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.

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