Halo v. Yale, the Second Circuit, Hamilton and Sideways Challenges to the Scope of Discretionary Review
In the musical Hamilton, everyone from Aaron Burr to Hamilton’s wife, Eliza, asks why Hamilton always “writes like he’s running out of time,” and the lyrics assign various pop psychology rationales to his urgency. This morning, though, after listening to the soundtrack again, I realized the real reason – he’s a lawyer! He’s always on deadline and running out of time!
Me too, which is why I haven’t had time to post regularly lately, but, between all the briefing and court hearings, I have been reading everything that has crossed my desk, making note of a number of recent decisions that I wanted to comment on. Interestingly though, the luxury of waiting to write on them – not of my choosing, but nonetheless – has allowed time for a theme to emerge, and it is this: we are seeing a series of cases coming out of major courts that are aggressively pushing back against the unbridled assertion of broad discretion by plan administrators operating under a grant of discretion. For years, commentators have argued that the breadth of discretionary review was excessive, and even many judges, while broadly applying that scope of review, have commented in dicta that the extent of that scope should be revisited by higher tribunals or Congress. I myself have, time and again, while winning cases on behalf of administrators, fiduciaries and sponsors, had the experience of judges ruling in favor of my clients noting at the same time that their figurative hands were figuratively tied by circuit and Supreme Court jurisprudence, and on occasion commenting that the claimant’s complaints in that regard were more properly addressed to Congress than to a district court judge.
But, to continue the Hamilton references, for every action there is an equal and opposite reaction. In Hamilton, Thomas Jefferson uses this law of physics to explain the breaking up into factions of George Washington’s cabinet. Here, though, I think it holds true as well as an explanation for a series of recent decisions that have placed some checks on the freedom of action of plan administrators operating under grants of discretion. Over time, in reaction to the evidentiary and substantive benefits granted to plans and their administrators by discretionary review, and in response to clever arguments made over the course of years by lawyers for participants seeking to undermine discretionary review, courts have begun developing doctrines that reign in, to a certain degree, the advantages granted to administrators by a discretionary grant. For the most part, these are not direct restrictions on the exercise of discretion itself, but instead consist of challenges to the applicability at all of discretion, such as in the form of decisions holding plan administrators to strict compliance with technical requirements of claims handling upon pain of losing the benefits granted them by discretionary review.
An excellent example of this phenomenon is the Second Circuit’s recent decision in Halo v. Yale Health Plan, Dir. of Benefits & Records Yale University, which addressed the impact on discretionary review of an administrator’s failure to strictly comply with the claims handling regulations of the Department of Labor, and which held that non-compliance could forfeit a grant of discretion. The Court held that “when denying a claim for benefits, a plan's failure to comply with the Department of Labor's claims-procedure regulation, 29 C.F.R. § 2560.503–1, will result in that claim being reviewed de novo in federal court, unless the plan has otherwise established procedures in full conformity with the regulation and can show that its failure to comply with the claims-procedure regulation in the processing of a particular claim was inadvertent and harmless. Moreover, the plan ‘bears the burden of proof on this issue since the party claiming deferential review should prove the predicate that justifies it.’”
This theme – of sideways, rather than frontal, attacks on the application of discretionary review – has cropped up in a number of recent decisions. With any luck, if I don’t run out of time, I will comment on those decisions and how they fit in this theme in upcoming posts.
My Exclusive Interview with Fiduciary News on ERISA Litigation
The good people at Fiduciary News gave me a soapbox, and I was happy to climb up on it. They interviewed me as part of their series of monthly interviews on ERISA and related topics, and I discussed ERISA litigation and a wide range of related issues. You can find the “Exclusive Interview: ERISA Attorney Stephen Rosenberg Says Litigation’s Legacy is Improved Plan Design” here. You will see I went on for a bit, as I am wont to do when anyone wants to talk about ERISA!
Clearing Out the Attic of My Mind: Notes From ACI's 8th National Forum on ERISA Litigation
With all due apologies to longtime Globe sports columnist Dan Shaugnessy, who would periodically “clean out his desk” by running a column of short bits he had collected, here’s a list, in no particular order, of interesting (to me, anyway) items I took away from ACI’s excellent 8th National Forum on ERISA Litigation in New York City this week, where I spoke on ethical issues in ERISA litigation:
●What a great group of panelists, and thoughtful, educated audience. They reaffirmed my (somewhat narcissistic and self serving) belief that ERISA litigation attracts and holds onto the sharper tools in the bar.
●Day 2 of the conference had an excellent panel on ESOPs, with at least one panelist noting the pervasive problem of conflicted fiduciaries in this area, who may have interests in the outcome of a transaction that are not the same as those of the employee participants in the ESOP. During the course of the day, whether at lunch or by the coffee table outside the meeting room, everyone I spoke to had a horror story about a conflicted ESOP trustee and an ESOP transaction that disserved employees as a result. Isn’t it past time to effectively require the appointment of independent fiduciaries, from outside of the employee owned or soon to be employee owned company, to pass on transactions on behalf of the employee owners?
●I’ve been hearing for years that Broadway is either dead or dying, but you couldn’t tell that from the outdoor advertising at all of the theaters surrounding the conference site. Either all the shows out there right now are the best there’s ever been, or it is truth in advertising, rather than Broadway, that is dead.
●Incidentally, every time I left my hotel I saw a big promo for Bradley Cooper in a new version of Elephant Man on stage. I know everyone’s a critic, but Cooper was the weak link in the American Hustle cast, so I can’t say the promo had me reaching for my wallet.
●Nobody knows nothing, at this point, about what impact Dudenhoeffer will have (I exaggerate slightly, as many panelists and audience members had calculated and well-educated guesses as to the future of stock drop litigation). As I discussed with some members of the audience, one wonders whether the class action bar will go forum shopping with regard to the next round of decision making in this area, looking for the most favorable possible venues for the first of the next round of decisions in this area.
●Speaking of the class action bar, those of its members who were in the audience looked amused when a panelist referenced the class action bar as “sharks.”
●There was an excellent panel on the public pension crisis. It looks to me like the problem will inevitably be left to bankruptcy courts and litigators to sort out, which drives home the extent to which the political will and leadership needed to address the problem is absent.
●One of the most interesting panels to me every year is the insurance industry panel discussing fiduciary liability and other insurance matters related to insuring risks and exposures in the benefit plan industry. It lays the complexity of insurance coverage law (which many lawyers find a very complex area) on top of one of the few areas of the law that exceeds it in complexity, ERISA.
●In the time between the insurance panel’s presentation and getting back to my office, what showed up on my desk but a complicated problem concerning the extent of insurance coverage for an ERISA exposure.
●In the time between my own presentation on ethical issues in litigating ERISA cases and getting back to my office, what showed up on my desk but an ethical conundrum I had never seen nor even thought of before. Grist for the next time I give a presentation on that issue, I suppose.
●The judicial panels on the morning of the second day of the conference are always interesting, and it always catches my attention how many times, and in how many different ways, the judges reference their desire to have the lawyers before them simply act courteously and respectfully to each other in the cases pending before them. One judge commented that, from his seat on the bench, it looks to him that “civil lawyers act criminally to each other and criminal lawyers act civilly to each other.”
●In the time between that judicial panel and my own presentation several hours later, I received at least two emails that documented the judges’ concerns in this regard.
●And I bet so did every other lawyer sitting in the audience.
●There are worse places in the world to watch a World Series game than the West Side Palm in NY.
●I really enjoyed the top hat plan litigation presentation, but that may just be me. There is something I have always found fun about litigating top hat and other executive compensation disputes. Maybe it’s the structure of top hat plan cases, which have a very logical order and composition of issues that can be exploited by a litigator. The presentation matched this, with a focus on the step by step elements of creating top hat status and defending against challenges to it.
●And finally, the panelist who discussed standards of review in ERISA litigation and noted that he may be the only person in the room old enough to remember litigating before Firestone was a treat. Firestone was decided in1989, and, despite nearly 25 years of experience, I never litigated benefit disputes in a pre-Firestone environment, so it was fun to hear, even briefly, how the litigants and the courts addressed the standard of review in the days before Firestone (hint: they typically didn’t).
Excessive Fee Litigation Remains a Hot Topic
There’s a nice overview from Bloomberg BNA on plan fee litigation, and its status in the courts at this point in time. The article opens up by setting the stage:
Plan fee litigation had a big year in 2013, with divisive appellate court decisions affecting standards of judicial review, statutes of limitations and functional fiduciary status that may open the door for increased and novel litigation, employee benefits attorneys said during a conference panel presentation.
Its interesting to read the rest of the article, which summarizes the current status of cases such as Tibble and Leimkuehler, and discusses the totally conflicting views of the defense bar and the plaintiffs’ bar over these cases. If there were ever a case of two sides not being able to agree on whether it is day or night, it is the two sides of the bar arguing over the propriety of judicial decisions over ERISA liability, particularly with regard to excessive fee litigation. I thought there was a divide bordering on the ecumenical decades ago, in my earlier life as an insurance coverage litigator (which I still sometimes am, when not busy with ERISA fiduciary problems or other types of litigation) between policyholder and insurer lawyers over oddities like the asbestosis exclusion, the meaning of the words “expected or intended,” or what the words “sudden and accidental” actually mean, but they had nothing on the current divide between the plaintiff and defense bars when it comes to high stakes ERISA litigation (a division I wrote about at length here).
Substantively, though, the best takeaway from the article comes in its last line, in a quote from someone with the Department of Labor, who notes on one particular issue raised by the fee cases that it is “an interesting issue, and I don't think we've heard the last of it.” One can say that across the board about all of the excessive fee litigation, and its spin off of other types of cases all targeting the question of whether plan participants are paying more than they should for plan benefits. Tibble itself is a wonderful example of the extent to which excessive fee litigation is a gift that keeps on giving, of a sort, for everyone from the lawyers involved, to plan participants (in those instances where they either obtain a recovery as part of a class or receive the incidental benefit of having lower plan expenses because sponsors are responding to the threat, real or perceived, of excessive fee litigation), and, yes, commentators. I wrote substantially about Tibble way back at the trial court level, in 2011, and here we still are, these many years later, writing and talking about the further history of that case.
Me, Massachusetts Lawyers Weekly and Gross v. Sun Life
Eric Berkman’s article in this week’s Massachusetts Lawyers Weekly on Gross v. Sun Life, in which I am quoted, does an excellent job of explaining the case, particularly to those readers who do not have years of experience with ERISA cases, benefit litigation, or the long history of the law in this circuit governing benefit cases. I have written before of my thoughts on the Court’s opinion in Gross, but I realized, in reading Eric’s article, that his questions when he interviewed me for his article were astute enough to draw out some additional thoughts on the case, which I had not yet thought of when I posted about the case on my blog.
Eric presents those additional ideas of mine very well in his article and, citing my own personal interpretation of the fair use doctrine, I thought I would pass them along here:
Stephen Rosenberg, a Boston ERISA lawyer who typically represents insurers and employers, described the case as a “natural culmination of years of judicial approach” in this circuit.
“Whether or not it’s shown up in decisions, there’s been a certain level of skepticism on how best to apply standards of review to medical evidence in these circumstances,” said Rosenberg, who practices with the McCormack Firm and was not involved in the case. “It was only a matter of time before they deviated from Brigham and established a higher bar for obtaining discretionary review. The court makes clear — as do other circuits — that they really want to see a clear statement that ‘we retain discretion’ to decide the issues.”
He also said the ruling extends beyond long-term disability insurance plans. In many contexts, the employer itself, rather than an insurer, provides an ERISA plan and wants to maintain discretion to determine benefits eligibility, Rosenberg explained.
“These plans are often written by an in-house benefits person or an in-house attorney who has no ERISA expertise,” Rosenberg said. “Years later, when a dispute arises, the company will always want to claim discretionary review, and I think they’ll have to learn from this decision that they need to use the proper language in these types of plans as well.”
A State of the Art ERISA Benefits Decision from the First Circuit: Gross v Sun Life
Great, great decision out of the First Circuit a few days ago on ERISA benefits litigation, covering, in no particular order: what language is necessary to establish discretionary review; when does the safe harbor exception to preemption apply; when is an LTD policy part of an ERISA governed plan; the proper weight and mode of analysis to be given to video surveillance in the context of an LTD claim; and when to remand to a plan administrator for further determination as opposed to the court ordering an award of, or denial of, benefits.
I can’t say enough about the Court’s analysis of each one of these issues, particularly if, like me, you have been carefully reading all of the ERISA decisions out of the First Circuit and the district courts in this circuit over the past decade or more. On each one of the issues I noted above, the opinion builds quite carefully, and persuasively, on the evolution on each of these issues that has taken place in this circuit, quite slowly, over many years. I will give you two examples. First, the Court raises the bar for establishing discretionary review, and in so doing, gives a careful presentation of exactly why this is the normal and logical result of years of jurisprudence. Here’s a second example. It wasn’t that long ago that we all expected the district court to either affirm a denial of benefits by an administrator or to instead overturn that denial and order an award of benefits. At one point in time, though, the case law shifted towards an analysis of whether, if a denial would not be upheld by the district court, the entire issue should be remanded to the plan administrator for further evaluation of evidentiary concerns identified by the court, so that the plan administrator could determine whether an award of benefits was warranted given those concerns; further litigation could thereafter ensue if the administrator maintained a denial and the plan participant wanted to challenge that determination in court. In this latest decision out of the First Circuit, however, you see something very interesting: the pure application of the need for remand to the administrator, as though this is simply the basic rule in this circuit (which, in fact, is what it has become).
The decision is Gross v. Sun Life. To echo a comment I made on Twitter about it, I don’t think you can litigate ERISA cases in this circuit unless and until you have both read it and thoroughly incorporated its lessons. And a side note: one of the plaintiff’s lawyers was Jonathan Feigenbaum, who, as I discussed here, takes exception to the very idea that discretionary review is even constitutional.
Why Discretionary Review Is Not Unconstitutional
Attorneys Jonathan Feigenbaum and Scott Riemer, who represent claimants in long term disability cases, have published a fascinating article, titled “Did the Supreme Court Flunk Constitutional Law when it Permitted Discretionary Review of Insured ERISA Benefits Cases?” In it, they argue, not surprisingly given the title, that it is unconstitutional for courts to apply discretionary review. In short form, their argument is that it deprives claimants of their constitutional right to have their cases adjudicated by an Article III court, by giving initial decision making, subject to a limited scope of review, to an outside, non-judicial party, without allowing for a full trial in court. This is a simplification of their well-developed thesis, which is more subtle and complicated than that, which is what makes it fun.
The response to their argument, though, rests in the proper response to a gauntlet the authors throw down at the outset of their paper, in which they challenge readers to:
identify any litigation in the federal courts between private litigants, other than discussed in this paper, where the Article III Judge must defer to the decision of the defendant without conducting a full trial on the merits. We bet you can’t.
This isn’t really what discretionary review does, however. Instead, it is simply a presumption running in favor of the private decision maker – who is best understood as a party to a contract who made a decision that is now being challenged in court by the other party to the contract – under which the other party must rebut the presumption by showing that the decision was not based on substantial enough evidence to support it. The American legal system is rife with these types of presumptions. What is the Moench presumption in stock drop litigation, if not a presumption running against the claimants that they can overcome with the right type of evidence? Employment law, with its burden shifting evidentiary rules, historically was rife with similar examples, in which one party bears a burden of proof only after another party makes a certain showing. The business judgment rule applies a gloss in favor of directors and officers in certain types of cases, which must be overcome by a plaintiff. Patents are presumed valid when challenged in court, and a holder of a registered copyright is presumed to have a valid copyright, unless and until proven otherwise in court.
One could go on like this for hours, making such a list. The point, though, is simple: discretionary review is not an unconstitutional removal from the court system of decision making authority over a claim, but rather the creation by the courts of an evidentiary presumption and a burden of proof, no different than what occurs in numerous other areas of the law.
And the Ninth Circuit Swings Away at Tibble v. Edison . . .
Well, the United States Court of Appeals for the Ninth Circuit has affirmed the District Court’s well-crafted opinion in Tibble v. Edison. I discussed the District Court’s opinion in detail in my article on excessive fee claims, Retreat From the High Water Mark. From a precedential perspective, as well as from the point of view of what the opinion foretells about the future course of breach of fiduciary duty litigation in the defined contribution context, there is a lot to consider in the opinion. There is too much, in fact, for a single blog post to cover, or at least without the post turning into the length of a published paper. I try to avoid that with blog posts because otherwise, to misquote a poet, what’s a journal or law review for?
I plan instead, however, to run a series of posts, each tackling, in turn, a separate point that is worth taking away from the Ninth Circuit’s opinion. The first one, which I will discuss today, concerns ERISA’s six year statute of limitations for breach of fiduciary duty claims. The Court held that, in this context, ERISA’s six year statute of limitations starts running when a fiduciary breach is committed by choosing and including a particular imprudent plan investment. The Court held that the fact that it stayed in the investment mix did not mean that the breach continued, and the statute of limitations therefore did not start running, for so long as the investment remained in the plan.
Beware future arguments over this holding. You can expect defendants to regularly argue that this case stands for the proposition that the six years always runs from the day an investment option was first introduced, and that any breach of fiduciary duty claims involving that investment that are filed later than six years after that date are untimely. You can also expect defendants to argue to expand this idea into other contexts, and to ask courts to rule that anytime the first part of a breach began more then six years before suit was filed, the statute of limitations has passed. This would not be correct. The opinion only finds this to be the case where there were no further, later in time events that, as a factual matter, should have caused the fiduciaries to act, or which, under the circumstances of those events, constituted a breach of fiduciary duty in its own right; if there were, then those are independent breaches of fiduciary duty from which an additional six year period will run. Those independent, later in time breaches would presumably be their own piece of litigation, evaluated independent (to some extent) of the original breach.
Stephan v. Unum, the Attorney-Client Privilege, and the Need for Independent Counsel for Company Officers and Plan Fiduciaries
Tidal Wave! Landslide! Look out below!
Pick out the metaphor of your choice, because Unum just got taken out behind the woodshed by the Ninth Circuit and spanked hard. Frankly, the Ninth Circuit’s opinion is a rout in favor of the participant, and participants in general. In many ways, the case presented a perfect storm for such an overwhelming opinion against a long term disability carrier. The case involved: a very sympathetic plaintiff who suffered a horrible, fluke injury that most readers could sympathize with; a lot of money; and a long term disability carrier with a documented history of claim disputes that the court could point to in further support of its ruling. I have to tell you that the facts painted by the Ninth Circuit in this opinion, related to both the claim and the carrier, are clearly of an outlier event, one not representative of the handling of most claims by most long term disability carriers, or of most long term disability carriers at all, for that matter. Twenty years of experience tell me most attorneys representing participants would, even if only off the record, agree with that assessment.
Frankly, despite Unum’s own documented history with regard to claims handling, cited by the Ninth Circuit to support its opinion, I am not sure that the depiction of the carrier in this opinion is even representative of that carrier at this point in time, but I don’t know enough to comment knowingly in that regard.
More importantly though, and moving away from the overflowing kettle of clichés with which I deliberately chose to fill the first couple paragraphs of this post, it would be a shame if courts, participants, companies and their lawyers allowed the unusual nature of the case to become the focus of their attention. This is because there are several key takeaways from this case, some specific to long term disability cases and others, even more important, to ERISA litigation in general.
With regard to these types of benefit claims, one should look closely at the Court’s handling of the structural conflict of interest issue. The Court not only points toward significant discovery and even a possible bench trial over this issue, but also demonstrates how to use the contents of an administrative record in support of proving the impact of such a conflict. This is all strong stuff, and for many who thought the Supreme Court’s structural conflict of interest ruling in Glenn opened up a Pandora’s box or put us all on a slippery slope towards ever expansive, and more expensive, benefits litigation, here is the proof for that hypothesis.
To me, the most worrisome aspect of the decision, and one that sponsors and companies need to pay very careful attention to in terms of planning their benefit operations and obtaining legal services, is the Court’s very broad application of the fiduciary exception to the attorney-client privilege. The issue here isn’t so much the conclusion that the exception makes internal legal discussions related to a claim subject to disclosure, but the line drawing it demonstrates with regard to when legal advice is, and is not, subject to disclosure. In short, plan administration – including benefit determination issues – are subject to disclosure and not protected. At the same time, though, what is protected is advice related to the protection of fiduciaries against personal liability, civil or criminal, when that advice is clearly distinct from the handling of claims under a plan and the administration of a plan.
Now the interesting thing about that distinction is that, as anyone who litigates breach of fiduciary duty or other ERISA cases knows, there is clearly some overlap between the two types of legal advice and there is not always a clear separation between the two. Certainly a fiduciary sued for misconduct is being sued because of events involving a claim and a plan’s administration, and thus legal advice rendered to the fiduciary falls somewhere in the middle of those two extremes. Further complicating this issue is a fact that the Ninth Circuit points out, which is that plan sponsors and plan fiduciaries often rely on the same lawyers and law firm for advice on all aspects of their plans, from formation to termination and everything in between, including the handling of claims and the representation of officers sued as fiduciaries.
In that latter instance of breach of fiduciary duty litigation against officers, it is crucially important for numerous reasons, as every litigator knows, to have a safe, secure and fully privileged attorney-client relationship. The standards enunciated by the Ninth Circuit, however, place that privilege at some risk in instances in which the same firm that has represented the plan in general is also representing fiduciaries or other company officers with regard to their personal potential liability. The best answer, for numerous reasons, to protecting those fiduciaries and officers, and maintaining the attorney-client privilege that is crucial to their protection, is going to be separating out the representation of such individuals from the routine legal work related to the plan’s formation, operation, administration and claims handling, and using independent, distinct counsel for the representation of such individuals. By segregating out and using separate, independent counsel for any issues related to their potential exposures, you make clear that the legal advice at issue involves privileged issues concerning the potential liability of officers and fiduciaries, which should still be privileged after the Ninth Circuit’s ruling, and is not intermingled with or otherwise part of the broad range of legal services typically required by a plan, which the Ninth Circuit’s opinion holds is likely to be subject to disclosure.
In short, the pragmatic solution is to continue to use one firm for the overall handling of a plan’s various needs, but separate, independent counsel for any and all needs – whether involving litigation or only the potential risk of litigation or exposure – of a plan’s fiduciaries or the officers of the company sponsoring the plan.
That’s my two cents for now. The case is Stephan v. Unum, and you can find it here.
On State Regulators and the Continued Existence of Discretionary Review
You know the old saying “let a thousand flowers bloom”? Its long been a shorthand way (ironically enough, given its origin) of referring to the idea of letting state governments and programs serve as testing grounds for different approaches to the same problem, rather than having the federal government dictate one definitive solution, in the form of a particular program. What’s this have to do with ERISA? Well, in all the years I have been writing this blog, people have complained that the Supreme Court, perhaps inadvertently, granted plan administrators too much power by authorizing the application of discretionary review so long as the plan’s authors remembered to grant that to them in the plan documents. Eventually, the carping at the federal level – predominately by means of arguments made in litigation in the federal courts – resulted in some minor changes at the margins, such as rules regarding structural conflicts of interest that are at least slightly more favorable to participants than they are to plans. This approach to date has still not resulted in any great gains in favor of participants, or weakening of the system of arbitrary and capricious, or discretionary, review that governs decisions under most plans. With much less fanfare, however, certain state regulators have targeted this problem by banning the use of the operative language that generates this type of review in insurance policies affecting residents of their states. I have not made a careful study, but the cases that cross my desk from time to time clearly show that these regulatory initiatives are being upheld by the courts, are not preempted, and are serving to impose de novo review – instead of discretionary review – on plans. Why this is working in this way is perfectly summed up in this decision out of the United States District Court for the Northern District of Illinois, Curtis v. Hartford.
The Very Interesting Lessons of Novella
The Second Circuit these days is the gift that just keeps on giving when it comes to ERISA litigation, and for that matter to blogging about ERISA litigation. Following up hard on the heels of its thorough and legitimately interesting opinion on employer stock drop litigation in Citigroup and McGraw-Hill, the court issued this much more low profile opinion in Novella v. Westchester County. Interestingly, while the employer stock drop cases received full blown press coverage – and while my own view is they essentially spelled the death knell for straight forward stock drop claims as a viable cause of action – I would bet a doppio that the much less noticed Novella case will be the far more cited case as time goes on. The Novella decision offers far more of relevance to the day in, day out run of ERISA cases than does Citigroup/McGraw-Hill, with its focus on one big ticket item, namely the exposure of major corporations to employer stock drop claims, and as a result, it is likely to be turned to by ERISA litigators and courts far more often over the years ahead than are its more high profile cousins.
Novella provides a thorough review and analysis of at least three key, and often encountered, issues in ERISA litigation, particularly denial of benefit cases; more than that, it provides the imprimatur of one of the country’s leading benches to a particular analysis of these issues, which are otherwise subject to some conflicting, and sometime unsettled, interpretations in various circuits. Here they are, in no particular order.
In the first instance, the court provides a clear example of how to determine the reasonableness of a plan administrator’s analysis of its plan terms, and gives some guidance to the proper use of long-accepted canons of contract construction in this context.
In the second, the court addresses one of the more enigmatic issues in denial of benefit claims, which is the question of whether a plan can defend against litigation by relying on an argument not raised in the administrative process before the plan during which the benefits were denied. The court’s words on this point are telling:
It is apparent from the record, however, that the defendants did not use Section 3.16 to calculate Novella's pension in the first instance. As the district court noted, the defendants identified this section as justification for their calculation of Novella's pension “for the first time in litigation.” They did not cite this section of the Plan in their letters to Novella explaining the calculation of his benefits. Nor did they indicate to Novella at any point during his administrative appeals that their two-rate calculation relied in any way on section 3.16. To permit them to assert this newly coined rationale in litigation despite their failure to rely upon it during the internal Fund proceedings that preceded this lawsuit would subvert some of the chief purposes of ERISA exhaustion: to “ ‘uphold Congress'[s] desire that ERISA trustees be responsible for their actions, not the federal courts,’ “ and to “ ‘provide a sufficiently clear record of administrative action’ “ should litigation ensue. It would also clearly be inequitable.
This item is a huge point that should not be overlooked. Lawyers for participants will often argue – whether calling it waiver, estoppel, or something else – that a plan cannot shift its grounds during litigation from what the plan administrator relied upon during the processing of the participant’s claim for benefits, including the participant’s appeal to the plan of an initial denial of benefits. Here, in this language from the court, is a striking, easily lifted passage supporting that exact argument. There is a proactive lesson to be learned from this, beyond just the question of how the court’s ruling on this point affects cases in litigation, and that lesson is that plan administrators must be careful to raise in their denials all plan terms and grounds they believe justify a denial. This requires more work and more attention during the claim processing and appeal stage, including – if the amounts at stake warrant it – getting the benefits lawyers involved.
And finally, I am fond of the court’s analysis of the application of ERISA’s statute of limitations, more specifically the court’s analysis of when the statute of limitations starts running on a claim involving the miscalculation of benefits. The events underlying such a claim occur over a broad swath of time, during which benefits are calculated, granted, appealed, recalculated, denied, and the like. The court narrows down the point in that run of events at which the statute of limitations starts to run, finding that “the statute of limitations will start to run when there is enough information available to the [plaintiff] to assure that he knows or reasonably should know of the miscalculation.” This is a fact based inquiry, but at least it is a standard one on which all parties can focus in litigating such disputes.
Interpreting Ambiguous Plan Language
So half the parties interpreting a possibly ambiguous plan term that is subject to discretionary review come out one way in reading the term, and the other two the other way. Who wins? Well, this is a trick question to some extent, because it doesn’t matter the numbers – all that matters is who gets the last say. This means, of course, that the side who wins that split is whichever one the appeals court agrees with.
And that is a roundabout lead in to this story here - from Michael Rigney's excellent blog on Seventh Circuit appeals - that crossed my desk, about a Seventh Circuit opinion in September concerning the interpretation of the offset provisions in a pension plan where the plan terms invested the administrator with discretionary authority; in that case, the appellate bench concluded that the administrator’s interpretation was reasonable enough to pass muster and thus controlled the question.
More than the outcome, though, what I liked about the case was the panel’s explanation of the law of plan interpretation under ERISA, which was described as:
As a general rule, “federal common law principles of contract interpretation govern” the interpretation of ERISA plans. Swaback v. Am. Info. Techs. Corp., 103 F.3d 535, 540 (7th Cir. 1996). In this context, we have said that the fiduciary, in interpreting the plan, is not free, by virtue of its discretion, “to disregard unambiguous language in the plan.” Marrs v. Motorola, Inc., 577 F.3d 783, 786 (7th Cir. 2009); Swaback, 103 F.3d at 540. On the other hand, the fiduciary’s “use of interpretive tools to disambiguate ambiguous language is . . . entitled to deferential consideration by a reviewing court.” Marrs, 577 F.3d at 786 (emphasis omitted). In using such tools, the fiduciary may not, of course, rewrite or modify the plan. See Ross v. Indiana State Teacher’s Ass’n Ins. Trust, 159 F.3d 1001,12 No. 10-1900 1011 (7th Cir. 1998). “Interpretation and modification are different; the power to do the first does not imply the power to do the second.” Cozzie v. Metro. Life Ins. Co., 140 F.3d 1104, 1108 (7th Cir. 1998). Rather, the fiduciary must reach an interpretation compatible with the language and the structure of the plan document. Of course, “it is not our function to decide whether we would reach the same conclusion as the administrator.” Sisto v. Ameritech Sickness & Accident Disability Benefit Plan, 429 F.3d 698, 701 (7th Cir. 2005) (internal quotation marks omitted)
A handy synopsis of the issue, ready at a moment’s notice to be inserted in the beginning of a brief on the issue.
The case, by the way, is Frye v. Thompson Steel Company.
What's a Good ERISA Lawyer Worth, Anyway?
That’s what this case here begins to answer, at least in the Boston market and in the context of the fees that should be awarded to a prevailing plaintiff. This case was intended to be the next in the series of recent Massachusetts/First Circuit centric decisions I started writing two weeks ago, and haven’t returned to since. It is interesting on two fronts, the first being, as intimated above, it’s survey of billing rates for ERISA counsel in the Boston market. The second is it provides a good explanation, as well as example, of applying a lodestar.
It seemed particularly timely to return to the series of recent decisions by bringing up this one, in light of the Supreme Court’s recent hearing of arguments on the question of the nature of attorney’s fee awards to prevailing plaintiffs in ERISA cases. That case, and the argument before the Court, revolved heavily around exactly what result adds up to a sufficient enough win by a plaintiff/plan participant to trigger an award of attorney’s fees, since an ERISA case involving denied benefits can end up with a result that falls anywhere across a broad continuum of possible outcomes that range from a win for the plan, to a remand back to the plan administrator to fix procedural errors and make a new decision, to an outright win for the plan participant. It is my view, even as predominately a defense lawyer, that those courts who use substantial success (under other names sometimes) by the plan participant in his or her suit as the proper trigger for awarding attorney’s fees under ERISA have it right. There are a lot of barriers to plan participants bringing suit over denied benefits that relate to the costs of doing so, including the fact that many cases simply don’t involve enough in benefit amounts to warrant the plan participant incurring the costs needed to prosecute a claim out of his or her own pocket; making attorney’s fees available so long as the participant proves some substantive problem in the handling of the claim, even if it only results in remand to the plan administrator, is both a necessary counterweight to this problem and consistent with the premise that a plan participant is entitled, even if not to benefits, than to the proper handling of his or her claim and a correct decision making process.
Indeed, if you think about it, the animating principle that makes arbitrary and capricious review morally appropriate is the idea that the decision must be based on a proper process; absent a proper process, the justification for allowing the plan administrator the leeway to make the decision, with only limited review by a court, is weak at best. One can only assume that the administrator’s decision making is appropriate, which is the essential assumption behind discretionary review, if in fact the process used to make that decision was correct; anything less, and there is no reason to assume a correct outcome by the administrator. From a practical perspective, as one who has represented various plan administrators over the years, there is nothing wrong with this approach and idea either, as it is my experience that most good companies strive for a proper process and a correct result (something that itself is dependent on a quality decision making process in the first instance).
For arbitrary and capricious review to exist in a fair legal system, there has to be a realistic opportunity for plan participants to test whether the process pursued was correct, and the opportunity to recover the legal costs incurred in proving that the process was flawed is a necessary part of that, as in its absence, participants will become, for financial reasons, even less likely than they are now to challenge the procedural underpinnings of decisions that go against them. This is simply logical, if you think about it. Why would any rational economic actor spend tens of thousands to prove a mere procedural error leading to remand to the administrator, in cases that often involve only five figures in benefits, absent a realistic opportunity to recoup those fees if correct in his or her belief that the process was flawed?
From this point of view, the exceptional (when compared to every other legal area I can think of at the moment) degree of latitude granted to the administrator by arbitrary and capricious review, something firmly shored up most recently by Chief Justice Roberts in Conkright v Frommert, must exist hand in hand with rules that create a realistic system under which participants can test the administrator’s process in reaching decisions, and the ability to recover legal fees by proving a procedural error and forcing a remand is a sensible part of that system.
What Conkright v. Frommert Means
Well, I guess this wouldn’t be much of an ERISA blog if I didn’t put up a post about the Supreme Court’s decision in Conkright v. Frommert, on the question of whether an administrator continues to be entitled to deferential review when it has already had one interpretation of the challenged plan terms rejected by the court under that standard. Interestingly, coming on the heels of Glenn, the simple fact that the Court had accepted cert in the case suggested some type of change was in the offing for the standard of review, even if it was only incrementally with regard to the application of that standard of review in this type of a fact pattern. Otherwise, frankly, one could see no reason for the Court’s particular interest in the case. The Court, though, found no change to be warranted, and simply reinforced the basic themes of its main cases over the years related to this issue: that deferential review is to be applied, that lower courts are not to deviate from it on ad hoc rationales, and that deferential review is a necessary element of the balancing act between employee rights on the one hand and the need to encourage employers to provide benefit plans on the other. Its not a bad ruling, in the sense that it does give lower courts and practitioners some much needed guidance after decisions such as Glenn, by the Supreme Court, and lower court decisions that played at the margins of the deferential review standards; the decision can, in many ways, be understood as a signal to stick to the basic rules that apply in this area, to not accept the many creative challenges to deferential review that participant lawyers come up with (and which, to their credit, seem to be limited only by the extent of their imagination and legal skills), and to not read cases like Glenn as suggesting any fundamental weakening of that standard outside of the specific factual circumstances presented by that case. And in that regard, the majority opinion can be read as sending that message loud and clear; in fact, the language of the opinion seems to have been selected to purposely drive that point home in as strong a tone as possible. That’s my take on it, anyway.
In fact, the majority opinion was written by Chief Justice Roberts, who, you will recall, authored a concurring opinion in LaRue that has been interpreted by some writers, myself included, as an attempt to prevent the ruling from significantly expanding the extent and scope of ERISA litigation, by placing the type of claim at issue in that case in the realm of denied benefit claims - where deferential review, limited discovery, limitation to the administrative record, and internal administrative appeals rule - rather than in the more free form realm of fiduciary duty litigation. His opinion in LaRue strikes the same tone of wanting to prevent an escalation in ERISA litigation that is at play in the opinion authored by him in Conkright, and this ruling may well have that exact effect; if nothing else, it should quickly become arrow number one in a defense lawyer’s quiver whenever a participant or a participant class seeks to deviate from a strict application of the arbitrary and capricious standard.
When Does a Flaw in an Administrative Appeal Render an Administrator's Denial of Benefits Arbitrary and Capricious?
There have been a series of interesting ERISA decisions over the past several weeks out of the United States District Court for Massachusetts, whose Boston courthouse I can see through my office window as I type this post. The decisions have stacked up on my desk a little bit, like a leaning tower of paper. I am going to run a series of posts, some short and others perhaps longer, passing them on with my comments as to their value. The first is this summary judgment ruling in DiGiallonardo v. Saint-Gobain Retirement Income Group, which has to do with a challenge to a denial of disability retirement benefits. It is most interesting, and useful to other practitioners, for one specific point, namely its handling of an administrator’s procedurally poor processing of a claim and its appeal. The court found that the administrator had not considered the actual key term in the contract in ruling on the claim for benefits, and that this required remand to the administrator for a proper handling of the claim, because under those circumstances, the claimant had not received the “full and fair review of the administrator’s decision” to which a claimant is entitled under ERISA. The court found that this procedural irregularity rendered the administrator’s decision arbitrary and capricious.
You Say Potato, I Say Potato: Two Different Understandings of What Discretionary Review Means
This is interesting. I have written before on this blog, on numerous occasions, about courts sometimes engaging in a more searching level of discretionary review that, in essence, is not discretionary review at all, at least in the manner it has long been traditionally understood. The common belief, and applied in that way by many and probably most courts over the years, is that discretionary - sometimes called arbitrary and capricious - review means that an administrator’s decision in a long term disability case must be upheld if there is significant medical evidence in the administrative record to support the administrator’s determination, and that the process of weighing the different pieces of evidence in the medical record - much of which may be conflicting - belongs to the administrator; the court, applying this type of review, is normally understood to not engage in its own independent weighing of that evidence. Actually looking into and weighing that conflicting evidence to decide whether the administrator was correct was traditionally understood to be part of de novo review, not discretionary review.
However, as I have commented in the past, court decisions in this area reflect a subtle shift away from granting that much discretion to the administrator and towards analyzing the credibility and weight of the evidence supporting the administrator’s decision, even as part of discretionary review. Essentially, while applying discretionary review, some courts have begun to look more closely at the evidence to decide whether to uphold the administrator’s decision, finding that the decision is arbitrary if the court disagrees with the administrator over the value of or weight to be given to certain aspects of the administrative record. It’s a gradual and subtle shift in jurisprudence, but one that exists and that can change the outcome of a long term disability case, by affecting exactly how the court reviews the record and the administrator’s decision. The developing jurisprudence over structural conflicts of interest has provided still greater impetus to, and opportunities for, this shift.
Roy Harmon at his always excellent Health Plan Law blog had a perfect example of this in a post yesterday, concerning a Ninth Circuit ruling in which the appeals court looked behind the medical evidence to weigh it in deciding a long term disability case, finding that the evidence, looked at closely, did not support the administrator’s determination. In contrast, though, you can see in that same case how the district court applied a more traditional understanding of discretionary review, which does not involve independently analyzing the evidence in that manner, to find that the administrator’s decision was not arbitrary and capricious since it was supported by substantial evidence in the administrative record. The end result is that you can compare in this case the effect on the same facts of these two different approaches to applying discretionary review, with the more traditional view of it - applied by the district court - resulting in a win for the administrator - and the more searching and activist approach - applied by the Ninth Circuit - resulting in a win by the participant.
Here's What the Court Will Do In Conkright v. Frommert
Alright, here we go on Conkright v. Frommert, which will be argued at the Supreme Court on Wednesday. SCOTUS has the full run down of the case and what is at issue right here, and long time ERISA blogger Paul Secunda has an amici brief before the Court on the core issue, which can be found here. At its heart, the case presents one fundamental question, though cloaked - like many ERISA cases - in a wide ranging and complicated documentary, factual, and judicial history. That, by the way, is what makes ERISA cases fun for litigators like me - nothing is ever simple, even the issues that one would think should be. This is a natural outcropping from a number of aspects of this area of the law, running from a complicated statute that leaves much to further development by the courts, to the inherent limitations posed by both the English language and the (inevitably finite) skill of the scrivener in drafting complicated benefit plans, to the frequent disagreement among circuits (and even among district court judges within the same circuit in some instances) on a variety of issues under the statute. Here though, the key issue is one of deference, and whether a court must continue to apply deferential review to a plan administrator’s interpretation of a plan when the court has already rejected the administrator’s earlier interpretation as being arbitrary and capricious. A non-lawyer - and most lawyers too - would say the case is simply about whether the plan administrator only gets one bite at the apple, or perhaps is about whether its one strike and you are out.
This case continues a recent trend of the Court taking on ERISA cases that pose very finite issues, ones that aren’t likely to recur frequently but that pose the opportunity to present some sense of what are the outer guidelines of ERISA litigation - how broad is deference, does it apply when there is a conflict, what kind of conflict matters, how much room does the administrator get to work with plan language, and what is the proper balance between the plan administrator and the district courts (and eventually the circuit courts) in deciding factual and plan language issues in ERISA cases. Much of this goes back to Firestone, and the universe governing ERISA cases that it spawned; if I had my guess, I think the Court would like to have that one back, and start all over again with a cleaner, more easily applied legal structure. But they can’t go back, and I don’t think anyone believes they will go so far as to overturn that ruling and start anew with a new framework. So what we will have instead is cases like this one being decided in a manner intended to reign in the outer limits of the universe spawned by Firestone (ouch, that extended “Firestone as the Big Bang” metaphor is beginning to make my head hurt), which means I call this one for the participants, with a finding that the plan administrator gets deference only the first time around.
And yes, I know I am dramatically simplifying how the parties frame the questions here - but what I have said above will be the essence of the outcome.
Blending De Novo and Deferential Review
I just noticed I haven’t posted since last year, for a few weeks to be more accurate, due to the usual end of the year crunch and a briefing schedule in a case overlaid on top of that to boot. No matter the reason, it runs afoul of my general feeling that you shouldn’t host a blog if you are not going to post frequently. In any event, Paul Secunda, over at Workplace Prof, has given me an easy reentry into posting, with his post here on the Seventh Circuit - the Seventh Circuit! - overturning a denial of short term disability benefits in a case where the administrator had been cloaked with discretionary authority. The interesting thing, to me anyway, about the ruling is that the court focused on certain minute details of the administrator’s handling and the precise details of the medical review relied on by the administrator, finding that a flaw in the medical review warranted overturning the denial. This is much different than what, for many years, has been the essence of judicial review of benefit denials where the arbitrary and capricious standard of review is applied, in which the courts essentially just looked to see if there was some medical evidence in the record that could justify the decision and, if so, affirmed the decision by the administrator. What you see in the Seventh Circuit decision is something different, and something more and more apparent in rulings over the past year or two, namely a closer look behind that evidence by the judicial body before whom the case is pending, to see not just - as was traditionally the case - whether there is evidence to support the administrator’s determination, but to instead test the quality of that evidence, followed by a decision as to whether the evidence is of a sufficient quality, and not just quantity, to support the administrator’s decision. If you think about it, that is tending more and more towards de novo review, to a certain extent, just under a different name.
Does the Bell Toll for Discretionary Clauses?
I have been wondering about the question of whether state insurance commissioners can effectively gut the industry practice of including discretionary clauses in disability policies by refusing to approve forms for use that include them, or whether ERISA preemption precludes that action. I was preoccupied with a trial at the end of October when the Ninth Circuit concluded that they could do exactly that, without running afoul of preemption, according to this post by Mitchell Rubinstein at the Adjunct Law Prof blog. I have to wonder, though, whether it is something of a pyrrhic victory, since my view, without ever having seen actuarial data one way or the other, is that discretionary clauses reduce litigation costs and thus likely reduce the price of group long term disability policies. If insurance commissioners effectively gut the industry of that option, it would seem to me it could only drive up claim costs and, naturally then, policy pricing. Will that reduce employer willingness to provide this important benefit? Time will tell, but we already know that rising costs are the primary reason that employers don’t provide as much health insurance as they used to. We should keep this in mind when legal and regulatory decisions occur that can only drive up the cost of other employer provided, and ERISA governed, benefits.
Conkright, Discretion and the Supreme Court
Here’s a nice little story on Conkright, and the new Supreme Court session. As the article explains in a nutshell:
The issue in Conkright vs. Frommert involves how much deference a court must give to an ERISA plan administrator's interpretation of the terms of the plan. A group of Xerox Corp. retirees who left and then returned before retiring brought the suit. At issue is the method of accounting for lump sum distributions received by the employees when they first left the company when determining the benefits to which they were entitled at retirement.
In a review of the case, a three-judge panel of the 2nd U.S. Circuit Court of Appeals ruled last year that a district court has no obligation to defer to a plan administrator's reasonable interpretation of the plan's terms if the administrator arrived at the conclusion outside the context of an administrative claim for benefits. It also held that a district court has “allowable discretion” to adopt any “reasonable” interpretation of the retirement plan terms under certain circumstances. The high court has not set a date for oral arguments.
I studiously ignored Conkright during the cert phase - we will discuss it in detail in future posts, however. Gut instinct right now, based only on what the Court did with its most recent ERISA cases? Expect a decision that narrows the administrator’s discretion and gives more freedom of interpretation to the court. How's that for instant analysis?
Comments on First Circuit Law Post-Glenn
I thought I would post some thoughts and comments on the First Circuit’s pronouncement of its law after Glenn, before too much more time goes by, rather than waiting for a window of time that would allow me to write a much longer post on it. Some things that sit too long get stale, and comments on new, noteworthy opinions fall in that category, so here are my thoughts. First, for those of you who haven’t seen it yet, a First Circuit panel has now issued an opinion detailing how the First Circuit will handle structural conflict of interest situations in light of the Supreme Court’s ruling in Glenn. You can find the opinion here. Of note, the panel goes out of its way to paint prior, pre-Glenn, First Circuit decisions as not particularly different than the holding in Glenn, and to a certain extent this is true: prior First Circuit precedent had required that structural conflicts only affect the outcome if there was a showing that the conflict had actually impacted the benefit determination, and in many ways this is very consistent with the holding in Glenn that consideration of the structural conflict is only one aspect of the review and that such a conflict is essentially irrelevant if the evidence shows the conflict was cabined in a way that demonstrates it played little or no role in the outcome.
Second, and of particular note, the panel made clear that it was only dealing with the specific issue at play in Glenn, namely the impact of a structural conflict of interest. The court indicated that the rule may well be different in the presence of evidence showing that there was an actual conflict that motivated the outcome, and that a change in the standard of review might continue to be appropriate under that circumstance. In essence, while withholding judgment on what rule it might adopt in that circumstance after Glenn, the First Circuit is distinguishing between arguments that begin from the premise that there was a structural conflict of interest - the Glenn type scenario - and arguments based on the idea that the administrator was actually subjectively motivated by a conflict; the court made clear that only the former scenario is governed by its new decision applying the Glenn rubric.
Third, in an aspect of its decision that provoked the ire of one member of the Panel who wrote a concurring opinion specifically to challenge the opinion’s analysis of this issue, the case holds that the First Circuit’s prior rulings on discovery in denial of benefits cases - that little is to be allowed and it is disfavored - remain in effect and are consistent with Glenn. Of even more interest and practical concern going forward, though, is the court’s conclusion that, rather than engage in discovery into the possible impact of a structural conflict of interest on a decision, it is incumbent upon administrators to make the evidence of the cabining and lack of impact of such a conflict part of the administrative record compiled during the administrator’s handling of a claim. If there is a functional impact of the First Circuit’s ruling on plan administrators, it is this one - the need to evidence the lack of importance of the structural conflict in the administrative record itself.
The Seventh Circuit Puts a Spin on Discretionary Review
There is an interesting twist to a recent Seventh Circuit decision, Leger v. Tribune Company Long Term Disability Plan. The decision starts out as an attempt by the participant to resuscitate her benefits claim by invoking Glenn v. MetLife and asserting that a structural conflict of interest existed warranting an alteration to the standard of review. The Seventh Circuit, though, quickly rejected that position, finding that there wasn’t even a conflict of a level that warranted being considered as a factor in conducting an arbitrary and capricious standard of review. Uh oh, says the reader, we know how this story ends: the conflict of interest argument in this context signifies in most decisions that the participant has no other hook to hang her claim on, and is taking her last, desperate shot, dooming her when, as in this opinion, the court summarily rejects the argument. But the Seventh Circuit surprises here, as this issue is not the last one addressed, but is instead simply a signpost along the way to the ultimate conclusion and to the application by the court of what, in most cases, is not an approach one sees taken. Rather than stopping with the standard analysis that, one, the conflict of interest doesn’t change anything, and, two, there is reasonable support in the record for the decision to terminate benefits, thus ending the case, the court continued from there, finding, instead, that the decision, despite having support in the record, failed to account for numerous conflicting pieces of evidence contained in the administrative record or possible interpretations justified by the record. The court held that the decision to terminate could not be sustained in that circumstance, and that, instead, the issue had to go back to the administrator for purposes of making a decision that did, in fact, take all such concerns into account (the court actually just remanded it to the district court for proceedings consistent with its ruling, but one presumes this would mean remanding it back to the administrator to address these issues, followed by litigating the issues all over again).
I have commented in the past on this point - the question of courts applying a more searching level of review while nominally still proceeding under the arbitrary and capricious standard of review is much more significant both to parties and to the development of the law in this area than is the question of whether conflicts exist, and if so their impact.
Talkin' ERISA Litigation Trends
I will be presenting a seminar next week, on Wednesday January 14th, to the ASPPA Benefits Council of New England, entitled “ERISA Litigation: An Update from the Front Lines.” After three full days of outlining my talk, I now actually have a pretty good idea of what I am going to say; the talk will blend the latest developments nationally and at the Supreme Court in ERISA law with ERISA litigation trends and realities in the First Circuit. If you are interested in attending, its not too late to register. The brochure and registration form for the talk is here.
What Effect Does MetLife v. Glenn Have on Discovery in Denial of Benefit Claims?
Permalink | Apparently none, at least according to the first ruling on this question I have seen out of a court in the First Circuit. In a ruling by a magistrate judge, the United States District Court for the District of Maine has concluded that MetLife v. Glenn does not change the rules in the First Circuit governing the extent to which - if at all - a party is allowed to conduct discovery beyond the administrative record itself in a denied benefits case governed by the arbitrary and capricious standard of review. The court found that MetLife is not a discovery ruling, and posits only that, on a case by case basis, a structural conflict of interest may be determined to impact the outcome. The court found that as a result, whether to allow discovery into any prejudice caused by the conflict of interest is likewise to be determined on a case by case basis, and to only be allowed upon a showing by the claimant that discovery into the subject is justified under the circumstances of the particular case at bar; the court specifically found that discovery beyond the administrative record was not allowed in general and as of right, simply because of MetLife. Interestingly, the court found that this is entirely consistent with the existing standards in the First Circuit governing when discovery beyond the administrative record can be allowed- standards which have existed since long before MetLife was decided - and the court is correct on this.
However, to the extent that the case may suggest that a bulwark can be maintained against the expansion of discovery in ERISA cases involving structural conflict of interests, I doubt it should be read in that way, or that the judge intended that. First, certainly MetLife, to mean anything, will over time have to be interpreted as allowing discovery to some extent into whether the conflict played a role, what role it played, and whether it should factor into the court’s review (and if so, in what manner). Otherwise, the decision really doesn’t grant claimants any significant opportunity to prove that the type of conflict at issue in MetLife should affect the outcome of a particular case. Second, the real question, and upcoming battleground, then, is what impact MetLife should be interpreted to have with regard to discovery. The answer, I think, is in line with the magistrate judge’s reasoning and matches up, as the judge suggested, perfectly with current First Circuit law on extra-administrative record discovery, which generally posits that a claimant has to show some really good reason to warrant such discovery. This standard would apply perfectly to cases involving structural conflicts of interest, by requiring that claimants establish a valid reason (perhaps based on discrepancies in the administrative record, or other facts that would at least imply that the conflicted status may have played a role in the benefit determination) that justifies further discovery into the effect of the conflict and justifies a particular scope of discovery. This would be consistent with MetLife, while simultaneously preventing denial of benefit cases from being transformed into the type of overpriced discovery heavy cases that, one, burden much of the rest of civil litigation, and, two, courts have long sought to prevent ERISA cases from being transformed into.
I could write all day on the interplay of ERISA discovery, current standards governing it, and MetLife, but for now, I’d best stop there. If time allows, perhaps I will return to the topic in still more detail in another post.
On Intoxication and Accidental Death and Dismemberment Policies
Permalink | I wrote a long time back about Stamp v. MetLife, a decision out of the United States District Court for Rhode Island on a particular, oft litigated, and unfortunately frequently repeated fact pattern: namely, whether an unwitnessed automobile accident causing death of an apparently intoxicated driver constituted an accident for purposes of ERISA governed accidental death policies. The First Circuit has now entered its opinion in that case, finding, consistent with what appears to be almost every other federal court to weigh in on the issue, that an administrator can rightly deny benefits for such a death on the ground that the evidence of intoxication indicates that the death should not be deemed an accident for purposes of an accidental death and dismemberment policy governed by ERISA. For those of you not in the know on this issue, such policies limit benefits to deaths caused by accident, and this body of case law supports an administrator’s denial of benefits on the ground that the death was not an accident when the evidence supports the conclusion that the deceased was operating under the influence at the time of death.
There are a few things of interest about the opinion that warrant further reading. In the first instance, the case lays out the proper manner by which a court should consider an administrator’s review of this particular type of scenario, and what type of discretion is granted to that review. Second, there is a nice paragraph summarizing what the First Circuit deems to be a developing federal common law granting an administrator the ability to deny such claims despite the lack of any definitive, eyewitness evidence as to whether the intoxication was actually the cause of the automobile accident and the resulting death. And finally, and of import to ERISA practitioners who may care not one wit for the law governing the application of accidental death policies to cases of driving under the influence, the court weighs in with what I believe is the First Circuit’s first application of MetLife v. Glenn to the question of conflicts of interest by an administrator.
From Preemption to ERISA Standing, and Lots of Things In-Between
Permalink | Philadelphia, New York, court hearings - I have been everywhere the past week or so other than at my desk where I could put up blog posts. Here’s a run down of interesting things I came across along the way that you may want to read. First, for those of you who can’t get enough of this topic - I know I can’t, but then I am fascinated enough by this stuff to maintain an entire blog on the subject of ERISA - Workplace Prof passed along this student note on preemption and “pay or play” statutes: Leslie A. Harrelson, Recent Fourth Circuit Decisions: Retail Industry Leaders Ass'n v. Fielder: ERISA Preemption Trumps the "Play or Pay" Law, 67 Maryland L. Rev. 885 (2008).
Second, SCOTUS passed along that the Supreme Court decided not to accept for hearing Amschwand v. Spherion Corp., which, I noted in a previous post, presented an opening for the Court to address when monetary awards for breaches of fiduciary duty can qualify as equitable relief that can be sought under ERISA. I have commented before that the Court has advanced the ball on equitable relief under ERISA into almost untenable terrain, and I am not sure whether the Court can bring any greater clarity to the issue without backtracking from its recent jurisprudence on the subject; given the unlikeliness of the Court doing so already with regard to such relatively recent decisions, it is probably just as well that the Court did not take on the issues presented by that case.
Third, you could learn everything you need to know about the standards of review for benefit denials and the impact of the Supreme Court’s decision in MetLife v. Glenn by clicking on the “Standard of Review” topic over on the left hand side of this blog; or you could spend an hour listening to this webinar on the topic.
Fourth, Pension Risk Matters passes along this Sixth Circuit decision enforcing the Supreme Court’s approach to individual claimants in LaRue, finding that two participants could sue for breach of fiduciary duty. There are two particularly interesting side notes about this. First, it illustrates a particular point I - and others - made in a number of media outlets after the Supreme Court issued its opinion in LaRue, namely that, while it may not result in an avalanche of litigation that otherwise would not have been filed, the ruling is certainly going to lead to an increase in the filing of smaller cases on behalf of a few participants in circumstances that, in the past, would not have generated suits unless a class wide action could be brought. Second, the case presages what may be the dying off, by a thousand cuts, of the long held use of standing to cut off ERISA breach of fiduciary duty suits at the earliest stages of procedural wrangling, long before any litigation over the merits of a case, something which occurred at the federal district court level in the original LaRue case itself. Roy Harmon, over at his Health Plan Law blog, has a detailed analysis of this question, one I have been thinking about since LaRue was decided but which Roy has thankfully saved me from addressing in detail at this point.
Two More ERISA Cases for the Supreme Court?
Permalink | The good folks who write the SCOTUS blog are engaged in one of their periodic attempts to read the tea leaves and predict what cases the Supreme Court will choose to hear. This time, they think the Court will review two ERISA cases, Geddes v. United Staffing - which concerns the standard of review to be applied to benefit determinations when fiduciary duties are delegated to a non-fiduciary - and Amschwand v. Spherion Corp., which presents an opportunity to clarify when monetary awards for breaches of fiduciary duty can qualify as equitable relief actionable under ERISA. If the Court hears both cases, we will see a continuation of the trend of the Court focusing on and likely reframing the course of ERISA litigation. Geddes provides not just an opportunity to understand the impact of delegation to third party administrators, and to open up for further development some of the unsettled issues in that realm, but also an opportunity, on the heels of whatever the Court decides in the currently pending MetLife v. Glenn case, to alter the settled understandings of when and how to apply the differing standards of review that apply in benefit cases. Amschwand, in turn, presents the Court with an opportunity to address a very technical and specific question, but one that continues to bedevil courts and litigants, namely the question of what types of claims for monetary recovery can proceed, under current Supreme Court jurisprudence, as claims for equitable relief under ERISA. Of note, the Solicitor General’s office, in recommending that the Court accept review of that case, seems to emphasize a need to broaden the range of theories that can be brought as equitable relief claims under ERISA so as to ensure an acceptable range of remedies and recourse to aggrieved plan participants, a proposition that many who favor broader remedies might not have expected to be forwarded by the administration’s legal team.
Why Structural Conflicts of Interest, Standing Alone, Are Irrelevant
Permalink | Workplace Prof passes along today this opinion out of the Seventh Circuit by Judge Easterbrook addressing the question of structural conflicts of interest and their effect on the standard of review in ERISA governed benefit cases. Anyone who has read the bulk of my past posts on this subject knows that I do not buy the idea that the mere existence of the structural conflict standing alone - without more, such as an inference of distorted decision making that can be drawn from the administrative record itself - should affect the standard of review. There are a number of reasons for this, many of which I have explored in past posts on the question. One of the most persuasive of which, however, has always been that the assumption that the structural arrangement by definition is affecting the decision making is frequently belied by close observation of the evidence concerning the processing of particular individual claims in situations where the administrator was also the payor; the evidence simply does not support the view that outcomes are typically varying simply because the administrator is also the payor of the benefits at issue.
Judge Easterbrook presents a very interesting take on this idea, focusing on the actual decision making by the administrator in any particular case, and suggesting why the mere fact that the same organization will also pay any covered benefits does not logically lead under those circumstances to improper claims processing. As the judge writes, in a section discussed by the Workplace Prof:
[O]ne must not anthropomorphize “the administrator.” Rarely is a pension or welfare plan’s administrator a person whose own welfare is at stake. Administrators commonly are large organizations, and the real people who make decisions on its behalf are no more interested in the outcome than federal judges are “interested” in the resolution of a tax case. True, judges’ salaries won’t be paid if taxes can’t be collected, but the effect of any one case on federal finances is so small that the judge does not care who prevails. Just so with the people who act on requests for pension or welfare benefits. Corporations often find it hard to align employees’ incentives with stockholders’ interests; they use stock options, bonuses, piece rates, and other devices. Administrators usually don’t try. There would be a real conflict of interest if a given administrator put in place a method of linking decisionmakers’ income to the substance of their decisions. A quota system (“grant no more than 50% of all applications”) or some other means of tying the wages or promotion of staff to its disposition of claims could call for non-deferential judicial review. But [the claimant here] has not argued that anyone who handled his claim had any personal interest in the outcome.
To which I would say, exactly. Note as well that the judge emphasizes one important distinction that I fear often gets overlooked when critics get their back up when anyone, myself included, suggests that structural conflicts of interest should not affect the standard of review. He is not saying that it can never affect the standard of review and that an administrator who also pays the benefits may not be acting under a conflict, but is instead recognizing that, given the realities of claim administration, it is inappropriate (perhaps more accurately, illogical) to assume that this alone is corrupting the claim determination process. Rather, as the judge points out, something more is needed in this situation to justify such an inference, something such as, in the judge’s example, evidence of a quota system or other activity that would suggest that the process was corrupted and not impartial.
The case is Williams v. Interpublic Severance Pay Plan.
Some Thoughts on the Oral Argument in MetLife v. Glenn
Permalink | I had a chance over the weekend after a busy few days to ruminate on the oral argument in MetLife v. Glenn, a transcript of which you can find here; you can find Workplace Prof’s review of the argument here and a thorough recap of the argument here, at SCOTUS blog. My take? There will be some sort of rule announced governing the standard of review that a court is to apply when presented with an appeal from a decision by an administrator functioning under a so-called structural conflict of interest - how’s that for going out on a limb, since that’s what the Court accepted cert to address? Moreover, there can’t help but be a rule of general applicability of some type set forth by the Court for these situations, since, as I discussed in detail here for instance, there is wide divergence among the circuit courts of appeals in the decision making rules they apply when confronted with that situation; given the idee fixe that ERISA is supposed to give rise to uniform rules governing employee benefits across the country (an idea that in practice, tends to be honored more in the breach, something particularly illustrated at the district court level where you can often find two judges in the same circuit reaching opposite conclusions on the same open issue), this is not a situation that can be allowed to continue. That said, however, those hoping this case would lead to a wholesale reinterpretation of the standards of review that apply to ERISA cases, and more particularly to an overall rejection of both the “arbitrary and capricious” standard of review and of the existing formulations as to when that standard of review applies, are going to be soundly disappointed; I read the argument as telegraphing a fixation on determining, and creating (and then announcing), exactly what the technical rule should be when arbitrary and capricious review is applied by a supposedly conflicted administrator, and as telegraphing a lack of interest in changing the overall structure of the case law governing the standard of review question.
Supreme Court to Weigh In on Structural Conflicts of Interest
Permalink | I suggested some time ago that the Supreme Court looked poised to weigh in on some of the more tempestuous ERISA issues floating around the circuit courts of appeal, and there is probably no single issue that has raised more hackles than the question of so-called structural conflicts of interest, which exists when the administrator who decides a claim for benefits under ERISA is also the party who will have to pay the benefits if the claim is allowed. The lower courts have created a wide range of rules as to how, and when, such a conflict can alter the standard of review that a district court is to apply when passing on a benefit determination made by such an administrator.
SCOTUSBlog reported on Friday that the Supreme Court has now accepted cert on a case presenting this exact issue. To quote SCOTUS:
An ERISA case added to the docket tests whether the manager of an employee benefit plan has an illegal conflict of interest if the plan gives that individual the authority both to pay benefits and to rule on eligibility for benefits (MetLife v. Glenn, 06-923). In addition to that question, the Court added a second issue to be addressed: if that is a conflict of interest, how should that be taken into account by a court reviewing a specific benefit decision. The Sixth Circuit Court, in conflict with some federal appeals courts but in agreement with others, ruled that the dual role of funding and decider for plan administrators is a potential conflict of interest that must be weighed in judging a plan manager’s benefit eligibility ruling.
There is certainly benefit to the Court weighing in on this issue and hopefully adding some conformity across the federal courts on this issue; as I have discussed in other posts, such as here, different rules apply to this type of situation in different circuits, and it obviously makes no sense for a federal statute to be interpreted and applied differently dependent simply on the state in which a lawsuit over the issue is filed. However, as I have argued before in these digital pages, I think the whole issue of this so-called structural conflict of interest is something of a tempest in a teapot, and I do not agree with those, such as the Workplace Prof in his post on this same subject, who think that the mere existence of such a dual role on the part of the administrator warrants treating the decision maker as suspect and the decision as unworthy of the deference normally granted to an administrator operating under the appropriate grant of discretionary authority. Rather, either there is evidence before a court from which it can be determined or at least inferred that the administrator’s dual role affected the outcome, or there isn’t. While it may make sense to take that conflict into account in the former instance, where evidence exists that the administrator actually acted in a conflicted manner, there is no logical basis to do so in the latter instance; in the absence of evidence that the dual role actually affected the outcome, changing the standard of review constitutes nothing more than punishing the administrator simply based on its status, and not on evidence of misconduct. Last I looked, that’s not generally how we do things in the courts of this country.
The Meaning of Arbitrary and Capricious Review
Permalink | A colleague - who, to protect the innocent, shall remain nameless (sort of a blog witness protection program) - passed along this remarkable decision out of the Fourth Circuit this month, Evans v. Eaton Corporation Long Term Disability Plan. The decision is an elegant and sustained defense of the granting of discretion to administrators and the application of the arbitrary and capricious standard of review under ERISA. The opinion reads almost as though the court set out to answer, and perhaps even to throw down a gauntlet to, critics who complain that the Supreme Court should not have established discretionary authority and the corresponding level of review, explaining, among other points, that such review is instead entirely consistent with the purposes and operation of ERISA, as well as with congressional intent. It’s a fine decision, whether you agree or disagree with the court’s analysis and conclusions. I would go beyond that, and suggest that critics of arbitrary and capricious review need to confront and provide a persuasive response to the court’s analysis of these issues, if they are going to criticize, with any credibility, the arbitrary and capricious review standards applied by the courts.
Two for the Price of One: An Excellent District Court Ruling Worth Reading, and More on the First Circuit's Decision in Gillis
Permalink | 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
Permalink | 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.
More on that Grand Irony Theory
Permalink | 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
Permalink | 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.
A Divergent Voice on Whether The Supreme Court Cares About ERISA
Permalink | Brian King has an interesting post over at his ERISA Law Blog, concerning my recent suggestion that the Supreme Court was poised to shift the currents of the river that is the law of ERISA. Brian’s take? Ain’t happening, although in truth Brian’s point is a little more subtle than that, and is that the Supreme Court certainly isn’t about to make any big changes in the law of ERISA in a way that will be of great help to claimants. I can’t say I disagree. I do suspect, however, that the Court is about to wade into these issues and begin addressing some of the technical points that are in dispute at the lower courts, in a way that will affect the general contours of the law of ERISA. I think the Court just did that on a more dramatic level with patent law, and is looking at ERISA cases with the same skeptical eye. There are subtle points affecting such topics as 401(k) plans and the application of the arbitrary and capricious standard to certain issues that I think the Court may be about to address. But a wholesale rewriting of precedent in a way that loosens up the whole kit and kaboodle in a manner that makes it dramatically easier to sue plans and administrators? Well, no.
But I will say that, as an aside, one of the great pleasures of blogging is exactly this type of opportunity to consider multiple viewpoints on the same issue in real time (rather than have to wait a few years for a law review to issue a special edition collecting pieces on both sides of an issue).
Is the Supreme Court Setting Out To Alter the Law of ERISA?
Permalink | Conventional wisdom holds that the Supreme Court set out last term to change the direction of patent law, and did so. Are they out to do the same thing now with the law of ERISA? I think so. They already have LaRue up on their plate, a case I have said will result in a reversal of the circuit court and an expansion of plan participants’ ability to avoid some of the procedural hurdles to filing suit, and on Monday SCOTUSBLOG reported that:
Among 85 pages of orders [issued by the Supreme Court] on pending cases, the Court asked the U.S. Solicitor General for the federal government’s views on four cases [including]:
06-1398, AT&T Pension Benefit Plan v. Call, an ERISA benefits case involving a split in the Circuit Courts over the question of deference to a benefit plan administrator’s interpretation of the plan.
06-1458, Geddes v. United Staffing Alliance, another ERISA case involving a conflict among federal Circuit Courts over the standard for judging denials of medical benefits by plan administrators.
Workplace Prof, reporting on these same developments, gives a little more detail about the two cases, describing the AT&T case as involving “whether an employer is entitled to deference for its determination that the actuarial assumptions it used to calculate lump-sum distributions were not considered accrued benefits” and the Geddes case as concerning “whether a nondiscretionary standard of review applies in an ERISA action when the benefit plan administrator delegates its discretionary authority to someone who is not a fiduciary.” As the Prof points out, the Court’s request to the Solicitor General’s office for input does not necessarily mean the Court will take the cases, but certainly raises the possibility that it will; at a minimum, it reflects the interest of at least some segment of the Court in how the law governing ERISA is evolving.
Regular readers of this blog and ERISA practitioners know that there has been a fair amount of discontent at the district court and circuit court levels when it comes to the issue of standards of review and the discretion granted to administrators, including a decision out of the Ninth Circuit that I described awhile back as looking as though it had been written for the express purpose of bringing conflict among the circuits over some of these issues to the direct attention of the Supreme Court. The Court may be about ready to start delving into these issues and concerns.
When Does Plan Language Mandate De Novo Review?
Permalink | I wanted to take a moment over the next couple of posts to return to a couple of cases from earlier this month that are worth a look and a comment, but that I haven’t had a chance to talk about yet. One of them is a decision by Judge Lindsay of the United States District Court for the District of Massachusetts from the beginning of the month, Dickerson v. Prudential Insurance Company, in which the court considered the question of whether plan documents actually conferred discretionary authority on the administrator of an ERISA governed long term disability plan; as most of you already know, if it did not, then the court had to decide a dispute over benefits under that plan de novo, while if it did, the court was to decide the dispute by applying a deferential standard of review.
Now, we see many cases finding that discretionary authority is conferred and that deferential review applies, but cases finding the opposite are actually not quite as common. This is usually because the plan in question in a case either clearly grants discretion, or doesn’t do so at all. As a result, it is comparatively infrequent that a court has to address in any depth whether or not particular plan language grants discretion. Into this relative void steps the Dickerson decision, which is an interesting example of a case finding that the particular language used in a plan did not clearly confer discretionary authority. I liked Judge Lindsay’s description of the applicable standard, which was that:
Courts have recognized that "there are no magic words determining the scope of judicial review of decisions to deny benefits." Brigham, 371 F.3d at 81 (quoting Herzberger v. Standard Ins. Co., 205 F.3d 327, 331 (7th Cir. 2000)). Until insurance plans include language that "could leave no doubt about the administrator's discretion . . . we must in fairness carefully consider existing language that falls short of that ideal." Id.
"[T]he critical question is notice: participants must be able to tell from the plan's language whether the plan is one that reserves discretion for the administrator." Diaz v. Prudential Ins. Co. of Am., 424 F.3d 635, 637 (7th Cir. 2005). Language that merely requires a determination of eligibility by the administrator and proof of the applicant's claim "does not give the employee adequate notice that the plan administrator is to make a judgment largely insulated from judicial review by reason of being discretionary." Herzberger, 205 F.3d at 332. Cf. Diaz, 424 F.3d at 639 (for Plan language to confer discretion on the administrator, it must "communicate the idea that the administrator not only had broad-ranging authority to assess compliance with pre-existing criteria, but also has the power to interpret the rules, to implement the rules, and even to change them entirely.").
The Court concluded that the particular language in the plan at issue in Dickerson gave the administrator the “ the power to make the determination” but imposed a list of specific conditions on the exercise of that power. As a result, the judge held that “[b]ecause the Plan language” suggests that "the plan administrator is to make a judgment within the confines of pre-set standards [and does not have] the latitude to shape the application, interpretation, and content of the rules in each case . . . the language [was] insufficient to trigger deferential review by the court.”
Still More on Structural Conflicts of Interest
Permalink | 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
Permalink | 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
Permalink | 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, the NFL and ERISA
Permalink | They say that professional football is far and away the most successful entertainment business - let alone sports league - in the country, but behind the scenes all is not tea and roses, quite clearly. Anyone who follows the sport knows the physical toll it takes on many of its best players, and a dark story of that aspect of the sport has been playing out in the courts for some time now, involving the debilitating injuries, and subsequent claim for disability benefits, of one of football’s bigger stars, the former Pittsburgh Steelers center Mike Webster. Webster, we learn from a lawsuit his estate brought seeking higher benefits than those awarded to him by the administrator of the National Football League’s retirement plan, “was diagnosed in 1998 with brain damage resulting from multiple head injuries he incurred while playing football.” He thereafter received from the retirement plan the lesser of two possible disability benefit awards available under the league’s retirement plan.
Lawyers for Webster eventually sued the retirement plan, alleging that the plan was governed by ERISA and that the plan administrator abused its discretion in denying the higher of the benefit awards to Webster, and in awarding him only the lower of the two. Discretion was reserved to the administrator in no uncertain terms, and yet the courts had no trouble concluding that the discretion had been abused, and in therefore overruling the plan’s benefit decision. As any of you who practice in this field or regularly read this blog know, a finding that an administrator acted arbitrarily and capriciously and abused its discretion - warranting rejection of the administrator’s determination - is a relatively uncommon event.
As a result, when one gets beyond the sports story interest raised by the case, the interesting question that is left behind is what was it about the administrator’s determination that drove the court to such a conclusion. And the answer to that question is telling: the Fourth Circuit had little trouble concluding that an abuse of discretion had occurred because “[w]hile recognizing that the decisions of a neutral plan administrator are entitled to great deference, we are nevertheless constrained to find on these facts that the Board lacked substantial evidence to justify its denial here. In particular, the Board ignored the unanimous medical evidence, including that of its own expert, disregarded the conclusion of its own appointed investigator, and relied for its determination on factors disallowed by the Plan.”
Well, if you think about it, how can those facts be anything but an abuse of discretion? And in many ways, that is what is different about this case from most denial of benefit cases, in which claimants routinely assert that an administrator wrongly weighed the evidence in the administrative record and therefore committed an abuse of discretion; in those typical cases, the evidence in the administrative record is subject to differing possible conclusions, and ERISA grants the administrator - so long as it was granted discretion by the plan documents - the freedom to select which of those possible conclusions should apply. Here, however, the administrator was not picking among possible conclusions warranted by the evidence, but was instead selecting a conclusion that was entirely contradicted by the overwhelming - and it appears possibly unanimous - evidence before it. That, we see quite clearly in this case, is beyond the outer edge of an administrator’s discretion.
The case, which is interesting for those of you interested in football, in Mike Webster, or in ERISA, is Sunny Jani, Administrator of the Estate of Michael L. Webster v. the Bert Bell/Pete Rozelle NFL Player Retirement Plan, out of the Fourth Circuit this week.
Summary Plan Descriptions and Grants of Discretion
Permalink | Here is an interesting post concerning a recent decision from the Second Circuit on the impact - there is apparently none in that circuit, given this post and the Second Circuit decision, Tocker v. Phillip Morris Companies, discussed in the post - of an administrator reserving discretion in determining claims for benefits only in the plan documents and not in the summary plan description itself.
Now I don’t necessarily agree with the writer of the post, who feels that if a participant cannot locate in the summary plan description the magical Firestone language that reserves discretion to the administrator, then de novo and not arbitrary and capricious review should apply. The writer’s view is that the summary exists to educate the participant, and the participant ought to be able to rely on it and find the reservation of discretion there, or else not have it applied against him or her. Personally, I favor a more realpolitik view of the world when it comes to establishing litigation rules, based on how we can expect people in the real world to act. Most participants, frankly, unless they have been educated about Firestone, discretionary language and standard of reviews by some other source, will have no idea what the Firestone language means or its effect, even if they find it in the summary plan description; for those who have been or choose to educate themselves sufficiently to understand that issue under the employee benefit plans provided by their employers, they will likewise understand that there are other sources of documents that they need to examine that govern the plan. The Second Circuit ruling in Tocker seems to fit that understanding of the real world quite well.
And some of this goes back to a fundamental issue, of whether participants really understand - or even read - the summary plan description, or whether it is instead simply something that gets pulled out by a participant’s lawyer after a claim for benefits has been denied. The summaries exist because we need to mandate disclosure, and certainly the more the better - but I don’t think it is realistic to structure a legal rule and indeed an entire regime around the myth that participants actually do read them, rely on them and understand them. When we do that, we move into simply creating traps that make the administration of plans more difficult and create loopholes to be exploited in litigation; while this may be good for lawyers’ wallets, I think we are all better served by legal rules that fit comfortably with how non-lawyers actually conduct themselves in their day to day lives.
On a more practical and technical level, the Tocker opinion provides an excellent overview of the law governing summary plan descriptions, and the role of those documents in the ERISA regime, for those of you interested in more information on those subjects.
The Supreme Court, Abatie and Conflicts of Interest
Permalink | I have written extensively before - including both here and here -about Abatie v. Alta Health, the Ninth Circuit’s relatively recent decision revising that circuit’s approach to structural conflicts of interest and the effect such conflicts should have on the standard of review in denial of benefit cases. The Ninth Circuit’s new rule, I noted, placed it in conflict with the position of other circuits on the same issue, most notably, for purposes of this blog, the First Circuit, whose approach is really diametrically opposed to that of the Ninth Circuit on this issue.
The internet is abuzz today with the story of the Supreme Court remanding a denied benefits case back to the Ninth Circuit for further consideration in light of the intervening decision from that circuit in Abatie. SCOTUS blog, really the gold standard in Supreme Court coverage, has the story here, as well as links here to the petition for certiorari filed by the administrator/insurer and here to the Supreme Court order remanding the case for further consideration.
What is perhaps more interesting, to me anyway, is the unknown future of the remanded case in light of that remand. I have written before that Abatie itself reads as though it was written in the hope of becoming the vehicle for the Supreme Court to return to the issue of standards of review and the effect of conflicts of interest on the arbitrary and capricious standard of review. Can we look forward to seeing the newly remanded decision back up to the Supreme Court later, after further consideration by the Ninth Circuit of it in light of the principles enunciated in Abatie, as the vehicle for that inquiry?
On a side note, by the way, the petition for certiorari is itself a terrific review of the split among the circuits on the issues noted above.
Preemption, Appellate Review and Plan Interpretation in the First Circuit
The First Circuit released its most recent ERISA decision, Carrasquillo v. Pharmacia Corp., a few days ago. Of interest in the decision, the court notes the standards that the appellate court should apply in reviewing a district court's entry of summary judgment when the arbitrary and capricious standard applies. The court reiterated that while the First Circuit reviews a district court's summary judgment decision de novo, if the district court's decision was governed by "arbitrary and capricious review, [the First Circuit] evaluate[s] the district court's determination by asking whether the aggregate evidence, viewed in a light most favorable to the non-moving party, could support a rational determination that the plan administrator acted arbitrarily in denying a claim for benefits;" if not, then the First Circuit will uphold the plan administrator's determination.
The First Circuit also spends a little time in this case reemphasizing that an administrator's interpretation of the plan terms, and not just its ultimate benefit determination, is to be accepted and applied by the court in ruling on the challenge to the benefit determination so long as the administrator's interpretation was not arbitrary and capricious, if the plan reserved discretion over such interpretation to the administrator. And what does it mean to be an interpretation that is not arbitrary and capricious? It simply means the interpretation needs to be reasonable.
The court also returned to what was once a common point of contention in this circuit, namely whether and to what extent judicial review of a benefit determination is limited to the administrative record that was before the administrator at the time the administrator decided the claim for benefits. A series of First Circuit opinions issued in the last few years put an end to any question over this issue, to the point that in this most recent decision, the First Circuit saw no need to make any further comment on this point than to note that "there is a presumption that judicial review is limited to the evidentiary record presented to the administrator."
And finally, in something I liked, the court summed up the state of preemption law in this circuit, and provided a nice little handy one paragraph starting point for lawyers who might brief preemption issues before the district courts of the First Circuit in the future, stating:
We next turn to the district court's finding that Otero's state law claims are preempted by ERISA. In light of ERISA's goal to promote uniformity in the nationwide regulation of employee benefit plans, Congress designed the statute to supersede "any and all State [causes of action] insofar as they may now or hereafter relate to any employee benefit plan." Id. (emphasis added). The Supreme Court has identified two instances where a state cause of action relates to an employee benefit plan: where the cause of action requires "the court's inquiry [to] be directed to the plan," or where it conflicts directly with ERISA. . . . Because the resolution of Otero's Commonwealth law claims for fraudulent inducement and intentional infliction of emotional distress would require analysis of the Plan, the district court correctly concluded that they are preempted.
What Standard of Review Applies to a Claim That Was Never Reviewed?
We have talked a lot about the different standards of review that courts should apply when reviewing an administrator's decision concerning a claim for benefits under ERISA. But what about if the administrator never applied any review at all before the dispute ended up in the courts? Courts differ on whether this should change the standard of review, with many finding that, under those circumstances, a reviewing court should apply a de novo standard of review even if the plan reserved discretion to the administrator (something which would normally mean that the more deferential arbitrary and capricious standard of review should apply).
The First Circuit has not passed on this issue, but the federal district court here has just come out with its conclusion: it means nothing more than that the entire matter is remanded back to the administrator to actually perform the required review. You can find the case here.
More from the Academy on ERISA Standards of Review and the Conflicted Decision Maker
Allright, here's another law review article, this time out of the Oklahoma Law Review by way of Workplace Prof, complaining about the standards of review currently applied by the courts to ERISA benefit denial cases. Although I haven't yet read it - I just finished Langbein's on the same topic, and I'm not ready to delve into another article on the same subject just yet -the article proceeds as follows:
Part II below provides background analysis of the ERISA standard of review controversy. This Part illustrates the continuing failure of the circuit courts to produce a consistent and just claims process in employee benefit cases where courts defer to self-interested plan administrators. The analysis begins with Firestone and its pronouncement that trust law should guide review of challenged benefit claim denials.
Next, Part II argues that the lower courts have struggled to tease a clear message from Firestone's "opaque" standard of review analysis. In particular, this Part explores the Tenth Circuit Court of Appeals's attempt in Fought to cure this wounded process, and we describe the unfortunate failure of the Tenth Circuit to discover a trust law-based antidote to Firestone.
Finally, Part III of this comment works within the parameters of Firestone to re-introduce the historic trust law-based solution to the problem of self- dealing fiduciaries: the no-further-inquiry rule. Here the article capitalizes on prolific trust law and ERISA scholar Professor John H. Langbein's recent examination of the no-further-inquiry rule. Professor Langbein's analysis is adapted to support a thesis that he did not reach, by applying his discussion of the no-further-inquiry rule to ERISA benefit cases. This Part describes how the summary adjudicative process, invented by contemporary ERISA courts under the guise of deferential review, mimics the archaic circumstances existing in courts of equity that spawned the no-further-inquiry rule.
Finally, Part IV concludes that ERISA courts should apply the no-further-inquiry rule to irrebuttably counter the mischief that courts have historically presumed attach to the actions of self-dealing fiduciaries. Ultimately, by application of the no-further-inquiry rule in ERISA benefit claims, courts can, and should, return federal Article III trial judges to their role as neutral, de novo referees in plan participant claims for benefits due under ERISA.
There is an assumption, as one can see from this, in the academic literature that self-interested fiduciaries are up to no good, can't be trusted, and won't be caught by the current standards of review applied by the courts. Poppycock I said, in essence, here. But this emphasis on an academic and hypothetical level as to whether the applicable standards of review are appropriate raises an interesting real world question: namely, how often would court decisions reached in cases decided under the arbitrary and capricious standard (a level of review that law school faculty appear to uniformly find fault with when applied by a conflicted decision maker) be different if the court had instead applied the de novo standard of review (which the academy seems to uniformly prefer)? I wouldn't mind seeing an article that took fifty denied benefit cases and presented the findings of such a review. With courts applying an ever more searching scope of review when applying the arbitrary and capricious standard of review than they may have done in the past, I don't see that high a percentage of cases, either in my own practice or in the reported decisions, that would end up with a different result under one standard of review than under the other. The litigation over the case, including the extent of discovery and the expense, might change, but I am skeptical whether the outcome would be different if you changed the standard of review.
The Unum Provident Problem
I have spent some time recently reading a draft version of Yale Professor John Langbein's article, Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials under ERISA. For those of you who have more socially redeeming hobbies (like mowing the lawn, watching paint dry, pretty much just about anything I suspect) than reading law review articles, the good professor essentially argues that the Unum Provident problem, referenced here, shows that the current regime under which ERISA benefit claims are litigated is one giant failure and that the Supreme Courts needs to alter the jurisprudence governing denied benefit claims. For those who would like more detail on what the article has to say in full, without having to spend the time reading the article in its entirety, the abstract of the article is here.
I have a few initial thoughts in response to the article, some of which perhaps I will flesh out in greater detail in future posts if time allows. Here they are, however, in a nut shell.
One, the good professor makes the case that Unum Provident's conduct in handling claims and the questionable conduct uncovered in investigations into its conduct show that the governing legal regime needs to be changed. Not really. To avoid the obvious fact that Unum Provident may simply be an outlier, which has already been caught by the system currently in place, Professor Langbein has to create a straw company, asserting that Unum Provident was caught, but only because it was clumsy and the regime should be fixed to protect against other companies acting the same way, only with more subtlety. I don't see any evidence that other companies are doing this, or that, if so, they are so good at what they are doing they won't be caught in the same way that Unum Provident was nabbed. Indeed, the professor points out that Unum Provident was partly caught by a long run of federal court decisions in which judges found Unum Provident's claims decisions to be highly questionable under the standards of review currently in force; a different insurer trying the same thing is going to run into the same problem. Hiding from shadows is what I would call it, changing an entire legal structure on the theory that somewhere, there might be someone doing something wrong, but we don't know about it.
Second, on a micro level, the truth is that unscrupulous claims handling of the kind described in the article is caught in litigation in the federal courts, and thus the improper rejection of a particular claimant's benefit claim can be and is resolved successfully under the current system and standards of review. In fact, if anything, we see courts providing an ever more skeptical review of administrators' decisions even under the arbitrary and capricious standard of review as it currently exists than we ever have, for the exact reason, I believe, of making sure no administrator is trying to hide improperly motivated decision making behind the cloak of judicial deference that is owed to an administrator who is acting with discretionary authority.
Third, on a macro level, litigation is an awfully blunt instrument for modifying long term corporate behavior, and I am skeptical that changing the standards of review that apply to denied benefit claims will have such an effect. It may well be that the combination of the current standards of review, which do contain effective protections of the rights of individual claimants, with a vigorous state level regulatory apparatus is the correct way to proceed. This combination did, after all, successfully handle the Unum Provident problem.
Fourth, I am not convinced that the Unum Provident problem really shows, as the article wants it to, a problem with courts relying on market place forces to provide some protection against biased and self-serving decision making by administrator/insurers. Courts assume that in the long run, such companies will be hurt by such conduct when competing for business in the marketplace, and that this will have a deterrent effect. Critics of this thinking like to point to Unum Provident and its size in the market to prove otherwise. But I am not sure it proves anything of the sort. As the professor points out, Unum Provident is the product of a series of mergers and acquisitions, and one has to ask whether a company that stands accused of the type of misconduct that Unum Provident is charged with could have grown so large organically. Unum Provident may well show that the problem/hole in the system is in the mergers and acquisition regime, not in the benefit review regime.
Finally, a quick note of thanks to Workplace Prof Blog and Benefits Blog, without whom I would never have noticed the professor's paper, since I generally don't spend time surfing faculty websites (their blogs, yes, but not their websites). You can find a link to the the actual paper, by the way, here.
Is More Supreme Court Review of ERISA Standards of Review in the Works?
With lawyers, how we view an opinion, and for that matter a blog post, frequently depends on the focus of our practices and the things that, as a result, we are looking for. I was reminded of this over the weekend when I came across this post on Appellate Law and Practice, a blog run by a self described group of federal law clerks and appellate lawyers who post about the recent decisions in the circuit courts of appeals that they cover. Being appellate practice oriented folk, a central aspect of their take on my recent posts about Janeiro and the contrary opinion, Abatie, out of the Ninth Circuit was to note that the two cases, and my posts on them, demonstrate a split in the circuits on the issues addressed in the two decisions.
Which was interesting because one of the things that jumped out at me right off the bat about the Ninth Circuit's decision in Abatie, a decision I discussed in detail here and here, but did not previously comment on, is that in reading it, one can almost see the court and its clerks targeting a spot on the Supreme Court's docket. From the detailed presentation of the interaction of the decision with current Supreme Court precedent, to the almost scholarly review of the various approaches of other circuits, it reads like an invitation to the Supreme Court to weigh in yet again on the standard of review and conflict of interest questions still open under current Supreme Court jurisprudence.
Abatie, Part II
I don't want to leave the impression that the Ninth Circuit's decision in Abatie is a wacky or fringe decision, or that I think that myself. Far from it. The new rule it announces for that circuit on the effect of structural conflicts is certainly well within the margins of current mainstream jurisprudence on the issue, probably more so than the somewhat Rube Goldberg like burden shifting contraption that the Abatie court described the circuit as previously applying to such conflict situations. It is fair to say, though, that with regard to the core of its ruling, I simply don't agree with the premise that the conflict of interest alone, without a showing that the conflict actually played a role in the decision making at issue, should affect the standard of review. It is not as though other circuits don't take such conflicts into account, as they do and they should. But I think the more appropriate rule is to have that conflict only matter if the claimant can show that it actually mattered; i.e., that it affected the decision made by the plan or its administrator. This is, in essence, what the First Circuit required in Janeiro, as discussed here. And requiring this simply should not be a significant issue, since proving a conflict of interest, based on documents or testimony, is - or at least should be - a standard arrow in the quiver of any competent trial lawyer; there is no quicker way to discredit testimony on cross examination than to show the speaker had agendas other than the truth in mind when he or she spoke. So at the end of the day, I don't think the broad, throw the baby out with the bath water condemnation of all insurers and of all administrators acting while burdened with a structural conflict that Abatie enacts is warranted; you can clearly protect against the undue influence of such conflicts in a more nuanced and fact specific manner than what the Ninth Circuit has chosen to do.
So to those I have heard from who are concerned that the reliance on the market argument that I presented here is too favorable to insurers/administrators and does not provide sufficient protection against having benefit determinations swayed by such conflicts, I can say only this in a short piece: I do think market discipline works against any tendency for such decisions to be swayed by conflicts of this nature, but when the market is not enough to prevent it, an aggrieved party is still protected against having a benefit determination affected by the conflict simply by proving that the conflict actually did affect the outcome of his or her particular claim. Market forces and an evidence based rule to protect claimants is a nice one - two punch, and certainly seems more preferable to me than simply assuming that all decisions made by an administrator who must pay any benefits that are awarded are always suspect.
And as to why I am not fond of that latter approach, I will hopefully return to that point in a subsequent post, for those of you who, like me (I hope I am not the only one), simply can't get enough of Abatie.
First vs Ninth, and Structural Conflicts of Interest in ERISA Litigation
A frequent correspondent, even though he normally runs from ERISA cases as though he 'd been handed a basket full of snakes, forwarded me the Ninth Circuit's decision from earlier this week in Abatie v Alta Health and Life Insurance. Fascinating opinion. I could write an article or even a book on the decision, given its themes, its discussion of the historical development of the law on certain issues, and the rules for benefit litigation in the Ninth Circuit it declares (but that is what this blog is for, to discuss these kinds of things in a more timely manner than could be done in these other forms of media). What this means is you will probably see multiple posts on it from time to time, on different facets that are worth shining a light on.
For now though, what I wanted to comment on is its central focus, namely the impact on the standard of review of what is known as a structural conflict on behalf of a plan administrator in cases where the plan grants discretion to the administrator (and as a result the court should be applying the arbitrary and capricious standard of review to any judicial review of the administrator's decisions). I discussed structural conflicts and their effects a couple of days ago in a post on how the First Circuit deals with such a conflict. To reiterate, as the Ninth Circuit phrased it In Abate, "an insurer that acts as both the plan administrator and the funding source operates under what may be termed a structural conflict of interest." The First Circuit recently reaffirmed that this type of conflict, without more - namely proof that the administrator actually had a real world, not just a hypothetical, conflict, and made a benefit determination that was truly influenced by it - does not alter the standard of review. In contrast, the Ninth Circuit believes it does affect it, and how it does so is the primary subject of the opinion in Abate.
The rationale for the belief of the First Circuit, and other circuits that follow the same line of thought, that such structural conflicts can be ignored is that market forces should be sufficient to dissuade administrators from declining to pay benefits simply because they are the source of the funds, the idea being that, over time, market forces will punish those who do and reward those who do not. These structural conflicts usually entail insurers who both insure the benefits at issue and administer the claims made for benefits under the plan. The idea is that there will be a flight to quality, if you will, by plans and the companies who run them to insurers/administrators who do not act to their own benefit and the detriment of the plan's participants as a result of such a conflict.
Now, I am not totally convinced by this line of thinking, and clearly the judges of the Ninth Circuit aren't either, but I am more inclined than not to agree with it. I have never been totally inclined because it has always felt too much like what happens when lawyers play at being economists; they find a nice sounding macroeconomic idea and apply it as though true, without it ever having really been rigorously tested. On the other hand, based on my own experience of seeing, both in my own practice and in the case law, hundreds of cases in which such a conflict existed, it seems to me that the anecdotal evidence is clear that this reliance on the market does in fact seem to work and account for any problems posed by this potential conflict. The better companies that insure and/or administer plans do not, in fact, act out this conflict, even without anything more elaborate in the case law to prevent them from doing so than the assumption that the market will take care of the problem. My own belief is that such an approach is just the natural outgrowth of the overall mentality -from hiring to training to accountability - of the better run companies, who seem to operate on the assumption that good business practices pay off, or as I am inclined to say, that good business is itself good business. Recent research suggests that this may just be the case, Enron and the like notwithstanding; research indicates that "ethical business practices generate better financial performance," at least in the insurance industry (on this point, see here and here and here as well).
Meanwhile, the lesser companies, who may - it is almost never, if ever, really proven on the evidence to my satisfaction that they are doing so - be acting based on such a conflict, usually get caught and defeated simply under the traditional arbitrary and capricious standard without any change being imposed on the standard of review based on the existence of a mere structural conflict. And why is this? Because the administrative record, on which the court is basing its decision if the scope of review is the arbitrary and capricious standard, won't sufficiently support the decision of such a conflicted administrator if the conflict is the real reason for the denial of benefits. If you think about it, it is both logical and points out the irrelevance of the structural conflict. If the administrative record actually supported the administrator's decision to deny the claim, than the conflict either didn't exist or was irrelevant: the record evidence justifies the denial, and it is irrelevant if the claim was also denied because the administrator was also acting due to the conflict it faced. On the other hand, if the record evidence doesn't support the denial (which will presumably be the case if the only reason for the denial is the administrator's conflict of interest), than the administrator's decision will be overturned by the court as having been an arbitrary and capricious decision since it lacked sufficient support in the record, regardless of whether or not the reason for the denial was the administrator's conflict of interest.
So maybe I am a bit of a hometown fan, but I'll go with the First Circuit on this one.
Proving a Conflict of Interest in the First Circuit
What happens when a long time business relationship falls apart, and the principal who had been serving as the administrator of the business' employee benefit plans starts making benefit determinations intended to avoid unnecessarily enriching the other principal? Well, one of the most interesting things that happens - besides expensive litigation and an eventual award that makes a significant impact on the plan's assets - is that the standard of review applied by the court changes, and the playing field becomes far better for the aggrieved party than it otherwise would. This according, at least, to a terrific decision issued last week by the First Circuit, Janeiro v. Urological Surgery Professional Association.
In Janeiro, the plans, which were apparently well - and professionally - designed, granted, as most such plans do, discretion to the administrator; such a grant normally requires a court hearing a dispute over benefit decisions by the administrator to apply a deferential level of review to such disputes, under which the administrator's decision must be upheld unless it was arbitrary and capricious. Normally, the plan participant or beneficiary tries to avoid the application of this standard by claiming that the administrator was acting with a conflict of interest, since it is correct that, as a general proposition only, a conflict of interest can preclude application of that deferential standard of review.
But the trick, however, is in the details. The First Circuit does not lightly acknowledge or recognize such conflicts, as I talked about in an earlier post, and the First Circuit emphasized this again in Janeiro, noting that so-called structural conflicts, which are situations where the administrator has a financial interest in whether or not to award the benefits, without more, do not justify an alteration in the standard of review. In Janeiro, however, the court went on to show what does constitute a conflict that justifies such a deviation in this circuit: evidence that the administrator was driven by animus towards the participant and actually misapplied the plan terms as a result. Of particular interest is the fact that the court made it a point to note that the evidence showed that the conflict on the part of the administrator played a "real role" in the administrator's decisions; it is notable that the court emphasized this point given that the First Circuit has reliably rejected claims of conflict on the part of the administrator where the claimant has not been able to show an actual linkage between the alleged conflict and the decisions made by the administrator.
Now Janeiro involved a small scale retirement plan, making it easier to show such a thing (and making it more likely as well that the parties involved knew each other well enough for personal animus to even come into play, since it is familiarity, after all, that supposedly breeds contempt). This is obviously much less likely to be the case with large employee benefit plans administered by independent third parties. As a result, while Janeiro can be understood as standing for the proposition that a conflict sufficient to alter the standard of review is shown by proving an actual linkage between the administrator's decision and the administrator's motivations, that window for proving a conflict is unlikely to be of much use in most cases.
Interpreting ERISA Plans and Insurance Policies
ERISA on the web generally does a nice job of chronicling ERISA decisions out of the Eleventh Circuit, but one of its recent posts, about an August 8th decision by the United States Court of Appeals for the Eleventh Circuit, jumped out at me more than most. The post discusses the case of Billings v UNUM Life Insurance Company, a case involving whether a pediatrician was entitled to continued disability benefits after being disabled due to obsessive compulsive disorder, or whether, instead, the mental health limitation in the plan limited the length of time to which he was entitled to benefits. Although the case presents a somewhat unusual, and certainly curiosity invoking, fact pattern, that is not what drew my attention. Instead, what caught my eye when reading the post was that it discussed the decision and described the court's reasoning in a manner that made me think not of ERISA litigation, but instead of the other focus of this blog, insurance coverage litigation. As the post described and the court's opinion reflects, the Eleventh Circuit decided the question by applying rules of policy construction to the plan language at issue that we more often see in insurance coverage disputes, such as the doctrine of contra proferentem (a fancy way of saying construe ambiguities in the document against the drafter, which in the insurance context most often means against the insurer); the court then decided on that basis whether or not the plan language limited the physician's benefits.
The post left hanging the question of why such an approach was applied, rather than the more typical approach of the court yielding to the administrator's interpretation of the plan language and ultimate decision so long as both were reasonable and rationally supported by the evidence, but it was easy to guess the reason, and a quick jump over to the opinion itself confirmed it; the plan at issue did not grant discretion to the plan administrator, meaning that the court, and not the administrator, was the ultimate decision maker on the issues presented by the claim.
What interested me most about the case, and the post, was that it illustrated the extent to which if you remove the deferential standard of review usually required of courts deciding benefit cases under ERISA from the equation, they would become, essentially, insurance coverage cases, consisting of a dispute over the plan language and an eventual decision by a court over which interpretation - that favored by the plan or that favored by the claimant - should be selected, with the outcome of that determination essentially deciding who wins. That is insurance coverage litigation in a nutshell, but normally is not ERISA benefits litigation in a nutshell.
It's a bird, it's a plan . .
This being - roughly - the start of a new month, I engaged in my usual habit of reviewing any ERISA decisions issued in the past month by the courts in the First Circuit, just to make sure I didn't miss anything while busy with the usual run of business. As it turns out, on July 20th, the United States District Court for the District of Rhode Island issued its opinion in Holm v. Liberty Mutual Life Assurance Co. and Bank of America , a case in which an employee who had resigned from a company without first seeking disability benefits thereafter sought them later. In many ways, this is a traditional denial of benefits decision in this circuit, with the court finding that the plan granted the administrator sufficient discretion to invoke the arbitrary and capricious standard of review and then finding that under that standard the administrator's denial of benefits must be upheld since there was sufficient evidence in the record to support the decision. The court does offer some good language, and a good synopsis of the circuit's most popular decisions, on these points, and, frankly, you can tell on one read of the opinion that the outcome should have been the same regardless of the level of review applied by the court.
What makes the decision more interesting than most, however, is that the case presented the somewhat unique situation of the defendants raising the question of whether the benefit was even provided under an ERISA governed plan, and the court provides a nice summary of the law in this circuit for making that determination. As per the court (I have left out the cites):
ERISA provides a broad definition for employee benefit plans, and this definition has been divided by the First Circuit into "five essential constituents:"
(1) a plan, fund or program (2) established or maintained (3) by an employer or by an employee organization, or by both (4) for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits ... (5) to participants or their beneficiaries. . . . In determining whether a specific plan is an ERISA plan, the First Circuit reviews the extent of the employer's role in administering the benefits. Those obligations are the touchstone of the determination: if they require an ongoing administrative scheme that is subject to mismanagement, then they will more likely constitute an ERISA plan; but if the benefit obligations are merely a one-shot, take-it-or-leave-it incentive, they are less likely to be covered. Particularly germane to assessing an employer's obligations is the amount of discretion wielded in implementing them.
The court had little trouble concluding that the benefit plan in question was "clearly an employee benefit plan as defined by the ERISA statute" in light of the actual facts of the matter.
Long Term Disabilty Benefits, Human Behavior and Standards of Review
An article in the New York Times yesterday on men who simply won't go back to work caught my eye because at times expressly and at other times by implication, it delves into the potent mix of cultural and behavioral forces that seem to impact what we offhandedly refer to as "work ethic." The behavioral and cultural issues noted in the article circle back to an interesting point in litigation involving ERISA governed long term disability plans, which is that - so long as certain legal requirements are met - the plans and their administrators have a great deal of discretion in deciding whether or not someone is disabled or should, instead, be expected to return to work in some capacity or another. In real world terms, in the course of litigation, this grant of discretion provides plans and administrators with a certain amount of power over plan beneficiaries with regard to the question of whether the beneficiary is truly disabled or instead belongs at work.
The general ins and outs of the discretion granted to administrators in that circumstance, I won't discuss in much detail here. For present purposes, it is sufficient to note that when an ERISA governed disability plan grants the administrator discretion in interpreting and applying the plan's terms, the administrator has a great deal of latitude in its decision making, generally subject only to the requirement that the decision be reasonable (with the case law providing further detail as to what reasonable means in that context). This issue is delved into in more detail here. Although lawyers for claimants often object to this line of thinking, this grant of discretion is usually considered to be acceptable on the thesis that it fits with Congress' intention to encourage employers, by making it relatively easy to provide them and by limiting employers' exposure to liability, to provide such benefits.
But the New York Times article points to another possible - and real world - justification for granting such discretion to plans and their administrators, and for granting them great leeway in determining whether a claimant is sufficiently employable to be expected to work rather than collect long term disability benefits. Discussing disability benefits under social security, the article points out:
The ailments that qualify them are usually real, like back pain, heart trouble or mental illness. But in some cases, the illnesses are not so serious that they would prevent people from working if a well-paying job with benefits were an option.
The disability program, in turn, is an obstacle to working again. Taking a job holds the risk of demonstrating that one can earn a living and is thus no longer entitled to the monthly payments. But staying out of work has consequences. Skills deteriorate, along with the desire for a paying job and the habits that it requires.
"The longer you stay on disability benefits," said Martin H. Gerry, deputy commissioner for disability and income security at the Social Security Administration, "the longer you're out of the work force, the less likely you are to go back to work."
Now I have no basis to know whether these statements are correct, or whether there is independent research to support - or for that matter to discredit - these points. If true, however, they may suggest an independent justification - possibly intended but more likely simply fortuitous - for granting such authority to plans and their administrators, namely that it may counterbalance a disabled employee's own tendency to prefer the safe harbor of disability benefits to the riskier and harder course of returning to work.
One of the problems that insurers, and insurance law, have to confront is the distortion in behavior, economic and otherwise, that insurance can create. Insurance coverage law deals with this problem in a number of ways, such as by means of the known loss doctrine, which - although the specifics of its application vary from jurisdiction to jurisdiction - essentially holds that a person cannot insure against an expected, existing or highly probable loss. As such, it prevents an insured company or individual from insuring against something the company or the person intends to do and knows is likely to cause harm. One can think of the known loss doctrine in this context as protecting against people undertaking harmful activities that they would not otherwise have done if they did not think they could insure themselves against the consequences.
We can also understand the various treatments given by the courts of different states to the question of whether a punitive damages award against an insured is insurable as being part of the same thought process. . . .
Arbitrary and Capricious Standard of Review
I mentioned West Legalworks' upcoming ERISA Litigation Conference in a recent post. Of interest - to me anyway, and I think to anyone who litigates denial of benefit claims - is that in the marketing materials for the conference, the organizers note "shifting standards of review" on benefit denials as an important subject.
To the extent the conference organizers may be referring to actual precedential changes in the applicable standards of review in certain circuits, that is one thing. But in my own practice I have noticed a subtle shift in the way judges are applying standards of review that have long been on the books, and that have not formally been shifted by any superceding appellate rulings.
When applying the arbitrary and capricious standard, I have noted a more skeptical eye being applied by judges. Whereas in the past judges would typically be satisfied that the standard was met so long as there was a reasonable amount of evidence in the administrative record that supports the administrator's finding, now they seem more often than not to actually look at the pieces of evidence in the record with a critical eye and decide for themselves whether it supports the finding. Another way to think about this is that in the past the mere existence of supporting evidence in the record was enough for the administrator to prevail; now it seems that judges are looking more closely at the quality of that evidence as well in deciding whether or not it was reasonable for the administrator to reach its determination.
It is a more skeptical application of the same standard, and as such something of a quiet and barely perceptible shift in the case law, one that, if I am right about this and this thought holds up across time and over a broader sampling of cases, is occurring without any appeals court rulings announcing an actual change in the law.
At this point, it is somewhat of a small sampling on which I base this impression; I will be curious to see what the future holds in this regard.
An Interesting New ERISA Decision
Judge Woodlock of the United States District Court for the District of Massachusetts has issued a comprehensive 42 page summary judgment opinion concerning a challenge to the denial of benefits under an ERISA governed plan. The opinion, Kansky v. Aetna Life Insurance Company and Coca-Cola Enterprises, available on the court's website at http://pacer.mad.uscourts.gov/dc/cgi-bin/recentops.pl?filename=woodlock/pdf/kansky%20may%201%202006.pdf, surveys a number of issues, ranging from conflict of interests and their impact on the standard of review to penalties for failing to produce requested plan documents. At its heart, however, is the issue of when a preexisting condition restriction in a plan can be invoked to deny benefits.
Full disclosure and self-congratulatory note: I represented all of the prevailing parties in the case.
In the First Circuit, There Is No Such Thing As an Easy Conflict of Interest
The First Circuit has raised a strong bulwark over the years against challenges to the application of a strict arbitrary and capricious standard of review to cases in which the employee benefit plan at issue granted discretionary authority to the plan or the administrator. The circuit has, if anything, been hostile to attempts by participants to lessen the extensive deference shown to the plan and its administrator in such cases. The most common line of attack has been the argument that the administrator or other decision maker is operating under a conflict of interest, and that the court should not grant the usual degree of deference to the decision as a result. To say that this argument has done little to advance the ball for plan participants in this circuit would probably be an understatement.
The United States District Court for the District of Puerto Rico has just issued a decision that nicely sums up the law in this circuit at this point in time on this issue. As the court framed it:
If a plan administrator or fiduciary is operating under a conflict of interest, "the conflict must be weighed as a factor in determining whether there is an abuse of discretion." Firestone Tire & Rubber Co., 489 U.S. at 103, 115. "In this Circuit, if a court concludes there is an improper motivation amounting to a conflict of interest the court 'may cede a diminished degree of deference--or no deference at all--to the administrator's determinations." ' Wright v. R.R. Donnelley & Sons Co. Group Benefits, 402 F.3d 67, 74 (1st Cir.2005) (quoting Leahy v. Raytheon, 315 F.3d 11, 16 (1st Cir.2002)). "However 'a conflict of interest must be real. A chimerical, imagined or conjectural conflict will not strip the fiduciary's determination of the deference that otherwise would be due." ' Id. (quoting Leahy v. Raytheon Co., 315 F.3d 11,16 (1st Cir.2002)). On summary judgment, the burden is on the claimant to show that the benefits decision was improperly motivated. Doyle v. Paul Revere Life Ins. Co., 144 F.3d 181, 184 (1st Cir.1998) (finding that simply pointing out that any award of benefits would come out of the plan administrator's own pocket was not sufficient to satisfy a claimant's burden and thus, the traditional arbitrary and capricious standard of review must be applied.)
Participants must prove an actual, substantive conflict that truly affects the ability of the decision maker to act impartially. Generalized complaints that it is in the decision maker's own pecuniary interest to deny the claim are not sufficient, as this district court pointed out, quoting precedent in this circuit that:
Under the law of this Circuit, the fact that [a fiduciary or] 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.
The case is Olivera v. Bristol Laboratories, 2006 WL 897972 (D.Puerto Rico Apr 05, 2006) (NO. CIV. 03-2195(HL)).