, the judge presents the current status of the law in the First Circuit concerning so-called structural conflict of interests, which I have discussed many times on this blog, most recently in my post yesterday, and identifies the internal debate in the circuit over whether the law on that issue should be revised, a bone of contention in the circuit that I also noted before, in my post yesterday. Judge Woodlock comments that it appears the First Circuit may be waiting for possible guidance from the Supreme Court in the case of MetLife v. Gillis, discussed in yesterday's post, before venturing into that issue. And finally with regard to the Island View case, I think, in a blogger’s version of professional courtesy, I would be remiss if I did not mention that one of the parties to the case was represented by fellow law blogger Brian King out of Utah, who blogs on ERISA issues - from what is probably a decidedly more participant oriented perspective than my own - at his excellent ERISA Law Blog.
The First Circuit on an Administrator's Discretion in Determining the Amount of Retirement Benefits
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Oddly, this appears to be “calculating benefits” week among the courts of the First Circuit. In addition to the LeBlanc case I discussed in the last post, the First Circuit just ruled on a case involving a challenge to the calculation of pension benefits. Just as in the LeBlanc case, where a district court found that the method of calculation would stand because the administrator had discretion in conducting that effort under the terms of the plan and the calculation method was reasonable, so too does the First Circuit conclude, in Gillis v SPX Corporation, that the administrator’s determination of certain factors in calculating retirement benefits would not be overturned because the administrator had discretion and the determinations made were reasonable given the plan’s terms and purposes.
Appellate Law & Practice, who chronicle all rulings out of the First Circuit regardless of topic, has this somewhat more tongue in cheek take on the case here. While the Gillis case, as the Appellate Law & Practice post reflects, concerns certain issues beyond just the reasonableness of the calculation approach, there isn’t much to the court’s analysis of those issues; the real take away is in the requirement of reasonableness in the calculation activity, and then proceeding from there, the court finds, without too much in-depth analysis of the issues, that the other issues raised by the participant simply don’t support a challenge to that reasonable approach to calculation that was applied by the administrator.
When Can You Sue an Employer for Denial of ERISA Governed Benefits?
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Interesting case out of the United States District Court for the District of Maine the other day, concerning a challenge by a plan participant to how his long term disability payments were calculated. The court essentially found that, since deferential review applied, the administrator’s calculation method could not be challenged, since it was a reasonable approach given the plan’s terms and the evidence. Of more interest, however, was the court’s nice thumbnail approach to the question of when an employer, who has delegated plan operation and decision making to an outside administrator - in the case at bar, the insurer of the long term disability benefits - can be properly named as a defendant in a claim for benefits. The court’s answer is generally never, unless the employer inserted itself into the actual administration and decision making over the claim. The court’s handy-dandy summary, suitable for inclusion in a parenthetical in the brief of your choice, is:
[T]he proper defendant for a denial of benefits claim is "the party that controls administration of the plan." Terry v. Bayer Corp., 145 F.3d 28, 36 (1st Cir. 1998) (quoting Garren v. John Hancock Mut. Life Ins. Co., 114 F.3d 186, 187 (11th Cir. 1997)). Typically, an employer is not the proper defendant when the plan documents name another entity as the plan administrator or claims fiduciary. Kennard v. Unum Life Ins. Co., 2002 U.S. Dist. LEXIS 4467, 2002 WL 412067, *2 (D. Me. March 14, 2002). Here, the Plan names Guardian Life as the "Claims Fiduciary with discretionary authority to determine eligibility for [long-term disability] benefits and to construe the terms of the plan with respect to claims." The Plan expressly states that Guardian Life decides whether a claimant is eligible for disability insurance, whether a claimant meets the requirements for payment of benefits, and what long-term benefits will be paid by the Plan. Guardian Life also disburses the long-term benefits. The courts have developed an exception to the rule that the plan administrator is the proper defendant in instances in which the plaintiff presents evidence that the employer, although not formally identified as the plan administrator, "controlled or influenced the administration of the plan." Beegan v. Associated Press, 43 F. Supp.2d 70, 73-74 (D. Me. 1999) (listing cases); Law v. Ernst & Young, 956 F.2d 364, 372-73 (1st Cir. 1992) ("[U]nless an employer is shown to control administration of a plan, it is not a proper party defendant in an action concerning benefits.") (quoting Daniel v. Eaton Corp., 839 F.2d 263, 266 (6th Cir. 1988)).
The case is LeBlanc v. Sullivan Tire Company.
More on that Grand Irony Theory
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Does the fact pattern below allow for a remedy under ERISA, particularly as the Sereboff/equitable relief line of cases has been interpreted in the First Circuit to date?
The plaintiff employee says that she purchased a life insurance policy on her husband through her employer's group coverage. When her husband was dying, she resigned her employment to care for him. She asked her employer for the proper forms to convert the group life insurance coverage to individual coverage, as she was entitled to do. Her employer refused or failed to provide the forms despite several in-person and telephone requests. In the meantime, the time for conversion (31 days) expired, her husband died, and now the life insurance company has denied her any benefits.
The United States District Court for the District of Maine just found in the case of Mitchell v. Emeritus Management that the fact pattern does not support a cause of action under any of ERISA’s remedial rights - for breach of fiduciary duty, for denied benefits and for equitable relief - available to a plan participant, a situation the court found “very troubling.” The court found that: (1) the participant could not recover the insurance benefits by means of an action for equitable relief because it was truly a claim for payment of the benefits at issue, rather than for equitable relief; and (2) the participant could not recover the proceeds on a claim seeking benefits because, under the facts at issue, there was no right to life insurance proceeds under the actual plan terms since there was no timely conversion, and therefore the administrator did not act arbitrarily and capriciously in denying the claim.
I guess two things jump out at me. One, the court rightly acknowledged that this result flows from the fact that ERISA simply leaves some harms incapable of remediation, something that is understood to have simply been part of the balancing act engaged in by Congress in enacting the statute, in which a decision was made to grant only limited rights of recovery in exchange for enacting a statute that would encourage the creation of employee benefits. Second, however, and at the same time, I think this is more what the Workplace Prof had in mind last month when he complained about what he considers the “grand irony” of ERISA, that a statute intended to protect employees can end up depriving them of a remedy, than was the case of the Wal-Mart equitable lien, that I discussed here, in which the Prof proffered the “grand irony” thesis, one which I took issue with in the context of that particular case.
Suicide Exclusions Under ERISA Plans, and the Impact, If Any, of the Standard of Review
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There’s an interesting, if brief, ERISA case out of the United States District Court for the District of Massachusetts decided last week that enforced a suicide exclusion in an employer provided supplemental life insurance program. The court found that the evidence in the administrative record supported the administrator’s determination that the employee had committed suicide within two years of electing the coverage, and that the benefits were therefore not available because the plan excluded death by suicide in the first two years of coverage. The case itself is not very noteworthy, other than to the parties themselves of course, except for one thing that jumped out at me. Many critics of the current legal regime under ERISA complain that the arbitrary and capricious standard of review that applies to cases, such as this one, where the administrator retains discretion to interpret and apply the plan, terribly distorts the outcome of cases in ways unfair to claimants. I have argued before that I am not convinced that, in the vast overwhelming majority of cases, this is true at all. Rather, most of the time, the same administrative record that would justify upholding a denial under the arbitrary and capricious standard on the theory that the administrator’s decision is reasonable given the evidence in the record, also contains enough evidence to prove the administrator correct under a de novo standard of review, where the court makes its own independent determination of the claimant’s entitlement to benefits. This case illustrates that point yet again: while the court upheld the ruling while applying the arbitrary and capricious standard, the evidence detailed in the opinion should have led to the exact same result even if the issue were considered de novo or the case treated as simply a breach of contract case under standard common law governing contracts. Indeed, in my other hat as an insurance coverage litigator, it seems clear to me that the result here, on the evidence detailed in the opinion, would have been the same even if this policy was not controlled by ERISA and was instead simply a private contract of insurance between the deceased and the insurance company; the policy language and the facts would have led to a finding of no coverage even if litigated as an insurance coverage, rather than an ERISA, case. The case is Keiffer v. Shaw Group, and you can find it here.
Simply Put, Drunk Driving Doesn't Happen By Accident
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Turns out that the key word in the accidental death and dismemberment insurance that many people get through their employers (and which is therefore an ERISA governed benefit) is “accidental.” The United States District Court for the District of Massachusetts has an interesting opinion out that details the applicable standards for determining whether a particular death is accidental for these purposes, and finding that an insured’s death after driving while intoxicated does not qualify. This issue comes up a lot, unfortunately, and I have talked about it before here and here. The newest decision out of Massachusetts on this topic, McGillivray v. Life Insurance Company of North America, is an interesting example of this type of case, and reflects two particular points: first, the continuing influence in this area of the law of the First Circuit’s 1990 decision in Wickman v. Northwestern National Ins. Co., which laid out the standards for determining if a particular death is accidental for these purposes; and second, that the weight of authority is running heavily towards a general rule that deaths arising from automobile accidents in which the employee was intoxicated simply do not constitute accidents for these purposes and are not covered.
In truth, it is fair to say that we have reached the point that (although the courts never come right out and say this) there is, in effect, essentially a rebuttable - and if that, just barely - presumption that an intoxicated employee who dies in a drunk driving accident is not covered under these policies. The standard test, crafted in the Wickman case, that courts apply to determine whether or not a particular death was an accident for these purposes, when applied to the typical facts of these type of cases, simply leads inexorably to a loss of coverage.
I remember being dressed down in a first year law school class on torts for suggesting - apparently contrary to the professor’s belief - that a particular rule of recovery should be shifted so as to sanction the driver who engages in the socially disapproved activity - such as intoxication - in favor of the other driver. Twenty years later, the courts seem to be saying the same thing I said, essentially taking the intoxicated driver out of the range of those who can be covered under accidental death and dismemberment policies.
The case, by the way, is also interesting for a number of other reasons that warrant giving it a quick read, including not least its analysis of whether statistical studies concerning the likely outcome of drunk driving should be considered and, if so, the weight to give them. Beyond that, this is another case that contradicts a particular chestnut held by many, which is the belief that the standard of review applied in ERISA cases is the be all and end all; I don’t hold with this thesis, and believe that the facts of the administrator’s handling of a particular claim are much more likely to dictate the outcome of a case, without regard to which particular standard of review a particular court applies to a case. In a footnote that I particularly enjoyed, the court commented that “In all candor, the Court must note that even if it were to apply a de novo standard rather than an ‘arbitrary and capricious’ standard, the Court, applying the Wickman test, would find that Mr. McGillivray's death was not the result of an ‘accident.’"
How an Administrator Can Lose The Right To An Offset
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This is actually a kind of fascinating, if someone odd, long term disability benefits case out of the United States District Court for the District of Massachusetts. It involves what otherwise would seem to be a remarkably unnoteworthy issue, namely the right of the plan administrator - an insurer who also administered the plan - to offset from the benefit amount the estimated value of social security benefits that the claimant would have received but for the fact that the claimant never applied for them. Seems pretty straightforward, except the court did not allow the insurer to do so, because the insurer did not provide the claimant with assistance in applying for social security benefits as provided for under the plan’s terms. The court found that the insurer could not simultaneously enforce the social security offset provision while not complying with its own obligations under the plan to assist the claimant in seeking social security, and the court proceeded to find that loss of the right to enforce the offset was an appropriate remedy for this violation of the plan terms. Offsets of this ilk are routine, and while claimants often complain about them and try to avoid them, they are normally enforced without any big uproar. Not so here, where the insurer managed to lose the right to the offset. What is more interesting is the reasoning of the magistrate judge (whose recommendations were affirmed and adopted by the district court), which, despite application of the arbitrary and capricious standard of review - which would normally grant the insurer great discretion in the interpretation of the plan terms in question - found that the insurer’s own interpretation of the relevant plan terms was simply too far removed from any sensible reading of the plan terms to be upheld. In a realm of the law where many critics feel that the simple fact of applying the arbitrary and capricious standard of review is outcome determinative in favor of the administrator (a sentiment I don’t agree with and a thesis frequently disproved by court rulings), this is a relatively unusual event. The case is McCormick v. Metropolitan Life, and you can find it here.
What Critics of The Standard of Review In Cases Involving Structural Conflicts of Interest Are Really Complaining About
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There’s a very interesting long term disability decision that was just issued by the District of New Hampshire that is worth a read, not so much for the case itself as for its commentary concerning the standard of review under ERISA in instances where the administrator has been granted discretionary authority by the plan. The court’s facts and the reasoning themselves are nothing out of the ordinary: the arbitrary and capricious standard applies, there is enough evidence in the record to support the administrator’s denial, and thus the administrator’s decision is, quite properly under current law, upheld. But what is interesting is the court’s discussion of its views as to the standard of review and how it affects the outcome of the case, and how those comments shed some light on the criticism that is out there of the law governing the standard of review.
The court acknowledged that the insurer of the plan, which was also the administrator of claims under the plan, had “fully and carefully reviewed [the claimant]'s medical history and thoroughly investigated her claims,” and that there was substantial evidence in the record to support the insurer’s denial of the claim for benefits; the court, however, nonetheless went on to make clear that it disagreed with the applicable body of law governing the standard of review and which mandated the outcome under those facts. The court expressed its displeasure with the First Circuit’s treatment of what are known as structural conflicts of interest, which is a fancy way of saying the circumstance in which the claim administrator deciding the claim for benefits is also the insurer of the benefits who has the obligation to pay the benefits. The court’s exact words? That:
[N]umerous courts, including this one, have questioned the propriety, and even fairness, of the "arbitrary and capricious" standard of review in cases where the same entity that makes eligibility determinations also funds benefit payments. Two judges on a split panel of the First Circuit Court of Appeals recently suggested that the full court, sitting en banc, ought to revisit the standard of review applicable to ERISA cases in which the plan administrator determines benefits eligibility and also funds benefit payments. Denmark v. Liberty Life Assurance Co. of Boston, 481 F.3d 16, 31 (1st Cir. 2007) (Judge Lipez wrote: "I think it is time to reexamine the standard of review issue in an en banc proceeding. Although Judge Howard dissents from the judgment agreed to by Judge Selya and myself, he agrees with me, as indicated in his dissent, that we should reexamine the standard of review issue."). A petition for en banc review is apparently pending in Denmark. But, unless and until the court of appeals (or the Supreme Court) changes the governing standard of review, this court is obliged to apply the law as it currently exists.
Now, I don’t necessarily join in the belief that the First Circuit’s current law on the effect of such structural conflicts of interest is the wrong approach or needs to be modified, in the absence of Supreme Court changes to the law governing the standard of review in circumstances in which the administrator has been granted discretionary authority. You can find my thinking on that point here and here. As the District Court explained the law:
Under the current law of this circuit, merely pointing out that a plan administrator is also the entity that pays any benefits found due under the plan is insufficient to warrant departure from the applicable arbitrary and capricious standard of review. See, e.g., Wright v. R.R. Donnelley & Sons Co. Group Benefits Plan, 402 F.3d 67, 75 (1st Cir. 2005) ("[T]he fact that the plan administrator will have to pay the plaintiff's claim out of its own assets does not change the arbitrary and capricious standard of review.") (citation and internal punctuation omitted); Doyle v. Paul Revere Life Ins. Co., 144 F.3d 181, 184 (1st Cir. 1998) (same). To warrant subjecting a plan administrator's benefits eligibility determination to a stricter standard of review, a plaintiff must point to some evidence suggesting that its decision was actually influenced by improper factors.
I don’t see anything wrong with this standard, and the actual facts of cases decided recently in this circuit and its district courts concerning this issue support maintaining, rather than changing, this standard. When, as in the case that was before the District Court, a claimant cannot point to anything concrete from inside or outside of the administrative record to suggest that the administrator’s decision was actually distorted by its dual role, there is no reason that the dual role should change the standard of review or the outcome of the case. This point is well illustrated by this case here out of the First Circuit, in which I represented the prevailing defendants, and in which a panel of the First Circuit again suggested that the law concerning structural conflicts of interest should be altered. Yet in that case, the panel found that changing the law was irrelevant for purposes of the case pending before it and that the administrator’s decision would be upheld regardless of the standard of review that was applied, because the claim was properly handled and properly evaluated.
When, as in both of those cases, there is no actual evidence suggesting that the dual role altered the outcome, there is no justification for believing or acting as though it did. The truth, which you see when you spend enough time in the courtroom with these types of cases, is that, as these two and a host of other cases (both in which an alteration of the standard of review was warranted and those in which it was not) show, there will be some sort of distortion or disjunct between the evidence in the administrative record and the administrator’s handling of the claim if an untoward motive was actually involved; it may be disguised, but if you look closely you will find it. In contrast, when you cannot find some sort of gap in logic or reasoning or documentation between the administrator’s decision and the administrative record, there is a reason for this, which is that the determination was on the up and up. Thus, in the absence of evidence founded in the record to suggest an ulterior motive, namely the impact of the structural conflict of interest, there is no reason to assume the conflict affected the outcome and should be allowed to change the standard of review.
What’s more interesting is a second, almost throw away comment by the court, which I think goes more to the center of the complaints critics have about the standard of review, including in cases involving structural conflicts of interest. The court commented:
If this were a breach of contract case, in which [the claimant] sued her insurance company for disability benefits, the outcome might be different. There is, after all, substantial evidence in her medical records (including the opinions of two treating physicians) supportive of the view that [she] is disabled. But, because this case is governed by ERISA, what would otherwise be an insurance coverage or breach of contract case is, instead, one governed by principles of trust law. Liberty's adverse benefits eligibility determination is subject to a far more deferential standard of review.
I think this comment by the court goes directly to what critics of the standard of review are really complaining about, which is not really that the standards of review being applied are wrong, but that they are applied at all. I believe the real complaint of critics of the law on this subject is instead that long term disability claims should be treated and resolved in the same manner as any other type of breach of contract or insurance denial (non-ERISA division) case. This is a whole different kettle of fish than arguing over how the standard of review should be affected by a structural conflict of interest or other issue on the margin, and instead goes right to the heart of the ERISA regime. To some extent, these on-going disputes in the case law that are directed at altering the standard of review to make them more favorable to claimants, such as in cases where the administrator is also the insurer of the benefits, are really proxy wars being fought instead of the real dispute that critics of the system have with denial of benefit claims under ERISA, which is the very application of ERISA doctrines, rather than traditional breach of contract doctrines, to these types of cases.
Reinsurance and LaRue, All in the Same Post
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Instead of posting twice in the same morning, I am going to try to address two distinct substantive issues, one involving reinsurance and the other ERISA, all in the same post, hopefully without turning this post into some sort of Frankenstein monster combination of topics that instead should have been kept entirely separate.
On the first, ever wonder why so many reinsurance companies are domiciled in Bermuda? I thought so. The New York Times has an excellent article today explaining why, and as one might have guessed, it has to do with taxes. As the New York Times sums up the matter:
At issue are federal rules that allow insurance premiums to be shifted from the United States to offshore affiliates — which reduces taxes — and allow the proceeds to be invested tax free, increasing the profit to parent companies. . . .The core of the dispute is an unusual tax treaty with Bermuda. It allows insurance companies based on the island to deduct from their American taxes premiums that their subsidiaries in the United States collect from American customers and send back to the headquarters abroad. In Bermuda and other tax havens, the money is invested tax free. This money is moved, under the law, through the purchase of reinsurance by the affiliates from their parent companies.
Personally, I really like Bermuda and have long wanted to have reinsurance clients there that would justify my opening an office in Bermuda, which I suspect influences my views on this issue, and so I will therefore keep them to myself.
The second is an ERISA issue, involving the Supreme Court’s decision to hear LaRue v. DeWolfe, Boberg and Associates. This case, which I discussed here and here, involves whether a plan participant can sue under ERISA to recover losses suffered only in that participant’s account, and not across the plan as a whole. As I discussed here, it makes sense that a participant can do so and I expect the Supreme Court to rule to that effect. The defendants, in an attempt to avoid the Supreme Court ever reaching this issue, moved to dismiss the appeal as moot on the ground that the plaintiff had cashed out of the plan and therefore cannot proceed with a claim against the plan for losses incurred in the plaintiff’s now cashed out account; whether such cashed out participants can proceed with such cases is something of a hot topic that has been decided in differing ways by trial level judges in the federal system, including by judges sitting in the same federal district court, as I discussed here. Well, Workplace Prof and SCOTUSBLOG are reporting that the Supreme Court has denied the motion to dismiss on that ground and the Supreme Court will go ahead and hear the case.
There, I did it - two items on two different issues, all for the price of one admission.
The First Circuit's Road Map for Terminating Benefit Plans
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Just a fairly short post on a technical ERISA issue that the First Circuit ruled on a few days ago, namely the steps that have to be followed to terminate or amend a benefit plan, at least with regards to the documentation and formalities needed to do so. In Coffin v. Bowater, Inc., the First Circuit provides a clear and definitive road map to follow to effectuate such a termination, and the court makes clear that veering off of that road map will result in a finding that the benefit plan has not been terminated. While the legal rule itself presented in the case isn’t all that gripping, although it is certainly a technical point that is important to know, the context of the case and some of the discussion in it are interesting in and of themselves, for at least two reasons. The first is the fact pattern of the case itself, which involved the failure of a plan sponsor and an acquiring company to effectively terminate a benefit plan as part of a corporate acquisition, causing them to later have to try to convince a court - unsuccessfully - to create some sort of common law exception to the rules established by the courts and ERISA that would excuse their failure to follow the basic requirements for a plan termination. Its simply interesting to see this important issue poorly executed in a complex corporate transaction, and the end result of litigation and additional liability that results.
The second is that the panel ventures into the question of the standard of review - de novo or arbitrary and capricious - in this circuit with regard to benefit issues and interpretation of plan language. As certain judges of the First Circuit have done in a couple of earlier decisions, this panel suggests that the time may be right for the First Circuit to revisit this question en banc and reset the law in the First Circuit on this issue, although the panel makes clear that doing so is not necessary for purposes of Bowater because the result would be the same under any standard of review that could apply. One wonders how much more pot stirring of this nature on the issue of the standard of review there can be before the circuit chooses a case to fully review and possibly revise the law in this circuit on this issue.
Another View on Whether a Cashed Out 401(k) Participant Has Standing to Sue for Losses Under ERISA
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Judge Tauro, of the United States District Court for the District of Massachusetts, has weighed in lately on some of the more cutting edge and currently unsettled issues in ERISA litigation, such as the impact of ERISA preemption on the powers of a state agency. This week, he ventured into the now hot topic of whether a plan participant who has cashed out of a 401(k) plan has standing to sue for breach of fiduciary duty, in this instance for imprudently investing in allegedly inflated company stock. In the decision, involving a putative class action against Boston Scientific, the judge surveyed case law from other jurisdictions on the issue and broke from the opinion of another judge of the circuit, who had found that such a participant, once cashed out, lacked standing to bring a claim for benefits. Judge Tauro reviewed case law from other circuits to the contrary, and elected to follow those rulings.
The cases relied upon by the judge are an instructive lot, and almost a road map for briefing this issue when arguing in favor of standing for such a cashed out participant:
More persuasive is the reasoning of the Seventh Circuit, which recently reached an opposite outcome and found that a plan participant did have standing, despite having cashed out of the plan. [The Seventh Circuit found that] "[b]enefits are benefits; in a defined-contribution plan they are the value of the retirement account when the employee retires, and a breach of fiduciary duty that diminishes that value gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty." The Third and Sixth Circuits have adopted this line of reasoning as well. Also instructive is the analysis by Judge Hall in the District of Connecticut: “[T]he court is puzzled by the . . . assertion that a claim for benefits lost due to imprudent fiduciary investment becomes a claim for damages once the plaintiff accepts a lump sum payment constituting the balance of her account with the relevant plan. . . . Regardless of whether [the participant] accepted or refused the balance of her account, her underlying claim would still be for the money lost by the Plan as a result of the defendants' imprudent investments. The court sees no logical reason why such a claim seeks an ascertainable benefit when the plaintiff refuses a lump sum, but the very same claim seeks an unascertainable damage award once the plaintiff accepts a lump sum.”
Misrepresentations Under ERISA Plans: Is There A Cause of Action?
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Here’s an interesting case out of the First Circuit this week concerning an attempt to use an equitable estoppel theory to force a plan to pay supplemental life insurance benefits even though the former employee covered by the plan had not submitted the necessary health forms to qualify for that coverage. The case, Todisco v. Verizon Communications, involved a situation in which the now deceased employee was supposedly told that he could sign up for the additional life insurance benefits without submitting the necessary health information. The plan administrator refused to pay those benefits after his death because his failure to submit that information precluded such coverage under the terms of the plan.
After much wrangling at the district court (“wrangling” in this context being a euphemism for substantial motion practice), what remained was the plaintiff’s theory that she could recover the benefits on an estoppel theory based on the allegedly misleading statements made to the deceased at the time he elected the benefits. The First Circuit held that the theory failed as a matter of law, however. The Court analyzed the issue under both possible statutory causes of action available to the plaintiff, namely Section 502(a)(1)(B), which “empowers a ‘participant or beneficiary’ to bring suit ‘to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan,’ and Section 502(a)(3), which “allows a ‘participant, beneficiary, or fiduciary’ to sue ‘(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (I) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan."
The First Circuit held, however, that the plaintiff’s equitable estoppel claim had no home under either statutory section. It found that even though in common parlance equitable estoppel is understood to be an equitable remedy, it did not constitute equitable relief for purposes of ERISA under applicable Supreme Court precedent; for ERISA purposes, equitable relief has a very narrow and specific meaning, and the plaintiff’s attempt to recover compensatory damages only under an estoppel theory did not fit that meaning. The plaintiff’s claim was therefore not actionable as a matter of law under Section 502(a)(3). At the same time, however, the First Circuit found that the relief was not viable as a claim for damages - namely the denied benefits - under Section 502(a)(1)(B), because that section only allows recovery of benefits due under the terms of the plan, and the plaintiff's estoppel theory did not allege that the benefits were due under the actual terms of the plan, but that they were instead due under the terms of the plan as misrepresented to the deceased at the time he sought to obtain the coverage. The Court found that this claim did not fit the express requirements of the statutory provision in question, which limits recovery to benefits when the actual terms of the plan require them to be paid.
The Interrelationship of Suits for Benefits and for Breach of Fiduciary Duty Under ERISA
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If it seems like I have been digressing a lot these past couple of weeks off of the primary topics of this blog and into other areas that interest me - such as the billable hour system - or that I practice in, like intellectual property litigation, it is because the courts of the First Circuit have been fairly quiet with regard to ERISA issues since the First Circuit issued its opinion in this case a few weeks back in which I represented the prevailing parties. Things change quickly in the forest, though, and the courts in this circuit have begun speaking again on ERISA issues. The United States District Court for the District of Puerto Rico has now provided this nice, handy summary of why an individual plan participant whose benefits have been terminated must bring solely a claim for benefits, and cannot press forward with an alternative theory for breach of fiduciary duty. In the words of the court:
ERISA recognizes two avenues through which a plan participant may maintain a breach of fiduciary duty claim: (1) a Section 502(a)(2) claim to obtain plan-wide relief, see 29 U.S.C. § 1132(a)(2); and (2) an individual suit under Section 502(a)(3) to obtain equitable relief, see 29 U.S.C. § 1132(a)(3). Cintron [the plaintiff] does not seek plan-wide relief. Consequently, ERISA authorizes her breach of fiduciary duty claim only if she seeks "appropriate equitable relief." 29 U.S.C. § 1132(a)(3); Varity Corp. v. Howe, 516 U.S. 489, 512, 116 S. Ct. 1065, 134 L. Ed. 2d 130 (1996); Watson v. Deaconess Waltham Hosp., 298 F.3d 102, 109-10 (1st Cir. 2002); Larocca v. Borden, Inc., 276 F.3d 22, 27-28 (1st Cir. 2002). The Supreme Court of the United States has described Section 502(a)(3) as a "safety net" that provides appropriate equitable relief for injuries that Section 502 does not elsewhere adequately remedy. Varity, 516 U.S. at 512. Section 502(a)(3), therefore, does not authorize an individualized claim where the plaintiff's injury finds adequate relief in another part of ERISA's statutory scheme. Id. at 512, 515; see also Watson, 298 F.3d at 112-13; Larocca, 276 F.3d at 27-28; Turner v. Fallon Cmty. Health Plan, 127 F.3d 196, 200 (1st Cir. 1997). Following Varity, "federal courts have uniformly concluded that, if a plaintiff can pursue benefits under the plan pursuant to Section [502(a)(1)(B)], there is an adequate remedy under the plan which bars any further remedy under Section [502(a)(3)]." Larocca, 276 F.3d at 28.
Section 502(a)(1)(B) provides Cintron the opportunity to obtain redress for the injury she alleges to have suffered--a wrongful termination of her benefits. If the defendants wrongfully stopped paying her benefits, Section 502(a)(1)(B) provides an avenue through which she may recover benefits due. She may not seek relief for the same injury under Section 502(a)(3). . . .Thus, she may not maintain a claim for breach of fiduciary duty under Section 502(a)(3).
As some of you know from other posts, I like to collect handy summaries like this to insert into future briefs in appropriate spots, and I pass this one along to anyone who may want to do likewise. The case is Cintron-Serrano v. Bristol-Myers Squibb P.R., Inc.
The Latest Word Out of the First Circuit on Pre-existing Conditions, Long Term Disability Benefits, and Uncertainty Over the Standard of Review
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No one is quicker to post about decisions out of the First Circuit than Appellate Law & Practice, who quickly had this post up on Friday about the First Circuit's opinion issued that day in a long term disability benefits case where the plan and the administrator prevailed at the District Court, and then again before the First Circuit. I represented the prevailing parties before both the District Court and the First Circuit in that one.
Appellate Law & Practice focused in its post on some of the issues addressed by the First Circuit that apply across the board to other types of litigation, and not so much on the issues specific to ERISA that were addressed by the First Circuit in its opinion. There are some points about that opinion that are specific to ERISA cases, and should be of interest to those who practice in this area. Sometime in the next couple of days, I will return to the opinion and discuss those issues, from the perspective of the lawyer - me - who briefed and argued them. For now, here is the opinion itself.
Time to Reset the Clocks, at Least When It Comes to Calculating Interest Awards in ERISA Cases
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We are in another one of those stretches where the courts of this circuit issue a fair number of ERISA related decisions in a short time span. I always think that, when this happens, it simply points out how ubiquitous are ERISA governed employee benefits. Appellate Law & Practice has the story of one of those cases, a ruling out of the First Circuit concerning the narrow question of when, during the course of litigation, the interest clock switches from prejudgment time to postjudgement time. In that case, the conclusion was that “a finding of liability alone without a corresponding determination on damages does not suffice to start the clock on postjudgement interest,” and thus to end the clock on prejudgment interest.
The case is Radford Trust v. First Unum Life Insurance.
LaRue v. DeWolff, Losses to the Plan and the Supreme Court
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SCOTUSBLOG is the NY Times, or maybe - given its focus on one particular field - the Wall Street Journal, of the legal blog world. With the backing of a major international law firm, it brings tremendous resources to its in-depth coverage of all things goings on at the Supreme Court. Cripes, the blog even has its own reporter, to supplement the work of the actual bloggers.
And of course that’s also why I read it, because you know you are not going to miss anything of importance to your own practice area that happens at the Supreme Court. And here, of interest, is their post on the United States Solicitor General’s brief recommending that the Supreme Court hear an appeal from the Fourth Circuit’s decision in LaRue v. DeWolff, Boberg & Associates, which presents the question of whether an individual participant in a 401(k) plan can sue to recover losses from errors by fiduciaries that affected only his or her account in the plan, rather than the accounts of all or most participants in the plan. In dispute is the question of whether it qualifies, first, as a loss to the plan, such that the participant can sue for breach of fiduciary duty, and/or second as equitable relief as the Supreme Court has interpreted that phrase for purposes of ERISA, such that the participant can recover on a separate equitable relief theory.
One thing’s for sure. If the Supreme Court puts its imprimatur on this theory, and makes clear that individual plan participants can sue for their own individual losses in their defined contribution accounts, there will be a whole range of new potential plaintiffs out there, and I am sure plenty of lawyers ready and willing to represent them. At the same time, to be fair, in a world of Enrons and the like, maybe there should be.
The Workplace Prof reads SCOTUSBLOG too, and here’s the prof’s take on these events.
Summary Plan Descriptions and Discovery in ERISA Cases: the Latest from the First Circuit
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The First Circuit issued an opinion in the case of Morales-Alejandro v. Medical Card System on Wednesday. The case, which involved a challenge to a denial of long term disability benefits, is noteworthy for two aspects. The first is that the case reaffirms this circuit’s reluctance to allow discovery beyond production of the administrative record in denial of benefits cases prosecuted under ERISA. The court pointed out that, in this circuit anyway, “ERISA cases are generally decided on the administrative record without discovery, and some very good reason is needed to overcome the presumption that the record on review is limited to the record before the administrator."
The second issue of note is that the court addressed the role of summary plan descriptions in ERISA plans and related litigation, and described the role they should play in a litigated dispute over benefits. In particular, the court declared:
ERISA imposes an important requirement on plan administrators and insurers to communicate accurately with plan participants and beneficiaries. See Bard, 471 F.3d at 244-45. Part of the communication requirement is that the SPD provide certain information "written in a manner calculated to be understood by the average plan participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan." 29 U.S.C. § 1022(a). Section 1022(b) specifies the information to be included in the summary. When the terms, language, or provisions of the SPD conflict with the plan, the language that the claimant reasonably relied on in making and proving his claim will govern the claim process. Bard, 471 F.3d at 245. The burden is on the claimant to show reasonable reliance and resulting prejudice. Id.
401(k) Plans and Breach of Fiduciary Duty Lawsuits
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I have written before, and frequently (such as here and here), about the coming boom in litigation against plan sponsors and fiduciaries over alleged excessive fees and other alleged malfeasance in the administration of 401(k) plans. One point I have tried to drive home in my posts, including here and here, is that the best defense to this litigation boomlet, possibly soon to be a boom, is a good offense, in the form of careful, regularly scheduled due diligence with regard to the funds offered in a plan and the fees charged for those funds.
This article, making the same points, by the lawyers at Littler Mendelson, crossed my inbox today. It provides a nice easy to digest overview of the issue, and recommends the same preemptive course of conduct, in the form of these recommendations for due diligence:
What to Do? We believe that there are some actions that employers and plan fiduciaries can take to protect themselves:
•Continually monitor all plan and fund expenses and assure that they have negotiated the best deal for participants, but keeping in mind that fees are only one piece of the fiduciary puzzle; the others include risk, rate of return, and historical performance.
•Periodically review all aspects of the fund selection and monitoring, and document these efforts.
•Be sure that all plan expenses can be determined from documentation provided or made available to participants, and consider providing participants with a separate summary of those expenses.
•Review your service provider agreements, make sure you get legal counsel involved in negotiating those agreements. It is recommended that all 401(k) plan service provider agreements prohibit any undisclosed revenue sharing.
•Ask your plan service providers to provide you with a detailed written description of all plan fees – hard dollar and soft dollar.
•If you believe you may be vulnerable, consider having a legal audit performed on your 401(k) plan.
Sound advice in my book, and one I - and others - have been recommending for awhile.
Behavioral Economics, the Pension Protection Act and 401(k) Litigation
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I have written before about my thesis that 401(k) litigation, and the tendency of individuals to pursue such suits, may be driven in part by the psychology of retirement benefits and the uncertainty for employees as to whether they will be able to fund their retirement that these types of retirement savings vehicles create, particularly as opposed to pensions, which, on anecdotal evidence, seem to generate far less litigation than 401(k) plans. Along these lines, this article out of today’s New York Times about behavioral economics and the impact of consumer choice on 401(k) contributions caught my eye. The article compares retirement savings to research into the strange behavioral distortions that appear to underlie overeating, and discusses how the Pension Protection Act is written in a manner intended to remove certain behavioral distortions from the decision to make 401(k) contributions. Is there a linkage between the security of retirement and the tendency to sue over retirement benefits, and if so, can restructuring the benefit programs, such as in the manner pursued by the Pension Protection Act, reduce the extent of litigation over such benefits?
I certainly don’t pretend to know the answer, and I suspect academic research doesn’t provide an answer to this question at this point either. But the article sums up the research into consumer behavior as follows: “[w]hether it’s 401(k)’s or food, the way choices are presented to people — what the economist Richard Thaler calls ‘choice architecture’ — has a huge effect on the decisions they make.” If we are presenting 401(k)s to employees in a way that makes for retirement uncertainty and for doubt (or at least fears, founded or unfounded) as to the abilities and fidelity of those managing them, the question becomes whether we are creating a “choice architecture” that points people towards litigation, rather than away from it. If, on the other hand, we can create an environment of greater trust in the operation of those types of retirement vehicles, perhaps employees will tend away from trying to resolve concerns over retirement funding through the blunt instrument of litigation.
The Interrelationship of ERISA and the ADA
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I have talked in other posts about the rights of plans and their administrators to recoup overpayments of benefits directly from the beneficiary, and of the creative lawyering that has been employed - although generally without much success - by overpaid plan participants in the hope of avoiding paying the funds back. The United States District Court for the District of Rhode Island has just issued a very interesting opinion involving this scenario, only this time involving an attempt to rely on the Americans with Disabilities Act to prevent the repayment; this tactic didn’t work either, except to the extent that a claim that the attempt to recoup the overpayment was retaliatory could survive a motion to dismiss. The case is Hatch v. Pitney Bowes, Inc.
Defined Benefit, Defined Contribution, and The Psychological Effect on Litigants
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Here is a very neat and interesting paper contrasting defined benefit plans - i.e. pensions - with defined contribution plans - i.e. 401(k) plans - and addressing, in particular: (1) the decline in the former in the workplace and replacement by the latter; and (2) the problems engendered by that change. In essence, the authors argue that the defined contribution plans, as they currently are regulated and operated, simply are not satisfactory replacements for the vanishing pension system, and cannot be counted on to provide an appropriate stream of retirement income for most retired workers. The authors provide suggested changes for both types of plans that, they hope, will make pensions more palatable to employers and 401(k) plans more beneficial to employees.
I have spent a couple days musing on the paper, which was first brought to my attention in this post last week on Workplace Prof, and have a few thoughts to offer, mostly about how the facts and arguments in this paper fit in with the litigation climate involving, in particular, 401(k) plans. What jumps out at me is the central theme of the paper, that pensions are overly regulated and employee contribution plans like 401(k) plans insufficiently regulated, with the result that the latter plans are unlikely to meet the needs of the prototypical employee. And this leads to two thoughts about excessive fee, breach of fiduciary duty and other types of lawsuits against companies sponsoring 401(k) plans and the advisors they retain. First, are the suits driven, at core, by the defined contribution plans' absence of overarching regulation and government protection, placing the onus for policing them on employees and their lawyers, who can be seen to have been forced into serving almost in a “private attorney general” role with regard to such plans? And would this be the case if, like pensions, they were more heavily regulated and backstopped by the government, much like pensions are by the Pension Benefit Guaranty Corporation? And second, echoing a theme I have commented on in the past, to what extent is the litigation driven by the exact problem emphasized in the article, namely that workers cannot confidently assume an appropriate retirement income by relying on 401(k) plans and therefore may rightfully be afraid for their long term economic security? If they didn’t have that fear, and instead were confident in their retirement income, much as - sometimes wrongly - they generally are in pensions, would they be so quick to authorize lawyers to sue in their names?
Merger and Anti-Cutback Provisions of ERISA, and a Handy Rule of Thumb
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This case, out of the United States District Court for the District of Massachusetts, provides a nice little rule of thumb for amending, merging or otherwise altering retirement benefit plans - namely, that it makes it hard to get sued and lose if you make the changes in a way that avoids altering the actual benefit amounts of any given participant. In this case, an employee complained about changes to the company’s retirement plan made as part of a corporate acquisition and about a later change intended to protect other participants’ participation in the plan. The court found that the changes did not violate ERISA’s merger or anti-cutback provisions, as the evidence showed the changes had no adverse impact on the plaintiff’s benefits. In an interesting discussion of the merger and anti-cutback provisions, the court explained that:
Pursuant to ERISA § 208 and I.R.C. § 414(1), when benefit plans are merged, each plan participant must receive benefits immediately after the merger that are equal to the benefits he would have received had his plan terminated immediately prior to the merger. . . .At its core, this merger rule is a simple one, intended to prevent companies from eliminating an employee's previously accrued benefits when merging one benefit plan with another. . . . Much like the merger rule, the purpose of the anti-cutback provisions of § 204(g)(1) of ERISA is to prevent an employer from "pulling the rug out from under employees" by amending its benefit plan to eliminate or reduce a previously accrued early retirement subsidy. Specifically, the anti-cutback rule provides, with certain exceptions not relevant here, that "[t]he accrued benefit of a participant under a plan may not be decreased by an amendment of the plan." 29 U.S.C. § 1054(g)(1). . . .The Act requires that the merger or amendment of retirement plans does not result in a plan that has the effect of reducing an employee's previously accrued benefits.
The court ruled across the board in favor of the defendant, not just on the merger and anti-cutback counts but on all counts pled by the participant, with the decision driven in large part by the fact that the evidence demonstrated that the changes to the plan did not detrimentally alter the benefits available under the plan to the complaining participant.
The case is Gillis v. SPX Corp. Individual Retirement Plan.
Still More on Structural Conflicts of Interest
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Day 3 of my discussion of the First Circuit’s recent ruling concerning structural conflicts of interest and their impact on claims for benefits under ERISA: Workplace Prof blog has his take, and quotes from others, here, and one of my favorite, quirkier, law blogs, Appellate Law & Practice, has its take here.
A Survey of All the Circuits on the Effect on the Standard of Review of Structural Conflicts of Interest
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One of the things lawyers learn early in their careers is that the time it takes to research a particular issue can be reduced dramatically by finding a good published decision out of one of the better federal courts on the issue; such an opinion will often include an excellent synopsis, at a minimum, of the key case law on the issue. In essence, the opinion offers up the outstanding work product, already concluded on the issue in question, of high quality law clerks. Wednesday’s decision in the Denmark case in the First Circuit, which I discussed in yesterday’s post, is a perfect example of this phenomenon, as it provides, in a four paragraph section of the lead opinion, a summary of the law in each circuit on the effect on benefit cases of so-called structural conflicts of interest. As the opinion states:
The circuits have adopted varying approaches to the issue of whether the structural conflict that arises when an insurer both reviews and pays claims justifies less deferential review. In addition to this court, the Seventh and Second Circuits have held that a structural conflict alone is insufficient to alter the standard of review. Instead, these circuits require an actual showing that the conflict of interest affected the benefits decision before there will be any alteration in the standard of review. See Rud v. Liberty Life Assurance Co., 438 F.3d 772, 776-77 (7th Cir. 2006) (holding that a structural conflict of interest, without more, does not affect the standard of review); Sullivan v. LTV Aerospace & Def. Co., 82 F.3d 1251, 1255-56 (2d Cir. 1996) (holding that a claimant must show that a conflict of interest affected the benefits decision, but if such showing is made, de novo review applies).
However, seven other circuits have held that a structural conflict warrants alteration to the standard of review, although six of these circuits apply less deferential review within the arbitrary and capricious framework. Of these six circuits, all except one have adopted a "sliding scale" approach to the standard of review, in which the court applies less deferential review to the extent that a conflict of interest exists. See, e.g., Fought v. Unum Life Ins. Co. of Am., 379 F.3d 997, 1004 (10th Cir. 2004) (per curiam) (explaining that "the court must decrease the level of deference given to the conflicted administrator's decision in proportion to the seriousness of the conflict" (internal citation and quotation omitted)); Pinto, 214 F.3d at 379 (expressly adopting a "sliding scale method, intensifying the degree of scrutiny to match the degree of the conflict"); Vega v. Nat'l Life Ins. Servs., Inc., 188 F.3d 287, 297 (5th Cir. 1999) (en banc) (explaining that "[t]he greater the evidence of conflict on the part of the administrator, the less deferential our abuse of discretion standard will be"); Woo v. Deluxe Corp., 144 F.3d 1157, 1161-62 & n.2 (8th Cir. 1998) (explicitly adopting the sliding scale approach while noting that "not every funding conflict of interest per se warrants heightened review"); Doe v. Group Hosp. & Med. Servs., 3 F.3d 80, 87 (4th Cir. 1993) (applying less deference "to the degree necessary to neutralize any untoward influence resulting from the conflict"). The Ninth Circuit employs a "substantially similar" approach, but with a "conscious rejection of the 'sliding scale' metaphor" on the ground that "[a] straightforward abuse of discretion analysis allows a court to tailor its review to all the circumstances before it." Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 967-68 (9th Cir. 2006)(en banc).
The Eleventh Circuit uses a different framework. It first determines, under de novo review, whether the decision was wrong; if it was, and if an inherent conflict of interest exists, "the burden shifts to the claims administrator to prove that its interpretation of the plan is not tainted by self-interest." HCA Health Servs., Inc. v. Employers Health Ins. Co., 240 F.3d 982, 993-94 (11th Cir. 2001). The claims administrator may then meet this burden "by showing that its wrong but reasonable interpretation of the plan benefits the class of participants and beneficiaries." Id. at 994-95.
Finally, the D.C. Circuit has not yet established a standard of review in cases involving a structural conflict of interest. See Wagener v. SBC Pension Benefit Plan-Non Bargained Program, 366 U.S. App. D.C. 1, 407 F.3d 395, 402 (D.C. Cir. 2005) (finding that the result would be the same under either arbitrary and capricious or de novo review).
Current First Circuit Thinking on Structural Conflicts of Interest
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Interesting decision out of the First Circuit yesterday, in the case of Denmark v. Liberty Life Assurance Company, that focused on the proper standard of review to apply in cases in which the administrator both decides the claim for benefits and is also the party that will have to pay the benefits if the claim is upheld. I have addressed in other posts this Circuit’s approach to that issue, and my belief that, although some other circuits take a different approach, the approach taken by this Circuit is the correct one. I discussed that here, here and here. The Denmark appeal generated a separate opinion from each of the judges on the panel, with two judges believing that it is time for the Circuit to reconsider, en banc, its approach to this issue. The third judge emphasized his belief, much like mine, that the Circuit’s current approach is time proven and battle tested, and should not be overturned lightly; he also points out that, given the split among the circuits over this issue, it would make sense not to change course on this issue unless and until the Supreme Court resolves the split.
Mike Webster to Ted Johnson: Are the NFL and the New York Times Kidding?
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I don’t want to turn this blog into a soapbox, and as someone who really likes newspapers, I also don’t want to join the Greek chorus of self-appointed media watchdogs that seems to make up much of the blogosphere. Some things, however, such as this article in the New York Times, call out for a skeptical and critical reaction. The article explains how the NFL has now created a program to provide some funding for long term, home or facility, care for former pro players who “have various forms of dementia,” even though the NFL insists that football injuries to the brain - multiple concussion syndrome, anyone, for those of you who follow the sport? - are not the cause. The article seems to credit the NFL for providing this help to former players - help that, despite the vast wealth of the league, is capped at $88,000 a year - and praises the idea that this problem is being resolved through this program rather than by litigation, i.e. by former players suing the NFL. Astoundingly, the article describes the program as addressing an unmet need because, and I quote the Times here on this, “former players who have dementia do not qualify for the N.F.L.’s disability insurance program, because neither the league nor the union consider their conditions football-related, a stance that has been cast in doubt by several scientific studies.”
And yet, as I discussed in this post several months ago, the family of the late Pittsburgh Steelers center Mike Webster litigated that exact issue for years, finally defeating the NFL, the players association and the plan before the Fourth Circuit court of appeals, to recover benefits under the league’s ERISA governed pension and disability system for exactly this type of injury. The Fourth Circuit’s opinion, in fact, was a pretty powerful condemnation of the roadblocks that had been tossed in Webster and the estate’s path in their attempt to obtain the benefits.
Which brings me to a couple of points that should be kept in mind in reading the Times article and considering the value of the NFL’s new program that the article praises. First, I suspect that the pension plan/disability plan system that the Webster family targeted provides far greater benefits than does this separate plan discussed in the article. If so, the idea that former players should pursue help under that program, rather than through the pension plan, is a disservice to retired players. Second, again if I am right about the greater benefits available under the pension/disability plan, then one has to wonder whether the separate NFL plan discussed in this article, although commendable for providing some help to aging players, actually serves as something of a Trojan horse (not a perfect analogy, I know) that, intentionally or otherwise, draws retired players away from seeking the larger payouts of the pension/disability system and instead to this plan. And third, given that a leading federal court of appeals with a significant track record in ERISA cases has already found that the NFL’s pension and disability plan actu