:: Conflict In Terms Between ERISA Plan Language and Summary Plan Descriptions – A Circuit By Circuit Synopsis

We certainly do not write on a clean slate. Indeed, there appears to be a five-way circuit split regarding whether an ERISA claimant needs to establish reliance and/or prejudice based on the conflicting terms of an SPD.

Washington v. Murphy Oil USA, Inc., — F.3d —-, 2007 WL 2326071 (C.A.5) (August 16, 2007)

When the terms of an ERISA plan and its summary plan description conflict, which terms apply? The answer to this question is another question – which circuit’s law governs the dispute?

As will be set forth below, the circuits differ in their conclusions.

The case that gave rise to the Fifth Circuit view on the issue, Washington v. Murphy Oil USA, Inc., involved a long term disability benefit claim. The dispute turned on the length of service required under the plan for benefits to vest. As the court put the matter:

According to the SPD, benefits vest after five years of service. According to the Plan, benefits vest after ten years of service. The conflict is plain.

The Standard of Review

The Fifth Circuit applied a modified abuse of discretion standard:

Because we are evaluating the factual and legal determinations of an ERISA administrator, the modified abuse of discretion standard applies in this case. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989); Rhorer v. Raytheon Eng’rs & Constructors, Inc., 181 F.3d 634, 638-40 (5th Cir.1999). Those determinations are granted deference using a two-step process. First, the court determines whether the administrator’s interpretation of the plan was legally correct. Rhorer, 181 F.3d at 639-40. If so, then the inquiry ends. Id. If not, the court then determines whether that interpretation constitutes an abuse of discretion. Id. at 640.

The Conflict In the Circuit Courts Of Appeal

The Fifth Circuit recounted the differing treatments of the issue in a useful review. Here are the differing views, by circuit:

• The Third and Sixth Circuits

The Third and Sixth Circuits do not require a showing of reliance. See Burstein v. Ret. Account Plan for Employees of Allegheny Health Edu. and Research Found., 334 F.3d 365, 380-82 (3d Cir.2003); Edwards v. State Farm Mut. Auto. Ins. Co., 851 F.2d 134, 137 (6th Cir.1988).

• The Second Circuit

The Second Circuit also does not require a showing of reliance, but does require a showing of a likelihood of prejudice, which an employer may then rebut through evidence that the deficient SPD was in effect a harmless error. See Burke v. Kodak Ret. Income Plan, 336 F.3d 103, 111-14 (2d Cir.2003).

• The Seventh and Eleventh Circuits

The Seventh and Eleventh Circuits require a showing of reliance. See Health Cost Controls, Inc. v. Washington, 187 F.3d 703, 711 (7th Cir.1999); Branch v. G. Bernd Co., 955 F.2d 1574, 1579 (11th Cir.1992).

• The First, Fourth, and Tenth Circuits

The First, Fourth, and Tenth Circuits require a showing of reliance or prejudice, though it appears that the terms “reliance” and “prejudice” are sometimes treated synonymously. See Govoni v. Bricklayers, Masons & Plasterers International Union, Local No. 5 Pension Fund, 732 F.2d 250, 252 (1st Cir.1984); Aiken v. Policy Management Sys. Corp., 13 F.3d 138, 141 (4th Cir.1993); Chiles v. Ceridian Corp., 95 F.3d 1505, 1519 (10th Cir.1996).

• The Eighth Circuit

The Eighth Circuit requires a showing of reliance or prejudice, but only if the SPD is “faulty.” See Palmisano v. Allina Health Sys., 190 F.3d 881, 887-88 (8th Cir.1999); Marolt v. Alliant Techsystems, 146 F.3d 617, 621-22 (1998).

The Fifth Circuit

The Fifth Circuit weighed in on the issue, and took a position similar to the Third and Sixth Circuits. The Court compared its contractual approach to the analysis of plan rights and obligations as similar to the Third Circuit, noting:

In Burstein, the Third Circuit, relying primarily on contract law, held that an ERISA claimant need not show reliance or prejudice when the terms of an SPD conflict with the plan itself. 334 F.3d at 380-82. As the Third Circuit explained:

Claims for ERISA plan benefits under ERISA § 502(a)(1)(b) are contractual in nature…. If an SPD conflicts with a plan document, then a court should read the terms of the ‘contract’ to include the terms of a plan document, as superseded and modified by conflicting language in the SPD. And, just as a court’s enforcement of a contract generally does not require proof that the parties to the contract actually read, and therefore relied upon, the particular terms of the contract, we are persuaded that enforcement of an SPD’s terms under a claim for plan benefits does not require a showing of reliance.Id. at 381 (emphasis in original).

The Contractual Approach

The Fifth Circuit “has also recognized that ERISA claims are contractual in nature.” See, e.g., Weir v. Federal Asset Disposition Ass’n, 123 F.3d 281, 286 (5th Cir.1997). There the court held:

[T]he summary plan description is binding, and that if there is a conflict between the summary plan description and the terms of the policy, the summary plan description shall govern. Any other rule would be, as the Congress recognized, grossly unfair to employees and would undermine ERISA’s requirement of an accurate and comprehensive summary.940 F.2d at 982 (emphasis added).

Ambiguities Resolved Against Drafter

Drawing upon the law of contracts of insurance, the Fifth Circuit previously held that “the ambiguity in the summary plan description must be resolved in favor of the employee and made binding against the drafter.” The rationale:

We refused to place the burden of careless drafting on the employee, arguing that “[a]ccuracy is not a lot to ask …. especially … in return for the protection afforded by ERISA’s preemption of state law causes of action-causes of action which threaten considerably greater liability than that allowed by ERISA “ Id. Finally, we concluded that “drafters of a summary plan description may not disclaim its binding nature.” Id. (emphasis added).

Thus, the Court stated its position as follows:

Accordingly, we hold that when the terms of an SPD and an ERISA plan conflict and the terms of the conflicting SPD unequivocally grant the employee with a vested right to benefits, the employee need not show reliance or prejudice. We find that this approach is most consistent with ERISA, which is designed to protect employees; and most consistent with our opinion in Hansen, which refused to place the burden of conflicting SPDs on plan beneficiaries. Because the SPD in this case unequivocally vests disability benefits after five years of service and Washington has at least five years of vesting credit, as a matter of contract law, his right to disability benefits vested and it cannot be taken away. Thus, the district court was correct in concluding that Washington need not show reliance or prejudice.

Note: The Fifth Circuit limited the holding to cases of an unequivocal grant of vested rights, stating:

Our holding today is limited to situations in which the conflicting terms of an SPD unequivocally grant the employee with a vested right to benefits. We are sensitive to concerns about creating a windfall for employees in other situations, such as when the terms of the conflicting SPD are susceptible to different interpretations or the conflict between the SPD and the plan is de minimis. Whether we would require a showing of reliance or prejudice in such cases is an issue we need not decide today because the terms of the conflicting SPD in this case unequivocally provide Washington with a vested right to disability benefits.

The Art Of Summarization - When we summarize, we must alter the presentation of the subject of description. In that alteration, mischief can arise. The drafting of SPD’s must be approached with caution. In the words of the Court:

This effort at simplification, however, often produces situations in which the terms of the SPD conflict with the more detailed terms of the plan. This court has held that in such situations, the terms of the SPD control and are binding.

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