:: District Court Opinion Provides A Primer On ERISA Venue Considerations

28 U.S.C. § 1404(a) provides that, for “the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.”  The plain text of § 1404(a) requires a two-part analysis.  The Court must first determine if the action could have originally been filed in the transferee district.  Van Dusen v. Barrack, 376 U.S. 612, 616 (1964).  If so, the Court must then determine “whether, on balance, a transfer would serve ‘the convenience of the parties and witnesses’ and otherwise promote ‘the interest of justice.’”  Atl. Marine Constr. Co. v. U.S. Dist. Court for W. Dist. of Tex., 134 S. Ct. 568, 581 (2013) (quoting 28 U.S.C. § 1404(a)).

JANICE D. YOUNGBLOOD, Plaintiff v. LIFE INSURANCE COMPANY OF NORTH AMERICA (W.D. Kentucky April 14, 2016) Slip Copy 2016 WL 1466559

In this claim for long term disability benefits case, the plaintiff filed suit in the Western District of Kentucky though she lived in the Northern District of Alabama for a company that was headquartered in Wisconsin. Which district is proper for venue?

The district court reviewed the various factors and provides a useful overview of considerations involved in on a motion to transfer venue (which the defendant LINA filed). The plaintiff clearly wanted the case in the Sixth Circuit but the court found that Alabama was the proper venue after applying the factor analysis.

Preliminary Question

As an initial matter, the court noted that venue must be proper in another district before the Court can transfer. Venue in an ERISA action is proper in any district: Continue reading

:: Forum Selection Clause Enforced In ERISA Claim Litigation

Plaintiff asserts that forum selection clauses are not enforceable under ERISA. In support, Plaintiff relies on a district court case from the Eastern District of Texas, Nicolas v. MCI Health & Welfare Plan No. 501, 453 F. Supp. 2d 972 (E.D. Tex. 2006). In that case, the court held that the policies of the ERISA statutory framework supersede the general policy in the Fifth Circuit of enforcing forum selection clauses. Id. at 974.

Drapeau v. Airpax Holdings, 2011 U.S. Dist. LEXIS 82992 (D. Minn. July 27, 2011)

Plaintiff sought pay and benefits under a severance policy. The severance plan fit into a larger set of agreements following the sale of a business, the terms of which were included in a stock purchase agreement (“SPA”). (In the SPA, the successor employer agreed to “honor all employment, severance . . . and other compensation and benefit plans, policies, arrangements and agreements . . . “)

The plan administrator denied the plaintiff’s claim, asserting that he was terminated for willful misconduct (a defense under the plan terms), and denied a subsequent appeal. The plaintiff filed suit and the Defendants moved to dismissed under Rules 12(b)(3), 12(b)(6), and 28 U.S.C. § 1406(a), or, in the alternative, to transfer the action under 28 U.S.C. § 1404(a) and/or § 1406(a).

The Defendants argued that the SPA’s forum selection clause requires this action to be brought in the Northern District of Illinois or a state court in Chicago, Illinois. The Plaintiff asserted that forum selection clauses are not enforceable under ERISA.

Could the SPA forum selection clause be enforced in this context?

The Forum Selection Clause Language

The SPA contained a choice of venue provision which the Court excerpted as follows:

[A]ny suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought in the United States District Court for the Northern District of Illinois or any Illinois State court sitting in Chicago, Illinois, and each of the parties hereby consents to the jurisdiction of such courts . . . in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient form [sic].

The Plaintiff’s Arguments

The Plaintiff presented three reasons that the Court should not enforce the forum selection clause:

#1 the SPA’s forum selection clause is not explicit enough to be enforceable because it was “buried” in the SPA and does not specifically reference Plaintiff’s severance agreement;

#2 forum selection clauses are not enforceable under ERISA; and

#3 the forum selection clause was unreasonable.

The Court’s Response

The Court was unconvinced.

First, the Court noted that the forum selection clause in the SPA was unambiguous and clear in its terms.

Second, the Court distinguished the legal authority cited by the Plaintiff, observing that the SPA “is not a SPA is not a welfare-benefits plan covered by ERISA.” Even if it were, the authority cited, Nicolas v. MCI Health & Welfare Plan No. 501, 453 F. Supp. 2d 972 (E.D. Tex. 2006), “conflicts with the reasoning of the court in Schoemann ex rel. Schoemann v. Excellus Health Plan, Inc., 447 F. Supp. 2d 1000 (D. Minn. 2006).” In short, the Court agreed that ERISA “does not require the Court to disregard, as a matter of law, a forum-selection clause.”

Finally, the Court rejected the unreasonableness argument, stating:

Here, Plaintiff’s action arises from the SPA, which contains a forum selection clause that requires this case to be heard in Illinois. Plaintiff has not demonstrated that the forum selection clause was the product of fraud or overreaching or that Plaintiff was unaware of the clause before signing the SPA. Thus, the forum selection clause should be enforced absent a compelling and countervailing reason. Plaintiff has demonstrated no such reason here and Plaintiff’s assertions that the forum selection clause is unreasonable do not suffice.

Note: Though this case arose in the context of a collateral agreement, namely the SPA, the Court was clearly of the opinion that forum selection clauses contained in ERISA plan terms were enforceable. On the other hand, the Court appears to leave open challenges within the framework of 28 U.S.C. § 1404(a)

Section 1404(a) Factors: The existence of a forum selection clause constitutes a factor to be considered within the general rule governing objections to venue. The general rule is that, for the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.”

The Court must consider:

#1 convenience of the parties,

#2 the convenience of the witnesses, and

#3 the interests of justice.

The review involves a “case-by-case evaluation of the particular circumstances at hand and a consideration of all relevant factors.” Generally, the burden is on the party seeking the transfer “to show that the balance of factors ‘strongly’ favors the movant.”

A valid and applicable forum selection clause becomes a “significant factor that figures centrally into the district court’s calculus.” A forum selection clause is “prima facie valid and should be enforced unless enforcement is shown . . . to be ‘unreasonable’ under the circumstances.” (citing, M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972) (quotation omitted). Overcoming a forum selection clause requires a “compelling and countervailing reason.”

“Unambiguous & Clear” Language. The Court noted that the clause was set forth separately under the bolded heading “Jurisdiction.”

Agreement & “Waiver” – Additionally, Plaintiff agreed to the forum selection clause and, under the terms of the agreement “waived any venue objection when he signed onto the SPA.”

Basis For Challenge – The foregoing factors reveal important points for plan sponsors to consider in drafting forum selection clauses. On the other hand, one can also infer from the opinion factors that improve the odds of challenging such provisions, such as:

#1 the clause is “the product of fraud or overreaching”

#2 the plaintiff was unaware of the clause before signing (or perhaps signed nothing, as in the case when the clause appears in the terms of an ERISA plan)

#3 enforcement would effectively deprive the opposing party of a meaningful day in court and

#4 other factors that show that enforcement would be unjust or unreasonable.

:: Whose Privilege Is It Anyhow?

The fiduciary exception to the attorney-client privilegehas its roots in 19th-century English common-law casesholding that, “when a trustee obtained legal advice relating to his administration of the trust, and not in antici-pation of adversarial legal proceedings against him, thebeneficiaries of the trust had the right to the production of that advice.” Ibid. (collecting cases). The fiduciary excep-tion is now well recognized in the jurisprudence of both federal and state courts,1 and has been applied in a widevariety of contexts, including in litigation involving com-mon-law trusts, see, e.g., Riggs Nat. Bank of Washington, D. C. v. Zimmer, 355 A. 2d 709 (Del. Ch. 1976), disputesbetween corporations and shareholders, see, e.g., Garner v. Wolfinbarger, 430 F. 2d 1093 (CA5 1970), and ERISA enforcement actions, see, e.g., United States v. Doe, 162 F. 3d 554 (CA9 1999).

United States v. Jicarilla Apache Nation, 564 U.S. ___ (June 13, 2011)

Though not an ERISA case, the Jicarilla opinion holds interest for ERISA practitioners.   The primary holding addressed the scope of the attorney-client privilege in a controversy over the United States government’s management of funds held in trust for Indian tribes.   The Supreme Court reversed the Federal Circuit, holding that the common-law fiduciary exception to the attorney-client privilege did not apply to the trust relationship at issue.

In the course of its opinion, however, the Court noted application of the fiduciary exception in the context of ERISA litigation.  Moreover, the Court explained the rationale of the exception with reference to the leading case on the issue, Riggs Nat. Bank of Washington, D. C. v. Zimmer, 355 A. 2d 709 (Del. Ch. 1976).

The Court observed that the Riggs court focused on who the “real clients” were, stating that:

. . .  the trustees had obtained the legal advice as “mere representative[s]” of the beneficiaries because the trustees had a fiduciary obligation to act in the beneficiaries’ interest when administering the trust. Ibid.

For that reason, the beneficiaries were the “real clients” of the attorney who had advised the trustee on trust-related matters, and therefore the attorney-client privilege properly belonged to the beneficiaries rather than the trustees.

The Court also noted the use of a balancing test in Riggs:

Second, the court concluded that the trustees’ fiduciaryduty to furnish trust-related information to the beneficiaries outweighed their interest in the attorney-client privilege. “The policy of preserving the full disclosure necessary in the trustee-beneficiary relationship,” the court explained, “is here ultimately more important than the protection of the trustees’ confidence in the attorney for the trust.” Id., at 714. Because more information helped the beneficiaries to police the trustees’ management of the trust, disclosure was, in the court’s judgment, “a weightier public policy than the preservation of confidential attorney-client communications.”

The Court stated that [t]he Federal Courts of Appeals apply the fiduciary exception based on the same two criteria” and cited the following cases in support of that conclusion:

In re Long Island Lighting Co., 129 F. 3d 268, 272 (CA2 1997);
Wachtel v. Health Net, Inc., 482 F. 3d 225, 233–234 (CA3 2007);
Solis v. Food Employers Labor Relations Assn., 2011 U. S. App. LEXIS 9110, *12 (CA4, May 4, 2011);
Wildbur v. Arco Chemical Co., 974 F. 2d 631, 645 (CA5 1992); and
United States v. Evans, 796 F. 2d 264, 265–266 (CA9 1986) (per curiam).

Note: Factors which may assist in determination of who the “real client” may be derived from the following points taken from Riggs and noted by the Supreme Court: (1) when the advice was sought, no adversarial proceedings between thetrustees and beneficiaries had been pending, and thereforethere was no reason for the trustees to seek legal advice in a personal rather than a fiduciary capacity; (2) the court saw no indication that the memorandum was intended for any purpose other than to benefit the trust; and (3) the law firm had been paid out of trust assets. While not stated in such terms, the third factor appears to create a virtual presumption that the real client was the trust, not the fiduciaries.

See also – I have several posts about this case going back to the lower court’s opinion on erisaboard.com. Also, some useful practice pointers may be found in article published by Hayne & Boone attorneys on this site.


:: Conkright In The Courts — Making Sense Of The Firestone Trilogy

People make mistakes. Even administrators of ERISA plans

Conkright v. Frommert, 130 S. Ct. 1640 (U.S. 2010)

The pithy statement quoted above, coupled with the comment that a “single honest mistake” does not alter the standard of review, seems destined to become the talismanic essence of what Conkright means to ERISA law. Starting from the boggy, loamy soil Metropolitan Life v. Glenn left behind, the Court sought traction by reaching for something fixed and weighty — like Firestone v. Bruch, for example.

The trilogy now seems to be in place – Firestone, providing generous deferential review; Glenn, providing a multi-factor analysis for cases in which the fiduciary is deemed unworthy of such deference; and Conkright, to remind us that Firestone remains the bedrock on which all else rests.

A review of post-Conkright cases corroborates this interpretative template.

For example, the following excerpt provides a good summary of Conkright‘s policy argument:

These principles were discussed further in Conkright, in which the Supreme Court declared that a single mistake by a plan administrator cannot serve as a basis for depriving that administrator of deference that would otherwise be warranted under Firestone Tire. Conkright, 130 S.Ct. at 1644-47. It was noted that deference to the findings of a plan administrator, where warranted under the terms of the plan in question, promoted the goals of “efficiency,” “predictability” and “uniformity.” Id. at 1649.

Deference promotes efficiency by encouraging the resolution of benefits disputes by means of “internal grievance procedures,” rather than by means of “costly litigation.” Id.

Predictability is ensured by standards allowing an employer to “rely on the expertise of the plan administrator rather than worry about unexpected and inaccurate plan interpretations that might result from de novo judicial review.” Id.

Uniformity is secured when an employer is able to “avoid a patchwork of different interpretations of a plan” that covers multiple employees in several different jurisdictions. Id. ERISA does not affirmatively require employers to establish employee benefit plans, nor does it mandate what types of benefits must be provided by employers who choose to create such plans. Lockheed Corp. v. Spink, 517 U.S. 882, 887, 116 S. Ct. 1783, 135 L. Ed. 2d 153 (1996). It should not be construed in such a way as to “lead those employers with existing plans to reduce benefits,” or to discourage employers without such plans from adopting them in the first place. Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11, 107 S. Ct. 2211, 96 L. Ed. 2d 1 (1987). Instead, it should be interpreted in light of its objectives of ensuring the enforcement of employees’ rights under existing employee benefit plans and encouraging employers to create additional employee benefit plans. Aetna Health, Inc. v. Davila, 542 U.S. 200, 215, 124 S. Ct. 2488, 159 L. Ed. 2d 312 (2004).

Haisley v. Sedgwick Claims Mgmt. Servs., 2011 U.S. Dist. LEXIS 20751 (W.D. Pa. Mar. 2, 201

The district court’s perspective shows its perfect appreciation for the general rule enunciated in Conkright.

The notion of a single honest mistake “rule” is captured in another excerpt from a recent district court opinion:

Where, as here, an employer both administers the Plan and pays benefits, this dual role creates a conflict of interest, and “‘that conflict must be weighed as a factor in determining whether there was an abuse of discretion.'” Metro. Life Ins. Co. v. Glenn, 554 U.S. 105, 128 S.Ct. 2343, 2348, 171 L. Ed. 2d 299 (2008)(quoting, Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 957, 103 L. Ed. 2d 80 (1989)).  Nevertheless, the administrator’s decision is still entitled to deference and that deference remains, even where the administrator makes a mistake, because a “single honest mistake in plan interpretation” does not justify “stripping the administrator of . . . deference for subsequent related interpretations of the plan.” Conkright v. Frommert, 130 S.Ct. 1640, 1645, 176 L. Ed. 2d 469 (2010).

Canada v. Am. Airlines, Inc. Pilot Ret. Ben. Program, 50 Employee Benefits Cas. (BNA) 1272 (M.D. Tenn. Aug. 10, 2010)

On the other hand, a magistrate judge swims upstream in an opinion in which he defends the Ninth Circuit Abatie opinion, post-Conkright, and simultaneously overcomes the “single” mistake hurdle:

In Conkright, the court held that a Plan Administrator’s single, honest mistake does not strip a Plan Administrator of deference. 130 S. Ct. 1640, 176 L. Ed. 2d 469, Id. 2010 WL 1558979 at *9-10. Abatie similarly requires that a court “should give the administrator’s decision broad deference notwithstanding a minor irregularity.” Id., 458 F.3d at 972. If anything, Conkright reinforces the basic themes of the main cases over the years related to whether a Plan Administrator is entitled to deference: 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 and the need to encourage employers to provide benefits plans. Conkright, 130 S. Ct. 1640, 176 L. Ed. 2d 469, 2010 WL 1558979 at *7. Instead of changing the controlling law, Conkright reaffirmed it. See e.g., Conkright, 130 S. Ct. 1640, 176 L. Ed. 2d 469, 2010 WL 1558979 at *9 (noting that it would be inappropriate to defer to a Plan Administrator’s interpretation when he does not exercise his discretion fairly or honestly or is too incompetent to exercise his discretion fairly). Accordingly, there are no grounds for reconsideration of my April 12, 2010 Opinion and Order.

Even assuming arguendo that Conkright had changed existing law, application of Conkright’s holding would not change the result here. In Conkright, the Supreme Court rejected the notion that a single honest mistake had infected the ERISA review process. Conkright. 130 S. Ct. 1640, 176 L. Ed. 2d 469, 2010 WL 1558979 at *7. The instant case is not a case about a single mistake. Instead, significant procedural irregularities throughout Providence’s internal review proces

Lafferty v. Providence Health Plans, 720 F. Supp. 2d 1239 (D. Or. 2010)

The Ninth Circuit remains somewhat mired in the bog. In a recent opinion (over a vehement dissent), the Court trotted out a number of axiomatic propositions from the Firestone trilogy (ultimately holding against the plan):

The Supreme Court further refined the standard of review in its decision this year in Conkright v. Frommert, holding that a single honest mistake in plan interpretation” administration does not deprive the plan of the abuse of discretion standard or justify de novo review for subsequent related interpretations. The Court emphasized that under Glenn, “a deferential standard of review remains appropriate even in the face of a conflict.” Conkright noted, though, that “[a]pplying a deferential standard of review does not mean that the plan administrator will prevail on the merits.” n24 What deference means is that the plan administrator’s interpretation of the plan ” ‘will not be disturbed if reasonable.’ ”

Salomaa v. Honda Long Term Disability Plan, 2011 U.S. App. LEXIS 4386 (9th Cir. Cal. Mar. 7, 2011)

But most courts appear to be on board and repeat the now familiar refrain, as in this Seventh Circuit opinion:

“People make mistakes. Even administrators of ERISA plans.” Conkright v. Frommert, 130 S. Ct. 1640, 1644, 176 L. Ed. 2d 469 (2010). This introduction was fitting in Conkright, which dealt with a single honest mistake in the interpretation of an ERISA plan. It is perhaps an understatement in this case, which involves a devastating drafting error in the multi-billion-dollar plan administered by Verizon Communications, Inc. (“Verizon”).

Verizon’s pension plan contains erroneous language that, if enforced literally, would give Verizon pensioners like plaintiff Cynthia Young greater benefits than they expected. Young nonetheless seeks these additional benefits based on ERISA’s strict rules for enforcing plan terms as written. Although Young raises some forceful arguments, we conclude that ERISA’s rules are not so strict as to deny an employer equitable relief from the type of “scrivener’s error” that occurred here. We will accordingly affirm the district court’s judgment granting Verizon equitable reformation of its plan to correct the scrivener’s error.

Young v. Verizon’s Bell Atl. Cash Balance Plan, 615 F.3d 808 (7th Cir. Ill. 2010)

Likewise, from the Third Circuit:

Also waived is Goletz’s argument that, because Prudential’s handling of this case has already been faulted once by the District Court, we should now forego extending any deference to Prudential’s decision and subject it to de novo review. This position was all but rejected by the Supreme Court in Conkright, in which the Court explained that ERISA plan administrators “make mistakes” and that a “single honest mistake in plan interpretation” does not justify “stripping the administrator of . . . deference for subsequent related interpretations of the plan.” ___ U.S. ___, 130 S. Ct. 1640, 176 L. Ed. 2d 469, 2010 WL 1558979, at *3.

Goletz v. Prudential Ins. Co. of Am., 383 Fed. Appx. 193 (3d Cir. Del. 2010)

And the now-chastened Second Circuit (from whence Conkright emerged):

More recently, in Conkright v. Frommert, 130 S. Ct. 1640, 176 L. Ed. 2d 469 (2010), the Supreme Court reiterated its longstanding concern with ERISA litigation expenses. In Frommert, the Court addressed the deference that courts should accord to a plan administrator’s interpretation of an ERISA plan. Central to the Court’s holding was the increased litigation costs associated with de novo review of a plan administrator’s decisions as to plan benefits. As the Court explained:HN19Congress enacted ERISA to ensure that employees would receive the benefits they had earned, but Congress did not require employers to establish benefit plans in the first place. We have therefore recognized that ERISA represents a careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans. Congress  sought to create a system that is not so complex that administrative costs, or litigation expenses, truly discourage employers from offering [ERISA] plans in the first place. ERISA induc[es] employers to offer benefits by assuring a predictable set of liabilities, under uniform standards of primary conduct and a uniform regime of ultimate remedial orders and awards when a violation has occurred.Id. at 1648-49 (internal quotation marks and citations omitted). Extending ERISA liability to unintentional misstatements regarding non-plan consequences of retirement decisions would run counter to these goals.

Bell v. Pfizer, Inc., 626 F.3d 66 (2d Cir. 2010)

All of which leaves us to ask, what are we to make of Metropolitan Life v. Glenn, if Conkright is the other bookend to Firestone? I think that would be a great theme for an article about Conkright and one that I hope to finish in the next few weeks.

:: New Scholarship Tests Heightened Pleading Requirements Against Empirical Data

Alexander A. Reinert, Assistant Professor of Law, Benjamin N. Cardozo School of Law, has published a meticulously researched article that examines effects of the heightened pleading requirements under recent United States Supreme Court jurisprudence.

Entitled “The Costs of Heightened Pleading”, the article appears in the Winter 2011 issue of the Indiana Law Journal ( 86 Ind. L.J. 119).

Professor Reinert observes that Twombly v. Bell Atlantic Corp., 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) have created a pleading standard that “heightens attention to ‘conclusory’ pleading, treats state of mind allegations in a manner at odds with prior precedent, and encourages lower courts to apply their own  intuitions to decide whether a plaintiff’s legal claims and allegations are sufficient to proceed to discovery.”

Have these developments aided judicial economy and the cause of justice by eliminating a measurable number of meritless claims?  Through a carefully designed research project, this work parses  “empirical data to question the widespread assumptions about the costs and benefits of heightened pleading.”   This work illustrates a gap in the supposed link between the heightened pleading standards and filtering of meritorious claims.

Nor does the heightened pleading standard come without costs. In this regard, the author suggests “a heightened pleading standard may function in the same way that randomized dismissal would, amounting to a radical departure from pleading standards that few would find satisfactory.”

See, Reinert, Alex A., The Costs of Heightened Pleading (August 16, 2010). Indiana Law Journal, Vol. 86, 2011; Cardozo Legal Studies Research Paper No. 307.

Available at SSRN: http://ssrn.com/abstract=1666770

:: ERISA Preemption Notes After PCMA v. District Of Columbia

The Supreme Court has not prescribed a standard for determining whether a state law sufficiently constrains an EBP’s decision-making in an area of ERISA concern that the law is pre-empted, but it has indicated a law that “bind[s] plan administrators to any particular choice” is pre-empted. Travelers, 514 U.S. at 659. We need go no further: Sections 48-832.01(a), (b)(1), and (d) bind plan administrators because the “choice” they leave an EBP between self administration and third-party administration of pharmaceutical benefits is in reality no choice at all.

For most if not all EBPs, internal administration of beneficiaries’ pharmaceutical benefits is a practical impossibility because it would mean forgoing the economies of scale, purchasing leverage, and network of pharmacies only a PBM can offer.  By imposing requirements upon third-party service providers that administer pharmaceutical benefits for an EBP, §§ 48-832.01(a), (b)(1), and (d) “function as a regulation of an ERISA plan itself.” Travelers, 514 U.S. at 659. Because these provisions also regulate an area of ERISA concern, they are pre-empted.

Pharm. Care Mgmt. Ass’n v. District of Columbia, 2010 U.S. App. LEXIS 13991 (D.C. Cir. July 9, 2010)

The decision by the D.C. Circuit in PCMA v. D.C. touches on issues that at first glance appear somewhat remote in the average benefits practice, but I think readers will find some useful analysis in the opinion.

On the big picture, the Court of Appeals found that a substantial part of the District’s  law regulating pharmacy benefit mangers (Access Rx Act of 2004, D.C. Code § 48-832.01 et seq.) was preempted.   Some contractual provisions that could be waived by benefit plans survived the preemption challenge.   Additional argument remains for consideration on remand, so the case will likely be around for a while yet.

On a decidedly less rarefied level, we find development of some recurring themes that arise in everyday concerns about which claims are preempted and why.    Of course, in the PCMA case, the key theme was state law preemption.

A state law “relates to” an EBP “if it [1] has a connection with or [2] reference to such a plan.” Egelhoff v. Egelhoff, 532 U.S. 141, 147, 121 S. Ct. 1322, 149 L. Ed. 2d 264 (2001) (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97, 103 S. Ct. 2890, 77 L. Ed. 2d 490 (1983)).

The PCMA argued that Title II of the law intruded on plan administration.   As such, the law would be preempted if it had an impermissible effect upon employee benefit plans.   Bypassing the discussion of these legally freighted terms, I think the District’s defense of the statute is really more interesting for my purposes.

The District found itself inconveniently stuck with the fact that its law regulating PBM’s impinged plan benefit administration.  (The law imposes fiduciary responsibilities, disclosure of rebates and pass through of discounts, among other things.)

This point had to be admitted.

The District does not deny the administration of employee benefits is an area of core ERISA concern or that PBMs administer benefits on behalf of EBPs; indeed at oral argument  it conceded as much.

The District sought refuge in case law suggesting that garden variety breach of contract of malpractice claims are not preempted:

Rather, the District argues the various provisions of Title II nonetheless fall within the scope of state law the Congress did not intend to pre-empt with ERISA because they do not regulate “relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries.

The District points to no support for this limitation upon pre-emption either in ERISA itself or in any Supreme Court case interpreting it. Instead, the District relies upon decisions of other circuits holding ERISA did not pre-empt breach of contract or professional malpractice claims against third-parties who provided services to an EBP.

This argument failed, as the preceding excerpt would suggest.

The Court says that the District read too much into the cases it relied upon.   A law affecting the  “relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries is a concern – but that is not a touchstone for preemption.

As the PCMA points out, in none of the cases cited by the District did the state law regulate a third party who administered employee benefits on behalf of a plan. Those cases therefore suggest only that the relationship among ERISA entities is an area of ERISA concern, not that the objective of uniformity in plan administration is for some reason inapplicable simply because a plan has contracted with a third party to provide administrative services.

Given the restrictions the law would impose on plan administrators in their dealings with PBM’s, the Court found an impermissible effect on ERISA plan administration and held Title II preempted.

Note: The non-preempted state law claims relied upon by analogy in the opinion are quite important for benefit practitioners in the prosecution or defense of negligence and contractual cases against plan administrators and other service providers.

A case by a participant against a service provider has at least two strikes against it – #1 the traditional ERISA entities are involved – and #2 the case will likely consist of complaints about administration issues.    Here the Court’s observation distinguishing the cited authorities is of interest:

Indeed, dicta in two cases central to the District’s argument   suggest a state law regulating a third party’s performance of administrative functions on behalf of a plan could be pre-empted. See Gerosa v. Savasta & Co., 329 F.3d 317, 324 (2d Cir. 2003) (noting that although courts are “reluctant to find that Congress intended to preempt state laws that do not affect the relationships among [ERISA entities]” they have “typically” held ERISA pre-empts “state laws that would tend to control or supersede central ERISA functions–such as state laws affecting the determination of eligibility for benefits, amounts of benefits, or means of securing unpaid benefits”); Airparts Co. v. Custom Benefit Servs. of Austin, 28 F.3d 1062, 1066 (10th Cir. 1994) (holding claims for negligence, indemnity, and common-law fraud not pre-empted where defendant “was simply an outside consultant which did not directly perform any administrative act vis-a-vis the plan”).

Furthermore, when actually confronted with a malpractice claim challenging a third party’s performance of administrative services on behalf of a plan, the Third Circuit held the claim was pre-empted by ERISA. See Kollman v. Hewitt Assocs., 487 F.3d 139, 148 (2007) (holding ERISA pre-empts malpractice claim  against non-fiduciary service provider responsible for plan administration; goal of uniformity reflected in ERISA is “equally applicable to agents of employers … who undertake and perform administrative duties for and on behalf of ERISA plans”).

Note, however,  that the plaintiff in Kollman was a plan participant. (#1 above)  Compare: Custer v. Sweeney, 89 F.3d 1156, 1167 (4th Cir. 1996) (trustee’s state law legal malpractice claim against an ERISA plan’s attorney not subject to ERISA preemption), where trustee was plaintiff.

What Is Plan Administration? From the opinion:

Plan administration includes “determining the eligibility of claimants, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payments, and keeping  appropriate records in order to comply with applicable reporting requirements.” Fort Halifax, 482 U.S. at 9.

Voluntary Provisions Prevail – It was not all downside for the District:

The District’s point is well-taken with regard to the usage pass back provision, § 48-832.01(b)(2), because it expressly provides that it “does not prohibit the covered entity from agreeing by contract to compensate the [PBM] by returning a portion of the benefit or payment,” and with regard to § 48-832.01(c), which requires disclosure (and imposes a corresponding duty of confidentiality) only “[u]pon request by a covered entity.” Those provisions are in essence voluntary provisions for the covered entity.

Circuit Conflict – As the Court observed:

This holding differs from that of the First Circuit in Rowe, which held no part of a nearly identical Maine statute was pre-empted by ERISA. See 429 F.3d at 303. In our view the uniform administrative scheme encouraged by ERISA includes  plan administrative functions performed by a third party on behalf of an EBP.

See also :: PBM’s Prevail In Controversy Over ERISA Preemption Of Disclosure Legislation

:: Plan Administrators Cannot Invoke “SPD Prevails” Rule To Cure Plan Language Deficiencies

Here, there are no terms in the plan which allow it to be amended by inserting into the SPD such critical provisions as the administrator’s discretionary authority to interpret the plan or to determine eligibility for benefits. Indeed, this particular plan wholly fails to comply with § 1102(b)(3)’s requirement to include a procedure governing amendment of the plan.

Thus, there is no basis for concluding that the purported grant of discretion in the SPD is a procedurally proper amendment of the policy, and therefore “the policy’s failure to grant discretion results in the default de novo standard.” Jobe, 598 F.3d at 486. “Consequently, the district court should not have reviewed the administrator’s decision for abuse of discretion but, rather, should have reviewed it de novo.” Id.

Ringwald v. Prudential Ins. Co. of Am. (8th Cir.) (06/21/10)

It is not unusual to see plan documents and summary plan descriptions merged into one document these days, or for summary plan descriptions to take on the role as the source of authority and documentation of administrative practices.   This recent Eighth Circuit opinion should give plan fiduciaries pause as they delegate such paperwork to their claims administrators and benefit communications consultants.

Here, the question was whether the plan granted discretionary authority to the plan administrator so as to invoke the benefit of an abuse of discretion standard of review.  The answer – the summary plan description did, but the plan document did not.  And therefore, a de novo standard of review applied.

Some of you may be saying, but I thought the summary plan description controlled in the case of a conflict between the plan and the SPD?   The Eighth Circuit observes that this rule of “SPD prevails” only applies where necessary to protect the plan participants.

the policy underlying the “SPD prevails” rule was ERISA’s important goal of providing complete disclosure to plan participants, such that where disclosures made in an SPD pursuant to 29 U.S.C. § 1022(a)(1) . . .  ERISA’s policy of full disclosure – inuring to the benefit of employees, not employers – would not be advanced by a blanket rule indicating an SPD “prevails over the policy in all circumstances.”

Thus, the door opens for the plan participant to introduce the plan document as a means of impeaching the SPD.   ERISA forbids a plan administrator from using the SPD “to enlarge the rights of the plan administrator at the expense of plan participants when the plan itself does not confer those rights.”

Note: This case does not address the combination of the plan and the SPD into one document.   It does illustrate, however, the risks incurred when plan administrators deviate from ERISA’s documentary scheme.

ERISA contemplates plan documents which control many important legal matters, such as allocation of fiduciary responsibilities, specification of amendment procedures, eligibility, participation and claims adjudication rules.  ERISA further contemplates an SPD or SMM that put these matters in the vernacular for the plan participants.

In view of Ringwald, if important language fails to appear in the plan document, such as a grant of discretion, the SPD cannot cure this deficiency. Plan fiduciaries should review and compare the plan language on this issue as well as other important issues, such as ERISA subrogation and reimbursement rights, to ensure consistency in plan documentation.

:: Discovery Of Claims Administrator’s Personnel Records Permitted On Question Of Bias

Based on Glenn and Abatie, therefore, it is within the discretion of the district court to permit limited discovery in an ERISA case. Any discovery, however, “must be narrowly tailored and cannot be a fishing expedition.” Groom v. Standard Ins. Co, 492 F. Supp. 2d 1202, 1205 (C.D. Cal. 2007).

Sullivan v. Deutsche Bank Ams. Holding Corp., 2010 U.S. Dist. LEXIS 8414 (S.D. Cal. Feb. 2, 2010)

Sullivan v. Deutsche Bank offers support for limited discovery where the objective is limited to issues pertinent to conflict of interest.   The plaintiff sought performance reviews of the insurance carrier’s employees involved in evaluation of the claim in dispute, namely:

the “performance evaluations or performance reviews for each of [Unum’s] employees [who were involved in the evaluation of Plaintiff’s claim] . . . for the years 2005, 2006, and 2007.”


The plaintiff based its case for discovery on a tightly constructed argument:

  1. discovery of the performance evaluations is necessary to determine the credibility of the evaluators involved in denying Plaintiff’s claim.
  2. if Unum awarded superior evaluations for higher rates of denying benefits, this would constitute evidence of a conflict of interest in the administration of claims.
  3. the scope of this discovery is reasonably limited: “Plaintiff is not seeking defendant’s employees personnel files, but merely the performance evaluations over a three year period during which plaintiff’s claim was handled.”

UNUM demurred, citing two objections that essentially cohere into one – the request was overbroad and beyond permitted discovery in an ERISA case – and a third, based upon privacy concerns.

Survey Of Opinions

The Court began with a broad consideration of the judicial landscape, stating that:

. . . district courts have reached different conclusions.

At the far end of the spectrum, the Eastern District of Kentucky summarily denied production of “performance reviews and personnel files” because “those requests are unduly burdensome and their intrusiveness outweighs any likely benefit.” Pemberton v. Reliance Std. Life Ins. Co., 2009 WL 89696 at *3 (E.D. Ky. Jan. 13, 2009).

Other courts have taken a more moderate stance, holding that access to the personnel files is unwarranted, but at the same time ordering production of “documents about employee compensation criteria or standards . . . for employees involved in that claim.” Hughes v. CUNA Mut. Grp., 257 F.R.D. 176, 180-81 (S.D. Ind. 2009); see also, e.g., Santos v. Quebecor World Long Term Disability Plan, 254 F.R.D. 643, 650 (E.D. Cal. 2009); Myers v. Prudential Ins. Co. of Am., 581 F. Supp. 2d 904, 914 (E.D. Tenn. 2008).

Ruling For Plaintiff

Nonetheless, the narrow construction of the Plaintiff’s argument carried the day on the issue.  The Court observes that:

Plaintiff does not request a blanket production of personnel files, however.  Instead, Plaintiff seeks the performance evaluations of 11 individuals–each involved in the evaluation of Plaintiff’s claim for LTD benefits–for a period of three  years.

.  .  .

the evaluators’ performance evaluations are closely related to the issue of conflict of interest.   Accordingly, Plaintiff’s request for the performance evaluations is reasonably calculated to lead to the discovery of admissible evidence. Fed. R. Civ. P. 26(b)(1).   Furthermore, Plaintiff’s request for production is narrowly tailored to the time and scope of Plaintiff’s particular claim for benefits.

Based thereon, the Court GRANTS Plaintiff’s motion to compel production of the performance evaluations [Doc. 21], as identified by Plaintiff’s Request for Production No. 4. Defendant shall produce the performance evaluations on or before February 22, 2010.

Note: The Court cited Knopp v. Life Ins. Co. of N. Am., 2009 WL 5215395 at *4 (N.D. Cal. Dec. 28, 2009) in support of its decision, stating:

Addressing a similar issue, the Northern District of California ordered production of the evaluations, noting:

“This discovery request asks for performance evaluations for the medical consultants or companies.  This information is closely related to the issue of conflict of interest. For instance, if the medical consultants or companies were rewarded by Defendants for providing opinions adverse to a claimant, that would significantly affect the credibility of their evaluations.”

The Court found that discovery was even more appropriate in the case at bar in light of Glenn:

Whereas the standard of review in Knopp was de novo, the Court in the present case reviews UNUM’s denial of Plaintiff’s LTD benefits for an abuse of discretion.   Thus, limited discovery is even more appropriate. Under the abuse of discretion standard, the potential bias of an evaluator–and in turn the potential conflict of interest inherent in the administration of the benefits claim–is a necessary factor in the Court’s analysis. Glenn, 128 S.Ct. at 2350 (holding, in an ERISA case, “that a conflict [of interest] should be weighed as a factor in determining whether there is an abuse of discretion”)(internal  quotations omitted).

Ninth Circuit Authority – The Court framed its analysis within the larger perspective of the Ninth Circuit’s opinion in Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 970 (9th Cir. 2006):

in the Ninth Circuit, “when a court must decide how much weight to give a conflict of interest under the abuse of discretion standard, . . . the court may consider evidence outside the [administrative] record.” Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 970 (9th Cir. 2006). Based on Glenn and Abatie, therefore, it is within the discretion of the district court to permit limited discovery in an ERISA case. Any discovery, however, “must be narrowly tailored and cannot be a fishing expedition.” Groom v. Standard Ins. Co, 492 F. Supp. 2d 1202, 1205 (C.D. Cal. 2007).

:: Increase Predicted For 2010 Workplace Litigation

The National Underwriter reports that the sixth annual Workplace Class Action Litigation Report by Seyfarth Shaw LLP indicates an increase in workplace litigation for 2010, both in terms of settlements and exposure. The report examines class action and collective action settlements over the past year, including 715 class action litigation rulings.

J. Stephen Poor, Chair and Managing Partner of Seyfarth Shaw, states that “since we began publishing this annual report six years ago, both the number of cases filed and the financial exposure that they pose to companies has increased exponentially.”

Six key trends from the report are epitomized by the firm as follows:

  • First, the plaintiffs’ bar increased the pace of the Fair Labor Standards Act (“FLSA”) collective action and the Employee Retirement Income Security Act (“ERISA”) class action filings seeking recovery for unpaid wages and 401(k) losses. As lay-offs increased, displaced workers also filed more age discrimination and Worker Adjustment and Retraining Notification lawsuits. Even more litigation is expected in 2010, as businesses re-tool their operations.
  • Second, wage & hour litigation continued to out-pace all other types of workplace class actions. Collective actions pursued in federal court under FLSA outnumbered all other types of private class actions in employment-related cases. Significant growth in wage & hour litigation also was centered at the state court level, and especially in California, Florida, Illinois, New Jersey, New York, Massachusetts, Minnesota, Pennsylvania, and Washington. This trend is likely to continue in 2010.
  • Third, the change in Presidential Administrations created heightened workplace litigation exposures for employers. The Obama Administration’s emphasis on regulation and enforcement also spawned more government-initiated litigation over workplace issues. It is expected that employers will encounter more investigations – and more governmental enforcement lawsuits – in 2010 as the newly augmented staffs of the DOL and EEOC carry out their law enforcement functions.
  • Fourth, the Class Action Fairness Act of 2005 (“CAFA”) continued to have significant effects on workplace litigation, and most significantly on wage & hour class actions filed in state court. As the plaintiffs’ bar continues to devise techniques to adapt to the CAFA, rulings on the scope, meaning, and application of the law are already numerous for a statute of such recent vintage.
  • Fifth, class action plaintiffs’ lawyers are a tight-knit community, which fosters quick evolution in case theories, and, in turn, impacts defense litigation strategies. As a result, cutting-edge developments are spreading rapidly throughout the substantive areas encompassed by workplace class action law.
  • Sixth and finally, the financial stakes in workplace class action litigation increased in 2009. Plaintiffs’ lawyers have continued to push the envelope in crafting damages theories to expand the size of classes and the scope of recoveries. These strategies resulted in a series of massive settlements in nationwide class actions, particularly in the context of wage & hour litigation. This trend is also unlikely to abate in 2010.

The entire report may be ordered from the Seyfarth Shaw website here.

:: Eighth Circuit Clarifies Standing Requirements For Class Action Plaintiffs

The district court erred by conflating the issue of Braden’s Article III standing with his potential personal causes of action under ERISA.

Braden v. Wal-Mart Stores, Inc., 2009 U.S. App. LEXIS 25810 (8th Cir. Mo. Nov. 25, 2009)

The  Eighth Circuit found very little correctly done by the district court in this recent opinion addressing threshold requirements for properly stating ERISA claims.  The opinion offers a welcome clarification of recurring issues, such as standing and the specificity required in stating claims for relief.

The gist of the complaint was that Wal Mart’s ten billion dollar 401(k) plan paid excessive managment fees and a number of improprieties involving the alleged sharing of these fees with the trustee.  In any event, the defendants moved for dismissal under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) and the district court granted the motion:

The district court granted the motion, concluding that Braden lacked constitutional standing to assert claims based on breaches of fiduciary duty prior to the date he first contributed to the Plan and that he otherwise failed to state any plausible claim upon which relief could be granted.

“Conflation” Of Standing And Merits

The Eighth Circuit hewed to a conservative line in circumscribing the contours of Article III standing.  This defense, routinely asserted in ERISA litigation, can often overwhelm considerations of the merits of the principal claims such that the two issues converge on one point.  When that happens, every case becomes a constitutional issue – and that should suggest a flaw in analysis. 

So the Eighth Circuit concluded, was the case here:

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:: Motions To Strike Affirmative Defenses In ERISA Litigation – An Arrow In The Plaintiff’s Quiver

Plaintiffs are correct that this affirmative defense — particularly the last clause — is sufficiently vague as to fail to provide sufficient notice. While Defendants counter that they addressed the factual underpinning of this defense in the motion to dismiss, nothing in the language of the affirmative defense  ties it to the disclosure discussed in the motion.

While Defendants are correct that motions to strike are disfavored, the affirmative defense here is sufficiently vague as to warrant striking.

Trs. of the Local 464A UFCW Pension Fund v. Wachovia Bank, N.A., 2009 U.S. Dist. LEXIS 109567 (D.N.J. Nov. 24, 2009)

Defendants are increasingly tasked with articulating their defenses with clarity and specificity.  In this district court opinion in an ERISA case, the plaintiffs employ a motion to strike to eliminate several affirmative defenses set out in the defendants’ answer to the complaint.

“Bare Bones Conclusory Allegations”

The eleventh affirmative defense stated:

“Plaintiffs’ claims are barred … because Defendants have complied with all disclosure requirements under all applicable laws and informed Plaintiffs regarding matters concerning investments and risk.”

The Plaintiffs move to strike the eleventh affirmative defense, arguing that it failed to provide them with notice as to the nature of the defense and the legal basis therefor.  The court agreed.

Plaintiffs are correct that this affirmative defense — particularly the last clause — is sufficiently vague as to fail to provide sufficient notice.

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:: A Primer On Venue Choice In ERISA Claim Disputes

Plaintiffs originally filed their complaint in the Court of Common  Pleas of Philadelphia County, Pennsylvania. Defendants then removed the action to federal court. The plaintiffs’ choice of venue is generally accorded great weight, but other factors such as where the underlying events occurred and where the plaintiffs reside can override this concern.

Schoonmaker v. Highmark Blue Cross Blue Shield, 2009 U.S. Dist. LEXIS 101088 (E.D. Pa. Oct. 30, 2009)

This district court opinion features an ample discussion of an important preliminary issue that is often taken for granted – choice of venue.   One of the advantages of modern medical advances has been the proliferation of centers of excellence for various diseases.  On the other hand, access to these facilities often requires travel.

What factors should a court take into account in determining proper venue in a dispute over benefit payment?  The Court in Schoonmaker reviews this question in considerable detail.

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:: Joint Venture Liability For Medical Stop Loss Claims

Majestic has included RMTS as a defendant in Count I (declaratory relief), Count II (breach of contract), and Count IV (bad faith). RMTS argues that it should be “dismissed” from this action because it was not a party to the stop loss contracts.   Majestic counters that RMTS is a proper defendant because it is a party to the contract, or alternatively, because it was engaged in a joint venture with Trustmark.

Majestic Star Casino, LLC v. Trustmark Ins. Co., 2009 U.S. Dist. LEXIS 93911 (N.D. Ill. Oct. 8, 2009)

Joint venture is likely not the first legal theory that comes to mind when considering the liability of managing general underwriters for stop loss claims by plan sponsors.  The theory has been advanced in ERISA cases from time to time as a means to expand the defendant group.

Common endeavor and sharing of risks are required to sustain the claim.  See, e.g., Transit Mgmt. v. Group Ins. Admin., 1998 U.S. Dist. LEXIS 15784 (E.D. La. Sept. 30, 1998).  In this recent opinion, the theory survives a summary judgment motion given the factual issues implicated by the claim.

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:: “Retrospective Claim Denial” Litigation Challenges Circumvention Of Procedural Requirements

Recent class action litigation challenges a practice of health insurance carriers whereby the carrier seeks refunds from providers.  This retrospective claims review is conducted by investigative teams that purportedly employ criteria designed to identify claims that should not have been paid. 

According to a Reuters press release, a class action lawsuit has been filed against the Blue Cross Blue Shield Association (“BCBSA”) and 22 leading BCBS insurers across the country on behalf of a putative nationwide class of health care providers, as well as the Pennsylvania Chiropractic Association (“PCA”), the New York Chiropractic Council (the “Council”), and the Association of New Jersey Chiropractors (“ANJC”).

The suit challenges the Defendants` abusive practices in using post-payment audits and reviews, and improper repayment demands, to pressure providers to repay substantial sums that have previously properly been paid as health insurance benefits for services provided to BCBS subscribers.

The action alleges that the post-payment audit and review process as applied by the various named BCBS Entities violates the Employee Retirement Income Security Act of 1974 (“ERISA”), in that its repayment demands are retroactive determinations that particular services are not covered under the terms of the BCBS health care plans, but without proper appeal or other protections otherwise available under ERISA for both self-funded and fully insured health care plans offered through private employers. The complaint further alleges that the post-payment audit and review process, as well as the forced withholds of unrelated benefit payments to offset alleged prior overpayments, violate the Racketeer Influenced and Corrupt Organizations Act (“RICO”).

This suit is similar to a case filed against Aetna which is now pending in the District of New Jersey.  (I uploaded a copy of that complaint on erisaboard.com.)

The legal theory advanced in these cases could have far-reaching implications for health plan payers that seek refunds of claims paid based upon discovery of mistake or overpayment.

:: Employer Practice Of Payments In Exchange For Releases Does Not Constitute ERISA Plan

To be sure, the record supports Kawski’s claim that Johnson & Johnson had an ongoing practice of providing release agreements to certain employees. But Kawski points to no communication or other evidence suggesting that “a reasonable employee would perceive an ongoing commitment” by Johnson & Johnson to provide such payments.

Kawski v. Johnson & Johnson, 2009 U.S. App. LEXIS 19573 (2d Cir. N.Y. Sept. 1, 2009) (unpublished)

The Second Circuit recently addressed an important issue that can arise in the context of employment termination. In this case, the plaintiff, on behalf of herself and similarly situated employees, alleged that her employer had an ongoing practice of offering payments in exchange for a release of claims. The key issue: was this practice, in effect, an employee welfare benefit plan?

This is a issue frequently overlooked. While an ERISA plan is required to be described in a written document, an ERISA plan can be created through pattern and practice even though not described in a written document. This fact creates substantial risk that a course of payments on termination of employment may give rise to a severance pay plan. That is essentially what the plaintiff alleged in Kawski.

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:: District Court Holds That Potential Claim For Benefits Forecloses Other ERISA Relief

On September 13, 2006, Mr. Tebbetts consulted with a doctor because he was experiencing pain in his abdomen, and the doctor ordered a CT scan of Mr. Tebbetts’ abdomen. The doctor sought pre-approval from Defendants of the CT scan, but Defendants declined coverage. Several days later, Mr. Tebbetts was taken to the hospital where a CT scan and ultrasound revealed that Mr. Tebbetts had a cyst on his pancreas that had caused his spleen to rupture. Mr. Tebbetts’ spleen was surgically removed.

Tebbetts v. Blue Cross Blue Shield of Ala., 2009 U.S. Dist. LEXIS 54505 (M.D. Ala. June 26, 2009)

This unpublished district court opinion addresses two frequent issues in claim denial cases – whether 29 U.S.C. 1132(a)(3) remedies available when (a)(2) claims may have been brought and whether equitable estoppel may apply in an ERISA case.

One of the several unfortunate aspects of 29 U.S.C. 1132(a)(3) often complained about from a policy perspective is the notion that it is unavailable if a claim for benefit case could have been brought instead under (a)(2).  That, coupled with ERISA’s broad preemption of state law and limited equitable remedies even when (a)(3) does apply, limits claimants to a narrow channel of relief.

As Tebbetts illustrates, despite serious consequences of a claim denial, a frequent outcome will be the shunting of the claim back to a simple claim fo benefits case where the argument is simply over the  cost of the denied procedure.  In other words, the contours of a claim for benefits case under (a)(2) define the scope of relief under (a)(3), regardless of how the claims are actually brought.

For example, the Tebbitts court reasoned that:

Congress intended this provision [[1132(a)(3)]to be a “catchall” that would act “as a safety net, offering appropriate equitable relief for injuries caused by violations that § 502 does not elsewhere adequately remedy.” Varity Corp. v. Howe, 516 U.S. 489, 512, 116 S. Ct. 1065, 134 L. Ed. 2d 130 (1996). This provision authorizes some individualized claims for breach of fiduciary duty, but under precedents handed down by the Eleventh Circuit Court of Appeals, not where plaintiffs had a cause of action based on the same allegations under § 1132(a)(1)(B) or ERISA’s other more specific remedial provisions. See, e.g., Jones v. Am. Gen. Life & Accident Ins. Co., 370 F.3d 1065, 1073-74 (11th Cir.), reh’g denied, 116 Fed. Appx. 254 (11th Cir. 2004); Ogden v. Blue Bell Creameries U.S.A., Inc., 348 F.3d 1284, 1286-88 (11th Cir. 2003); Katz v. Comprehensive Plan of Group Ins., ALLTEL, 197 F.3d 1084, 1088-89 (11th Cir. 1999)  [*11] reh’g denied 209 F.3d 726 (11th Cir. 2000). Accord, Nolte v. BellSouth Corp., No. 1:06-cv-762-WSD, 2007 U.S. Dist. LEXIS 2108, 2007 WL 120842, *3-*7 (N.D. Ga. Jan. 11, 2007).

In light of these cases, it is clear that this Court must determine whether the allegations supporting the § 1132(a)(3) claim were also sufficient to state a cause of action under § 1132(a)(1)(B), regardless of the relief sought. 370 F.3d at 1073. Thus, the fact that Plaintiffs have recast the relief they seek from claims for damages into claims for equitable relief, the Court must focus on whether the factual predicate for their claim could have supported a cause of action under § 1132(a)(1)(B).

The court determined that the plaintiffs could have paid for the scan themselves and filed a claim for benefits.  So, the court reasoned, the plaintiffs just had a garden variety claim denial case under (a)(2).

In the case at hand, it is plain that all of Plaintiffs’ complaints against Defendants arise out of a denial of coverage for a CT scan. Upon that denial, Plaintiffs could have paid for the test themselves and then sought reimbursement through a § 1132(a)(1)(B) action or file such an action seeking a preliminary injunction. They could have filed  suit pursuant to § 1132(a)(1)(B) seeking clarification of their rights to future benefits under the terms of the plan. Plaintiffs elected not to pursue their remedies under § 1132(a)(1)(B), but the remedies were available to them. Because Plaintiffs had an adequate remedy under § 1132(a)(1)(B), they cannot assert a § 1132(a)(3) claim even if their § 1132(a)(1)(B) has been lost. See Ogden, 348 F.3d at 1287; Katz, 197 F.3d at 1089. Thus, Plaintiffs’ claim pursuant to § 1132(a)(3) is due to be DISMISSED.

As I mentioned at the outset, the plaintiffs did have an estoppel argument.  It did not fare any better, however.  The opinion really does not provide much for evaluation of this claim and that may be because there simply weren’t sufficient facts to allege a well-rounded ERISA claim.  At least, that is what the court found, stating:

Defendants contend that Count Two of the Amended Complaint must be dismissed because Plaintiffs have failed to sufficiently plead the necessary facts to support a claim for equitable estoppel. Plaintiffs make no response in opposition to this contention. “This circuit has created a very narrow common law doctrine under ERISA for equitable estoppel.” Katz, 197 F.3d at 1090 (citing Glass v. United of Omaha Life Ins. Co., 33 F.3d 1341, 1347 (11th Cir. 1994) and Kane v. Aetna Life Ins., 893 F.2d 1283, 1285-86 (11th Cir.), cert. denied, 498 U.S. 890, 111 S. Ct. 232, 112 L. Ed. 2d 192 (1990)). Such a claim for equitable estoppel under ERISA is “only available when (1) the provisions of the plan  at issue are ambiguous, and (2) representations are made which constitute an oral interpretation of the ambiguity.” Id.

Having reviewed the Amended Complaint, the Court cannot find that Plaintiffs have alleged enough facts to state a claim of equitable estoppel under ERISA to show that relief that is plausible on this claim and they have certainly not presented a complaint which on its face provides the grounds of their entitlement to relief on this claim. Accordingly, the motions to dismiss are due to be GRANTED as to Count Two of the Complaint.

Note:   The plaintiff originally challenged the application of ERISA to the plan, but the court held otherwise.  The coverage was under the “Medical Association of the State of Alabama Group Health Care Plan” which the plaintiff argued was not an employee benefit plan within the meaning of ERISA.   (“The MASA policy was issued by Defendant Blue Cross Blue Shield (“Blue Cross”) and administered in part by Defendant CareCore National, LLC “).  That was actually a good strategic angle though unavailing on these facts.
Eleventh Circuit On (a)(3) – From Jones v. Am. Gen. Life & Accident Ins. Co., 370 F.3d 1065 (11th Cir. Ga. 2004), relied upon by the district court:
As we recently explained in  Ogden v. Blue Bell Creameries U.S.A., Inc., 348 F.3d 1284 (11th Cir. 2003), and as Varity itself makes clear, “the central focus of the Varity inquiry involves whether Congress has provided an adequate remedy . . . elsewhere in the ERISA statutory framework.”  Id. at 1288 (internal quotations omitted) (emphasis added); see also  Varity, 516 U.S. at 515, 116 S. Ct. at 1079 (stating inquiry as whether “Congress elsewhere provided adequate relief for a beneficiary’s injury”) (emphasis added). Thus, for purposes of establishing whether the Appellants had stated a claim under Section 502(a)(3), the district court should have considered whether the allegations supporting the Section 502(a)(3) claim were also sufficient to state a cause of action under Section 502(a)(1)(B), regardless of the relief sought, and irrespective of  the Appellants’ allegations supporting their other claims.

:: Indemnification Provisions: Do They Apply To Excuse A Party’s Own Wrongdoing?

Only after the first tranche of the settlement funds had been distributed was a challenge raised in late January 2007 by a dissatisfied class member as to the accuracy of the distribution. Upon investigating, Hewitt represents that it discovered that an archived computer system used to calculate ESOP class member allocations contained an incorrect share value for January 1, 1998, resulting in overly large losses to participants holding ESOP shares at the start of the class period. As a result, excessive amounts of the settlement proceeds were distributed to them at the expense of other class members who received underpayments.

Enron Corp. Sav. Plan v. Hewitt Assocs., L.L.C., 2009 U.S. Dist. LEXIS 34569 (S.D. Tex. Apr. 23, 2009)

A novel indemnification issue arose in the context of the complex ERISA litigation before U.S. District Court Judge Melinda Harmon in the Texas Southern District.  Can a party invoke an indemnification provision in an administrative services agreement as a defense to its own negligence?

The facts are quite complex, but unnecessary for comprehending the essential issue at stake here.   The litigation is not about the Enron class action settlement, but about mistakes in calculation of entitlement to the settlement funds.

In short, the critical issue is responsibility for losses and expenses resulting from Hewitt’s mistaken calculations for distribution of the first tranche of the settlement funds, as well as for defense of claims brought against Hewitt by Enron Corp. Savings Plan and the Administrative Committee of the Enron Savings Plan.

The procedural posture of the case was motion to dismiss Hewitt’s declaratory judgment action seeking to establish a right to indemnification from Enron under the administrative services agreement.

The Administrative Services Agreement

Enron argued that, under the express terms of the ASA, Hewitt is the only party required to provide indemnification against damages arising out of Hewitt’s own conduct.

Moreover, Enron observes “[i]t would be incongruous indeed for Hewitt to be both obligated to provide indemnification to Enron for Hewitt’s own conduct and entitled to indemnification from Enron for damages resulting from Hewitt’s own conduct. 

 Texas Fair Notice Doctrine

Enron buttressed its argument with a state law contractual doctrine requiring conspicuity in indemnification provisions.

Furthermore, argues Enron, even if Hewitt did state a claim under the ASA for contractual indemnity by Enron for Hewitt’s own conduct, it is unenforceable under Texas’ fair notice doctrine. Under Texas law, a contractual provision to indemnify a party for its own negligence must afford fair notice of its existence.

Actual Notice

Hewitt countered that (1) the ASA not only meets the fair notice requirements, but (2) even if it did not, Hewitt is entitled to demonstrate that Enron had actual notice and knowledge of its obligations to indemnify Hewitt.

The Court Decides

This Court “fully concurred]” with Enron’s reasoning. The Court concluded that “there is no basis for Hewitt’s claim for contractual indemnification for damages Hewitt suffered as a result of its own conduct.”

 Hewitt’s forced pastiche of provisions in the ASA, unconnected by proximity, reference, format, or logic, does not create a clear statement sufficient to indemnify Hewitt for damages arising from its own conduct.

Nor did Hewitt make out well with the fair notice doctrine.

[T]he Court concludes that the ASA fails to satisfy the express negligence doctrine. As the party that drafted the ASA and the party seeking indemnification from the consequences of its own negligence, Hewitt has failed to express clearly and in specific terms within the four corners of the contract the intent of the parties to the ASA to include a viable agreement to indemnify Hewitt for the results of its own negligence.

The Court thus held for Enron, stating:

. . . because the Court has concluded that the ASA does not oblige Enron to indemnify Hewitt for damages to Hewitt resulting from Hewitt’s own conduct, it also concludes that Hewitt fails to state a claim in its Declaratory Judgment Complaint, Third Party Complaint, and Counterclaim for indemnification against Enron for those damages.

Note:   Actual notice being a fact issue, it remains possible for Hewitt to make out a defense on this basis as discovery proceeds in the case.

Because the actual knowledge exception is in the nature of an affirmative defense to a claim of lack of fair notice, the burden is on the indemnitee to prove actual notice or knowledge. U.S. Rentals, Inc. v. Mundy, 901 S.W.2d 789, 792-93 & n.8 (Tex. App.–Houston [14 Dist.] 1995, writ denied); Interstate Northborough Partners v. Examination Management Serv., Inc., No. 14-96-00335-CV, 1998 Tex. App. LEXIS 2824, 1998 WL 242448, *3-4 (Tex. App.–Houston [14 Dist.] 1998); Douglas Cablevision, 992 S.W.2d at 510.

Evidence Showing Notice –  Where actual notice is concerned, the Court noted that:

The indemnitee might meet that burden with evidence of specific negotiation of those contract terms (e.g., by prior drafts), through prior dealings of the parties (e.g., evidence of similar contracts over a number of years with a similar indemnity provision), proof that the provision had been brought to the indemnitor’s attention (e.g., by a prior claim).  Whether an indemnitor had actual notice or knowledge of an indemnity provision is a question of fact. Interstate Northborough, 1998 Tex. App. LEXIS 2824, 1998 WL 242448, *4.

Indemntification Provisions –  Often overlooked, indemnification provisions (like arbitration provisions and choice of venue) are an extremely important issue in review of administrative services agreements.    This case illustrates the range of  unanticipated consequences flowing from these provisions and a good overview of issues for consideration in contract review.

:: Brief Urges Rehearing En Banc Of Seventh Circuit ERISA Fiduciary Case

Hecker v. Deere & Co., 45 Employee Benefits Cas. (BNA) 2761 (7th Cir. Wis. Feb. 12, 2009) began with a preamble that signaled the distaste of the Court for litigation directed at plan asset mismanagment.  Judge Cook opined in the opening paragraph that:

Even before the stock market began its precipitous fall in early October 2008, litigation over alleged mismanagement of defined contribution pension plans was becoming common. This type of litigation received a boost when, in LaRue v. DeWolff, Boberg & Associates, Inc., 128 S.Ct. 1020, 169 L. Ed. 2d 847 (2008), the Supreme Court held that “a participant in a defined contribution pension plan [may] sue a fiduciary whose alleged misconduct  impaired the value of plan assets in the participant’s individual account.” 128 S.Ct. at 1022. Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132(a), provides the basis for such an action.

The ending was no less than advertised from this inauspicious beginning.  The service providers were exonerated from any culpability as functional fiduciaries and Deere was exonerated from any inattentiveness to service fees.

While Deere may not have been behaving admirably by creating the impression that it was generously subsidizing its employees’ investments by paying something to Fidelity Trust when it was doing no such thing, the Complaint does not allege any particular dollar amount that was fraudulently stated. How Fidelity Research decided to allocate the monies it collected (and about which the participants were fully informed) was not, at the time of the events here, something that had to be disclosed. It follows, therefore, that the Hecker group failed to state a claim against Deere based on the revenue-sharing arrangement and the lack of disclosure about it.

The problem depicted in Deere is not a new one.  Plan fiduciaries have known for years that investment firms were charging fees paid with “soft dollars”.  Some took due diligence measures that ameliorated the problem, but many didn’t.

All of this is by way of setting up the essential purpose of this post which is notice of a amici brief posted on SSRN supporting a rehearing en banc in the Deere case.

The abstract:

Amici curiae law professors filed this brief to urge the Seventh Circuit to grant the plaintiffs’ petition for rehearing en banc to clarify the proper scope of the fiduciary duty under ERISA in the context of investment funds. The brief argues that members of the Seventh Circuit have taken conflicting positions on the central issue regarding whether the market for mutual fund fees is competitive, that this case presents an excellent opportunity to reconcile its doctrine in this area, and that the panel’s decision to expand the Section 404(c) exemption to the fiduciary duty eviscerates an essential element in the security of retirement savings plans.

Birdthistle, William A. and Secunda, Paul M.,Seventh Circuit Amicus Brief of Law Professors in Support of Rehearing En Banc, Hecker v. Deere, Nos. 07-3605 & 08-1224(March 18, 2009). Available at SSRN: http://ssrn.com/abstract=1362553

Note:   Drafting a complaint that will survive a motion to dismiss in this context is a daunting task.   As the case developed, the plaintiffs amended their complaint twice.  Nonetheless, the Court found fault.  In their attempt to draw the investment firm into the case, the plaintiffs argued that “notwithstanding the language of the Trust Agreement, Fidelity Trust exercised de facto control over the selection of the funds and Deere rubber-stamped its recommendations.”  The Court rejected this argument, observing “That is not, however, what the Complaint alleges.”

Expense Of Fiduciary Litigation –  The problem for plaintiffs in ERISA litigation such as the Deere case do not end with a potential loss.   Consider this award of costs:

Fidelity asked for $ 186,488.95 in costs, and the court awarded it $ 164,814.43. While this is a substantial amount, we see no abuse of discretion in the district court’s decision. Plaintiffs’ principal complaint is that it was improper to award Fidelity its costs for document selection, as opposed to document processing. Fidelity responds that the costs were for converting computer data into a readable format in response to plaintiffs’ discovery requests; such costs are recoverable under 28 U.S.C. § 1920. The record supports Fidelity’s characterization of the costs, and so we will not disturb the district court’s order

:: Class Actions Suits Alleged Improper Reimbursement Of Out Of Network Providers

I have been reporting the highlights of the Ingenix database controversy which has been at the center of investigation by the New York Attorney General and several significant lawsuits. According to the allegations, the use of a database operated by Ingenix, a subsidiary of United Health Group, has resulted in improper reimbursements of out of network medical providers.

Two new cases involving the Ingenix database have been filed in the New Jersey federal district court, one against CIGNA and the other against Aetna. The plaintiffs are the AMA, several state medical associations and several individual physicians. The plaintiffs seek class action status for the litigation, and base their claims on RICO, ERISA and the Sherman Act. I uploaded the complaints here.

Note: The controversy led to a significant settlement in the Health Net litigation discussed in :: Health Net Settlement At $215 Million May Set Class Action Record. As I noted in :: PHCS Provider Reimbursement Controversy Affects ERISA Self-Funded Health Plans, the case could have broarder implications for the self-funded health plan community. The reason – many claims administrators have relied upon the data in dispute – not just the large MCO’s.

:: Fifth Circuit Holds That ERISA Fiduciary Insurance Coverage Does Not Encompass Alleged COBRA Violations

The relevant Policy provisions, which are expressly described as providing “fiduciary liability coverage,” only insure against claims of “wrongful acts.” The Policy defines “wrongful acts” as  “any breach of the responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan by [ERISA], as amended, . . . or any negligent act, error or omission in the Administration of any Sponsored Plan.” The district court properly found that the COBRA allegations were not covered “wrongful acts” because any alleged failure to offer continuing benefits under its plans rests on Mary Kay as a plan sponsor, and sponsorship acts or omissions are not fiduciary in nature. See 29 U.S.C. § 1161(a); Lockheed Corp. v. Spink, 517 U.S. 882, 890-91, 116 S. Ct. 1783, 135 L. Ed. 2d 153 (1996).

Mary Kay Holding Corp v. Fed. Ins. Co., 2009 U.S. App. LEXIS 2381 (5th Cir. Tex. Feb. 6, 2009)

In this diversity action, the Fifth Circuit construed insurance policy provisions in a dispute over the duty to defend aspect of the insurance coverage.   The Mary Kay organization, as policyholder, filed suit against Federal Insurance Company (”FIC”) in response to FIC’s refusal to indemnify or defend Mary Kay in a suit brought against it by Marketing Specialists Corporation and others (collectively, “MSC”).

The Court held for the carrier, finding that the claims against Mary Kay by MSC related to plan sponsor functions, not “wrongful acts” as an ERISA fiduciary.  This finding was fatal to Mary Kay’s claims.

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:: How Long Is Too Long In An ERISA Case?

Therefore, the circuit courts generally have refused to apply the ERISA statute of limitations to any ERISA action that arises under a provision other than the fiduciary duty section for plan recoveries.  These other ERISA causes of action are most notably the informational penalty lawsuit,  the benefits due lawsuit, the equitable remedy lawsuit to enforce various plan provisions,  the employer retaliatory discrimination lawsuit,  and the employer delinquent contribution lawsuit.

In these five situations, the circuit courts have opted to use other law to determine the limitations period. Surprisingly, the circuit courts, rather than developing a uniform federal common law rule applicable to all persons similarly situated, have instead chosen to use the very same state law that ERISA supposedly preempted. Even more shocking is that the state law generally chosen is the same contract law rejected for determining whether the court should conduct the ERISA lawsuit by jury trial.

George Lee Flint, Jr., ERISA: Fumbling the Limitations Period 84 Neb. L. Rev. 313 (2005)

Merits of a case aside, it must be timely.  What is timely under ERISA?  The question can be quite troublesome.

In Pressley v. Tupperware LTD, the Fourth Circuit has recently held that 29 U.S.C. 1132(c) claims for failure to respond for a request for information are subject to a three year statute of limitations (applying South Carolina law).

I posted today a query about the limitations period proper  for assertion of a ERISA plan reimbursement claim. As noted in that context, the reimbursement right must be authorized under ERISA Section 502(a)(3).  As an example of how a court might approach the issue, I noted that;

The Fourth Circuit has held that a claim asserted under 502 of ERISA is analogous to a contract claim and, according to one district court, is thus governed by the limitations period applicable to contract actions in the forum state. See, Lincoln Gen. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 425 F. Supp. 2d 738 (E.D. Va. 2006). In Lincoln the district court applied a 5 year limitations period based upon Virginia law.

As the law review article noted above indicates, however, the questions are remarkably varied considering the vaunted comprehensive and reticulated nature of the ERISA statute.

:: District Court Holds That Procedural Conflict Results In Expanded Discovery Rights

Two types of potential conflicts can be alleged by a plaintiff, a structural conflict or a procedural conflict. “The structural inquiry focuses on the financial incentives created by the way the plan is organized, whereas the procedural inquiry focuses on how the administrator treated the particular claimant.” Post, 501 F.3d at 162.

A structural conflict arises when an entity “both determines whether an employee is eligible for benefits” and also pays benefits under the plan. Glenn, 128 S.Ct. at 2346. A procedural conflict involves the examination of “the process by which the administrator came to its decision to determine whether there is evidence  of bias.” Post, 501 F.3d at 165 (citing Pinto, 214 F.3d at 393).

Kalp v. Life Ins. Co. of N. Am., 2009 U.S. Dist. LEXIS 7957 (W.D. Pa. Feb. 4, 2009)

In this dispute over long term disability benefits, the district court addressed the scope permissible discovery and the proper standard of review.   Given the procedural irregularities found in the record, the court permitted rather extensive discovery beyond the administrative record.

In addition, the recent Supreme Court decision in MetLife v. Glenn forced the district court to consider that decision’s effect of Third Circuit’s use of a “sliding scale” of heightened scrutiny where the plan fiduciary operated under a conflict of interest.    

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:: How To Address Protected Health Information Issues Under HIPAA In ERISA Litigation

Whether plaintiff or defendant, obligations to protect health information increasingly present obstacles to progress in ERISA litigation. A recent district court order serves as an example of how parties may reach an accord that assures confidentiality of protected health information without thwarting necessary discovery in development of issues central to the case.

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:: Strategic Decisions In Pleading (And Defending) Provider Reimbursement Claims – A Case Study

St. Luke’s may amend within thirty days. If St. Luke’s amends to assert an ERISA claim, the personal jurisdiction issue is far simpler.  “[U]nder ERISA’s nationwide service of process provision,” 29 U.S.C. § 1132(e)(2), “[a] court may exercise personal jurisdiction over the defendant if it determines that the defendant has sufficient ties to the United States.” . . . Because BCBSLA has sufficient contacts with the United States, this court would have personal jurisdiction if St. Luke’s were to amend to assert claims under ERISA.

St. Luke’s Episcopal Hosp. v. La. Health Serv. & Indem. Co., 2009 U.S. Dist. LEXIS 388 (S.D. Tex. Jan. 6, 2009) (citations omitted)

This recent opinion from the Southern District of Texas provides an excellent insight into the strategic decisions involved in provider reimbursement litigation. In the final analysis, the provider’s attempt to assert state law remedies in state court against the Blue Cross defendant failed for want of jurisdiction. All was not lost, however, since the ruling left open the avenue for an amended complaint stating a claim under ERISA on principles of derivative standing (via assignment of benefits).

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:: ERISA Plan Claims Dismissed As Jurisdictionally Flawed

Plaintiff also claims it is a fiduciary. However, Plaintiff has offered no authority for this claim, nor does the amended complaint contain allegations that would support this contention. Plaintiff merely alleges that it is an employee welfare benefit plan established and maintained to provide insurance and related benefits to participants and beneficiaries. (Plaintiff’s Amended Complaint, P 9.)  Nowhere did Plaintiff allege that it is its own fiduciary.

Nat’l Prod. Workers Union Ins. Trust v. Harter, 2008 U.S. Dist. LEXIS 99986 (N.D. Ill. Dec. 10, 2008)

Is a plan a proper plaintiff to assert breach of fiduciary claims?  That was the issue before the district court in the Harter case.  The facts involved various allegations of misfeasance and professional malpractice against a set of consultants and insurance brokers.

The plan made the following jurisdictional allegations:

Trust makes the following allegations.

That it is an employee welfare benefit plan within the meaning of ERISA, 29 U.S.C. § 1002(1), which was maintained for the purpose of providing insurance and related benefits to eligible participants and beneficiaries.

That the Defendants fraudulently concealed their relationships and failed to objectively advise Trust in the management of the employee benefit plan in order to receive unreasonable compensation.

That the Court has subject matter-jurisdiction over the ERISA claims pursuant to 29 U.S.C. § 1132(e)(1).

Trust alleges that each Defendant was a fiduciary under ERISA and alleges five counts under ERISA, including three counts of breach of fiduciary duty, one count of prohibited transactions, and a count of investment advice.

Trust also alleges five supplemental state claims pursuant to 28 U.S.C. § 1367. These supplemental claims include fraud, breach of contract, negligence, and two counts of malpractice.


The defendants raised a question of subject matter jurisdiction – and the district court ruled in their favor.  To frame the argument, here is the relevant statutory grant of jurisdiction:

(e) Jurisdiction

(1) Except for action under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter brought by the Secretary or by a participant, beneficiary, fiduciary, or any person referred to in section 1021(f)(1) of this title.

29 U.S.C. § 1132(e)(1) 

(Note that employee benefit plans are not included in that provision.)

The court observed that the district courts are courts of limited jurisdiction (citing, Amalgamated Industrial Union Local 44-A Health and Welfare Fund v. Webb, 562 F. Supp. 185, 187 (N.D. Ill. 1983)), and that the language of Section 1132(e)(1) was an exclusive grant of subject-matter jurisdiction for an ERISA claim.  Thus, under a long line of Seventh Circuit decisions interpreting 29 U.S.C. § 1132(e)(1), employee benefit plans do not have standing to sue under ERISA.  

Furthermore, the district court held that the plan was not a fiduciary, stating:

Plaintiff also claims it is a fiduciary. However, Plaintiff has offered no authority for this claim, nor does the amended complaint contain allegations that would support this contention. Plaintiff merely alleges that it is an employee welfare benefit plan established and maintained to provide insurance and related benefits to participants and beneficiaries. (Plaintiff’s Amended Complaint, P 9.) Nowhere did Plaintiff allege that it is its own fiduciary.

Note:  The cases relied on by the defendants were:

 Giardono v. Jones, 867 F.2d 409, 413 (7th Cir. 1989); Financial Institutions Employee Benefit Trust v. Financial Ins. Serv. Consultants, Inc., Case No. 92 C 0620, 1992 U.S. Dist. LEXIS 14252, 1992 WL 245527 (N.D. Ill. Sept. 21, 1992); Contract Cleaning Maintenance, Inc. Defined Benefit Plan v. Marks, Case No. 94 C 7204, 1995 U.S. Dist. LEXIS 11879, 1995 WL 495922 (N. D. I11. Aug. 16, 1995); Chicago District Council of Carpenters Pension Fund v. Reinke Insulation Co., Case No. 94 C 2296, 1995 U.S. Dist. LEXIS 8727, 1995 WL 383007 (N.D. Ill. June 23, 1995).

Leave To Amend –  All was not lost, however.  Though the allegations in the plaintiff’s complaint failed to show that it had standing to sue under ERISA, the court granted leave to file a second amended complaint.

:: The Fiduciary Exception To Attorney Client Privilege In ERISA Cases

In the context of ERISA, courts have found that an ERISA plan fiduciary generally may not assert the attorney-client privilege against plan participants with regard to matters of plan administration.

Tatum v. R.J. Reynolds Tobacco Co., 247 F.R.D. 488 (M.D.N.C. 2008)

For those that find chess insufficiently challenging, there is a variant, three-dimensional chess.  It’s played (evidently) using five boards to similate play through a cube.

Perhaps the analogy isn’t too strained when I compare that odd game to ERISA discovery jousts when the additional hazard of electronic discovery is added, and then further complicated by the various privacy issues and privilege concerns that often arise.

Stephen Rosenberg really prompted me to think about this with his post expressing concerns about the breadth of discovery obligations under the Federal Rules of Civil Procedure.   The article he posted about outlines significant risks of waiver of privilege by inadvertent disclosures.

Add to that the consideration that, when advising on fiduciary matters, there may be no attorney client privilege, and you have what comes close to the cubic chess game to my way of thinking.  The topic is an interesting one.  Here’s one take on the “fiduciary exception” by the district court quoted above:

A fiduciary exception to the attorney-client privilege has become “well established in federal jurisprudence” of some circuits. Geissal v. Moore Med. Corp., 192 F.R.D. 620, 624 (E.D. Mo. 2000); see, e.g., United States v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999); In re Long Island Lighting Co., 129 F.3d 268, 271-72 (2d Cir. 1997); [**12] Wildbur v. ARCO Chem. Co., 974 F.2d 631, 645 (5th Cir. 1992); Fausek v. White, 965 F.2d 126, 132-33 (6th Cir. 1992); Garner v. Wolfinbarger, 430 F.2d 1093, 1103-04 (5th Cir. 1970); Wash.-Balt. Newspaper Guild, Local 35 v. Wash. Star Co., 543 F. Supp. 906, 909 (D.D.C. 1982).

The fiduciary exception is rooted in English trust law, and has been applied in numerous contexts. Mett, 178 F.3d at 1063. In the context of ERISA, courts have found that an ERISA plan fiduciary generally may not assert the attorney-client privilege against plan participants with regard to matters of plan administration. See, e.g., Mett, 178 F.3d at 1063; Long Island Lighting, 129 F.3d at 271-72; Geissal, 192 F.R.D. at 624; Wash. Star, 543 F. Supp. at 909.

The challenge of the game remains even at this level, however, since:

courts have limited the fiduciary exception, recognizing that “not all acts of the plan administrator which relate to the plan involve the administration of the plan.”

From Stephen’s native Bay State, a district court found the fiduciary exception applicable, stating:

In conclusion, this court finds that the fiduciary exception recognized by the majority of courts that have analyzed the fiduciary exception in the ERISA context should apply in the instant case. Privileged communications between the insurer and its in-house counsel should be protected to the extent they are not related to fiduciary matters, but must be disclosed where they concern matters of plan administration. This application of the fiduciary exception is most consistent with the disclosure requirements and fiduciary obligations established by ERISA, even where, as here, the fiduciary is an insurer.

Smith v. Jefferson Pilot Fin. Ins. Co., 245 F.R.D. 45 (D. Mass. 2007)

Thus, for the ERISA lawyer, the question is not only avoiding waiver of the privilege, but whether there is a privilege – and that will depend on the further question of what court your case happens to be in.

Tip – Communications prior to benefit decisions are more likely to be subject to the exception than subsequent communications.

See also – :: Exhibit A: Your “Confidential” E-Mail – Old E-Mails Prove Damaging To Plaintiffs And Defendants Alike

:: Personal Liability Claims Based Upon Unpaid Plan Contributions Advance

On May 8, 2003, United States magistrate Judge Roanne L. Mann issued a report and Recommendation (“R&R”), finding damages in favor of the plaintiffs in the amount of $ 2,272,647.80 On February 22, 2006, this Court adopted Judge Mann’s R&R in its entirety and entered judgment for the plaintiffs. However, by the time, both LMG and All Pro had declared bankruptcy. The judgment remains unsatisfied.

Calemine v. Gesell, 2008 U.S. Dist. LEXIS 78042, 1-17 (E.D.N.Y. Oct. 2, 2008)

In difficult economic times, a case like Calemine resonates more than it would otherwise.  Here, the plaintiffs obtained a judgment, but the defendant employers declared bankruptcy.  Unpaid plan contributions lay at the center of the dispute.  This recent opinion illustrates that judgments against the bankrupt employer may not be worthless after all.

Posture Of The Case

It is important to note that the facts were all assumed to be true and provable since the issues arose in the context of the defendants’ motions to dismiss.

Dismissal under Rule 12(b)(6) is appropriate if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80, (1957). Furthermore, when considering a motion to dismiss a complaint under Rule 12(b)(6), a court “must accept as true all of the factual allegations set out in plaintiff’s complaint, draw inferences from those allegations in the light most favorable to plaintiff, and construe the complaint liberally.” Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001).

With that caveat in mind, the legal arguments presented are recapped below.

Breach Of Fiduciary Duty Claims

The defendants, corporate officers of the defunct company, asserted that the plaintiff’s claims based upon alleged breaches of fiduciary duty were time-barred.  The Court agreed.

A couple of points are still worth noting here.

First, the court, for the purposes of this motion, assumed that the missing contributions were assets of the Fund’s plan.  The supporting authorities are noted in this excerpt:

Pension Benefit Guaranty Corp. v. Solmsen, 671 F. Supp. 938 (E.D.N.Y. 1987), is among the regularly-cited cases in which “courts have consistently held that employers who exercise discretionary control over funds that are designated for deposit into an ERISA fund qualify as fiduciaries, including individuals managing corporations obliged to mare fund contributions. NYSA-ILA Med. & Clinical Servs. Fund By & Through Capo v. Catucci, 60 F. Supp. 2d 194, 202 (S.D.N.Y. 1999). See also Connors v. Paybra Mining Co., 807 F. Supp 1242, 1246 (S.D.W.V. 1992) (individuals who, as officers, directors, and sole shareholders of corporations in debt to ERISA funds, “exercised broad personal discretion and control over the assets and spending practices of the corporat[ions], … [and] decisions on which bills to pay and … which of those bills were being delayed to pay…. Contributions due and owing the funds were withheld and directed elsewhere and such spending decisions were the personal, conscious choices of these Defendants.”)

Second, the court held that the plaintiffs made out a sufficient case that the individual defendants were fiduciaries:

Plaintiffs allege that Defendant  [*9] Robert Gesell was an LMG shareholder and President of LMG. Robert Gesell ran LMG Air Corporation, and he was the president and the officer in charge. Id. at 7. He also signed the collective bargaining agreements with Local Union 295. Id. Defendant Ronald Gesell was an LMG shareholder, the Secretary-Treasury of LMG and the general manger of All Pro. Id. At trial, Ronald Gesell verified that he was “primarily in charge of All Pro . . . .” Id. Defendant Eileen Gesell was an All Pro shareholder and held the office of President. At trial, Ronald Gesell confirmed that that Eileen Gesell supervised the bookkeeping and accounting for All Pro. Id. at 7. Under these circumstances, for the purposes of the Rule 12(b)(6) and 12(b)(1) motions, Defendants do qualify as fiduciaries.

Statute Of Limitations

The breach of fiduciary duty claims ran afoul of the statute of limitations, however, as the court rejected a “continuing violation” theory advanced by the plaintiffs:

I. . . as late as 1998, the Plaintiffs’ were aware that the corporations were operating illegally as “alter-ego” companies and that therefore the Defendants, as controlling corporate officials, were also responsible for delinquent contributions to their Fund. This claim is not “inherently susceptible to being broken down into a series of independent and distinct events or wrongs, each having its own associated damages.” . . . Indeed, the gravamen of the Plaintiffs’ complaint is grounded in facts known to them since the entry of the 1998 judgment. The instant action was filed August 29, 2006, and this date exceeds the six-year applicable statute of limitations. Therefore, the Court grants Defendants’ motion to dismiss Plaintiffs’ claim for breach of fiduciary duty.

Enforcement Of Judgment Against Plan Fiduciaries

The plaintiffs were not finished, however, as they had an argument based upon enforcement of the judgments against the bankrupt corporation.  The plaintiffs sought to hold the Defendants personally liable for the corporations’ judgment  of liability to the Fund “pursuant to ERISA and federal common law.”

The plaintiff’s theory gave them a important advantage in view of the limitations period issue.

Plaintiffs rely on the 20-year stature of limitations to enforce judgments, found in N.Y. C.P.L.R. § 211(b). For the purposes of deciding this motion, based on the allegations of the Amended Complaint, this Court accepts Plaintiffs’ allegations that Defendants (1) are controlling officers, and (2) defrauded and conspired to defraud the Fund’s plan of required contributions.

. . . .

The outstanding judgment for damages owed to the Fund’s plan by the corporation is dated February 17, 2006 in the amount of $ 2,272,647. Therefore, the Plaintiffs’ claims to hold the Defendants’ personally liable for the corporation’s judgment are well within the 20 year limitations window. Defendants’ motion to dismiss Plaintiffs’ second claim is denied.

Action For An Accounting

The plaintiffs’ fortunes improved as well on their claim for an accounting.

As corporate controlling officials of All Pro and LMG, the Defendants are required to provide a financial accounting based on the actions taken in their capacity as corporate officers.  Thus Defendant’s motion to dismiss the Plaintiffs’ third claim is denied.

Piercing the Corporate Veil

The plaintiff’s advanced yet another state law claim that found favor with the court in their bid to peirce the corporate veil”.  The defendants met this argument with jurisdictional defenses that were rebuffed by the court.

As noted supra, this Court found that the Plaintiffs have adequately demonstrated the possibility that Defendants’ may bear personal liability under ERISA for defrauding or conspiring to defraud a benefit fund of contributions, while acting in their role as corporate officers. Such fraud is explicitly recognized as the type that can expose corporate officers to personal liability under ERISA. Therefore, contrary to the Defendants’ argument, the Plaintiffs have established subject matter jurisdiction based upon an underlying violation of ERISA.

Note: It is important to note that the claim attempting to enforce the judgment was based upon ERISA and federal common law.  This theory has a lineage that must be carefully considered in evaluating the viability of the claim.  The Second Circuit caselaw begins with Leddy v. Standard Drywall, Inc., 875 F.2d 383, 388 (2d Cir. 1989).  The district court commented on that case as follows:

There [in Leddy], the Court relied on Fair Labor Standards Act precedents that imposed liability on “a corporate officer with operational control who [was] directly responsible for a failure to pay statutorily required wages.” Id. The court held that “at least to the extent that a controlling corporate official defrauds or conspires to defraud a benefit fund of required contributions, the official is individually liable under Section 502 of ERISA, 29 U.S.C. § 1132.” Id. at 388.

In this case, Defendants were corporate officials and exercised control & power over entities deemed to have been operated illegally as “alter-egos.” It is argued that the Defendants, in their capacity as corporate officers are exposed to liability for judgments entered against the corporation. These facts fit squarely within the exception to the rule wherein a corporate official defrauds or conspires to defraud a benefit fund of required official might be held personally liable under ERISA.

As noted at the outset, the alleged facts were assumed to be true for purposes of the motion.  As the case develops, the plaintiffs have a substantial proof burden to meet in order to impose liability on the theories alleged in their Amended Complaint.

The General Rule – As a general rule, individuals are not liable for corporate ERISA obligations solely by virtue of his and her role as officer, shareholder or manager. Cement & Concrete Workers Dist. Counsil Welfare Fund, Pension Fund, Legal Servs Fund & Annuity Fund v. Lollo, 148 F.3d 194, 195 (2d Cir. N.Y.1998) laid the groundwork for the exception invoked above, stating:

“one circumstance pertinent to this matter in which a corporate official might be personally liable under ERISA — namely where a controlling corporate official defrauds or conspires to defraud a benefit fund of required contributions.”

The Second Circuit appears to be a trailblazer on this issue, incidently, as noted in IUE AFL-CIO Pension Fund v. Locke Machine Co., Div. of U.S. Components Corp., 726 F. Supp. 561, 567 (D.N.J. 1989)

Only one circuit has suggested a corporate official may be personally liable for delinquent contributions without piercing the corporate veil. In Leddy v. Standard Drywall, Inc., 875 F.2d 383 (2d Cir. 1989), the Second Circuit held the president of the defendant corporation liable for delinquent contributions despite the finding of the lower court that there was insufficient evidence to pierce the corporate veil. Id. at 387. However, in Leddy, the president of the corporation had been indicted, along with other corporate officials, for defrauding the pension fund from contributions. Id. at 385.

The Scope Of The Exception – In my view, the success of such claims will typically require that the defendant be required to make the contributions, e.g., under the terms of a CBA plus a successful alter ego argument, and this in the context of fraudulent or deceptive conduct.  A personal guarantee of corporate obligations in the course of a workout might raise interesting possibilities beyond this context, but I am not aware of any cases on this point.


:: Class Action Complaint Sufficient To Meet Twombley Standards

The complaint, however, clearly states what Anthem is alleged to have done: deny, as a matter of policy and in violation of ERISA, Plaintiff’s request for insurance benefits to cover RFA treatment, on the basis that the treatment is considered investigational. This is far from a “formulaic recitation of the elements of a cause of action,” id., and is sufficient to withstand a motion to dismiss. Nor does Anthem need a more definite statement in order to enable it to raise its defenses in the answer. Cady v. Anthem Blue Cross Life & Health Ins. Co., 2008 U.S. Dist. LEXIS 76783, 17-18 (N.D. Cal. Oct. 2, 2008)

Cady presents a challenge to denial of health plan benefits based upon an “investigational” classification in a class action context.  The lexicographical bent of this case showed itself ahead of the dispute over what treatments are investigational, however, as the principal defendant began with the parsing of terms descriptive of the “plan administrator.”

Anthem concedes that Plaintiff has standing to sue it, but asserts that the complaint is nonetheless insufficient to state a claim against it. It notes that the complaint does not identify Anthem as a “plan administrator,” and argues that it is therefore not a proper defendant.

For this proposition, Anthem relied upon Everhart v. Allmerica Financial Life Insurance Co., 275 F.3d 751, 756 (9th Cir. 2001), which affirmed that an ERISA action for benefits may not be brought against a third-party insurer who acts as a claims administrator, but rather must be brought against the plan administrator. The district court turned to its dictionary.  The OED resolved the dispute in favor of the plaintiff, as the court observed that:

It is true that the complaint does not state that Anthem is the “plan administrator.” But it states, “Cady is a participant in a group health plan . . . administered by defendant BC Life [(Anthem)].” Compl. P 49. Alleging that the plan is “administered by Anthem” is no different than alleging that Anthem is the “plan administrator.” (citing, Oxford English Dictionary, 2d Ed. (1989) (defining “administrator” as “[o]ne who administers”)).

Personally, I am a bit leery of case outcomes determined by resort to dictionaries.  If a statute defines a term, as does ERISA, usage should be ascertained by that special, technical lexicon, not the OED.  In this case, however, the outcome appears substantially justified, and the issue may be revisited if warranted by further factual developments as noted below.

From the plaintiff’s point of view, however, it seems clear enough that specific reference to defendants by statutory designation in the drafting of the complaint will avoid needless linguistic speculations at the motion stage of the case.

The dispute then turned to specificity in the allegations.  Here, the standard is defined in Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955 (2007), a case that is getting cited quite a bit these days.  In that case, the Supreme Court stated that:

in order to survive a motion to dismiss, the factual allegations “must be enough to raise a right to relief above the speculative level.” 127 S. Ct. at 1965.

Once again, the plaintiff cleared the hurdle.

he complaint, however, clearly states what Anthem is alleged to have done: deny, as a matter of policy and in violatiTon of ERISA, Plaintiff’s request for insurance benefits to cover RFA treatment, on the basis that the treatment is considered investigational.  This is far from a “formulaic recitation of the elements of a cause of action,” id., and is sufficient to withstand a motion to dismiss. Nor does Anthem need a more definite statement in order to enable it to raise its defenses in the answer.

Note: The OED will not have the last word.  The issues arose in the posture of a motion to dismiss.  Subsequent proceedings may show that Anthem is not the plan administrator, and that would be a critical failing of the plaintiff’s claims:

Anthem also cites Ford v. MCI Communications Corp. Health and Welfare Plan, 399 F.3d 1076 (9th Cir. 2005), in support of its position. In Ford, the Ninth Circuit characterized its decision in Everhart as “reject[ing] the argument that an insurer who controlled the administration of the plan and made the discretionary decisions as to whether benefits were owed could be sued under § 1132(a)(1)(B).” Id. at 1082 (internal quotation marks omitted). The court also noted that ERISA defines a “plan administrator” as “the person specifically so designated by the terms of the instrument under which the plan is operated.” 29 U.S.C. § 1002(16)(A)(I). However, neither Ford nor Everhart addressed the sufficiency of the allegations in the complaint on a motion to dismiss; in both cases, it had already been established that the defendant, despite arguably administering the plan, was not designated as the plan administrator in the operative instrument. If the evidence demonstrates that Anthem is not in fact the administrator designated in the plan’s instrument, Anthem may move for summary judgment. However, dismissing the complaint at this stage would elevate form over substance and would not serve the goal of judicial efficiency, in that Plaintiff would be given leave to amend the complaint to allege that Anthem is the plan administrator.

Detailed Factual Obligations Not Required – From Twombley


While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ibid.; Sanjuan v. American Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (CA7 1994), a plaintiff’s obligation to provide the  “grounds” of his “entitle[ment] to relief” requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do, see Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L. Ed. 2d 209 (1986) (on a motion to dismiss, courts “are not bound to accept as true a legal conclusion couched as a factual allegation”). Factual allegations must be enough to raise a right to relief above the speculative level, see 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp 235-236 (3d ed. 2004) (hereinafter Wright & Miller) (“[T]he pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”), on the assumption that all the allegations in the complaint are true (even if doubtful in fact), see, e.g., Swierkiewicz v. Sorema N. A., 534 U.S. 506, 508, n. 1, 122 S. Ct. 992, 152 L. Ed. 2d 1 (2002); Neitzke v. Williams, 490 U.S. 319, 327, 109 S. Ct. 1827, 104 L. Ed. 2d 338 (1989) (“Rule 12(b)(6) does not countenance . . . dismissals based on a judge’s disbelief of a complaint’s factual allegations”); Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 40 L. Ed. 2d 90 (1974) (a well-pleaded complaint may proceed even if it appears “that a recovery is very remote and unlikely”).

Twombley has particular importance for ERISA practitioners given the substantial amount of motion practice in this field.  LEXIS shows over 10,000 cites to the opinion (granted not all in the ERISA context) which I think is simply amazing given its relatively recent vintage.

:: ERISA Subrogation Litigation In Perspective – Another Look At The Mills Decision

In a huge win for lawyers representing children injured in auto accidents, a federal judge has ruled that an ERISA insurer has no right to enforcement of a lien for medical expenses when the minor’s settlement funds are placed in a “special-needs trust.” Law.com, ERISA Bars Medical Expense Lien Against Child’s Trust (July 26, 2007)

I noted on Tuesday that the decision in Mills, Jr. v. London Grove Tp., Slip Copy, 2007 WL 2085365 (E.D.Pa.) (July 19, 2007) would likely lead to misleading inferences in short order. The article yesterday excerpted above provides timely proof of that surmise.

The unfortunate consequence will needless litigation and legal fees demonstrating what the Supreme Court has already decided in Sereboff. Some lawyers and consultants may benefit from the ensuing conflicts, but their clients will seldom have anything to show for the effort.

Continue reading

:: Attorneys Potentially Liable As ERISA Fiduciaries

The Reimbursement Agreement provides that: “I hereby direct my attorney or attorneys or any person or entity holding proceeds on my behalf to pay over such proceeds to the Plan.” Plaintiffs allege that Ross is in receipt of $50,000 of Papero’s $150,000 settlement. As possessor of a portion of the funds received by Papero, Ross is obligated to the Plan, pursuant to the terms of the Agreement, to “pay over” the moneys due and owing to plaintiffs. Defendant Ross, therefore, need not be a signatory to the Agreement in order to be bound by it. Trustees of The Teamsters Local Union No. 443 Health Services and Trustees of The Teamsters Local Union No. 443 Health Services and Ins. Plan v. Papero, — F.Supp.2d —-, 2007 WL 1189483 (D.Conn.) (April 19, 2007)

In this recent case, a health plan sued personal injury attorneys who failed to reimburse the plan for accident-related expenditures out of a tort settlement. The attorneys filed a motion to dismiss. The district court held that the attorneys were potentially ERISA fiduciaries with respect to the recovered funds and refused to dismiss the plan’s claims.

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:: The Continuing Controversy Over Standing To Sue Under ERISA

In our view, the term “participant” is naturally read to mean either “employees in, or reasonably expected to be in, currently covered employment,” Saladino v. I.L.G.W.U. National Retirement Fund, 754 F.2d 473, 476 (CA2 1985), or former employees who “have … a reasonable expectation of returning to covered employment” or who have “a colorable claim” to vested benefits, Kuntz v. Reese, 785 F.2d 1410, 1411 (CA9) (per curiam), cert. denied, 479 U.S. 916, 107 S.Ct. 318, 93 L.Ed.2d 291 (1986). In order to establish that he or she “may become eligible” for benefits, a claimant must have a colorable claim that (1) he or she will prevail in a suit for benefits, or that (2) eligibility requirements*118 will be fulfilled in the future. “This view attributes conventional meanings to the statutory language since all employees in covered employment and former employees with a colorable claim to vested benefits ‘may become eligible.’ A former employee who has neither a reasonable expectation of returning to covered employment nor a colorable claim to vested benefits, however, simply does not fit within the [phrase] ‘may become eligible.’ ” Saladino v. I.L.G.W.U. National Retirement Fund, supra, at 476. Firestone Tire & Rubber v. Bruch, 489 U.S. 101, 117, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989)

ERISA creates a right of action only for participants, beneficiaries, and fiduciaries of benefits plans. 29 U.S.C. § 1132(a)(3). Thus, the courts have held that, if a plaintiff does not fit within these categories, he or she lacks standing to sue under ERISA.

The standing concept has been refined as an effective defense to ERISA claims and may be rightfully regarded as one of the current hot topics in the ERISA field. The notion of standing is so fundamental that it can be overlooked, and its contours sufficiently vague to allow for a division of judicial opinion as to its application.

As one of the most effective tools for dispatching an ERISA case, however, the question of standing should be considered in every case by both plaintiff and defendant alike. The filing of briefs by the Solicitor General’s Office in two recent cases, cited in the commentary note below, underscores the differences of opinion on the proper approach to the issue.

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:: DOL Enforcement Litigation Year To Date

From the Department of Labor, these are the reported enforcement actions for 2007 thus far:

Continue reading

:: How Long Before It Is Too Late? – ERISA Claims & Limitation of Actions By Contract

In this claim for benefits case under ERISA § 502(a)(1)(B) (29 U.S.C. § 1132(a)(1)(B)), the critical issue was the applicable statute of limitations. Koert v. GE Group Life Assur. Co, 2007 WL 595028 C.A.3 (Pa.) (February 27, 2007).

Always a potential hazard for plaintiffs, limitations period issues in ERISA can be particularly tricky as this case illustrates. In 1991, Koert, the plaintiff, began receiving long-term disability benefits from a predecessor-in-interest to General Electric.

On December 14, 2000, GE notified Koert that it was not satisfied that her condition continued to meet the criteria for benefits and that it would terminate her benefits within thirty days.

On January 26, 2001, GE informed Koert that it was terminating her benefits. Koert continued to supply GE with medical evidence in an effort to challenge the benefit determination, but GE did not alter its decision.

In a letter dated March 20, 2003, GE notified Koert that it would not change its determination and that Koert had exhausted the appeal remedy under her policy.

Koert filed suit on December 7, 2004.

When did the limitations period begin to run?

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:: Provider Claims Against Aetna Remanded To State Court: A Suggested Checklist of Removal Factors

In Somerset Orthopedic Associates, P.A. v. Aetna Life Ins. Co., Slip Copy, 2007 WL 432986 (D.N.J.), a healthcare provider sued to recover for services provided to a beneficiary of a group health plan. The Defendant removed the case, asserting federal question jurisdiction under ERISA.

The case provides another chapter in the continuing development of provider/payer caselaw deriving from the important Third Circuit opinion in Pascack Valley Hospital, Inc. v. Local 464A UFCW Welfare Reimbursement Plan, 388 F.3d 393 (3d Cir.2004). The issue holds something of interest for both sides of payment disputes as the outcome will determine both the forum and the remedies available to the litigants.

ERISA’s Claim For Benefits Framework

To establish a frame of reference, provider payment disputes are decided in terms of Section 502(a) of ERISA which allows “a participant or beneficiary” to bring a civil action:

to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B).

As is frequently noted in such litigation, the statute by its terms, limits standing to participants and beneficiaries. To bridge that gap, a provider must obtain standing under ERISA, if an all, by an assignment. Continue reading

:: HIPAA Violations As A Basis For Private Causes of Action

The very concept of HIPAA violations as lending any opportunity for private litigants may seem far-fetched. Nonetheless, recent cases suggest a trend worthy of some reflection.

Stating The Obvious

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), Pub.L. No. 104-191, §§ 261-264, 110 Stat.1936 (1996) provides, among other things, for confidentiality of medical records. To say that HIPAA does not authorize or imply a private right of action would be about as safe an observation as could be conceived.

The supporting authorities are myriad, to wit:

Walker v. Gerald, 2006 WL 1997635, (E.D.La. Jun 27, 2006); Makas v. Miraglia, 2007 WL 152092 (S.D.N.Y. Jan 23, 2007); Univ. of Colo. Hosp. Auth. v. Denver Publ. Co., 340 F.Supp.2d 1142, 1145 (D.Colo.2004); Lester v. M&M Knopf Auto Parts, 2006 WL 2806465,99 Fair Empl.Prac.Cas. (BNA) 546, 546, 18 A.D. Cases 1462, 1462 (W.D.N.Y. Sep 28, 2006); Gliatta v. Stein, 2006 WL 2482019, (W.D.N.Y. Aug 25, 2006); Johnson v. Kachelmeyer, 2006 WL 625837 (W.D.N.Y. Mar 09, 2006) Jones v. Stayner, (not Reported in F.Supp.2d) 2006 WL 1831527 (W.D.La. 2006) ; Cassidy v. Nicolo, 2005 WL 3334523 (W.D.N.Y.2005); Wright v. Combined Ins. Co. of Am., 959 F.Supp. 356, 363 (N.D.Miss.1997) (“in HIPAA, the undersigned cannot find any manifest congressional intent to create a new federal cause of action”); Means v. Ind. Life & Accident Ins. Co., 963 F.Supp. 1131, 1135 (M.D.Ala.1997) (“the court finds no evidence of congressional intent to create a private right of action under the HIPAA”); Brock v. Provident Am. Ins. Co., 144 F.Supp.2d 652, 657 (N.D.Tex.2001); O’Donnell v. Blue Cross Blue Shield of Wyoming, 173 F.Supp.2d 1176, 1180 (D.Wyo.2001).

The Not So Obvious: HIPAA Violations As An Element Of A Distinct Legal Claim

Though HIPAA does not authorize a private cause of action, may a violation of HIPAA nonetheless supply an element of a distinct cause of action? Consider the case of Acosta v. Byrum, 638 S.E.2d 246 (N.C.App.)(December 19, 2006). Continue reading

:: Third Circuit Extends “Clear Repudiation” Rule To Erroneous Benefit Award Claims

Even though we know of no case applying the concept directly to a benefit award, we believe that the principles articulated in clear repudiation cases, which reflect the federal discovery rule, are applicable here. With this in mind, we now consider whether, before Miller’s claims were formally denied, his rights under the LTD plan were “clearly repudiated.”

Miller v. Fortis Benefits Ins. Co., — F.3d —-, 2007 WL 210370 (C.A.3 (N.J.)) (Jan. 29, 2007)

The Third Circuit handed down an important decision yesterday that bears careful reading by ERISA practitioners. On the somewhat tedious subject of when an action accrues for purposes of the applicable limitations period, the Court extended the “clear repudiation” rule applied in benefit denial cases to cases of inaccurate benefit awards. In effect, the ruling treats the award of an incorrect benefit as the denial of a correct benefit. While simple in concept, the holding creates an array of risks to ERISA litigants who will find the ambit of circumstances in which a claims should have been filed earlier now substantially broader. Continue reading

:: Role of In-House Legal Counsel In Claim Investigation Proper Delegation of Authority

[N]othing set forth in ERISA prohibits plan administrators from relying on information provided by and following the recommendations of either in-house or outside attorneys for the employer who sponsors the plan.

Ford v. Motorola Inc. Involuntary Severance Plan, Slip Copy, 2007 WL 162680 (D. Ariz. 2007)(January 18, 2007)

Plaintiff Jenny Ford claimed benefits under the Motorola, Inc. Involuntary Severance Plan. According to the facts of the case, Ford, having several weeks prior advised her supervisor she would be resigning to take a position at Intel, was nonetheless offered severance benefits under the involuntary severance plan. Upon investigation of Plaintiff’s claim, it was learned that the offer of benefits came about as an error, and the claim was subsequently denied.

Involvement of In-House Legal Counsel

The involvement of in-house legal counsel would form a basis of Ford’s claim that that the plan failed to follow procedural requirements. Continue reading

:: Tennessee Medical Association Claims Against Blue Cross Dismissed

On June 19, 2006, three months after argument of the case at bar, the District Court for the Southern District of Florida ended trial court proceedings in In re Managed Care Litig., 430 F.Supp.2d 1336 (S.D.Fla.2006). Motions for summary judgment filed by the last two defendants, United Healthcare, Inc. and Coventry Healthcare, Inc. were granted by the trial court. The parties to many of the cases in the multi-district litigation had settled their claims, and summary judgment had previously been granted in favor of PacifiCare Health Systems, Inc. After all the massive volumes of the multi-district litigation, the Court observed, “Those desiring changes in the way health care is provided in America must either look for remedies before Congress or allow the free market to dictate the results.” 430 F.Supp.2d at 1340. To the extent that this case seeks to use the Tennessee Consumer Protection Act to accomplish what could not be accomplished in the multi-district litigation, it suffers the same fate.

Tennessee Medical Ass’n v. BlueCross BlueShield Slip Copy, 2007 WL 63610 (Tenn.Ct.App.) (January 09, 2007)

Associational standing cases are difficult to plead and prove. This case furnishes another example of that challenge in the context of a provider-payer controversy.

The case originates out of a dispute between Tennessee physicians and Blue Cross Blue Shield, CIGNA and other managed care entities. In the words of the court:

These court actions by TMA are consistent with a nationwide attack on the actions of managed care entities. ( See In re Humana Inc. Managed Care Litig., No. 1334, 2000 U.S.Dist Lexis 5099 (J.P.M.L. Apr. 13, 2000), same being multi-district litigation, centralized in the Southern District of Florida.) Continue reading

: Using The Offset Defense In Recoupment Cases

Finch v. Unum Life Ins. Co. of America, — F.Supp.2d —-, 2006 WL 3735373 (D.Minn.) (December 18, 2006) raises a number of interesting issues in the evolving caselaw of equitable recoupment. The case presents a simple factual pattern of a series of disability payments to plan participants followed by a demand for reimbursement when the plaintiffs received Social Security benefits.

Whether disability carriers may seek to attach Social Security benefits or offset receipt of Social Security benefits constitutes an issue that divides the courts. In Finch, the plaintiffs’ amended complaint challenged the application of the recoupment remedy as well as calculation of the overpayment and the method of offset. More specifically, the plaintiffs’ claims were as follows:

Since filing their Third Amended Complaint, Plaintiffs have withdrawn some of their claims and legal theories. Plaintiffs now argue that Unum has violated ERISA by (1) improperly calculating Paul’s overpayment by including $5,300 in attorney’s fees that Paul never received nor was entitled to receive; (2) not providing Plaintiffs with amended W-2 forms or amended tax information; and (3) demanding immediate lump sum payment of the overpayments rather than allowing Plaintiffs to repay the overpayment on a pro-rated basis. Continue reading

:: Assignments and Contractual Agreements Form Basis For Differing Preemption Outcomes

“[L]awsuits against ERISA plans for commonplace, run-of-the-mill state-law claims-although obviously affecting and involving ERISA plans-are not preempted by ERISA.” Baylor Univ. Med. Center v. Arkansas Blue Cross Blue Shield, 331 F.Supp.2d 503, 507 (N.D.Tex.2004). Thus, “[t]he critical question for courts is whether the provider’s claim is based on a direct cause of action against the managed care company, in which situation it is not preempted, or whether it is derivative to the patient’s cause of action, where ERISA applies.”

The Alabama Dental Ass’n v. Blue Cross and Blue Shield Of AL, Inc., Slip Copy, 2007 WL 25488 (M.D.Ala.) (January 3, 2007)

In what may be described as “A Tale of Two Dentists”, yet another provider reimbursement case is reported involving reimbursement calculations. The first dentist, Sanderson, sued Blue Cross Blue Shield of Alabama (“BCBS”) as an out of network provider as assignee of his patients’ insurance coverage; the second, Mitchell, sued BCBS based upon a provider agreement with BCBS.

Both dentists had submitted their claimed services to BCBS in conformity with Current Dental Technology (“CDT”) codes, the national standard for reporting dental services required by the Federal Government under HIPAA. Both asserted various State law claims based upon allegations that:

BCBS has taken advantage of this arrangement by processing submitted claims through an automated system that automatically decreases the dentists’ compensation. BCBS allegedly achieves this result by “downcoding” and “bundling” submitted services. Downcoding occurs when a claims processor changes the code submitted by a dentist to a service with a less expensive CDT code.

The matter appeared before the district court on various motions, including a motion by the dentists to remand to State court, a motion by BCBS to dismiss the Alabama Dental Association for lack of standing, and a motion to transfer venue. Both the motion to dismiss based upon lack of standing and the motion to transfer venue were granted.

The following addresses the two different outcomes on the preemption issues discussed in the decision on the motion to remand. Continue reading

:: Court Permits Antitrust and RICO Claims To Go Forward Based Upon UCR Database Allegations

The calculation of reimbursement rates under a “usual, customary and reasonable” standard lies at the center of a significant case on the docket in the United States District Court, Southern District of New York. Judge Lawrence M. McKenna handed down a ruling last week that allows the plaintiffs to amend their complaint to state antitrust and RICO claims against the defendants. See, American Medical Ass’n v. United Healthcare Corp. Slip Copy, 2006 WL 3833440 S.D.N.Y. 2006 (December 29, 2006)

The complex case, originating in 2000, involves multiple plaintiffs and defendants. The district court has deftly managed the litigation and, in the most recent ruling, set the stage for a full consideration of all allegations against the defendants.

The Core Dispute

Certain health care plans either directly insured or administered by United Healthcare permitted plan subscribers to obtain health care services from “out-of-network” or “non-participating” physicians. Under the plan United Health Care agreed to reimburse these physicians a certain percentage of the “usual, customary and reasonable” (“UCR”) fees for such services based on United Healthcare’s calculation of the UCR rates.

The plaintiffs allege misconduct in the use of the UCR rates. Initially, the plaintiffs asserted violations of the Employee Retirement Income Security Act (ERISA), as well as, breach of contract and implied covenant of good faith and fair dealing, and deceptive acts and practices in violation of New York law. After initial discovery, the plaintiffs sought to add additional claims of antitrust and RICO violations. In large measure, the district court permitted the plaintiffs to amend their complaint to add these claims in its decision last week. Continue reading

:: First Circuit Court of Appeals Leaves Door Open to Broader View of Section 502(a)(3) Equitable Relief

We have no occasion to address the broader controversy about the scope of section (a)(3). The claimants’ argument is that those who administered the plan had a general fiduciary duty to Dr. Renfro and violated it by not assuring that he had the necessary election forms at the start of his employment. We will assume, again arguendo, that a fiduciary duty was owed by at least some of those involved. Watson v. Deaconess Waltham Hosp., 298 F.3d 102, 111 n. 12 (1st Cir.2002). Green v. ExxonMobil Corp., — F.3d —-, 2006 WL 3541979 C.A.1 (R.I.) (December 08, 2006 )

While the United States Court of Appeals for the First Circuit sidestepped the need for an ultimate conclusion on the issue of damages for fiduciary violations under ERISA Section 502(a)(3), Green v. ExxonMobil Corp still adds to the ongoing debate in a couple of respects.

The case originated in the context of a dispute over delayed delivery of group life insurance election forms. When the employee died before receiving the forms, the benefits department assisted in completion of the forms electing coverage, an action later countermanded by the plan administrator. The factual findings of the district court on these issues largely colored the outcome at the appellate level and for the most part undercut any clear case of misconduct.

The plaintiffs, the deceased’s children, brought two claims under ERISA – one for benefits due under the plan, 29 U.S.C. § 1132(a)(1)(B); the other for equitable relief on the ground that the delay in furnishing the forms was a breach of fiduciary duty under § 1132(a)(3). The district court ruled for the defendants after a five-day trial.

On appeal, the First Circuit likewise found no reason to overturn the plan administrator’s decision as arbitrary in the benefits denial. The Court then turned to the plaintiffs’ claims that they were entitled to relief under Section 1132(a)(3) based upon allegations of a breach of fiduciary duties.

Rather than summarily dismissing the fiduciary breach claim under Section 1132(a)(3) as superceded by the benefits claim under Section 1132(a)(1)(B) (see Korotynsky), however, the First Circuit left the issue open for the present. Finding no need to “address the broader controversy about the scope of Section (a)(3)”, the First Circuit, citing Watson v. Deaconess Waltham Hosp., 298 F.3d 102 (1st Cir. 2002), stated that, “[we will assume, again arguendo, that a fiduciary duty was owed by at least some of those involved.”

The Court ultimately found that the plaintiffs had not alleged any facts that would support a fiduciary breach claim. Therefore, the Court ruled for the defendants with the philosophical observation that:

Life is filled with small events and choices that have large consequences; but hindsight is not the test of reasonableness. If Dr. Renfro had chosen to begin work at the start of January 2001, his children’s recovery could have been larger; if he had chosen March, his children could have received nothing. We will not disturb the district court’s decision.

Note: The Court observed that “[w]hether and when this provision [Section 1132(a)(3)] provides an employee or his beneficiary a cause of action to recover damages for plan misconduct is the subject of more than one controversy.” In a footnote, the Court stated:

Circuits disagree on whether Varity Corp. v. Howe, 516 U.S. 489, 514-15, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), allows simultaneous claims under section (a)(1)(b) and section (a)(3). Compare, e.g., Tolson v. Avondale Indus., Inc., 141 F.3d 604, 610 (5th Cir.1998), with Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 89 (2d Cir.2001), cert. denied, 537 U.S. 1170, 123 S.Ct. 1015, 154 L.Ed.2d 911 (2003). Also in dispute is what forms of relief can be “equitable.” See, e.g., Sereboff v. Mid Atlantic Med. Servs. Inc., — U.S. —-, 126 S.Ct. 1869, 164 L.Ed.2d 612 (2006).

Thus, the resolution of the issue in the First Circuit must await another case, but the outcome in Green is remarkable for the very fact that it leaves the door open to a future decision. (For more discussion on this issue, see :: ERISA Section 502(a)(3) “Make Whole” Remedy Issue Headed To Seventh Circuit and :: Fourth Circuit Joins Circuits Limiting Section 502(a)(3) Fiduciary Breach Claims)

The Secretary of Labor filed an amicus brief, “urging a broad construction of section (a)(3)”. According to the opinion, the DOL’s brief nonetheless stated that it was “extremely skeptical” that a breach of fiduciary duty occurred given the factual findings of the district court. Nonetheless, the continued interest of the DOL in the issue means that the argument for broadening Section 502(a)(3) relief will not fail for lack of advocacy and briefing.

:: Fourth Circuit Joins Circuits Limiting Section 502(a)(3) Fiduciary Breach Claims

We join our sister circuits and hold that § 1132(a)(1)(B) affords the plaintiff adequate relief for her benefits claim, and a cause of action under § 1132(a)(3) is thus not appropriate. Plaintiff insists that § 1132(a)(1)(B) is inadequate because, “[u]nless MetLife is required to answer for its actions under [§ 1132(a)(3) ], its illegal practices will remain free from scrutiny.” But this is not the case. This court has held that review of a benefits determination under § 1132(a)(1)(B) should consider, among other factors, “whether the decisionmaking process was reasoned and principled,” “whether the decision was consistent with the procedural and substantive requirements of ERISA,” and “the fiduciary’s motives and any conflict of interest it may have.” Booth v. Wal-Mart Stores, Inc. Assocs. Health & Welfare Plan, 201 F.3d 335, 342-43 (4th Cir.2000). These factors address exactly the kinds of procedural deficiencies alleged by the plaintiff, in the context of review of actual benefits claims under § 1132(a)(1)(B). Korotynska v. Metropolitan Life Ins. Co.— F.3d —-, 2006 WL 3616275, C.A.4 (Md.) (December 13, 2006)

The recent case, Korotynska v. Metropolitan Life Ins. Co., highlights yet another split in the Circuits as to the proper interpretation of ERISA in the familiar battleground of ERISA Section 502(a)(3). Distilled to the core issue, the circuits disagree on whether Varity Corp. v. Howe, 516 U.S. 489, 514-15, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), allows simultaneous claims under section (a)(1)(b) and section (a)(3).

In Korotynska, the plaintiff brought an action “on behalf of herself and others similarly situated” against defendant Metropolitan Life Insurance Company (“MetLife”). Nonetheless, no class action had been certified, and Korotynska was at this stage of review the sole plaintiff.

Korotynska, through previous employment, was a participant in a disability plan for which MetLife acted as insurer and fiduciary. Her dispute with MetLife arose after it terminating disability benefits some two years after having initially approved benefits on the claim that Korotynska was no longer disabled.

Review of Benefits Denial Versus Claims Of Breach of Fiduciary Duty

Critical to the case was the plaintiff’s decision to pursue Section 502(a)(3) (29 U.S.C. § 1132(a)(3)) claims against MetLife – not claims for review of the benefits determination under 29 U.S.C. § 1132(a)(1)(B).

In this action, Korotynska maintains that she is not seeking individualized review of her adverse benefits determination under 29 U.S.C. § 1132(a)(1)(B). Instead, Korotynska seeks equitable relief under 29 U.S.C. § 1132(a)(3). Section 1132(a)(3) provides, “A civil action may be brought ··· by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” 29 U.S.C. § 1132(a)(3).

The plaintiff’s goal in so doing was to obtain judicial review of MetLife’s claims review practices. Thus, under § 1132(a)(3), the plaintiff alleged “systemic improper and illegal claims handling practices” which it used “to deny her and other ERISA beneficiaries a full and fair review of their claims for disability benefits and a full and fair review of claims.” To support this claim, the plaintiff alleged several examples, including:

a. Targeting types of claims that have self-reported symptoms, lack of objective medical findings supporting the claims, or an undefined diagnosis, without due regard for the actual impact of the claimants’ conditions on their ability to work;

b. Targeting low-benefit claimants for denial and/or termination with the expectation that such claimants will not have the wherewithal or financial incentive to engage counsel to pursue their rights, or have the physical or emotional fortitude to fight over these benefits;

c. Employing claim practices that ignore treating physician opinions, ignore subjective complaints of pain, and/or ignore the effects of medications upon claimants’ abilities to work;

d. Failing to consider in its handling of these claims, pursuant to 29 C.F.R. § 2560.503-1(h)(2)(iv), all comments, documents, records and other information submitted by the claimant relating to the claim;

e. Requesting inappropriate, unnecessary and burdensome materials from claimants, all in furtherance of delaying claims determinations;

f. Designing a system in which claimants cannot receive a full and fair review of their claims, by virtue of its reliance upon Medical Examinations from Interested Physicians (called “Independent” Medical Examinations), Functional Capacity Evaluations (“FCE’s”) and/or peer reviews;

g. Utilizing the services of professional entities that perform medical and/or vocational reviews, including but not limited to National Medical Review, that are biased against claimants based upon financial incentives provided by Met Life;

h. Developing and utilizing claim management plans that are designed to terminate benefits not based upon the actual condition of claimants, but, rather, upon duration guidelines used to determine when to terminate claims;

i. Developing claim management plans to deny or terminate claims without due regard for the actual impact of the claimants’ conditions on their ability to work; and

j. By employing numerous other practices that pressure claims handling personnel into denying or terminating legitimate claims.

Application of Varity To Preclude Section 502(a)(3) Relief

The Fourth Circuit rejected the plaintiff’s contention that she could elect to make out a case for breach of fiduciary duty rather than state a claim for benefits. In the Fourth Circuit’s view, Section 502(a)(3) relief is limited under Varity to instances in which relief under other ERISA provisions is inadequate. The Court stated:

Assuming that Korotynska’s previous denial of benefits and alleged subjection to improper claims procedures qualify her to bring a claim under § 1132(a)(3), that statutory provision is only available for claims of breach of fiduciary duty in the circumstances outlined by the Supreme Court in Varity. See 516 U.S. at 507-15. In Varity, the Supreme Court held that § 1132(a)(3) authorizes some individualized claims for breach of fiduciary duty, but not where the plaintiff’s injury finds adequate relief in another part of ERISA’s statutory scheme. Id. at 512, 515.

In Varity, the plaintiffs’ employer consolidated unprofitable divisions into a new subsidiary and then persuaded employees to transfer their benefit plans to the new subsidiary through deceptive depictions of its financial outlook. The subsidiary subsequently failed and the employees lost their nonpension benefits. The issue was joined when the plaintiffs sued for reinstatement of the benefits they would have been owed under their previous plan.

The pertinent portion of Varity in the view of the Fourth Circuit appears in the following excerpt:

The plaintiffs in this case could not proceed under [§ 1132(a)(1) ] because they were no longer members of the [original] plan and, therefore, had no benefits due them under the terms of the plan. They could not proceed under [§ 1132(a)(2) ] because that provision, tied to [§ 1109], does not provide a remedy for individual beneficiaries. They must rely on [§ 1132(a)(3) ] or they have no remedy at all.

From this treatment of Section 502(a)(3), the Fourth Circuit concluded that claims under the provision must be limited to claims not “redressable elsewhere in ERISA’s scheme”. The analysis can be reduced to the following points:

1. As an initial matter, there is no question that what plaintiff is pressing is a claim for individual benefits.

2. The plaintiff’s injury is redressable elsewhere in ERISA’s scheme inasmuch as under § 1132(a)(1)(B), a plan participant may bring a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B).

3. Therefore, “[t]he fact that the plaintiff has not brought an § 1132(a)(1)(B) claim does not change the fact that benefits are what she ultimately seeks, and that redress is available to her under § 1132(a)(1)(B).”

Contrary View of the Second Circuit

The Fourth Circuit noted that the Second Circuit had taken a different view of Varity in Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 89 (2d Cir.2001), cert. denied, 537 U.S. 1170, 123 S.Ct. 1015, 154 L.Ed.2d 911 (2003). The Court aligned itself, however, with “the great majority of circuit courts [that] have interpreted Varity to hold that a claimant whose injury creates a cause of action under § 1132(a)(1)(B) may not proceed with a claim under § 1132(a)(3)”, citing, Antolik v. Saks, Inc., 463 F.3d 796, 803 (8th Cir.2006); Ogden v. Blue Bell Creameries U.S.A., Inc., 348 F.3d 1284, 1287-88 (11th Cir.2003); Tolson v. Avondale Indus., Inc., 141 F.3d 604, 610-11 (5th Cir.1998); Wilkins v. Baptist Healthcare Sys., Inc., 150 F.3d 609, 615-16 (6th Cir.1998); Forsyth v. Humana, Inc., 114 F.3d 1467, 1474-75 (9th Cir.1997); Wald v. Sw. Bell Corp. Customcare Medical Plan, 83 F.3d 1002, 1006 (8th Cir.1996).

Note: This Fourth Circuit decision raises the bar even further for plaintiffs seeking remedies under Section 502(a)(3). None of the cases cited by the Fourth Circuit stated so clearly a distinction between challenging fiduciary duties of the plan administrator versus restating a claim for benefits in the guise of a fiduciary breach claim. In fact, the plaintiff in Korotynsky did not even allege a claim under 1132(a)(1)(B).

The stakes were significant in that the Fourth Circuit’s approach folds challenges to claims administration into simply a factor in evaluating the proper standard of review. This approach served the Court’s interests in limiting what it perceived as duplicative claims under two sections of ERISA. The Court stated:

Not only is relief available to the plaintiff under § 1132(a)(1)(B), but the equitable relief she seeks under § 1132(a)(3)-the revision of claims procedures-is pursued with the ultimate aim of securing the remedies afforded by § 1132(a)(1)(B). The plaintiff admits that she reserves her § 1132(a)(1)(B) claim so that she might bring it at a later date under reformed claims procedures achieved through the current litigation. It may be that plaintiff perceives in § 1132(a)(3) a clearer path to § 1132(a)(1)(B) relief while possibly circumventing § 1132(a)(1)(B)’s standard of review of abuse of discretion. But Varity allows equitable relief when the available remedy is inadequate, not when the legal framework for obtaining that remedy is, to the plaintiff’s mind, undesirable. “To permit the suit to proceed as a breach of fiduciary duty action would encourage parties to avoid the implications of section 502(a)(1)(B) by artful pleading.” Coyne & Delany Co. v. Blue Cross & Blue Shield of Va., Inc., 102 F.3d 712, 714 (4th Cir.1996).

Thus, the well-pleaded complaint rule has limited efficacy in the context of a Section 502(a)(3) claim in jurisdictions adhering to this view, and the relief granted the plaintiffs in Varity emerges as a further limitation on the reach of Section 502(a)(3) claims. Unless a claim cannot be redressed under any other provision of ERISA’s scheme, no claim will lie under Section 502(a)(3).

:: District Court Judge Imposes Stiff Penalties on Health Net For Discovery Violations

The Wachtel and McCoy cases are two of the oldest on this Court’s docket. The litigation has been fierce and without respite, through several changes of defense counsel. The docket sheet is 81 pages with 73 motions, 219 briefs, and 152 other applications to the Court. In sum, it gives new meaning to the term “scorched earth” litigation tactics. This litigation began more than five years ago and many of the events at issue in this Rule 37/Integrity Hearing go back even further. This Court is extremely reluctant to sanction parties or counsel. Unfortunately, Health Net’s repeated and unabated discovery abuses and lack of candor leave this Court no other choice in order to protect the integrity of the judicial process, remedy the prejudice suffered by Plaintiffs, punish the wrongdoers, and accord a measure of relief to the other parties and counsel in this case. When the abuses are as extreme as they are in this case, to refrain from sanctions is unfair to the parties who conduct themselves according to the rules.

Judge Faith Hochberg, United States District Court Judge, Wachtel v. Health Net, Inc., 2006 WL 3538935 D.N.J.,2006. December 06, 2006

The importance of e-discovery has been noted on this site in the past. With the growing dominance of e-mail and electronic record storage as standard tools of communication, commerce and data manipulation, the advent of a robust use and regulation of e-discovery has been long overdue.

Wachtel v. Health Net, Inc. represents a showcase of discovery jousting and may reveal the full panoply of sanctions available under Federal Rule of Civil Procedure 37. The case provides an insight into the operations of one HMO’s use of databases to set “reasonable and customary” fees, and its reaction when challenged on those practices.

The primary elements of the case are simple enough. The plaintiff beneficiaries sued Health Net under ERISA for breach of fiduciary duty and “other wrongs connected to the way in which Health Net reimburses out-of-network (“ONET”) claims.”

The critical issues giving rise to the collateral discovery battles involve the use of certain databases, the availability of historical information on the use of the databases, and e-mails concerning such issues.

The case came before the court on plaintiffs’ motions for entry of default and for a discovery monitor; applications to strike documents submitted by Defendants as summary judgment and trial exhibits; the magistrate’s recommendation that sanctions be considered for Defendants’ failure to produce emails during discovery and decisions to stop restoring and producing emails; and various other matters under Rule 37.

What gave rise to such a tempest over e-mails and databases? The critical issue in the primary case lies in whether the defendants used antiquated data to suppress reimbursements in violation of contractual obligations, and in some instances, State rules and regulations. In the words of the Court:

Plaintiffs allege misconduct by Health Net in administering health plans for beneficiaries who utilize ONET health care providers under the terms of their health plans. An ONET (or non-participating) provider is not part of Health Net’s network of providers and does not have a contracted-for rate with Health Net. When Health Net beneficiaries use ONET providers, they receive reduced levels of coverage because Health Net does not cover the entire fee charged by these providers. In such cases, Health Net pays a percentage of the allowable charge for a particular procedure, known as the UCR. The beneficiary pays the remaining percentage of the UCR charge and is responsible for the rest of his/her medical bill that exceeds the UCR charge . . . Health Net contends that the use of back-dated data is permissible in large group plans; Plaintiffs contend that the contractual terms and non-disclosure to beneficiaries barred such use. No merits determination is made at this time.

According to the Court, the database information had to be loaded by the insurer. In its Northeast plans, Health Net based its UCR determinations on a nationwide database, known as the Health Insurance Association of America (“HIAA”) or Prevailing Healthcare Charges System (“PHCS”) database.

The database is updated at least annually, but the insurer has the responsibility for loading the data. Health Net did not use the database in its updated form for several years at issue in this case. Thus, old costs were used to calculate current reimbursements.

The Court observed in a footnote that:

the database is owned by Ingenix, Inc., a for-profit wholly owned subsidiary of United Healthcare. It is represented to consist of charges for ONET services submitted by numerous insurance companies. The Court has not yet reached the question of the propriety and adequacy of the Ingenix product as used in the instant case.

The defendants made two restitution offers, but both came under pressure from regulators and, increasingly under duress of the pressing litigation. The inferences from discovery suggested an orchestrated plan of non-compliance:

Despite extensive top-level corporate knowledge of the use of outdated data prior to July 2001, Health Net did not disclose to NJ-DOBI any liability from 1999 through June 2001, cutting in half its period of liability. This decision led to the discovery abuses in the instant litigation, which appear calculated to avoid revealing that Health Net’s 2002 Consent Order with NJ-DOBI rested upon misinformation. The 2002 Consent Order with NJ-DOBI required Health Net to provide proof of its compliance, including a list of the affected members and the amount of refund due to each member. Although Health Net computer programmers had created a file including use of outdated data to process claims going back to 1999, the spreadsheet that Health Net provided to NJ-DOBI only covered the period from July 2001 to October 2002, and the discovery in this case was obfuscated to make it look as if Health Net had only discovered its half-truths to NJ-DOBI on the eve of this Court’s November 2003 Preliminary Injunction hearing, when in fact Health Net had known it all along.

In the end, the defendants face spoliation claims and worse. The document retention policy provoked the strongest reaction from the Court:

It was not until the conclusion of the Rule 37/Integrity Hearing that this Court finally understood the cause of these preservation problems. As highly relevant e-mails kept appearing for the first time during the Rule 37/Integrity Hearing, this Court kept asking from October 2005 through March 2006 why they had never been produced during discovery. This Court’s repeated query for an explanation was never met with a candid answer from defense counsel. On February 28, 2006, this Court learned for the first time that Health Net used an e-mail retention policy that automatically removed e-mails from employees’ active files and sent them to back-up disks every 90 days. E-mails older than 90 days were not searched-ever. During the preceding four years of litigation, Health Net never told the Magistrate Judge this crucial fact, and Health Net never told the McCarter counsel tasked with discovery production this fact. Health Net did tell new outside counsel at Epstein Becker in March 2005 after discovery had ended; Epstein Becker and Herve Gouraige, Esq. did not notify the Court or Plaintiffs of this systematic failure to search. Health Net never searched the back-up disks during the three years of open discovery and never disclosed that it did not search e-mails over 90 days old for even its most centrally involved personnel.

Further adding to spoliation, any e-mails that an employee deleted within 30 days of receipt were lost permanently upon transfer to storage at 90 days. Thus, when Health Net asked its employees to search their own e-mails for documents responsive to Plaintiffs’ demands, those employees could only search e-mails on their active server or those they had chosen to archive before each 90 day back-up. It was not candid of Health Net to keep this information about the 90 day back-up system from Plaintiffs, their own outside counsel at McCarter, Magistrate Judge Shwartz, and this Court throughout the entire discovery period.

In response, the Court granted the plaintiffs’ motion to strike exhibits, deemed certain allegations admitted, struck portions of privilege logs, and indicated it would impose a monetary fine. The Court required the production of SEC filings and information in this connection. “In order to consider the potential impact of a financial sanction on the Health Net companies, this Court will consider public filings concerning the Health Net Defendants’ financial stability.” Further, the Court appointed a Special Master as discovery monitor, at the expense of defendants.

Note: The Health Net case presents an extreme example of abusive discovery practices, but serves as a reminder that database and e-mail retention policies can become a front and center issue that competes with, if not dominates, the central issues in a case. The Court’s several references to “meet and confer” sessions show the importance of these events in influencing a judge’s perspective on issues of good faith. Issues of communication between corporate IT departments, in-house counsel and successive new outside legal firms surfaced frequently in the opinion.

In the end, parties may want to consider including the investor relations and marketing departments. Almost immediately after the Court took under advisement the amount of monetary fine against Health Net based upon its financial condition, the following report appeared in Reuters:

The company, however, said it believes the ultimate outcome of the proceedings “should not have a material adverse effect” on its financial condition or liquidity. It plans to “pursue all appropriate appellate rights with respect to the court’s order.”

Perhaps less than optimal timing for that news release.

:: Challenge To Factual Basis Set Forth In Removal Notice Rejected

Notwithstanding Defendant Patten Seed’s failure to fully support its Notice of Removal with facts demonstrating that ERISA preemption exists in this case, the Court will not, at this time, adopt the “well-pleaded notice-of-removal” rule oft-applied in the Northern District of Alabama. Because neither the Supreme Court nor the Eleventh Circuit has ever pronounced a “well-pleaded notice-of-removal” rule, the Court cannot, in good conscience, remand this case to the state court solely because Defendants did not fully expound on the basis for this Court’s ERISA-based federal-question jurisdiction in their Notice of Removal. Sumter Regional Hosp. v. Patten Seed Co. Slip Copy, 2006 WL 3490797 (M.D.Ga.) (December 01, 2006)

The recent case of Sumter Regional v. Patten Seed raises the question of what facts must be asserted to support removal of a putative ERISA case to federal court. While the complete preemption doctrine undoubtedly permits removal of an ERISA case notwithstanding the wording of the complaint, what facts must be alleged to invoke federal question jurisdiction? Continue reading

:: Dillard’s Announces “Memorandum of Understanding” To Settle ERISA Class Action

The Dow Jones Market Watch reports that, according to SEC filings, Dillard’s Inc. has entered a memorandum of understanding to settle a class action alleging violations of the Employee Retirement Income Security Act for $35 million. The SEC filings can be viewed on Edgar.

The litigation arose out of Dillard’s acquisition of Mercantile Stores in 1998. By way of background, in 1999 The Wall Street Journal CareerJournalEurope.com page published this report:

Last summer, word spread through branches of Mercantile Stores Inc. from Baton Rouge to Billings: The company was being bought, and the new owner was terminating the overfunded pension plan. To Cheryl Clevenger, a 50-year-old widow with two dependent children, this was bad news. She had worked at Mercantile’s Cincinnati store for 12 years and hoped to stay until retirement, when the pension would supplement her small 401(k) account. With the plan killed, she got a lump sum for the pension’s current worth, about $6,000. And she lost her job.

The 1999 article continued with discussion of trends in pension plan terminations and this interesting tidbit: Continue reading

:: Plan Fiduciary Claims For Overpayments, Post-Sereboff

Since the U.S. Supreme Court’s decision in Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006), several courts have interpreted the holding in that case in evaluating claims by insurers and plans for the recovery of overpayments to plan participants and beneficiaries. If anything, it seems the Sereboff decision, a health plan subrogation case, has opened the door to reciprocal claims in disability cases and thus heightened the risk for disability claimants. Notwithstanding this development, in several cases the approach taken does not appear to square neatly with the Sereboff analysis.

In Reliance Standard v. Smith, 2006 WL 2993054 (E.D.Tenn.) (October 18, 2006), for example, Reliance claimed to have erroneously issued three checks to Smith in settlement of a death benefit payable under a group life plan. Reliance filed suit seeking to impose a constructive trust on certain stocks which were admittedly purchased with funds from the claimed overpayment. The issue appeared before the court on cross motions for summary judgment.

Smith opposed Reliance’s motion contending that, among other things, Reliance’s claims constituted a money damages not permitted under 29 U.S.C. § 1132(a)(3) and Reliance failed to exhaust administrative remedies. The Court turned to Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006) in analyzing the viability of the carrier’s claims under § 1132(a)(3). The district court noted that the Sereboff court held that the health plan’s claim was equitable because the insurer did not seek to impose personal liability on the Sereboffs.

By comparison, the district court observed that:

Reliance also is not asking the court to impose personal liability. Rather, it is asking for an equitable lien on the funds belonging to it and which can be traced to Smith’s stock fund . . . Reliance does not seek to impose personal liability on Smith. Rather, it seeks relief to restore to itself particular funds or property in Smith’s possession. Smith has admitted that the funds have not been dissipated but have been invested in a stock purchase. Accordingly, the court finds that Reliance is entitled to a constructive trust/equitable lien on Smith’s stock assets traceable to the overpayment.

The district court then turned to Smith’s objection that Reliance had not exhausted its administrative remedies before filing suit. The court rejected this contention, stating:

. . . the exhaustion requirement is not applicable here for several reasons. Subparts 1 and 2 of Section 1133 indicate that the full and fair review opportunity must be provided to a participant and/or beneficiary. Reliance is neither. Rather, Reliance is the claim review fiduciary. Further, Section 1133 provides a review only for adverse claim determinations. There has been no adverse claim determination in this case.

The Court ultimately held that Smith was “unjustly enriched in the sum of $59,839.72, for which Reliance will be granted an equitable lien.”

The district court’s approach in Reliance is not altogether consistent with Sereboff. In Sereboff, the Supreme Court held that the equitable lien arose by agreement and need not be characterized as a “free-standing action for equitable subrogation”. By contrast, the district court in Reliance, though citing Sereboff, made no reference to the plan document and spoke in terms of “unjust enrichment”. Cf., Smith v. Accenture U.S. Group Long-Term Disability Ins. Plan 2006 WL 2644957 (N.D.Ill.) (September 13, 2006)(“this court finds based on these cases that a federal common law cause of action for unjust enrichment exists”) (citing, Leipzig v. AIG Life Ins. Co., 362 F.3d 406, 410 (7th Cir.2004))

In Dillard’s Inc. v. Liberty Life Assur. Co. of Boston, 456 F.3d 894 (8th Cir. 2006), the Eighth Circuit applied Sereboff to find that a disability carrier was entitled to reimbursement of amounts paid to an insured by the Social Security Administration. The Court stated:

The present case is analogous to Sereboff in that Liberty seeks reimbursement for amounts paid to Bolton from a third-party source, the Social Security Administration. Liberty’s complaint states that it is a request for equitable relief, and Liberty seeks a particular share of a specifically identified fund – all overpayments resulting from the payment of social security benefits. Accordingly, Liberty’s complaint constitutes a request for equitable relief, and the district court did not err in exercising subject matter jurisdiction over Liberty’s third-party complaint.

The Eighth Circuit in Dillards appears to have given little consideration to the existence of a res to support jurisdiction over the § 1132(a)(3) constructive trust claim. That the Sereboff/Knudson requirement that an identifiable fund exist can be met by reference to “all overpayments resulting from the payment of social security benefits” seems doubtful. Cf. Verizon Employee Benefits Committee v. Adams 2006 WL 66711 (N.D.Tex.) (January 11, 2006) (complaint dismissed for failure to identify a specific res, such as a bank account or trust, where funds could be found).

In Gutta v. Standard Select Trust Ins., 2006 WL 2644955 (D.Ill.) (September 14, 2006), the district court applied the Eighth Circuit’s holding in Dillard’s in another overpayment case. Interpreting an offset provision in a disability policy, the district court held that the disability carrier, Standard Select,

may seek reimbursement of the benefits paid . . . if the plan created an equitable lien covering these benefits because the plan contains an offset provision preventing plan participants from receiving money from multiple group plans and provides that the participant must immediately reimburse Standard Select for any overpayments.”

The district court concluded that benefits payable under another disability policy constituted a “group plan” within the meaning of Standard’s offset provision and awarded summary judgment to the carrier.

In Disability Reinsurance Management Services, Inc. v. Disability Reinsurance Management Services, Inc. v. DeBoer 2006 WL 2850120 (E.D.Tenn.) (September 29, 2006), the district court applied the terms of a long term disability requiring an offset for Social Security disability benefits. The decision followed Sereboff in its analysis of the plan provision and scope of equitable relief.

On the other hand, as in the Eighth Circuit decision in Dillards, the district court glossed over the requirement of a “fund” as a predicate for § 1132(a)(3) relief. The court seems to have instead limited its view to the terms of the plan and not whether the actual overpayment could be identified. The court stated:

The relief the plaintiff seeks is equitable in nature and permissible under ERISA. The Plan calls for the deduction of SS benefits from the LTD benefits received under the Plan; thus, the plaintiff seeks a “specifically identified fund-all overpayments resulting from the payments of Social Security benefits.”

By contrast, the district court in McGuire v. Hartford Life and Acc. Ins. Co. 2006 WL 2773441 N.D.Ohio (September 25, 2006), another disability overpayment case, maintained that “[a] key factor in this determination is whether the individual possesses the identifiable property or funds, or whether relief would amount to personal liability against an individual’s general assets.

Another important issue in the disability cases lies in the construction of 42 U.S.C. § 407. See, Mote v. Aetna Life Ins. Co.435 F.Supp.2d 827 (N.D.Ill.) (June 26, 2006) (holding that 42 U.S.C. § 407 prevented carrier’s counterclaim to Social Security benefits); accord Ross v. Pennsylvania Mfrs. Ass’n Ins. Co., WL 1390446 (S.D.W.Va.) (May 22, 2006); Kay v. American Elec. Power Service Corp. 2006 WL 2228992 (S.D.W.Va.) (August 3,2006) (plan requests an action, the imposition of a constructive trust on future SSDI benefits, that is not permitted); but see, Smith v. Accenture U.S. Group Long-Term Disability Ins. Plan 2006 WL 2644957 (N.D.Ill.) (September 13, 2006) (“respectfully disagrees with Mote“)

Note: The cases suggest that, depending on the jurisdiction, overpayment actions may be stated in terms of unjust enrichment and, alternatively, § 1132(a)(3) claims for equitable relief. The validity of the unjust enrichment claims post-Sereboff is arguable. Also, the issue of the availability of claims against Social Security funds remains a matter of contention with the outcome depending on venue at this point.

:: The “Long Arm” of ERISA: An Overview of ERISA Venue Provisions

“Applying the legal standards explained above, the court determines that ERISA’s national service of process provision permits this court to exercise personal jurisdiction over Defendant Jaeger, so long as he has had sufficient minimum contacts with the United States. The court finds that Jaeger’s lifelong residency within the United States establishes the necessary minimum contacts, such that an exercise of personal jurisdiction over him would comport with constitutional due process requirements.”

Verizon Employee Benefits Committee v. Jaeger, 2006 WL 2880451 (N.D.Tex.) (September 28, 2006)

The expansive reach of ERISA’s venue provision, 29 U.S.C. 1132(e)(2), is illustrated by the recent decision in Verizon Employee Benefits Committee v. Jaeger, 2006 WL 2880451 (N.D.Tex.) (September 28, 2006). Continue reading

:: Court Denies Wal-Mart Administrative Committee’s Motions In Subrogation Controversy

Having been precluded from pursuing a participant’s estate for reimbursement (see prior post), Wal-Mart recently renewed its battle for reimbursement of plan expenditures against the participant’s widow in Administrative Committee of Wal-Mart Stores, Inc. v. Mooradian, 2006 WL 2793183 (M.D.Fla.) (2006). In this development the Court denied the Wal-Mart Administrative Committee’s “Motion to Affirm Decision of Administrative Committee, or, in the Alternative, Motion for Summary Judgment.” The Committee is seeking reimbursement of $52,147.43 which the plan expended for treatment of Shannon Mooridian, a Wal-Mart employee and plan participant.

In the last significant development, the district court held that the Committee’s claims against the estate were time-barred by the applicable probate limitations period. The court left open the issue of whether Debbie Mooridian, Shannon’s widow and executrix of his estate (and also a Wal-Mart employee), might be liable for any funds she received in a personal capacity.

Some pointers can be gleaned from the court’s recent order denying the Committee’s motions. Continue reading

:: Restoration of Benefits Via Reformation of Plan – An Available Remedy Under ERISA?

In a thorough 43-page recommendation and report, Magistrate Judge Thomas Reuter interpreted ERISA Section 502(a)(3) as allowing a district court to shape a powerful remedy for plan participants. At issue was whether plan fiduciaries violated sections 404(a) and 502(a)(3) of ERISA, 29 U.S.C. §§ 1104(a) and 1132(a)(3), in terminating post-retirement health plan benefits, and if so, what form of remedy, if any would be available. In re Unisys Corp. Retiree Medical Benefits Erisa Litigation, 2006 WL 2822261 (E.D.Pa.) (September 29, 2006)

Previous articles on this site have addressed an inclination by the courts to explore the limits of available equitable relief under ERISA Section 502(a)(3) under some form of “make whole” relief. The Third Circuit may soon have an opportunity to consider whether the equitable remedy of reformation may be an avenue for an expanded award of equitable relief under the statute. Continue reading